---

---

•

there is the potential for a wide range of uncertainties related to the 2020 Presidential and Congressional elections that could change funding related to our lines of business. Because we generate a substantial portion of our revenues from contracts with U.S. government agencies, our operating results could be adversely affected by spending caps or changes in budgetary priorities, as well as by delays in the government budget process, program starts or the award of contracts or task orders under contracts. Changes in spending authorizations and budgetary priorities may occur as a result of the shifts in spending priorities from defense-related and other programs as a result of competing demands for federal funds and the number and intensity of military conflicts and other factors;

•	operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;

•	the COVID-19 pandemic has increased the severity and duration of world health events, including volatility in the capital markets, deteriorating financial conditions or bankruptcy, and related economic repercussions resulting from severe disruption in multiple industries, which may negatively impact our clients' ability to meet their payment obligations to us in a timely manner; and

•	the level of capital spending and access to capital markets by industrial companies, including significant reductions and potential additional reductions in capital expenditures in response to commodity prices and dramatically reduced demand

---

---

---

---

---

---

---

---

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our 2019 Annual Report on Form 10-K.

The condensed consolidated financial statements include all normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2020 and the results of our operations for the three and nine months ended September 30, 2020 and 2019, and our cash flows for the nine months ended September 30, 2020 and 2019.

There are many factors that may affect the accuracy of our cost estimates and ultimately our future profitability. These include, but are not limited to, the availability and costs of resources (such as labor, materials and equipment), productivity and

weather. We generally realize both lower and higher than expected margins on projects in any given period. We recognize revisions of revenues and costs in the period in which the revisions are known. This may result in the recognition of costs before the recognition of related revenue recovery, if any. Our significant accounting policies are detailed in "Note 1. Significant Accounting Policies" of our 2019 Annual Report on Form 10-K.

We have evaluated all events and transactions occurring after the balance sheet date but before the financial statements were issued and have included the appropriate disclosures.

 

Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of KBR, Inc. and the subsidiaries it controls, including VIEs where it is the primary beneficiary. We account for investments over which we have significant influence, but not a controlling financial interest, using the equity method of accounting. See Note 9 to our condensed consolidated financial statements for further discussion of our equity investments and VIEs. All material intercompany balances and transactions are eliminated in consolidation.

Business Reorganization and Restructuring Activities

The impact of the decline in oil and gas prices, the COVID-19 pandemic and related economic and business and market disruptions over the first six months of 2020 continues to evolve and its future effects remain uncertain. The impact of these recent developments on our business will depend on many factors, many of which are beyond management's control and knowledge. During the first quarter of 2020, our management initiated and approved a restructuring plan in response to the dislocation of the global energy market resulting from the decline in oil prices and the COVID-19 pandemic. The restructuring plan is designed to reduce costs and improve operational efficiencies. In the second quarter of 2020, management approved additional restructuring activities in connection with decisions to discontinue pursuing certain types of work, principally lump-sum EPC and commoditized construction services. As a result of these restructuring activities and adverse market conditions, we have performed interim impairment tests of our goodwill, intangible assets, significant investments and various other assets. See Note 7 "Restructuring Charges and Asset Impairments" and Note 8 "Goodwill and Goodwill Impairment" for further discussion of restructuring and impairment charges recognized during the three and nine month periods ended September 30, 2020.

The restructuring plan included the reorganization of KBR's management structure primarily within our Energy Solutions business segment during the first and second quarters of 2020. These reorganization activities did not have an impact on our identified reportable segments. See Note 2 to our condensed consolidated financial statements for further discussion of our segments.

Impact of Adoption of New Accounting Standards

Financial Instruments - Credit Losses

Effective January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, using the modified retrospective approach. This ASU replaces the incurred loss

---

impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset, including receivables, are recorded. The estimate of expected credit losses considers not only historical information, but also current and future economic conditions and events. As a result of the adoption, we recorded a cumulative effect adjustment to retained earnings of $3 million, net of tax of $1 million, on our opening condensed consolidated balance sheet as of January 1, 2020. See Note 19 "Financial Instruments and Risk Management" for further discussion related to credit losses.

Other Standards

Effective January 1, 2020, we adopted ASU No. 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. The adoption of this standard did not have any impact on our financial position, results of operations or cash flows.

Effective January 1, 2020, we adopted ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU amends the guidance for determining whether a decision-making fee is a variable interest. The adoption of this standard did not have any impact on our financial position, results of operations or cash flows.

Effective January 1, 2020, we adopted ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU permits customers in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. We have elected to avail this option. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.

Effective January 1, 2020, we adopted ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU amends ASC 820 to add, remove and modify certain disclosure requirements for fair value measurements. For example, the Company will now be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The adoption of this standard did not have a material impact on our condensed consolidated financial statements or disclosures.

Effective January 1, 2020, we adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. As a result of the adoption of this standard, we used Step 1 to measure the goodwill impairment losses recognized during the first and second quarters of 2020 without proceeding to Step 2 of the goodwill impairment test as required under the previous standard. See Note 8 "Goodwill and Goodwill Impairment" for discussion of goodwill impairment recognized for the three and six month periods ended June 30, 2020.

---

Additional Balance Sheet Information

Other Current Liabilities

    

The components of "Other current liabilities" on our condensed consolidated balance sheets as of September 30, 2020, and December 31, 2019, are presented below:

	September 30,				December 31,
Dollars in millions	2020				2019
Current maturities of long-term debt	$	12			$	27
Reserve for estimated losses on uncompleted contracts	15				10
Retainage payable	26				41
Income taxes payable	1				25
Restructuring reserve	32				—
Value-added tax payable	44				36
Dividend payable	14				11
Other miscellaneous liabilities	49				36
Total other current liabilities	$	193			$	186

Impact on Previously Issued Financial Statements for the Correction of an Error

During the second quarter ended June 30, 2020, we identified and corrected an immaterial error affecting previously issued financial statements related to the adoption of ASU No. 2017-13, Revenue from Contracts with Customers (Topic 606) for several unconsolidated affiliates as of January 1, 2019. The error was due to the impact of improperly calculated cumulative effect of initially applying ASC Topic 606 on our assets and shareholders' equity in the balance sheet. The previously reported error resulted in an overstatement of "Equity in and advances to unconsolidated affiliates" and "Retained earnings" of approximately $4 million in our condensed consolidated balance sheets as of March 31, 2019. The error had no impact on our previously reported condensed consolidated statements of operations or cash flows. We assessed the materiality, both quantitatively and qualitatively, in accordance with the SEC's SAB No. 99 and SAB No. 108, and concluded the error was not material to any of our previously issued quarterly or annual financial statements. To correctly present the error noted above, previously issued financial statements have been revised and are presented as "As Corrected" in the table below.

	As of December 31, 2019
Revised Balance Sheet Amounts:	As Previously Reported				Adjustments				As Corrected
Equity in and advances to unconsolidated affiliates	$	850			$	(4	)		$	846
Retained earnings	$	1,441			$	(4	)		$	1,437

---

We provide a wide range of professional services and the management of our business is heavily focused on major projects or programs within each of our reportable segments. At any given time, a relatively few number of projects, government programs and joint ventures represent a substantial part of our operations. We are organized into three core business segments, Government Solutions, Technology Solutions, and Energy Solutions and two non-core business segments as described below:

Government Solutions. Our GS business segment provides full life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies in the U.S., U.K. and Australia. KBR services cover the full spectrum from research and development, through systems engineering, test and evaluation, systems integration and program management, to operations support, readiness and logistics. With the acquisition of Centauri Holdings Platform, LLC ("Centauri") on October 1, 2020 described in Note 4 to the condensed consolidated financial statements, our GS business segment also provides software and engineering solutions to critical national security missions across space, cyber, intelligence, surveillance and reconnaissance, missile defense and intelligence domains to the U.S. government and related defense agencies. See Note 4 "Acquisitions" for further details.

Technology Solutions. Our TS business segment combines KBR's proprietary technologies, equipment and catalyst supply, digital solutions and associated knowledge-based services into a global business for ammonia/fertilizers, nitric acid, refining, petrochemicals, inorganic and specialty chemicals refining. Our TS business segment focuses on the development of advanced digital and proprietary tools. From early planning through scope definition, advanced technologies and project life-cycle support, our TS business segment works closely with customers to provide what we believe is the optimal approach to maximize their return on investment.  Licensing and engineering/design services are typically provided during the front-end planning stage of both green- and brown-field capital projects, and proprietary equipment is delivered and installed as part of facility construction. Catalysts, or process consumables designed to drive process performance, efficiency and reliability, are delivered for start-up and are subsequently replenished, as needed. 

 

Energy Solutions. Our ES business segment provides full life-cycle support solutions across the upstream, midstream and downstream energy markets. Global events and the associated market disruptions have accelerated KBR’s transition to becoming a solutions-oriented business and a migration away from lump-sum EPC and commoditized services.

Non-strategic Business. Non-strategic Business represents the operations or activities we determine are no longer core to our business strategy and that we have exited or intend to exit upon completion of existing contracts. All Non-strategic Business projects are substantially complete. Current activities in this business segment primarily relate to final project close-out, negotiation and settlement of claims, joint venture liquidation and various other matters associated with these projects. 

Other. Our Other segment includes corporate expenses and selling, general and administrative expenses not allocated to the business segments above.

