Introduction
The purpose of MD&A is to disclose material changes in our financial condition since the most recent fiscal year-end and results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year. The MD&A should be read in conjunction with the condensed consolidated financial statements, accompanying notes, and our 2019 Annual Report on Form 10-K.
Overview
KBR, aDelaware corporation, is a global provider of differentiated, professional services and technologies delivered across a wide government, defense and industrial base. Drawing from its rich 100-year history and culture of innovation and mission focus, KBR combines technical, scientific and engineering expertise and intellectual property with our full life cycle capabilities in its service offerings to clients. Our capabilities and offerings include the following:
• 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. KBR has completed a strategic transformation to be a provider of high-end, digitally-enabled solutions and technologies across defense, space, intelligence and industrial markets. Our people combine deep mission understanding, technical expertise and an operational focus to deliver solutions to our clients. KBR's operating model has shifted toward agile, technology-driven, solutions-oriented delivery and away from higher risk, increasingly commoditized markets. Our focus continues to be to move upmarket into differentiated areas that we believe will provide attractive returns and consistent growth. Our key areas of strategic focus include: • Defense modernization; • Space superiority;
• Health and human performance; and
• Sustainable technology. KBR delivers a wide range of professional services across defense, space and other government agencies spanning program management and consulting, mission planning, operational and platform support, research and development, test and evaluation, training, and logistics and facilities management. These services are provided primarily to government agencies in theU.S. ,U.K. ,Australia and other select countries under long-term programs with technical, scientific or mission-specific differentiation. Customers includeU.S. DoD agencies such as theMissile Defense Agency ,U.S. Army ,U.S. Navy andU.S. Air Force ;U.S. civilian agencies such as NASA,U.S. Geological Survey andNational Oceanic and Atmospheric Administration ; theU.K. Ministry of Defence ,London Metropolitan Police ,U.K. Army , otherU.K. Crown Services; and theRoyal Australian Air Force ,Navy and Army. Consistent with our corporate focus towards sustainability, KBR continues to develop and prioritize investment in process technologies that enable clients to produce cleaner, safer, and more sustainable outputs and also do so with improved economic outcomes. We provide high-end advisory solutions centered around energy transition, license process technologies, provide basic engineering and design services, sell proprietary equipment and catalysts, and provide asset optimization and remote facility operations monitoring. Customers include national governments, industrial companies, and oil and gas companies. Areas of long-term strategic focus include sustainable technology solutions, energy transition and technology-led asset optimization. 43 --------------------------------------------------------------------------------
Business Environment and Trends
Government Outlook
While funded through a continuing resolution that are subject to periodic congressional budget approvals, theU.S. defense and national security strategy continues to prioritize the restoration of military readiness, furthers investment to confront near peer and other threats around the world, enhances theDoD's cybersecurity and cyber warfare capabilities, funds theU.S. Space Force under theU.S. Air Force , and directs innovation to meet long-range emerging threats. The strategy includes a number of measures to strengthen emerging technologies, including cyber-science and technologies, artificial intelligence, directed energy, hypersonics, and emerging biotechnologies. Internationally, our Government Solutions work is performed primarily for theU.K. MoD and theAustralian Department of Defence . A significant majority of our work in theU.K. is contracted through long-term privately financed initiatives ("PFIs") that are expected to provide stable, predictable earnings and cash flow over the program life, with our largest PFI extending through 2041. The Australian government continues to increase defense spending, with particular focus on enhancing regional security, building defense capabilities, strengthening cyber defenses and promoting broader economic stability. With defense and civil budget spending driven in part by political instability, military conflicts, aging platforms and infrastructure and the need for technology upgrades, we expect continued opportunities to provide solutions and technologies to mission critical work aligned with our customers' priorities.
