UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
T
Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For
the quarterly period ended September 30, 2009
OR
£
Transition
Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the
transition period from _____ to _____
Commission
File Number 1-33146
KBR,
Inc.
(a
Delaware Corporation)
20-4536774
601
Jefferson Street
Suite
3400
Houston,
Texas 77002
(Address
of Principal Executive Offices)
Telephone
Number – Area Code (713) 753-3011
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days.
Yes
T
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
T
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
T
|
|
Accelerated
filer
£
|
|
|
|
Non-accelerated
filer
£
(Do not check if a smaller reporting company)
|
|
Smaller
reporting company
£
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
£
No
T
As of
October 23, 2009, 160,357,250 shares of KBR, Inc. common stock, $0.001 par
value per share, were outstanding.
KB
R, Inc.
Index
|
|
Page No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
|
4
|
|
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|
|
|
4
|
|
|
5
|
|
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6
|
|
|
7
|
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8
|
|
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|
Item
2.
|
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29
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|
Item
3.
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46
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|
|
Item
4.
|
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46
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|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
47
|
|
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|
Item
1A.
|
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47
|
|
|
|
Item
2.
|
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47
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|
Item
3.
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48
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Item
4.
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48
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Item
5.
|
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48
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|
Item
6.
|
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49
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50
|
Forward-Looking
and Cautionary Statements
This
report contains certain statements that are, or may be deemed to be,
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Private Securities Litigation Reform Act of 1995
provides safe harbor provisions for forward-looking information. The words
“believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “plan,”
“expect” and similar expressions are intended to identify forward-looking
statements. All statements other than statements of historical fact
are, or may be deemed to be, forward-looking statements. Forward-looking
statements include information concerning our possible or assumed future
financial performance and results of operations and backlog
information.
We
have based these statements on our assumptions and analyses in light of our
experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. Although we believe that the forward-looking statements contained
in this report are based upon reasonable assumptions, forward-looking statements
by their nature involve substantial risks and uncertainties that could
significantly affect expected results, and actual future results could differ
materially from those described in such statements. While it is not possible to
identify all factors, factors that could cause actual future results to differ
materially include the risks and uncertainties disclosed in our 2008 Annual
Report on Form 10-K contained in Part I under “Risk Factors”.
Many
of these factors are beyond our ability to control or predict. Any of these
factors, or a combination of these factors, could materially and adversely
affect our future financial condition or results of operations and the ultimate
accuracy of the forward-looking statements. These forward-looking statements are
not guarantees of our future performance, and our actual results and future
developments may differ materially and adversely from those projected in the
forward-looking statements. We caution against putting undue reliance on
forward-looking statements or projecting any future results based on such
statements or present or prior earnings levels. In addition, each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statement.
PART
I. FINANCIAL INFORMATION
It
em 1. Financial Statements
KB
R, Inc.
Condensed
Consolidated Statements of Income
(In
millions, except for per share data)
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
2,841
|
|
|
$
|
3,005
|
|
|
$
|
9,095
|
|
|
$
|
8,161
|
|
Equity
in earnings (losses) of unconsolidated affiliates, net
|
|
|
(1
|
)
|
|
|
13
|
|
|
|
46
|
|
|
|
34
|
|
Total
revenue
|
|
|
2,840
|
|
|
|
3,018
|
|
|
|
9,141
|
|
|
|
8,195
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
2,648
|
|
|
|
2,819
|
|
|
|
8,567
|
|
|
|
7,646
|
|
General
and administrative
|
|
|
54
|
|
|
|
55
|
|
|
|
157
|
|
|
|
163
|
|
Impairment
of goodwill
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
Loss
(gain) on disposition of assets
|
|
|
1
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Total
operating costs and expenses
|
|
|
2,709
|
|
|
|
2,874
|
|
|
|
8,729
|
|
|
|
7,807
|
|
Operating
income
|
|
|
131
|
|
|
|
144
|
|
|
|
412
|
|
|
|
388
|
|
Interest
income, net
|
|
|
—
|
|
|
|
7
|
|
|
|
1
|
|
|
|
32
|
|
Foreign
currency gains (losses), net
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
(2
|
)
|
Other
non-operating expense
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
Income
from continuing operations before income taxes and noncontrolling
interests
|
|
|
130
|
|
|
|
151
|
|
|
|
412
|
|
|
|
418
|
|
Provision
for income taxes
|
|
|
(33
|
)
|
|
|
(55
|
)
|
|
|
(137
|
)
|
|
|
(151
|
)
|
Income
from continuing operations, net of tax
|
|
|
97
|
|
|
|
96
|
|
|
|
275
|
|
|
|
267
|
|
Income
from discontinued operations, net of tax benefit of $0, $11, $0, and
$11
|
|
|
—
|
|
|
|
11
|
|
|
|
—
|
|
|
|
11
|
|
Net
income
|
|
|
97
|
|
|
|
107
|
|
|
|
275
|
|
|
|
278
|
|
Less:
Net income attributable to noncontrolling interests
|
|
|
(24
|
)
|
|
|
(22
|
)
|
|
|
(58
|
)
|
|
|
(47
|
)
|
Net
income attributable to KBR
|
|
$
|
73
|
|
|
$
|
85
|
|
|
$
|
217
|
|
|
$
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income attributable to KBR, Inc. common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
73
|
|
|
$
|
74
|
|
|
$
|
217
|
|
|
$
|
220
|
|
Discontinued
operations, net
|
|
|
—
|
|
|
|
11
|
|
|
|
—
|
|
|
|
11
|
|
Net
income attributable to KBR
|
|
$
|
73
|
|
|
$
|
85
|
|
|
$
|
217
|
|
|
$
|
231
|
|
Basic
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations – Basic
|
|
$
|
0.46
|
|
|
$
|
0.45
|
|
|
$
|
1.35
|
|
|
$
|
1.30
|
|
Discontinued
operations, net – Basic
|
|
|
—
|
|
|
|
0.07
|
|
|
|
—
|
|
|
|
0.07
|
|
Net
income attributable to KBR per share – Basic
|
|
$
|
0.46
|
|
|
$
|
0.51
|
|
|
$
|
1.35
|
|
|
$
|
1.37
|
|
Diluted
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations – Diluted
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
1.35
|
|
|
$
|
1.30
|
|
Discontinued
operations, net – Diluted
|
|
|
—
|
|
|
|
0.07
|
|
|
|
—
|
|
|
|
0.07
|
|
Net
income attributable to KBR per share – Diluted
|
|
$
|
0.45
|
|
|
$
|
0.51
|
|
|
$
|
1.35
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
160
|
|
|
|
166
|
|
|
|
160
|
|
|
|
168
|
|
Diluted
weighted average common shares outstanding
|
|
|
161
|
|
|
|
167
|
|
|
|
161
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
(1) Due
to the effect of rounding, the sum of the individual per share amounts may not
equal the total shown.
See
accompanying notes to condensed consolidated financial
statements.
KB
R, Inc.
Condensed
Consolidated Balance Sheets
(In
millions except share data)
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
1,020
|
|
|
$
|
1,145
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net of allowance for bad debts of $21 and $19
|
|
|
1,538
|
|
|
|
1,312
|
|
Unbilled
receivables on uncompleted contracts
|
|
|
732
|
|
|
|
835
|
|
Total
receivables
|
|
|
2,270
|
|
|
|
2,147
|
|
Deferred
income taxes
|
|
|
130
|
|
|
|
107
|
|
Other
current assets
|
|
|
507
|
|
|
|
743
|
|
Total
current assets
|
|
|
3,927
|
|
|
|
4,142
|
|
Property,
plant, and equipment, net of accumulated depreciation of $258 and
$224
|
|
|
242
|
|
|
|
245
|
|
Goodwill
|
|
|
691
|
|
|
|
694
|
|
Intangible
assets, net
|
|
|
61
|
|
|
|
73
|
|
Equity
in and advances to related companies
|
|
|
197
|
|
|
|
185
|
|
Noncurrent
deferred income taxes
|
|
|
210
|
|
|
|
167
|
|
Unbilled
receivables on uncompleted contracts
|
|
|
135
|
|
|
|
134
|
|
Other
assets
|
|
|
115
|
|
|
|
244
|
|
Total
assets
|
|
$
|
5,578
|
|
|
$
|
5,884
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,173
|
|
|
$
|
1,387
|
|
Due
to former parent, net
|
|
|
54
|
|
|
|
54
|
|
Advance
billings and unearned revenue on uncompleted contracts
|
|
|
443
|
|
|
|
519
|
|
Reserve
for estimated losses on uncompleted contracts
|
|
|
53
|
|
|
|
76
|
|
Employee
compensation and benefits
|
|
|
296
|
|
|
|
320
|
|
Other
current liabilities
|
|
|
548
|
|
|
|
680
|
|
Current
liabilities related to discontinued operations, net
|
|
|
4
|
|
|
|
7
|
|
Total
current liabilities
|
|
|
2,571
|
|
|
|
3,043
|
|
Noncurrent
employee compensation and benefits
|
|
|
439
|
|
|
|
403
|
|
Other
noncurrent liabilities
|
|
|
183
|
|
|
|
333
|
|
Noncurrent
income tax payable
|
|
|
44
|
|
|
|
34
|
|
Noncurrent
deferred tax liability
|
|
|
66
|
|
|
|
37
|
|
Total
liabilities
|
|
|
3,303
|
|
|
|
3,850
|
|
|
|
|
|
|
|
|
|
|
KBR
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and
outstanding
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 300,000,000 shares authorized,
170,462,232 and 170,125,715 shares issued, and 160,386,291 and
161,725,715 shares outstanding
|
|
|
—
|
|
|
|
—
|
|
Paid-in
capital in excess of par
|
|
|
2,104
|
|
|
|
2,091
|
|
Accumulated
other comprehensive loss
|
|
|
(421
|
)
|
|
|
(439
|
)
|
Retained
earnings
|
|
|
797
|
|
|
|
596
|
|
Treasury
stock, 10,075,941 shares and 8,400,000 shares, at cost
|
|
|
(221
|
)
|
|
|
(196
|
)
|
Total
KBR shareholders’ equity
|
|
|
2,259
|
|
|
|
2,052
|
|
Noncontrolling
interests
|
|
|
16
|
|
|
|
(18
|
)
|
Total
shareholders’ equity
|
|
|
2,275
|
|
|
|
2,034
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
5,578
|
|
|
$
|
5,884
|
|
See
accompanying notes to condensed consolidated financial
statements.
KB
R, Inc.
Condensed
Consolidated Statements of Comprehensive Income
(In
millions)
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$
|
97
|
|
|
$
|
107
|
|
|
$
|
275
|
|
|
$
|
278
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cumulative translation adjustments
|
|
|
4
|
|
|
|
(22
|
)
|
|
|
14
|
|
|
|
(24
|
)
|
Pension
liability adjustment
|
|
|
1
|
|
|
|
6
|
|
|
|
11
|
|
|
|
8
|
|
Net
unrealized gain (loss) on investments and derivatives
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
Total
other comprehensive income (loss), net of tax
|
|
|
6
|
|
|
|
(17
|
)
|
|
|
24
|
|
|
|
(16
|
)
|
Comprehensive
income
|
|
|
103
|
|
|
|
90
|
|
|
|
299
|
|
|
|
262
|
|
Less: Comprehensive
income attributable to noncontrolling interests
|
|
|
(23
|
)
|
|
|
(24
|
)
|
|
|
(64
|
)
|
|
|
(47
|
)
|
Comprehensive
income attributable to KBR
|
|
$
|
80
|
|
|
$
|
66
|
|
|
$
|
235
|
|
|
$
|
215
|
|
See
accompanying notes to condensed consolidated financial
statements.
KB
R, Inc.
Condensed
Consolidated Statements of Cash Flows
(In
millions)
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
275
|
|
|
$
|
278
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
41
|
|
|
|
33
|
|
Equity
in earnings of unconsolidated affiliates
|
|
|
(46
|
)
|
|
|
(34
|
)
|
Deferred
income taxes
|
|
|
(14
|
)
|
|
|
52
|
|
Impairment
of goodwill
|
|
|
6
|
|
|
|
—
|
|
Other
|
|
|
10
|
|
|
|
(37
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(191
|
)
|
|
|
(119
|
)
|
Unbilled
receivables on uncompleted contracts
|
|
|
94
|
|
|
|
73
|
|
Accounts
payable
|
|
|
(233
|
)
|
|
|
(102
|
)
|
Advanced
billings and unearned revenue on uncompleted contracts
|
|
|
(68
|
)
|
|
|
(212
|
)
|
Accrued
employee compensation and benefits
|
|
|
(24
|
)
|
|
|
(2
|
)
|
Reserve
for loss on uncompleted contracts
|
|
|
(23
|
)
|
|
|
(25
|
)
|
Collection
of advances from unconsolidated affiliates, net
|
|
|
(1
|
)
|
|
|
69
|
|
Distribution
of earnings from unconsolidated affiliates, net
|
|
|
35
|
|
|
|
88
|
|
Other
assets
|
|
|
25
|
|
|
|
(89
|
)
|
Other
liabilities
|
|
|
87
|
|
|
|
28
|
|
Total
cash flows provided by (used in) operating activities
|
|
|
(27
|
)
|
|
|
1
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(22
|
)
|
|
|
(27
|
)
|
Sales
of property, plant and equipment
|
|
|
—
|
|
|
|
6
|
|
Acquisition
of businesses, net of cash acquired
|
|
|
—
|
|
|
|
(498
|
)
|
Other
investing activities
|
|
|
2
|
|
|
|
—
|
|
Total
cash flows used in investing activities
|
|
|
(20
|
)
|
|
|
(519
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
to reacquire common stock
|
|
|
(27
|
)
|
|
|
(196
|
)
|
Net
proceeds from issuance of common stock
|
|
|
1
|
|
|
|
3
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(1
|
)
|
|
|
2
|
|
Payments
of dividends to shareholders
|
|
|
(24
|
)
|
|
|
(17
|
)
|
Distributions
to noncontrolling shareholders, net
|
|
|
(30
|
)
|
|
|
(23
|
)
|
Other
financing activities
|
|
|
(11
|
)
|
|
|
—
|
|
Total
cash flows used in financing activities
|
|
|
(92
|
)
|
|
|
(231
|
)
|
Effect
of exchange rate changes on cash
|
|
|
14
|
|
|
|
(2
|
)
|
Decrease
in cash and equivalents
|
|
|
(125
|
)
|
|
|
(751
|
)
|
Cash
and equivalents at beginning of period
|
|
|
1,145
|
|
|
|
1,861
|
|
Cash
and equivalents at end of period
|
|
$
|
1,020
|
|
|
$
|
1,110
|
|
|
|
|
|
|
|
|
|
|
Noncash
operating activities
|
|
|
|
|
|
|
|
|
Other
assets (see Note 7)
|
|
$
|
369
|
|
|
$
|
—
|
|
Other
liabilities (see Note 7)
|
|
$
|
(369
|
)
|
|
$
|
—
|
|
Noncash
financing activities
|
|
|
|
|
|
|
|
|
Dividends
declared or payable
|
|
$
|
8
|
|
|
$
|
9
|
|
See
accompanying notes to condensed consolidated financial
statements.
KB
R, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1. Description of Business and Basis of
Presentation
KBR, Inc.
and its subsidiaries (collectively, “KBR”) is a global engineering, construction
and services company supporting the energy, petrochemicals, government services,
industrial and civil infrastructure sectors. We offer a wide range of services
through six business units; Government and Infrastructure (“G&I”), Upstream,
Services, Downstream, Technology and Ventures. See Note 4 for financial
information about our reportable business segments.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules of the United States Securities and
Exchange Commission (“SEC”) for interim financial statements and do not include
all annual disclosures required by accounting principles generally accepted in
the United States. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008 filed with the
SEC. We believe that the presentation and disclosures
herein are adequate to make the information not misleading, and the condensed
consolidated financial statements reflect all normal adjustments that management
considers necessary for a fair presentation of our consolidated results of
operations, financial position and cash flows. Operating
results for interim periods are not necessarily indicative of results to be
expected for the full fiscal year 2009 or any other future
periods. We have evaluated subsequent events for potential
recognition or disclosure in the financial statements through our Form 10-Q
issuance date of October 29, 2009.
The
preparation of our condensed consolidated financial statements in conformity
with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the balance sheet dates and the reported amounts of revenue and
costs during the reporting periods. Actual results could
differ materially from those estimates. On an ongoing
basis, we review our estimates based on information currently available, and
changes in facts and circumstances may cause us to revise these
estimates.
Our
condensed consolidated financial statements include the accounts of
majority-owned, controlled subsidiaries and variable interest entities where we
are the primary beneficiary. The equity method is used to
account for investments in affiliates in which we have the ability to exert
significant influence over the affiliates’ operating and financial
policies. The cost method is used when we do not have the
ability to exert significant influence. All material
intercompany accounts and transactions are eliminated.
Effective
January 1, 2009, we adopted guidance for noncontrolling interests in
consolidated financial statements in accordance with the FASB Accounting
Standards Codification
TM
(“ASC”) 810 - Consolidation. Noncontrolling interests in consolidated
subsidiaries in our condensed consolidated balance sheets represent
noncontrolling shareholders’ proportionate share of the equity in our
consolidated subsidiaries. Noncontrolling interest in
consolidated subsidiaries is adjusted each period to reflect the noncontrolling
shareholders’ allocation of income or the absorption of losses. ASC
810 requires that losses be attributed to the noncontrolling interest without
regard to the noncontrolling shareholders obligation to fund their share of the
losses. As of December 31, 2008 and September 30, 2009, the
noncontrolling shareholders in all of our consolidated subsidiaries were
obligated to fund their share of any losses.
Note
2.
Income per Share
Basic income per share is based upon
the weighted average number of common shares outstanding during the
period. Dilutive income per share includes additional
common shares that would have been outstanding if potential common shares with a
dilutive effect had been issued. A reconciliation of the
number of shares used for the basic and diluted income per share calculations is
as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Millions
of shares
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic
weighted average common shares outstanding
|
|
160
|
|
|
|
166
|
|
|
160
|
|
|
168
|
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and restricted shares
|
|
1
|
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Diluted
weighted average common shares outstanding
|
|
161
|
|
|
|
167
|
|
|
161
|
|
|
169
|
|
No
adjustments to net income were made in calculating diluted earnings per share
for the three months ended September 30, 2009 and 2008. The diluted
earnings per share calculation did not include 1.4 million and 1.7 million
antidilutive weighted average shares for the three and nine months ended
September 30, 2009, respectively. The antidilutive weighted average
shares were 1.0 million and 0.4 million for the three and nine months ended
September 30, 2008, respectively. For purposes of applying the
two-class method in computing earnings per share, net earnings allocable to
participating securities was approximately $1 million for both the nine months
ended September 30, 2009 and 2008.
Note
3. Percentage-of-Completion Contracts
Unapproved
claims
The
amounts of unapproved claims included in determining the profit or loss on
contracts and the amounts recorded as “Unbilled receivables on uncompleted
contracts” as of September 30, 2009 and December 31, 2008 are as
follows:
Millions
of dollars
|
|
|
|
|
|
|
Probable
unapproved claims
|
|
$
|
134
|
|
|
$
|
133
|
|
Probable
unapproved change orders
|
|
|
17
|
|
|
|
5
|
|
Probable
unapproved claims related to unconsolidated subsidiaries
|
|
|
—
|
|
|
|
33
|
|
Probable
unapproved change orders related to unconsolidated
subsidiaries
|
|
|
3
|
|
|
|
5
|
|
As of
September 30, 2009, the probable unapproved claims, including those from
unconsolidated subsidiaries, primarily related to three completed
contracts. See Note 6 for a discussion of United States government
contract claims, which are not included in the table above.