---

Operations by Reportable Segment

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2020				2019				2020				2019
Dollars in millions
Revenues:
Government Solutions	$	980			$	978			$	2,860			$	2,986
Technology Solutions	71				96				232				281
Energy Solutions	327				351				1,205				919
Subtotal	1,378				1,425				4,297				4,186
Non-strategic Business	1				—				4				1
Total revenues	$	1,379			$	1,425			$	4,301			$	4,187
Gross profit (loss):
Government Solutions	$	129			$	110			$	370			$	312
Technology Solutions	30				30				82				83
Energy Solutions	15				21				55				81
Subtotal	174				161				507				476
Non-strategic Business	(2		)		7				(7		)		7
Total gross profit	$	172			$	168			$	500			$	483
Equity in earnings of unconsolidated affiliates:
Government Solutions	$	9			$	7			$	21			$	21
Energy Solutions	4				2				9				16
Subtotal	13				9				30				37
Non-strategic Business	—				—				—				(13		)
Total equity in earnings of unconsolidated affiliates	13				9				30				24
Selling, general and administrative expenses:
Government Solutions	$	(43	)		$	(28	)		$	(112	)		$	(93	)
Technology Solutions	(6		)		(7		)		(18		)		(21		)
Energy Solutions	(15		)		(14		)		(48		)		(48		)
Other	(25		)		(25		)		(81		)		(80		)
Total selling, general and administrative expenses	(89		)		(74		)		(259		)		(242		)
Acquisition and integration related costs	(2		)		—				(2		)		(2		)
Goodwill impairment	—				—				(99		)		—
Restructuring charges and asset impairments	(1		)		—				(176		)		—
Gain on disposition of assets	—				1				18				11
Operating income	$	93			$	104			$	12			$	274
Interest expense	(18		)		(25		)		$	(60	)		$	(76	)
Other non-operating (loss) income	(4		)		3				$	1			$	10
Income (loss) before income taxes and noncontrolling interests	$	71			$	82			$	(47	)		$	208

---

Disaggregated Revenue

We disaggregate our revenue from customers by geographic destination and contract type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

Revenue by Service/Product line and reportable segment was as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
Dollars in millions	2020				2019				2020				2019
Government Solutions
Space	$	256			$	226			$	735			$	642
Engineering	218				199				630				594
Logistics	292				323				847				1,081
International	214				230				648				669
Total Government Solutions	980				978				2,860				2,986
Technology Solutions	71				96				232				281
Energy Solutions	327				351				1,205				919
Non-strategic business	1				—				4				1
Total revenue	$	1,379			$	1,425			$	4,301			$	4,187

Government Solutions revenue earned from key U.S. government customers includes U.S. DoD agencies and NASA, and is reported as Space, Engineering, and Logistics.  Government Solutions revenue earned from non-U.S. government customers primarily includes the U.K. MoD and the Australian Defence Force and is reported as International.

---

Revenue by geographic destination was as follows:

	Three Months Ended September 30, 2020
Total by Countries/Regions Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
United States	$	559			$	3			$	149			$	1			$	712
Middle East	179				2				52				—				233
Europe	165				21				42				—				228
Australia	43				—				37				—				80
Canada	1				—				8				—				9
Africa	22				—				15				—				37
Asia	—				40				(2		)		—				38
Other countries	11				5				26				—				42
Total revenue	$	980			$	71			$	327			$	1			$	1,379
	Three Months Ended September 30, 2019
Total by Countries/Regions Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
United States	$	561			$	19			$	146			$	—			$	726
Middle East	159				3				61				—				223
Europe	205				17				50				—				272
Australia	23				1				50				—				74
Canada	1				1				12				—				14
Africa	17				7				22				—				46
Asia	—				48				2				—				50
Other countries	12				—				8				—				20
Total revenue	$	978			$	96			$	351			$	—			$	1,425

---

	Nine Months Ended September 30, 2020
Total by Countries/Regions Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
United States	$	1,593			$	17			$	579			$	4			$	2,193
Middle East	537				6				171				—				714
Europe	514				35				125				—				674
Australia	114				1				133				—				248
Canada	1				1				39				—				41
Africa	60				2				50				—				112
Asia	—				161				—				—				161
Other countries	41				9				108				—				158
Total revenue	$	2,860			$	232			$	1,205			$	4			$	4,301
	Nine Months Ended September 30, 2019
Total by Countries/Regions Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
United States	$	1,635			$	29			$	357			$	1			$	2,022
Middle East	598				11				163				—				772
Europe	586				51				138				—				775
Australia	67				1				149				—				217
Canada	1				1				19				—				21
Africa	57				25				59				—				141
Asia	—				161				5				—				166
Other countries	42				2				29				—				73
Total revenue	$	2,986			$	281			$	919			$	1			$	4,187

Many of our contracts contain both fixed price and cost reimbursable components. We define contract type based on the component that represents the majority of the contract. Revenue by contract type was as follows:

	Three Months Ended September 30, 2020
Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
Fixed Price	$	240			$	67			$	65			$	—			$	372
Cost Reimbursable	740				4				262				1				1,007
Total revenue	$	980			$	71			$	327			$	1			$	1,379
	Three Months Ended September 30, 2019
Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
Fixed Price	$	266			$	93			$	62			$	—			$	421
Cost Reimbursable	712				3				289				—				1,004
Total revenue	$	978			$	96			$	351			$	—			$	1,425

We have included $73 million and $66 million of revenue from U.S. Government time-and-materials type contracts within the cost reimbursable contract type for the three months ended September 30, 2020 and 2019, respectively.

---

	Nine Months Ended September 30, 2020
Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
Fixed Price	$	724			$	223			$	233			$	—			$	1,180
Cost Reimbursable	2,136				9				972				4				3,121
Total revenue	$	2,860			$	232			$	1,205			$	4			$	4,301
	Nine Months Ended September 30, 2019
Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Non-strategic Business				Total
Fixed Price	$	777			$	276			$	147			$	1			$	1,201
Cost Reimbursable	2,209				5				772				—				2,986
Total revenue	$	2,986			$	281			$	919			$	1			$	4,187

    

We have included $206 million and $179 million of revenue from U.S. Government time-and-materials type contracts within the cost reimbursable contract type for the nine months ended September 30, 2020 and 2019, respectively.

Performance Obligations, Contract Assets, and Contract Liabilities

We recognized an immaterial amount of revenue from performance obligations satisfied in previous periods for the three months ended September 30, 2020 and 2019, and $36 million and $14 million for the nine months ended September 30, 2020 and 2019, respectively.

On September 30, 2020, we had $9.9 billion of transaction price allocated to remaining performance obligations. We expect to recognize approximately 32% of our remaining performance obligations as revenue within one year, 33% in years two through five, and 35% thereafter. Revenue associated with our remaining performance obligations to be recognized beyond one year includes performance obligations related to the Aspire Defence and Fasttrax projects, which have contract terms extending through 2041 and 2023, respectively. Remaining performance obligations does not include variable consideration that was determined to be constrained as of September 30, 2020.

We recognized revenue of $294 million for the nine months ended September 30, 2020, which was previously included in the contract liability balance at December 31, 2019.

Accounts Receivable

	September 30,				December 31,
Dollars in millions	2020				2019
Unbilled	$	475			$	308
Trade & other	501				630
Accounts receivable	$	976			$	938

Scientific Management Associates (Operations) Pty Ltd

On March 6, 2020, we acquired certain assets and assumed certain liabilities related to the government defense business of Scientific Management Associates (Operations) Pty Ltd ("SMA"). The acquired business of SMA provides technical training services to the Royal Australian Navy and is reported within our GS business segment. We accounted for this transaction using the acquisition method under ASC 805, Business Combinations. The agreed-upon purchase price for the acquisition was $13 million, less purchase price adjustments totaling $4 million resulting in net cash consideration paid of $9 million. We recognized goodwill of $12 million arising from the acquisition, which relates primarily to future growth opportunities to expand services provided to the Royal Australian Navy. 

---

Centauri Platform Holdings, LLC

On October 1, 2020, we acquired Centauri in accordance with an agreement and plan of merger, pursuant to which a wholly owned subsidiary of KBR merged with and into Centauri, with Centauri continuing as the surviving company and a wholly owned subsidiary of KBR. The aggregate consideration paid was approximately $827 million in cash, subject to certain working capital, net debt and other post-closing adjustments, if applicable. The Company funded the aggregate consideration paid using cash on-hand, borrowings under our Senior Credit Facility, net proceeds from the private offering of $250 million aggregate principal amount of our 4.750% Senior Notes due 2028 (the "Senior Notes"), and proceeds from the sale of receivables. See Note 11 "Debt and Other Credit Facilities" for further discussion of our Senior Credit Facility and Senior Notes, and Note 19 "Fair Value of Financial Instruments and Risk Management" for further discussion of our sale of receivables.

The amounts of unapproved change orders, and claims against clients and estimated recoveries of claims against suppliers and subcontractors included in determining the profit or loss on contracts are as follows:

Dollars in millions	2020				2019
Amounts included in project estimates-at-completion at January 1,	$	978			$	973
(Decrease) increase in project estimates	(1		)		16
Approved change orders	(6		)		(7		)
Foreign currency effect	5				(37		)
Amounts included in project estimates-at-completion at September 30,	$	976			$	945
Amounts recognized over time based on progress at September 30,	$	976			$	938

As of September 30, 2020 and 2019, the predominant component of the change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors above relates to our 30% proportionate share of unapproved change orders and claims associated with the Ichthys LNG Project discussed below.

KBR intends to vigorously pursue approval and collection of amounts due under all unapproved change orders and claims, against the clients and recoveries from subcontractors. Further, there are additional claims that KBR believes it is entitled to recover from its client and from subcontractors which have been excluded from estimated revenues and profits at completion as appropriate under U.S. GAAP. These commercial matters may not be resolved in the near term. Our current estimates for the

---

above unapproved change orders, client claims and estimated recoveries of claims against suppliers and subcontractors may prove inaccurate and any material change could have a material adverse effect on our results of operations, financial position and cash flows.

Ichthys LNG Project

Project Status

We have a 30% ownership interest in the JKC joint venture, which has contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia (the "Ichthys LNG Project"). The contract between JKC and its client is a hybrid contract containing both cost-reimbursable and fixed-price (including unit-rate) scopes.

The construction and commissioning of the Ichthys LNG Project is complete and all performance tests have been successfully performed. The entire facility, including two LNG liquefaction trains, cryogenic tanks and the combined cycle power generation facility, has been handed over to the client and is producing LNG. JKC is in the process of completing administrative close-out activities and continues to progress the various legal and commercial disputes with the client, suppliers and other third parties as further described below.

Unapproved Change Orders and Claims Against Client

Under the cost-reimbursable scope of the contract, JKC has entered into commercial contracts with multiple suppliers and subcontractors to execute various scopes of work on the project. Certain of these suppliers and subcontractors have made contract claims against JKC for recovery of costs and extensions of time to progress the works under the scope of their respective contracts due to a variety of issues related to alleged changes to the scope of work, delays and lower than planned subcontractor productivity. In addition, JKC has incurred costs related to scope increases and other factors and has made claims to its client for matters for which JKC believes it is entitled to reimbursement under the contract.

JKC believes any amounts paid or payable to the suppliers and subcontractors in settlement of their contract claims related to the cost-reimbursable scope are an adjustment to the contract price, and accordingly JKC has made claims for contract price adjustments under the cost-reimbursable scope of the contract between JKC and its client. However, the client disputed some of these contract price adjustments and subsequently withheld certain payments. In order to facilitate the continuation of work under the contract while JKC worked to resolve this dispute, the client agreed to a contractual mechanism (“Funding Deed”) in 2016 providing funding in the form of an interim contract price adjustment to JKC and consented to settlement of subcontractor claims as of that date related to the cost-reimbursable scope. While the client has reserved its contractual rights under this funding mechanism, settlement funds (representing the interim contract price adjustment) have been paid by the client. JKC in turn settled these subcontractor claims which have been funded through the Funding Deed by the client.

