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
|
|
|
452
|
|
|
|
306
|
|
|
|
146
|
|
|
|
48
|
%
|
|
|
242
|
|
|
|
64
|
|
|
26
|
%
|
|
|
Divisional
overhead
|
|
|
(46
|
)
|
|
|
(44
|
)
|
|
|
(2
|
)
|
|
|
(5)
|
%
|
|
|
(54
|
)
|
|
|
10
|
|
|
19
|
%
|
|
|
Total
Upstream business unit income
|
|
|
406
|
|
|
|
262
|
|
|
|
144
|
|
|
|
55
|
%
|
|
|
188
|
|
|
|
74
|
|
|
39
|
%
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Job
income
|
|
|
226
|
|
|
|
151
|
|
|
|
75
|
|
|
|
50
|
%
|
|
|
67
|
|
|
|
84
|
|
|
125
|
%
|
|
|
Gain
on sale of assets
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(100)
|
%
|
|
|
—
|
|
|
|
1
|
|
|
—
|
|
|
|
Divisional
overhead
|
|
|
(82
|
)
|
|
|
(42
|
)
|
|
|
(40
|
)
|
|
|
(95)
|
%
|
|
|
(11
|
)
|
|
|
(31
|
)
|
|
|
(282)
|
%
|
|
Total
Services business unit income
|
|
|
144
|
|
|
|
110
|
|
|
|
34
|
|
|
|
31
|
%
|
|
|
56
|
|
|
|
54
|
|
|
96
|
%
|
|
|
Downstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Job
income
|
|
|
59
|
|
|
|
72
|
|
|
|
(13
|
)
|
|
|
(18)
|
%
|
|
|
26
|
|
|
|
46
|
|
|
177
|
%
|
|
|
Divisional
overhead
|
|
|
(24
|
)
|
|
|
(21
|
)
|
|
|
(3
|
)
|
|
|
(14)
|
%
|
|
|
(16
|
)
|
|
|
(5
|
)
|
|
|
(31)
|
%
|
|
Total
Downstream business unit income
|
|
|
35
|
|
|
|
51
|
|
|
|
(16
|
)
|
|
|
(31)
|
%
|
|
|
10
|
|
|
|
41
|
|
|
410
|
%
|
|
|
Technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Job
income
|
|
|
49
|
|
|
|
41
|
|
|
|
8
|
|
|
|
20
|
%
|
|
|
39
|
|
|
|
2
|
|
|
5
|
%
|
|
|
Divisional
overhead
|
|
|
(27
|
)
|
|
|
(22
|
)
|
|
|
(5
|
)
|
|
|
(23)
|
%
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
(10)
|
%
|
|
Total
Technology business unit income
|
|
|
22
|
|
|
|
19
|
|
|
|
3
|
|
|
|
16
|
|
|
|
19
|
|
|
|
—
|
|
|
—
|
%
|
|
|
Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Job
loss
|
|
|
19
|
|
|
(4
|
)
|
|
|
23
|
|
|
|
575
|
%
|
|
|
(9
|
)
|
|
|
5
|
|
|
56
|
%
|
||
|
Gain
on sale of assets
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
100
|
%
|
|
|
—
|
|
|
|
1
|
|
|
—
|
%
|
|
|
Divisional
overhead
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
(3
|
)
|
|
|
1
|
|
|
33
|
%
|
||
|
Total
Ventures business unit income (loss)
|
|
|
19
|
|
|
(5
|
)
|
|
|
24
|
|
|
|
480
|
%
|
|
|
(12
|
)
|
|
|
7
|
|
|
58
|
%
|
||
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Job
income
|
|
|
9
|
|
|
|
7
|
|
|
|
2
|
|
|
|
29
|
%
|
|
|
—
|
|
|
|
7
|
|
|
—
|
|
|
|
Impairment
of goodwill
|
(6
|
)
|
—
|
(6
|
)
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Gain
on sale of assets
|
|
|
—
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(100)
|
%
|
|
|
—
|
|
|
|
1
|
|
|
—
|
|
||
|
Divisional
overhead
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(20
|
)%
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
Total
Other business unit income
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
(200)
|
%
|
|
|
—
|
|
|
|
3
|
|
|
—
|
|
|
|
Total
business unit income
|
|
|
764
|
|
|
|
772
|
|
|
|
(8
|
)
|
|
|
(1)
|
%
|
|
|
540
|
|
|
|
232
|
|
|
43
|
%
|
|
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Labor
cost absorption (1)
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
(38)
|
%
|
|
|
(20
|
)
|
|
|
12
|
|
|
60
|
%
|
|
|
Corporate
general and administrative
|
|
|
(217
|
)
|
|
|
(223
|
)
|
|
|
6
|
|
|
3
|
%
|
|
|
(226
|
)
|
|
|
3
|
|
|
1
|
%
|
||
|
Total
operating income
|
|
$
|
536
|
|
|
$
|
541
|
|
|
$
|
(5
|
)
|
|
|
(1)
|
%
|
|
$
|
294
|
|
|
$
|
247
|
|
|
84
|
%
|
|
_________________________
|
|
(1)
|
Labor
cost absorption represents costs incurred by our central labor and
resource groups (above) or under the amounts charged to the operating
business units.
|
Government and
Infrastructure. Revenue from our Middle East Operations
decreased by $680 million in 2009 largely as a result of the overall reduction
in volume of activity on our LogCAP III contract in Iraq. Revenue
from the LogCAP III contract decreased $664 million in 2009 which was primarily
driven by declines in troop levels throughout the year. Additionally,
the U.S. Army is in the process of transitioning services in Kuwait and
Afghanistan from the LogCAP III contract to the LogCAP IV contract which has
also contributed to the decrease in revenues for 2009. We expect to
continue to provide services in Iraq under the LogCAP III contract through
2010. However, we expect our overall volume of work to decrease in
the Middle East Region. Revenues from our Americas Operations
decreased in 2009 primarily as a result of the reduction in activity on the Los
Alamos project and other domestic cost-reimbursable U.S. government projects
including the CONCAP and NRO Office of Space Launch projects. Revenue
on these projects decreased approximately $189 million in the
aggregate. These decreases in revenue from our Americas Operations
were partially offset by increased activity on the CENTCOM project and the
causeway project in Bahrain which increased revenue in 2009 by $76 million in
the aggregate. Revenues from our International Operations decreased
in 2009 largely due to reduced levels of work volumes on U.K. MoD projects
including the Tier 3 Basra project in Iraq and the Temporary Deployable
Accommodations project as well as the completion of various engineering projects
in Western Australia.