We have
contracts with probable unapproved claims that will likely not be settled within
one year totaling $121 million at September 30, 2009 and $130 million at
December 31, 2008, respectively, included in the table above, which are
reflected as a non-current asset in “Unbilled receivables on uncompleted
contracts” on the condensed consolidated balance sheets. Other probable
unapproved claims that we believe will be settled within one year have been
recorded as a current asset in “Unbilled receivables on uncompleted contracts”
on the condensed consolidated balance sheets.
Escravos
Project
In July
2007, we and our joint venture partner modified the contract terms and
conditions converting the project from a fixed-price to a reimbursable contract
whereby we will be paid our actual cost incurred less a credit that approximates
the charge we identified in the second quarter of 2006. The
unamortized balance of the charge is included as a component of the “Reserve for
estimated losses on uncompleted contracts” in the accompanying condensed
consolidated balance sheets.
Skopje
Embassy Project
In 2005,
we were awarded a fixed-price contract to design and build a U.S. embassy in
Skopje, Macedonia. We recorded losses of $21 million in 2008,
bringing our total losses to $60 million. On March 31, 2009 we
received notice of substantial completion from our customer which ended our
exposure to liquidated damages. The customer took control of the
facility on April 27, 2009. We have not incurred any further losses
since 2008. Although we do not expect to incur additional losses on
this project, it is possible that additional losses could be incurred if we
exceed the amounts currently estimated for warranty type items. The
warranty period expires in March 2010 per the terms of the
contract. Additionally, we are pursuing claims filed with the
Department of State to recover a portion of the losses we incurred primarily
related to certain schedule delays and errors included in the bid for this
project.
PEMEX
Arbitration
In 1997
and 1998 we entered into three contracts with PEMEX, the project owner, to build
offshore platforms, pipelines and related structures in the Bay of Campeche
offshore Mexico. The three contracts were known as Engineering,
Procurement and Construction (“EPC”) 1, EPC 22 and EPC 28. All three
projects encountered significant schedule delays and increased costs due to
problems with design work, late delivery and defects in equipment, increases in
scope and other changes. PEMEX took possession of the offshore
facilities of EPC 1 in March 2004 after having achieved oil production but prior
to our completion of our scope of work pursuant to the contract. We
filed for arbitration with the International Chamber of Commerce (“ICC”) in 2004
and 2005 claiming recovery of damages for EPC 22 and 28. We received
favorable arbitration awards for EPC 22 and 28 in 2007 and 2008, and
subsequently negotiated settlements and received payment from PEMEX in
2008. In the first quarter of 2008, we recognized a gain of $51
million related to our settlement of EPC 28 with PEMEX.
We filed
for arbitration with the ICC in 2004 claiming recovery of damages of $323
million for EPC 1 and PEMEX subsequently filed counterclaims totaling $157
million. The EPC 1 arbitration hearings were held in November 2007,
and a decision from the ICC has been pending since that time. The
costs incurred related to EPC 1 continue to be classified as a probable claim
receivable with no significant adjustments to the claim amount since
2004. Based on facts known by us as of September 30, 2009, we believe
that the remaining EPC 1 counterclaims referred to above, filed by PEMEX, are
without merit and have concluded there is no reasonable possibility that a loss
has been incurred. No amounts have been accrued for these
counterclaims at September 30, 2009.
In
Amenas Project
We own a
50% interest in an unconsolidated joint venture which began construction of a
gas processing facility in Algeria in early 2003 known as the In Amenas project
which was completed in 2006. Five months after the contract was
awarded in 2003, the client requested the joint venture to relocate to a new
construction site as a result of soil conditions discovered at the original
site. The joint venture subsequently filed for arbitration with the
ICC claiming recovery of $129 million. During the first quarter of
2009, we received a ruling on the claim brought forth by the joint venture
against the client. Although the joint venture was awarded recovery
of relocation costs thereon of approximately $33 million, it did not prevail on
the claim for extension of time for filing of liquidated damages and other
damage claims. As a result of the ruling, we recognized a loss of
approximately $15 million during the first quarter of 2009 which is recorded in
“Equity in earnings of unconsolidated affiliates.” The loss
represents the difference in the amount awarded by the ICC and the amount
initially recorded in 2006.
Other
Projects
Our
unconsolidated joint ventures in our gas monetization operations include the
results of three major LNG projects which had significant activity in the third
quarter of 2009. We incurred additional costs due to equipment
failures, subcontractor claims and schedule delays related to these projects,
all of which are now commercially operational. As a result, “Equity in
earnings (loss) of unconsolidated subsidiaries, net” includes net
losses of $25 million for the three months ended September 30, 2009 for
these projects.
Note
4. Business Segment Information
We
provide a wide range of services, but the management of our business is heavily
focused on major projects within each of our reportable segments. At
any given time, a relatively few number of projects and joint ventures represent
a substantial part of our operations. Intersegment revenues are
immaterial. Our equity in earnings and losses of unconsolidated
affiliates that are accounted for using the equity method of accounting is
included in revenue of the applicable segment.
The table
below presents information on our business segments.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$
|
1,376
|
|
|
$
|
1,759
|
|
|
$
|
4,672
|
|
|
$
|
5,150
|
|
Upstream
|
|
|
735
|
|
|
|
550
|
|
|
|
2,273
|
|
|
|
1,860
|
|
Services
|
|
|
566
|
|
|
|
539
|
|
|
|
1,723
|
|
|
|
776
|
|
Other
|
|
|
163
|
|
|
|
170
|
|
|
|
473
|
|
|
|
409
|
|
Total
revenue
|
|
$
|
2,840
|
|
|
$
|
3,018
|
|
|
$
|
9,141
|
|
|
$
|
8,195
|
|
Operating
segment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$
|
89
|
|
|
$
|
104
|
|
|
$
|
250
|
|
|
$
|
247
|
|
Upstream
|
|
|
48
|
|
|
|
53
|
|
|
|
186
|
|
|
|
197
|
|
Services
|
|
|
36
|
|
|
|
27
|
|
|
|
89
|
|
|
|
57
|
|
Other
|
|
|
16
|
|
|
|
20
|
|
|
|
50
|
|
|
|
50
|
|
Operating
segment income (a)
|
|
$
|
189
|
|
|
$
|
204
|
|
|
$
|
575
|
|
|
$
|
551
|
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposition of assets – corporate
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
Labor
cost absorption (b)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
—
|
|
Corporate
general and administrative
|
|
|
(54
|
)
|
|
|
(55
|
)
|
|
|
(157
|
)
|
|
|
(163
|
)
|
Total
operating income
|
|
$
|
131
|
|
|
$
|
144
|
|
|
$
|
412
|
|
|
$
|
388
|
|
|
(a)
|
Operating
segment performance is evaluated by our chief operating decision maker
using operating segment income which is defined as operating segment
revenue less the cost of services and segment overhead directly
attributable to the operating segment. Operating segment income
excludes certain cost of services directly attributable to the operating
segment that is managed and reported at the corporate level, and corporate
general and administrative expenses. We believe this is the
most accurate measure of the ongoing profitability of our operating
segments.
|
|
(b)
|
Labor
cost absorption represents costs incurred by our central service labor and
resource groups (above)/under the amounts charged to the operating
segments.
|
Note
5. Committed and Restricted Cash
Cash and
equivalents include cash from advanced payments related to contracts in progress
held by our joint ventures that we consolidate for accounting
purposes. The use of these cash balances is limited to joint venture
activities and is not available for other projects, general cash needs, or
distribution to us without approval of the board of directors of the respective
joint ventures. Cash from advanced payments held by our joint
ventures that we consolidate for accounting purposes totaled approximately $185
million at September 30, 2009 and $175 million at December 31,
2008. Cash and equivalents also includes $20 million at September 30,
2009 and $179 at December 31, 2008, of cash from advance payments that are not
available for other projects related to a contract in progress that is not
executed through a joint venture.
Included
in “Other current assets” and “Other assets” at September 30, 2009 is restricted
cash in the amounts of $4 million and $11 million,
respectively. Restricted cash consists of amounts held in deposit
with certain banks to collateralize standby letters of credit.
Note
6. United States Government Contract
Work
We
provide substantial work under our government contracts to the United States
Department of Defense and other governmental agencies. These contracts include
our worldwide United States Army logistics contracts, known as LogCAP and U.S.
Army Europe (“USAREUR”).
Given the
demands of working in Iraq and elsewhere for the United States government, we
expect that from time to time we will have disagreements or experience
performance issues with the various government customers for which we work. If
performance issues arise under any of our government contracts, the government
retains the right to pursue remedies, which could include threatened termination
or termination, under any affected contract. If any contract were so terminated,
we may not receive award fees under the affected contract, and our ability to
secure future contracts could be adversely affected, although we would receive
payment for amounts owed for our allowable costs under cost-reimbursable
contracts. Other remedies that could be sought by our government customers for
any improper activities or performance issues include sanctions such as
forfeiture of profits, suspension of payments, fines, and suspensions or
debarment from doing business with the government. Further, the
negative publicity that could arise from disagreements with our customers or
sanctions as a result thereof could have an adverse effect on our reputation in
the industry, reduce our ability to compete for new contracts, and may also have
a material adverse effect on our business, financial condition, results of
operations, and cash flow.
We have
experienced and expect to be a party to various claims against us by employees,
third parties, soldiers, subcontractors and others that have arisen out of our
work in Iraq such as claims for wrongful termination, assaults against
employees, personal injury claims by third parties and army personnel, and
subcontractor claims. While we believe we conduct our operations safely, the
environments in which we operate often lead to these types of claims. We believe
the vast majority of these types of claims are governed by the Defense Base Act
or precluded by other defenses. We have a dispute resolution program under which
most of these employee claims are subject to binding arbitration. However, an
unfavorable resolution or disposition of these matters could have a material
adverse effect on our business, financial condition, results of operations, and
cash flow.
Award
fees
In
accordance with the provisions of the LogCAP III contract, we earn profits on
our services rendered based on a combination of a fixed fee plus award fees
granted by our customer. Both fees are measured as a percentage rate applied to
estimated and negotiated costs. The LogCAP III customer is
contractually obligated to periodically convene Award-Fee Boards, which are
comprised of individuals who have been designated to assist the Award Fee
Determining official in making award fee determinations. Award fees are based on
evaluations of our performance using criteria set forth in the contract, which
include non-binding monthly evaluations made by our customers in the field of
operations. Although the criteria have historically been used by the
Award-Fee Boards in reaching their recommendations, the amount of
award fees are determined at the sole discretion of the Award Fee Determining
Official.
We
recognize award fees on the LogCAP III contract using an estimated accrual of
the amounts to be awarded. Once task orders underlying the work are
definitized and award fees are granted, we adjust our estimate of award fees to
the actual amounts earned. In 2007, we reduced our award fee accrual
rate on the LogCAP III contract from 84% to 80% of the total amount of possible
award fees, as a result of the rate of actual award fees received in that
year. No Award Fee Evaluation Boards have been held for our Iraq
based work on LogCAP III since the June 2008 meeting, which evaluated our
performance for the period of January 2008 through April 2008, and for which we
have not received the results of the award fee
determination. Accordingly, we have not received any award fee
determinations in Iraq since the period of performance beginning January 1,
2008. Our award fees recognized since that date are based on our
estimated accrual rates. The 80% accrual rate continued to be applied
through April 30, 2008. Beginning in May 2008, based on our assessments of
monthly non-binding client evaluations of our performance, we reduced our award
fee accrual rate from 80% to 72% of the total possible award fees and have
continued to use 72% as our accrual rate through September 30,
2009. At September 30, 2009, approximately $118 million is recorded
in unbilled receivables as our estimate of award fees. The customer
has not established the date of the next Award Fee Evaluation Board, but we
anticipate that it could occur in late 2009 or early 2010. If our
next award fee letter has performance scores and award rates higher or lower
than our historical rates, our revenue will be adjusted
accordingly.
For
contracts containing multiple deliverables entered into subsequent to June 30,
2003, we analyze each activity within the contract to ensure that we adhere to
the separation guidelines for revenue arrangements with multiple deliverables in
accordance with FASB ASC 605 - Revenue Recognition. For service-only
contracts and service elements of multiple deliverable arrangements, award fees
are recognized only when definitized and awarded by the customer. The LogCAP IV
contract would be an example of a contract in which award fees would be
recognized only when definitized and awarded by the customer. Award fees on
government construction contracts are recognized during the term of the contract
based on our estimate of the amount of fees to be awarded.
DCAA
audit issues
Our
operations under United States government contracts are regularly reviewed and
audited by the Defense Contract Audit Agency (“DCAA”) and other governmental
agencies. The DCAA serves in an advisory role to our customer. When issues are
identified during the governmental agency audit process, these issues are
typically discussed and reviewed with us. The DCAA then issues an audit report
with its recommendations to our customer’s contracting officer. In the case of
management systems and other contract administrative issues, the contracting
officer is generally with the Defense Contract Management Agency (“DCMA”). We
then work with our customer to resolve the issues noted in the audit report. We
self-disallow costs that are expressly not allocable to government contracts per
the relevant regulations. However, if our customer or a government auditor forms
an opinion that we improperly charged any costs to a contract, these costs,
depending on facts and circumstances and the issue resolution process, could
become non-reimbursable and in such instances if already reimbursed, the costs
must be refunded to the customer. Our revenue recorded for government contract
work is reduced for our estimate of potentially refundable costs related to
dispute issues that may be categorized as disputed or unallowable as a result of
cost overruns or the audit process.
Security
. In
February 2007, we received a letter from the Department of the Army informing us
of their intent to adjust payments under the LogCAP III contract associated with
the cost incurred for the years 2003 through 2006 by certain of our
subcontractors to provide security to their employees. Based on that letter, the
Army withheld its initial assessment of $20 million. The Army based its initial
assessment on one subcontract wherein, based on communications with the
subcontractor, the Army estimated 6% of the total subcontract cost related to
the private security costs. The Army previously indicated that not all task
orders and subcontracts have been reviewed and that they may make additional
adjustments. In August 2009, we received a letter from the DCAA
disapproving an additional $83 million of costs incurred by us and our
subcontractors to provide security during the same periods. In
August 2009, the Army withheld an additional $22 million in payments from us
bringing the total payments withheld to approximately $42 million as of
September 30, 2009 out of the total disapproved costs to date of $103
million. We intend to file an appeal to the ASBCA to recover the
additional amounts withheld.
The Army
indicated that they believe our LogCAP III contract prohibits us and our
subcontractors from billing costs of privately acquired security. We believe
that, while the LogCAP III contract anticipates that the Army will provide force
protection to KBR employees, it does not prohibit us or any of our
subcontractors from using private security services to provide force protection
to KBR or subcontractor personnel. In addition, a significant portion of our
subcontracts are competitively bid lump sum or fixed price subcontracts. As a
result, we do not receive details of the subcontractors’ cost estimate nor are
we legally entitled to it. Our subcontractors have not sought
additional compensation for security services. Accordingly, we
believe that we are entitled to reimbursement by the Army for the cost of
services provided by us or our subcontractors, even if they incurred costs for
private force protection services. Therefore, we believe that the Army’s
position that such costs are unallowable and that they are entitled to withhold
amounts incurred for such costs is wrong as a matter of law.
In 2007,
we provided at the Army's request information that addresses the use of armed
security either directly or indirectly charged to LogCAP III. In October 2007,
we filed a claim to recover the original $20 million that was withheld which was
deemed denied as a result of no response from the contracting
officer. In March 2008, we filed an appeal to the Armed Services
Board of Contract Appeals (“ASBCA”) to recover the initial $20 million withheld
from us, and that appeal is currently in the discovery process. Court
hearings related to this matter are expected to occur in May 2010.
This
matter is also the subject of an ongoing investigation by the Department of
Justice (“DOJ”) for possible violations of the False Claims Act. We
are cooperating fully with this investigation. We believe these sums
were properly billed under our contract with the Army. At this time,
we believe the likelihood that a loss related to this matter has been incurred
is remote. We have not adjusted our revenues or accrued any amounts
related to this matter.
Containers.
In June 2005, the DCAA recommended withholding certain costs associated
with providing containerized housing for soldiers and supporting civilian
personnel in Iraq. The DCMA recommended that the costs be withheld pending
receipt of additional explanation or documentation to support the subcontract
costs. During 2006, we resolved approximately $26 million of the withheld
amounts with our contracting officer and payment was received in the first
quarter of 2007. In May of 2008, we received notice from the DCMA of their
intention to rescind their 2006 determination to allow the $26 million of costs
pending additional supporting information. We have not received a
final determination by the DCMA. As of September 30, 2009, approximately
$55million of costs have been suspended related to this matter of which $28
million has been withheld by us from our subcontractors. In April 2008, we filed
a counterclaim in arbitration against one of our LogCAP III subcontractors,
First Kuwaiti Trading Company, to recover approximately $51 million paid to the
subcontractor for containerized housing as further described under the caption
First Kuwaiti Arbitration below. We will continue working with the government
and our subcontractors to resolve the remaining amounts. At this time, the
likelihood that a loss in excess of the amount accrued for this matter is
remote.
Dining
facilities.
In 2006, the DCAA raised questions regarding costs
related to dining facilities in Iraq. We responded to the DCMA that our costs
are reasonable. Since 2007, the DCAA disapproved payment for $86
million of costs related to these dining facilities until such time we provide
documentation to support the price reasonableness of the rates negotiated with
our subcontractor and demonstrate that the amounts billed were in accordance
with the contract terms. We believe the prices obtained for these
services were reasonable and intend to vigorously defend ourselves on this
matter. As of September 30, 2009, we filed claims in the U.S. Court of Federal
Claims to recover $58 million of amounts withheld from us by the
customer. With respect to questions raised regarding billing in
accordance with contract terms, as of September 30, 2009, we believe it is
reasonably possible that we could incur losses in excess of the amount accrued
for possible subcontractor costs billed to the customer that were possibly not
in accordance with contract terms. However, we are unable to estimate an amount
of possible loss or range of possible loss in excess of the amount accrued
related to any costs billed to the customer that were not in accordance with the
contract terms. As of September 30, 2009, we had withheld $63 million
in payments from our subcontractors pending the resolution of these matters with
our customer.
Kosovo
fuel.
In April 2007, the DOJ issued a letter alleging the
theft in 2004 and subsequent sale of diesel fuel by KBR employees assigned to
Camp Bondsteel in Kosovo. In addition, the letter alleges that KBR employees
falsified records to conceal the thefts from the Army. The total value of the
fuel in question is estimated by the DOJ at approximately $2 million based on an
audit report issued by the DCAA. We believe the volume of the alleged
misappropriated fuel is significantly less than the amount estimated by the
DCAA. We responded to the DOJ that we had maintained adequate programs to
control, protect, and preserve the fuel in question. We further believe that our
contract with the Army expressly limits KBR’s responsibility for such
losses. In April 2009, the DOJ informed us that they have closed
their file on the matter and we believe the matter is now resolved.
Transportation
costs
. The DCAA, in performing its audit activities under the LogCAP III
contract, raised a question about our compliance with the provisions of the Fly
America Act. Subject to certain exceptions, the Fly America Act requires Federal
employees and others performing U.S. Government-financed foreign air travel to
travel by U.S. flag air carriers. There are times when we transported personnel
in connection with our services for the U.S. military where we may not have been
in compliance with the Fly America Act and its interpretations through the
Federal Acquisition Regulations and the Comptroller General. As of September 30,
2009, we have accrued an estimate of the cost incurred for these potentially
non-compliant flights with a corresponding reduction to revenue. The DCAA may
consider additional flights to be noncompliant resulting in potential larger
amounts of disallowed costs than the amount we have accrued. At this time, we
cannot estimate a range of reasonably possible losses that may have been
incurred, if any, in excess of the amount accrued. We will continue to work with
our customer to resolve this matter.
