UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
T
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the fiscal year ended December 31, 2009
OR
|
o
|
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.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
20-4536774
|
|
(State or other jurisdiction
of incorporation
or organization)
|
(I.R.S. Employer Identification
No.)
|
601
Jefferson Street
Suite
3400
Houston,
Texas 77002
(Address
of principal executive offices)
Telephone
Number - Area code (713) 753-3011
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each Exchange on which registered
|
|
Common
Stock par value $0.001 per share
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
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
the past 90 days. Yes x No o
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 x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £
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 x
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do not
check if a 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 o No x
The
aggregate market value of the voting stock held by non-affiliates on June 30,
2009, was approximately $2,947,702,000, determined using the closing price of
shares of common stock on the New York Stock Exchange on that date of
$18.44.
As of
February 19, 2010, there were 160,466,526 shares of KBR, Inc. Common Stock,
$0.001 par value per share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the KBR, Inc. Company Proxy Statement for our 2010 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
report.
TABLE OF CONTENTS
|
|
Page
|
|
PART
I
|
|
| 4 | |
| 15 | |
| 26 | |
| 26 | |
| 26 | |
| 27 | |
|
PART
II
|
|
| 27 | |
| 30 | |
| 31 | |
| 60 | |
| 60 | |
| 114 | |
| 114 | |
| 116 | |
|
FINANCIAL
STATEMENTS
|
|
| 61 | |
| 62 | |
| 63 | |
| Consolidated Statements of Comprehensive Income | 64 |
| 65 | |
| 66 | |
| 67 | |
|
PART
III
|
|
| 116 | |
| 116 | |
| 116 | |
| 116 | |
| 116 | |
|
PART
IV
|
|
| 116 | |
| 122 |
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. Some of the statements
contained in this annual report are forward-looking statements. All statements
other than statements of historical fact are, or may be deemed to be,
forward-looking statements. The words “believe,” “may,” “estimate,” “continue,”
“anticipate,” “intend,” “plan,” “expect” and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include
information concerning our possible or assumed future financial performance and
results of operations.
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. 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 described under “Risk Factors” contained in Part I of this Annual
Report on Form 10-K.
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
Item
1. Business
General
KBR, Inc.
and its subsidiaries (collectively, “KBR”) is a global engineering, construction
and services company supporting the energy, hydrocarbon, government services,
minerals, civil infrastructure, power and industrial 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 7 to our consolidated financial statements for
financial information about our reportable business segments.
KBR, Inc.
was incorporated in Delaware on March 21, 2006 as an indirect wholly-owned
subsidiary of Halliburton Company (“Halliburton”). KBR was formed to own and
operate KBR Holdings, LLC (“KBR Holdings”), which was contributed to KBR by
Halliburton in November 2006. In November 2006, KBR, Inc. completed
an initial public offering of 32,016,000 shares, or approximately 19%, of its
common stock. On April 5, 2007, Halliburton completed the separation
of KBR through a tax-free exchange with Halliburton’s stockholders of the
remaining 135,627,000 shares of KBR owned by Halliburton for publicly held
shares of Halliburton common stock pursuant to the terms of an exchange offer
commenced by Halliburton on March 2, 2007. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Transactions with Former Parent” for further discussion regarding our
relationship with Halliburton.
Recent
acquisitions and dispositions
In June
2007, we completed the disposition of our 51% interest in Devonport Management
Limited (“DML”) to Babcock International Group plc. DML owns and operates
Devonport Royal Dockyard, one of Western Europe’s largest naval dockyard
complexes. Our DML operations, which were part of our G&I business unit,
primarily involved refueling nuclear submarines and performing maintenance on
surface vessels for the U.K. Ministry of Defence as well as limited commercial
projects.
In April
2008, we acquired 100% of the outstanding common stock of Turnaround Group of
Texas, Inc. (“TGI”) and Catalyst Interactive. TGI is a Houston-based turnaround
management and consulting company that specializes in the planning and execution
of turnarounds and outages in the petrochemical, power, and pulp & paper
industries. Catalyst Interactive is an Australian e-learning and training
solution provider that specializes in the defense, government and industry
training sectors. TGI’s results of operations are included in our Services
business unit. Catalyst Interactive’s results of operations are included in our
Government & Infrastructure business unit.
In July
2008, we acquired 100% of the outstanding common shares of BE&K, Inc.,
(“BE&K”) a privately held, Birmingham, Alabama-based engineering,
construction and maintenance services company. The acquisition of BE&K
enhances our ability to provide contractor and maintenance services in North
America. BE&K and its acquired divisions were integrated into our
Services, Downstream and Government & Infrastructure business units based
upon the nature of the underlying projects acquired.
In
October 2008, we acquired 100% of the outstanding common stock of Wabi
Development Corporation (“Wabi”). Wabi was a privately held Canada-based general
contractor, which provides services for the energy, forestry and mining
industries. Wabi provides maintenance, fabrication, construction and
construction management services to a variety of clients in Canada and Mexico.
Wabi was integrated into our Services business unit and it provides additional
growth opportunities for our heavy hydrocarbon, forestry, oil sand, general
industrial and maintenance services business.
See Note
4 to our consolidated financial statements for further discussion of our recent
acquisitions.
Our
Business Units
Downstream. Our
Downstream business unit serves clients in the petrochemical, refining, coal
gasification and syngas markets, executing projects throughout the world. We
leverage our differentiated process technologies, some of which are the most
efficient ones available in the market today, and also execute projects using
non-KBR technologies, either alone or with joint venture or alliance partners to
a wide variety of customers. Downstream’s work with KBR’s Ventures business unit
has resulted in creative equity participation structures such as our Egypt Basic
Industries Corporation Ammonia plant which offers our customers unique solutions
to meet their project development needs. We are a leading contractor in the
markets that we serve delivering projects through a variety of service offerings
including front-end engineering design (“FEED”), detailed engineering,
engineering, procurement and construction (“EPC”), engineering, procurement and
construction management (“EPCM”) and program management. We are
dedicated to providing life cycle value to our customers.
Government and
Infrastructure. Our G&I business unit provides program and
project management, contingency logistics, operations and maintenance,
construction management, engineering and other services to military and civilian
branches of governments and private clients worldwide. We deliver on-demand
support services across the full military mission cycle from contingency
logistics and field support to operations and maintenance on military bases. A
significant portion of our G&I business unit’s current operations relate to
the support of the United States government operations in the Middle East, which
we refer to as our Middle East operations, and is one of the largest U.S.
military deployments since World War II. In the civil infrastructure market, we
operate in diverse sectors, including transportation, waste and water treatment
and facilities maintenance. We design, construct, maintain and operate and
manage civil infrastructure projects ranging from airport, rail, highway, water
and wastewater facilities, and mining and mineral processing to regional
development programs and major events. We provide many of these services to
foreign governments such as the United Kingdom and Australia.
Services. Our Services
business unit delivers full scope engineering, construction, construction
management, fabrication, maintenance, and turnaround expertise to customers
worldwide. Our experience is broad and based on 90 years of
successful project realization beginning with the founding of legacy company
Brown & Root in 1919. With the acquisition of BE&K, our
market reach has expanded and now includes power, alternate energy, pulp and
paper, industrial and manufacturing, and pharmaceutical industries in addition
to our base markets in the oil, gas, oil sands, petrochemicals and hydrocarbon
processing industries. We provide commercial building construction
services to education, food and beverage, healthcare, hospitality and
entertainment, life science and technology, and mixed use building clients
through our Building Group. KBR Services and its joint venture
partner offer maintenance, small capital construction, and drilling support
services for offshore oil and gas producing facilities in the Bay of Campeche
through the use of semisubmersible vessels.
Technology. Our
Technology business unit offers differentiated process technologies, some of
which are the most efficient ones available in the market today, including
value-added technologies in the coal monetization, petrochemical, refining and
syngas markets. We offer technology licenses, and, in conjunction with our
Downstream business unit, offer project management and engineering, procurement
and construction for integrated solutions worldwide. We are one of a few
engineering and construction companies to possess a technology center, with 80
years of experience in technology research and development.
Upstream. Our
Upstream business unit provides a full range of services for large, complex
upstream projects, including liquefied natural gas (“LNG”), gas-to-liquids
(“GTL”), onshore oil and gas production facilities, offshore oil and gas
production facilities, including platforms, floating production and subsea
facilities, and onshore and offshore pipelines. In gas-to-liquids, we are
leading the construction of two of the world’s three gas-to-liquids projects
under construction or start-up, the size of which exceeds that of almost any
other in the industry. Our Upstream business unit has designed and constructed
some of the world’s most complex onshore facility and pipeline projects and, in
the last 30 years, more than half of the world's operating LNG liquefaction
capacity. In oil & gas, we provide integrated engineering and program
management solutions for offshore production facilities and subsea developments,
including the design of the largest floating production facility in the world to
date.
Ventures. Our
Ventures business unit’s purpose is to help our customers realize completed
projects. The Ventures business unit invests KBR equity alongside
clients’ equity in projects where one or more of KBR’s other business units has
a direct role in engineering, construction, construction management or
operations and maintenance. The Ventures business unit also manages
KBR’s existing portfolio of project equity and debt investments and represents
KBR’s interests on project company boards. Project equity investments under
current management include defense equipment and housing, toll roads and
petrochemicals.
Our
Significant Projects
The
following table summarizes several significant contracts under which business
units are currently providing or have recently provided services.
G&I-Middle East
Operations
|
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
|
LogCAP
III
|
|
U.S.
Army
|
|
Worldwide
|
|
Cost-reimbursable
|
|
Contingency
support services.
|
G&I-Americas
Operations
|
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
|
CENTCOM
|
|
U.S.
Army
|
|
Middle
East
|
|
Fixed-price
and cost-reimbursable
|
|
Construction
of military infrastructure and support facilities.
|
|
|
|
|
|
|
|
|
|
|
|
DOCCC-Office
of Space Launch
|
|
NRO
Office of Space Launch
|
|
USA
|
|
Fixed-price
plus award fee
|
|
Provide
on call project management, construction management and related support
for mission critical facilities at Cape Canaveral and other
locations.
|
|
|
|
|
|
|
|
|
|
|
|
Qatar
Bahrain Causeway Phase I and II
|
|
Qatar
Bahrain Causeway Foundation
|
|
Qatar/Bahrain
|
|
Cost-reimbursable
|
|
Program
management contracting.
|
|
|
|
|
|
|
|
|
|
|
|
USAREUR
|
|
U.S.
Army
|
|
Europe
(Balkans)
|
|
Fixed-
price and cost-reimbursable
|
|
Contingency
support within the USAREUR AOR; Balkans
Support.
|
G&I-International
Operations
|
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
|
Aspire
Defence-Allenby & Connaught Accommodation Project
|
|
Aspire
Defence U.K. Ministry of Defence
|
|
U.K.
|
|
Fixed-price
and cost-reimbursable
|
|
Design,
build and finance the upgrade and service of army
facilities.
|
|
|
|
|
|
|
|
|
|
|
|
Temporary
Deployable Accommodations (“TDA”)
|
|
U.K.
Ministry of Defence
|
|
Worldwide
|
|
Fixed-price
|
|
Battlefield
infrastructure support.
|
|
|
|
|
|
|
|
|
|
|
|
CONLOG
|
|
U.K.
Ministry of Defence
|
|
Worldwide
|
|
Fixed-
price and cost-reimbursable
|
|
Provide
contingency support services to MOD.
|
|
|
|
|
|
|
|
|
|
|
|
Hope
Downs Iron Ore Project
|
|
Rio
Tinto IO
|
|
Western
Australia
|
|
Cost-reimbursable
|
|
Engineering,
Procurement & Construction Management.
|
|
|
|
|
|
|
|
|
|
|
|
Afghanistan
ISP UK
|
|
Ministry
of Defence (Defense Estates)
|
|
Afghanistan
|
|
Firm-fixed
price
|
|
Construction
of military infrastructure and support facilities.
|
|
|
|
|
|
|
|
|
|
|
|
Tier
3 Basra
|
|
UK
Ministry of Defence Basra
|
|
Iraq
|
|
Fixed-price
and cost-reimbursable
|
|
Construction
of Hardened Accommodation (Field Hospital,
DFAC)
|
Upstream- Gas
Monetization
|
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
|
Tangguh
LNG
|
|
BP
Berau Ltd.
|
|
Indonesia
|
|
Fixed-price
|
|
EPC-CS
services for two LNG liquefaction trains; joint venture with
JGC.
|
|
|
|
|
|
|
|
|
|
|
|
Yemen
LNG
|
|
Yemen
LNG Company Ltd.
|
|
Yemen
|
|
Fixed-price
|
|
EPC-CS
services for two LNG liquefaction trains; joint venture with JGC and
Technip.
|
|
|
|
|
|
|
|
|
|
|
|
Skikda
LNG
|
|
Sonatrach
|
|
Algeria
|
|
Fixed-price
and cost-reimbursable
|
|
EPC-CS
services for one LNG liquefaction train.
|
|
|
|
|
|
|
|
|
|
|
|
Escravos
GTL
|
|
Chevron
Nigeria Ltd & Nigeria National Petroleum Corp.
|
|
Nigeria
|
|
Cost-reimbursable
|
|
EPC-CS
services for a GTL plant producing diesel, naphtha and liquefied petroleum
gas; joint venture with Snamprogetti.
|
|
|
|
|
|
|
|
|
|
|
|
Pearl
GTL
|
|
Qatar
Shell GTL Ltd.
|
|
Qatar
|
|
Cost-reimbursable
|
|
Front-end
engineering design (“FEED”) work and project management for the overall
complex and EPCM for the GTL synthesis and utilities portions of the
complex; joint venture with JGC.
|
|
|
|
|
|
|
|
|
|
|
|
Gorgon
LNG
|
|
Chevron
Australia Pty Ltd
|
|
Australia
|
|
Cost-reimbursable
|
|
Front-end
engineering design (“FEED”) work and project management for a Liquefied
Natural Gas (LNG) facility (Three Trains) on Barrow Island; joint venture
with JGC, Clough and Hatch.
|
|
KEP2010
|
|
Statoil
Hydro
|
|
Norway
|
|
Cost-reimbursable
|
|
Engineering
and support services for the overall construction of an upgrade to a gas
plant.
|
Upstream-Oil &
Gas
|
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
|
Azeri-Chirag-
Gunashli
|
|
AIOC
|
|
Azerbaijan
|
|
Cost-reimbursable
|
|
Engineering
and procurement services for six offshore platforms, subsea facilities,
600 kilometers of offshore pipeline and onshore terminal
upgrades.