Industrial Outlook
Long-range industrial market fundamentals are supported by global population growth, global expansion of the middle class, and acceleration of demand for energy transition and renewable energy sources for which momentum and investment continue, even amidst COVID-19, as clients advance important objectives around decarbonization and climate change. Demand for our solutions and services is highly correlated to the level of capital and operating expenditures of our customers and prevailing market conditions. Clients continue to prioritize investment in solutions to increase end-product flexibility and energy efficiency and reduce their environmental footprint.
Our Business
Overall, we believe we have a balanced portfolio of global professional services and technologies across a wide government, defense and industrial base. Our business is organized into three core and two non-core business segments as follows:
Core business segments • Government Solutions • Technology Solutions • Energy Solutions Non-core business segments • Non-strategic Business • Other
See additional information on our business segments, including detail with respect to changes to our reportable segments in Notes 1 and 2 to our condensed consolidated financial statements.
The Company has initiated a strategic transition from its current three-core business segment model to a two-core business segment model comprised of Government Solutions and Technology Solutions. This transition will occur over the remainder of 2020. The core component of the new Technology Solutions segment will be the Company's proprietary process technologies. It will also include the Company's advisory practice focused on energy transition and net-zero carbon ambitions as well as the technology-led industrial solutions focused on innovative digital operations and maintenance solutions and advanced remote operations capabilities to improve throughput, reliability and environmental sustainability. 44 --------------------------------------------------------------------------------
Three months ended
The information below is an analysis of our consolidated results for the three
months ended
Revenues Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Revenues$ 1,379 $ 1,425 $ (46 ) (3 )% The overall revenue decrease was primarily due to decisions to exit non-strategic areas in our ES business segment and lower volume in our TS business segment due to timing and mix of project deliveries. These decreases were partially offset by significant increases in project volume in our space and defense systems engineering business areas within the GS business segment. Gross Profit Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Gross profit$ 172 $ 168 $ 4 2 %
The overall gross profit increase was primarily due to favorable changes in estimates on projects within the GS business segment. These increases were partially offset by lower revenue volume in our ES business segment.
Equity in Earnings of Unconsolidated Affiliates Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Equity in earnings of unconsolidated affiliates$ 13 $ 9 $ 4 44 % The increase in equity in earnings of unconsolidated affiliates was primarily driven by higher earnings from aU.K. joint venture and foreign exchange effects in a project joint venture offset by reduced activity from an industrial services joint venture. Selling, General and Administrative Expenses Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ %
Selling, general and administrative expenses
$ 15 20 % Selling, general and administrative expenses in the three months endedSeptember 30, 2020 was$15 million higher than the same period in 2019 principally as a result of a favorable cost variance recorded in ourU.S. government contracting business in the three months endedSeptember 30, 2019 driven by lower than expected bid and proposal and information technology costs and a larger allocation base than expected due to higher volume. Our current estimate of selling, general and administrative expenses and the relative cost bases for 2020 remains materially unchanged. 45 -------------------------------------------------------------------------------- Acquisition and Integration Related Costs Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ %
Acquisition and integration related costs
$ 2 n/m
The increase in acquisition and integration related costs was comprised of
acquisition costs associated with the Company's acquisition of Centauri on
Goodwill Impairment, Restructuring Charges and Asset Impairments Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Goodwill impairment $ - $ - $ - n/m Restructuring charges and asset impairments$ (1 ) $ -$ (1 ) n/m
See Note 7 "Restructuring Charges and Asset Impairments" and Note 8 "
Interest Expense Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ %
Interest expense
The decrease in interest expense was primarily due to lower outstanding
borrowings under our Senior Credit Facility during the three months ended
Other Non-operating (Loss) Income Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Other non-operating (loss) income$ (4 ) $ 3 $
(7 ) 233 %
Other non-operating (loss) income includes interest income, foreign exchange gains and losses, and other non-operating income or expense items. The increase in loss in the third quarter of 2020 was primarily due to unfavorable foreign exchange rate effects on certainU.S. Dollar cash positions held internationally. 46 --------------------------------------------------------------------------------
Provision for Income Taxes Three Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Income before provision for income taxes and noncontrolling interests$ 71 $ 82 $ (11 ) (13 )% (Provision) for income taxes$ (19 ) $ (24 ) $ (5 ) (21 )% The provision for income taxes for the three months endedSeptember 30, 2020 reflects a 27% tax rate as compared to a 30% tax rate for the three months endedSeptember 30, 2019 , both of which were primarily impacted by the rate differential on our foreign earnings including equity in losses, of certain unconsolidated affiliates for which any tax effects are not reflected in the provision for income taxes because they are reflected on a net basis in equity in earnings of unconsolidated affiliates. See Note 12 to our condensed consolidated financial statements for further discussion on income taxes.