Revenue
from our Middle East Operations increased by $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 continues to positively impact our 2008 revenue. Revenue from the
LogCAP III project increased approximately $748 million in 2008 over the prior
year as a result of the troop surge in 2007. Revenue from our Americas
Operations decreased in 2008 primarily as a result of reduced activity on
several domestic cost-reimbursable U.S. Government projects including the
CENTCOM, CONCAP and Los Alamos projects. The increase in revenue in 2008 from
our International Operations is largely due to a project to design, procure and
construct facilities for the U.K. MoD in Basra, southern Iraq and several
engineering projects in Western Australia.
Job
income from our Middle East operations was lower in 2009 by approximately $172
million primarily due to the $132 million reduction in our award fee accrual for
the performance period January 2008 through December 2009, as well as lower
volume of activity on our LogCAP III contract. On February 19, 2010, we
were notified by the U.S. Army’s Iraq Award Fee Evaluation Board for the LogCAP
III project that KBR will not receive any award fees for the period from January
1, 2008 through April 30, 2008, for which we had previously accrued $20
million. As a result, we re-evaluated our assumptions used in the
estimation process related to the remainder of the open performance periods from
May 1, 2008 through December 31, 2009, that were based on our historic
experience, and in light of the discretionary actions of the Award Fee
Determining Official ("AFDO") in February 2010, and our inability to obtain
assurances to the contrary, we concluded that we can no longer estimate the fees
to be awarded. Accordingly, we reversed the remaining balance of the
remaining award fees of approximately $112 million. If our next award fee letter
has better performance scores and award rates are at levels for which we will
recieve an award, our revenues and earnings will increase accordingly. See Note
2 to our consolidated financial statements for further discussion of our award
fee accruals. Additionally, we recognized a $19 million charge in the
fourth quarter of 2009 as a result of an unfavorable judgment against us in
litigation with one of our LogCAP III subcontractors and additional charges
totaling $17 million related to the correction of errors primarily associated
with legal fees on various U.S. government related matters ongoing for the past
several years. See Note 2 to our Consolidated Financial Statements
for further discussion on the correction of errors. However, these
decreases were partially offset by $17 million of charges recorded in 2008
related to the ASCO litigation and the revenue that was subsequently recognized
in 2009 related to our recovery of these charges through billings to our
customer. In addition, our charges for potentially unallowable costs
in 2009 were lower than 2008. Job income from our Americas Operations
increased primarily due to the $22 million job loss recognized in 2008 on our
U.S. Embassy project in Macedonia which did not recur in 2009 as well as an
increase in job income in 2009 on the causeway project in Bahrain. Job
income from our International Operations decreased in 2009 primarily due to the
Allenby & Connaught joint venture resulting from lower interest rate returns
on project investments and strengthening of the U.S. Dollar to the British pound
as well as lower volumes of activity on other projects for the U.K. MoD and
engineering projects in Western Australia.
Job
income from our Middle East Operations increased in 2008 primarily as a result
of the increase in work volume, which was partially offset by a $17 million net
charge recognized during 2008 related to an unfavorable judgment from litigation
with one of our subcontractors for work performed on our LogCAP III contract in
2003. The increase in job income from our Middle East Operations in 2008, which
was further offset due to a reduction in our award fee accrual rate and
provisions for potentially unallowable costs. Job income from our Americas
Operations in 2008 decreased as a result of lower activity on the CENTCOM,
CONCAP and several other government projects. Job income from our International
Operations increased in 2008 due to several projects including increased
earnings from the Allenby & Connaught project and the recently awarded
project to design, procure and construct facilities for the U.K. MoD in southern
Iraq.
Divisional
overhead expenses incurred in 2009 increased significantly primarily due to
lower recoverability of certain costs as a result of decreased
activity as well as higher bid and proposal expenses. In 2008, our
overhead expenses decreased primarily as a result of certain office closures in
the Middle East and other cost reduction activities, which had a positive impact
on total business unit income.
Upstream. Revenues
for 2009 in our Gas Monetization Operations increased by $591 million primarily
due to increased activity from several projects including the Escravos GTL,
Gorgon LNG and Skikda LNG projects. Revenue from these projects
increased an aggregate $784 million in 2009. Our Escravos GTL and
Skikda LNG project revenues have increased primarily due to higher volumes of
material procurement activity compared to the prior year. Revenues on
our Gorgon LNG project have increased as a result of the transition from the
FEED to the EPCM portion of the project which was awarded in the third quarter
of 2009. Partially offsetting the 2009 increases in Gas Monetization
revenues are declines in revenues of approximately $228 million due to lower
activity on the Pearl GTL project as well as increases in project costs due to
schedule delays, subcontractor claims and equipment failures on other LNG
projects that are nearing completion. Revenues from our Oil & Gas
Operations increased largely as a result of the favorable arbitration award on
the EPC 1 project performed for PEMEX which contributed approximately $183
million to the increase in 2009 revenues. Partially offsetting the
increase in Oil & Gas Operations revenues were decreases due to the slower
progress on a number of offshore projects that were either completed or were
nearing completion in 2009 including the AIOC project in Kazakhstan and Woodside
North Rankin project in Australia.
Revenues
for 2008 in our Gas Monetization Operations increased by $755 million primarily
due to increased activity from several projects including the Escravos GTL,
Pearl GTL, Gorgon LNG and Skikda LNG projects. Revenue from these four projects
increased an aggregate $837 million during 2008. Partially offsetting these 2008
increases in Gas Monetization revenues were decreases in revenue of
approximately $95 million in the aggregate for the Yemen LNG, Nigeria LNG and
Tangguh LNG projects primarily due to lower activity in 2008 as compared to 2007
as these projects are nearing completion. In our Oil & Gas Operations, in
the first quarter of 2008 we recognized revenue in the amount of $51 million
related to the favorable arbitration award related to EPC 28 project, which
contributed significantly to the increase in 2008 revenues.