|
|
|
|
|
|
|
|
|
|
|
|
Kashagan
|
|
AGIP
|
|
Kazakhstan
|
|
Cost-reimbursable
|
|
Project
management services for the development of multiple facilities in the
Caspian Sea.
|
|
|
|
|
|
|
|
|
|
|
|
EOS
JV North Rankin 2 (NR2)
|
|
Woodside
Energy Limited
|
|
Australia
|
|
Fixed-price
|
|
Detailed
engineering and procurement management services to maintain gas supply to
its onshore LNG facility, principally by providing compression facilities
for the low pressure Perseus
reservoir.
|
Services
|
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
|
Georgia
Power
|
|
Georgia
Power
|
|
Georgia
|
|
Cost-reimbursable
and fixed price
|
|
Provision
of engineering project management, procurement, and direct hire
construction services for environmental related scope for coal-fired power
generation plant and environmental remediation.
|
|
|
|
|
|
|
|
|
|
|
|
Shell
Scotford
|
|
Shell
Canada
|
|
Canada
|
|
Cost-reimbursable
|
|
Provision
of direct hire construction services for oil sands upgrader
project.
|
|
|
|
|
|
|
|
|
|
|
|
LCRA
|
|
Lower
Colorado River Authority
|
|
Texas
|
|
Cost-
reimbursable
|
|
Provision
of project management, procurement, and direct hire construction services
for environmental related scope for coal-fired power generation
plant.
|
|
Crowfoot
Project
|
ADA,
Red River Environmental
|
Louisiana
|
Cost-reimbursable
and fixed price
|
Provision
of full scope EPC services for an activated carbon
facility.
|
||||
|
|
|
|
|
|
|
|
|
|
|
Hunt
Refining
|
|
Hunt
Refining
|
|
Alabama
|
|
Cost-reimbursable
with fixed fee
|
|
Provision
of engineering procurement, direct hire construction and program
management services for refinery expansion.
|
|
|
|
|
|
|
|
|
|
|
|
Borger
Refinery
|
|
ConocoPhillips
|
|
Texas
|
|
Cost-
reimbursable
|
|
Provision
of direct hire construction services for a Benzene Recovery
unit
|
|
North
County Waste to Energy
|
Solid
Waste Authority of Palm Beach
|
Florida
|
Cost-reimbursable
and fixed price
|
Provision
of full scope EPC services for repowering of waste to energy recovery
facility
|
||||
|
EFACEC
Transformer
|
EFACEC
|
Georgia
|
Guaranteed
Max-Price
|
Provision
of construction services for industrial building to manufacture
transformers
|
||||
|
Gold
Rush
|
Proctor
and Gamble
|
Utah
|
Cost-reimbursable
|
Provision
of engineering, procurement, construction management and direct hire
construction services for consumer products facility
|
||||
|
Richmond
County Plant
|
Progress
Energy
|
North
Carolina
|
Fixed-Price
|
Provision
of direct hire construction services for natural gas fired combined cycle
power plant
|
||||
|
Mt
Pleasant Hospital
|
Roper
St. Francis Healthcare
|
South
Carolina
|
Guaranteed
Max-Price
|
Provision
of construction services for a new build hospital and admin
building
|
Downstream
|
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
|
Ethylene/Olefins
Facility
|
|
Saudi
Kayan Petrochemical Company
|
|
Saudi
Arabia
|
|
Cost-reimbursable
|
|
Basic
process design and EPCM services for a new ethylene facility using SCORE™
technology
|
|
|
|
|
|
|
|
|
|
|
|
Ras
Tanura Integrated Project
|
|
Dow
and Saudi Aramco
|
|
Saudi
Arabia
|
|
Cost-reimbursable
|
|
FEED
and PM/CM of an integrated refinery and Petrochemical
complex.
|
|
|
|
|
|
|
|
|
|
|
|
Yanbu
Export Refinery Project
|
|
Aramco
Services Co. and ConocoPhillips Yanbu Ltd.
|
|
Saudi
Arabia
|
|
Cost-reimbursable
|
|
Program
management services including FEED for a new 400,000 barrels per day green
field export refinery.
|
|
|
|
|
|
|
|
|
|
|
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Ammonia
Plant
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Egypt
Basic Industries Corporation
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Egypt
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Fixed-price
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EPC-CS
services for an ammonia plant based on KBR Advanced Ammonia Process
technology.
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Sonaref
Refinery
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Sonangol
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Angola
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Cost-reimbursable
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FEED
and EPCM site development of a new 200,000 barrels per day green field
refinery.
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Technology
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Project
Name
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Customer
Name
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Location
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Contract
Type
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Description
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Moron
Ammonia Plant
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Ferrostaal/Pequiven
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Venezuela
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Fixed-price
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Technology
license and engineering services.
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Jose
Ammonia Facility
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Pequiven
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Venezuela
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Fixed-price
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Technology
license and basic engineering services.
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Hazira
Ammonia Plant Revamp
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KRIBHCO
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India
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Fixed-price
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Technology
license and basic engineering services.
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Lobito
Refinery Hydrocracker
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Sonangol
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Angola
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Fixed-price
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Technology
license and basic engineering services.
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Dumai
Revamp
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Pertamina
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Indonesia
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Fixed-price
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Technology
license and basic engineering
services.
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Ventures
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Project
Name
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Customer
Name
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Location
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Contract
Type
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Description
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Egypt
Basic Industries (EBIC)-Ammonia Project
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Transammonia
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Egypt
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Market
rates
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Design,
build, own, finance and operate an ammonia plant.
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Aspire
Defence-Allenby & Connaught Defence Accommodation
Project
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U.K.
Ministry of Defence
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U.K.
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Fixed-price
and cost-reimbursable
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Design,
build and finance the upgrade and service of army
facilities.
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See Note
7 to the consolidated financial statements for financial information about our
reportable business segments.
Our
Business Strategy
Our
business strategy is to create shareholder value by providing our customers
differentiated capital project and services offerings across the entire
engineering, construction and services project lifecycle. We will
execute our business strategy on a global scale through best in class risk
awareness, delivering consistent, predictable financial results in all markets
where we operate. Our core skills are conceptual design, FEED (front-end
engineering design), engineering, project management, procurement, construction,
construction management, operations and maintenance. Our primary
activities are scalable, which will enable us to grow the company organically.
We will complement organic growth by pursuing targeted merger and acquisition
opportunities with a focus on expanding our product and services capabilities
and market coverage to accelerate implementation of individual Business Unit
strategies. Key features of our business unit strategies include:
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The Government and
Infrastructure business unit will broaden our logistical design,
infrastructure and other service offerings to existing customers and
cross-sell to adjacent markets.
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The Upstream business unit
will build on our world-class strength and experience in gas
monetization and seek to expand our footprint in offshore oil and gas
services.
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The Services business
unit will expand existing construction and industrial services
operations while pursuing new offerings that capitalize on our brand
reputation and legacy core
competencies.
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The Downstream business
unit will grow by leveraging our leading technologies and execution
excellence to provide life-cycle value to
customers.
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The Technology business
unit will expand our range of differentiated process technologies
and increase our proprietary equipment and catalyst
offerings.
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The Ventures business unit
will differentiate the offerings of our business units by investing
capital and arranging project
finance.
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Competition
and Scope of Global Operations
We
operate in highly competitive markets throughout the world. The principal
methods of competition with respect to sales of our capital project and service
offerings include:
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customer
relationships;
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technical
excellence or differentiation;
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price;
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service
delivery, including the ability to deliver personnel, processes, systems
and technology on an “as needed, where needed, when needed” basis with the
required local content and
presence;
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service
quality;
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health,
safety, and environmental standards and
practices;
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financial
strength;
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breadth
of technology and technical
sophistication;
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risk
management awareness and processes;
and
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warranty.
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We
conduct business in over 45 countries. Based on the location of
services provided, our operations in countries other than the United States
accounted for 79% of our consolidated revenue during 2009, 85% of our
consolidated revenue during 2008 and 89% of our consolidated revenue during
2007. Revenue from our operations in Iraq, primarily related to our
work for the U.S. government, was 35% of our consolidated revenue in 2009, 43%
of our consolidated revenue in 2008 and 50% of our consolidated revenue in 2007.
See Note 7 to our consolidated financial statements for selected geographic
information.
We market
substantially all of our capital project and service offerings through our
servicing and sales organizations. We serve highly competitive industries and we
have many substantial competitors in the markets that we serve. Some
of our competitors have greater financial and other resources and better access
to capital than we do, which may enable them to compete more effectively for
large-scale project awards. The companies competing in the markets
that we serve include but are not limited to AMEC, Bechtel Corporation, CH2M
Hill Companies Ltd., Chicago Bridge and Iron Co., N.V., Chiyoda, DynCorp, Fluor
Corporation, Foster Wheeler Ltd., Jacobs Engineering Group, Inc., JGC Corp, John
Wood Group PLC, McDermott International, Petrofac PLC, Saipem S.PA., Shaw Group,
Inc., Technip, URS Corporation, and Worley Parsons Ltd. Since
the markets for our services are vast and cross numerous geographic lines, we
cannot make a meaningful estimate of the total number of our
competitors.
Our
operations in some countries may be adversely affected by unsettled political
conditions, acts of terrorism, civil unrest, force majeure, war or other armed
conflict, expropriation or other governmental actions, inflation, exchange
controls and currency fluctuations. Please read “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Financial Instruments
Market Risk” and Note 15 to our consolidated financial statements for
information regarding our exposures to foreign currency fluctuations, risk
concentration, and financial instruments used to manage our risks.
Joint
Ventures and Alliances
We enter
into joint ventures and alliances with other industry participants in order to
reduce and diversify risk, increase the number of opportunities that can be
pursued, capitalize on the strengths of each party, expand or create the
relationships of each party with different potential customers, and allow for
greater flexibility in choosing the preferred location for our services based on
the greatest cost and geographical efficiency. Several of our significant joint
ventures and alliances are described below. All joint venture
ownership percentages presented are as of December 31, 2009.
In 2002,
we entered into a cooperative agreement with ExxonMobil Research and Engineering
Company for licensing fluid catalytic cracking technology that was an extension
of a previous agreement with Mobil Oil Corporation. Under this
alliance, we offer to the industry certain fluid catalytic cracking technology
that is available from both parties. We lead the marketing effort
under this collaboration, and we co-develop certain new fluid catalytic cracking
technology.
M.W.
Kellogg Limited (“MWKL”) is a London-based joint venture that provides full
EPC-CS contractor services for LNG, GTL and onshore oil and gas projects. MWKL
is owned 55% by us and 45% by JGC. MWKL supports both of its parent companies,
on a stand-alone basis or through our gas alliance with JGC, and also provides
services to other third party customers. We consolidate MWKL for financial
accounting purposes.
Kellogg
Joint Venture (“KJV”) is a joint venture consisting of JGC, Hatch Associates,
Clough Projects and KBR for the purpose of design, procurement, fabrication,
construction, commissioning and testing of the Gorgon Downstream LNG Project
located on Barrow Island off the northwest coast of Western
Australia. We hold a 30% interest in the joint venture which is
consolidated for financial accounting purposes because we are the primary
beneficiary.
Aspire
Defence—Allenby & Connaught is a joint venture between us, Carillion Plc.
and two financial investors formed to contract with the U.K. Ministry of Defence
to upgrade and provide a range of services to the British Army’s garrisons at
Aldershot and around the Salisbury Plain in the United Kingdom. We own a 45%
interest in Aspire Defence. In addition, we own a 50% interest in each of the
two joint ventures that provide the construction and related support services to
Aspire Defence. We account for our investments in these entities using the
equity method of accounting.
MMM is a
joint venture formed under a Partners Agreement with Grupo R affiliated
entities. The principal Grupo R entity is Corporative Grupo R, S.A. de C.V. and
Discoverer ASA, Ltd a Cayman Islands company. The partners agreement covers five
joint venture entities related to the Mexico contract with PEMEX. The MMM joint
venture was set up under Mexican maritime law in order to hold navigation
permits to operate in Mexican waters. The scope of the business is to render
services of maintenance, repair and restoration of offshore oil and gas
platforms and provisions of quartering in the territorial waters of Mexico. We
own a 50% interest in MMM and in each of the four other joint ventures. We
account for our investment in these entities using the equity method of
accounting.
Backlog
Backlog
represents the dollar amount of revenue we expect to realize in the future as a
result of performing work on contracts awarded and in progress. Our
backlog was $14.1 billion at both December 31, 2009 and 2008,
respectively. We estimate that as of December 31, 2009, 55% of our
backlog will be complete within one year. Our G&I business unit’s
total backlog attributable to firm orders was $2.7 billion at December 31, 2009
and $3.3 billion as of December 31, 2008. For additional information
regarding backlog see our discussion within “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Contracts
Our
contracts can be broadly categorized as either cost-reimbursable or fixed-price,
the latter sometimes being referred to as lump-sum. Some contracts can involve
both fixed-price and cost-reimbursable elements.
Fixed-price
contracts are for a fixed sum to cover all costs and any profit element for a
defined scope of work. Fixed-price contracts entail more risk to us because they
require us to predetermine both the quantities of work to be performed and the
costs associated with executing the work. Although fixed-price contracts involve
greater risk than cost-reimbursable contracts, they also are potentially more
profitable since the owner/customer pays a premium to transfer more project risk
to us.
Cost-reimbursable
contracts include contracts where the price is variable based upon our actual
costs incurred for time and materials, or for variable quantities of work priced
at defined unit rates, including reimbursable labor hour contracts. Profit on
cost-reimbursable contracts may be a fixed amount, a mark-up applied to costs
incurred, or a combination of the two. Cost reimbursable contracts are generally
less risky than fixed-price contracts because the owner/customer retains many of
the project risks.
Our
G&I business unit provides substantial work under cost-reimbursable
contracts with the Department of Defense (“DoD”), the Ministry of
Defence (“MoD”) and other governmental agencies which are generally subject to
applicable statutes and regulations. If our customer or a government
auditor finds that we improperly charged any costs to a contract, these costs
are not reimbursable or, if already reimbursed, the costs must be refunded to
the customer. 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. Furthermore,
the government has the contractual right to terminate or reduce the amount of
work under our contracts at any time. See “Risk Factors – Our U.S. government contracts work
is regularly reviewed and audited by our customer, government auditors and
others, and these reviews can lead to withholding or delay of payments to us,
non-receipt of award fees, legal actions, fines, penalties and liabilities and
other remedies against us.”