If the issues raised in the Funding Deed arbitration remain unresolved by December 31, 2020, JKC could be required to refund sums funded by the client under the terms of the Funding Deed. The legal issues were presented to the arbitration tribunal in September 2020. JKC believes the subcontractor settlement sums were properly incurred and consented to by the client. JKC remains confident the arbitration tribunal will either rule in favor of JKC on the merits or will stay the client’s call on the Funding Deed at the end of December 2020. We, along with our joint venture partners, are jointly and severally liable to the client for any amounts required to be refunded. The client has reserved their contractual rights on certain amounts previously funded to JKC and may seek recoveries of those amounts, including calling the performance and warranty letters of credit.

Our proportionate share of the total amount of the contract price adjustments under the Funding Deed included in the unapproved change orders and claims related to JKC discussed above was $159 million and $158 million as of September 30, 2020 and December 31, 2019, respectively.

In September and October 2017, additional settlements pertaining to suppliers and subcontractors under the cost-reimbursable scope of the contract were presented to the client. The client consented to these settlements and paid for them but reserved its contractual rights. In reliance, JKC in turn settled these claims with the associated suppliers and subcontractors. The formal contract price adjustments for these settlements remained pending at September 30, 2020. However, unlike amounts funded under the Funding Deed, there is no requirement to refund these amounts to the client by a certain date.

In October 2018, JKC received a favorable ruling from the arbitration tribunal related to the Funding Deeds. The ruling determined a contract interpretation in JKC's favor, to the effect that delay and disruption costs payable to subcontractors under the cost-reimbursable scope of the EPC contract are for the client's account and are reimbursable to JKC. JKC contends this ruling

---

resolves the reimbursability of the subcontractor settlement sums under the Funding Deed and additional settlements made in September and October 2017. Pursuant to this decision, JKC has undertaken steps for a formal contract adjustment to the cost reimbursable scope of the contract for these settlement claims which are included in the recognized unapproved change orders as of September 30, 2020. Our view is that the arbitration ruling resolves our obligations under the Funding Deeds and settlements with reimbursable subcontractors. However, the client does not agree with the impact of the arbitration award and, accordingly, we have initiated the Funding Deed proceeding referenced above to obtain further determination from the arbitration tribunal.

There has been deterioration of paint and insulation on certain exterior areas of the plant. The client previously requested and funded paint remediation for a portion of the facilities. JKC’s profit estimate at completion includes a portion of revenues and costs for these remediation activities. Revenue for the client-funded amounts are included in the table above. In the first quarter of 2019, the client demanded repayment of the amounts previously funded to JKC. JKC is disputing the client's demand. The client has also requested a proposal to remediate any remaining non-conforming paint and insulation, but JKC and its client have not resolved the nature and extent of the non-conformances, the method and degree of remediation that was and is required, or who is responsible. We believe the remaining remediation costs will be material given the plant is now operating and there will be several operating constraints on any such works.

In addition, JKC has started proceedings against the paint manufacturer and initiated claims against the subcontractors. JKC has also made demands on insurance policies in respect of these matters. JKC believes that project insurance should significantly limit any exposure it has on painting and insulation damages. Proceedings and claims against the paint manufacturer, certain subcontractors and insurance policies are ongoing. As the principal insured, it is incumbent upon the client to pursue the insurance claims with diligence. JKC is urging the client to meet its contractual obligations.

Combined Cycle Power Plant

Pursuant to JKC's fixed-price scope of its contract with its client, JKC awarded a fixed-price EPC contract to a subcontractor for the design, construction and commissioning of the Combined Cycle Power Plant (the "Power Plant"). The subcontractor was a consortium consisting of General Electric and GE Electrical International Inc. and a joint venture between UGL Infrastructure Pty Limited and CH2M Hill (collectively, the "Consortium"). On January 25, 2017, JKC received a Notice of Termination from the Consortium, and the Consortium ceased work on the Power Plant and abandoned the construction site. JKC believes the Consortium materially breached its subcontract and repudiated its obligation to complete the Power Plant, plus undertook actions making it more difficult and more costly for the works to be completed by others after the Consortium abandoned the site. Subsequently, the Consortium filed a request for arbitration with the ICC asserting that JKC repudiated the contract. The Consortium also sought an order that the Consortium validly terminated the subcontract. JKC has responded to this request, denying JKC committed any breach of its subcontract with the Consortium and restated its claim that the Consortium breached and repudiated its subcontract with JKC and is liable to JKC for all costs to complete the Power Plant.

In March 2017, JKC prevailed in a legal action against the Consortium requiring the return of materials, drawings and tools following their unauthorized removal from the site by the Consortium. After taking over the work, JKC discovered incomplete and defective engineering designs, defective workmanship on the site, missing, underreported and defective materials and the improper termination of key vendors/suppliers. JKC's investigations also indicate that progress of the work claimed by the Consortium was over-reported. JKC has evaluated the cost to complete the Consortium's work, which significantly exceeds the awarded fixed-price subcontract value. JKC's cost to complete the Power Plant included re-design efforts, additional materials and significant re-work. These costs represent estimated recoveries of claims against the Consortium and have been included in JKC's estimate to complete the Consortium's remaining obligations.

JKC is pursuing recourse against the Consortium to recover all of the costs to complete the Power Plant, plus the additional interest, and/or general damages by all means inclusive of calling bank guarantees provided by the Consortium partners. In April 2018, JKC prevailed in a legal action to call bank guarantees (bonds) and received funds totaling $52 million. Each of the Consortium partners has joint and several liability with respect to all obligations under the subcontract. JKC intends to pursue recovery of all additional amounts due from the Consortium via various legal remedies available to JKC.

Costs incurred to complete the Power Plant that have been determined to be probable of recovery from the Consortium under U.S. GAAP have been included as a reduction of cost in our estimate of profit at completion. The estimated recoveries exclude interest, liquidated damages and other related costs which JKC intends to pursue recovery from the Consortium. Amounts expected to be recovered from the Consortium are included in the table at the beginning of this Note 6.

As of September 30, 2020, JKC's claims against the Consortium were approximately $1.8 billion (net of bonds and remaining lump sum contract value) for recovery of JKC's costs. Hearings on the power plant arbitration are scheduled for April 2021 and

---

August 2021 (the "Arbitration"). The previous hearing dates were vacated due to the COVID-19 outbreak. The current dates may continue to be impacted by the COVID-19 pandemic.

 

JKC asked the Australian courts to require the parent company guarantors of the Consortium to issue payment to JKC in advance of the completion of the arbitration proceedings. The court concluded that the parent companies are responsible for Consortium’s liability resulting from the arbitration outcome, but they are not required to pay in advance of the arbitration.  JKC continues to pursue the resolution of this matter and will seek collection from the Consortium and their parent guarantors who are all jointly and severally liable for any damages owed to JKC.

To the extent JKC is unsuccessful in prevailing in the Arbitration or the Consortium members are unable to satisfy their financial obligations in the event of a decision favorable to JKC, we would be responsible for our pro-rata portion of unrecovered costs from the Consortium. This could have a material adverse impact on the profit at completion of the overall contract and thus on our consolidated statements of operations and financial position.

 

Other Disputed Matters

JKC is entitled to an amount of profit and overhead (“TRC Fee”) which is a fixed percentage of the target reimbursable costs ("TRC") under the reimbursable component of the contract which was to be agreed by JKC and its client. At the time of the contract, JKC and its client agreed to postpone the fixing of the TRC until after a specific milestone in the project had been achieved. Although the milestone was achieved, JKC and its client have been unable to reach agreement on the TRC. This matter was taken to arbitration in 2017. A decision was issued in December 2017 concluding that the TRC should be determined based on project estimate information available at April 2014. JKC has included an estimate for the TRC Fee in its determination of profit at completion at September 30, 2020, based on the contract provisions and the decision from the December 2017 arbitration. JKC has submitted the revised estimate of the TRC Fee to the client. The parties have not agreed to the revised estimate, and JKC has started an additional arbitration on this dispute.

In late 2019, the International Chamber of Commerce consolidated the Funding Deed arbitration, TRC arbitration and certain other claims asserted by JKC along with claims asserted by its client. A hearing for the Funding Deed arbitration took place in September 2020 and a decision is pending. Pursuant to a recent procedural order, the client is expected to file a detailed statement of its claim in May 2021. The arbitration panel has been constituted but a hearing date has not been scheduled.

Ichthys Project Funding

As a result of the ongoing disputes with the client and pursuit of recoveries against the Consortium through the Arbitration, we have funded our proportionate share of the working capital requirements of JKC to complete the project. We made investment contributions to JKC of approximately $484 million on an inception-to-date basis to fund project execution activities. We continue to fund our proportionate share of ongoing legal and commercial close out costs.

    

If we experience unfavorable outcomes associated with the various legal and commercial disputes, our total investment contributions could increase which could have a material adverse effect on our financial position and cash flows. Further, if either of our joint venture partners in JKC do not fulfill their responsibilities under the JKC joint venture agreement or subcontract, we could be exposed to additional funding requirements as a result of the nature of the JKC joint venture agreement.

As of September 30, 2020, we had $164 million in letters of credit outstanding in support of performance and warranty guarantees provided to the client. The performance and warranty letters of credit have been extended to February 2021 to allow for the various disputes to be resolved.

All of the Ichthys LNG project commercial matters are complex and involve multiple interests, including the client, joint venture partners, suppliers and other third parties. Ultimate resolution may not occur in the near term and could be impacted by the COVID-19 pandemic. Our current estimates for resolving these matters may prove inaccurate and, if so, any material change could have a material adverse effect on our results of operations, financial position and cash flows.

See Note 9 "Equity Method Investments and Variable Interest Entities" to our condensed consolidated financial statements for further discussion regarding our equity method investment in JKC.