Construction
services
. During the third quarter of 2009, we received notice from the
DCAA disapproving approximately $26 million in costs related to work performed
under our CONCAP III contract with the U.S. Navy to provide emergency
construction services primarily to Government facilities damaged by Hurricanes
Katrina and Wilma. The DCAA claims the costs billed to the U.S. Navy
primarily related to subcontracts costs that were either inappropriately bid,
included unallowable profit markup or were unreasonable. We believe
we undertook adequate and reasonable steps to ensure that bidding procedures
were followed and documented and that the amounts billed to the customer were
reasonable and justified. As of September 30, 2009, we believe that
the likelihood of further loss in excess of the amount accrued related to these
claims is remote.
Other
issues.
The DCAA is continuously performing audits of costs
incurred for the foregoing and other services provided by us under our
government contracts. During these audits, there have been questions raised by
the DCAA about the reasonableness or allowability of certain costs or the
quality or quantity of supporting documentation. The DCAA might recommend
withholding some portion of the questioned costs while the issues are being
resolved with our customer. Because of the intense scrutiny involving our
government contracts operations, issues raised by the DCAA may be more difficult
to resolve.
Other
investigations
We
identified and reported to the U.S. Departments of State and Commerce numerous
exports of materials, including personal protection equipment such as night
vision goggles, body armor and chemical protective suits, that possibly were not
in accordance with the terms of our export license or applicable regulations.
However, we believe that the facts and circumstances leading to our conclusion
of possible non-compliance relating to our Iraq and Afghanistan activities are
unique and potentially mitigate any possible fines and penalties because the
bulk of the exported items are the property of the U.S. government and are used
or consumed in connection with services rendered to the U.S.
government. In October 2009 the Department of Commerce responded by
warning us that it believed that the disclosed conduct constituted violations,
but that the facts and circumstances were such that it would not seek
penalties. The Department of State is continuing to review
information and materials subject to its jurisdiction, including whether to seek
penalties. We are in on-going communications with the Department of
State.
Claims
Our
unapproved claims for costs incurred under various government contracts totaled
$122 million at September 30, 2009 and $73 million at December 31,
2008. The unapproved claims at September 30, 2009 include
approximately $51 million as a result of the de-obligation of 2004 funding on
certain task orders including $48 million withheld from us as further
discussed in Dining facilities above with incurred costs that have been disputed
by the DCAA and our customer. We believe such disputed costs will be
resolved in our favor at which time the customer will be required to obligate
funds from the year in which resolution occurs. The unapproved claims
outstanding at September 30, 2009 and December 31, 2008 are considered to be
probable of collection and have been recognized as revenue. These unapproved
claims relate to contracts where our costs have exceeded the customer’s funded
value of the task order. We understand that our customer is actively seeking
funds that have been or will be appropriated to the Department of Defense that
can be obligated on our contract.
McBride
Qui Tam suit
In
September 2006, we became aware of a qui tam action filed against us by a former
employee alleging various wrongdoings in the form of overbillings of our
customer on the LogCAP III contract. This case was originally filed
pending the government’s decision whether or not to participate in the
suit. In June 2006, the government formally declined to
participate. The principal allegations are that our compensation for
the provision of Morale, Welfare and Recreation (“MWR”) facilities under LogCAP
III is based on the volume of usage of those facilities and that we deliberately
overstated that usage. In accordance with the contract, we charged
our customer based on actual cost, not based on the number of
users. It was also alleged that, during the period from November 2004
into mid-December 2004, we continued to bill the customer for lunches, although
the dining facility was closed and not serving lunches. There are
also allegations regarding housing containers and our provision of services to
our employees and contractors. On July 5, 2007, the court granted our motion to
dismiss the qui tam claims and to compel arbitration of employment claims
including a claim that the plaintiff was unlawfully discharged. The
majority of the plaintiff’s claims were dismissed but the plaintiff was allowed
to pursue limited claims pending discovery and future motions. Substantially all
employment claims were sent to arbitration under the Company’s dispute
resolution program and were subsequently resolved in our favor. In
January 2009, the relator filed an amended complaint which is currently in the
discovery process. We believe the relator’s claim is without merit
and that the likelihood that a loss has been incurred is remote. As
of September 30, 2009, no amounts have been accrued.
Godfrey
Qui Tam suit
In
December 2005, we became aware of a qui tam action filed against us and several
of our subcontractors by a former employee alleging that we violated the False
Claims Act by submitting overcharges to the government for dining facility
services provided in Iraq under the LogCAP III contract. As required by the
False Claims Act, the lawsuit was filed under seal to permit the government to
investigate the allegations. In early April 2007, the court denied the
government’s motion for the case to remain under seal, and on April 23, 2007,
the government filed a notice stating that it was not participating in the suit.
In August 2007, the relator filed an amended complaint which added an additional
contract to the allegations and added retaliation claims. We filed motions to
dismiss and to compel arbitration which were granted on March 13, 2008 for all
counts except as to the employment issues which were sent to arbitration. The
relator has filed an appeal. We are unable to determine the likely outcome at
this time. No amounts have been accrued and we cannot determine any reasonable
estimate of loss that may have been incurred, if any.
ASCO
settlement
In 2003,
Associated Construction Company WLL (ASCO) was a subcontractor to KBR in Iraq
related to work performed on our LogCAP III contract. In 2008, a jury
in Texas returned a verdict against KBR awarding ASCO damages of $39 million
with the court to determine attorney’s fees and interest. In the
fourth quarter of 2008, we negotiated a final settlement with ASCO in the amount
of $22 million, of which we had previously concluded that $5 million was
probable of reimbursement from our customer. In the third quarter of
2009, we obtained approval from the customer to bill the entire $22 million
resulting in the recognition of an additional $17 million of
revenue.
First
Kuwaiti Trading Company arbitration
In April
2008 First Kuwaiti Trading Company, one of our LogCAP III subcontractors, filed
for arbitration of a subcontract under which KBR had leased vehicles related to
work performed on our LogCAP III contract. First Kuwaiti alleged that
we did not return or pay rent for many of the vehicles and sought initial
damages in the amount of $39 million. We filed a counterclaim to
recover amounts which may ultimately be determined due to the Government for the
$51 million in suspended costs as discussed in the preceding section of this
footnote titled “Containers.” First Kuwaiti subsequently responded by
adding additional subcontract claims, increasing its total claim to
approximately $121 million as of September 30, 2009. This matter is
in the early stages of the arbitration process. No amounts have been
accrued and we are unable to determine a reasonable estimate of loss, if any, at
this time.
Paul
Morrell, Inc. d/b/a The Event Source vs. KBR, Inc.
TES is a
former LogCAP III subcontractor who provided DFAC services at six sites in Iraq
from mid-2003 to early 2004. TES has sued KBR in Federal Court in
Virginia for breach of contract and tortuous interference with TES’s
subcontractors by awarding subsequent DFAC contracts to the
subcontractors. KBR denies these allegations. In addition, the
Government withheld funds from KBR that KBR had submitted for reimbursement of
TES invoices, and at that time, TES agreed that it was not entitled to payment
until KBR was paid by the Government. Eventually KBR and the
Government settled the dispute, and in turn KBR and TES agreed that TES would
accept, as payment in full with a release of all other claims, the amount the
Government paid to KBR for TES’s services. TES now seeks to overturn that
settlement and release, claiming that KBR misrepresented the
facts. TES seeks $36 million in compensatory and unspecified
punitive damages in its suit. The trial was completed in June 2009
and we expect a ruling from the court in the fourth quarter of
2009. We are unable to determine the likely outcome in excess
of the amount accrued for this suit at this time.
Electrocution
litigation
During
2008, two separate lawsuits were filed against KBR alleging that the Company was
responsible in two separate electrical incidents which resulted in the deaths of
two soldiers. One incident occurred at Radwaniyah Palace Complex and
the other occurred at Al Taqaddum. It is alleged in each suit that
the electrocution incident was caused by improper electrical maintenance or
other electrical work. We intend to vigorously defend these
matters. KBR denies that its conduct was the cause of either event
and denies legal responsibility. Both cases have been removed to Federal Court
where motions to dismiss have been filed. The plaintiffs voluntarily
have dismissed one suit. Discovery is in the early stages of the
other case. We are unable to determine the likely outcome of the
remaining case at this time. As of September 30, 2009, no amounts
have been accrued.
Burn
Pit Litigation
KBR has
been served with 22 lawsuits in various states alleging exposure to toxic
materials resulting from the operation of burn pits in Iraq or Afghanistan in
connection with services provided by KBR under the LogCAP III
contract. Each lawsuit has multiple named plaintiffs who purport to
represent a large class of unnamed persons. The lawsuits primarily
allege negligence, willful and wanton conduct, battery, intentional infliction
of emotional harm, personal injury and failure to warn of dangerous and toxic
exposures which has resulted in alleged illnesses for contractors and soldiers
living and working in the bases where the pits are operated. All of
the pending cases have been removed to Federal Court and will be consolidated
for multi-district litigation treatment. We intend to vigorously
defend these matters. Due to the inherent uncertainties of litigation
and because the litigation is at a preliminary stage, we cannot at this time
accurately predict the ultimate outcome of these matters, or the amounts of
potential loss, if any.
Note
7. Other Commitments and Contingencies
Foreign
Corrupt Practices Act investigations
On
February 11, 2009 KBR LLC, entered a guilty plea related to the Bonny Island
investigation in the United States District Court, Southern District of Texas,
Houston Division (the “Court”). KBR LLC plead guilty to one count of
conspiring to violate the FCPA and four counts of violating the FCPA, all
arising from the intent to bribe various Nigerian officials through commissions
paid to agents working on behalf of TSKJ on the Bonny Island
project. The plea agreement reached with the DOJ resolves all
criminal charges in the DOJ’s investigation into the conduct of KBR LLC relating
to the Bonny Island project, so long as the conduct was disclosed or known to
DOJ before the settlement, including previously disclosed allegations of
coordinated bidding. The plea agreement calls for the payment of a criminal
penalty of $402 million, of which Halliburton pays $382 million under the terms
of the indemnity in the master separation agreement, while we pay $20
million. The criminal penalties are to be paid in quarterly payments
over a two-year period ending October 2010. We also agreed to a
period of organizational probation of three years, during which we retain a
monitor who assesses our compliance with the plea agreement and evaluate our
FCPA compliance program over the three year period, with periodic reports to the
DOJ.
On the
same date, the SEC filed a complaint and we consented to the filing of a final
judgment against us in the Court. The complaint and the judgment were filed as
part of a settled civil enforcement action by the SEC, to resolve the civil
portion of the government’s investigation of the Bonny Island project. The
complaint alleges civil violations of the FCPA’s antibribery and
books-and-records provisions related to the Bonny Island project. The complaint
enjoins us from violating the FCPA’s antibribery, books-and-records, and
internal-controls provisions and requires Halliburton and KBR, jointly and
severally, to make payments totaling $177 million, all of which has been paid by
Halliburton pursuant to the indemnification under the master separation
agreement. The judgment also requires us to retain an independent
monitor on the same terms as the plea agreement with the DOJ.
Under
both the plea agreement and judgment, we have agreed to cooperate with the SEC
and DOJ in their investigations of other parties involved in TSKJ and the Bonny
Island project.
As a
result of the settlement, in the fourth quarter 2008 we recorded the $402
million obligation to the DOJ and, accordingly, recorded a receivable from
Halliburton for the $382 million that Halliburton will pay to the DOJ on our
behalf. The resulting charge of $20 million to KBR was recorded in
cost of sales of our Upstream business unit in the fourth quarter of 2008.
Likewise, we recorded an obligation to the SEC in the amount of $177 million and
a receivable from Halliburton in the same amount. Halliburton paid
their first four installments totaling $192 million to the DOJ and $177 million
to the SEC in the first nine months of 2009, and such payments totaling $369
million have been reflected in the accompanying statement of cash flows as
noncash operating activities in 2009.
At
September 30, 2009, the remaining obligation to the DOJ of $202 million has been
classified on our consolidated balance sheet as $152 million in “Other current
liabilities” and the remaining $50 million in “Other noncurrent
liabilities.” This classification is based on payment terms that
provide for quarterly installments of $50 million each due on the first day of
each subsequent quarter beginning on April 1, 2009 through October 1,
2010. Likewise, the remaining indemnification receivable from
Halliburton for the DOJ obligation of $190 million has been classified on our
consolidated balance sheet as $142 million in “Other current assets” and the
remaining $48 million in “Other assets”.
As part
of the settlement of the FCPA matters, we have agreed to the appointment of a
corporate monitor for a period of up to three years. We proposed the
appointment of a corporate monitor and received approval from the DOJ in the
third quarter of 2009. We are responsible for paying the fees and
expenses related to the monitor’s review and oversight of our policies and
activities relating to compliance with applicable anti-corruption laws and
regulations.
Under the
terms of the Master Separation Agreement, Halliburton has agreed to indemnify
us, and any of our greater than 50%-owned subsidiaries, for our share of fines
or other monetary penalties or direct monetary damages, including disgorgement,
as a result of claims made or assessed by a governmental authority of the United
States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a
settlement thereof relating to FCPA and related corruption allegations, which
could involve Halliburton and us through The M. W. Kellogg Company, M. W.
Kellogg Limited (“MWKL”), or their or our joint ventures in projects both in and
outside of Nigeria, including the Bonny Island, Nigeria project. Halliburton’s
indemnity will not apply to any other losses, claims, liabilities or damages
assessed against us as a result of or relating to FCPA matters and related
corruption allegations or to any fines or other monetary penalties or direct
monetary damages, including disgorgement, assessed by governmental authorities
in jurisdictions other than the United States, the United Kingdom, France,
Nigeria, Switzerland or Algeria, or a settlement thereof, or assessed against
entities such as TSKJ, in which we do not have an interest greater than
50%.
The
investigations by other foreign governmental authorities are
continuing. We are aware that the U.K. Serious Frauds Office is
conducting an investigation of activities conducted by current and former
employees of M.W. Kellogg Limited, our 55%-owned subsidiary in the U.K., as to
whether various U.K. laws were violated relating to the bribery of various
Nigerian officials through commissions paid to agents working on the Bonny
Island project. MWKL is in the process of responding to inquiries and
providing information as requested by the Serious Frauds Office
(“SFO”). The SFO investigation is prompted by the DOJ investigation
of Bonny Island and the involvement, if any, of U.K. companies in the
project
.
Other foreign
governmental authorities could conclude that violations of applicable foreign
laws analogous to the FCPA have occurred with respect to the Bonny Island
project and other projects in or outside of Nigeria. In such circumstances, the
resolution or disposition of these matters, even after taking into account the
indemnity from Halliburton with respect to any liabilities for fines or other
monetary penalties or direct monetary damages, including disgorgement, that may
be assessed by certain foreign governments or governmental agencies against us
or our greater than 50%-owned subsidiaries could have a material adverse effect
on our business, prospects, results or operations, financial condition and cash
flow.
Commercial
Agent Fees
We have
both before and after the separation from our former parent used commercial
agents on some of our large-scale international projects to assist in
understanding customer needs, local content requirements, vendor selection
criteria and processes and in communicating information from us regarding our
services and pricing. Prior to separation, it was identified by our
former parent in performing its investigation of anti-corruption activities that
certain of these agents may have engaged in activities that were in violation of
anti-corruption laws at that time and the terms of their agent agreements with
us. Accordingly, we have ceased the receipt of services from and
payments of fees to these agents. Fees for these agents are included
in the total estimated cost for these projects at their
completion. In connection with actions taken by U.S. Government
authorities, we have removed certain unpaid agent fees from the total estimated
costs in the period that we obtained sufficient evidence to conclude such agents
clearly violated the terms of their contracts with us. In the first
and third quarters of 2009, we reduced project cost estimates by $16 million and
$5 million, respectively, as a result of making such
determinations. As of September 30, 2009, approximately $88 million
is included in our estimated costs for various projects. We will make
no payments to these agents until we are assured that any payment complies with
all applicable laws. In addition, we will vigorously defend ourselves
against any claims for payment from such agents.
Barracuda-Caratinga
Project arbitration
In June
2000, we entered into a contract with Barracuda & Caratinga Leasing Company
B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields,
which are located off the coast of Brazil. Petrobras is a contractual
representative that controls the project owner. In November 2007, we
executed a settlement agreement with the project owner to settle all outstanding
project issues except for the bolts arbitration discussed below.
At
Petrobras’ direction, we replaced certain bolts located on the subsea flowlines
that failed through mid-November 2005, and we understand that additional bolts
failed thereafter, which were replaced by Petrobras. These failed bolts were
identified by Petrobras when it conducted inspections of the
bolts. In March 2006, Petrobras notified us they submitted this
matter to arbitration claiming $220 million plus interest for the cost of
monitoring and replacing the defective stud bolts and, in addition, all of the
costs and expenses of the arbitration including the cost of attorneys'
fees. Petrobras has not provided any evidentiary support or analysis
for the amounts claimed as damages. The arbitration is being
conducted in New York under the guidelines of the United Nations Commission on
International Trade Law (“UNCITRAL”). Petrobras contends that all of the bolts
installed on the project are defective and must be replaced.
During
the time that we addressed outstanding project issues and during the conduct of
the arbitration, KBR believed the original design specification for the bolts
was issued by Petrobras, and as such, the cost resulting from any replacement
would not be our responsibility. A preliminary hearing on legal and
factual issues relating to liability with the arbitration panel was held in
April 2008. In June 2009, we received an unfavorable ruling from the
arbitration panel on the legal and factual issues as the panel decided the
original design specification for the bolts originated with KBR and its
subcontractors. The preliminary hearing concluded that KBR’s express
warranties in the contract regarding the fitness for use of the design
specifications for the bolts took precedence over any implied warranties
provided by the project owner. Our potential exposure would
include the nominal costs of the bolts replaced to date by Petrobras, any
incremental monitoring costs incurred by Petrobras and damages for any other
bolts that are subsequently found to be defective which damages and exposure we
cannot quantify at this time because such costs will be dependent upon the
remaining legal and factual issues to be determined in the final arbitration
hearings which have not yet been scheduled. It remains to be
determined whether bolts that have not failed are in fact
defective. However, we believe that it is probable that we have
incurred some liability in connection with the replacement of bolts that have
failed to date but at this time cannot determine the amount of that liability as
noted above. For the remaining bolts at dispute in the bolt
arbitration with Petrobras, at this time we can not determine that we have
liability nor determine the amount of any such liability. As a
result, no amounts have been accrued. Under the master separation
agreement, Halliburton has agreed to indemnify us and any of our greater than
50%-owned subsidiaries as of November 2006, for all out-of-pocket cash costs and
expenses (except for ongoing legal costs), or cash settlements or cash
arbitration awards in lieu thereof, we may incur after the effective date of the
master separation agreement as a result of the replacement of the subsea
flowline bolts installed in connection with the Barracuda-Caratinga
project. Due to the indemnity from Halliburton, we believe any
outcome of this matter will not have a material adverse impact to our operating
results or financial position.
Derivative
Class Action Lawsuits
In the
second quarter of 2009, two shareholder derivative lawsuits were filed in the
District Court of Harris County, Texas, against certain current and former
officers and directors of Halliburton and KBR. The complaints are
summarized as follows:
On May
14, 2009, the Policemen and Firemen Retirement System of the City of Detroit
filed a shareholder derivative action on behalf of Halliburton Company and KBR,
Inc. against certain of their current and former officers and directors alleging
lack of oversight at both companies enabling employees to engage in a pattern of
illegal conduct, resulting in substantial losses to the
companies. The lawsuit alleges lack of internal controls to detect
fraud and wrongdoing which lead to the bribing of Nigerian officials and
ultimately violations of the FCPA, repeated overcharging the government for its
services under federal government contracts, acceptance of illegal kickbacks and
fraud under federal government contracts as well as violations of various other
environmental and human rights laws. The lawsuit seeks unspecified compensatory
damages on behalf of Halliburton and KBR, interest, and an award of attorney’s
fees and other disbursements. The case has been remanded to state
court and KBR is in the process of filing appropriate court
motions.