Significant
Customers
We
provide services to a diverse customer base, including international and
national oil and gas companies, independent refiners, petrochemical producers,
fertilizer producers and domestic and foreign governments. Revenue
from the United States government, which was derived almost entirely from our
G&I business unit, totaled $5.2 billion, or 43% of consolidated revenue, in
2009, $6.2 billion, or 53% of consolidated revenue, in 2008 and $5.4 billion, or
62% of consolidated revenue in 2007. Revenue from the Chevron
Corporation, which was derived almost entirely from our Upstream business unit,
totaled $1.4 billion, or 11% of consolidated revenue, in 2009 and was less than
10% of our consolidated revenues in 2008 and 2007. No other
customers represented 10% or more of consolidated revenues in any of the periods
presented.
Raw
Materials
Equipment
and materials essential to our business are available from worldwide sources.
The principal equipment and materials we use in our business are subject to
availability and pricing fluctuations due to customer demand, producer capacity,
market conditions and material shortage. We monitor the availability
and pricing of equipment and materials on a regular basis. Our
procurement department actively leverages our size and buying power to ensure
that we have access to key equipment and materials at the best possible prices
and delivery schedule. While we do not currently foresee any
lack of availability of equipment and materials in the near term, the
availability of these items may vary significantly from year to year and any
prolonged unavailability or significant price increases for equipment and
materials necessary to our projects and services could have a material adverse
effect on our business. Please read, “Risk Factors—Difficulties in
engaging third party subcontractors, equipment manufacturers or materials
suppliers or failures by third party subcontractors, equipment manufacturers or
materials suppliers to perform could result in project delays and cause us to
incur additional costs.”
Intellectual
Property
We have
developed or otherwise have the right to license leading technologies, including
technologies held under license from third parties, used for the production of a
variety of petrochemicals and chemicals and in the areas of olefins, refining,
fertilizers and semi-submersible technology. We also license a variety of
technologies for the transformation of raw materials into commodity chemicals
such as phenol and aniline used in the production of consumer end-products. We
are also a licensor of ammonia process technologies used in the conversion of
Syngas to ammonia. We believe our technology portfolio and experience in the
commercial application of these technologies and related know-how differentiates
us from other contractors, enhances our margins and encourages customers to
utilize our broad range of engineering, procurement, construction and
construction services (“EPC-CS”) services.
Our
rights to make use of technologies licensed to us are governed by written
agreements of varying durations, including some with fixed terms that are
subject to renewal based on mutual agreement. Generally, each
agreement may be further extended and we have historically been able to renew
existing agreements before they expire. We expect these and other similar
agreements to be extended so long as it is mutually advantageous to both parties
at the time of renewal. For technologies we own, we protect our rights through
patents and confidentiality agreements to protect our know-how and trade
secrets.
We own
and operate a technology center in Houston, Texas, where we collaborate with our
customers to develop new technologies and improve existing ones. We license
these technologies to our customers for the design, engineering and construction
of oil and gas and petrochemical facilities. We are also working to identify new
technologically driven opportunities in emerging markets. Our expenditures for
research and development activities were immaterial in each of the past three
fiscal years.
Seasonality
On an
overall basis, our operations are not generally affected by seasonality. Weather
and natural phenomena can temporarily affect the performance of our services,
but the widespread geographic scope of our operations mitigates those
effects.
Employees
As of
December 31, 2009, we had over 51,000 employees in our continuing operations, of
which approximately 7.2% were subject to collective bargaining agreements. Based
upon the geographic diversification of our employees, we believe any risk of
loss from employee strikes or other collective actions would not be material to
the conduct of our operations taken as a whole. We believe that our employee
relations are good.
Health
and Safety
We are
subject to numerous health and safety laws and regulations. In the United
States, these laws and regulations include: the Federal Occupation Safety and
Health Act and comparable state legislation, the Mine Safety and Health
Administration laws, and safety requirements of the Departments of State,
Defense, Energy and Transportation. We are also subject to similar requirements
in other countries in which we have extensive operations, including the United
Kingdom where we are subject to the various regulations enacted by the Health
and Safety Act of 1974.
These
regulations are frequently changing, and it is impossible to predict the effect
of such laws and regulations on us in the future. We actively seek to maintain a
safe, healthy and environmentally friendly work place for all of our employees
and those who work with us. However, we provide some of our services
in high-risk locations and, as a result, we may incur substantial costs to
maintain the safety of our personnel.
Environmental
Regulation
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:
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the
Comprehensive Environmental Response, Compensation and Liability
Act;
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the
Resources Conservation and Recovery
Act;
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the
Clean Air Act;
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the
Federal Water Pollution Control Act;
and
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the
Toxic Substances Control Act.
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In
addition to federal and state laws and regulations, other countries where we do
business often have numerous environmental regulatory requirements by which we
must abide in the normal course of our operations. The portions of our business
to which these requirements apply primarily relates to our Upstream, Downstream
and Services business units where we perform construction and industrial
maintenance services or operate and maintain facilities. 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. These locations were
primarily utilized for manufacturing or fabrication work and are no longer in
operation. The use of these facilities created various environmental issues
including deposits of metals, volatile and semi-volatile compounds, and
hydrocarbons impacting surface and subsurface soils and groundwater. The range
of remediation costs could change depending on our ongoing site analysis and the
timing and techniques used to implement remediation activities. Based on the
information presently available to us, we believe our accruals are adequate and
any future assessment and remediation costs associated with all environmental
matters will not have a material adverse effect on our consolidated financial
position or our results of operations. See Note 11 to our
consolidated financial statements for more information on environmental
matters.
Existing
or pending climate change legislation, regulations, international treaties or
accords are not expected to have a material direct effect on our business or the
markets that we serve, nor on our results of operations or financial position.
However, climate change legislation could have a direct effect on our customers
or suppliers which could have an indirect effect on our business. For
example, our commodity-based markets depend on the level of activity of oil and
gas companies, and existing or future laws, regulations, treaties or
international agreements related to climate change, including incentives to
conserve energy or use alternative energy sources, could have an indirect impact
on our business if such laws, regulations, treaties, or international agreements
reduce the worldwide demand for oil and natural
gas. We will continue to monitor emerging developments in this
area.
Website
Access
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act of 1934 are made available free of charge on
our internet website at www.kbr.com as soon
as reasonably practicable after we have electronically filed the material with,
or furnished it to, the SEC. The public may read and copy any materials we have
filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
internet site that contains our reports, proxy and information statements, and
our other SEC filings. The address of that site is www.sec.gov. We have
posted on our website our Code of Business Conduct, which applies to all of our
employees and Directors and serves as a code of ethics for our principal
executive officer, principal financial officer, principal accounting officer,
and other persons performing similar functions. Any amendments to our Code of
Business Conduct or any waivers from provisions of our Code of Business Conduct
granted to the specified officers above are disclosed on our website within four
business days after the date of any amendment or waiver pertaining to these
officers.
Item 1A. Risk Factors
Demand
for our services provided under government contracts are directly affected by
spending and capital expenditures by our customers and our ability to contract
with our customers.
We derive
a significant portion of our revenue from contracts with agencies and
departments of the U.S. government which is directly affected by changes in
government spending and availability of adequate funding. For
example, we are currently the sole service provider under our LogCAP III
contract in the Middle East and elsewhere and have been awarded a portion of the
LogCAP IV contract. However, the current level of government services
being provided in the Middle East will not likely continue for an extended
period of time and we expect our overall volume of work to decline as our
customer scales back its requirements for the types and the amounts of service
we provide. Factors that could impact current and future U.S.
government spending include:
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policy and/or spending changes
implemented by the current administration, DoD or other government
agencies;
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changes, delays or cancellations
of U.S. government programs or
requirements;
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adoption of new laws or
regulations that affect companies providing services to the U.S.
government;
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U.S.
government shutdowns or other delays in the government appropriations
process;
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curtailment of the U.S.
governments’ outsourcing of services to private
contractors;
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general economic conditions,
including a slowdown in the economy or unstable economic conditions in the
U.S. or in the countries in which we
operate.
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The loss
of or a significant decrease in the magnitude of work we perform for the U.S.
government in the Middle East or other decreases in governmental spending and
outsourcing of the type that we provide could have a material adverse effect on
our business, results of operations and cash flow.
The
U.S. government awards its contracts through a rigorous competitive process and
our efforts to obtain future contract awards from the U.S. government may be
unsuccessful.
The U.S.
government conducts a rigorous competitive process for awarding most contracts.
In the services arena, the U.S. government uses multiple contracting
approaches. It uses omnibus contract vehicles, such as LogCAP, for
work that is done on a contingency or as-needed basis. In more
predictable “sustainment” environments, contracts may include both fixed-price
and cost-reimbursable elements. The U.S. government has also recently
favored multiple award task order contracts, in which several contractors are
selected as eligible bidders for future work. Such processes require successful
contractors to continually anticipate customer requirements and develop
rapid-response bid and proposal teams as well as have supplier relationships and
delivery systems in place to react to emerging needs. We will face rigorous
competition and pricing pressures for any additional contract awards from the
U.S. government, and we may be required to qualify or continue to qualify under
the various multiple award task order contract criteria. The DoD has awarded us
a portion of the new LogCAP IV contract, which will replace the current LogCAP
III contract under which we are the sole provider, which is a multiple award
task order contract. We may not be awarded any task orders under the
LogCAP IV contract, which may have a material adverse effect on future results
of operations. It may be more difficult for us to win future awards from the
U.S. government and we may have other contractors sharing in any U.S. government
awards that we win. In addition, negative publicity regarding findings stemming
from DCAA audits and Congressional investigations may adversely affect our
ability to obtain future awards. See “Management’s Discussion and
Analysis of Financial Condition and Results of Analysis – U.S. Government
Matters.”
Our
U.S. government contract work is regularly reviewed and audited by our customer,
U.S. government auditors and others, and these reviews can lead to withholding
or delay of payments to us, non-receipt of award fees, legal actions, fines,
penalties and liabilities and other remedies against us.
U.S.
government contracts are subject to specific regulations such as the Federal
Acquisition Regulation (“FAR”), the Truth in Negotiations Act, the Cost
Accounting Standards (“CAS”), the Service Contract Act and Department of Defense
security regulations. Failure to comply with any of these
regulations, requirements or statutes may result in contract termination, and we
could be temporarily suspended or even debarred from U.S. government contracting
or subcontracting. Our U.S. government contracts are subject to
audits, cost reviews and investigations by U.S. government contracting oversight
agencies such as the Defense Contract Audit Agency
(“DCAA”). The DCAA reviews the adequacy of, and our
compliance with, our internal control systems and policies, including our labor,
billing, accounting, purchasing, property, estimating, compensation and
management information systems. The DCAA has the authority to review
how we have accounted for cost under the FAR and CAS, and if they determine that
we have not complied with the terms of our contract and applicable statutes and
regulations, payments to us may be disallowed which could result in adjustments
to previously reported revenues and refunding of previously collected cash
proceeds.
Given the
demands of working in the Middle East and elsewhere for the U.S. 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 our government customers may seek 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.
Demand
for our services depends on demand and capital spending by customers in their
target markets, many of which are cyclical in nature.
Demand
for many of our services, especially in our commodity-based markets, depends on
capital spending by oil and natural gas companies, including national and
international oil companies, and industrial and power companies, which is
directly affected by trends in oil, natural gas and commodities prices. Capital
expenditures for refining and distribution facilities by large oil and gas
companies have a significant impact on the activity levels of our businesses.
Demand for LNG facilities for which we provide construction services could
decrease in the event of a sustained reduction in crude oil or natural gas
prices. Perceptions of longer-term lower oil and natural gas prices by oil and
gas companies or longer-term higher material and contractor prices impacting
facility costs can similarly reduce or defer major expenditures given the
long-term nature of many large-scale projects. Prices for oil, natural gas and
commodities are subject to large fluctuations in response to relatively minor
changes in supply and demand, market uncertainty, and a variety of other factors
that are beyond our control. Factors affecting the prices of oil, natural gas
and other commodities include:
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worldwide political, military,
and economic conditions;
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the cost of producing and
delivering oil and natural
gas;
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the level of demand for oil,
natural gas, industrial services and power
generation;
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governmental regulations or
policies, including the policies of governments regarding the use of
energy and the exploration for and production and development of their oil
and natural gas reserves;
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a reduction in energy demand as a
result of energy taxation or a change in consumer spending
patterns;
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global economic growth or
decline;
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the level of oil production by
non-OPEC countries and the available excess production capacity within
OPEC;
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global weather conditions and
natural disasters;
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oil refining
capacity;
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shifts in end-customer
preferences toward fuel efficiency and the use of natural
gas;
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potential acceleration of the
development and expanded use of alternative
fuels;
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environmental regulation,
including limitations on fossil fuel consumption based on concerns about
its relationship to climate change;
and
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reduction in demand for the
commodity-based markets we
serve.
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Historically,
the markets for oil and natural gas have been volatile and are likely to
continue to be volatile in the future.
Additionally,
demand for our services may also be materially and adversely affected by the
consolidation of our customers, which:
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could cause customers to reduce
their capital spending, which in turn reduces the demand for our services;
and
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could result in customer
personnel changes, which in turn affects the timing of contract
negotiations and settlements of claims and claim negotiations with
engineering and construction customers on cost variances and change orders
on major projects.
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The
nature of our contracts, particularly our fixed-price contracts, subject us to
risks associated with cost over-runs, operating cost inflation and potential
claims for liquidated damages.
Our
long-term contracts to provide services are either on a cost-reimbursable basis
or on a fixed-price basis. At December 31, 2009, 18% of our backlog for
continuing operations was attributable to fixed-price contracts and 82% was
attributable to cost-reimbursable contracts. In connection with
projects covered by fixed-price contracts, we bear a significant portion of the
risk of cost over-runs, operating cost inflation, labor availability and
productivity, and supplier and subcontractor pricing and
performance. Our failure to accurately estimate the resources and
time required for a fixed-price project or our failure to complete our
contractual obligations within the time frame and costs committed could have a
material adverse effect on our business, results of operations and financial
condition. Risks under our contracts include:
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Our engineering, procurement and
construction projects may encounter difficulties in the design or
engineering phases related to the procurement of supplies, schedule
changes, equipment performance failures, and other factors that may result
in additional costs to us, reductions in revenue, claims or
disputes.
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We may not be able to obtain
compensation for additional work or expenses, particularly on our
fixed-price contracts, incurred as a result of customer change orders or
our customers providing deficient design or engineering information,
equipment or materials.
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We may be required to pay
liquidated damages upon our failure to meet schedule or performance
requirements of our
contracts.
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Difficulties in engaging third
party subcontractors, equipment manufacturers or materials suppliers or
failures by third party subcontractors, equipment manufacturers or
materials suppliers to perform could result in project delays and cause us
to incur additional costs.