---

Restructuring Charges

During the first quarter of 2020, our management initiated and approved a restructuring plan in response to the dislocation of the global energy market resulting from the recent decline in oil prices and the COVID-19 pandemic. The restructuring plan is designed to refine our market focus, optimize costs and improve operational efficiencies. The restructuring activities and related costs approved under the plan primarily relate to rationalization of real estate and overhead across various geographies in our ES and Other segments. As part of the restructuring plan, total restructuring charges of approximately $47 million were recognized in "Restructuring charges and asset impairments" in our condensed consolidated statements of operations for the three months ended March 31, 2020, of which $23 million relates to our ES business segment and $24 million relates to our Other segment representing corporate and other overhead expenses. Total restructuring charges include severance of approximately $24 million and real estate lease abandonments of approximately $23 million associated with office facilities located in the U.S. and U.K. These lease-related restructuring charges represent accrued estimated non-lease components and other operating expenses associated with the fully abandoned office space. In estimating the fair value of the lease-related restructuring charges, we utilized a discounted cash flow model with Level 3 inputs including discount rates based on our incremental borrowing rate, management assumptions regarding future estimated operating costs, office space utilization, and inflation over the remaining lease terms.

During the second quarter of 2020, our management approved additional restructuring activities and decided to discontinue pursuing certain projects, principally lump-sum EPC and commoditized construction services. These restructuring activities primarily related to further rationalization of real estate and overhead in our ES and Other segments. We recognized restructuring charges of approximately $32 million in "Restructuring charges and asset impairments" in our condensed consolidated statements of operations for the three months ended June 30, 2020 related in our ES business segment. Total restructuring charges in the second quarter of 2020 primarily include severance of approximately $12 million and charges associated with certain long-term engineering software agreements of approximately $19 million. The software-related restructuring charge represents the fair value of the future costs to be incurred under these agreements without economic benefit to our operations. Our estimate of the fair value of the software restructuring charge was based on a discounted cash flow model with Level 3 inputs including discount rates based on our incremental borrowing rate, management assumptions regarding the committed costs for the excess software capacity and the remaining term of the agreements.

  

We expect the restructuring activities will be substantially completed in 2020. Additional restructuring activities could be identified and approved as part of the plan. Software and lease related restructuring obligations will extinguish in 2023 and 2030, respectively.

The restructuring liability at September 30, 2020 was $64 million, of which $32 million is included in "Other current liabilities" and $32 million is included in "Other liabilities." A reconciliation of the beginning and ending restructuring liability balances is provided in the following table.

Dollars in millions	Severance					Lease Abandonment				Other				Total
Balance as of January 1, 2020	$	—				$	—			$	—			$	—
Restructuring charges accrued during the period	36					23				19				78
Cash payments / settlements during the period	(9		)			(1		)		(1		)		(11		)
Currency translation and other adjustments	(3		)			—				—				(3		)
Balance as of September 30, 2020	$	24		—		$	22			$	18			$	64

Asset Impairments

As a result of the significant adverse economic and market conditions associated with the dislocation of the global energy market and COVID-19 pandemic, the significant drop in the price of our common shares, and the resulting restructuring plans initiated during the first quarter of 2020, we performed interim impairment tests of our long-lived assets including goodwill, intangible assets and equity investments as well as leased right-of-use and related assets. During the second quarter of 2020, we continued to evaluate our long-lived and other assets for impairment as a result of the ongoing economic and market volatility as well as management's decision to discontinue pursuing certain projects within our ES business segment. See Note 8 "Goodwill and Goodwill Impairment" for further discussion of goodwill impairment recognized in the first and second quarters of 2020.

We determined the fair value of our long-lived assets based primarily on discounted cash flow analyses, and in the case of our equity investments, we used a blended income-based and market-based approach. These determinations included significant

---

management judgment, including short-term and long-term forecasts of operating performance, discount rates based on our weighted average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual market recovery, and in the case of long-lived assets, the remaining useful life and service potential of the asset. These impairment assessments incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts.

 

Leased office facilities and related assets. Management's restructuring plan included the rationalization of the certain leased real estate primarily in the U.S. and U.K. As a result, we began evaluating excess office space apart from office space we will continue to utilize. We made decisions to market certain excess office space for sublease and the remaining excess office space was abandoned along with any related leasehold improvements, furniture and fixtures. The abandoned leased facilities and related assets will not provide any substantial future economic benefit and were impaired accordingly. We recognized lease right-of-use asset impairments of approximately $28 million and impairments of leasehold improvements, furniture and fixtures of approximately $7 million which are included in "Restructuring charges and asset impairments" in our condensed consolidated statements of operations for the three months ended March 31, 2020. We recognized additional lease right-of-use asset impairments of approximately $18 million and impairments of leasehold improvements, furniture and fixtures of approximately $3 million during the three months ended June 30, 2020 as a result of decisions to abandon excess office space. In determining these impairments, we utilized a discounted cash flow model with Level 3 inputs including discount rates based on our incremental borrowing rate, management assumptions regarding future cash flows over the remaining estimated useful life of the asset, office space utilization and sublease assumptions.

Trade name intangibles. During the three months ended March 31, 2020, we recognized an impairment loss on indefinite-lived intangible assets of approximately $11 million associated with certain trade names acquired through previous business combinations. In connection with the energy market decline, management assessed the fair value of trade names utilized by certain operations within the ES business segment, concluded that they were substantially impaired and decided to cease use of those trade names. The trade names will provide no benefit to future periods and the carrying values of these intangibles were impaired accordingly. In determination of this impairment, we estimated fair value using a relief-from-royalty income approach which utilized Level 3 fair value inputs including management estimates of contract performance, hypothetical royalty rates and our weighted average cost of capital. The loss was included in "Restructuring charges and asset impairments" in our condensed consolidated statement of operations for the three months ended March 31, 2020.

Equity method investments. We evaluated significant investments and determined that two equity method investments were impaired as of March 31, 2020, comprised of 15% interest in a project joint venture located in the Middle East and a 50% interest in a joint venture in Latin America and that those impairments were other than temporary. We recognized total impairment losses of approximately $18 million on these investments included in "Restructuring charges and asset impairments" for the three months ended March 31, 2020, of which $13 million related to the Middle East joint venture project in our ES business segment. The fair value of this investment was determined using a blended income-based and market-based approach utilizing Level 2 fair value inputs including significant management assumptions such as projected commodity prices, operating margins, cash flows and weighted average cost of capital. See Note 19 “Financial Instruments and Risk Management” for definition of three levels of inputs used in measuring fair value. We recognized an impairment loss of $5 million in the first quarter of 2020 on the joint venture in Latin America that is reported in our Non-strategic Business segment. The impairment loss includes the write-off of a shareholder loan to the joint venture and funding of costs to dispose of the underlying joint venture assets. During the second quarter of 2020, we recognized additional impairments totaling approximately $6 million related to several equity method investments associated with management's decision to discontinue pursuing certain projects within our ES business segment.

   

In connection with our business reorganization and restructuring activities during the first quarter of 2020, we changed our internal management reporting structure, which resulted in changes to the underlying reporting units within our ES business segment. Additionally, given the significant adverse economic and market conditions associated with the dislocation of the global energy market and COVID-19 pandemic as well as the significant decline in the price of our common shares during the first quarter of 2020, we performed an interim impairment test of goodwill resulting in goodwill impairment of $62 million for the three months ended March 31, 2020. The goodwill impairment was associated with a reporting unit in our ES business segment.

---

As a result of the ongoing economic and market volatility as well as management's decision to discontinue pursuing certain projects within our ES business segment during the second quarter of 2020, we performed an interim impairment test of goodwill resulting in goodwill impairment of $37 million for the three months ended June 30, 2020. The goodwill impairment was associated with a reporting unit within our ES business segment. One reporting unit within our ES business segment had a negative carrying amount of net assets as of June 30, 2020 and goodwill of approximately $19 million.

For reporting units in our ES business segment, fair value was determined using an income approach utilizing discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses over a specified period plus a terminal value. For all other reporting units, fair values were determined using a blended approach including market earnings multiples and discounted cash flow models. Under the market approach, we estimated fair value by applying earnings and revenue market multiples to a reporting unit’s operating performance for the trailing twelve-month period. The income approach estimates fair value by discounting each reporting unit’s estimated future cash flows using a weighted-average cost of capital that reflects current market conditions and the risk profile of the reporting unit. To arrive at our future cash flows, we used estimates of economic and market assumptions, including growth rates in revenues, costs, estimates of future expected changes in operating margins, tax rates and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.

The table below summarizes changes in the carrying amount of goodwill by business segment.

Dollars in millions	Government Solutions				Technology Solutions				Energy Solutions				Total
Balance as of January 1, 2020	$	978			$	50			$	237			$	1,265
Goodwill from acquisitions during the period	12				—				—				12
Impairment loss	—				—				(99		)		(99		)
Foreign currency translation	—				1				—				1
Balance as of September 30, 2020	$	990			$	51			$	138			$	1,179

---

We conduct some of our operations through joint ventures, which operate through partnerships, corporations and undivided interests and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are VIEs.

The following table presents a rollforward of our equity in and advances to unconsolidated affiliates:

	Nine Months Ended September 30,				Year Ended December 31,
	2020				2019
Dollars in millions
Beginning balance at January 1,	$	846			$	724
Cumulative effect of change in accounting policy (a)	—				25
Adjusted balance at January 1,	846				749
Equity in earnings of unconsolidated affiliates	30				35
Distributions of earnings of unconsolidated affiliates	(35		)		(69		)
Advances to (payments from) unconsolidated affiliates, net	(15		)		(10		)
Investments (b)	22				146
Impairment of equity method investments (c)	(22		)		—
Foreign currency translation adjustments	1				(7		)
Other	(2		)		2
Ending balance	$	825			$	846

(a)	At January 1, 2019, we recognized a cumulative effect adjustment of $25 million as a result of the adoption of ASC 606 by our unconsolidated project joint ventures (excluding the Aspire Defence Limited joint venture which adopted on January 1, 2018). See Note 1 "Basis of Presentation" for further discussion.

(b)	Investments include $20 million and $141 million in funding contributions to JKC for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively.

(c)	During the nine months ended September 30, 2020, we recognized an impairment of $13 million associated with our investment in a joint venture project located in the Middle East, a $3 million impairment related to a joint venture in Latin America, and a $6 million impairment related to other equity method investments. See Note 7 "Restructuring Charges and Asset Impairments" for further discussion.

Unconsolidated Variable Interest Entities

For the VIEs in which we participate, our maximum exposure to loss consists of our equity investment in the VIE, any amounts owed to us for services we may have provided to the VIE, and any amounts that we may be contractually or constructively obligated to fund in the future reduced by any unearned revenues on the project. Our maximum exposure to loss may also include our obligation to fund our proportionate share of any future losses incurred. As of September 30, 2020, we do not project any material losses related to these joint venture projects. Where our performance and financial obligations are joint and several to the client with our joint venture partners, we may be further exposed to losses above our ownership interest in the joint venture.