Results of Operations by Business Segment
Three Months Ended September 30, Dollars in millions 2020 2019 Revenues Government Solutions $ 980 $ 978 Technology Solutions 71 96 Energy Solutions 327 351 Subtotal 1,378 1,425 Non-strategic Business 1 - Total revenues $ 1,379 $ 1,425 Gross profit Government Solutions $ 129 $ 110 Technology Solutions 30 30 Energy Solutions 15 21 Subtotal 174 161 Non-strategic Business (2 ) 7 Total gross profit $ 172 $ 168 Equity in earnings of unconsolidated affiliates Government Solutions $ 9 $ 7 Energy Solutions 4 2 Total equity in earnings of unconsolidated affiliates $ 13 $ 9 Total selling, general and administrative expenses $ (89 ) $ (74 ) Acquisition and integration related costs $ (2 ) $ - Restructuring charges and asset impairments $ (1 ) $ - Gain on disposition of assets $ - $ 1 Total operating income $ 93 $ 104 47
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Government Solutions
GS revenues increased by$2 million to$980 million in the third quarter of 2020, compared to$978 million in the third quarter of 2019. This slight increase was primarily driven by growth in the space and engineering businesses, ramp-up of LogCAP V Northern Command scope of work, higher volumes on projects inAustralia as well as the SMA acquisition inMarch 2020 . These increases were substantially offset by the completion of disaster recovery services provided to theU.S. Air Force in 2019, lower work volume on the LogCAP IV scope of work primarily in theMiddle East , and the reduction in revenue related to the construction component of the Aspire Defence project in theU.K. which is nearing completion. GS gross profit increased by$19 million , or 17%, to$129 million in the third quarter of 2020 compared to$110 million in the third quarter of 2019. The increase is primarily driven by growth in the space and engineering businesses and the non-recurrence of a contingency release on a project in theMiddle East in 2019. GS equity in earnings of unconsolidated affiliates increased by$2 million , or 29%, to$9 million in the third quarter of 2020 compared to$7 million in the third quarter of 2019. The increase is primarily associated with higher earnings from aU.K. project joint venture.
Technology Solutions
TS revenues decreased by$25 million , or 26%, to$71 million in the third quarter of 2020 compared to$96 million in the third quarter of 2019, primarily driven by higher volumes of proprietary equipment and catalyst sales in 2019 as compared to 2020. TS gross profit remained consistent at$30 million for the third quarter of 2020 and 2019, primarily due to favorable mix of higher margin license revenue and lower overhead spend in 2020. Energy Solutions
ES revenues decreased by
ES gross profit decreased by$6 million , or 29%, to$15 million in the third quarter of 2020 as compared to$21 million in the second quarter of 2019 due to reduced volume and an unfavorable mix of lower margin projects primarily inNorth America . ES equity in earnings of unconsolidated affiliates increased by$2 million , or 100%, to$4 million in the third quarter of 2020, compared to earnings of$2 million in the third quarter of 2019. This increase was primarily due to foreign exchange effects in project joint ventures.
Non-strategic Business
Non-strategic Business revenues were
Non-strategic Business incurred a gross loss of$2 million in the third quarter of 2020, compared to$7 million gross profit in the third quarter of 2019. All Non-strategic Business projects are substantially complete as ofSeptember 30, 2020 . We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects.