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Our projects expose us to
potential professional liability, product liability, warranty, performance
and other claims that may exceed our available insurance
coverage. Although we have historically been able to cover our
insurance needs, there can be no assurances that we can secure all
necessary or appropriate insurance in the
future.
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The
nature of our engineering and construction business exposes us to potential
liability claims and contract disputes which may reduce our
profits.
We engage
in engineering and construction activities for large facilities where design,
construction or systems failures can result in substantial injury or damage to
third parties. In addition, the nature of our business results in clients,
subcontractors and vendors occasionally presenting claims against us for
recovery of cost they incurred in excess of what they expected to incur, or for
which they believe they are not contractually liable. We have been and may in
the future be named as a defendant in legal proceedings where parties may make a
claim for damages or other remedies with respect to our projects or other
matters. These claims generally arise in the normal course of our business. When
it is determined that we have liability, we may not be covered by insurance or,
if covered, the dollar amount of these liabilities may exceed our policy limits.
Our professional liability coverage is on a "claims-made" basis covering only
claims actually made during the policy period currently in effect. In addition,
even where insurance is maintained for such exposures, the policies have
deductibles resulting in our assuming exposure for a layer of coverage with
respect to any such claims. Any liability not covered by our insurance, in
excess of our insurance limits or, if covered by insurance but subject to a high
deductible, could result in a significant loss for us, which claims may reduce
our profits and cash available for operations.
We
occasionally bring claims against project owners for additional cost exceeding
the contract price or for amounts not included in the original contract price.
These types of claims occur due to matters such as owner-caused delays or
changes from the initial project scope, which result in additional cost, both
direct and indirect. Often, these claims can be the subject of lengthy
arbitration or litigation proceedings, and it is often difficult to accurately
predict when these claims will be fully resolved. When these types of events
occur and unresolved claims are pending, we may invest significant working
capital in projects to cover cost overruns pending the resolution of the
relevant claims. A failure to promptly recover on these types of claims could
have a material adverse impact on our liquidity and financial
results.
Our
results of operations depend on the award of new contracts and the timing of the
performance of these contracts.
A
substantial portion of our revenue is directly or indirectly derived from new
contract awards. Delays in the timing of the awards or potential cancellations
of such prospects as a result of economic conditions, material and equipment
pricing and availability, or other factors could impact our long term projected
results. It is particularly difficult to predict whether or when we will receive
large-scale international and domestic projects as these contracts frequently
involve a lengthy and complex bidding and selection process which is affected by
a number of factors, such as market conditions, governmental approvals and
environmental matters. Because a significant portion of our revenue is generated
from such projects, our results of operations and cash flow can fluctuate
significantly from quarter to quarter depending on the timing of our contract
awards and the commencement or progress of work under awarded contracts. In
addition, many of these contracts are subject to financing contingencies and, as
a result, we are subject to the risk that the customer will not be able to
secure the necessary financing for the project.
We
may be unable to obtain new contract awards if we are unable to provide our
customers with bonds, letters of credit or other credit
enhancements.
Customers
may require us to provide credit enhancements, including surety bonds, letters
of credit or bank guarantees. We are often required to provide
performance guarantees to customers to indemnify the customer should we fail to
perform our obligations under the contract. Failure to provide a bond
on terms required by a customer may result in an inability to bid on or win a
contract award. Historically, we have had adequate bonding capacity
but such bonding is generally at the provider’s sole discretion. Due
to events that affect the insurance and bonding markets generally, bonding may
be difficult to obtain or may only be available at significant
cost. Moreover, many projects are often very large and complex, which
often necessitates the use of a joint venture, often with a competitor, to bid
on and perform the contract. However, entering into joint ventures or
partnerships exposes us to the credit and performance risk of third parties,
many of whom are not as financially strong as us. If our joint
ventures or partners fail to perform, we could suffer negative
results. In addition, future projects may require us to obtain
letters of credit that extend beyond the term of our current credit
facility. Any inability to obtain adequate bonding and/or provide
letters of credit or other customary credit enhancements and, as a result, to
bid on or win new contracts could have a material adverse effect on our business
prospects and future revenue.
Prior to
our initial public offering, Halliburton provided guarantees of most of our
surety bonds and letters of credit as well as most other payment and performance
guarantees under our contracts. The credit support arrangements in
existence at the completion of our initial public offering will remain in effect
and primarily relate our Aspire, Escravos and other
projects. Halliburton will not enter into any new credit
support arrangements on our behalf, except to the limited extent Halliburton is
obligated to do so under the master separation agreement. We have agreed to
indemnify Halliburton for all losses under our outstanding credit support
instruments and any additional credit support instruments for which Halliburton
may become obligated since our initial public offering, and under the master
separation agreement, we have agreed to use our reasonable best efforts to
attempt to release or replace Halliburton’s liability thereunder for which such
release or replacement is reasonably available.
The uncertainty
of the timing of future contract awards may inhibit our ability to recover our
labor costs.
The
uncertainty of our contract award timing can also present difficulties in
matching workforce size with contract needs. In some cases, we maintain and bear
the cost of a ready workforce that is larger than called for under existing
contracts in anticipation of future workforce needs for expected contract
awards. If an expected contract award is delayed or not received, we may incur
additional costs resulting from reductions in staff or redundancy of facilities,
which could have a material adverse effect on us.
Our
backlog is subject to unexpected adjustments and cancellations.
As of
December 31, 2009, our backlog was approximately $14.1
billion. We cannot guarantee that the revenue projected in our
backlog will be realized or profitable. Project terminations or suspensions and
changes in project scope may occur, from time to time, with respect to contracts
reflected in our backlog and could reduce the dollar amount of our backlog and
the revenue and profits that we actually earn. Many of our contracts
have termination for convenience provisions in them. In addition, projects may
remain in our backlog for an extended period of time. Finally, poor project or
contract performance could also impact our backlog and profits. We
cannot predict the impact the current worldwide economic recession may have on
our backlog which could include a diminished ability to replace backlog once
projects are completed and/or could result in the termination, modification or
suspension of projects currently in our backlog. Such developments
could have a material adverse affect on our financial condition, results of
operations and cash flows.
We
conduct a large portion of our engineering and construction operations through
project-specific joint ventures. The failure of our joint venture
partners to perform their joint venture obligations could impose on us
additional financial and performance obligations that could result in reduced
profits or, in some cases, significant losses.
We
conduct a large portion of our engineering, procurement and construction
operations through project-specific joint ventures, where control may be shared
with unaffiliated third parties. As with any joint venture arrangement,
differences in views among the joint venture participants may result in delayed
decisions or in failures to agree on major issues. We also cannot control the
actions of our joint venture partners, including any nonperformance, default, or
bankruptcy of our joint venture partners, and we typically have joint and
several liability with our joint venture partners under these joint venture
arrangements. If our partners do not meet their obligations, the
joint venture may be unable to adequately perform and deliver its contracted
services requiring us to make additional investments or provide additional
services. These factors could have a material adverse affect the
business operations of the joint venture and, in turn, our business operations
as well as our reputation within our industry and our client base.
Operating
through joint ventures in which we are minority holders results in us having
limited control over many decisions made with respect to projects and internal
controls relating to projects. These joint ventures may not be subject to the
same requirements regarding internal controls and internal control reporting
that we follow. As a result, internal control issues may arise, which could have
a material adverse effect on our financial condition and results of operation.
When entering into joint ventures, in order to establish or preserve
relationships with our joint venture partners, we may agree to risks and
contributions of resources that are proportionately greater than the returns we
could receive, which could reduce our income and returns on these investments
compared to what we would have received if the risks and resources we
contributed were always proportionate to our returns.
We
make equity investments in privately financed projects in which we could sustain
significant losses.
We
participate in privately financed projects that enable our government and other
customers to finance large-scale projects, such as railroads, major military
equipment, capital project and service purchases. These projects typically
include the facilitation of non-recourse financing, the design and construction
of facilities, and the provision of operation and maintenance services for an
agreed to period after the facilities have been completed.
We may
incur contractually reimbursable costs and typically make an equity investment
prior to an entity achieving operational status or completing its full project
financing. If a project is unable to obtain financing, we could incur losses
including our contractual receivables and our equity investment. After
completion of these projects, our equity investments can be at risk, depending
on the operation of the project and market factors, which may not be under our
control. As a result, we could sustain a loss on our equity investment in these
projects. Current equity investments in projects of this type include the
Allenby & Connaught project in the U.K. and the Egypt Basic Industries
Corporation ammonia plant in Egypt. Please read Note 16 to our
consolidated financial statements for further discussion of these
projects.
Intense
competition in the engineering and construction industry could reduce our market
share and profits.
We serve
markets that are highly competitive and in which a large number of multinational
companies compete. These highly competitive markets require substantial
resources and capital investment in equipment, technology and skilled personnel
whether the projects are awarded in a sole source or competitive bidding
process. Our projects are frequently awarded through a competitive bidding
process, which is standard in our industry. We are constantly competing for
project awards based on pricing and the breadth and technological sophistication
of our services. Any increase in competition or reduction in our competitive
capabilities could have a significant adverse impact on the margins we generate
from our projects or our ability to retain market share.
If
we are unable to attract and retain a sufficient number of affordable trained
engineers and other skilled workers, our ability to pursue projects may be
adversely affected and our costs may increase.
Our rate
of growth and success of our business depends upon our ability to attract,
develop and retain a sufficient number of affordable trained engineers and other
skilled workers either through direct hire or acquisition of other firms
employing such professionals. The market for these professionals is
competitive. If we are unable to attract and retain a sufficient
number of skilled personnel, our ability to pursue projects may be adversely
affected and the costs of performing our existing and future projects may
increase, which may adversely impact our margins.
We
ship a significant amount of cargo using seagoing vessels which expose us to
certain maritime risks.
We
execute different projects around the world that include remote
locations. Depending on the type of contract, location and the nature
of the work, we may charter vessels under time and bareboat charter parties that
assume certain risks typical of those agreements. Such risks may
include damage to the ship and liability for cargo and liability which
charterers and vessel operators have to third parties “at law”. In
addition, we ship a significant amount of cargo and are subject to hazards of
the shipping and transportation industry.
If
we are unable to enforce our intellectual property rights or if our intellectual
property rights become obsolete, our competitive position could be adversely
impacted.
We
utilize a variety of intellectual property rights in our services. We view our
portfolio of process and design technologies as one of our competitive strengths
and we use it as part of our efforts to differentiate our service offerings. We
may not be able to successfully preserve these intellectual property rights in
the future and these rights could be invalidated, circumvented, or challenged.
In addition, the laws of some foreign countries in which our services may be
sold do not protect intellectual property rights to the same extent as the laws
of the United States. Because we license technologies from third parties, there
is a risk that our relationships with licensors may terminate or expire or may
be interrupted or harmed. In some, but not all cases, we may be able to obtain
the necessary intellectual property rights from alternative sources. If we are
unable to protect and maintain our intellectual property rights, or if there are
any successful intellectual property challenges or infringement proceedings
against us, our ability to differentiate our service offerings could be reduced.
In addition, if our intellectual property rights or work processes become
obsolete, we may not be able to differentiate our service offerings, and some of
our competitors may be able to offer more attractive services to our customers.
As a result, our business and revenue could be materially and adversely
affected.
The
current worldwide economic recession will likely affect a portion of our client
base, subcontractors and suppliers and could materially affect our backlog and
profits.
The
current worldwide economic recession has reduced the availability of liquidity
and credit to fund or support the continuation and expansion of industrial
business operations worldwide. Recent financial market conditions have resulted
in significant write-downs of asset values by financial institutions, and have
caused many financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail. Many lenders and
institutional investors have reduced and, in some cases, ceased to provide
funding to borrowers. Continued disruption of the credit markets could adversely
affect our clients' borrowing capacity, which support the continuation and
expansion of projects worldwide, and could result in contract cancellations or
suspensions, project delays, payment delays or defaults by our clients. In
addition, in response to current market conditions, clients may choose to make
fewer capital expenditures, to otherwise slow their spending on our services or
to seek contract terms more favorable to them. Our government clients may face
budget deficits that prohibit them from funding proposed and existing projects
or that cause them to exercise their right to terminate our contracts with
little or no prior notice. Furthermore, any financial difficulties suffered by
our subcontractors or suppliers could increase our cost or adversely impact
project schedules. These disruptions could materially impact our
backlog and profits.
We
may not be able to raise additional capital or obtain additional financing in
the future for working capital, capital expenditures and/or
acquisitions.
The
financial market condition and overall worldwide economic recession have
significantly impacted and continue to impact the capital and credit markets
which could make it more difficult for us to raise additional capital or obtain
additional financing. Our ability to obtain such additional capital
or financing will depend in part upon prevailing market conditions, as well as
conditions in our business and our operating results; and those factors may
affect our efforts to arrange additional financings on terms that are
satisfactory to us. We cannot be certain that additional funds will
be available if needed to make future investments in certain projects, take
advantage of acquisitions or other future opportunities, or respond to
competitive pressures. If additional funds are not available, or are
not available on terms satisfactory to us, there could be a material adverse
impact on our business and operations.
Our revolving credit facility
imposes restrictions that limit our operating flexibility and may result in
additional expenses, and this credit facility will not be available if financial
covenants are not met or if an event of default
occurs.
Our
Revolving Credit Facility provides up to $1.1 billion of borrowing, including
$830 million in letters of credit fronting commitments at December 31, 2009, and
expires in November 2012. The Revolving Credit Facility contains a number
of covenants restricting, among other things, incurrence of additional
indebtedness and liens, sales of our assets, the amount of investments we can
make, and the amount of dividends we can declare to pay or equity shares that
can be repurchased. We are also subject to certain financial covenants,
including maintenance of ratios with respect to consolidated debt to
consolidated EBITDA and a minimum consolidated net worth. If we fail to meet the
covenants or an event of default occurs, we would not have available the
liquidity that the facility provides.
A breach
of any covenant or our inability to comply with the required financial ratios
could result in a default under our Revolving Credit Facility, and we can
provide no assurance that we will be able to obtain the necessary waivers or
amendments from our lenders to remedy a default. In the event of any default not
cured or waived, the lenders under our Revolving Credit Facility are not
required to lend any additional amounts or issue letters of credit and could
elect to require us to apply all of our available cash to collateralize any
outstanding letters of credit, declare any outstanding borrowings, together with
accrued interest and other fees, to be immediately due and payable or require us
to apply all of our available cash to repay any borrowings then outstanding at
the time of default. If we are unable to collateralize our letters of credit or
repay borrowings with respect to our Revolving Credit Facility when due, our
lenders could proceed against the guarantees of our major domestic subsidiaries.