On May
21, 2009, the Central Laborers’ Pension Fund filed a shareholder derivative
action on behalf of Halliburton Company against certain of its current and
former officers and directors alleging violations of state law, including breach
of fiduciary duties, abuse of control, gross mismanagement and waste of
corporate assets. Also named as defendants in the lawsuit are KBR LLC
and it current officers and directors. Most of the purported
allegations stem from activities relating to the DOJ’s and SEC’s FCPA
investigations in Nigeria. The lawsuit seeks, among other things, compensatory
damages on behalf of Halliburton in an unspecified amount, interest, and an
award of attorney’s fees, experts fees, costs and expenses of litigation. KBR
has answered and filed special exceptions seeking a dismissal of the
lawsuit.
The
allegations concern events the vast majority of which occurred prior to the
formation of KBR, Inc. or the appointment of its officers and
directors. We are in the process of responding to these complaints
which we intend to vigorously defend. We expect these cases to be
consolidated and for the plaintiffs to replead their claims in response to our
motions. Due to the inherent uncertainties of litigation and because
the litigation is at a preliminary stage, we cannot at this time accurately
predict the ultimate outcome of these matters, or of the range of
potential loss, if any. We are evaluating whether these matters are
covered under the indemnity from Halliburton.
Foreign
tax laws
We
conduct operations in many tax jurisdictions throughout the world. Tax laws in
certain of these jurisdictions are not as mature as those found in highly
developed economies. As a consequence, although we believe we are in
compliance with such laws, interpretations of these laws could be challenged by
the foreign tax authorities. In many of these jurisdictions,
non-income based taxes such as property taxes, sales and use taxes, and
value-added taxes are assessed on our operations in that particular location.
While we strive to ensure compliance with these various non-income based tax
filing requirements, there have been instances where potential non-compliance
exposures have been identified. In accordance with accounting
principles generally accepted in the United States of America, we make a
provision for these exposures when it is both probable that a liability has been
incurred and the amount of the exposure can be reasonably
estimated. To date, such provisions have been immaterial, and we
believe that, as of September 30, 2009, we adequately provided for such
contingencies. However, it is possible that our results of
operations, cash flows, and financial position could be adversely impacted if
one or more non-compliance tax exposures are asserted by any of the
jurisdictions where we conduct our operations.
In the
third quarter of 2009, the Mexican tax authorities proposed an unfavorable tax
adjustment to one of our Mexican wholly-owned subsidiaries in connection
with the audit of its Mexican tax returns for the years 2000 and
2001. We disagree with the adjustment and are working with the tax
authorities to resolve the matter. Further, we believe that the
applicable statute of limitations has expired. As a result, we do not
believe any tax assessment would be enforceable against the entity for those
years.
Environmental
We are
subject to numerous environmental, legal and regulatory requirements related to
our operations worldwide. In the United States, these laws and regulations
include, among others:
|
·
|
the
Comprehensive Environmental Response, Compensation and Liability
Act;
|
|
·
|
the
Resources Conservation and Recovery
Act;
|
|
·
|
the
Federal Water Pollution Control Act;
and
|
|
·
|
the
Toxic Substances Control Act.
|
In
addition to the federal laws and regulations, states and other countries where
we do business often have numerous environmental, legal and regulatory
requirements by which we must abide. We evaluate and address the environmental
impact of our operations by assessing and remediating contaminated properties in
order to avoid future liabilities and by complying with environmental, legal and
regulatory requirements. On occasion, we are involved in specific environmental
litigation and claims, including the remediation of properties we own or have
operated as well as efforts to meet or correct compliance-related matters. We
make estimates of the amount of costs associated with known environmental
contamination that we will be required to remediate and record accruals to
recognize those estimated liabilities. Our estimates are based on the best
available information and are updated whenever new information becomes known.
For certain locations, including our property at Clinton Drive, we have not
completed our analysis of the site conditions and until further information is
available, we are only able to estimate a possible range of remediation costs.
This range of remediation costs could change depending on our ongoing site
analysis and the timing and techniques used to implement remediation activities.
We do not expect costs related to environmental matters will have a material
adverse effect on our consolidated financial position or our results of
operations. At September 30, 2009 our accrual for the estimated assessment and
remediation costs associated with all environmental matters was approximately $8
million, which represents the low end of the range of possible costs that could
be as much as $14 million.
Letters
of credit
In
connection with certain projects, we are required to provide letters of credit,
surety bonds or other financial and performance guarantees to our customers. As
of September 30, 2009, we had approximately $532 million in letters of credit
and financial guarantees outstanding, of which $489 million were
issued under our Revolving Credit Facility and $43 million issued under
uncommitted bank lines. We have an additional $314 million of these
letters of credit issued and outstanding under various Halliburton facilities
and are irrevocably and unconditionally guaranteed by
Halliburton.
Other
commitments
We had
commitments to provide funds to our privately financed projects of $60 million
as of September 30, 2009 and $64 million as of December 31, 2008. Our
commitments to fund our privately financed projects are supported by letters of
credit as described above. These commitments arose primarily during
the start-up of these entities. At September 30, 2009, approximately
$17 million of the $60 million in commitments will become due within one
year.
Liquidated
damages
Many of
our engineering and construction contracts have milestone due dates that must be
met or we may be subject to penalties for liquidated damages if claims are
asserted and we were responsible for the delays. These generally relate to
specified activities that must be met within a project by a set contractual date
or achievement of a specified level of output or throughput of a plant we
construct. Each contract defines the conditions under which a customer may make
a claim for liquidated damages. However, in some instances, liquidated damages
are not asserted by the customer, but the potential to do so is used in
negotiating claims and closing out the contract.
During
the first quarter of 2009, one of our joint ventures experienced a delay that
extended the expected completion date of a plant. The joint venture is working
with the client to determine the exact cause of the delay and the amount of
liability, if any, the joint venture may have incurred with respect to schedule
related liquidated damages. We believe the joint venture is
entitled to a change order for an extension of time sufficient to alleviate its
exposure to liquidated damages related to this delay.
We have
not accrued for liquidated damages related to several projects, including the
exposure described in the above paragraph, totaling $33 million at September 30,
2009 and $31 million at December 31, 2008 (including amounts related to our
share of unconsolidated subsidiaries), that we could incur based upon completing
the projects as forecasted.
Leases
We are
obligated under operating leases, principally for the use of land, offices,
equipment, field facilities, and warehouses. We recognize minimum rental
expenses over the term of the lease. When a lease contains a fixed escalation of
the minimum rent or rent holidays, we recognize the related rent expense on a
straight-line basis over the lease term and record the difference between the
recognized rental expense and the amounts payable under the lease as deferred
lease credits. We have certain leases for office space where we receive
allowances for leasehold improvements. We capitalize these leasehold
improvements as property, plant, and equipment and deferred lease credits.
Leasehold improvements are amortized over the shorter of their economic useful
lives or the lease term.
Note
8. Income Taxes
Our
effective tax rate was 25% in the third quarter of 2009 and 33% for the nine
months ended September 30, 2009. Our effective tax rate for both the
three and nine months ended September 30, 2008 was approximately
36%. Our effective tax rate for the three and nine months of 2009 was
lower than our statutory rate of 35% primarily due to the final determination of
previously estimated 2008 domestic and foreign taxable income, made in
connection with the preparation and filing of our 2008 consolidated tax returns
as well as the benefit associated with income on unincorporated joint
ventures. Our effective tax rate for the three and nine months of
2008 exceeded our statutory rate of 35% primarily due to non-deductible
operating losses from our railroad investment in Australia, and state and other
taxes.
Note
9. Shareholders’ Equity
The
following tables summarize our shareholders’ equity activities for the first
nine months of 2009:
|
|
|
|
KBR
Shareholders
|
|
|
|
Millions
of dollars
|
|
Total
|
|
|
Paid-in
Capital in Excess
of par
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Noncontrolling
Interests
|
|
Balance
at December 31, 2008
|
|
$
|
2,034
|
|
|
$
|
2,091
|
|
|
$
|
596
|
|
|
|
(196
|
)
|
|
$
|
(439
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock issued upon exercise of stock options
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit related to stock-based plans
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dividends
declared to shareholders
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Repurchases
of common stock
|
|
|
(27
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
—
|
|
|
|
—
|
|
Issuance
of ESPP shares
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
Distributions
to noncontrolling interests
|
|
|
(42
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(42
|
)
|
Investments
by noncontrolling interests
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
275
|
|
|
|
—
|
|
|
|
217
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58
|
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cumulative translation adjustment
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
|
3
|
|
Pension
liability adjustment, net of tax
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
3
|
|
Net
unrealized gains (losses) on derivatives
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
Comprehensive
income, total
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
$
|
2,275
|
|
|
$
|
2,104
|
|
|
$
|
797
|
|
|
$
|
(221
|
)
|
|
$
|
(421
|
)
|
|
$
|
16
|
|
The
following tables summarize our shareholders’ equity activity for the first nine
months of 2008:
|
|
|
|
KBR
Shareholders
|
|
|
|
Millions
of dollars
|
|
Total
|
|
|
Paid-in
Capital in Excess
of par
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Noncontrolling
Interests
|
|
Balance
at December 31, 2007
|
|
$
|
2,235
|
|
|
$
|
2,070
|
|
|
$
|
319
|
|
|
|
—
|
|
|
$
|
(122
|
)
|
|
$
|
(32
|
)
|
Opening
balance sheet adjustment (a)
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS
158 remeasurement date
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based
compensation
|
|
|
11
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock issued upon exercise of stock options
|
|
|
3
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Tax
benefit related to stock-based plans
|
|
|
2
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dividends
declared to shareholders
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Repurchases
of common stock
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
—
|
|
Distributions
to noncontrolling interests
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
278
|
|
|
|
—
|
|
|
|
231
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47
|
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cumulative translation adjustment
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
(3
|
)
|
Pension
liability adjustment,
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
3
|
|
Net
unrealized gains (losses) on derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Comprehensive
income, total
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2008
|
|
$
|
2,277
|
|
|
$
|
2,086
|
|
|
$
|
523
|
|
|
$
|
(196
|
)
|
|
$
|
(136
|
)
|
|
$
|
—
|
|
|
(a)
|
The
opening balance sheet adjustment to accumulated other comprehensive loss
was a charge of $2 million, net of tax as of January 1, 2008, as a result
of the measurement date requirements of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.”
|
Accumulated
other comprehensive loss consisted of the following balances:
|
|
September
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
Cumulative
translation adjustments
|
|
$
|
(58
|
)
|
|
$
|
(69
|
)
|
Pension
liability adjustments
|
|
|
(360
|
)
|
|
|
(368
|
)
|
Unrealized
losses on investments and derivatives
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Total
accumulated other comprehensive loss
|
|
$
|
(421
|
)
|
|
$
|
(439
|
)
|
Note
10. Fair Value Measurements
The
financial assets and liabilities measured at fair value on a recurring basis are
included below:
|
|
Fair
Value Measurements at Reporting Date Using
|
|
Millions
of dollars
|
|
September 30,
2009
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
Marketable
securities
|
|
$
|
18
|
|
|
$
|
13
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
We manage
our currency exposures through the use of foreign currency derivative
instruments denominated in our major currencies, which are generally the
currencies of the countries for which we do the majority of our international
business. We utilize derivative instruments to manage the foreign currency
exposures related to specific assets and liabilities that are denominated in
foreign currencies, and to manage forecasted cash flows denominated in foreign
currencies generally related to long-term engineering and construction projects.
The purpose of our foreign currency risk management activities is to protect us
from the risk that the eventual dollar cash flow resulting from the sale and
purchase of products and services in foreign currencies will be adversely
affected by changes in exchange rates. The currency derivative instruments are
carried on the condensed consolidated balance sheet at fair value and are based
upon market observable inputs.
Note
11. Equity Method Investments and Variable Interest
Entities
We
conduct some of our operations through joint ventures which are in partnership,
corporate, undivided interest and other business forms and are principally
accounted for using the equity method of accounting.
Brown & Root
Condor Spa (“BRC”).
BRC was a joint venture in which we sold our 49%
interest and other rights in BRC in the third quarter of 2007 to Sonatrach for
approximately $24 million, resulting in a pre-tax gain of approximately $18
million. As of September 30, 2009, we have not collected the
outstanding amount of $18 million due from Sonatrach for the sale of our
interest in BRC, which is included in “Accounts receivable” in the accompanying
balance sheets. In the fourth quarter of 2008, we filed for
arbitration in an attempt to force collection and we will take other actions, as
deemed necessary, to collect the outstanding amounts.
Roads
project
. During the first quarter of 2008, we acquired an
additional 8% interest in a joint venture related to one of our privately
financed projects to design, build, operate, and maintain roadways for certain
government agencies in the United Kingdom. The additional interest
was purchased from an existing shareholder for approximately $8 million in
cash. As of March 31, 2008, we owned a 33% interest in the joint
venture. The joint venture is considered a variable interest entity;
however, we are not the primary beneficiary. We continue to account
for this investment using the equity method of accounting. In the
second quarter of 2008, we sold the additional 8% interest in the joint venture
to an unrelated party for approximately $9 million, leaving us with a 25%
interest in the joint venture. In the first quarter of 2009, we
negotiated and settled with the purchaser an additional $2 million in sales
proceeds which was contingent upon certain tax rulings in the United
Kingdom. The additional sales proceeds were recorded as “Gain on sale
of assets.”
Variable
Interest Entities
We assess
all newly created entities and those with which we become involved to determine
whether such entities are variable interest entities and, if so, whether or not
we are the primary beneficiary of such entities. Most of the entities
we assess are incorporated or unincorporated joint ventures formed by us and our
partner(s) for the purpose of executing a project or program for a customer,
such as a governmental agency or a commercial enterprise, and are generally
dissolved upon completion of the project or program. Many of our
long-term energy-related construction projects in our Upstream business unit are
executed through such joint ventures. Typically, these joint ventures
are funded by advances from the project owner, and accordingly, require little
or no equity investment by the joint venture partners but may require
subordinated financial support from the joint venture partners such as letters
of credit, performance and financial guarantees or obligations to fund any
losses incurred by the joint venture. Other joint ventures, such as
privately financed initiatives in our Ventures business unit, generally require
the partners to invest equity and take an ownership position in an entity that
manages and operates an asset post construction.
We
primarily perform a qualitative assessment in determining whether we are the
primary beneficiary once an entity is identified as a variable interest
entity. A qualitative assessment begins with an understanding of
nature of the risks in the entity as well as the nature of the entity’s
activities including terms of the contracts entered into by the entity,
interests issued by the entity and how they were marketed, and the parties
involved in the design of the entity. We then identify all of the
variable interests held by parties involved with the variable interest entity
including, among other things, equity investments, subordinated debt financing,
letters of credit, and financial and performance guarantees, and in some cases
service contracts. Once we identify the variable interests, we gain
understanding of the variability in the risks and rewards created by the entity
and how such variability is absorbed by the identified variable
interests. Most of the variable interest entities with which we are
involved have relatively few variable interests and are primarily related to our
equity investment and other subordinated financial
support. Generally, a qualitative assessment is sufficient for us to
determine which party, if any, involved with the entity is the primary
beneficiary. In certain circumstances where there are complex
arrangements involving numerous variable interests such as senior and
subordinated project financing, equity interests, or service contracts, we
perform a quantitative assessment using expected cash flows of the entity to
determine the primary beneficiary, if any.
We often
are involved in joint ventures with partners that are deemed to be de-facto
agency related parties primarily due to shareholder agreements with terms
prohibiting a partner from selling, transferring or otherwise encumbering its
interest in the joint venture without the prior approval of other
partners. In situations where the related party group is deemed to be
the primary beneficiary, we generally look to the relationship and significance
of the activities of the variable interest entity to the parties in the related
party group to identify which party is the primary beneficiary of the
entity. These activities primarily relate to the amount of effort in
terms of man hours contributed and the scope and significance of expertise
contributed to the project by each party.
The
following is a summary of the significant variable interest entities in which we
are either the primary beneficiary or in which we have a significant variable
interest:
|
•
|
during
2001, we formed a joint venture, in which we own a 50% equity interest
with an unrelated partner, that owns and operates heavy equipment
transport vehicles in the United Kingdom. This variable
interest entity was formed to construct, operate, and service certain
assets for a third party, and was funded with third party
debt. The construction of the assets was completed in the
second quarter of 2004, and the operating and service contract related to
the assets extends through 2023. The proceeds from the debt
financing were used to construct the assets and will be paid down with
cash flow generated during the operation and service phase of the
contract. As of September 30, 2009, the joint venture had total
assets of $122 million and total liabilities of $130
million. Our aggregate maximum exposure to loss as a result of
our involvement with this joint venture is represented by our investment
in the entity which was $5 million at September 30, 2009, and any future
losses related to the operation of the assets. We are not the
primary beneficiary. We account for this joint venture using
the equity method of accounting;
|
|
•
|
we
are involved in four privately financed projects, executed through joint
ventures, to design, build, operate, and maintain roadways for certain
government agencies in the United Kingdom. We have a 25%
ownership interest in each of these joint ventures and account for them by
the equity method of accounting. The joint ventures have obtained
financing through third parties that is nonrecourse to us. These joint
ventures are considered variable interest entities. However, we are not
the primary beneficiary of these joint ventures and therefore, account for
them using the equity method of accounting. As of September 30,
2009, these joint ventures had total assets of $1.7 billion and
liabilities of $1.6 billion. Our maximum exposure to loss was
$33 million at September 30, 2009, which consists primarily of our
investment balances of $33 million and other receivables due from the
ventures;
|
|
•
|
we
participate in a privately financed project executed through certain joint
ventures formed to design, build, operate, and maintain a toll road in
southern Ireland. The joint ventures were funded through debt and were
formed with minimal equity. These joint ventures are considered
variable interest entities, however, we are not the primary beneficiary of
the joint ventures. We have up to a 25% ownership interest in
the project’s joint ventures, and we are accounting for these interests
using the equity method of accounting. As of September 30,
2009, the joint ventures had combined total assets of $278 million and
total liabilities of $300 million. Our maximum exposure to loss
was less than $1 million at September 30,
2009;
|
|
•
|
in
April 2006, Aspire Defence, a joint venture between us, Carillion Plc. and
a financial investor, was awarded a privately financed project contract,
the Allenby & Connaught project, by the MoD to upgrade and provide a
range of services to the British Army’s garrisons at Aldershot and around
Salisbury Plain in the United Kingdom. In addition to a package
of ongoing services to be delivered over 35 years, the project includes a
nine-year construction program to improve soldiers’ single living,
technical and administrative accommodations, along with leisure and
recreational facilities. Aspire Defence will manage the existing
properties and will be responsible for design, refurbishment, construction
and integration of new and modernized facilities. We indirectly own a 45%
interest in Aspire Defence, the project company that is the holder of the
35-year concession contract. In addition, we own a 50% interest
in each of two joint ventures that provide the construction and the
related support services to Aspire Defence. Our performance
through the construction phase is supported by $108 million in letters of
credit and $21 million in surety bonds as of September 30, 2009, both of
which have been guaranteed by Halliburton. Furthermore, our financial and
performance guarantees are joint and several, subject to certain
limitations, with our joint venture partners. The project is
funded through equity and subordinated debt provided by the project
sponsors and the issuance of publicly held senior bonds which are
nonrecourse to us. The entities in which we hold an interest
are considered variable interest entities; however, we are not the primary
beneficiary of these entities. We account for our interests in
each of the entities using the equity method of accounting. As
of September 30, 2009, the aggregate total assets and total liabilities of
the variable interest entities were both $3.0 billion,
respectively. Our maximum exposure to project company losses as
of September 30, 2009 was $77 million. Our maximum exposure to
construction and operating joint venture losses is limited to the funding
of any future losses incurred by those entities under their respective
contracts with the project company. As of September 30, 2009,
our assets and liabilities associated with our investment in this project,
within our consolidated balance sheet, were $37 million and $20 million,
respectively. The $58 million difference between our recorded
liabilities and aggregate maximum exposure to loss was primarily related
to our $60 million remaining commitment to fund subordinated debt to the
project in the future;
|
|
•
|
during
2005, we formed a joint venture to engineer and construct a gas
monetization facility. We own 50% equity interest and
determined that we are the primary beneficiary of the joint venture which
is consolidated for financial reporting purposes. At September
30, 2009, the joint venture had $426 million in total assets and $524
million in total liabilities, respectively. There are no
consolidated assets that collateralize the joint venture’s
obligations. However, at September 30, 2009, the joint venture
had approximately $79 million of cash, respectively, which mainly relate
to advanced billings in connection with the joint venture’s obligations
under the EPC contract;
|
|
•
|
we
have equity ownership in three joint ventures to execute EPC projects. Our
equity ownership ranges from 33% to 50%, and these joint ventures are
considered variable interest entities. We are not the primary
beneficiary and thus account for these joint ventures using the equity
method of accounting. At September 30, 2009, these joint
ventures had aggregate assets of $587 million and aggregate liabilities of
$814 million, respectively. As of September 30, 2009, total
assets and liabilities recorded within our balance sheets were $28 million
and $25 million, respectively. Our aggregate, maximum exposure to
loss related to these entities was $28 million, and is comprised of our
equity investments in and receivables from the joint
ventures;
|
|
•
|
we
have an investment in a development corporation that has an indirect
interest in the Egypt Basic Industries Corporation (“EBIC”) ammonia plant
project located in Egypt. We are performing the engineering,
procurement and construction (“EPC”) work for the project and operations
and maintenance services for the facility. We own 65% of this
development corporation and consolidate it for financial reporting
purposes. The development corporation owns a 25% ownership
interest in a company that consolidates the ammonia plant which is
considered a variable interest entity. The development
corporation accounts for its investment in the company using the equity
method of accounting. The variable interest entity is funded
through debt and equity. Indebtedness of EBIC under its debt agreement is
non-recourse to us. We are not the primary beneficiary of the
variable interest entity. As of September 30, 2009, the
variable interest entity had total assets of $585 million and total
liabilities of $480 million. Our maximum exposure to loss on
our equity investments at September 30, 2009 was $49
million. As of September 30, 2009, our assets and liabilities
associated with our investment in this project, within our consolidated
balance sheet, were $49 million and $8, respectively. The $41
million difference between our recorded liabilities and aggregate maximum
exposure to loss was related completely to our investment balance and
other receivables in the project as of September 30,
2009;
|
|
•
|
in
July 2006, we were awarded, through a 50%-owned joint venture, a contract
with Qatar Shell GTL Limited to provide project management and
cost-reimbursable engineering, procurement and construction management
services for the Pearl GTL project in Ras Laffan, Qatar. The
project, which is expected to be completed by 2011, consists of gas
production facilities and a GTL plant. The joint venture is
considered a variable interest entity. We consolidate the joint
venture for financial reporting purposes because we are the primary
beneficiary. As of September 30, 2009, the Pearl joint venture
had total assets of $155 million and total liabilities of $133
million.