Changes in Estimates
Information relating to our changes in estimates is discussed in Note 1 "Basis of Presentation" to our condensed consolidated financial statements.
Nine months ended
The information below is an analysis of our consolidated results for the nine months endedSeptember 30, 2020 , compared to the nine months endedSeptember 30, 2019 . See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments. 48 --------------------------------------------------------------------------------
Revenues Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Revenues$ 4,301 $ 4,187 $ 114 3 % The increase in consolidated revenues was primarily driven by ramp-up in projects within theU.S. in our ES business segment. This was partially offset by lower volume in our GS business segment pertaining to our contingency logistics business and a construction component of the Aspire Defence project in theU.K. which nears completion, and lower volume in our TS business segment due to timing and mix of project deliveries. Gross Profit Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Gross profit$ 500 $ 483 $ 17 4 % The increase in gross profit is principally driven by the GS business segment primarily due to favorable changes in estimates on projects and improvements in margin on the Aspire Defence project in theU.K. These increases were offset by an unfavorable project mix in our ES business segment. We also incurred higher costs in our Non-Strategic business segment in 2019 related to project close-out activities. Equity in Earnings of Unconsolidated Affiliates Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Equity in earnings of unconsolidated affiliates$ 30 $ 24 $ 6 25 %
Equity earnings increased primarily due to the non-recurrence of an accrued loss
associated with an equity method investment in
Selling, General and Administrative Expenses Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ %
Selling, general and administrative expenses
$ 17 7 % Selling, general and administrative expenses in the nine months endedSeptember 30, 2020 was$17 million higher than the same period in 2019 principally as a result of a favorable cost variance recorded in ourU.S. government contracting business in the nine months endedSeptember 30, 2019 driven by lower than expected bid and proposal and information technology costs and a larger allocation base than expected due to higher volume. Our current estimate of selling, general and administrative expenses and the relative cost bases for 2020 remains materially unchanged. Acquisition and Integration Related Costs Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ %
Acquisition and integration related costs
$ - - % Acquisition and integration related costs for the nine months endedSeptember 30, 2020 are comprised of acquisition costs associated with our acquisition of Centauri onOctober 1, 2020 . We expect to incur integration costs related to the acquisition of Centauri over the next twelve months. Acquisition and integration costs for the nine months endedSeptember 30, 2019 are comprised of integration costs related to our acquisition of SGT. The integration of SGT was completed in early 2019. 49
-------------------------------------------------------------------------------- Goodwill Impairment, Restructuring Charges and Asset Impairments Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Goodwill impairment$ (99 ) $ -$ (99 ) n/m Restructuring charges and asset impairments$ (176 ) $ -$ (176 ) n/m As a result of the economic and market volatility as well as management's decision to discontinue pursuing certain projects within our ES business segment, we recognized goodwill impairments totaling$99 million associated with a reporting unit in our ES segment during the nine months endedSeptember 30, 2020 . In addition, management initiated a restructuring plan during the first quarter of 2020 and as a result, we recognized restructuring charges and asset impairments for the nine months endedSeptember 30, 2020 totaling$176 million . See Note 7 "Restructuring Charges and Asset Impairments" and Note 8 "Goodwill and Goodwill Impairments" in the footnotes to our accompanying condensed consolidated financial statements. Interest Expense Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ %
Interest expense
The decrease in interest expense was primarily due to lower outstanding borrowings under our Senior Credit Facility during the nine months endedSeptember 30, 2020 as compared to the same period in 2019 and lower weighted-average interest rates as a result of the refinancing of our Senior Credit Facility inFebruary 2020 . See Note 11 "Debt and Other Credit Facilities" to our condensed consolidated financial statements for further discussion.