If any future indebtedness under our Revolving Credit Facility is accelerated,
we can provide no assurance that our assets would be sufficient to repay such
indebtedness in full.
An impairment of
all or part of our goodwill and/or our intangible assets could have a material
adverse impact to our net earnings and net worth.
As of
December 31, 2009, we had $691 million of goodwill and $58 million of
intangible assets recorded on our consolidated balance
sheet. Goodwill represents the excess of cost over the fair market
value of net assets acquired in business combinations. If our market
capitalization drops significantly below the amount of net equity recorded on
our balance sheet, it might indicate a decline in our fair value and would
require us to further evaluate whether our goodwill has been impaired. We also
perform an annual review of our goodwill and intangible assets to determine if
it has become impaired which would require us to write down the impaired portion
of these assets. An impairment of all or a significant part of our
goodwill and/or intangible assets would have a material adverse impact to our
net earnings and net worth.
We
are subject to certain U.S. laws and regulations, which are the subject of
rigorous enforcement by the U.S. government.
To the
extent that we export products, technical data and services outside of the
United States we are subject to laws and regulations governing trade and
exports, including but not limited to, the International Traffic in Arms
Regulations, the Export Administration Regulations and trade sanctions against
embargoed countries, which are administered by the Office of Foreign Asset
Control within the Department of the Treasury. A failure to comply
with these laws and regulations could result in civil and/or criminal sanctions,
including the imposition of fines upon us as well as the denial of export
privileges and debarment from participation in U.S. government
contracts. Additionally, we may be subject to qui tam litigation
brought by private individuals on behalf of the U.S. government under the
Federal False Claims Act, which could include claims for treble
damages. U.S. government contract violations could result in the
imposition of civil and criminal penalties or sanctions, contract termination,
forfeiture of profit, and/or suspension of payment, any of which could make us
lose our status as an eligible U.S. government contractor and cause us to suffer
serious harm to our reputation. Any suspension or termination of our
U.S. government contractor status could have a negative adverse impact to our
business, financial condition or results of operations.
Potential
consequences arising out of our guilty plea to violations of the FCPA could
include suspension or debarment of our ability to contract with the United
States, state or local governments, U.S. government agencies or the MoD, third
party claims, loss of business, adverse financial impact, damage to reputation
and adverse consequences on financing for current or future
projects.
The FCPA
in the U.S. and similar anti-bribery laws in other jurisdictions generally
prohibit companies and their intermediaries from making improper payments to
non-U.S. officials for the purpose of obtaining or retaining business. Our
policies mandate compliance with these anti-bribery laws. We operate in many
parts of the world that have experienced governmental corruption to some degree
and, in certain circumstances, strict compliance with anti-bribery laws may
conflict with local customs and practices. We train our staff concerning FCPA
issues, and we also inform our partners, subcontractors, agents and other third
parties who work for us or on our behalf that they must comply with the
requirements of the FCPA and other anti-corruption laws. We also have procedures
and controls in place to monitor internal and external compliance. We cannot
assure you that our internal controls and procedures always will protect us from
the reckless or criminal acts committed by our employees or third parties
working on our behalf. If we are found to be liable for violations of these laws
(either due to our own acts or our inadvertence, or due to the acts or
inadvertence of others), we could suffer from criminal or civil penalties or
other sanctions which could have a material adverse effect on our
business.
On
February 11, 2009, Kellogg Brown and Root LLC, one of our subsidiaries, 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, a joint
venture in which one of our subsidiaries (a successor to The M.W. Kellogg
Company) had an approximate 25% interest, of a multibillion dollar contract to
construct a natural gas liquefaction complex and related facilities at Bonny
Island in Rivers State, Nigeria. On the same date, the SEC filed a complaint,
and we consented to the filing of a final judgment against us in the
Court. Potential consequences of the guilty plea arising out of the
investigations into FCPA violations or related corruption allegations could
include suspension of our ability to contract with the United States, state or
local governments, U.S. government agencies or the MoD in the United Kingdom. We
and our affiliates could be debarred from future contracts or new orders under
current contracts to provide services to any such parties. In 2009,
we had revenue of $5.2 billion from our government contracts work with agencies
of the United States or state or local governments and revenue of $185 million
from our government contracts work with the MoD. Suspension or debarment from
the government contracts business would have a material adverse effect on our
business, results of operations and cash flow. Please read “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Legal
Proceedings – FCPA Investigations” for more information.
Our
current business strategy includes acquisitions which present certain risks and
uncertainties.
We seek
business merger and acquisition activities as a means of broadening our
offerings and capturing additional market opportunities by our business units.
As a result, we may incur certain additional risks accompanying these
activities. These risks include the following:
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We may not identify or complete
future acquisitions conducive to our current business
strategy;
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Any future acquisition activities
may not be completed successfully as a result of potential strategy
changes, competitor activities, and other unforeseen elements associated
with merger and acquisition
activities;
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Valuation methodologies may not
accurately capture the value
proposition;
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Future completed acquisitions may
not be integrated within our operations with the efficiency and
effectiveness initially expected resulting in a potentially significant
detriment to the associated product service line financial results, and
pose additional risks to our operations as a
whole;
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We may have difficulty managing
the growth from merger and acquisition
activities;
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Key personnel within an acquired
organization may resign from their related positions resulting in a
significant loss to our strategic and operational efficiency associated
with the acquired company;
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The effectiveness of our daily
operations may be reduced by the redirection of employees and other
resources to acquisition
activities;
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We may assume liabilities of an
acquired business (e.g. litigation, tax liabilities, contingent
liabilities, environmental issues), including liabilities that were
unknown at the time the acquisition, that pose future risks to our working
capital needs, cash flows and the profitability of related
operations;
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Business acquisitions often may
include unforeseen substantial transactional costs to complete the
acquisition that exceed the estimated financial and operational
benefits;
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We may experience significant
difficulties in integrating our current system of internal controls into
the acquired operations;
and
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Future acquisitions may require
us to obtain additional equity or debt financing, which may not be
available on attractive terms. Moreover, to the extent an acquisition
transaction results in additional goodwill, it will reduce our tangible
net worth, which might have an adverse effect on our credit
capacity.
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If
we need to sell or issue additional common shares to finance future
acquisitions, our existing shareholder ownership could be diluted.
Part of
our business strategy is to expand into new markets and enhance our position in
existing markets both domestically and internationally through the merging and
acquiring of complementary businesses. To successfully fund and complete such
identified, potential acquisitions, we may issue additional equity securities
that have the potential to dilute our earnings per share and our existing
shareholder ownership.
Provisions
in our charter documents and Delaware law may inhibit a takeover or impact
operational control which could adversely affect the value of our common
stock.
Our
certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in
our management that a stockholder might consider favorable. These provisions
include, among others, a staggered board of directors, prohibiting stockholder
action by written consent, advance notice for raising business or making
nominations at meetings of stockholders and the issuance of preferred stock with
rights that may be senior to those of our common stock without stockholder
approval. Many of these provisions became effective following the exchange
offer. These provisions would apply even if a takeover offer may be considered
beneficial by some of our stockholders. If a change of control or change in
management is delayed or prevented, the market price of our common stock could
decline.
International
and political events may adversely affect our operations.
A
significant portion of our revenue is derived from our foreign operations, which
exposes us to risks inherent in doing business in each of the countries in which
we transact business. The occurrence of any of the risks described below could
have a material adverse effect on our results of operations and financial
condition. With respect to any particular country, these risks may
include:
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expropriation and nationalization
of our assets in that
country;
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political and economic
instability;
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civil unrest, acts of terrorism,
force majeure, war, or other armed
conflict;
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natural disasters, including
those related to earthquakes and
flooding;
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inflation;
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currency fluctuations,
devaluations, and conversion
restrictions;
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confiscatory taxation or other
adverse tax policies;
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governmental activities that
limit or disrupt markets, restrict payments, or limit the movement of
funds;
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governmental activities that may
result in the deprivation of contract rights;
and
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governmental activities that may
result in the inability to obtain or retain licenses required for
operation.
|
Due to
the unsettled political conditions in many oil-producing countries and countries
in which we provide governmental logistical support, our revenue and profits are
subject to the adverse consequences of war, the effects of terrorism, civil
unrest, strikes, currency controls, and governmental actions. Countries where we
operate that have significant amounts of political risk include: Afghanistan,
Algeria, Indonesia, Iraq, Nigeria, Russia, and Yemen. In addition, military
action or continued unrest in the Middle East could impact the supply and
pricing for oil and gas, disrupt our operations in the region and elsewhere, and
increase our costs for security worldwide.
We
may have additional tax liabilities associated with our international
operations.
We are
subject to income taxes in the United States and numerous foreign jurisdictions,
many of which are developing countries. Significant judgment is
required in determining our worldwide provision for income taxes due to lack of
clear and concise tax laws and regulations in certain developing
jurisdictions. It is not unlikely that laws may be changed or clarified
and such changes may adversely affect our tax provisions. Also, in the
ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination may be uncertain. We are regularly under
audit by various tax authorities. Although we believe that our tax estimates are
reasonable, the final outcome of tax audits and related litigation could be
materially different from that which is reflected in our financial
statements.
We
work in international locations where there are high security risks, which could
result in harm to our employees and contractors or substantial
costs.
Some of
our services are performed in high-risk locations, such as Iraq, Afghanistan,
Nigeria and Algeria where the country or location is suffering from political,
social or economic issues, or war or civil unrest. In those locations where we
have employees or operations, we may incur substantial costs to maintain the
safety of our personnel. Despite these precautions, the safety of our personnel
in these locations may continue to be at risk, and we have in the past and may
in the future suffer the loss of employees and contractors.
We
are subject to significant foreign exchange and currency risks that could
adversely affect our operations and our ability to reinvest earnings from
operations, and our ability to limit our foreign exchange risk through hedging
transactions may be limited.
We
generally attempt to denominate our contracts in U.S. Dollars or in the
currencies of our costs. A sizable portion of our consolidated
revenue and consolidated operating expenses are in foreign currencies. As a
result, we are subject to significant risks, including:
|
|
•
|
foreign exchange risks resulting
from changes in foreign exchange rates and the implementation of exchange
controls; and
|
|
|
•
|
limitations on our ability to
reinvest earnings from operations in one country to fund the capital needs
of our operations in other
countries.
|
In
particular, we may conduct business in countries that have non-traded or “soft”
currencies which, because of their restricted or limited trading markets, may be
difficult to exchange for “hard” currencies. The national governments in some of
these countries are often not able to establish the exchange rates for the local
currency. As a result, it may not be possible for us to engage in hedging
transactions to mitigate the risks associated with fluctuations of the
particular currency. We are often required to pay all or a portion of our costs
associated with a project in the local soft currency. As a result, we generally
attempt to negotiate contract terms with our customer, who is often affiliated
with the local government, to provide that we are paid in the local currency in
amounts that match our local expenses. If we are unable to match our costs with
matching revenue in the local currency, we would be exposed to the risk of an
adverse change in currency exchange rates.
Where
possible, we selectively use hedging transactions to limit our exposure to risks
from doing business in foreign currencies. Our ability to hedge may be limited
because pricing of hedging instruments, where they exist, is often volatile and
not necessarily efficient.
In
addition, the value of the derivative instruments could be impacted
by:
|
|
•
|
adverse movements in foreign
exchange rates;
|
|
|
•
|
interest
rates;
|
|
|
•
|
commodity prices;
or
|
|
|
•
|
the value and time period of the
derivative being different than the exposures or cash flow being
hedged.
|
Halliburton’s
indemnity for FCPA Matters and related corruption allegations does not apply to
all potential losses, Halliburton’s actions may not be in our stockholders’ best
interests and we may take or fail to take actions that could result in our
indemnification from Halliburton with respect to corruption allegations no
longer being available.
Under the
terms of the master separation agreement with Halliburton, Halliburton has
indemnified us for our share of fines or other monetary penalties or direct
money 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 certain
FCPA matters or related foreign corruption allegations. Halliburton’s
indemnity does not apply to any other losses, claims, liabilities or damages
assessed against us or other affiliates assessed by governmental authorities in
other jurisdictions. For purposes of the indemnity, “FCPA Matters” include
claims relating to alleged or actual violations occurring prior to the date of
the master separation agreement of the FCPA or particular, analogous applicable
statutes, laws, regulations and rules of U.S. and foreign governments and
governmental bodies identified in the master separation agreement in connection
with the Bonny Island project in Nigeria and in connection with any other
project, whether located inside or outside of Nigeria, including without
limitation the use of agents in connection with such projects, identified by a
governmental authority of the United States, the United Kingdom, France,
Nigeria, Switzerland or Algeria in connection with the current investigations in
those jurisdictions. Please read “—Potential consequences arising out
of our guilty plea to violations of the FCPA could include suspension or
debarment of our ability to contract with the United States, state or local
governments, U.S. government agencies or the MoD, third party claims, loss of
business, adverse financial impact, damage to reputation and adverse
consequences on financing for current or future projects.” and “—Our
indemnification from
Halliburton for FCPA Matters may not be enforceable as a result of being against
governmental policy.”
Either
before or after a settlement or disposition of any remaining corruption
allegations, we could incur losses as a result of or relating to such corruption
allegations for which Halliburton’s indemnity will not apply, and we may not
have the liquidity or funds to address those losses, in which case such losses
could have a material adverse effect on our business, prospects, results of
operations, financial condition and cash flow.
Subject
to the exercise of our right to assume control of the investigation, defense
and/or settlement of any remaining corruption allegations, Halliburton will have
broad discretion over investigation and defense of these matters. We expect that
Halliburton will take actions that are in the best interests of its
stockholders, which may not be in our or our stockholders’ best interests,
particularly in light of the potential differing interests that Halliburton and
we may have with respect to the matters currently under investigation and their
defense and/or settlement. In addition, the manner in which Halliburton controls
the investigation, defense and/or settlement of any remaining corruption
allegations and our ongoing obligation to cooperate with Halliburton in its
investigation, defense and/or settlement thereof could adversely affect us and
our ability to defend or settle other claims against us, or result in other
adverse consequences to us or our business that would not be subject to
Halliburton’s indemnification. We may take control over the investigation,
defense and/or settlement of any remaining corruption allegations or we may
refuse to agree to a settlement of such allegations negotiated by
Halliburton. Notwithstanding our decision, if any, to assume control
or refuse to agree to a settlement of any remaining corruption allegations, we
will have a continuing obligation to assist in Halliburton’s full cooperation
with any government or governmental agency, which may reduce any benefit of our
taking control over the investigation of such corruption allegations or refusing
to agree to a settlement. If we take control over the investigation,
defense and/or settlement of any remaining corruption allegations, refuse a
settlement negotiated by Halliburton, enter into a settlement without
Halliburton’s consent, materially breach our obligation to cooperate with
respect to Halliburton’s investigation, defense and/or settlement or materially
breach our obligation to consistently implement and maintain, for five years
following our separation from Halliburton, currently adopted business practices
and standards relating to the use of foreign agents, Halliburton may terminate
the indemnity, which could have a material adverse effect on our financial
condition, results of operations and cash flow.