|
Note
12. Retirement Plans
The
components of net periodic benefit cost related to pension benefits for the
three and nine months ended September 30, 2009 and 2008 were as
follows:
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Interest
cost
|
|
|
1
|
|
|
|
20
|
|
|
|
—
|
|
|
|
24
|
|
Expected
return on plan assets
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
(1
|
)
|
|
|
(27
|
)
|
Amortization
of prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Amortization
of net loss
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
3
|
|
Net
periodic benefit cost
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
7
|
|
Interest
cost
|
|
|
3
|
|
|
|
57
|
|
|
|
2
|
|
|
|
74
|
|
Expected
return on plan assets
|
|
|
(2
|
)
|
|
|
(63
|
)
|
|
|
(3
|
)
|
|
|
(83
|
)
|
Amortization
of prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Amortization
of net loss
|
|
|
1
|
|
|
|
8
|
|
|
|
—
|
|
|
|
9
|
|
Curtailment
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
Net
periodic benefit cost (benefit)
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
As of
September 30, 2009, we contributed $9 million of the $11million we currently
expect to contribute in 2009 to our international plans. We
contributed $5 million, which is our total expected contribution to our domestic
plans in 2009. The assets held by the trustee of the plans sustained
significant declines in market value during 2008, the effects of which are
accounted for as a component of accumulated other comprehensive loss in our
Condensed Consolidated Balance Sheets and our Shareholders’ Equity footnote (See
Note 9). If the market values of assets remain depressed, our levels
of contribution could be impacted in future years.
In March
2009, we amended the terms and conditions of one of our international pension
plans and ceased future service and benefit accruals for all plan
participants. This action meets the definition of a curtailment under
FASB ASC 715 - Compensation - Retirement Benefits, and resulted in a curtailment
gain of approximately $4 million during the first quarter of 2009.
The
components of net periodic benefit cost related to other postretirement benefits
were immaterial for the three and nine months ended September 30, 2009 and
2008.
Note
13. Transactions with Former Parent and Other Related Party
Transactions
Our
balance payable to Halliburton of $54 million at September 30, 2009 and December
31, 2008, was comprised of amounts owed to Halliburton primarily for estimated
outstanding income taxes under the tax sharing agreement. The amounts
due to or from Halliburton will be dependent upon the final resolution of IRS
audits and other matters that will be determined under the tax sharing
agreement.
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 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. Total revenues from services
provided to our unconsolidated joint ventures recorded in our consolidated
statements of income were $46 million and $48 million for the three months ended
September 30, 2009 and 2008, respectively, and revenues of $126 million and $163
million for the nine months ended September 30, 2009 and 2008,
respectively. Income from services provided to our unconsolidated
joint ventures was $3 million and $4 million for the three months ended
September 30, 2009 and 2008, respectively, and a loss of $4 million and income
of $22 million for the nine months ended September 30, 2009, and 2008,
respectively.
Note
14. Goodwill and Intangibles
In the
third quarter of 2009, we recognized a goodwill impairment charge of
approximately $6 million as a result of our annual goodwill impairment test on
September 30, 2009. The charge was taken against our reporting unit
related to a small staffing business acquired in the acquisition of BE&K
included in our "Other" reportable segment. The charge was primarily
the result of a decline in the staffing market, the current effect of the
recession on the market, and our reduced forecasts of the sales, operating
income and cash flows for this reporting unit that were identified through the
course of our annual planning process. As of September 30, 2009,
goodwill and intangibles for this reporting unit were approximately $18 million,
including goodwill of $12 million, after recognition of the impairment
charge. The fair value of all of our other reporting units exceeded
their respective carrying amounts as of September 30, 2009.
Note
15. New Accounting Standards
In March
2008, the FASB issued accounting guidance related to employers’ disclosure about
postretirement benefit plan assets which is discussed under FASB ASC 715 -
Compensation - Retirement Benefits. This topic addresses concerns
from users of financial statements about their need for more information on
pension plan assets, obligations, benefit payments, contributions, and net
benefit cost. The disclosures about plan assets are intended to provide users of
employers’ financial statements with more information about the nature and
valuation of postretirement benefit plan assets, and are effective for fiscal
years ending after December 15, 2009.
Effective
January 1, 2009, we adopted guidance for participating securities and the
two-class method in accordance with FASB ASC 260 - Earnings Per Share related to
determining whether instruments granted in share-based payment transactions are
participating securities. The standard provides that unvested
share-based payment awards that contain rights to non-forfeitable dividends or
dividend equivalents (whether paid or unpaid) participate in undistributed
earnings with common shareholders. Certain KBR restricted stock units
and restricted stock awards are considered participating securities since the
share-based awards contain a non-forfeitable right to dividends irrespective of
whether the awards ultimately vest. The standard requires that the
two-class method of computing basic EPS be applied. Under the
two-class method, KBR stock options are not considered to be participating
securities. As a result of adopting FASB ASC 260, previously reported
basic net income attributable to KBR per share decreased by $0.01 per share for
the nine months ended September 30, 2008.
Effective
September 30, 2009, we adopted guidance for the accounting standards
codification and the hierarchy of generally accepted accounting principles in
accordance with FASB ASC 105 - Generally Accepted Accounting
Principles. The standard establishes the FASB Accounting Standards
Codification
TM
(“ASC”) as the single source of authoritative U.S. generally accepted
accounting principles (U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. The FASB ASC supersedes all existing non-SEC
accounting and reporting standards. The FASB ASC does not have an
impact on our financial position, results of operations or cash
flows.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. ASU
2009-13 addresses the accounting for multiple-deliverable arrangements to enable
vendors to account for products or services (deliverables) separately rather
than as a combined unit. Specifically, this guidance amends the criteria in
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for
separating consideration in multiple-deliverable arrangements. This guidance
establishes a selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific objective evidence; (b)
third-party evidence; or (c) estimates. This guidance also eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance significantly expands
required disclosures related to a vendor's multiple-deliverable revenue
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010. We are evaluating the impact that the adoption of ASU 2009-13 will
have on our financial position, results of operations, cash flows and
disclosures.
The
following authoritative standards are not yet integrated into the
Codification:
In
June 2009, the FASB issued SFAS No. 166, “Accounting for
Transfers of Financial Assets — an amendment of FASB Statement
No. 140” (“SFAS 166”) requires additional information regarding
transfers of financial assets, including securitization transactions, and where
companies have continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets, and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. We are evaluating the
impact that the adoption of SFAS 166 will have on our financial position,
results of operations, cash flows and disclosures.
In
June 2009, the FASB issued SFAS No. 167, “Amendments to
FASB Interpretation No. 46(R)” (“SFAS 167”) modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an
ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. SFAS 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS
167 is effective for fiscal years beginning after November 15,
2009. We are evaluating the impact that the adoption of SFAS 167 will
have on our financial position, results of operations, cash flows and
disclosures.
It
em 2. M
anagem
ent’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
purpose of management’s discussion and analysis (“MD&A”) is to increase the
understanding of the reasons for 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 and accompanying notes and our 2008
Annual Report on Form 10-K.
Business
Environment and Results of Operations
Business
Environment
Hydrocarbon Markets.
We
provide a full range of engineering, procurement and construction services
for large and complex upstream and downstream projects, including LNG and GTL
facilities, onshore and offshore oil and gas production facilities, industrial,
power generation and other projects. We serve customers in the gas
monetization, oil and gas, petrochemical, refining, power and chemical markets
throughout the world. Our projects are generally long term in nature
and are impacted by factors including market conditions, financing arrangements,
governmental approvals and environmental matters. Demand for our services
depends primarily on our customers’ capital expenditures in our construction
services.
We have
benefited in recent years from increased capital expenditures from our petroleum
and petrochemical customers driven by historically high crude oil and natural
gas prices and general global economic expansion that occured prior to
mid-2008. We have indications that the hydrocarbons market in most
geographical regions outside of North America has recovered from the worldwide
economic conditions and financial market crisis. However, for the
North American Hydrocarbon region, many of our customers have decreased their
capital expenditure budgets in the short term until the economic conditions
become more favorable. Although it is presently not possible to
determine the impact these conditions may have on us in the future, to date we
have experienced only a minor impact to our business, primarily in
North America.
North American Engineering and
Construction Markets.
We provide a wide range of services to a variety of
industries in the U.S. and Canada, including oil sands, environmental, power,
general industrial, forest products, refining, chemical and commercial
buildings. The recent economic conditions, volatility in oil and gas
prices and current financial market conditions that began in 2008 have disrupted
the normal flow of bid/award opportunities in most of the market
sectors. However, power and power related environmental opportunities
remain strong due to low natural gas prices and air quality regulatory
requirements. We have seen a recent increase in prequalification
requests from our clients and expect a number of our markets to strengthen in
2010. Other than power, individual bid opportunities in 2010 are
generally expected to be smaller with increasing number of
competitors. A number of our customers are using the current market
conditions to identify cost savings by consolidating service providers to reduce
the number of contractors providing services at their facilities, which we see
as a potential opportunity for KBR.
Government
Markets.
A significant portion of our G&I business unit’s
current activities support the United States’ and the United Kingdoms’
operations in Iraq, Afghanistan and in other parts of the Middle East
region. These operations have resulted in one of the largest military
deployments since World War II, which has caused a parallel increase in
government spending. The logistics support services that KBR provides
the U.S. military are delivered under our LogCAP III contract, which was a
competitively bid contract. KBR is the only company providing
services under this contract. Currently, the U.S. government is
transitioning work from LogCAP III to LogCAP IV, which is a multiple award
contract with three contractors, including KBR, who can each bid and potentially
win specific task orders. As troop deployments shift within the
Middle East region, and as additional work is awarded under LogCAP IV, we expect
our work under LogCAP III to decline. However, we do not expect any
significant decrease in spending in the region in the near term due to the cost
of transitioning troops, equipment and facilities. We expect the U.K.
military will also remain engaged in the region, although their focus has
shifted from Iraq to Afghanistan.
In the
civil infrastructure sector, we operate in diverse sectors, including
transportation, waste and water treatment and facilities maintenance. In
addition to U.S. state, local and federal agencies, we provide these services to
governments around the world including the U.K., Australia and the Middle
East. In Australia, we also provide related services to the global
mining industry. There has been a general trend of historic under-investment in
infrastructure. As a result, demand is at an all time high. However,
the global economic crisis has caused a slow down in some
projects. Stimulus spending and a general economic recovery should
result in increased opportunities in the future across all
sectors.
Results
of Operations
LogCap Project
. We
are currently the sole service provider under our LogCAP III contract, which has
been extended by the DoD through the fourth quarter of 2009 and we anticipate
further extensions into 2010. Although KBR is one of the
executing contractors under the LogCAP IV contract, we expect our overall volume
of work to decline in the near future as our customer reduces its requirement
for the types and the amounts of services we provide in the region.
Backlog
related to the LogCAP III contract was $776 million at September 30, 2009, and
$1.4 billion at December 31, 2008. During the almost seven-year
period we have worked under the LogCAP III contract, we have been awarded 82
“excellent” ratings out of 104 total ratings. Our award fees on the
LogCAP III contract are recognized based on our estimate of the amounts to be
awarded. Once the task orders underlying the work are definitized and
award fees are granted, we adjust our estimate of award fees to the actual
amounts earned. In the first nine months of 2009, our award fee
accrual rate on this project is 72%. At September 30, 2009,
approximately $118 million is recorded in unbilled receivables as our estimate
of award fees earned since the April 2008 performance
period. We expect to receive our next award fee letter from our
customer either in late 2009 or early 2010. If our next award fee
letter has performance scores and award rates higher or lower than our
historical rates, our revenue will be adjusted accordingly.
For
purposes of reviewing the results of operations, “business unit income” is
calculated as revenue less cost of services managed and reported by the business
unit and are directly attributable to the business unit. Business unit income
excludes corporate general and administrative expenses and other non-operating
income and expense items.
Revenue
by Business Unit
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(In
millions of dollars)
|
|
Revenue:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government —Middle East Operations
|
|
$
|
1,108
|
|
|
$
|
1,364
|
|
|
$
|
(256
|
)
|
|
|
(19
|
)
%
|
U.S.
Government —Americas Operations
|
|
|
130
|
|
|
|
183
|
|
|
|
(53
|
)
|
|
|
(29
|
)
%
|
International
Operations
|
|
|
138
|
|
|
|
212
|
|
|
|
(74
|
)
|
|
|
(35
|
)
%
|
Total
G&I
|
|
|
1,376
|
|
|
|
1,759
|
|
|
|
(383
|
)
|
|
|
(22
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
637
|
|
|
|
434
|
|
|
|
203
|
|
|
|
47
|
%
|
Oil
& Gas
|
|
|
98
|
|
|
|
116
|
|
|
|
(18
|
)
|
|
|
(16
|
)
%
|
Total
Upstream
|
|
|
735
|
|
|
|
550
|
|
|
|
185
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
566
|
|
|
|
539
|
|
|
|
27
|
|
|
|
5
|
%
|
Downstream
|
|
|
123
|
|
|
|
138
|
|
|
|
(15
|
)
|
|
|
(11
|
)
%
|
Technology
|
|
|
27
|
|
|
|
19
|
|
|
|
8
|
|
|
|
42
|
%
|
Ventures
|
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
|
|
400
|
%
|
Other
|
|
|
8
|
|
|
|
12
|
|
|
|
(4
|
)
|
|
|
(33
|
)
%
|
Total
revenue
|
|
$
|
2,840
|
|
|
$
|
3,018
|
|
|
$
|
(178
|
)
|
|
|
(6
|
)
%
|
________________________
(1)
|
Our
revenue includes both equity in the earnings of unconsolidated affiliates
as well as revenue from the sales of services into the joint ventures. We
often participate on larger projects as a joint venture partner and also
provide services to the venture as a subcontractor. The amount included in
our revenue represents our share of total project revenue, including
equity in the earnings (loss) from joint ventures and revenue from
services provided to joint
ventures.
|
Income
(loss) by Business Unit
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(In
millions of dollars)
|
|
Business
Unit Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government —Middle East Operations
|
|
$
|
71
|
|
|
$
|
78
|
|
|
$
|
(7
|
)
|
|
|
(9
|
)
%
|
U.S.
Government —Americas Operations
|
|
|
19
|
|
|
|
13
|
|
|
|
6
|
|
|
|
46
|
%
|
International
Operations
|
|
|
38
|
|
|
|
42
|
|
|
|
(4
|
)
|
|
|
(10
|
)
%
|
Total
job income
|
|
|
128
|
|
|
|
133
|
|
|
|
(5
|
)
|
|
|
(4
|
)
%
|
Divisional
overhead
|
|
|
(39
|
)
|
|
|
(29
|
)
|
|
|
(10
|
)
|
|
|
(34
|
)
%
|
Total
G&I business unit income
|
|
|
89
|
|
|
|
104
|
|
|
|
(15
|
)
|
|
|
(14
|
)
%
|
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
40
|
|
|
|
37
|
|
|
|
3
|
|
|
|
8
|
%
|
Oil &
Gas
|
|
|
20
|
|
|
|
26
|
|
|
|
(6
|
)
|
|
|
(23
|
)
%
|
Total
job income
|
|
|
60
|
|
|
|
63
|
|
|
|
(3
|
)
|
|
|
(5
|
)
%
|
Divisional
overhead
|
|
|
(12
|
)
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
(20
|
)
%
|
Total
Upstream business unit income
|
|
|
48
|
|
|
|
53
|
|
|
|
(5
|
)
|
|
|
(9
|
)
%
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
56
|
|
|
|
41
|
|
|
|
15
|
|
|
|
37
|
%
|
Divisional
overhead
|
|
|
(20
|
)
|
|
|
(14
|
)
|
|
|
(6
|
)
|
|
|
(43
|
)
%
|
Total
Services business unit income
|
|
|
36
|
|
|
|
27
|
|
|
|
9
|
|
|
|
33
|
%
|
Downstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
16
|
|
|
|
20
|
|
|
|
(4
|
)
|
|
|
(20
|
)
%
|
Divisional
overhead
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(20
|
)
%
|
Total
Downstream business unit income
|
|
|
10
|
|
|
|
15
|
|
|
|
(5
|
)
|
|
|
(33
|
)
%
|
Technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
14
|
|
|
|
10
|
|
|
|
4
|
|
|
|
40
|
%
|
Divisional
overhead
|
|
|
(7
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(17
|
)
%
|
Total
Technology business unit income
|
|
|
7
|
|
|
|
4
|
|
|
|
3
|
|
|
|
75
|
%
|
Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
|
|
400
|
%
|
Divisional
overhead
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
%
|
Total
Ventures business unit income
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
%
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
2
|
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
(50
|
)
%
|
Impairment
of goodwill
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
%
|
Divisional
overhead
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
67
|
%
|
Total
Other business unit income (loss)
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
(600
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
business unit income
|
|
$
|
189
|
|
|
$
|
204
|
|
|
$
|
(15
|
)
|
|
|
(7
|
)
%
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposition of assets - corporate
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
%
|
Labor
costs absorption (1)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
40
|
%
|
Corporate
general and administrative
|
|
|
(54
|
)
|
|
|
(55
|
)
|
|
|
1
|
|
|
|
2
|
%
|
Total
operating income
|
|
$
|
131
|
|
|
$
|
144
|
|
|
$
|
(13
|
)
|
|
|
(9
|
)
%
|
________________________
|
(1)
|
Labor
cost absorption represents costs incurred by our central labor and
resource groups (above)/under the amounts charged to the operating
business units.
|
Three
months ended September 30, 2009 compared to three months ended September 30,
2008
Government and
Infrastructure.