Job
income increased $63 million in the aggregate on the Escravos GTL and Gorgon LNG
projects in 2009. We recognized higher incentive fees on the Escravos
GTL project in 2009 than in the prior year and increased activity on the Gorgon
LNG project due to the award of the EPCM portion of the project contributed to
the increase in job income for 2009. Also, in 2008 we recognized a
$20 million charge related to the settlement of the FCPA and bidding practices
investigation in Nigeria which did not recur in 2009 further contributing to the
increase in Gas Monetization Operations job income in 2009. Partially
offsetting these 2009 increases in Gas Monetization Operations job income were
increases in project costs on other LNG projects due to schedule delays,
subcontractor claims and equipment failures as these projects near
completion. Job income in our Oil & Gas Operations for 2009
increased primarily due to the $351 million favorable arbitration award on the
EPC 1 project performed for PEMEX which resulted in $183 million of job
income. As discussed below, our 2008 job income included a $51
million gain related to a settlement with PEMEX on the EPC 28
project.
Job
income in our Gas Monetization Operations for 2008 was largely driven by a
combined $76 million on the Skikda LNG, Pearl GTL and Gorgon LNG projects due to
increased activity as compared to the prior year. These increases in 2008 job
income were partially offset by lower activity on other recently completed Gas
Monetization projects as well as a decrease in recognized profits on one of our
LNG projects caused by increases in estimated costs of our joint venture. We
decreased our recognized profits from this LNG project by $24 million during the
second quarter of 2008 and subsequently executed a change order to recover these
cost increases which were partially offset by further cost increases of
approximately $7 million. Additionally, we recognized a $20 million charge in
2008 related to our liability for the settlement of the FCPA and bidding
practices investigations in Nigeria, which was charged to our Gas Monetization
Operations job income. In our Oil & Gas Operations, job income increased in
2008 primarily as a result of the $51 million favorable arbitration award
related to the EPC 28 project performed for PEMEX.
Services. Services
revenues in 2009 increased by $893 million primarily as a result of the business
we obtained through the acquisition of BE&K on July 1, 2008, which
contributed approximately $768 million to the increase. The increase
in revenues from the BE&K acquisition was largely driven by the increased
progress on our Georgia Power, Red River and Hunt Refining
projects. Revenue from our Services legacy operations also increased
as a result of continued growth in our North American Construction and Canadian
operations. North American Construction revenues in 2009 increased
approximately $67 million over the prior year due to increased progress on the
Borger and Exxon Mobil Flare Gas projects in Texas. Revenues from our
Canadian operations increased approximately $57 million due to the ramp up in
field work on the Shell AOSP project and project mobilization on the Syncrude
ESP project in late 2008.
The 2008
increase in Services revenue of $1.1 billion is primarily due to business we
obtained through the acquisition of BE&K on July 1, 2008, which contributed
approximately $825 million of revenue from the date of our acquisition through
December 31, 2008. Additionally, revenue in 2008 from Services legacy operations
increased significantly as a result of continued growth in our Canadian and
North American Construction operations. Revenue in 2008 from our
Canadian operations was up approximately $125 million over the prior year
primarily as a result of increased construction services and modules fabrication
on the Shell Scotford Upgrader project. North American Construction revenues in
2008 increased approximately $81 million as a result of newly awarded domestic
construction projects as well as growth on projects awarded in
2007.
Job
income increased by $75 million in 2009 largely due to the business we obtained
through the acquisition of BE&K which contributed approximately $91 million
to the increase. The increase in job income from the BE&K
acquisition was primarily due to the increased progress on our Georgia Power,
Red River and Hunt Refining projects. Additionally, job income
increased $7 million in 2009 as a result of higher utilization of marine vessel
support services provided through our MMM joint venture in the Gulf of
Mexico. Partially offsetting these increases were reductions of
approximately $21 million in job income primarily in our Canadian operations due
to a transition in that nature of the work performed from fabrication of modules
to direct hire field construction which generally is performed at lower profit
margins.
Job
income from Services increased in 2008 by $84 million primarily due to of the
business we obtained through the acquisition of BE&K which contributed
approximately $65 million to job income. In our Canadian operations, job income
was up in 2008 due to increased progress on the Shell Scotford Upgrader project
offset by decreases in other projects in our Canadian operations that were
completed in 2007. Job income was positively impacted in 2008 as a result of an
actuarially determined insurance adjustment of $4 million. Divisional overhead
of the Services business unit in 2008 increased primarily as a result of the
BE&K acquisition.
Downstream. Overall
Downstream business revenues were flat in 2009. During 2008 revenue
from our operations increased by approximately $123 million primarily due to
increased activity on the Saudi Kayan olefin and the Ras Tanura projects in
Saudi Arabia which contributed $92 million in the aggregate to revenues.
Downstream revenue for the year ended December 31, 2008 increased an additional
$64 million as a result of the BE&K acquisition on July 1,
2008. Downstream refining operations was awarded a number of new
refining projects in 2008 which also contributed approximately $37 million to
the increase in revenue. Increases in revenue related to these and
other projects were partially offset by a $90 million decline in revenue during
2008 on the EBIC ammonia plant project in Egypt as it nears
completion.
Downstream
job income in 2009 decreased by $13 million primarily due to a $23 million
reduction in profit on the EBIC ammonia plant project. As this
project neared completion, we incurred additional costs associated with a delay
in completing the plant’s reliability test which was successfully completed and
formally accepted by the client in the third quarter of
2009. Partially offsetting this decrease was an aggregate increase in
job income of $7 million in our refining operations primarily due to the
increased activity of new refining projects awarded in late 2008.
Downstream
job income in 2008 increased $46 million largely due to an aggregate $25 million
increase in job income in our petrochemicals operations from program management
services for the Ras Tanura project and construction management services on the
Saudi Kayan project in Saudi Arabia. Additionally, during 2008, we
reversed $8 million of the previously recognized losses on the Saudi Kayan
project resulting from the effects of change orders executed during the second
quarter of 2008. Furthermore, job income from the business we
obtained through the acquisition of BE&K on July 1, 2008, contributed
approximately $9 million to the increase in job income in 2008 and primarily
related to our chemical operations. Job income from our refining
operations increased approximately $14 million as a result of the award of
several new refining projects and increases in scope on two existing refining
projects.