Our indemnification from Halliburton
for FCPA matters or related corruption allegations may not be enforceable as a
result of being against governmental policy.
Our
indemnification from Halliburton of any corruption allegations may not be
enforceable as a result of being against governmental policy. Under the
indemnity with Halliburton, our share of any liabilities for fines or other
monetary penalties or direct monetary damages, including disgorgement, as a
result of U.S. or certain foreign governmental claims or assessments relating to
corruption allegations would be funded by Halliburton and would not be borne by
us and our public stockholders. If we are assessed by or agree with U.S.
or certain foreign governments or governmental agencies to pay any such fines,
monetary penalties or direct monetary damages, including disgorgement, and
Halliburton’s indemnity cannot be enforced or is unavailable because of
governmental requirements of a settlement, we may not have the liquidity or
funds to pay those penalties or damages, which would have a material adverse
effect on our business, prospects, results of operations, financial condition
and cash flow.
Halliburton’s
indemnity for matters relating to the Barracuda-Caratinga project only applies
to the replacement of certain subsea bolts, and Halliburton’s actions may not be
in our stockholders’ best interests.
Under the
terms of the master separation agreement, Halliburton agreed to indemnify us for
out-of-pocket cash costs and expenses, or cash settlements or cash arbitration
awards in lieu thereof, we incur as a result of the replacement of certain
subsea flow-line bolts installed in connection with the Barracuda-Caratinga
project, which we refer to as “B-C Matters.” At our cost, we
will control the defense, counterclaim and/or settlement with respect to B-C
Matters, but Halliburton will have discretion to determine whether to agree to
any settlement or other resolution of B-C Matters. We expect Halliburton will
take actions that are in the best interests of its stockholders, which may or
may not be in our or our stockholders’ best interests. Halliburton has the right
to assume control over the defense, counterclaim and/or settlement of B-C
Matters at any time. If Halliburton assumes control over the defense,
counterclaim and/or settlement of B-C Matters, or refuses a settlement proposed
by us, it could result in material and adverse consequences to us or our
business that would not be subject to Halliburton’s indemnification. In
addition, if Halliburton assumes control over the defense, counterclaim and/or
settlement of B-C Matters, and we refuse a settlement proposed by Halliburton,
Halliburton may terminate the indemnity. Also, if we materially breach our
obligation to cooperate with Halliburton or we enter into a settlement of B-C
Matters without Halliburton’s consent, Halliburton may terminate the
indemnity.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own or
lease properties in domestic and foreign locations. The following locations
represent our major facilities.
|
Location
|
|
Owned/Leased
|
|
Description
|
|
Business
Unit
|
|
Houston,
Texas
|
|
Leased(1)
|
|
High-rise
office facility
|
|
All
and Corporate
|
|
|
|
|
|
|
|
|
|
Arlington,
Virginia
|
|
Leased
|
|
High-rise
office facility
|
|
G&I
|
|
|
|
|
|
|
|
|
|
Houston,
Texas
|
|
Owned
|
|
Campus
facility
|
|
All
and Corporate
|
|
|
|
|
|
|
|
|
|
Birmingham,
Alabama
|
|
Owned
|
|
Campus
facility
|
|
Services,
Downstream and Corporate
|
|
|
|
|
|
|
|
|
|
Leatherhead,
United Kingdom
|
|
Owned
|
|
Campus
facility
|
|
All
|
|
|
|
|
|
|
|
|
|
Greenford,
Middlesex
United
Kingdom
|
|
Owned(2)
|
|
High-rise
office facility
|
|
Upstream,
Downstream and Technology
|
_________________________
|
(1)
|
At
December 31, 2009, we had a 50% interest in a joint venture which owns
this office facility.
|
|
(2)
|
At
December 31, 2009, we had a 55% interest in a joint venture which owns
this office facility.
|
We also
own or lease numerous small facilities that include our technology center, sales
offices and project offices throughout the world. We own or lease marine
fabrication facilities, which are currently for sale, covering approximately 300
acres in Scotland. All of our owned properties are unencumbered and we believe
all properties that we currently occupy are suitable for their intended
use.
Item 3. Legal Proceedings
Information
relating to various commitments and contingencies is described in “Risk Factors”
contained in Part I of this Annual Report on Form 10-K and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and in
Notes 10 and 11 to our consolidated financial statements and the information
discussed therein is incorporated by reference into this Item
3.
Item 4. Submission of Matters to a Vote of Security
Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2009.
PART II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our
common stock is traded on the New York Stock Exchange under the symbol
“KBR.” The following table sets forth, on a per share basis for the
periods indicated, the high and low sale prices per share for our common stock
as reported by the New York Stock Exchange and dividends declared:
|
|
|
Common Stock Price Range
|
|
|
Dividends
Declared
|
|
||||||
|
|
|
High
|
|
|
Low
|
|
|
Per Share (a)
|
|
|||
|
Fiscal
Year 2009
|
|
|
|
|
|
|
|
|
|
|||
|
First
quarter ended March 31, 2009
|
$
|
17.67
|
$
|
11.41
|
$
|
0.05
|
||||||
|
Second
quarter ended June 30, 2009
|
19.74
|
13.31
|
|
0.05
|
||||||||
|
Third
quarter ended September 30, 2009
|
24.73
|
16.29
|
|
0.05
|
||||||||
|
Fourth
quarter ended December 31, 2009
|
24.68
|
17.28
|
|
0.05
|
||||||||
|
Fiscal
Year 2008
|
||||||||||||
|
First
quarter ended March 31, 2008
|
|
$
|
41.95
|
|
|
$
|
24.00
|
|
|
$
|
0.05
|
|
|
Second
quarter ended June 30, 2008
|
|
|
38.41
|
|
|
|
27.79
|
|
|
|
0.05
|
|
|
Third
quarter ended September 30, 2008
|
|
|
35.30
|
|
|
|
13.50
|
|
|
|
0.05
|
|
|
Fourth
quarter ended December 31, 2008
|
|
|
18.59
|
|
|
|
9.78
|
|
|
|
0.05
|
|
|
|
(a)
|
Dividends
declared per share represents dividends declared and payable to
shareholders of record in our fiscal year ended December 31, 2009 and
2008. Excluded from the table are dividends declared of $0.05 per share,
which were declared on December 21, 2009 for shareholders of record as of
March 15, 2010.
|
At
February 19, 2010, there were 145 shareholders of record. In calculating the
number of shareholders, we consider clearing agencies and security position
listings as one shareholder for each agency or listing.
In
December 2008, our Board of Directors authorized a share repurchase program
pursuant to which we intend to repurchase shares in the open market to reduce
and maintain, over time, our outstanding shares at approximately 160 million
shares. 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. This share repurchase program
expired December 31, 2009. The following is a summary of share
repurchases of our common stock during the three months ended December 31,
2009.
|
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 (b)
|
||||||||||||
|
October
1 – 22, 2009
|
||||||||||||||||
|
Repurchase
Program
|
40,496 | $ | 22.54 | 40,496 | 358,865 | |||||||||||
|
Employee
Transactions (a)
|
5,016 | $ | 22.56 | — | — | |||||||||||
|
November
2 –30, 2009
|
||||||||||||||||
|
Repurchase
Program
|
21,033 | $ | 19.79 | 21,033 | 464,286 | |||||||||||
|
Employee
Transactions (a)
|
40,780 | $ | 19.03 | — | — | |||||||||||
|
December
1 – 18, 2009
|
||||||||||||||||
|
Repurchase
Program
|
137,893 | $ | 18.97 | 137,893 | — | |||||||||||
|
Employee
Transactions (a)
|
1,542 | $ | 18.47 | — | — | |||||||||||
|
Total
|
||||||||||||||||
|
Repurchase
Program
|
199,422 | $ | 19.78 | 199,422 | — | |||||||||||
|
Employee
Transactions (a)
|
47,338 | $ | 19.39 | — | — | |||||||||||
|
(a)
|
Reflects
shares acquired from employees in connection with the settlement of income
tax and related benefit withholding obligations arising from vesting in
restricted stock units.
|
|
(b)
|
Calculated
based on shares outstanding at the end of each month less our targeted
number of approximately 160 million outstanding shares. At December 31,
2009, this share repurchase program expired and there were zero shares
available to be purchased.
|
In
November 2009, we replaced our $930 million revolving credit facility with a
$1.1 billion three-year revolving credit facility (“Revolving Credit Facility”),
which expires in November 2012. Our Revolving Credit Facility
restricts, among other things, the total dollar amount we may pay for dividends
and equity repurchases of our common stock to a maximum of $400 million in the
aggregate during the term of the facility. At December 31, 2009, we
have the capacity to pay additional dividends or repurchase shares in the amount
of $397 million after the declaration of dividends and shares
repurchased. See Note 9 to our consolidated financial statements. The
declaration and payment of any future dividends will be at the discretion of our
Board of Directors and will depend upon, among other things, future earnings,
general financial condition and liquidity, success in business activities,
capital requirements, and general business conditions.
Performance
Graph
The chart
below compares the cumulative total shareholder return on our common shares from
November 16, 2006 (the date of our initial public offering) to the end of the
year with the cumulative total return on the Dow Jones Heavy Construction
Industry Index and the Russell 1000 Index for the same period. The comparison
assumes the investment of $100 on November 16, 2006, and reinvestment of all
dividends. The shareholder return is not necessarily indicative of future
performance.
|
|
11/16/2006
|
12/29/2006
|
12/31/2007
|
12/31/2008
|
12/31/2009
|
|||||||||||||||
|
KBR
|
$ | 100.00 | $ | 126.04 | $ | 186.95 | $ | 73.91 | $ | 93.18 | ||||||||||
|
Dow
Jones Heavy Construction
|
100.00 | 103.62 | 196.48 | 87.91 | 100.05 | |||||||||||||||
|
Russell
1000
|
100.00 | 101.31 | 105.22 | 64.17 | 80.51 | |||||||||||||||
Item 6. Selected Financial Data
The
following table presents selected financial data for the last five years. You
should read the following information in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and the related notes to the consolidated
financial statements.
|
|
Years Ended December
31,
|
|||||||||||||||||||
|
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
|
(In
millions, except for per share and employee headcount
amounts)
|
|||||||||||||||||||
|
Statements
of Operations Data:
|
|
|
|
|
|
|||||||||||||||
|
Total
revenue
|
$ | 12,105 | $ | 11,581 | $ | 8,745 | $ | 8,805 | $ | 9,291 | ||||||||||
|
Operating
income
|
536 | 541 | 294 | 152 | 385 | |||||||||||||||
|
Income
from continuing operations, net of tax
|
364 | 356 | 204 | 34 | 204 | |||||||||||||||
|
Income
from discontinued operations, net of tax
|
— | 11 | 132 | 114 | 55 | |||||||||||||||
|
Net
income attributable to KBR
|
290 | 319 | 302 | 168 | 240 | |||||||||||||||
|
Basic
net income attributable to KBR per share:
|
||||||||||||||||||||
|
—Continuing
operations
|
$ | 1.80 | $ | 1.84 | $ | 1.08 | $ | 0.39 | $ | 1.36 | ||||||||||
|
—Discontinued operations
(a)
|
— | 0.07 | 0.71 | 0.81 | 0.40 | |||||||||||||||
|
Basic net income attributable to
KBR per share
|
$ | 1.80 | $ | 1.91 | $ | 1.79 | $ | 1.20 | $ | 1.76 | ||||||||||
|
Diluted
net income attributable to KBR per share:
|
||||||||||||||||||||
|
—Continuing
operations
|
$ | 1.79 | $ | 1.84 | $ | 1.08 | $ | 0.39 | $ | 1.36 | ||||||||||
|
—Discontinued operations
(a)
|
— | 0.07 | 0.71 | 0.81 | 0.40 | |||||||||||||||
|
Diluted net income attributable to KBR per
share
|
$ | 1.79 | $ | 1.90 | $ | 1.78 | $ | 1.20 | $ | 1.76 | ||||||||||
|
Basic
weighted average shares outstanding
|
160 | 166 | 168 | 140 | 136 | |||||||||||||||
|
Diluted
weighted average shares outstanding
|
161 | 167 | 169 | 140 | 136 | |||||||||||||||
|
Cash
dividends declared per share (b)
|
$ | 0.20 | $ | 0.20 | $ | — | $ | — | $ | — | ||||||||||
|
|
||||||||||||||||||||
|
Balance
Sheet Data (as of the end of period):
|
||||||||||||||||||||
|
Cash
and equivalents
|
$ | 941 | $ | 1,145 | $ | 1,861 | $ | 1,410 | $ | 362 | ||||||||||
|
Net
working capital
|
1,350 | 1,099 | 1,433 | 915 | 944 | |||||||||||||||
|
Total
assets
|
5,327 | 5,884 | 5,203 | 5,414 | 5,182 | |||||||||||||||
|
Total
debt (including notes payable to former parent)
|
— | — | — | — | 774 | |||||||||||||||
|
Total
shareholders’ equity
|
2,296 | 2,034 | 2,235 | 1,829 | 1,399 | |||||||||||||||
|
Other
Financial Data:
|
||||||||||||||||||||
|
Backlog
at year end
|
$ | 14,098 | $ | 14,097 | $ | 13,051 | $ | 12,437 | $ | 10,589 | ||||||||||
|
Gross
operating margin percentage
|
4.4 | % | 4.7 | % | 3.4 | % | 1.7 | % | 4.1 | % | ||||||||||
|
Capital
expenditures (c)
|
$ | 41 | $ | 37 | $ | 36 | $ | 47 | $ | 51 | ||||||||||
|
Depreciation
and amortization expense (d)
|
$ | 55 | $ | 49 | $ | 31 | $ | 29 | $ | 29 | ||||||||||
|
(a)
|
We
completed the sale of our Production Services group in May 2006 and the
disposition of our 51% interest in DML in June 2007. The results of
operations of Production Services group and DML for all periods presented
have been reported as discontinued operations. See Note 20 to the
consolidated financial statements for further
information.
|
|
(b)
|
Dividends
declared for 2009 include dividends for shareholders of record as of March
13, 2009, which were declared in December 17, 2008. Excluded from the
table are dividends declared of $0.05 per share, which were declared in
December 21, 2009 for shareholders of record as of March 15,
2010.
|
|
(c)
|
Capital
expenditures do not include expenditures related to the discontinued
operations for DML of $7 million, $10 million and $25 million for the
years ended December 31, 2007, 2006 and 2005,
respectively.
|
|
(d)
|
Depreciation
and amortization expense does not include expenses related to the
discontinued operations for DML of $10 million, $18 million and $27
million for the years ended December 31, 2007, 2006 and 2005,
respectively.
|
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
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,
results of operations, liquidity and certain other factors that may affect our
future results. The MD&A should be read in conjunction with the consolidated
financial statements and related notes included in Item 8 of this Annual
Report.