Revenue from our Middle East Operations
decreased approximately $256 million in the third quarter of 2009 over the same
period in the prior year largely as a result of continued reduction in volume on
U.S. military support activities in Iraq as the Army continues to refocus their
forces on the battlefield and redistributes forces away from existing forward
operating bases and into more combat outposts and joint security
sites. We expect to continue to provide services on certain LogCAP
III task orders through the second half of 2010. However, over the
next 12 months we expect our overall volume of work to
decrease. Revenue from our Americas Operations decreased $53 million
in the third quarter of 2009 primarily as a result of reductions in activity on
the Los Alamos project which substantially ended in 2008 as well as the
reduction in the volume of work due to the delay of new awards for the NRO
Office of Space Launch project. The decrease in revenue in the third
quarter of 2009 from our International Operations is largely due to reduced
level of work volume on U.K. MoD projects, including the project to design,
procure and construct facilities in Basra, southern Iraq, the Temporary
Deployable Accommodations project and the completion of several engineering
projects in Australia.
Job
income from our Middle East Operations decreased in the third quarter of 2009
primarily as a result of decreased volume of activities in Iraq and the
reduction in our LogCAP award fee accrual rate from 80% to 72% in late 2008 as
well as lower award fees earned in the third quarter of 2009. Job
income from our Americas Operations increased an aggregate $5 million primarily
due to increased activity on the CENTCOM project and the causeway project in
Qatar. Job income from our International Operations decreased in the
third quarter of 2009 due to lower volume on several projects, including the
Allenby & Connaught project and the U.K. MoD facility project in Basra,
southern Iraq.
Divisional
overhead expenses incurred in the third quarter of 2009 by the G&I business
unit increased primarily due to lower recovery of overhead expenses resulting
from decreased activity as well as higher bid and proposal
activities.
Upstream.
Revenues
in our Gas Monetization Operations increased in the third quarter of 2009
primarily due to increased procurement activity from several Gas Monetization
projects, including the Escravos GTL, Gorgon LNG and Skikda LNG projects as they
reach peak activity levels in 2009. Revenue from these three projects
increased an aggregate $235 million in the third quarter of 2009 over the same
quarter in the prior year. Partially offsetting the 2009 Gas
Monetization revenue increases was a decline in revenues of approximately $35
million due to lower progress on the Pearl GTL project as well as increases in
project costs due to schedule delays, subcontractor claims and equipment
failures on other LNG projects nearing completion. Revenues in our
Oil and Gas Operations declined $18 million in the third quarter of 2009
primarily due to the relatively slower progress on a number of offshore projects
that were either completed or were nearing completion.
Job
income in our Gas Monetization Operations in the third quarter of 2009 increased
$28 million in the aggregate on the Skikda LNG, Escravos GTL, Gorgon LNG and
Pearl GTL projects. We recognized higher incentive fees on the
Escravos GTL and Pearl GTL during the third quarter of 2009. We were
also awarded an increase in work scope on the Gorgon LNG project as a result of
the customer’s financial investment decision in the project which resulted in
increased activity during the quarter. These increases in Gas
Monetization job income were substantially offset by increases in project costs
on other LNG projects due to schedule delays, subcontractor claims and equipment
failures as these projects near completion. In our Oil and Gas
Operations, job income declined by $6 million as a result of the completion of a
number of offshore engineering projects during the third quarter of
2009.
Services.
Services
revenue was $566 million and $539 million in the third quarter of 2009 and 2008,
respectively. Services business unit revenues increased approximately
$55 million in the third quarter of 2009 primarily due to increased progress on
the Hunt Refining and other cost reimbursable construction project in our
BE&K construction operations. Additionally, revenue increased a
combined $42 million in our Canadian and North American operations primarily as
a result of increased progress on the Shell Scotford Upgrader and other projects
in Canada and the Exxon Mobil Flare Gas project in Texas. These
increases in the third quarter of 2009 were partially offset by a combined
decrease in revenue of $72 million in our Industrial Services and BEK Building
Group operations primarily as a result of reduced man-hours on existing projects
and fewer new awards in 2009.
Job
income from Services increased in the third quarter of 2009 primarily due to the
increased progress on projects in our BE&K construction operations which
contributed approximately $16 million to the increase in job income over the
prior year. Additionally, job income increased approximately $5
million as a result of higher rates for marine vessel support services in the
Gulf of Mexico provided through our MMM joint venture. Partially
offsetting these increases were lower job income on projects in our Industrial
Services operations.
Downstream.
In the third
quarter of 2009, revenue from our Downstream operations decreased by
approximately $15 million primarily due to a general slow down in our Chemicals
operations and completion of the EBIC ammonia plant project in
Egypt. Revenues in our Chemical operations decreased approximately
$16 million primarily related to reduced activity on projects we acquired from
BE&K to provide EPC and other services to customers in the United
States. Revenues declined approximately $9 million on the EBIC
ammonia plant as this project nears completion. Partially offsetting
these decreases were increases in revenue from a number of new Refining projects
awarded in the second half of 2008, additional work awarded on the Ras Tanura
project in our Petrochemical operations and the award of a new Syngas
project.
Downstream
job income in the third quarter of 2009 was $16 million compared to $20 million
in the same period in 2008. The majority of the decrease in job
income is due to the slow down in activity on projects we acquired from BE&K
in our Chemicals operations.
Technology.
Technology
revenue was $27 million and $19 million in the third quarter of 2009 and 2008,
respectively. Technology job income increased to $14 million in the
third quarter of 2009 as compared to $10 million in the third quarter of
2008. Revenues and job income in 2009 increased a combined $12
million and $8 million, respectively, primarily as a result of progress on two
new grassroots ammonia projects in South America, an ammonia plant revamp in
India and the completion of a grassroots ammonia facility in
Trinidad. These increases were partially offset by slower progress
due to several existing engineering projects nearing completion in our other
operations.
Ventures.
Ventures
job income was $5 million in the third quarter of 2009 compared to $1 million in
the third quarter of 2008. Job income increased in third quarter of
2009 primarily driven by increased construction progress and lower maintenance
costs on the Aspire Defence (Allenby & Connaught) project as well as lower
index linked interest expense on two of our road projects in the
U.K.
Labor cost
absorption.
Labor cost absorption expense was $3 million in
the third quarter of 2009 and $5 million in the third quarter of
2008. Labor cost absorption represents costs incurred by our central
labor and resource groups (above) or under the amounts charged to the operating
business units. Labor cost absorption expense decreased in the third
quarter of 2009 primarily due to higher chargeability and utilization in several
of our engineering offices.
General and Administrative
expense.
General and administrative expense was $54 million in
the third quarter of 2009 and $55 million in the third quarter of
2008. General and administrative expense decreased in the third
quarter of 2009 primarily due to higher expenses recorded related to Hurricane
Ike in the third quarter of 2008 partially offset by higher legal expenses in
the third quarter of 2009.
Non-operating
items
Net
interest income was $0 in the third quarter of 2009 and $7 million in the third
quarter of 2008. Interest income decreased significantly in the third
quarter as a result of the decrease in our average interest rates earned and
average cash and equivalents balance. Average interest rates earned on our
invested cash declined from approximately 0.5% in the third quarter of 2008 to
0.1% in the third quarter of 2009 as a result of the current economic
conditions. Our average cash and equivalents balance was
approximately $1.0 billion in the third quarter of 2009 as compared to the
average cash balance of $1.5 billion in the third quarter of
2008. The decrease in our cash and equivalents balance is
attributable to the acquisition of BE&K on July 1, 2008 with a purchase
price of approximately $559 million, the use of cash in joint venture projects
and a contract in progress, working capital requirements for our Iraq related
work and total cumulative stock repurchases.
Provision
for income taxes was $33 million in the third quarter of 2009 and $55 million in
the third quarter of 2008. Our effective tax rate was approximately 25% for the
quarter ended September 30, 2009 and 36% for the quarter ended September 30,
2008. Our effective tax rate in the third quarter of 2009 was
lower than our statutory rate of 35% primarily due to the final determination of
previously estimated 2008 domestic and foreign taxable income, made in
connection with the preparation and filing of our 2008 consolidated tax returns
as well as the benefit associated with income on unincorporated joint
ventures. Our effective tax rate for the third quarter of 2008
exceeded our statutory rate of 35% primarily due to non-deductible operating
losses from our railroad investment in Australia, and state and other
taxes.
Revenue
by Business Unit
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(In
millions of dollars)
|
|
Revenue:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government —Middle East Operations
|
|
$
|
3,866
|
|
|
$
|
4,072
|
|
|
$
|
(206
|
)
|
|
|
(5
|
)
%
|
U.S.
Government —Americas Operations
|
|
|
389
|
|
|
|
460
|
|
|
|
(71
|
)
|
|
|
(15
|
)
%
|
International
Operations
|
|
|
417
|
|
|
|
618
|
|
|
|
(201
|
)
|
|
|
(33
|
)
%
|
Total
G&I
|
|
|
4,672
|
|
|
|
5,150
|
|
|
|
(478
|
)
|
|
|
(9
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
1,971
|
|
|
|
1,454
|
|
|
|
517
|
|
|
|
36
|
%
|
Oil
& Gas
|
|
|
302
|
|
|
|
406
|
|
|
|
(104
|
)
|
|
|
(26
|
)
%
|
Total
Upstream
|
|
|
2,273
|
|
|
|
1,860
|
|
|
|
413
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
1,723
|
|
|
|
776
|
|
|
|
947
|
|
|
|
122
|
%
|
Downstream
|
|
|
360
|
|
|
|
339
|
|
|
|
21
|
|
|
|
6
|
%
|
Technology
|
|
|
70
|
|
|
|
61
|
|
|
|
9
|
|
|
|
15
|
%
|
Ventures
|
|
|
16
|
|
|
|
(3
|
)
|
|
|
19
|
|
|
|
633
|
%
|
Other
|
|
|
27
|
|
|
|
12
|
|
|
|
15
|
|
|
|
125
|
%
|
Total
revenue
|
|
$
|
9,141
|
|
|
$
|
8,195
|
|
|
$
|
946
|
|
|
|
12
|
%
|
________________________
(1)
|
Our
revenue includes both equity in the earnings of unconsolidated affiliates
as well as revenue from the sales of services into the joint ventures. We
often participate on larger projects as a joint venture partner and also
provide services to the venture as a subcontractor. The amount included in
our revenue represents our share of total project revenue, including
equity in the earnings (loss) from joint ventures and revenue from
services provided to joint
ventures.
|
Income
(loss) by Business Unit
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase (Decrease)
|
|
|
Percentage
Change
|
|
|
|
(In
millions of dollars)
|
|
Business
Unit Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government —Middle East Operations
|
|
$
|
193
|
|
|
$
|
183
|
|
|
$
|
10
|
|
|
|
5
|
%
|
U.S.
Government —Americas Operations
|
|
|
49
|
|
|
|
27
|
|
|
|
22
|
|
|
|
81
|
%
|
International
Operations
|
|
|
112
|
|
|
|
126
|
|
|
|
(14
|
)
|
|
|
(11
|
)
%
|
Total
job income
|
|
|
354
|
|
|
|
336
|
|
|
|
18
|
|
|
|
5
|
%
|
Divisional
overhead
|
|
|
(104
|
)
|
|
|
(89
|
)
|
|
|
(15
|
)
|
|
|
(17
|
)
%
|
Total
G&I business unit income
|
|
|
250
|
|
|
|
247
|
|
|
|
3
|
|
|
|
1
|
%
|
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
155
|
|
|
|
110
|
|
|
|
45
|
|
|
|
41
|
%
|
Oil &
Gas
|
|
|
64
|
|
|
|
122
|
|
|
|
(58
|
)
|
|
|
(48
|
)
%
|
Total
job income
|
|
|
219
|
|
|
|
232
|
|
|
|
(13
|
)
|
|
|
(6
|
)
%
|
Divisional
overhead
|
|
|
(33
|
)
|
|
|
(35
|
)
|
|
|
2
|
|
|
|
6
|
%
|
Total
Upstream business unit income
|
|
|
186
|
|
|
|
197
|
|
|
|
(11
|
)
|
|
|
(6
|
)
%
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
149
|
|
|
|
76
|
|
|
|
73
|
|
|
|
96
|
%
|
Gain
on sale of assets
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(100
|
)
%
|
Divisional
overhead
|
|
|
(60
|
)
|
|
|
(20
|
)
|
|
|
(40
|
)
|
|
|
(200
|
)
%
|
Total
Services business unit income
|
|
|
89
|
|
|
|
57
|
|
|
|
32
|
|
|
|
56
|
%
|
Downstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
42
|
|
|
|
52
|
|
|
|
(10
|
)
|
|
|
(19
|
)
%
|
Divisional
overhead
|
|
|
(18
|
)
|
|
|
(15
|
)
|
|
|
(3
|
)
|
|
|
(20
|
)
%
|
Total
Downstream business unit income
|
|
|
24
|
|
|
|
37
|
|
|
|
(13
|
)
|
|
|
(35
|
)
%
|
Technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
34
|
|
|
|
32
|
|
|
|
2
|
|
|
|
6
|
%
|
Divisional
overhead
|
|
|
(19
|
)
|
|
|
(16
|
)
|
|
|
(3
|
)
|
|
|
(19
|
)
%
|
Total
Technology business unit income
|
|
|
15
|
|
|
|
16
|
|
|
|
(1
|
)
|
|
|
(6
|
)
%
|
Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income (loss)
|
|
|
15
|
|
|
|
(3
|
)
|
|
|
18
|
|
|
|
600
|
%
|
Gain
on sale of assets
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
100
|
%
|
Divisional
overhead
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
%
|
Total
Ventures business unit income (loss)
|
|
|
15
|
|
|
|
(4
|
)
|
|
|
19
|
|
|
|
475
|
%
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
7
|
|
|
|
4
|
|
|
|
3
|
|
|
|
75
|
%
|
Impairment
of goodwill
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
%
|
Divisional
overhead
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(67
|
)
%
|
Total
Other business unit income
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
(500
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
business unit income
|
|
$
|
575
|
|
|
$
|
551
|
|
|
$
|
24
|
|
|
|
4
|
%
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposition of assets - corporate
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
%
|
Labor
costs absorption (1)
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
%
|
Corporate
general and administrative
|
|
|
(157
|
)
|
|
|
(163
|
)
|
|
|
6
|
|
|
|
4
|
%
|
Total
operating income
|
|
$
|
412
|
|
|
$
|
388
|
|
|
$
|
24
|
|
|
|
6
|
%
|
________________________
|
(1)
|
Labor
cost absorption represents costs incurred by our central labor and
resource groups (above)/under the amounts charged to the operating
business units.
|
Nine
months ended September 30, 2009 compared to nine months ended September 30,
2008
Government and
Infrastructure.
Revenue from our Middle East Operations
decreased approximately $206 million for the nine months ended September 30,
2009 over the same period in the prior year largely as a result of continued
reduction in volume on U.S. military support activities in Iraq under our LogCAP
III contract as the Army continues to refocus their forces on the battlefield
and redistributes forces away from existing forward operating bases and into
more combat outposts and joint security sites. We expect to provide
services on certain task orders through the second half of
2010. However, over the next 12 months, we expect our overall volume
of work to decrease. Revenue from our Americas Operations decreased a
combined $158 million for the nine months ended September 30, 2009 primarily as
a result of reductions in activity on the Los Alamos and other domestic cost
reimbursable U.S. Government projects including the CONCAP and NRO Office of
Space Launch projects. The decreases were partially offset by
increased activity on the CENTCOM and the causeway project in Bahrain which
increased revenue during the nine months ended September 30, 2009 by
approximately $70 million in the aggregate. The decrease in revenue
in the nine months of 2009 from our International Operations is largely due to
reduced level of work volume on U.K. MoD projects, including the project to
design, procure and construct facilities in Basra, southern Iraq, the Temporary
Deployable Accommodations project and the Allenby & Connaught project as
well as the completion of several engineering projects in
Australia.
Job
income from our Middle East Operations increased for the nine months ended
September 30, 2009 primarily as a result of the net $22 million charge
recognized in the first nine months of 2008 related to an unfavorable jury
verdict from litigation with one of our subcontractors for work performed on our
LogCAP III contract in 2003. During the first nine months of 2009, we
recognized $17 million in revenue as we determined the costs related to the
litigation with the LogCAP III subcontractor was billable to our
customer. This increase was partially offset by the reduction in our
LogCAP award fee accrual rate from 80% to 72% in late 2008, lower award fees
earned during the first nine months of 2009 and provisions for potentially
unallowable costs. Job income from our Americas Operations increased
primarily due to the $15 million loss recognized in the first quarter of 2008 on
our U.S. Embassy project in Macedonia which did not recur in the first nine
months of 2009 as well as the CENTCOM project and the causeway project in
Bahrain. Job income from our International Operations decreased for
the nine months ended September 30, 2009 due to lower volume on several
projects, including the Allenby & Connaught project and several other
projects for the U.K. MoD.
Upstream.
Revenues
in our Gas Monetization Operations increased for the nine months ended September
30, 2009 primarily due to increased procurement activity from several Gas
Monetization projects, including the Escravos GTL and Skikda LNG projects as
they reach peak activity levels in 2009. Revenue from these two
projects increased an aggregate $626 million for the nine months ended September
30, 2009 over the same period in the prior year. Partially offsetting
the 2009 Gas Monetization revenue increases was a decline in revenues of
approximately $152 million due to lower progress on the Pearl GTL project as
well as increases in project costs due to schedule delays, subcontractor claims
and equipment failures on other LNG projects nearing
completion. Revenues in our Oil and Gas Operations declined $104
million for the nine months ended September 30, 2009 primarily due to the
relatively slower progress on a number of offshore projects that were either
completed or were nearing completion during the first nine months of
2009. Additionally, in the first quarter of 2008 we recognized
revenue in the amount of $51 million related to the favorable arbitration award
related to one of our projects performed for PEMEX, EPC 28, which also
contributed to the decrease in revenues for the nine months ended September 30,
2009. Partially offsetting these decreases in revenue during the
first nine months of 2009 was an aggregate $47 million in revenue related to
several new engineering projects awarded in late 2008.
Job
income in our Gas Monetization Operations for the nine months ended September
30, 2009 increased $76 million in the aggregate on the Skikda LNG, Escravos GTL,
and Gorgon LNG projects. We recognized higher incentive fees on the
Escravos GTL project during the first nine months of 2009. We were
also awarded an increase in work scope on the Gorgon LNG project as a result of
the customer’s financial investment decision in the project which resulted in
increased activity during the first nine months of 2009. These
increases in Gas Monetization job income were partially offset by increases in
project costs on other LNG projects due to schedule delays, subcontractor claims
and equipment failures as these projects near completion. In our Oil
and Gas Operations, job income declined by $58 million primarily due to the $51
million favorable arbitration award recognized in the first quarter of 2008
related to one of our projects performed for PEMEX, EPC 28, which contributed to
the decrease in revenues for the nine months ended September 30,
2009.