Other Non-operating Income Nine Months Ended
2020 vs. 2019 Dollars in millions 2020 2019 $ % Other non-operating income$ 1 $ 10 $ (9 ) (90
)%
Other non-operating income includes interest income, foreign exchange gains and losses, and other non-operating income or expense items. The decrease in income for the nine months endedSeptember 30, 2020 , was primarily due to less favorable foreign exchange rate effects on certainU.S. Dollar cash positions held internationally. Provision for Income Taxes Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % (Loss) income before provision for income taxes and noncontrolling interests$ (47 ) $ 208 $ (255 ) (123 )% Provision for income taxes$ (24 ) $ (58 ) $ (34 ) (59 )% The provision for income taxes for the nine months endedSeptember 30, 2020 , reflects a (51)% tax rate as compared to a 28% tax rate for the nine months endedSeptember 30, 2019 . The difference between the effective tax rate of (51)% for the nine months endedSeptember 30, 2020 and the statutory rate was caused by goodwill and asset impairment charges incurred during the period. Excluding the impact of the certain goodwill and asset impairments, our tax rate was 27% for the nine months endedSeptember 30, 2020 . The effective tax rate of 28% for the nine months endedSeptember 30, 2019 was primarily impacted by the rate differential on our foreign earnings and equity in losses, of certain unconsolidated affiliates for which any tax effects are not reflected in the provision for income taxes because they are reflected on a net basis in equity in earnings unconsolidated affiliates. See Note 12 to our condensed consolidated financial statements for further discussion on income taxes. 50 -------------------------------------------------------------------------------- Net Income Attributable to Noncontrolling Interests Nine Months Ended September 30, 2020 vs. 2019 Dollars in millions 2020 2019 $ % Net income attributable to noncontrolling interests$ (20 ) $ (6 ) $ 14 n/m
The increase in net income attributable to noncontrolling interests was associated with variable consideration resulting from the resolution of a contingency on a completed LNG project and liquidation of the associated joint venture.
Results of Operations by Business Segment
Nine Months Ended September 30, Dollars in millions 2020 2019 Revenues Government Solutions $ 2,860 $ 2,986 Technology Solutions 232 281 Energy Solutions 1,205 919 Subtotal 4,297 4,186 Non-strategic Business 4 1 Total revenues $ 4,301 $ 4,187 Gross profit (loss) Government Solutions $ 370 $ 312 Technology Solutions 82 83 Energy Solutions 55 81 Subtotal 507 476 Non-strategic Business (7 ) 7 Total gross profit $ 500 $ 483 Equity in earnings of unconsolidated affiliates Government Solutions $ 21 $ 21 Energy Solutions 9 16 Subtotal 30 37 Non-strategic Business - (13 ) Total equity in earnings of unconsolidated affiliates $ 30 $ 24
Total selling, general and administrative expenses $ (259 ) $ (242 )
Acquisition and integration related costs $ (2 ) $ (2 ) Goodwill impairment $ (99 ) $ - Restructuring charges and asset impairments $ (176 ) $ - Gain on disposition of assets $ 18 $ 11 Total operating income $ 12 $ 274 51
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Government Solutions
GS revenues decreased by$126 million , or 4%, to$2.9 billion in the nine months endedSeptember 30, 2020 , compared to$3.0 billion in the nine months endedSeptember 30, 2019 . This decrease was primarily driven by the completion of disaster recovery services provided to theU.S. Air Force in 2019, lower work volume on the LogCAP IV project primarily in theMiddle East and the reduction in revenues on the construction component of the Aspire Defence project in theU.K. which is nearing completion. These decreases were partially offset by growth of human performance and behavioral health services provided to theU.S. Special Operations Command and services provided to NASA, increased engineering services on various otherU.S. government programs such as LogCAP V Northern Command, a new award from theU.K. MoD in late 2019 for the provision of services in theMiddle East , and overall growth of our Australian business including the acquisition of SMA inMarch 2020 . GS gross profit increased by$58 million , or 19%, to$370 million in the nine months endedSeptember 30, 2020 , compared to$312 million in the nine months endedSeptember 30, 2019 . The increase was driven by improved profitability on the Aspire project as uncertainties associated with index-based price adjustments dissipate, and volume growth on the newly awarded LogCAP V Northern Command project. These increases were offset by lower work volume on the LogCAP IV project primarily in theMiddle East , and completion of disaster recovery services provided to theU.S. Air Force in 2019.