Technology. Technology
revenues in 2009 increased by a net $13 million primarily due to the progress
achieved on several ammonia projects including grassroots ammonia projects in
Venezuela and Trinidad and an ammonia plant revamp in India which contributed
$24 million to the increase. Additionally, new refining projects in
India, Angola, and Indonesia contributed approximately $10 million to the
increase. Partially offsetting these increases were decreases in
revenue primarily driven by the completion in 2009 of ammonia projects in China
and South America as well as several other projects that were completed in
2008.
The 2008
decrease in Technology revenue of $6 million is primarily attributable to
several projects in China and South America with lower activity as they are
completed or nearly completed in 2008.
Technology
job income for 2009 increased by $8 million primarily due to our grassroots
ammonia projects in Venezuela and Trinidad and the ammonia plant revamp in India
which contributed $17 million to the increase. Additionally, job
income increased by approximately $6 million on our refining projects in India,
Angola and Indonesia. We had lower activity on our ammonia projects
in China and South America and other projects that were completed in 2008 and
early 2009.
The 2008
increase in Technology job income of $2 million is primarily attributable to
contributions from an ammonia project in Venezuela, a refinery fluid catalytic
cracking revamp project in Colombia, and a royalty payment for a technology
license in India. The decreases in 2008 job income from these projects are
partially offset by increases from technology licensed to an ammonia plant in
Venezuela and an aniline plant in China awarded in early 2008.
Ventures. Our
Venture’s operations consist of investments in joint ventures accounted for
under the equity method of accounting, net of tax. Ventures job
income (loss) was $19 million, $(4) million and $(9) million for the years ended
December 31, 2009, 2008 and 2007, respectively. Ventures job income
in 2009 increased approximately $23 million over the prior
year primarily due to the adoption by two of our U.K. road project
joint ventures of a favorable U.K. tax ruling related to the tax depreciation of
certain assets which resulted in an increase to “Equity earnings from
unconsolidated affiliates” of approximately $8 million. This
favorable UK tax ruling enabled Ventures to also recognize an additional $2
million of gain on a prior disposal of pre-emption share rights relating to
these roads which was contingent upon this tax ruling. In addition,
as a result of lower inflation in the UK certain Ventures investments benefited
from significantly lower indexed linked bond interest cost in
2009. Job income increased approximately $3 million in 2009 on the
Aspire Defence project as a result of higher progress and lower maintenance
costs offset by significantly lower interest income due lower interest rates in
the UK than the previous year. In addition, the EBIC ammonia plant
was completed during the year and made its first shipment of ammonia in May
2009. The EBIC ammonia plant operations contributed an additional $3
million to the increase in Ventures job income in 2009.
Ventures
job losses in 2008 and 2007 were primarily driven by continued operating losses
generated on our investment in APT/FreightLink, the Alice Springs-Darwin
railroad project in Australia. As of December 31, 2008, our investment in
APT/Freightlink had been written-off as a result of the continued operating
losses and previously recognized impairments. The losses in 2008 and 2007 were
partially mitigated by income generated by the Aspire Defence (Allenby &
Connaught) project.
Labor cost absorption. Labor
cost absorption expense was $11 million in 2009, $8 million in 2008 and $20
million in 2007. Labor cost absorption represents costs incurred by our central
labor and resource groups (above) or under the amounts charged to the operating
business units. The increase in labor cost absorption expense in 2009 was
primarily due to lower chargeability and utilization in several of our
engineering offices as well as higher incentive compensation which was partially
offset by lower headcount. The decrease in labor cost absorption in
2008 was primarily due to chargeability and utilization. Partially offsetting
the 2008 reduction was a $6 million charge recorded in 2008 related to the
impact of Hurricane Ike in Houston, Texas. The increase in labor cost absorption
in 2007 compared to 2006 was primarily due to an increase in incentive
compensation and the issuance of performance based award units during
2007.
General and Administrative expense.
General and administrative expense was $217 million, $223 million and
$226 million for the years ended December 31, 2009, 2008 and 2007,
respectively. General and administrative expense declined slightly in
2009 primarily due to 2008 charges related to Hurricane Ike along with lower
costs from Halliburton for access to their HR Payroll system and lower state tax
audit adjustments. Offsetting these reductions were increases in
legal expenses related to both litigation and the FCPA monitor preparation; the
write off of approximately $4 million in costs associated with our contemplated
West Houston campus project after a decision to maintain our current area
location; and higher incentive compensation related to the third year of our
long-term incentive plans.
The
slight decline in general and administrative expense in 2008 was due to lower
activity related to our deployment of our HR/Payroll instance of SAP and lower
associated charges from Halliburton for access to their HR/Payroll system,
decreases in incentive compensation as compared to the same period of the prior
year, and lower costs from acquisition related activities for transactions not
closed. These decreases in costs for 2008 were offset by incremental general and
administrative expense of $8 million since our acquisition of BE&K on July
1, 2008, as well as $5 million in charges recognized related to the impact of
Hurricane Ike in Houston, Texas. As a result of the net impact of these
activities and other cost reductions, our general and administrative expense in
2008 remained relatively flat with 2007.
Business
Reorganization
In 2010,
we plan to reorganize our business into discrete engineering and construction
business operations, each focused on a specific segment of the market with
identifiable customers, business strategies, and sales and marketing
capabilities. We expect our operating and reportable segments as defined by FASB
ASC 280 – Segment Reporting will change as we finalize our preparations for the
reorganization in the first quarter of 2010. The reorganization will
include the realignment of certain underlying projects among our existing
business units as well as the transfer of certain projects to several newly
formed business units. Each of the realigned business units will be
reported under one of two new business groups.
Non-operating
items
Net
interest expense was $1 million for the year ended December 31, 2009 and net
interest income was $35 million and $62 million for the years ended December 31,
2008 and 2007, respectively. Interest expense was $5 million in 2009,
$2 million in 2008 and $6 million in 2007. The significant decline in
interest income was a result of the decrease in our average interest rates
earned and average cash and equivalents balance. Average interest
rates earned on our invested cash have declined as a result of the current
economic recession. Our excess cash is generally invested in either
time deposits with commercial banks or money market funds. Our
average cash balances declined to approximately $900 million in 2009 from an
average cash balance of $1.4 billion for the year ended December 31,
2008. The decrease in our cash and equivalents balance is
attributable to the acquisition of BE&K on July 1, 2008 with a purchase
price of approximately $559 million, the use of cash in joint venture projects
and a contract in progress, working capital requirements for our Iraq related
work and total cumulative stock repurchases.