Executive
Overview
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 occurred 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 recession and financial market condition. 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 economic conditions, volatility in oil and gas prices
and financial market conditions that began in 2008 disrupted the normal flow of
bid/award opportunities in most of the market sectors during the first half of
the year. However, we have seen a recent increase
in prequalification requests from our clients and expect a number of our markets
to strengthen in 2010. With few exceptions, 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 and Infrastructure
Business. 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. Revenues under the LogCAP III project
were approximately $4.8 billion, $5.5 billion, and $4.7 billion for the years
ended December 31, 2009, 2008 and 2007, respectively. 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 have seen a decline in work under LogCAP III and we expect this decline
will continue. We expect the U.K. military will remain engaged in the
region, although their presence 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. In particular,
infrastructure related to the quality of water, wastewater, roads and transit,
airports, and educational facilities has historically declined while demand for
expanded and improved infrastructure has historically outpaced funding. As a
result, demand is at an all time high. We expect increased
opportunities for our engineering and construction services and for privately
financed project activities where our ability to assist with arranging financing
and our desire to participate in project ownership make us an attractive partner
for state and local governments undertaking important infrastructure projects.
However, the global economic recession 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.
Summary
of Consolidated Results
Consolidated
revenues in 2009 increased approximately $524 million, or 5%, to $12.1 billion
compared to $11.6 billion in 2008. The primary drivers of this
increase were from our Upstream and Services business units. Our
Upstream business unit revenues grew $648 million in 2009, or 24%, largely as a
result of several cost reimbursable LNG and GTL projects in our Gas Monetization
Operations. Although the recent worldwide economic recession and
financial market conditions continue to impact our customers in the hydrocarbons
market, most of our ongoing LNG and GTL projects were under development and
awarded prior to mid-2008 and continue to have a positive impact on revenue
growth and backlog in our Gas Monetization Operations. Our Services
business unit revenues increased $893 million in 2009, or 65%, primarily as a
result of our July 1, 2008 acquisition of BE&K, an Alabama-based
engineering, construction and maintenance services company that has greatly
increased our presence in the North American engineering and construction
markets. Our Georgia Power, Hunt Refinery and Red River plant
expansion projects where we provide process construction and program management
services and other projects acquired in the BE&K transaction were
significant contributors to the increase in Services revenue in
2009. Revenues from our G&I business unit were down approximately
$1.1 billion in 2009, or 15%, compared to the prior year. The
majority of this decrease is due to our Middle East Operations where U.S.
military troop level reductions in Iraq have resulted in a significant impact to
our staffing levels on the LogCAP III contract. In 2009, the total
number of staff working on the LogCAP III project decreased by approximately 17%
including direct hires, subcontractors and local hires. Additionally,
the U.S. Army has transitioned work in Kuwait and Afghanistan from the LogCAP
III contract to the LogCAP IV contract. Although we expect to
continue to provide services to the U.S. Army in Iraq under the LogCAP III
contract through late 2010, we have not been awarded any new work under the
LogCAP IV contract. Also contributing to the decline in G&I
revenues in 2009 were declines in our International Operations where we
experienced reduced levels of activities for the U.K. military in Iraq and
Afghanistan as well as a number of engineering projects completed during the
year.
Consolidated
operating income in 2009 decreased approximately $5 million, or 1%, to $536
million compared to $541 million in 2008. Job income for 2009 from
our G&I business unit was down approximately $168 million in 2009 as a
result of the $132 million reduction in our award fee accrual and lower volume
of activity on our LogCAP III contract. G&I business unit
overheads increased $23 million, or 20%, primarily due to lower recoverability
of certain costs as a result of decreased activity as well as higher
bid and proposal expenses. Additionally, Services business unit
overheads increased $40 million, or 95%, due to the additional overhead
resulting from the BE&K corporate headquarters in Birmingham, Alabama,
acquired in the BE&K acquisition on July 1, 2008. These decreases in job
income were partially offset by a favorable arbitration award of $351 million on
the EPC 1 project performed for PEMEX in our Oil and Gas Operations which
resulted in $183 million of job income for 2009. Additionally, in
2008, our Oil and Gas Operations recognized a $51 million gain related to a
settlement with PEMEX on the EPC 28 project. Additionally, we
experienced higher activity in 2009 on Gas Monetization projects in our Upstream
business unit and projects in our Services business unit resulting from the July
1, 2008 acquisition of BE&K.
Consolidated
revenues in 2008 were $11.6 billion as compared to $8.7 billion in 2007. Revenue
was significantly impacted by our Middle East operations in our G&I business
unit. Revenues from our Middle East Operations were up approximately
$736 million in 2008 largely as a result of higher volume on U.S. military
support activities in Iraq under our LogCAP III contract due to a U.S. military
troop surge in the second half of 2007 that continued to positively impact our
2008 revenue. In 2008, the total number of employees working in the
Middle East increased by approximately 11% to just over 72,000 including direct
hires, subcontractors and local hires. Revenues from our Gas
Monetization operations in our Upstream business unit increased approximately
$755 million in 2008 due to increased progress on a number of GTL and LNG
projects. Revenues from our Services business unit increased
significantly during 2008 by approximately $1.1 billion. The majority
of this increase relates to the business we obtained through the acquisition of
BE&K which contributed approximately $825 million of revenue during
2008. Also contributing to the increase in 2008 in our Services
business unit were increases in activity from direct construction and modular
fabrication services in our Canadian and North American construction
operations.
Consolidated
operating income in 2008 was $541 million as compared to $294 million in 2007.
All of our business units had improvements in business unit income primarily due
to increased revenue from work performed. Income from our Services
business unit increased significantly both as a result of continued growth in
our legacy operations and as a result of the business we obtained through the
acquisition of BE&K. In addition, our Oil & Gas operations in the
Upstream business unit recognized increased income as a result of a $51 million
favorable arbitration award on the EPC 28 PEMEX project in the first quarter of
2008. Our Downstream income increased primarily due to increased activity on
several large petrochemical projects in Saudi Arabia and newly awarded refining
projects as well as a result of the work we obtained in the BE&K
acquisition. We also reduced our labor cost absorption and our corporate general
and administrative expenses during 2008.
For a
more detailed discussion of the results of operations for each of our business
units, corporate general and administrative expense, income taxes and other
items, see “Results of Operations” below.
Acquisition
of BE&K, Inc.
On July
1, 2008, we acquired 100% of the outstanding common shares of BE&K, Inc.,
(“BE&K”) a privately held, Birmingham, Alabama-based engineering,
construction and maintenance services company serving both domestic and
international customers. BE&K’s international operations are located in
Poland and Russia. The acquisition of BE&K enhances our ability
to provide construction and maintenance services in North America. We paid
approximately $559 million in cash including certain stockholders equity
adjustments as defined in the stock purchase agreement and direct transaction
costs. BE&K and its acquired divisions have been integrated into our
Services, Downstream and Government & Infrastructure business units based
upon the nature of the underlying projects acquired. As a result of the
acquisition, the condensed consolidated statements of income include the results
of operations of BE&K since the date of acquisition. See Note 4 to our
consolidated financial statements for further discussion of the BE&K
acquisition.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to select
appropriate accounting policies and to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses. Our
critical accounting policies are described below to provide a better
understanding of how we develop our assumptions and judgments about future
events and related estimations and how they can impact our financial statements.
A critical accounting estimate is one that requires our most difficult,
subjective, or complex estimates and assessments and is fundamental to our
results of operations.
We base
our estimates on historical experience and on various other assumptions we
believe to be reasonable according to the current facts and circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. We
believe the following are the critical accounting policies used in the
preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States, as well as the
significant estimates and judgments affecting the application of these policies.
This discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes.
Percentage of
completion. Revenue from long-term contracts to provide
construction, engineering, design or similar services are reported on the
percentage-of-completion method of accounting. This method of accounting
requires us to calculate job profit to be recognized in each reporting period
for each job based upon our projections of future outcomes, which include
estimates of the total cost to complete the project; estimates of the project
schedule and completion date; estimates of the extent of progress toward
completion; and amounts of any probable unapproved claims and change orders
included in revenue. Progress is generally based upon physical progress,
man-hours or costs incurred depending on the type of job. Physical progress is
determined as a combination of input and output measures as deemed appropriate
by the circumstances.
At the
outset of each contract, we prepare a detailed analysis of our estimated cost to
complete the project. Risks relating to service delivery, usage, productivity,
and other factors are considered in the estimation process. Our project
personnel periodically evaluate the estimated costs, claims, change orders, and
percentage of completion at the project level. The recording of profits and
losses on long-term contracts requires an estimate of the total profit or loss
over the life of each contract. This estimate requires consideration of total
contract value, change orders, and claims, less costs incurred and estimated
costs to complete. We also take into account liquidated damages when determining
total contract profit or loss. Our contracts often require us to pay
liquidated damages should we not meet certain performance requirements,
including completion of the project in accordance with a scheduled time. We
include an estimate of liquidated damages in contract costs when it is deemed
probable that they will be paid. Anticipated losses on contracts are
recorded in full in the period in which they become evident. Profits are
recorded based upon the product of estimated contract profit at completion times
the current percentage-complete for the contract.
When
calculating the amount of total profit or loss on a long-term contract, we
include unapproved claims in contract value when the collection is deemed
probable based upon the four criteria for recognizing unapproved claims under
FASB ASC 605-35 regarding accounting for performance of construction-type and
certain production-type contracts. Including probable unapproved claims in this
calculation increases the operating income (or reduces the operating loss) that
would otherwise be recorded without consideration of the probable unapproved
claims. Probable unapproved claims are recorded to the extent of
costs incurred and include no profit element. In all cases, the probable
unapproved claims included in determining contract profit or loss are less than
the actual claim that will be or has been presented to the customer. We are
actively engaged in claims negotiations with our customers, and the success of
claims negotiations has a direct impact on the profit or loss recorded for any
related long-term contract. Unsuccessful claims negotiations could result in
decreases in estimated contract profits or additional contract losses, and
successful claims negotiations could result in increases in estimated contract
profits or recovery of previously recorded contract losses.
At least
quarterly, significant projects are reviewed in detail by senior management. We
have a long history of working with multiple types of projects and in preparing
cost estimates. However, there are many factors that impact future costs,
including but not limited to weather, inflation, labor and community
disruptions, timely availability of materials, productivity, and other factors
as outlined in our “Risk Factors” contained in Part I of this Annual Report on
Form 10-K. These factors can affect the accuracy of our estimates and materially
impact our future reported earnings.
Estimated Losses on Uncompleted
Contracts and Changes in Contract Estimates. We record
provisions for estimated losses on uncompleted contracts in the period in which
such losses are identified. The cumulative effects of revisions to contract
revenue and estimated completion costs are recorded in the accounting period in
which the amounts become evident and can be reasonably estimated. These
revisions can include such items as the effects of change orders and claims,
warranty claims, liquidated damages or other contractual penalties, adjustments
for audit findings on US government contracts and contract closeout settlements.
Our contracts often require us to pay liquidated damages should we not meet
certain performance requirements, including completion of the project in
accordance with a scheduled time. We include an estimate of liquidated damages
in contract costs when it is deemed probable that they will be
paid.
Accounting for government
contracts. Most of the services provided to the United States
government are governed by cost-reimbursable contracts. Generally, these
contracts contain both a base fee (a fixed profit percentage applied to our
actual costs to complete the work) and an award fee (a variable profit
percentage applied to definitized costs, which is subject to our customer’s
discretion and tied to the specific performance measures defined in the
contract, such as adherence to schedule, health and safety, quality of work,
responsiveness, cost performance, and business management).
Revenue
is recorded at the time services are performed, and such revenues include base
fees, actual direct project costs incurred and an allocation of indirect costs.
Indirect costs are applied using rates approved by our government customers. The
general, administrative, and overhead cost reimbursement rates are estimated
periodically in accordance with government contract accounting regulations and
may change based on actual costs incurred or based upon the volume of work
performed. Revenue is reduced for our estimate of costs that either are in
dispute with our customer or have been identified as potentially unallowable per
the terms of the contract or the federal acquisition regulations.
Award
fees are generally evaluated and granted periodically by our customer. For
contracts entered into prior to June 30, 2003, award fees are recognized during
the term of the contract based on our estimate of amounts to be awarded. Once
award fees are granted and task orders underlying the work are definitized, we
adjust our estimate of award fees to actual amounts earned. Our estimates are
often based on our past award experience for similar types of work. We
periodically receive LogCAP award fee scores and, based on these actual amounts,
we adjust our accrual rate for future awards, if necessary. The controversial
nature of this contract may cause actual awards to vary significantly from past
experience.
For
contracts containing multiple deliverables entered into subsequent to June 30,
2003 (such as PCO Oil South), we analyze each activity within the contract to
ensure that we adhere to the separation guidelines of FASB ASC 605 – Revenue
Recognition and FASB ASC 605-25 – Multiple-Element Arrangements. 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.
Similar
to many cost-reimbursable contracts, these government contracts are typically
subject to audit and adjustment by our customer. Each contract is unique;
therefore, the level of confidence in our estimates for audit adjustments varies
depending on how much historical data we have with a particular contract.
Further, the significant size and controversial nature of our contracts may
cause actual awards to vary significantly from past experience.
Goodwill
Impairment. We operate our business through six business units
which are also our operating segments as defined by FASB ASC 280 – Segment
Reporting. These operating
segments form the basis for our reporting units used in our goodwill impairment
testing. These reporting units include the Upstream, Downstream,
Services, Government & Infrastructure, Technology, and Ventures business
units. Additionally, in 2008 we identified an additional reporting
unit related to a small staffing business acquired in the acquisition of
BE&K. This reporting unit is presented as a component of “Other”
within our MD&A segment disclosure.