GS equity in earnings of unconsolidated affiliates remained consistent at
Technology Solutions
TS revenues decreased by$49 million , or 17%, to$232 million in the nine months endedSeptember 30, 2020 , compared to$281 million in the nine months endedSeptember 30, 2019 , primarily driven by higher mix of license revenue in 2020 compared to 2019. TS gross profit decreased by$1 million , or 1%, to$82 million in the nine months endedSeptember 30, 2020 , compared to$83 million in the nine months endedSeptember 30, 2019 , primarily due to higher mix of license revenue offset by one-time settlements in the first half of 2020 and lower overall overhead spend. Energy Solutions ES revenues increased by$286 million , or 31%, to$1.2 billion in the nine months endedSeptember 30, 2020 , compared to$919 million in the nine months endedSeptember 30, 2019 . The increase was largely attributable to new awards and the ramp-up of existing projects along theU.S. Gulf Coast andMexico . ES gross profit decreased by$26 million , or 32%, to$55 million in the nine months endedSeptember 30, 2020 , compared to$81 million in the nine months endedSeptember 30, 2019 . This decrease was due to an unfavorable project mix in 2020 primarily in theU.S. , reductions in project services provided to a joint venture in theAsia and the non-recurrence of a favorable close-out of an EPC project in theU.S. in 2019. These decreases were partially offset by higher volume and a favorable change in variable consideration resulting from resolution of a contingency on a completed LNG project during the first quarter of 2020. ES equity in earnings of unconsolidated affiliates decreased by$7 million to$9 million in the nine months endedSeptember 30, 2020 , compared to earnings of$16 million in the nine months endedSeptember 30, 2019 . This decrease was primarily due to the completion of aNorth Sea project in 2019 and lower earnings from an industrial services joint venture in theU.S.
Non-strategic Business
Non-strategic Business earned revenues of$4 million in the nine months endedSeptember 30, 2020 , compared to$1 million earned in the nine months endedSeptember 30, 2019 , primarily associated with close-out activities on completed projects as we exit the related businesses. Non-strategic Business incurred a gross loss of$7 million in the nine months endedSeptember 30, 2020 due to a settlement resolution and legal costs related to project close-out activities compared to$7 million gross profit for the nine months endedSeptember 30, 2019 . All Non-strategic Business projects are substantially complete as ofSeptember 30, 2020 . We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects. 52 -------------------------------------------------------------------------------- Non-strategic Business earned no equity in earnings of unconsolidated affiliates for the nine months endedSeptember 30, 2020 compared to a loss of$13 million for the nine months endedSeptember 30, 2019 due to recognition of an accrued loss associated with an equity method investment inLatin America in 2019.
Changes in Estimates
Information relating to our changes in estimates is discussed in Note 1 "Basis of Presentation" to our condensed consolidated financial statements. See Note 6 "Unapproved Change Orders, and Claims, Against Clients and Estimated Recoveries of Claims Against Suppliers and Subcontractors" to our condensed consolidated financial statements for more information on the Ichthys LNG project.