Interest
income decreased significantly in 2008 as a result of the decrease in our cash
and equivalents balance from $1.9 billion at December 31, 2007 to $1.1 billion
as of December 31, 2008. Additionally, interest rates earned on our
invested cash declined significantly in 2008 as a result of the current economic
recession which further contributed to the decrease in interest
income. The 2008 decrease in our cash and equivalents balance is
largely attributable to the acquisition of BE&K mentioned previously, and
stock repurchase totaling $196 million in 2008. In addition, as a
result of the July 2007 conversion of Escravos contract from fixed price to cost
reimbursable, we were no longer entitled to interest income earned on advanced
funds from the project owner.
We had
net foreign currency gains of approximately zero for the year ended December 31,
2009 and losses of $8 million and $15 million for the years ended December 31,
2008 and 2007, respectively. The foreign currency losses incurred of
$8 million in 2008 were primarily related to losses on the Mexican peso
denominated receivable due from PEMEX on the EPC 28 arbitration award and
weakening of the Indonesian currency against positions that were not fully
hedged. These losses were partially offset by strengthening of the
U.S. Dollar against the British Pound in 2008.
Provision
for income taxes was $168 million, $212 million and $138 million for the years
ended December 31, 2009, 2008 and 2007, respectively. Our effective
tax rate was 32%, 37% and 40% for the years ended December 31, 2009, 2008 and
2007, respectively. Our U.S. statutory tax rate for all years is
35%. Our effective tax rate for 2009 was lower than our statutory
rate of 35% primarily due to favorable rate differentials on foreign earnings
compared to the U.S. tax rate, the favorable final determination of previously
estimated 2008 domestic and foreign taxable income made in connection with the
preparation and filing of our 2008 consolidated tax returns and the benefit
associated with income on unincorporated joint ventures. Our
effective tax rate for 2008 exceeded our statutory rate primarily due to certain
dividends from foreign affiliates, the non-deductible fine resulting from our
settlement of the FCPA investigation in Nigeria and domestic state
taxes. For the year ended December 31, 2008, our valuation allowance
was reduced from $33 million to $19 million primarily as a result of utilizing
foreign branch net operating losses for which a valuation allowance had been
previously established in prior years. Our 2007 effective tax rate
was higher than the statutory rate primarily as a result of certain
non-deductible losses in foreign jurisdictions, operating losses from our
railroad investment in Australia, and state and other taxes. We
expect our 2010 expected tax rate to be 35%.
Income
from discontinued operations was zero, $11 million and $132 million for the
years ended December 31, 2009, 2008 and 2007,
respectively. Discontinued operations primarily represent revenues
and gain on the sale of our 51% interest in DML in June 2007. In 2008, we
recognized a tax benefit of $11 million related to foreign tax credits upon
completion of a tax pool study related to DML. Revenues from our
discontinued operations were $449 million and income from discontinued
operations, net of tax, was $132 million for 2007 and included a gain on sale,
net of tax, of approximately $101 million.
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. We
generally include total expected revenue in backlog when a contract is awarded
and/or the scope is definitized. For long-term contracts, the amount
included in backlog is limited to five years. In many instances, arrangements
included in backlog are complex, nonrepetitive in nature, and may fluctuate
depending on expected revenue and timing. Where contract duration is indefinite,
projects included in backlog are limited to the estimated amount of expected
revenue within the following twelve months. Certain contracts provide maximum
dollar limits, with actual authorization to perform work under the contract
being agreed upon on a periodic basis with the customer. In these arrangements,
only the amounts authorized are included in backlog. For projects where we act
solely in a project management capacity, we only include our management fee
revenue of each project in backlog.
For our
projects related to unconsolidated joint ventures, we have included in the table
below our percentage ownership of the joint venture’s revenue in
backlog. However, because these projects are accounted for under the
equity method, only our share of future earnings from these projects will be
recorded in our revenue. Our backlog for projects related to
unconsolidated joint ventures totaled $2.1 billion at December 31, 2009 and $2.4
billion at December 31, 2008. We also consolidate joint ventures
which are majority-owned and controlled or are variable interest entities in
which we are the primary beneficiary. Our backlog included in the
table below for projects related to consolidated joint ventures with
noncontrolling interests includes 100% of the backlog associated with those
joint ventures and totaled $4.6 billion at December 31, 2009 and $3.1 billion at
December 31, 2008.
Backlog
(1)
|
(in
millions)
|
|
December
31,
|
|
|||||
|
|
|
2009
|
|
|
2008
|
|
||
|
G&I:
|
|
|
|
|
|
|
||
|
U.S.
Government - Middle East Operations
|
|
$
|
901
|
|
|
$
|
1,428
|
|
|
U.S.
Government - Americas Operations
|
|
|
561
|
|
|
|
600
|
|
|
International
Operations
|
|
|
1,553
|
|
|
|
1,446
|
|
|
Total
G&I
|
|
$
|
3,015
|
|
|
$
|
3,474
|
|
|
Upstream:
|
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
6,976
|
|
|
|
6,196
|
|
|
Oil
& Gas
|
|
|
109
|
|
|
|
260
|
|
|
Total
Upstream
|
|
$
|
7,085
|
|
|
$
|
6,456
|
|
|
Services
|
|
|
2,484
|
|
|
|
2,810
|
|
|
Downstream
|
|
|
611
|
|
|
|
578
|
|
|
Technology
|
|
|
154
|
|
|
|
130
|
|
|
Ventures
|
|
|
749
|
|
|
|
649
|
|
|
Total
backlog
|
|
$
|
14,098
|
|
|
$
|
14,097
|
|
_________________________
|
(1)
|
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. Our
G&I business unit’s total backlog attributable to unfunded orders was
$326 million as of December 31, 2009 and $196 million as of December 31,
2008.
|
We
estimate that as of December 31, 2009, 55% of our backlog will be complete
within one year. As of December 31, 2009, 18% of our backlog was
attributable to fixed-price contracts and 82% was attributable to
cost-reimbursable contracts. For contracts that contain both fixed-price and
cost-reimbursable components, we classify the components as either fixed-price
or cost-reimbursable according to the composition of the contract except for
smaller contracts where we characterize the entire contract based on the
predominant component.