---

The following summarizes the total assets and total liabilities as reflected in our condensed consolidated balance sheets related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary.

	September 30, 2020
Dollars in millions	Total Assets				Total Liabilities
Affinity joint venture (U.K. MFTS project)	$	10			$	11
Aspire Defence Limited	$	59			$	5
JKC joint venture (Ichthys LNG project)	$	561			$	39
U.K. Roads project joint ventures	$	57			$	—
Middle East Petroleum Corporation (EBIC ammonia project)	$	31			$	1

 

	December 31, 2019
Dollars in millions	Total Assets				Total Liabilities
Affinity joint venture (U.K. MFTS project)	$	14			$	10
Aspire Defence Limited	$	67			$	5
JKC joint venture (Ichthys LNG project)	$	546			$	29
U.K. Roads project joint ventures	$	40			$	21
Middle East Petroleum Corporation (EBIC ammonia project)	$	47			$	1

Related Party Transactions

We often provide engineering, construction management and other subcontractor services to our unconsolidated joint ventures and our revenues include amounts related to these services. For the nine months ended September 30, 2020 and 2019, our revenues included $379 million and $525 million, respectively, related to the services we provided primarily to the Aspire Defence Limited joint venture within our GS business segment and two other joint ventures within our ES business segment.

Amounts included in our condensed consolidated balance sheets related to services we provided to our unconsolidated joint ventures as of September 30, 2020, and December 31, 2019 are as follows:

	September 30,				December 31,
Dollars in millions	2020				2019
Accounts receivable, net of allowance for credit losses	$	78			$	74
Contract assets (a)	$	1			$	2
Contract liabilities (a)	$	48			$	33

(a)	Reflects contract assets and contract liabilities related to joint ventures within our GS and ES business segments.

---

Consolidated Variable Interest Entities

We consolidate VIEs if we determine we are the primary beneficiary of the project entity because we control the activities that most significantly impact the economic performance of the entity. The following is a summary of the significant VIEs where we are the primary beneficiary:

Dollars in millions	September 30, 2020
	Total Assets				Total Liabilities
Fasttrax Limited (Fasttrax project)	$	47			$	21
Aspire Defence subcontracting entities (Aspire Defence project)	$	440			$	208

 

Dollars in millions	December 31, 2019
	Total Assets				Total Liabilities
Fasttrax Limited (Fasttrax project)	$	45			$	24
Aspire Defence subcontracting entities (Aspire Defence project)	$	530			$	283

The components of net periodic benefit cost related to pension benefits for the nine months ended September 30, 2020 and 2019 were as follows:

	Three Months Ended September 30,
	2020								2019
Dollars in millions	United States				Int’l				United States				Int’l
Components of net periodic pension cost (benefit)
Service cost	$	—			$	1			$	—			$	—
Interest cost	$	—			$	9			$	1			$	12
Expected return on plan assets	—				(15		)		(1		)		(18		)
Recognized actuarial loss	—				6				—				4
Net periodic benefit cost (benefit)	$	—			$	1			$	—			$	(2	)
	Nine Months Ended September 30,
	2020								2019
Dollars in millions	United States				Int’l				United States				Int’l
Components of net periodic pension cost (benefit)
Service cost	$	—			$	1			$	—			$	—
Interest cost	$	1			$	28			$	2			$	37
Expected return on plan assets	(2		)		(44		)		(2		)		(57		)
Amortization of prior service cost	—				1				—				1
Recognized actuarial loss	1				17				1				12
Net periodic pension cost (benefit)	$	—			$	3			$	1			$	(7	)

---

Our outstanding debt consisted of the following:

Dollars in millions		September 30, 2020				December 31, 2019
Term Loan A		$	277			$	176
Term Loan B		518				756
Convertible Notes		350				350
Senior Notes		250				—
Unamortized debt issuance costs - Term Loan A		(4		)		(4		)
Unamortized debt issuance costs and discount - Term Loan B		(16		)		(15		)
Unamortized debt issuance costs and discount - Convertible Notes		(44		)		(53		)
Unamortized debt issuance costs and discount - Senior Notes		(5		)		—
Total debt		1,326				1,210
Less: current portion		12				27
Total long-term debt, net of current portion		$	1,314			$	1,183

Senior Credit Facility

On February 7, 2020, we amended our Senior Credit Facility to, among other things, reduce the applicable margins and commitment fees associated with the various borrowings under the facility. Simultaneous with the amendment, we used proceeds from the new facility and cash on hand to refinance our outstanding borrowings resulting in an amended senior secured credit facility ("Senior Credit Facility") that consisted of a $500 million revolving credit facility ("Revolver"), a $500 million PLOC, a $275 million Loan A, ("Term Loan A") of which a portion is denominated in Australian dollars, and a $520 million Term Loan B ("Term Loan B"). In addition, the amendment extended the maturity dates with respect to the Revolver, PLOC and the Term Loan A to February 2025 and Term Loan B to February 2027, and amended certain other provisions including the financial covenants.

On July 2, 2020, we amended our Senior Credit Facility to convert the $500 million capacity formerly available under our PLOC to our Revolver, increasing our Revolver capacity from $500 million to $1 billion. On September 14, 2020, we further amended our Senior Credit Facility to modify the definition and calculation of Consolidated EBITDA (as defined therein) to permit pro forma cost reductions resulting from certain corporate transactions. The aggregate amount under our Senior Credit Facility remains $1.795 billion and all other terms and conditions remain unchanged.

    

The interest rates with respect to the Revolver and Term Loan A are based on, at the Company's option, adjusted LIBOR plus an additional margin or base rate plus additional margin. The interest rate with respect to the Term Loan B is LIBOR plus 2.75%. The Senior Credit Facility provides for fees on letters of credit issued under the PLOC at varying rates, as shown below. Additionally, there is a commitment fee with respect to the Revolver and PLOC.

The details of the applicable margins and commitment fees under the amended Senior Credit Facility are based on the Company's consolidated leverage ratio as follows:

		Revolver and Term Loan A
Consolidated Leverage Ratio		LIBOR Margin			Base Rate Margin			Performance Letter of Credit Fee			Commitment Fee
Greater than or equal to 3.25 to 1.00		2.25	%		1.25	%		1.35	%		0.35	%
Less than 3.25 to 1.00 but greater than or equal to 2.25 to 1.00		2.00	%		1.00	%		1.20	%		0.30	%
Less than 2.25 to 1.00 but greater than or equal to 1.25 to 1.00		1.75	%		0.75	%		1.05	%		0.25	%
Less than 1.25 to 1.00		1.50	%		0.50	%		0.90	%		0.20	%

---

The Term Loan A provides for quarterly principal payments of 0.625% of the aggregate principal amount commencing with the fiscal quarter ending June 30, 2020, increasing to 1.25% starting with the quarter ending June 30, 2022. The Term Loan B provides for quarterly principal payments of 0.25% of the initial aggregate principal amounts commencing with the fiscal quarter ending June 30, 2020.

The Senior Credit Facility contains financial covenants of a maximum consolidated leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the Senior Credit Facility). Our consolidated leverage ratio as of the last day of any fiscal quarter may not exceed 4.25 to 1 through 2021, reducing to 4.00 to 1 in 2022 and 3.75 to 1 in 2023. Our consolidated interest coverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2020 and thereafter, may not be less than 3.00 to 1. As of September 30, 2020, we were in compliance with our financial covenants related to our debt agreements.

Convertible Senior Notes

On November 15, 2018, we issued and sold $350 million of 2.50% Convertible Senior Notes due 2023 (the "Convertible Notes") pursuant to an indenture between us and Citibank, N.A., as trustee. The Convertible Notes are senior unsecured obligations and bear interest at 2.50% per year, and interest is payable on May 1 and November 1 of each year. The Convertible Notes mature on November 1, 2023 and may not be redeemed by us prior to maturity.

The net carrying value of the equity component related to the Convertible Notes was $57 million as of September 30, 2020 and December 31, 2019. The amount of interest cost recognized relating to the contractual interest coupon was $3 million and $7 million for the three and nine months ended September 30, 2020, respectively, and $2 million and $6 million for the three and nine months ended September 30, 2019, respectively. The amount of interest cost recognized relating to the amortization of the discount and debt issuance costs was $3 million for three months ended September 30, 2020 and 2019 and $9 million for the nine months ended September 30, 2020 and 2019. The effective interest rate on the liability component was 6.50% as of September 30, 2020 and December 31, 2019.

Senior Notes

On September 30, 2020, we issued and sold $250 million aggregate principal amount of 4.750% Senior Notes due 2028 pursuant to an indenture among us, the guarantors party thereto and Citibank, N.A., as trustee. The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed by each of our existing and future domestic subsidiaries that guarantee our obligations under the Senior Credit Facility and certain other indebtedness. The net proceeds from the offering was approximately $245 million, after deducting fees and estimated offering expenses and were used to finance a portion of the purchase price for the acquisition of Centauri and pay related fees and expenses. Interest is payable semi-annually in arrears on March 30 and September 30 of each year, beginning on March 31, 2021, and the principal is due on September 30, 2028.

At any time prior to September 30, 2023, we may redeem all or part of the Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest, if any, to (but not including) the redemption date, plus a specified “make-whole premium.” On or after September 30, 2023 we may redeem all or part of the Senior Notes at our option, at the redemption prices set forth in the Senior Notes, plus accrued and unpaid interest, if any, to (but not including) the redemption date. At any time prior to September 30, 2023, we may redeem up to 35% of the original aggregate principal amount of the Senior Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 104.750% of the principal amount of the Senior Notes, together with accrued and unpaid interest, if any, to (but not including) the redemption date. If we undergo a change of control, we may be required to make an offer to holders of the Senior Notes to repurchase all of the Senior Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.

Letters of credit, surety bonds and guarantees

In connection with certain projects, we are required to provide letters of credit, surety bonds or guarantees to our customers in the ordinary course of business as credit support for contractual performance guarantees, advanced payments received from customers and future funding commitments. As of September 30, 2020, we had $1 billion in a committed line of credit under the Senior Credit Facility and $415 million of uncommitted lines of credit to support the issuance of letters of credit. As of September 30, 2020, with respect to our Senior Credit Facility, we had no outstanding borrowings and $116 million of outstanding letters of credit. On October 1, 2020, the Company borrowed $260 million on the Senior Credit Facility to fund the acquisition of Centauri. With respect to our $415 million of uncommitted lines of credit, we had utilized $207 million for letters of credit as of September 30, 2020. The total remaining capacity of these committed and uncommitted lines of credit was approximately $1.1 billion. Of the letters of credit outstanding under the Senior Credit Facility, none have expiry dates beyond the maturity date of the Senior

---

Credit Facility. Of the total letters of credit outstanding, $166 million relate to our joint venture operations where the letters of credit are posted using our capacity to support our pro-rata share of obligations under various contracts executed by joint ventures of which we are a member.