Backlog of Unfilled Orders
Backlog generally represents the dollar amount of revenues we expect to realize in the future as a result of performing work on contracts and our pro-rata share of work to be performed by unconsolidated joint ventures. We generally include total expected revenues in backlog when a contract is awarded under a legally binding agreement. In many instances, arrangements included in backlog are complex, nonrepetitive and may fluctuate over the contract period due to the release of contracted work in phases by the customer. Additionally, nearly all contracts allow customers to terminate the agreement at any time for convenience. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we act solely in a project management capacity, we only include the expected value of our services in backlog. We define backlog, as it relates toU.S. government contracts, as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period (including customer approved option periods) for which work scope and price have been agreed with the customer. We define funded backlog as the portion of backlog for which funding currently is appropriated, less the amount of revenue we have previously recognized. We define unfunded backlog as the total backlog less the funded backlog. Our GS backlog does not include any estimate of future potential delivery orders that might be awarded under our government-wide acquisition contracts, agency-specific indefinite delivery/indefinite quantity contracts, or other multiple-award contract vehicles nor does it include option periods that have not been exercised by the customer. Within our GS business segment, we calculate estimated backlog for long-term contracts associated with theU.K. government's PFIs based on the aggregate amount that our client would contractually be obligated to pay us over the life of the project. We update our estimates of the future work to be executed under these contracts on a quarterly basis and adjust backlog if necessary. We have included in the table below our proportionate share of unconsolidated joint ventures' estimated backlog. Because these projects are accounted for under the equity method, only our share of future earnings from these projects will be recorded in our results of operations. Our proportionate share of backlog for projects related to unconsolidated joint ventures totaled$2.5 billion atSeptember 30, 2020 , and$2.6 billion atDecember 31, 2019 . Our backlog included in the table below for projects related to consolidated joint ventures with noncontrolling interests includes 100% of the backlog associated with those joint ventures and totaled$53 million and$78 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. 53 --------------------------------------------------------------------------------
The following table summarizes our backlog by business segment as of
September 30 ,December 31 ,
Dollars in millions 2020 2019 Government Solutions$ 10,868 $ 10,960 Technology Solutions 582 579 Energy Solutions 1,345 3,097 Subtotal 12,795 14,636 Non-strategic Business - - Total backlog$ 12,795 $ 14,636 Backlog for the ES business segment decreased approximately$1.8 billion during the nine months endedSeptember 30, 2020 and was primarily due to management's decision to discontinue pursuing certain projects totaling approximating$1.2 billion . The remaining decrease was due to workoff, net of new awards during the period. For further discussion, see Notes 1 and 7 to our condensed consolidated financial statements. We estimate that as ofSeptember 30, 2020 , 31% of our backlog will be executed within one year. Of this amount, 87% will be recognized in revenues on our condensed consolidated statement of operations and 13% will be recorded by our unconsolidated joint ventures. As ofSeptember 30, 2020 ,$68 million of our backlog relates to active contracts that are in a loss position. As ofSeptember 30, 2020 , 10% of our backlog was attributable to fixed-price contracts, 53% was attributable to PFIs and 37% was attributable to cost-reimbursable contracts. For contracts that contain both fixed-price and cost-reimbursable components, we classify the individual components as either fixed-price or cost-reimbursable according to the composition of the contract; however, for smaller contracts, we characterize the entire contract based on the predominant component. As ofSeptember 30, 2020 ,$8.9 billion of our GS backlog was currently funded by our customers.
As of
The difference between backlog of$12.8 billion and the remaining performance obligation as defined by ASC 606 of$9.9 billion is primarily due to our proportionate share of backlog related to unconsolidated joint ventures which is not included in our remaining performance obligation. See Note 3 to our condensed consolidated financial statements for discussion of the remaining performance obligation.