In our
Oil and Gas Operations, job income in 2008 included a $51 million favorable
arbitration award related to the EPC 28 project performed for
PEMEX. Also, contributing to the decrease in Oil and Gas Operations
was one of our Algerian joint ventures that received an unfavorable arbitration
award related to the In Amenas project resulting in a $15 million decrease to
job income for the nine months ended September 30, 2009. Partially
offsetting these decreases in job income were increases in job income of $12
million in the aggregate related to several new engineering projects awarded in
late 2008.
Services.
Services
revenues increased to $1.7 billion for the nine months ended September 30, 2009
as compared to $776 million for the nine months ended September 30,
2008. Services business unit revenues increased for the nine months
ended September 30, 2009 primarily due to the business we obtained through the
acquisition of BE&K on July 1, 2008, which contributed approximately $809
million to the increase in revenue. Additionally, revenue for the
nine months ended September 30, 2009 from our Services legacy operations
increased as a result of continued growth in our North American Construction and
Canadian operations. North American Construction revenues for the
nine months ended September 30, 2009 increased approximately $70 million as a
result of increased activity on several recently awarded projects including the
Borger and Exxon Mobil Flare Gas projects in Texas. Revenues from our
Canadian operations increased approximately $33 million during the first nine
months in 2009 primarily as a result of the Shell AOSP and Syncrude
projects.
Job
income from Services increased for the nine months ended September 30, 2009
primarily due to the business we obtained through the acquisition of BE&K
which contributed approximately $70 million to job income. Job income
increased approximately $8 million as a result of higher rates for marine vessel
support services provided through our MMM joint venture in the Gulf of
Mexico.
Downstream.
For
the nine months ended September 30, 2009, revenue from our Downstream operations
increased by approximately $21 million. Revenues from our
Refining operations increased in the first nine months of 2009 by approximately
$59 million as a result of a number of new refining projects awarded in the
second half of 2008. Downstream revenue increased an additional
$25 million in our Chemical operations as a result of projects we acquired from
BE&K to provide EPC and other services to customers in the United
States. Increases in revenue related to these and other
projects were partially offset by a $57 million decline in revenue as a result
of the completion of the EBIC ammonia plant project in Egypt.
The
decrease in Downstream job income for the nine months ended September 30, 2009
is primarily due to a $21 million decrease in income on the EBIC ammonia project
due to a combination of the project nearing completion and costs associated with
a delay in completing the plant’s reliability test. We successfully
completed the plant’s reliability test on the EBIC ammonia project in July 2009
and the ammonia plant was formally accepted by the client in the third quarter
of 2009. These decreases were offset by an aggregate increase of $11
million of job income in our Refining operations as a result of the award of
several new refining projects in the second half of 2008.
Technology.
Technology
revenue increased to $70 million for the nine months ended September 30, 2009 as
compared to $61 million for the nine months ended September 30,
2008. Technology job income increased slightly to $34 million for the
nine months ended September 30, 2009 as compared to $32 million for the nine
months ended September 30, 2008. Revenues and job income increased
slightly primarily as a result of progress on two new grassroots ammonia
projects in South America, an ammonia plant revamp in India and the completion
of a grassroots ammonia facility in Trinidad. These increases were
partially offset by slower progress due to several existing engineering projects
nearing completion in our other operations.
Ventures.
Ventures
job income was $15 million for the nine months ended September 30, 2009 and job
loss was $3 million for the nine months ended September 30, 2008. The
increase in job income is primarily due to the adoption by two of our U.K. road
project joint ventures of a favorable U.K. tax ruling related to the tax
depreciation of certain assets. The adoption resulted in an increase
to Equity earnings from unconsolidated affiliates of approximately $8 million
during the first nine months of 2009. Additionally, job income
increased $2 million as a result of the negotiation and settlement of contingent
purchase price consideration related to the sale of an 8% interest in two U.K.
road project joint ventures and lower maintenance costs on the Aspire Defence
(Allenby & Connaught) project. Job loss for the first nine months
of 2008 was primarily driven by nonrecurring operating losses of approximately
$6 million generated on our investment in APT/FreightLink, the Alice
Springs-Darwin railroad project in Australia.
Labor cost
absorption.
Labor cost absorption expense was $5 million for
the nine months ended September 30, 2009, and $0 for the nine months ended
September 30, 2008. Labor cost absorption represents costs incurred
by our central labor and resource groups (above) or under the amounts charged to
the operating business units. Labor cost absorption expense increased
for the nine months ended September 30, 2009, primarily due to lower
chargeability and utilization in several of our engineering offices partially
offset by reduced headcount in 2009.
General and Administrative
expense.
General and administrative expense was $157 million
for the nine months ended September 30, 2009 and $163 million for the nine
months ended September 30, 2008. The decrease for the first nine
months of 2009 was primarily related to the non recurring expenses accrued in
the third quarter of 2008 related to Hurricane Ike, state tax audits and costs
related to the deployment of the HR/Payroll instance of SAP together
with a charge from Halliburton for access to their HR/Payroll system which were
partially offset by higher 2009 legal expenses.
Non-operating
items
Net
interest income was $1 million and $32 million for the nine months ended
September 30, 2009 and 2008, respectively. Interest income was
partially offset by interest expense of $2 million in each nine-month
period. Interest income decreased significantly in the nine months
ended September 30, 2009 as a result of the decrease in our average interest
rates earned and average cash and equivalents balance. Average
interest rates earned on our invested cash declined from approximately 2.2% for
the nine months ended September 30, 2008 to 0.3% for the nine months ended
September 30, 2009, as a result of the current economic
conditions. Our average cash balances declined to approximately $1.0
billion in 2009 from an average cash balance of $1.5 billion for the nine months
ended September 30, 2008. The decrease in our cash and equivalents
balance is attributable to the acquisition of BE&K on July 1, 2008 with a
purchase price of approximately $559 million, the use of cash in joint venture
projects and a contract in progress, working capital requirements for our Iraq
related work and total cumulative stock repurchases.
We had
foreign currency gains of $1 million for the nine months ended September 30,
2009 and foreign currency losses of $2 million for the nine months ended
September 30, 2008. The foreign currency gains for the nine months
ended September 30, 2009 primarily resulted from the remeasurement of monetary
assets and liabilities in foreign jurisdictions as a result of the strengthening
of the U.S. dollar against certain foreign currencies in the first quarter of
2009 including the Euro, Algerian dinar and Japanese yen. Some of
these positions were not fully hedged.
Provision
for income taxes was $137 million and $151 million for the nine months ended
September 30, 2009 and 2008, respectively. Our effective tax rate was
approximately 33% and 36% for the nine months ended September 30, 2009 and 2008,
respectively. Our effective tax rate for the nine months ended
September 30, 2009 was lower than our statutory rate of 35% primarily due to the
final determination of previously estimated 2008 domestic and foreign taxable
income, made in connection with the preparation and filing of our 2008
consolidated tax returns as well as the benefit associated with income on
unincorporated joint ventures. Our effective tax rate for
the first nine months of 2008 exceeded our statutory rate of 35% primarily due
to not receiving a benefit for operating losses on our railroad investment in
Australia, and state and other taxes.
Backlog
Backlog
represents the dollar amount of revenue we expect to realize in the future as a
result of performing work under multi-period contracts that have been awarded to
us. Backlog is not a measure defined by generally accepted accounting
principles, and our methodology for determining backlog may not be comparable to
the methodology used by other companies in determining their backlog. Backlog
may not be indicative of future operating results. Not all of our revenue is
recorded in backlog for a variety of reasons, including the fact that some
projects begin and end within a short-term period. Many contracts do not provide
for a fixed amount of work to be performed and are subject to modification or
termination by the customer. The termination or modification of any one or more
sizeable contracts or the addition of other contracts may have a substantial and
immediate effect on backlog.
We
generally include total expected revenue in backlog when a contract is awarded
and/or the scope is definitized. For our projects related to unconsolidated
joint ventures, we have included in the table below our percentage ownership of
the joint venture’s revenue in backlog. However, because these projects are
accounted for under the equity method, only our share of future earnings from
these projects will be recorded in our revenue. Our backlog for projects related
to unconsolidated joint ventures totaled $2.2 billion at September 30, 2009 and
$2.4 billion at December 31, 2008. We also consolidate joint ventures which are
majority-owned and controlled or are variable interest entities in which we are
the primary beneficiary. Our backlog included in the table below for projects
related to consolidated joint ventures with noncontrolling interest includes
100% of the backlog associated with those joint ventures and totaled $4.8
billion at September 30, 2009 and $3.1 billion at December 31,
2008.
For
long-term contracts, the amount included in backlog is limited to five years. In
many instances, arrangements included in backlog are complex, nonrepetitive in
nature, and may fluctuate depending on expected revenue and timing. Where
contract duration is indefinite, projects included in backlog are limited to the
estimated amount of expected revenue within the following twelve months. Certain
contracts provide maximum dollar limits, with actual authorization to perform
work under the contract being 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
our management fee revenue of each project in backlog.
Backlog
(1)
(in
millions)
|
|
|
|
|
|
|
G&I:
|
|
|
|
|
|
|
U.S.
Government - Middle East Operations
|
|
$
|
781
|
|
|
$
|
1,428
|
|
U.S.
Government - Americas Operations
|
|
|
379
|
|
|
|
600
|
|
International
Operations
|
|
|
1,390
|
|
|
|
1,446
|
|
Total
G&I
|
|
$
|
2,550
|
|
|
$
|
3,474
|
|
Upstream:
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
7,414
|
|
|
|
6,196
|
|
Oil
& Gas
|
|
|
149
|
|
|
|
260
|
|
Total
Upstream
|
|
$
|
7,563
|
|
|
$
|
6,456
|
|
Services
|
|
|
1,898
|
|
|
|
2,810
|
|
Downstream
|
|
|
624
|
|
|
|
578
|
|
Technology
|
|
|
140
|
|
|
|
130
|
|
Ventures
|
|
|
709
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
Total
backlog for continuing operations
|
|
$
|
13,484
|
|
|
$
|
14,097
|
|
______________________
(1)
|
Our
G&I business unit’s total backlog attributable to firm orders was
$2.4 billion at September 30, 2009 and $3.3 billion at December
31, 2008. Our G&I business unit’s total backlog
attributable to unfunded orders was $125 million at September 30, 2009 and
$196 million as of December 31,
2008.
|
We
estimate that as of September 30, 2009, 52% of our backlog will be complete
within one year. As of September 30, 2009, approximately 18% of our backlog was
attributable to fixed-price contracts and 82% was attributable to
cost-reimbursable contracts. For contracts that contain both fixed-price and
cost-reimbursable components, we classify the components as either fixed-price
or cost-reimbursable according to the composition of the contract except for
smaller contracts where we characterize the entire contract based on the
predominant component.
Backlog
in our G&I business unit decreased primarily as a result of the net work-off
on the LogCAP III contract in our Middle East operations. As of
September 30, 2009, backlog in our G&I business unit includes approximately
$776 million for our continued services under the LogCAP III contract and $1.0
billion related to the Allenby & Connaught for the U.K. Ministry of Defence
in our International operations.
In our
Upstream business, we were awarded the EPCM scope of work on the Gorgon LNG
project during the third quarter of 2009 which resulted in an increase to
backlog of approximately $2.2 billion. Partially offsetting this
increase were decreases in our Upstream business backlog primarily as a result
of work-off on several Gas Monetization projects including the Pearl GTL,
Escravos GTL, Yemen LNG and Skikda projects. As of September 30,
2009, our Gas Monetization backlog included $2.2 billion on the Escravos LNG
project and $2.4 billion on the Skikda LNG project.
Backlog
in our Services business decreased due to the work-off in our Canadian, North
American Construction, BE&K Construction and BE&K Building Group
operations which significantly outpaced new awards.
Liquidity
and Capital Resources
Cash and
equivalents totaled $1.0 billion at September 30, 2009 and $1.1 billion at
December 31, 2008, which included $185 million and $175 million, respectively,
of cash and equivalents from advanced payments related to contracts in progress
held by our joint ventures and that we consolidate for accounting
purposes. The use of these cash balances in consolidated joint
ventures is limited to the joint venture activities and is not available for
other projects, general cash needs or distribution to us without approval of the
board of directors of the respective joint ventures. In addition,
cash and equivalents includes $20 million and $179 million as of September 30,
2009 and December 31, 2008, respectively, of cash from advance payments that are
not available for other projects related to a contract in progress that is not
executed through a joint venture. We expect to use the cash and
equivalents advanced on this project to pay project costs.
Our
Revolving Credit Facility has a total capacity of $930 million and is available
for cash working capital needs and letters of credit to support our
operations. Letters of credit issued in support of our operations
reduce the Revolving Credit Facility capacity on a dollar-for-dollar
basis. Amounts drawn under the Revolving Credit Facility bear
interest at variable rates based on a base rate (equal to the higher of
Citibank’s publicly announced base rate, the Federal Funds rate plus 0.5% or a
calculated rate based on the certificate of deposit rate) or the Eurodollar
Rate, plus, in each case, the applicable margin. The applicable
margin will vary based on our utilization spread. At September 30,
2009, we did not have any cash draws and $489 million in letters of credit
issued and outstanding, which reduced the availability under the Revolving
Credit Facility to $441 million. In addition, we pay a commitment fee
on any unused portion of the credit line under the Revolving Credit Facility
ranging from 0.15% to 0.25% per annum depending upon the level of total capacity
utilized.
Debt covenants.
The Revolving
Credit Facility contains a number of covenants restricting, among other things,
our ability to incur additional indebtedness and liens, sales of our assets and
payment of dividends, as well as limiting the amount of investments we can
make. Further, the Revolving Credit Facility limits the amount of new
letters of credit and other debt we can incur outside of the credit facility to
$250 million, which could adversely affect our ability to bid or bid
competitively on future projects if the credit facility is not amended or
replaced. In January 2008, we entered into an Agreement and Amendment
to the Revolving Credit Facility which (i) permits us to elect whether any
increase in the aggregate commitments under the Revolving Credit Facility used
solely for the issuance of letters of credit are to be funded from existing
banks or from one or more eligible assignees; and (ii) permits us to declare and
pay shareholder dividends and/or engage in equity repurchases not to exceed a
total of $400 million in the aggregate. As of September 30, 2009, we
have the capacity to pay additional dividends or repurchase shares in the amount
of $120 million after dividends paid and shares repurchased through September
2009.
The
Revolving Credit Facility also requires us to maintain certain financial ratios,
as defined by the Revolving Credit Facility agreement, including a
debt-to-capitalization ratio that does not exceed 50%; a leverage ratio that
does not exceed 3.5; and a fixed charge coverage ratio of at least
3.0. At September 30, 2009 and December 31, 2008, we were in
compliance with these ratios and other covenants.
Operating
activities.
Cash used in operations was $27 million for the
nine months of 2009 compared to cash provided by operations of $1 million for
the nine months of 2008. Cash from advanced payments held by our
joint venture projects that we consolidate for accounting purposes increased
from $175 million at December 31, 2008 to $185 million at September 30,
2009. Cash related to advanced payments on a contract in progress
decreased from $179 million at December 31, 2008 to $20 million at September 30,
2009. The net decrease in joint venture and project related cash
balances represent funding of $149 million to these projects during the first
nine months of 2009. Offsetting these cash decreases were increases
of $34 million in distributions and repayments of advances we received from our
unconsolidated joint ventures, which are accounted for using the equity method
of accounting.
Cash
provided by operating activities was $1 million for the nine months of 2008.
Collections of accounts receivable balances and a payment from PEMEX related to
the EPC 22 arbitration award of $79 million were more than offset by the use of
cash on our Escravos project of approximately $180 million during the nine
months ended September 30, 2008. Cash used in operating activities also includes
approximately $67 million of contributions made to our international and
domestic pension plans during the nine months ended September 30, 2008. Our
working capital requirements for our Iraq-related work decreased from $239
million at December 31, 2007 to $117 million at September 30, 2008,
generating cash of $122 million.
Investing
activities.
Cash used in investing activities for the first
nine months of 2009 and 2008 totaled $20 and $519 million,
respectively. Capital expenditures were $22 million for the first
nine months of 2009 and $27 million for the first nine months of
2008. In July 2008, we acquired BE&K for $487 million, net of
cash received. In April 2008, we acquired TGI and Catalyst Interactive for a
combined purchase price of approximately $11 million, net of cash
received.
Financing
activities.
Cash used in financing activities was $92 million
for the first nine months of 2009 and included $27 million of payments to
reacquire 1.7 million shares of our common stock and $54 million related to
dividend payments to our shareholders and to noncontrolling shareholders of
several of our consolidated joint ventures. Included in other
financing activities of $11 million is our net cash collateralization of our
standby letters of credit in accordance with certain agreements. Cash
used in financing activities was $231 million for the first nine months of 2008,
which was almost entirely related to $196 million of payments to reacquire our
common stock and $40 million related to dividend payment to shareholders and
minority shareholders.
Future sources of
cash
. Future sources of cash include cash flows from
operations, including cash advance payments from our customers, and borrowings
under our Revolving Credit Facility. The Revolving Credit Facility is available
for cash advances required for working capital and letters of credit to support
our operations. However, to meet our short- and long-term liquidity
requirements, we will primarily look to our existing cash balances and cash
generated from future operating activities.
Future uses of
cash
. Future uses of cash will primarily relate to working
capital requirements for our operations. In addition, we will use
cash to fund share repurchases, cash dividends, capital expenditures, pension
obligations, operating leases and various other obligations, as they
arise.
Capital
expenditures for 2009 are expected to be approximately $30 million, and
primarily relate to information technology, real estate and equipment/facilities
to be used in our business units. We expect total capital
expenditures for the fourth quarter of 2009 to be consistent with the first
three quarters of 2009.
On
October 7, 2009, our Board of Directors declared a quarterly cash dividend of
$0.05 per share of common stock payable on January 15, 2010 to shareholders of
record on December 15, 2009. Any future dividend declarations will be
at the discretion of our Board of Directors.
Other
obligations.
We had commitments to provide funds to our
privately financed projects of $60 million as of September 30, 2009 and $64
million as of December 31, 2008. Our commitments to fund our privately financed
projects are supported by letters of credit as described above. These
commitments arose primarily during the start-up of these entities or due to
losses incurred by them. At September 30, 2009, approximately $17
million of the $60 million in commitments are current.
We have
an obligation to fund estimated losses on our uncompleted contracts which
totaled $53 million at September 30, 2009. Approximately $42 million
of this amount relates to our Escravos project, the majority of which is
expected to be funded in 2009.
Off
balance sheet arrangements
Letters of credit, surety bonds and
bank guarantees.
In connection with certain projects, we are
required to provide letters of credit and surety bonds to our
customers. Letters of credit are provided to customers in the
ordinary course of business to guarantee advance payments from certain
customers, support future joint venture funding commitments and to provide
performance and completion guarantees on engineering and construction
contracts. We have $1.3 billion in committed and uncommitted lines of
credit to support letters of credit and as of September 30, 2009, we had
utilized $532 million of our credit capacity. We have an additional
$314 million in letters of credit issued and outstanding under various
Halliburton facilities and are irrevocably and unconditionally guaranteed by
Halliburton. Surety bonds are also posted under the terms of certain
contracts primarily related to state and local government projects to guarantee
our performance.