Nonrecourse Project Debt

Fasttrax Limited, a consolidated joint venture in which we indirectly own a 50% equity interest with an unrelated partner, was awarded a concession contract in 2001 with the U.K. MoD to provide a Heavy Equipment Transporter Service to the British Army. Fasttrax Limited operates and maintains 91 HETs for a term of 22 years. The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and subordinated debt from the joint venture partners. The secured bonds are an obligation of Fasttrax Limited and are not a debt obligation of KBR as they are nonrecourse to the joint venture partners. Accordingly, in the event of a default on the notes, the lenders may only look to the assets of Fasttrax Limited for repayment.

The secured bonds were issued in two classes consisting of Class A 3.5% Index Linked Bonds in the amount of £56.0 million and Class B 5.9% Fixed Rate Bonds in the amount of £20.7 million.  Semi-annual payments on both classes of bonds will continue through maturity in March 2021.  The subordinated notes payable to each of the partners initially bear interest at 11.25% increasing to 16.00% over the term of the notes until maturity in 2025. For financial reporting purposes, only our partner's portion of the subordinated notes appears in the condensed consolidated financial statements.

The effective tax rate was approximately 27% and (51)% for the three and nine months ended September 30, 2020, respectively. The effective tax rate was approximately 30% and 28% for the three and nine months ended September 30, 2019, respectively. The difference between the effective tax rate for the nine months ended September 30, 2020 and the U.S. statutory rate of 21%, was primarily caused by certain goodwill and asset impairments incurred that are not deductible for tax purposes. Excluding the tax impact of the goodwill and asset impairment charges, our tax rate was 27% for the nine months ended September 30, 2020.

Our estimated annual effective rate for 2020 is 26% excluding the effects of discrete items. Our estimated annual effective rate is subject to change based on the actual jurisdictions where our 2020 earnings are generated.

The valuation allowance for deferred tax assets as of September 30, 2020 and December 31, 2019 was $195 million and $200 million, respectively. The decrease of $5 million and $10 million for the nine months ended September 30, 2020 and 2019, respectively, was due to the reversal of certain valuation allowances related to the utilization of foreign tax credits during these periods resulting from changes in the amount and character of forecasted income. The remaining valuation allowance is primarily related to foreign tax credit carryforwards and foreign and state net operating loss carryforwards that, in the judgment of management, are not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income, in the appropriate character and source, during the periods in which those temporary differences become deductible or within the remaining carryforward period. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment.

The utilization of the unreserved foreign tax credit carryforwards is based on our ability to generate income from foreign sources of approximately $748 million prior to their expiration. The utilization of other net deferred tax assets, excluding those associated with indefinite-lived intangible assets, is based on our ability to generate U.S. forecasted taxable income of approximately $586 million. Changes in our forecasted taxable income, in the appropriate character and source, as well as jurisdiction, could affect the ultimate realization of deferred tax assets.

---

We provide services to various U.S. governmental agencies, including the U.S. DoD, NASA, and the Department of State. We may have disagreements or experience performance issues on our U.S. government contracts. When performance issues arise under any of these contracts, the U.S. government retains the right to pursue various remedies, including challenges to expenditures, suspension of payments, fines and suspensions or debarment from future business with the U.S. government. The negotiation, administration and settlement of our contracts are subject to audit by the DCAA. The DCAA serves in an advisory role to the DCMA, which is responsible for the administration of the majority of our contracts. The scope of these audits includes, among other things, the validity of direct and indirect incurred costs, provisional approval of annual billing rates, approval of annual overhead rates, compliance with the FAR and CAS, compliance with certain unique contract clauses and audits of certain aspects of our internal control systems. Based on the information received to date, we do not believe any completed or ongoing government audits will have a material adverse impact on our results of operations, financial position or cash flows.

Legacy U.S. Government Matters

Between 2002 and 2011, we provided significant support to the U.S. Army and other U.S. government agencies in support of the war in Iraq under the LogCAP III contract. We have been in the process of closing out the LogCAP III contract since 2011, and we expect the contract closeout process to continue for at least another year. As a result of our work under LogCAP III, there are claims and disputes pending between us and the U.S. government which need to be resolved in order to close the contract. The contract closeout process includes resolving objections raised by the U.S. government through a billing dispute process referred to as Form 1s and MFRs. We continue to work with the U.S. government to resolve these issues and are engaged in efforts to reach mutually acceptable resolution of these outstanding matters. However, for certain of these matters, we have filed claims with the ASBCA or the COFC. We also have matters related to ongoing litigation or investigations involving U.S. government contracts. We anticipate billing additional labor, vendor resolution and litigation costs as we resolve the open matters in the future.

The Company established a reserve for unallowable costs associated with open government matters related to the heritage KBR U.S. Government Services business in the amounts of $33 million and $39 million as of September 30, 2020, and December 31, 2019, respectively. The balance at September 30, 2020, is recorded in “Other liabilities.” The balance at December 31, 2019, is recorded in "Contract liabilities" and "Other liabilities" in the amounts of $27 million and $12 million, respectively.

    

Investigations, Qui Tams and Litigation

The following matters relate to ongoing litigation or federal investigations involving U.S. government contracts. Many of these matters involve allegations of violations of the FCA, which prohibits in general terms fraudulent billings to the U.S. government. Suits brought by private individuals are called "qui tams." We believe the costs of litigation and any damages that may be awarded in the FKTC matters described below are billable under the LogCAP III. All costs billed under LogCAP III are subject to audit by the DCAA for reasonableness.

First Kuwaiti Trading Company arbitration. In April 2008, FKTC, one of our LogCAP III subcontractors providing housing containers, filed for arbitration with the American Arbitration Association all its claims under various LogCAP III subcontracts. After complete hearings on all claims, the arbitration panel awarded FKTC $17 million plus interest for claims involving damages on lost or unreturned vehicles. In addition, we determined that we owe FKTC $32 million in connection with other subcontracts provided we are reimbursed for these same costs by the U.S. government. We previously paid FKTC $19 million and the remaining $30 million is recorded in "Other current liabilities" on our condensed consolidated balance sheets. As of September 30, 2020, we believe our recorded accruals are adequate if we are unable to favorably resolve our claims and disputes against the U.S. government. See "KBR Contract Claim on FKTC containers" below.

Howard qui tam. In March 2011, Geoffrey Howard and Zella Hemphill filed a complaint in the U.S. District Court for the Central District of Illinois alleging that KBR mischarged the government $628 million for unnecessary materials and equipment. In October 2014, the DOJ declined to intervene and the case was partially unsealed. Depositions of some DCMA and KBR personnel have taken place and more were expected to occur in early 2020 but have been postponed due to COVID-19. KBR and the relators filed various motions including a motion to dismiss by KBR. KBR's motion to dismiss was not granted and we are considering appellate options.  The deadline for all fact discovery and depositions has been extended due to COVID-19 travel restrictions and related delays and discovery continues. We believe the allegations of fraud by the relators are without merit and, as of September 30, 2020, no amounts have been accrued.

DOJ False Claims Act complaint - Iraq Subcontractor. In January 2014, the DOJ filed a complaint in the U.S. District Court for the Central District of Illinois against KBR and two former KBR subcontractors, including FKTC, alleging that three former KBR employees were offered and accepted kickbacks from these subcontractors in exchange for favorable treatment in

---

the award and performance of subcontracts to be awarded during the course of KBR's performance of the LogCAP III contract in Iraq. The complaint alleges that as a result of the kickbacks, KBR submitted invoices with inflated or unjustified subcontract prices, resulting in alleged violations of the FCA and the Anti-Kickback Act. The DOJ's investigation dates back to 2004. We self-reported most of the violations and tendered credits to the U.S. government as appropriate. On May 22, 2014, FKTC filed a motion to dismiss, which the U.S. government opposed. Following the submission of our answer in April 2014, the U.S. government was granted a Motion to Strike certain affirmative defenses in March 2015. We do not believe this limits KBR's ability to fully defend all allegations in this matter.

Discovery for this complaint is now mostly complete. On March 30, 2020, the Court granted KBR’s motion to transfer the case to the Southern District of Texas and the court recently ruled on various discovery motions allowing one additional deposition to take place. As of September 30, 2020, we have accrued our best estimate of probable loss related to an unfavorable settlement of this matter in "Other liabilities" on our condensed consolidated balance sheets.

   

Other matters

Unaoil Investigation. We previously disclosed that the DOJ, SEC, and the SFO had been conducting investigations of Unaoil, a Monaco based company, in relation to international projects involving several global companies, including KBR.  The DOJ and SEC have informed us that their investigations with regard to KBR are now closed. The SFO has informed us that its KBR investigation is no longer focused on allegations of corruption involving Unaoil although some lines of inquiry remain under investigation. To the extent necessary, KBR will continue to cooperate with the authorities in their investigations.

Chadian Employee Class Action. In May 2018, former employees of our former Chadian subsidiary, Subsahara Services, Inc. ("SSI"), filed a class action suit claiming unpaid damages arising from the ESSO Chad Development Project for Exxon Mobil Corporation ("Exxon") dating back to the early 2000s. Exxon is also named as a defendant in the case. The SSI employees previously filed two class action cases in or around 2005 and 2006 for alleged unpaid overtime and bonuses.  The Chadian Labour Court ruled in favor of the SSI employees for unpaid overtime resulting in a settlement of approximately $25 million which was reimbursed by Exxon under its contract with SSI.  The second case for alleged unpaid bonuses was ultimately dismissed by the Supreme Court of Chad. 

The current case claims $122 million in unpaid bonuses characterized as damages rather than employee bonuses to avoid the previous Chadian Supreme Court dismissal and a 5-year statute of limitations on wage-related claims.  SSI’s initial defense was filed and a hearing was held in December 2018.  A merits hearing was held in February 2019.  In March 2019, the Labour Court issued a decision awarding the plaintiffs approximately $34 million including a $2 million provisional award.  Exxon and SSI have appealed the award and requested suspension of the provisional award which was approved on April 2, 2019.  Exxon and SSI filed a submission to the Court of Appeal on June 21, 2019 and filed briefs at a hearing on February 28, 2020. The plaintiffs failed to file a response on March 13, 2020 and a hearing was scheduled for April 17, 2020. The hearing was postponed due to COVID-19 but took place on September 18, 2020. On October 9, 2020 the appellate court of Moundou awarded the plaintiffs approximately $19 million. The court has only issued an extract of its decision so we do not know the legal basis for the decision.