Transactions with Joint Ventures
We perform many of our projects through incorporated and unincorporated joint ventures. In addition to participating as a joint venture partner, we often provide engineering, procurement, construction, operations or maintenance services to the joint venture as a subcontractor. Where we provide services to a joint venture that we control and therefore consolidate for financial reporting purposes, we eliminate intercompany revenues and expenses on such transactions. In situations where we account for our interest in the joint venture under the equity method of accounting, we do not eliminate any portion of our subcontractor revenues or expenses. We recognize the profit on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting primarily using the percentage-of-completion method. See Note 9 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. The information discussed therein is incorporated by reference into this Part I, Item 2. Legal Proceedings Information relating to various commitments and contingencies is described in Notes 13 and 14 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part I, Item 2. 54 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Liquidity is provided by available cash and equivalents, cash generated from operations, our Senior Credit Facility and access to financial markets. Our operating cash flow can vary significantly from year to year and is affected by the mix, terms, timing and stage of completion of our projects. We often receive cash in the early phases of our larger fixed-price projects, technology projects, and those of our consolidated joint ventures in advance of incurring related costs. On reimbursable contracts, we may utilize cash on hand or availability under our Senior Credit Facility to satisfy any periodic operating cash requirements for working capital as we incur costs and subsequently invoice our customers. ES services projects generally require us to provide credit support for our performance obligations to our customers in the form of letters of credit, surety bonds or guarantees. Our ability to obtain new project awards in the future may be dependent on our ability to maintain or increase our letter of credit and surety bonding capacity, which may be further dependent on the timely release of existing letters of credit and surety bonds. As the need for credit support arises, letters of credit will be issued under our$1 billion Revolver under our Senior Credit Facility. Letters of credit may also be arranged with our banks on a bilateral, syndicated or other basis. As discussed in Note 11 "Debt and Other Credit Facilities" of our condensed consolidated financial statements, we amended our Senior Credit Facility onFebruary 7, 2020 , reducing the applicable margins and commitment fees associated with the various borrowings under the facility. Additionally, the amendment extended maturity dates with respect to the Revolver, PLOC and Term Loan A toFebruary 2025 and Term Loan B toFebruary 2027 . OnJuly 2, 2020 , we amended our Senior Credit Facility to convert the$500 million capacity formerly available under our PLOC to our Revolver, thereby increasing our Revolver capacity from$500 million to$1 billion . OnSeptember 14, 2020 , we further amended our Senior Credit Facility to modify the definition and calculation of Consolidated EBITDA (as defined therein) to provide for more flexibility in permitting 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. We believe that existing cash balances, internally generated cash flows, availability under our Senior Credit Facility and other lines of credit are sufficient to support our business operations for the next 12 months. As ofSeptember 30, 2020 , we were in compliance with all financial covenants related to our debt agreements. Cash and equivalents totaled$949 million atSeptember 30, 2020 , and$712 million atDecember 31, 2019 , and consisted of the following: September 30, December 31, Dollars in millions 2020 2019 Domestic U.S. cash $ 566 $ 207 International cash 199 245 Joint venture and Aspire Defence project cash 184 260 Total $ 949 $ 712 Our cash balances are held in numerous accounts throughout the world to fund our global activities. Domestic cash relates to cash balances held byU.S. entities and is largely used to support project activities of those businesses as well as general corporate needs such as the payment of dividends to shareholders, repayment of debt and potential repurchases of our outstanding common stock. Our international cash balances may be available for general corporate purposes but are subject to local restrictions, such as capital adequacy requirements and maintaining sufficient cash balances to support ourU.K. pension plan and other obligations incurred in the normal course of business by those foreign entities. Repatriations of our undistributed foreign earnings are generally free ofU.S. tax but may incur withholding and/or state taxes. We consider our futureU.S. and non-U.S. cash needs as 1) our anticipated foreign working capital requirements, including funding of ourU.K. pension plan, 2) the expected growth opportunities across all geographical markets and 3) our plans to invest in strategic growth opportunities, which may include acquisitions around the world, including whether foreign earnings are permanently reinvested. Joint venture cash and Aspire Defence project cash balances reflect the amounts held by joint venture entities that we consolidate for financial reporting purposes. These amounts are limited to those entities' activities and are not readily available for general corporate purposes; however, portions of such amounts may become available to us in the future should there be a distribution of dividends to the joint venture partners. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture projects. 55
-------------------------------------------------------------------------------- As ofSeptember 30, 2020 , substantially all of our excess cash was held in commercial bank time deposits or interest bearing short-term investment accounts with the primary objectives of preserving capital and maintaining liquidity. Cash Flows
The following table summarizes our cash flows for the periods indicated:
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