Backlog
in our G&I business unit decreased by $459 million primarily as a result of
the net work-off on existing projects of approximately $1.1 billion, partially
offset by new awards of $631 million, primarily in our International and
Americas operations. We had net work-off of approximately $531
million on our LogCAP III contract in our Middle East operations without any new
significant awards in 2009. Net work-off in our Americas operations
was approximately $175 million in 2009 primarily related to our Centcom project
and was substantially offset by new awards on various other
projects. In our International operations, new awards in 2009,
primarily from the U.K. MoD, outpaced net work-off on existing
projects. As of December 31, 2009, backlog in our G&I business
unit includes approximately $891 million for our continued services under the
LogCAP III contract and $964 million related to the Allenby & Connaught for
the U.K. MoD in our International operations.
In our
Upstream business unit, we were awarded the EPCM scope of work on the Gorgon LNG
project during the third quarter of 2009 which resulted in an increase to our
Gas Monetization backlog of approximately $2.2 billion. Partially
offsetting this increase were decreases due to net work-off Gas Monetization
operations on several projects including the Escravos GTL, Skikda, Pearl GTL,
and Yemen LNG projects. As of December 31, 2009, our Gas Monetization
backlog included $2.2 billion on the Escravos LNG project, $2.1 billion on the
Gorgon LNG project and $2.1 billion on the Skikda LNG project.
Backlog
in our Services business unit decreased due to the work-off in our Canadian,
North American Construction, BE&K Construction and BE&K Building Group
operations which outpaced new awards in 2009.
Liquidity
and Capital Resources
Our
operating cashflows can vary significantly from year to year and are affected by
the mix, percentage of completion and terms of our engineering and construction
projects. We often receive cash through advanced billings to our
customers on our larger engineering and construction projects and those of our
consolidated joint ventures. These cash advances are generally only available
for use on a specific project and not available for other general corporate
purposes. As the cash advances are used in execution of the project,
they are recovered through regular or milestone billings to the customer which
tend to stabilize as the project progresses. In the event the net
investment in the operating assets of a project is greater than available
project cash balance, we may utilize other cash on hand or availability under
our Revolving Credit Facility to satisfy any periodic net operating cash
outflows.
Our
engineering and construction projects generally require us to provide credit
enhancements to our customers including letters of credit, surety bonds or
guarantees. Our ability to obtain new project awards in the future
may be dependent on our ability to maintain our letter of credit and surety
bonding capacity and the timely release of existing letters of credit and surety
bonds. As the need arises, future projects will be supported by
letters of credit issued under our Revolving Credit Facility or arranged on a
bilateral basis. We believe we have adequate letter of credit
capacity under our existing Revolving Credit Facility and bilateral lines of
credit to support our operations for the next twelve
months. Additionally, we believe our current surety bond capacity is
adequate to support our current backlog of projects for the next twelve
months.
Historically,
our primary sources of liquidity were cash flows from operations, including cash
advance payments from our customers and borrowings from our former parent,
Halliburton. In October 2005, Halliburton capitalized $300 million of
the then outstanding intercompany balance to equity through a capital
contribution. In December 2005, our intercompany balance of $774
million payable to Halliburton was converted into subordinated intercompany
notes to Halliburton. Effective December 16, 2005, we entered into a
bank syndicated unsecured $850 million five-year revolving credit
facility. In October 2006, we repaid $324 million in aggregate
principal amount of the $774 million of indebtedness we owed under the
Subordinated Intercompany Notes. In November 2006, we completed an
initial public offering of our common stock which generated net proceeds of $511
million. In connection with the initial public offering, we repaid
the remaining $450 million in aggregate principal amount of the Subordinated
Intercompany Notes.
Cash and
equivalents totaled $941 million at December 31, 2009 and $1.1 billion at
December 31, 2008, which included $236 million and $175 million, respectively,
of cash and equivalents from advanced payments related to contracts in progress
held by our joint ventures and that we consolidate for accounting purposes and
these amounts are not available for use on other projects or for corporate
purposes. In addition, cash and equivalents includes $75 million and $179
million as of December 31, 2009 and 2008, respectively, of cash from advance
payments that are not available for other projects or corporate purposes related
to a contract in progress that is not executed through a joint venture. We
expect to use the cash and equivalents advanced on these projects to pay project
costs.
As of
December 31, 2009, we had restricted cash of $46 million related to the amounts
held in deposit with certain banks to collateralize standby letters of credit,
of which $35 million is included in “Other current assets” and $11 million is
included in “Other assets” in the accompanying consolidated financial
statements.
Our
excess cash is generally invested in either time deposits with commercial banks
with an Individual Rating of B or better by Fitch or money market funds governed
under rule 2a-7 of the U.S. Investment Company Act of 1940 and rated
AAA by Standard & Poor’s or Aaa by Moody’s Investors Service,
respectively. As of December 31, 2009, substantially all of our
excess cash is held in time deposits with commercial banks with the primary
objectives of preserving capital and maintaining liquidity.
As of
December 31, 2009, a significant portion of our cash was held in foreign
locations in support of our international operations. We have the
ability to return certain amounts of our foreign cash deposits to the U.S. but
may incur incremental income taxes under certain
circumstances. Although we assess the need for cash in our domestic
locations on an ongoing basis, we currently do not anticipate returning foreign
cash deposits to the U.S. that would cause us to incur incremental income
taxes.