At this time we do not believe a risk of material loss is probable related to this matter.  SSI is no longer an existing entity in Chad or the United States.  Further, we believe any amounts ultimately paid to the former employees related to this adverse ruling would be reimbursable by Exxon based on the applicable contract.  

North West Rail Link Project. We participate in an unincorporated joint venture with two partners to provide engineering and design services in relation to the operations, trains and systems of a metro rail project in Sydney, Australia.  The project commenced in 2014 and during its execution encountered delays and disputes resulting in claims and breach notices submitted to

---

the joint venture by the client.  Since November 2018, the client has submitted multiple claims alleging breach of contract and breach of duty by the joint venture in its execution of the services, claiming losses and damages of up to approximately $300 million Australian dollars.   We currently believe the gross amount of the claims significantly exceeds the client’s entitlement as well as the joint venture’s limits of liability under the contract and that the claims will be covered by project-specific professional indemnity insurance subject to deductibles. 

We enter into lease arrangements primarily for real estate, project equipment, transportation and information technology assets in the normal course of our business operations. Real estate leases accounted for approximately 84% of our lease obligations at September 30, 2020. An arrangement is determined to be a lease at inception if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration. We have elected not to recognize a ROU asset and lease liability for leases with an initial term of 12 months or less. Many of our equipment leases, primarily associated with the performance of projects for U.S. government customers, include one or more renewal option periods, with renewal terms that can extend the lease term in one year increments. The exercise of these lease renewal options is at our sole discretion and is generally dependent on the period of project performance, or extension thereof, determined by our customers. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term to determine total future lease payments. Because most of our lease agreements do not explicitly state the discount rate, we use our incremental borrowing rate on the commencement date to calculate the present value of future lease payments.

Certain leases include payments that are based solely on an index or rate. These variable lease payments are included in the calculation of the ROU asset and lease liability. Other variable lease payments, such as usage-based amounts, are excluded from the ROU asset and lease liability, and are expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease, such as commissions.

In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. We exclude these non-lease components in calculating the ROU asset and lease liability for real estate leases and expense them as incurred. For all other types of leases, non-lease components are included in calculating our ROU assets and lease liabilities.

 

---

The components of lease costs for the three and nine months ended September 30, 2020 and 2019 were as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
Dollars in millions	2020				2019				2020				2019
Operating lease cost	$	13			$	15			$	39			44
Short-term lease cost	19				36				88				83
Total lease cost	$	32			$	51			$	127			$	127

    

Operating lease cost includes operating lease ROU asset amortization of $25 million and $27 million for the nine months ended September 30, 2020 and 2019, respectively, and other noncash operating lease costs related to the accretion of operating lease liabilities and straight-line lease accounting of $14 million and $17 million for the nine months ended September 30, 2020 and 2019, respectively.

Total short-term lease commitments as of September 30, 2020 were approximately $101 million. Additional information related to leases was as follows:

	September 30,
Dollars in millions	2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	45
Right-of-use assets obtained in exchange for new operating lease liabilities	$	11
Weighted-average remaining lease term-operating (in years)	6.0
Weighted-average discount rate-operating leases	7.1		%

The following is a maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities as of September 30, 2020:

	Year
Dollars in millions	2020				2021				2022				2023				2024				Thereafter				Total
Future payments - operating leases	$	14			$	47			$	39			$	33			$	23			$	91			$	247

Dollars in millions	Operating Leases
Total future payments	$	247
Less imputed interest	(54		)
Present value of future lease payments	$	193
Less current portion of lease obligations	(39		)
Noncurrent portion of lease obligations	$	154

---

Changes in AOCL, net of tax, by component

Dollars in millions	Accumulated foreign currency translation adjustments				Accumulated pension liability adjustments				Changes in fair value of derivatives				Total
Balance at December 31, 2019	$	(315	)		$	(654	)		$	(18	)		$	(987	)
Other comprehensive income adjustments before reclassifications	(15		)		—				(20		)		(35		)
Amounts reclassified from AOCL	(12		)		15				5				8
Net other comprehensive income (loss)	(27		)		15				(15		)		(27		)
Balance at September 30, 2020	$	(342	)		$	(639	)		$	(33	)		$	(1,014	)

Dollars in millions	Accumulated foreign currency translation adjustments				Accumulated pension liability adjustments				Changes in fair value of derivatives				Total
Balance at December 31, 2018	$	(304	)		$	(592	)		$	(14	)		$	(910	)
Other comprehensive income adjustments before reclassifications	(48		)		—				(17		)		(65		)
Amounts reclassified from AOCL	—				11				10				21
Net other comprehensive income (loss)	(48		)		11				(7		)		(44		)
Balance at September 30, 2019	$	(352	)		$	(581	)		$	(21	)		$	(954	)

Reclassifications out of AOCL, net of tax, by component

	Nine Months Ended September 30,
Dollars in millions	2020				2019				Affected line item on the Condensed Consolidated Statements of Operations
Accumulated foreign currency adjustments
Reclassification of foreign currency adjustments	$	12			$	—			Net income attributable to noncontrolling interests and Gain on disposition of assets and investments
Tax benefit	—				—				Provision for income taxes
Net accumulated foreign currency	$	12			$	—			Net of tax
Accumulated pension liability adjustments
Amortization of actuarial loss (a)	$	(18	)		$	(13	)		See (a) below
Tax benefit	3				2				Provision for income taxes
Net pension and post-retirement benefits	$	(15	)		$	(11	)		Net of tax
Changes in fair value for derivatives
Foreign currency hedge and interest rate swap settlements	$	(6	)		$	(10	)		Other non-operating income
Tax benefit	1				—				Provision for income taxes
Net changes in fair value of derivatives	$	(5	)		$	(10	)		Net of tax

(a)	This item is included in the computation of net periodic pension cost. See Note 10 "Retirement Benefits" to our condensed consolidated financial statements for further discussion.

---

Authorized Share Repurchase Program

On February 25, 2014, our Board of Directors authorized a plan to repurchase up to $350 million of our outstanding shares of common stock, which plan replaced and terminated the August 26, 2011 share repurchase program. As of December 31, 2019, $160 million remained available under this authorization. On February 19, 2020, our Board of Directors authorized an increase of approximately $190 million to our share repurchase program, returning the authorization level to $350 million. The authorization does not obligate us to acquire any particular number of shares of common stock and may be commenced, suspended or discontinued without prior notice. The share repurchases are intended to be funded through our current and future cash and the authorization does not have an expiration date.

Withheld to Cover Program

We have in place a "withheld to cover" program, which allows us to withhold common shares from employees in connection with the settlement of income tax and related benefit withholding obligations arising from the issuance of share-based equity awards under the KBR, Inc. 2006 Stock and Incentive Plan.

The table below presents information on our share repurchases activity under this program:

	Three Months Ended										Nine Months Ended
	September 30, 2020										September 30, 2020
	Number of Shares			Average Price per Share				Dollars in Millions			Number of Shares			Average Price per Share				Dollars in Millions
Withheld to cover shares	4,914			$	23.06			—			165,046			$	25.66			$	4
	Three Months Ended										Nine Months Ended
	September 30, 2019										September 30, 2019
	Number of Shares			Average Price per Share				Dollars in Millions			Number of Shares			Average Price per Share				Dollars in Millions
Withheld to cover shares	16,534			$	25.62			1			190,402			$	20.47			$	4

Basic income (loss) per share is based upon the weighted average number of common shares outstanding during the period. Dilutive income (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued using the treasury stock method.

A reconciliation of the number of shares used for the basic and diluted income per share calculations is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
Shares in millions	2020			2019			2020			2019
Basic weighted average common shares outstanding	142			141			142			141
Stock options, restricted shares, and convertible debt	—			1			—			—
Diluted weighted average common shares outstanding	142			142			142			141

For purposes of applying the two-class method in computing income (loss) per share, there were $0.3 million and no net earnings allocated to participating securities, or a negligible amount per share and none for the three and nine months ended September 30, 2020, respectively. Net earnings allocated to participating securities for the three and nine months ended September 30, 2019 were $0.4 million and $1.1 million, respectively, or a negligible amount per share and $0.01 per share, respectively. The diluted income (loss) per share calculation did not include 1.2 million antidilutive weighted average shares for the three and nine months ended September 30, 2020. The diluted income per share calculation did not include 1.0 million and 1.3 million antidilutive weighted average shares for the three and nine months ended September 30, 2019, respectively.

---

Fair value measurements. The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

The carrying amount of cash and equivalents, accounts receivable and accounts payable, as reflected in the condensed consolidated balance sheets, approximates fair value due to the short-term maturities of these financial instruments. The carrying values and estimated fair values of our financial instruments that are not required to be recorded at fair value in our condensed consolidated balance sheets are provided in the following table.

			September 30, 2020								December 31, 2019
Dollars in millions			Carrying Value				Fair Value				Carrying Value				Fair Value
Liabilities (including current maturities):
Term Loan A	Level 2		$	277			$	277			$	176			$	176
Term Loan B	Level 2		518				513				756				764
Convertible Notes	Level 2		350				396				350				466
Senior Notes	Level 2		250				252				—				—
Nonrecourse project debt	Level 2		12				12				18				18

See Note 11 "Debt and Other Credit Facilities" for further discussion of our term loans, convertibles notes, and nonrecourse project debt.

The following disclosures for foreign currency risk and interest rate risk includes the fair value hierarchy levels for our assets and liabilities that are measured at fair value on a recurring basis.

Foreign currency risk. We conduct business globally in numerous currencies and are therefore exposed to foreign currency fluctuations. We may use derivative instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. We do not use derivative instruments for speculative trading purposes. We generally utilize foreign exchange forwards and currency option contracts to hedge exposures associated with forecasted future cash flows and to hedge exposures present on our balance sheet.

As of September 30, 2020, the gross notional value of our foreign currency exchange forwards and option contracts used to hedge balance sheet exposures was $42 million, all of which had durations of 15 days or less. We also had approximately

$6 million (gross notional value) of cash flow hedges which had durations of 10 months or less. The cash flow hedges are primarily related to the British Pound.