The $532
million in letters of credit outstanding on KBR lines of credit was comprised of
$489 million issued under our Revolving Credit Facility and $43 issued under
uncommitted bank lines at September 30, 2009. Of the total letters of
credit outstanding, $313 million relate to our joint venture operations and $75
million of the letters of credit have terms that could entitle a bank to require
cash collateralization on demand. Approximately $398 million of the
$489 million letters of credit issued under our Revolving Credit Facility have
expiry dates close to or beyond the maturity date of the
facility. Under the terms of the Revolving Credit Facility, if the
original maturity date of December 16, 2010 is not extended then the issuing
banks may require that we provide cash collateral for these extended letters of
credit no later than 95 days prior to the original maturity
date. Currently, our intention is to further increase the capacity of
and extend the original maturity date of the Revolving Credit Facility which we
intend to complete in 2009. As the need arises, future projects will
be supported by letters of credit issued under our Revolving Credit Facility or
arranged on a bilateral basis. We believe we have adequate letter of
credit capacity under our existing Revolving Credit Facility and bilateral lines
of credit to support our operations for the next twelve months.
Halliburton
has guaranteed letters of credit and surety bonds and provided parent company
guarantees primarily related to our financial commitments. We expect
to cancel these letters of credit and surety bonds as we complete the underlying
projects. Since the separation from Halliburton we have been engaged in
discussions with surety companies and have arranged lines with multiple firms
for our own standalone capacity. Since the arrangement of this stand
alone capacity, we have been primarily sourcing surety bonds from our own
capacity without additional Halliburton credit support. We believe
our current surety bond capacity is adequate to support our current backlog of
projects and prospective projects for the next twelve months.
We are
pursuing several large projects that, if awarded to us will likely require us to
issue letters of credit that could be large in amount. The current
capacity of our Revolving Credit Facility is not adequate for us to issue
letters of credit necessary to replace all outstanding letters of credit issued
under the various Halliburton facilities or those guaranteed by Halliburton and
issue letters of credit for projects that we are currently pursuing should they
be awarded to us. In addition, we would not be able to make working
capital borrowings against the Revolving Credit Facility if the availability is
fully reduced by issued letters of credit. We are currently working to increase
our credit capacity.
We
participate, generally through an equity investment in a joint venture,
partnership or other entity, in privately financed projects that enable our
government customers to finance large-scale projects, such as railroads, and
major military equipment purchases. We evaluate the entities that are created to
execute these projects following the guidelines of FASB ASC 810 -
Consolidation. These projects typically include the facilitation of
non-recourse financing, the design and construction of facilities, and the
provision of operations and maintenance services for an agreed period after the
facilities have been completed. The carrying value of our investments
in privately financed project entities totaled $74 million at September 30, 2009
and $51 million at December 31, 2008. Our equity in earnings from
privately financed project entities totaled $9 million for both the three months
ended September 30, 2009 and 2008, respectively. Our equity in
earnings from privately financed project entities totaled $32 million and $23
million for the nine months ended September 30, 2009 and 2008,
respectively.
Other
factors affecting liquidity
Government
claims
. Our unapproved claims for costs incurred under various
government contracts totaled $122 million at September 30, 2009 and $73 million
at December 31, 2008. The unapproved claims at September 30,
2009 include approximately $51 million as a result of the de-obligation of 2004
funding on certain task orders including $48 million withheld from us as further
discussed in Dining facilities in Note 6 to the accompanying financial
statements with incurred costs that have been disputed by the DCAA and our
customer. We believe such disputed costs will be resolved in our favor at
which time the customer will be required to obligate funds from the year in
which resolution occurs. The unapproved claims outstanding at
September 30, 2009 and December 31, 2008 are considered to be probable of
collection and have been recognized as revenue. These unapproved claims relate
to contracts where our costs have exceeded the customer’s funded value of the
task order. We understand that our customer is actively seeking funds that have
been or will be appropriated to the Department of Defense that can be obligated
on our contract.
Liquidated
damages.
Many of our engineering and construction contracts
have milestone due dates that must be met or we may be subject to penalties for
liquidated damages if claims are asserted and we were responsible for the
delays. These generally relate to specified activities that must be
met within a project by a set contractual date or achievement of a specified
level of output or throughput of a plant we construct. Each contract
defines the conditions under which a customer may make a claim for liquidated
damages. However, in many instances, liquidated damages are not
asserted by the customer, but the potential to do so is used in negotiating
claims and closing out the contract.
During
the first quarter of 2009, one of our joint ventures experienced a delay that
extended the expected completion date of a plant. The joint venture
is working with the client to determine the exact cause of the delay and the
amount of liability, if any, the joint venture may have incurred with respect to
schedule related liquidated damages. We believe the joint
venture is entitled to a change order for an extension of time sufficient to
alleviate its exposure to liquidated damages related to this delay.
We had
not accrued for liquidated damages related to several projects, including the
exposure described in the above paragraph, totaling $33 million at September 30,
2009 and $31 million at December 31, 2008 (including amounts related to our
share of unconsolidated subsidiaries), that we could incur based upon completing
the projects as forecasted.
Halliburton
indemnities.
Halliburton has agreed to indemnify us and
certain of our greater than 50%-owned subsidiaries for fines or other monetary
penalties or direct monetary damages, including disgorgement, as a result of
claims made or assessed against us by U.S. and certain foreign governmental
authorities or a settlement thereof, relating to investigations under the FCPA
or analogous applicable foreign statutes related investigations with respect to
the construction and subsequent expansion by TSKJ of a natural gas liquefaction
complex in Nigeria. Halliburton has also agreed to indemnify us for
out-of-pocket cash costs and expenses, or cash settlement or cash arbitration
awards in lieu thereof, we may incur as a result of the replacement of certain
subsea flow-line bolts installed in connection with the Barracuda-Caratinga
project. See Note 7 to our Condensed Consolidated Financial
Statements for further discussion.
In
February 2009, one of our subsidiaries pleaded guilty to violating and
conspiring to violate the FCPA arising from the intent to bribe various Nigerian
officials through commissions paid to agents working on behalf of
TSKJ. The terms of the plea agreement with the DOJ call for the
payment of a criminal penalty of $402 million, of which Halliburton will pay
$382 million under the terms of the indemnity while we will pay $20 million in
quarterly payments over the next two years. We also agreed to a
judgment by the SEC requiring, Halliburton and us, jointly and severally, to
make payments totaling $177 million, all of which were paid by Halliburton under
the terms of the indemnity. During the first nine months of 2009,
Halliburton paid its first four installments to the DOJ in the amount of $192
million and paid in full the $177 million due to the SEC.
Worldwide economic conditions and
financial market crisis
. The financial market credit crisis
and the resulting current worldwide economic downturn have significantly
impacted and continue to impact the capital and credit
markets. Although it is presently not possible to determine the
full impact this situation may have on us in the future, to date we have not
experienced any significant impact to our business as a result of these
conditions. The following is a discussion of some of the risks and
possible consequences:
|
·
|
The
economic downturn and resulting decrease in energy prices may cause
clients to postpone or cancel their capital
projects. Accordingly, we may experience a decrease in the
demand for our engineering procurement, construction and construction
management services in the future. This may negatively impact
the future operating results and cash flows of our Upstream, Downstream,
Technology and Services business units. In addition, the economic downturn
may result in a decrease in client capital expenditures for U.S.
industrial, commercial healthcare and governmental buildings in the
future. This may negatively impact the future operating results
and cash flows of our Services and Government and Infrastructure business
units.
|
|
·
|
In
addition, the economic downturn and financial market credit crisis may
cause our vendors to experience financial difficulty which could impact
their ability to perform pursuant to their contractual obligations to
provide goods or services to us which may in turn require us to incur
additional costs or delays in meeting our contractual commitments to our
customers. Likewise, our customers may experience financial
difficulty resulting in delays or the inability for us to collect any
trade receivables that are owed to us. If either or both of these
situations occur, it could have a significant impact on our future
operating results and cash flows.
|
|
·
|
The
economic downturn could adversely affect our future operating results and
cash flows resulting in future impairments of our goodwill. At
September 30, 2009 we had goodwill of $691 million. We test
goodwill for impairment annually or more frequently if a triggering event
occurs. As discussed in Note 14 to the accompanying financial
statements, we recognized a goodwill impairment charge of approximately $6
million as a result of our regular annual goodwill impairment test on
September 30, 2009. The charge was taken against our reporting
unit related to a small staffing business acquired in the acquisition of
BE&K in the third quarter of 2008. The charge was primarily
the result of a worse than anticipated decline in the staffing market, the
current effect of the recession on the market, and our forecasts of the
sales, operating income and cash flows for this reporting unit that were
identified through the course of our annual planning
process. The fair value of all of our other reporting units
exceeded their respective carrying amounts as of September 30,
2009. If the fair value of our goodwill or that of any of our
reporting units declines below the carrying value in the future, we may
incur additional goodwill impairment
charges.
|
|
·
|
The
economic downturn has negatively impacted the value of the assets in the
defined benefit pension plans that we sponsor and we expect increased
funding requirements to these pension plans in the
future.
|
|
·
|
Our
Revolving Credit Facility is provided by a syndicate of 23 banks, one of
which was the subject of a recent bankruptcy as a result of the recent
financial market credit crisis. This bank provides $40 million, or
approximately 4%, of the total credit under this facility. To date, there
have been no performance demands made on this participating bank either by
us or the syndicate agent bank. Although we have $441 million
remaining capacity under this facility at September 30, 2009, we rely on
this facility to help fund our letter of credit needs as well as a
potential source of funding for acquisition transactions and working
capital. The inability of one or more banks in the consortium
to meet its commitment under the credit facility could impede our future
growth. After reviewing the credit worthiness of the banks in
the consortium, we have no reason to believe that access to the credit
facility is materially at-risk.
|
Legal
Proceedings
Information
related to various commitments and contingencies is described in Notes 6 and 7
to the condensed consolidated financial statements.
Environmental
Matters
We are
subject to numerous environmental, legal and regulatory requirements related to
our operations worldwide. In the United States, these laws and regulations
include, among others:
|
·
|
the
Comprehensive Environmental Response, Compensation and Liability
Act;
|
|
·
|
the
Resources Conservation and Recovery
Act;
|
|
·
|
the
Federal Water Pollution Control Act;
and
|
|
·
|
the
Toxic Substances Control Act.
|
In
addition to the federal laws and regulations, states and other countries where
we do business often have numerous environmental, legal and regulatory
requirements by which we must abide. We evaluate and address the environmental
impact of our operations by assessing and remediating contaminated properties in
order to avoid future liabilities and by complying with environmental, legal and
regulatory requirements. On occasion, we are involved in specific environmental
litigation and claims, including the remediation of properties we own or have
operated as well as efforts to meet or correct compliance-related matters. We
make estimates of the amount of costs associated with known environmental
contamination that we will be required to remediate and record accruals to
recognize those estimated liabilities. Our estimates are based on the best
available information and are updated whenever new information becomes known.
For certain locations, including our property at Clinton Drive, we have not
completed our analysis of the site conditions and until further information is
available, we are only able to estimate a possible range of remediation costs.
This range of remediation costs could change depending on our ongoing site
analysis and the timing and techniques used to implement remediation activities.
We do not expect costs related to environmental matters will have a material
adverse effect on our consolidated financial position or our results of
operations. At September 30, 2009 our accrual for the estimated assessment and
remediation costs associated with all environmental matters was approximately $8
million, which represents the low end of the range of possible costs that could
be as much as $14 million.
New
Accounting Standards
In March
2008, the FASB issued accounting guidance related to employers’ disclosure about
postretirement benefit plan assets which is discussed under FASB ASC 715 -
Compensation - Retirement Benefits. This topic addresses concerns
from users of financial statements about their need for more information on
pension plan assets, obligations, benefit payments, contributions, and net
benefit cost. The disclosures about plan assets are intended to provide users of
employers’ financial statements with more information about the nature and
valuation of postretirement benefit plan assets, and are effective for fiscal
years ending after December 15, 2009.
Effective
January 1, 2009, we adopted guidance for participating securities and the
two-class method in accordance with FASB ASC 260 - Earnings Per Share, related
to determining whether instruments granted in share-based payment transactions
are participating securities. The standard provides that unvested
share-based payment awards that contain rights to non-forfeitable dividends or
dividend equivalents (whether paid or unpaid) participate in undistributed
earnings with common shareholders. Certain KBR restricted stock units
and restricted stock awards are considered participating securities since the
share-based awards contain a non-forfeitable right to dividends irrespective of
whether the awards ultimately vest. The standard requires that the
two-class method of computing basic EPS be applied. Under the
two-class method, KBR stock options are not considered to be participating
securities. See Note 15 for further discussion of the impact on basic
and diluted EPS for the three and nine months ended September 30, 2009 and 2008
as a result of the adoption of this guidance.
Effective
September 30, 2009, we adopted guidance for the accounting standards
codification and the hierarchy of generally accepted accounting principles in
accordance with FASB ASC 105 - Generally Accepted Accounting
Principles. The standard establishes the FASB Accounting Standards
Codification
TM
(“ASC”) as the single source of authoritative U.S. generally accepted
accounting principles (U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. The FASB ASC supersedes all existing non-SEC
accounting and reporting standards. The FASB ASC does not have an
impact on our financial position, results of operations or cash
flows.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. ASU
2009-13 addresses the accounting for multiple-deliverable arrangements to enable
vendors to account for products or services (deliverables) separately rather
than as a combined unit. Specifically, this guidance amends the criteria in
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for
separating consideration in multiple-deliverable arrangements. This guidance
establishes a selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific objective evidence; (b)
third-party evidence; or (c) estimates. This guidance also eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance significantly expands
required disclosures related to a vendor's multiple-deliverable revenue
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010. We are evaluating the impact that the adoption of ASU 2009-13 will
have on our financial position, results of operations, cash flows and
disclosures.
The
following authoritative standards are not yet integrated into the
Codification:
In
June 2009, the FASB issued SFAS No. 166, “Accounting for
Transfers of Financial Assets — an amendment of FASB Statement
No. 140” (“SFAS 166”) requires additional information regarding
transfers of financial assets, including securitization transactions, and where
companies have continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets, and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. We are evaluating the
impact that the adoption of SFAS 166 will have on our financial position,
results of operations, cash flows and disclosures.
In
June 2009, the FASB issued SFAS No. 167, “Amendments to
FASB Interpretation No. 46(R)” (“SFAS 167”) modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an
ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. SFAS 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS
167 is effective for fiscal years beginning after November 15,
2009. We are evaluating the impact that the adoption of SFAS 167 will
have on our financial position, results of operations, cash flows and
disclosures.
Item
3. Qua
ntitat
ive and Qualitative
Disclosures About Market Risk
We are
exposed to financial instrument market risk from changes in foreign currency
exchange rates and interest rates. We selectively manage these exposures through
the use of derivative instruments to mitigate our market risk from these
exposures. The objective of our risk management is to protect our
cash flows related to sales or purchases of goods or services from market
fluctuations in currency rates. Our use of derivative instruments
includes the following types of market risk:
|
-
|
volatility
of the currency rates;
|
|
-
|
time
horizon of the derivative
instruments;
|
|
-
|
the
type of derivative instruments
used.
|
We do not
use derivative instruments for trading purposes. We do not consider
any of these risk management activities to be material.
Item
4. Controls and P
rocedure
s
In
accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), we carried out an evaluation, under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of September 30, 2009 to provide reasonable assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms. Our disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
During
the most recent fiscal quarter, there have been no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proc
eeding
s
Information
related to various commitments and contingencies is described in Notes 6 and 7
to the condensed consolidated financial statements and in Managements’
Discussion and Analysis of Financial Condition and Results of Operations – Legal
Proceedings and the information discussed therein is incorporated
herein.
Item
1A. Risk
Factors
There are
no material changes from the risk factors previously disclosed in
Part I, Item 1A in our Annual Report on Form 10-K, which
is incorporated herein by reference, for the year ended December 31,
2008.
Item
2. Unregistered Sales of Equity Se
curiti
es and Use of Proceeds
|
(c)
|
In
December 2008, our Board of Directors authorized a new share repurchase
program pursuant to which we will repurchase shares in the open market to
reduce and maintain, over time, our outstanding shares at approximately
160 million shares. This share repurchase program expires
December 31, 2009. We entered into an agreement with an agent
to conduct a designated portion of the repurchase program in accordance
with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of
1934. The share repurchases were funded through our
current cash position.
|
No shares
were repurchased in 2008 under the new program. In the third quarter
of 2009, we repurchased 0.2 million shares through our repurchase program and
through employee transactions at a cost of approximately $5
million. Inception to date, we have acquired approximately
10 million shares for $223 million through our share repurchase
programs and employee transactions.
Purchase
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or Programs
(2)
|
|
July
1 – 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
Program
|
|
|
13,449
|
|
|
$
|
18.79
|
|
|
|
13,449
|
|
|
|
449,983
|
|
Employee
Transactions
(1)
|
|
|
36,275
|
|
|
$
|
19.75
|
|
|
|
—
|
|
|
|
—
|
|
August
3 – 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
Program
|
|
|
34,817
|
|
|
$
|
21.79
|
|
|
|
34,817
|
|
|
|
508,129
|
|
Employee
Transactions
(1)
|
|
|
2,415
|
|
|
$
|
22.81
|
|
|
|
—
|
|
|
|
—
|
|
September
1 – 29, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
Program
|
|
|
153,462
|
|
|
$
|
21.90
|
|
|
|
153,462
|
|
|
|
386,291
|
|
Employee
Transactions
(1)
|
|
|
1,657
|
|
|
$
|
22.63
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
Program
|
|
|
201,728
|
|
|
$
|
21.68
|
|
|
|
201,728
|
|
|
|
—
|
|
Employee
Transactions
(1)
|
|
|
40,347
|
|
|
$
|
20.05
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Reflects
shares withheld (under the terms of grants under employee stock
compensation plans) to offset tax withholding obligations that occur upon
the delivery of outstanding shares underlying restricted stock
units. The year-to-date cost of shares withheld for
employee transactions totaled $2
million.
|
|
(2)
|
Calculated
based on shares outstanding at the end of each month less our targeted
number of approximately 160 million outstanding
shares.
|
It
em 3. Defaults Upon Senior S
ecu
rities
None.
It
em 4. Submission of Matters to a
Vote of Security Holders
None.
It
em 5. Other
Information
None.
It
em 6. Exhibits
|
|
Exhibit
Number
|
|
Description
|
|
|
3.1
|
|
KBR
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to KBR’s registration statement on Form S-1;
Registration No. 333-133302)
|
|
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of KBR, Inc. (incorporated by reference to Exhibit 3.1
to KBR’s Form 10-Q for the period ended June 30, 2008; File No.
1-33146)
|
|
|
|
|
|
|
|
4.1
|
|
Form
of specimen KBR common stock certificate (incorporated by reference to
Exhibit 4.1 to KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
|
|
*
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 302
of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
*
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section 302
of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
**
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906
of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
**
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section 906
of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
***
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
***
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
|
|
***
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
***
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Labels Linkbase Document
|
|
|
|
|
|
***
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Filed
with this Form 10-Q
|
|
|
**
|
|
Furnished
with this Form 10-Q
|
|
|
***
|
|
In
accordance with Rule 406T of Regulation S-T, the XBRL related information
in Exhibit 101 to this Quarterly Report on
Form 10-Q shall not be deemed to be “filed” for
purposes of Section 18 of the Exchange Act, or otherwise
subject to the liability of that section, and shall not be part of any
registration statement or other document filed under the Securities Act or
the Exchange Act, except as shall be expressly set forth by specific
reference in such filing.
|
Pu
rsuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
KBR,
INC.
/s/
T. Kevin
DeNicola
|
|
/s/
John W. Gann,
Jr.
|
T.
Kevin DeNicola
|
|
John
W. Gann, Jr.
|
Chief
Financial Officer
|
|
Vice
President and Chief Accounting
Officer
|
Date:
October 29, 2009
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