Credit
Facility
On
November 3, 2009, we entered into a new syndicated, unsecured $1.1 billion
three-year revolving credit agreement (the “Revolving Credit Facility”), with
Citibank, N.A., as agent, and a group of banks and institutional lenders
replacing the Prior Revolving Credit Facility, which was terminated at the same
time as the closing of the Revolving Credit Facility. The Revolving
Credit Facility will be used for working capital and letters of credit for
general corporate purposes and expires in November 2012. While there
is no sublimit for letters of credit under this facility, letters of credit
fronting commitments at December 31, 2009 totaled $830 million and was
expanded in January 2010 to $880 million, which we would seek to
expand if necessary. Amounts drawn under the Revolving Credit
Facility will bear interest at variable rates based either on the London
interbank offered rate plus 3%, or a base rate plus 2%, with the base rate being
equal to the highest of reference bank’s publicly announced base rate, the
Federal Funds Rate plus 0.5%, or the London interbank offered rate plus
1%. The Revolving Credit Facility provides for fees on the letters of
credit issued under the Revolving Credit Facility of 1.5% for performance and
commercial letters of credit and 3% for all others. We are also
charged an issuance fee of 0.05% for the issuance of letters of credit, a per
annum commitment fee of 0.625% for any unused portion of the credit line, and a
per annum fronting commitment fee of 0.25%. As of December 31, 2009,
there were zero borrowings/cash drawings and $371 million in letters of credit
issued and outstanding under the Revolving Credit Facility.
The
Revolving Credit Facility includes financial covenants requiring maintenance of
a ratio of consolidated debt to consolidated EBITDA of 3.5 to 1 and a minimum
consolidated net worth of $2 billion plus 50% of consolidated net income for
each quarter ending after September 30, 2009 plus 100% of any increase in
shareholders equity attributable to the sale of equity securities. At December 31, 2009, we
were in compliance with these ratios and other covenants mentioned
below.
The
Revolving Credit Facility contains a number of covenants restricting, among
other things, our ability to incur additional liens and sales of our assets, as
well as limiting the amount of investments we can make. The Revolving
Credit Facility also permits us, among other things, to declare and pay
shareholder dividends and/or engage in equity repurchases not to exceed $400
million in the aggregate during the term of the facility and to incur
indebtedness in respect of purchase money obligations, capitalized leases and
refinancing or renewals secured by liens upon or in property acquired,
constructed or improved in an aggregate principal amount not to exceed $200
million. Our subsidiaries may incur unsecured indebtedness not to
exceed $100 million in aggregate outstanding principal amount at any
time.
|
|
|
Years
Ended December 31,
|
|
|||||||||
|
Cash
flow activities
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
(In
millions)
|
|
|||||||||
|
Cash
flows (used in) provided by operating activities
|
|
$
|
(36
|
)
|
|
$
|
124
|
|
|
$
|
248
|
|
|
Cash
flows (used in) provided by investing activities
|
|
|
(9
|
)
|
|
|
(556
|
)
|
|
|
293
|
|
|
Cash
flows used in financing activities
|
|
|
(166
|
)
|
|
|
(244
|
)
|
|
|
(150
|
)
|
|
Effect
of exchange rate changes on cash
|
|
|
7
|
|
|
(40
|
)
|
|
|
9
|
|
|
|
Increase
(decrease) in cash and equivalents
|
|
$
|
(204
|
)
|
|
$
|
(716
|
)
|
|
$
|
400
|
|
Operating
activities. Cash used in operations was $36 million in 2009,
compared to cash provided by operations of $124 million and $248 million in 2008
and 2007, respectively. Cash used in operations in 2009 included an
increase to our working capital investment on our Skikda LNG project which
increased approximately $220 million in 2009. Our 2009 net income included
a gain of approximately $117 million, net of tax, related to the favorable award
on the EPC 1 project arbitration. We also expect to receive a refund of
$75 million of previously paid U.S. federal income taxes, including $35 million
paid in 2009, because of the U.S. foreign tax credit related to the EPC 1 gain
in Mexico that will reduce our 2009 U.S. federal income taxes. Other
changes in our working capital partially contributed to the use of
cash.
Cash
provided by operations was $124 million for the year ended December 31, 2008
compared to cash provided by operations of $248 million for the year ended
December 31, 2007. We received payments from PEMEX related to the EPC 22 and EPC
28 arbitration awards totaling $185 million in 2008. Additionally, we
received $121 million in dividends from unconsolidated joint ventures, which are
accounted for using the equity method of accounting. Our working capital
requirements for our Iraq-related work decreased from $239 at December 31, 2007
to $76 at December 31, 2008, generating cash of approximately $163
million. Offsetting these cash increases were decreases in cash of
approximately $342 million on our consolidated joint venture projects and a
contract in progress. We also made contributions to our international
and domestic pension plans of $74 million during 2008.
Investing
activities. Cash used in investing
activities totaled $9 million and $556 million for the years ended December 31,
2009 and 2008, respectively, compared to cash provided by investing activities
of $293 million for the year ended December 31, 2007. Capital
expenditures were $41 million, $37 million and $43 million for the years ended
December 31, 2009, 2008 and 2007, respectively. In 2009, we received
proceeds of approximately $32 million primarily from one of our joint
ventures that executed a pro-rata share repurchase transaction. Cash
used in investing activities in 2008 were primarily for business
acquisitions. In July 2008, we acquired BE&K for $494 million,
net of cash acquired and post closing purchase price adjustments. We also
acquired TGI, Catalyst Interactive and Wabi Development Corporation for a
combined purchase price of approximately $32 million, net of cash received. In
2007, we sold our 51% interest in DML for cash proceeds of approximately $345
million, net of direct transaction costs
Financing
activities. Cash used in financing activities was $166 million
for the year ended December 31, 2009 and included $54 million for distributions
to noncontrolling shareholders of several of our consolidated joint ventures,
$32 million related to dividend payments to our shareholders and $31 million for
payments to reacquire 2 million shares of our common
stock. Additionally, our financing activities included $44 million
related to the net cash collateralization of our standby letters of credit in
accordance with certain agreements.
Cash used
in financing activities for the year ended December 31, 2008 totaled $244
million which was almost entirely related to $196 million of payments to
reacquire 8.4 million shares of our common stock and $53 million related to
dividend payments to our shareholders and to minority shareholders of several of
our consolidated joint ventures.
Cash used
in financing activities for the year ended December 31, 2007 totaled $150
million and is primarily related to net payments of $120 million made to
Halliburton for various support services provided by Halliburton under our
transition services agreement and other amounts incurred prior to our separation
from Halliburton.