The fair value of our balance sheet and cash flow hedges included in "Other current assets" and "Other current liabilities" on our condensed consolidated balance sheets was immaterial at September 30, 2020, and December 31, 2019. The fair values of these derivatives are considered Level 2 under ASC 820, Fair Value Measurement, as they are based on quoted prices directly observable in active markets.

---

The following table summarizes the recognized changes in fair value of our balance sheet hedges offset by remeasurement of balance sheet positions. These amounts are recognized in our condensed consolidated statements of operations for the periods presented. The net of our changes in fair value of hedges and the remeasurement of our assets and liabilities is included in "Other non-operating income (expense)" on our condensed consolidated statements of operations.

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
Gains (losses) dollars in millions	2020				2019				2020				2019
Balance Sheet Hedges - Fair Value	$	(2	)		$	—			$	(2	)		$	—
Balance Sheet Position - Remeasurement	(2		)		3				4				8
Net	$	(4	)		$	3			$	2			$	8

Interest rate risk. We use interest rate swaps to reduce interest rate risk and to manage net interest expense by converting our LIBOR-rate based loans into fixed-rate loans.  In October 2018, we entered into interest rate swap agreements with a notional value of $500 million, which are effective beginning October 2018 and mature in September 2022. Under the October 2018 swap agreements, we receive a one-month LIBOR rate and pay a monthly fixed rate of 3.055% for the term of the swaps. In March 2020, we entered into additional swap agreements with a notional value of $400 million, which are effective beginning October 2022 and mature in January 2027. Under the March 2020 swap agreements, we will receive a one-month LIBOR rate and pay a monthly fixed rate of 0.965% for the term of the swaps.  Our interest rate swaps are reported at fair value using Level 2 inputs. The fair value of the interest rate swaps at September 30, 2020, was $39 million, of which $15 million is included in "Other current liabilities" and $24 million is included in "Other liabilities." The unrealized net losses on these interest rate swaps was $39 million and is included in "AOCL" as of September 30, 2020. The fair value of the interest rate swaps at December 31, 2019 was $21 million, of which $8 million is included in "Other current liabilities" and $13 million is included in "Other liabilities." The unrealized net losses on these interest rate swaps was $21 million and included in "AOCL" as of December 31, 2019.

Credit Losses. We are exposed to credit losses primarily related to our professional services, project delivery, and technologies offered in our ES and TS business segments. We do not consider our GS business segment to be at risk for credit losses because substantially all services within this segment are provided to agencies of the U.S., U.K. and Australian governments. We determined our allowance for credit losses by using a loss-rate methodology, in which we assessed our historical write-off of receivables against our total receivables and contract asset balances over several years. From this historical loss-rate approach, we also considered the current and forecasted economic conditions expected to be in place over the life of our receivables and contract assets.

We monitor our ongoing credit exposure through an active review of our customers’ receivables balance against contract terms and due dates. Our activities include timely performance of our accounts receivable reconciliations, assessment of our aging of receivables, dispute resolution and payment confirmation. We also monitor any change in our historical write-off of receivables utilized in our loss-rate methodology and assess for any forecasted change in market conditions to adjust our credit reserve.

At September 30, 2020, our ES and TS business segments that are subject to credit risk reported approximately $451 million of financial assets consisting primarily of accounts receivable and contract assets, net of allowances of $12 million. Although there continues to be an economic disruption resulting from the impact of COVID-19 and the decline in energy markets in 2020, changes in our credit loss reserve was not material for the nine months ended September 30, 2020. Based on an aging analysis at September 30, 2020, 80% of our accounts receivable related to these segments were outstanding less than 90 days.

---

Sales of Receivables. From time to time, we sell certain receivables to unrelated third-party financial institutions under various accounts receivable monetization programs. The receivables sold under the agreements do not allow for recourse if such receivables are not collected by our counterparties. The Company accounts for these receivable transfers under the third-party financial institutions as a sale under ASC Topic 860, Transfers and Servicing, and has derecognized $61 million of accounts receivables from the balance sheet under these agreements. The fair value of the sold receivables approximated their book value due to their short-term nature. The fees incurred are presented in “Other non-operating (loss) income” on the condensed consolidated statements of operations.

On September 21, 2020, the Company entered into a Master Accounts Receivable Purchase Agreement (the “RPA”) with MUFG Bank, Ltd. (“MUFG”), which provides for the sale to MUFG of certain of our designated eligible receivables, with a significant portion of such receivables being owed by the U.S. government. Under the RPA, the Company can sell eligible receivables up to a maximum amount of $150 million. The receivables sold under the RPA are without recourse for any credit risk or financial inability to pay any of the customers. The RPA has an initial term of one year, which will automatically renew annually unless terminated by either party During the quarter ended September 30, 2020, the Company sold certain receivables totaling $13 million under the RPA. Subsequent to the end of third quarter of 2020, the Company sold additional receivables to partially fund the acquisition of Centauri. See Note 4 "Acquisitions" for further discussion on this acquisition.

 

Activity for third-party financial institutions consisted of the following:

	Nine Months Ended
Dollars in millions	September 30, 2020
Sale of receivables	61
Cash collections	37
Outstanding balances sold to financial institutions	$	24

New accounting pronouncements requiring implementation in future periods are discussed below.

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU amends ASC 715 to add, remove and clarify certain disclosure requirements related to defined benefit pension and other post-retirement plans. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. We do not expect the adoption of ASU No. 2018-14 to have any impact on our financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in ASC Topic 740 related to the incremental approach for intraperiod tax allocation, accounting for basis differences for ownership changes in foreign investments and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax and enacted changes in tax laws in interim periods. For public entities, this ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those years. Early adoption is permitted. We are currently evaluating the future impact of adoption of this standard.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of the Interbank Offered Rate Transition on Financial Reporting to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued if certain criteria are met. Each of the expedients can be applied as of January 1, 2020 through December 31, 2022. For eligible hedging relationships existing as of January 1, 2020 and prospectively, we are currently in the process of assessing the optional expedient allowing an entity to assume that the hedged forecasted transaction in a cash flow hedge is probable of occurring. As reference rate reform is still an ongoing process, we will continue to evaluate the timing and potential impact of adoption for other optional expedients when deemed necessary.

In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Equity's Own Equity. The amendments in this update affect entities that issue convertible instruments and/or

---

contracts indexed to and potentially settled in an entity's own equity. The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public entities, this ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those years. Early adoption is permitted. We are currently evaluating the future impact of adoption of this standard.

---

•	Scientific research, such as quantum science and computing; health and human performance; life science research; and earth sciences;

•	Engineering services, such as systems and sustainment engineering; systems and platform integration; test and evaluation; aerospace acquisition support; and rapid prototyping;

•	Operations, such as command, control and communications; human spaceflight and satellite operations; integrated supply chain and logistics; technical training; and military aviation support;

•	Information operations, such as data analytics; mission planning systems; and artificial intelligence and machine learning; and

•	Technology, such as licensing of proprietary industrial process technology; advisory services focused on energy transition; and digitally-enabled asset optimization solutions.

•	Defense modernization;

•	Space superiority;

•	Health and human performance; and

•	Sustainable technology.

---

---

---

---

---

---

---

---

---

---

---

---

---

•	Accounts receivable unfavorable cash flow impact of $50 million primarily related to increases in accounts receivable in our GS U.S. operations partially offset by increased collections on certain projects in our ES business segment.

•	Contract assets favorable cash flow impact of $49 million was largely attributable to increased billings on U.S. government projects in our GS business segment.

•	Accounts payable favorable cash flow impact of $15 million was largely attributable to timing of payments on certain U.S. government contracts and several projects in the U.S. in our ES business segment.

•	Contract liabilities unfavorable cash flow impact of $124 million was primarily due to progress against project advances on the Aspire Defence project and U.S. government projects in our GS business segment and certain projects within our TS and ES business segment.

•	In addition, we received distributions of earnings from our unconsolidated affiliates of $35 million and contributed $33 million to our pension funds in the first nine months of 2020.

---

---

---

---

---

•	the health or availability of our workforce, including contractors and subcontractors, and restrictions that we and our customers, contractors and subcontractors impose, including limiting worksite access and facility shutdowns, to ensure the safety of employees and others;

•	the ability or willingness of our vendors and suppliers to provide the equipment, parts or raw materials for our operations or otherwise fulfill their contractual obligations, which in turn could impair our ability to perform under our contracts or to deliver products on a timely basis;

•	recommendations of, or restrictions imposed by, government and health authorities, including travel bans, quarantines, and shelter-in-place orders to address the COVID-19 outbreak;

•	potential contract delays, modifications or terminations;

•	increased potential for the occurrence of operational hazards, including terrorism, cyber-attacks or domestic vandalism, as well as information system failures or communication network disruptions;

•	reductions in the number and amounts of new government contract awards, delays in the timing of anticipated awards or potential cancellations of such prospects as a result of the fiscal, economic and budgetary challenges facing our customers, as well as material and equipment pricing;

•	increased cost and reduced availability of capital for growth or capital expenditures;

•	increased costs of operation in relation to the COVID-19 outbreak, which costs may not be fully recoverable or adequately covered by insurance; and

•	long-term disruption of the U.S. and global economy and financial and commodity markets.

---

•	world health events, including the COVID-19 pandemic, which has reduced and may continue to reduce demand for oil and natural gas because of reduced economic activity;

•	changes in the level of global demand for oil, natural gas, and industrial services due in part to governmental regulations, including travel bans and restrictions, quarantines, shelter in place orders, and shutdowns;

•	worldwide or regional political, social or civil unrest, military action and economic conditions;

•	governmental regulations or policies, including the policies of governments regarding the use of energy and the exploration for and production and development of their oil and natural gas reserves;

•	a reduction in energy demand as a result of energy taxation or a change in consumer spending patterns;

•	global economic growth or decline;

•	the global level of oil and natural gas production;

•	potential shut-ins of production by producers due to lack of downstream demand or storage capacity;

•	global weather conditions and natural disasters;

•	oil refining capacity;

•	shifts in end-customer preferences toward fuel efficiency and the use of natural gas;

•	potential acceleration of the development and expanded use of alternative fuels;

•	environmental regulation, including limitations on fossil fuel consumption based on concerns about its relationship to climate change; and

•	reduction in demand for the commodity-based markets in which we operate.

---

(1)	Shares repurchased include shares acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from issuance of share-based equity awards under the KBR, Inc. 2006 Stock and Incentive Plan. Total shares acquired from employees during the three months ended September 30, 2020 was 4,914 shares at an average price of $23.06 per share.

---

---