We test
the reporting unit goodwill for impairment on an annual basis, and more
frequently when negative conditions or other triggering events arise, such as
when significant current or projected operating losses exist or are
forecasted. The annual impairment test for goodwill is a two-step
process that involves comparing the estimated fair value of each reporting unit
to the reporting unit’s carrying value, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, the goodwill of the
reporting unit is not considered impaired; therefore, the second step of the
impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, we perform the second step of the goodwill
impairment test to measure the amount of impairment loss to be recorded, as
necessary.
Consistent
with prior years, the fair values of reporting units in 2009 were determined
using two methods, one based on market earnings multiples of peer companies for
each reporting unit, and the other based on discounted cash flow models with
estimated cash flows based on internal forecasts of revenues and expenses. We
believe these two approaches are appropriate valuation techniques and we
generally weight the two resulting values equally as an estimate of reporting
unit fair value for the purposes of our impairment testing. However,
we may weigh one value more heavily than the other when conditions merit doing
so. For instance, when historic results are believed to be higher
than forecast results, we would generally weigh the discounted cash flow method
more heavily than our historic earnings method. The earnings
multiples for the first method ranged between 5.5 times and 5.9 times for each
of our reporting units. The second method used market-based discount
rates ranging from 8.8 percent to 13.0 percent. The fair value
derived from the weighting of these two methods provided appropriate valuations
that, in aggregate, reasonably reconciled to our market capitalization, taking
into account observable control premiums.
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 the small staffing business acquired in the acquisition of
BE&K. The charge was primarily the result of a decline in the
staffing market, the 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 December 31, 2009, goodwill and intangibles for this
reporting unit totaled approximately $18 million, including goodwill of $12
million, after recognition of the impairment charge. Based upon our
analysis that we prepared in accordance with FASB ASC 350 – Intangibles—Goodwill
and Other, we believe that the reporting unit’s book value of $21 million,
include the related goodwill and customer relationship intangible is
recoverable.
Subsequent
to our September 30, 2009 annual goodwill impairment testing we monitored the
changes in our business and other factors that could represent indicators of
impairment. No such indicators of impairment were
noted. With the exception of the staffing business, the fair value of
all of our other reporting units significantly exceeded their respective
carrying amounts as of our last impairment test.
Our
goodwill totaled $691 million and $694 million at December 31, 2009 and 2008,
respectively. The decline in goodwill was due to the impairment
charge of $6 million partially offset by $3 million in opening balance sheet
adjustments related to our BE&K and Wabi acquisitions,
translation of goodwill balances denominated in a foreign currency
and purchase price adjustments.
Income tax
accounting. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have been
recognized in the financial statements or tax returns. A current tax
asset or liability is recognized for the estimated taxes payable or refundable
on tax returns for the current year. A deferred tax asset or
liability is recognized for the estimated future tax effects attributable to
temporary differences between the financial reporting basis and the income tax
basis of assets and liabilities. The measurement of current and
deferred tax assets and liabilities is based on provisions of the enacted tax
law, and the effects of potential future changes in tax laws or rates are not
considered. The value of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these items will not be
realized. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Additionally, we use forecasts of certain tax elements
such as taxable income and foreign tax credit utilization and the evaluation of
tax planning strategies in making this assessment of realization. Given the
inherent uncertainty involved with the use of such variables, there can be
significant variation between anticipated and actual results. As of
December 31, 2009, we had net deferred tax assets of $177 million, which are net
of deferred tax liabilities of $196 million and a valuation allowance of $30
million primarily related to certain foreign branch net operating
losses. In 2009, we increased our valuation allowance by $11 million
which was primarily due to net operating losses generated in tax jurisdictions
where future taxable income is not expected to be sufficient for us to recognize
a tax benefit.
We have
operations in numerous countries other than the United States. Consequently, we
are subject to the jurisdiction of a significant number of taxing authorities.
The income earned in these various jurisdictions is taxed on differing bases,
including income actually earned, income deemed earned, and revenue-based tax
withholding. The final determination of our tax liabilities involves the
interpretation of local tax laws, tax treaties, and related authorities in each
jurisdiction. Changes in the operating environment, including changes in tax law
and currency/repatriation controls, could impact the determination of our tax
liabilities for a tax year.
Tax
filings of our subsidiaries, unconsolidated affiliates, and related entities are
routinely examined in the normal course of business by tax authorities. These
examinations may result in assessments of additional taxes, which we work to
resolve with the tax authorities and through the judicial process. Predicting
the outcome of disputed assessments involves some uncertainty. Factors such as
the availability of settlement procedures, willingness of tax authorities to
negotiate, and the operation and impartiality of judicial systems vary across
the different tax jurisdictions and may significantly influence the ultimate
outcome. We review the facts for each assessment, and then utilize assumptions
and estimates to determine the most likely outcome and provide taxes, interest,
and penalties as needed based on this outcome.
Legal and Investigation
Matters. As discussed in Notes 10 and 11 of our consolidated
financial statements, as of December 31, 2009 and 2008, we have accrued an
estimate of the probable and estimable costs for the resolution of some of our
legal and investigation matters. For other matters for which the liability is
not probable and reasonably estimable, we have not accrued any amounts.
Attorneys in our legal department monitor and manage all claims filed against us
and review all pending investigations. Generally, the estimate of probable costs
related to these matters is developed in consultation with internal and outside
legal counsel representing us. Our estimates are based upon an analysis of
potential results, assuming a combination of litigation and settlement
strategies. The precision of these estimates is impacted by the amount of due
diligence we have been able to perform. We attempt to resolve these matters
through settlements, mediation, and arbitration proceedings when possible. If
the actual settlement costs, final judgments, or fines, after appeals, differ
from our estimates, our future financial results may be materially and adversely
affected. We record adjustments to our initial estimates of these types of
contingencies in the periods when the change in estimate is
identified.
Pensions. Our
pension benefit obligations and expenses are calculated using actuarial models
and methods, in accordance with FASB ASC 715 – Compensation—Retirement
Benefits. Two of the more critical assumptions and estimates used in
the actuarial calculations are the discount rate for determining the current
value of plan benefits and the expected rate of return on plan assets. Other
critical assumptions and estimates used in determining benefit obligations and
plan expenses, including demographic factors such as retirement age, mortality,
and turnover, are also evaluated periodically and updated accordingly to reflect
our actual experience.
The
discount rate was determined annually by reviewing yields on high-quality bonds
that receive one of the two highest ratings given by a recognized rating agency
and the expected duration of the obligations specific to the characteristics of
the Company’s plans. The overall expected long-term rate of return on
assets was determined by reviewing targeted asset allocations and historical
index performance of the applicable asset classes on a long-term basis of at
least 15 years. Plan assets are comprised primarily of equity and
debt securities. As we have both domestic and international plans, these
assumptions differ based on varying factors specific to each particular country
or economic environment.
The discount rate utilized to determine
the projected benefit obligation at the measurement date for our U.S.
pension plan decreased from 6.15% at December 31, 2008 to 5.35% at
December 31, 2009. The discount rate utilized to determine the projected benefit
obligation at the measurement date for our U.K. pension plans, which constitutes
all of our international plans and 95% of all plans decreased from 5.98% at
December 31, 2008 to 5.84% at December 31, 2009. An additional future
decrease in the discount rate of 25 basis points for our pension plans would
increase our projected benefit obligation by an estimated $2 million and $46
million for the US and UK plans, respectively, while a similar increase in the
discount rate would reduce our projected benefit obligation by an estimated $2
million and $44 million for the US and UK plans, respectively. Our
expected long-term rates of return on plan assets utilized at the measurement
date decreased from 7.81% to 7.63% for our U.S. pension plan and remained
unchanged at 7.0% for our international plans.
Unrecognized
actuarial gains and losses are generally being recognized over a period of 10 to
15 years, which represents the expected remaining service life of the employee
group. Our unrecognized actuarial gains and losses arise from several factors,
including experience and assumptions changes in the obligations and the
difference between expected returns and actual returns on plan assets. The
difference between actual and expected returns is deferred as an unrecognized
actuarial gain or loss and is recognized as future pension expense. Our
unrecognized actuarial loss at December 31, 2009 was $576 million, of which $20
million is expected to be recognized as a component of our expected 2010 pension
expense. Lower than expected long-term rates of return on our plan assets and
the previous curtailment of our existing pension plans could increase our future
pension costs and contributions over historical levels. During 2009,
we made contributions to fund our defined benefit plans of $23
million. We currently expect to make contributions in 2010 of
approximately $14 million.
The
actuarial assumptions used in determining our pension benefits may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates, and longer or shorter life spans of
participants. While we believe that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may materially affect
our financial position or results of operations. Our actuarial
estimates of pension benefit expense and expected pension returns of plan assets
are discussed in Note 18 in the accompanying financial statements.
Results
of Operations
We
analyze the financial results for each of our six business units and certain
product service lines. The business units presented are consistent
with our reportable operating segments discussed in Note 7 (Business Segment
Information) to our consolidated financial statements. We also present the
results of operations for product service lines (“PSL”). While certain of the
business units and product service lines presented below do not meet the
criteria for reportable segments in accordance with FASB ASC 280 – Segment
Reporting, we believe this supplemental information is relevant and meaningful
to our investors for various reasons including monitoring our progress and
growth in certain markets and product lines.
|
In
millions
|
|
Years
Ended December 31,
|
|
|||||||||||||||||||||||||
|
Revenue (1)
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
|||||||
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
U.S.
Government – Middle East Operations
|
|
$
|
4,838
|
|
|
$
|
5,518
|
|
|
$
|
(680
|
)
|
|
|
(12)
|
%
|
|
$
|
4,782
|
|
|
$
|
736
|
|
|
15
|
%
|
|
|
U.S.
Government – Americas Operations
|
|
|
484
|
|
|
|
618
|
|
|
|
(134
|
)
|
|
|
(22)
|
%
|
|
|
721
|
|
|
|
(103
|
)
|
|
|
(14)
|
%
|
|
International
Operations
|
|
|
557
|
|
|
|
802
|
|
|
|
(245
|
)
|
|
|
(31)
|
%
|
|
|
590
|
|
|
|
212
|
|
|
36
|
%
|
|
|
Total
G&I
|
|
|
5,879
|
|
|
|
6,938
|
|
|
|
(1,059
|
)
|
|
|
(15)
|
%
|
|
|
6,093
|
|
|
|
845
|
|
|
14
|
%
|
|
|
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Gas
Monetization
|
|
|
2,748
|
|
|
|
2,157
|
|
|
|
591
|
|
|
27
|
%
|
|
|
1,402
|
|
|
|
755
|
|
|
54
|
%
|
||
|
Oil
& Gas
|
|
|
582
|
|
|
|
525
|
|
|
|
57
|
|
|
11
|
%
|
|
|
485
|
|
|
|
40
|
|
|
8
|
%
|
||
|
Total
Upstream
|
|
|
3,330
|
|
|
|
2,682
|
|
|
|
648
|
|
|
24
|
%
|
|
|
1,887
|
|
|
|
795
|
|
|
42
|
%
|
||
|
Services
|
|
|
2,266
|
|
|
|
1,373
|
|
|
|
893
|
|
|
65
|
%
|
|
|
322
|
|
|
|
1,051
|
|
|
326
|
%
|
||
|
Downstream
|
|
|
485
|
|
|
|
484
|
|
|
|
1
|
|
|
—
|
|
|
361
|
|
|
|
123
|
|
|
34
|
%
|
|||
|
Technology
|
|
|
97
|
|
|
|
84
|
|
|
|
13
|
|
|
15
|
%
|
|
|
90
|
|
|
|
(6
|
)
|
|
|
(7)
|
%
|
|
|
Ventures
|
|
|
21
|
|
|
(2
|
)
|
|
|
23
|
|
|
|
1,150
|
%
|
|
|
(8
|
)
|
|
|
6
|
|
|
75
|
%
|
||
|
Other
|
|
|
27
|
|
|
|
22
|
|
|
|
5
|
|
|
|
23
|
%
|
|
|
—
|
|
|
|
22
|
|
|
—
|
||
|
Total
revenue
|
|
$
|
12,105
|
|
|
$
|
11,581
|
|
|
$
|
524
|
|
|
|
5
|
%
|
|
$
|
8,745
|
|
|
$
|
2,836
|
|
|
32
|
%
|
|
_________________________
|
(1)
|
Our
revenue includes both equity in the earnings of unconsolidated affiliates
and 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.
|
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.
|
In
millions
|
|
Years Ending December 31,
|
|
|||||||||||||||||||||||||
|
|
|
2009
|
|
|
2008
|
|
|
Increase (Decrease)
|
|
|
Percentage Change
|
|
|
2007
|
|
|
Increase (Decrease)
|
|
|
Percentage Change
|
|
|||||||
|
Business
unit income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
U.S.
Government – Middle East Operations
|
|
$
|
70
|
|
|
$
|
242
|
|
|
$
|
(172
|
)
|
|
|
(71
|
)%
|
|
$
|
231
|
|
|
$
|
11
|
|
|
5
|
%
|
|
|
U.S.
Government – Americas Operations
|
|
|
65
|
|
|
|
36
|
|
|
|
29
|
|
|
81
|
%
|
|
|
68
|
|
|
|
(32
|
)
|
|
|
(47)
|
%
|
|
|
International
Operations
|
|
|
145
|
|
|
|
170
|
|
|
|
(25
|
)
|
|
|
(15)
|
%
|
|
|
116
|
|
|
|
54
|
|
|
47
|
%
|
|
|
Total
job income
|
|
|
280
|
|
|
|
448
|
|
|
|
(168
|
)
|
|
|
(38
|
)%
|
|
|
415
|
|
|
|
33
|
|
|
8
|
%
|
|
|
Divisional
overhead
|
|
|
(139
|
)
|
|
|
(116
|
)
|
|
|
(23
|
)
|
|
|
(20)
|
%
|
|
|
(136
|
)
|
|
|
20
|
|
|
15
|
%
|
|
|
Total
G&I business unit income
|
|
|
141
|
|
|
|
332
|
|
|
|
(191
|
)
|
|
|
(58)
|
%
|
|
|
279
|
|
|
|
53
|
|
|
19
|
%
|
|
|
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Gas
Monetization
|
|
|
178
|
|
|
|
165
|
|
|
|
13
|
|
|
|
8
|
%
|
|
|
161
|
|
|
4
|
|
|
2
|
%
|
||
|
Oil
& Gas
|
|
|
274
|
|
|
|
141
|
|
|
|
133
|
|
|
|
94
|
%
|
|
|
81
|
|
|
|
60
|
|
|
74
|
%
|
|
|
Total
job income
|
|
|||||||||||||||||||||||||||