Future sources of
cash. Future sources of cash include cash flows from
operations, including cash advance payments from our customers, and borrowings
under our Revolving Credit Facility. The Revolving Credit Facility is available
for cash advances required for working capital and letters of credit to support
our operations. However, to meet our short- and long-term liquidity
requirements, we will primarily look to our existing cash balances and cash
generated from future operating activities.
Future uses of
cash. Future uses of cash will primarily relate to working
capital requirements for our operations. In addition, we will use
cash to fund capital expenditures, pension obligations, operating leases, cash
dividends, share repurchases and various other obligations, including the
commitments discussed in the table below, as they arise. The capital
expenditures budget for 2010 is approximately $62 million and primarily relates
to information technology, real estate and equipment/facilities to be used in
our business units. See “Off balance sheet arrangements –
commitments and other contractual obligations” below for a schedule of
contractual obligations and other long-term liabilities that will require the
use of cash.
Off
balance sheet arrangements
Letters of credit, surety bonds and
bank guarantees. In connection with certain projects, we are
required to provide letters of credit or surety bonds to our
customers. Letters of credit are provided to customers in the
ordinary course of business to guarantee advance payments from certain
customers, support future joint venture funding commitments and to provide
performance and completion guarantees on engineering and construction
contracts. We have $1.5 billion in committed and uncommitted lines of
credit to support letters of credit and as of December 31, 2009, and we had
utilized $497 million of our credit capacity. We have an additional
$289 million in letters of credit issued and outstanding under various
Halliburton facilities and are irrevocably and unconditionally guaranteed by
Halliburton. Surety bonds are also posted under the terms of certain
contracts primarily related to state and local government projects to guarantee
our performance.
The $497
million in letters of credit outstanding on KBR lines of credit was comprised of
$371 million issued under our Revolving Credit Facility and $126 million issued
under uncommitted bank lines at December 31, 2009. Of the total
letters of credit outstanding, $308 million relate to our joint venture
operations and $75 million of the letters of credit have terms that could
entitle a bank to require additional cash collateralization on
demand. Approximately $256 million of the $371 million letters of
credit issued under our Revolving Credit Facility have expiry dates close to or
beyond the maturity date of the facility. Under the terms of the
Revolving Credit Facility, if the original maturity date of November 2, 2012 is
not extended then the issuing banks may require that we provide cash collateral
for these extended letters of credit no later than 95 days prior to the original
maturity date. As the need arises, future projects will be supported
by letters of credit issued under our Revolving Credit Facility or arranged on a
bilateral basis. We believe we have adequate letter of credit
capacity under our existing Revolving Credit Facility and bilateral lines of
credit to support our operations for the next twelve months.
Halliburton
has guaranteed certain letters of credit and surety bonds and provided parent
company guarantees primarily related to the financial commitments on our EBIC
and Allenby and Connaught projects. We expect to cancel these letters of credit
and surety bonds as we complete the underlying projects. Since the separation
from Halliburton, we have arranged lines with multiple surety companies for our
own standalone capacity. Since the arrangement of this stand alone capacity, we
have been sourcing surety bonds from our own capacity without additional
Halliburton credit support.
We agreed
to pay Halliburton a quarterly carry charge, which has increased in accordance
with our extension provisions, for its guarantees of our outstanding letters of
credit and surety bonds and agreed to indemnify Halliburton for all losses in
connection with the outstanding credit support instruments and any new credit
support instruments relating to our business for which Halliburton may become
obligated following the separation. During 2009 we paid an annual fee to
Halliburton calculated at 0.40% of the outstanding performance-related letters
of credit, 0.80% of the outstanding financial-related letters of credit
guaranteed by Halliburton and 0.25% of the outstanding guaranteed surety bonds.
Effective January 1, 2010, the annual fee increases to 0.90%, 1.65% and 0.50% of
the outstanding performance-related and financial-related outstanding issued
letters of credit and the outstanding guaranteed surety bonds,
respectively.
The
current capacity of our Revolving Credit Facility is adequate for us to issue
letters of credit necessary to replace all outstanding letters of credit issued
under the various Halliburton facilities or those guaranteed by Halliburton and
issue letters of credit for projects that we are currently pursuing should they
be awarded to us.
Commitments and other contractual
obligations. The following table summarizes our
significant contractual obligations and other long-term liabilities as of
December 31, 2009:
|
Payments
Due
|
||||||||||||||||||||||||||||
|
Millions
of dollars
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Operating
leases
|
56 | 46 | 41 | 34 | 30 | 76 | 283 | |||||||||||||||||||||
|
Purchase
obligations(a)
|
17 | 4 | 2 | — | — | — | 23 | |||||||||||||||||||||
|
Pension
funding obligation (b)
|
14 | — | — | — | — | — | 14 | |||||||||||||||||||||
|
Total
(c)
|
87 | 50 | 43 | 34 | 30 | 76 | 320 | |||||||||||||||||||||
_________________________
|
(a)
|
The
purchase obligations disclosed above do not include purchase obligations
that we enter into with vendors in the normal course of business that
support existing contracting arrangements with our customers. The purchase
obligations with our vendors can span several years depending on the
duration of the projects. In general, the costs associated with those
purchase obligations are expensed to correspond with the revenue earned on
the related projects.
|
|
(b)
|
The
combined funded status of all of our defined benefit pension plans was an
obligation of $320 million at December 31, 2009. We are in
discussions with the trustees of our largest pension plan in the U.K.
regarding its tri-annual valuation. We currently are uncertain
how the results of the tri-annual valuation will impact our future funding
obligations.
|
|
(c)
|
Unrecognized
tax benefits recorded pursuant to FASB ASC 740 – Income Taxes were $55
million, including $14 million in interest and penalties. The
ultimate timing of when these obligations will be settled cannot be
determined with reasonable assurance and have been excluded from the table
above. Refer to Note 12 in our consolidated financial
statements.
|
Other
obligations. We had commitments to provide funds to our
privately financed projects of $52 million as of December 31, 2009 primarily
related to future equity funding on our Allenby and Connaught
project. Our commitments to fund our privately financed projects are
supported by letters of credit as described above. At December 31,
2009, approximately $17 million of the $52 million in commitments will become
due within one year.
We have
an obligation to fund estimated losses on our uncompleted contracts which
totaled $40 million at December 31, 2009. Approximately $34 million
of this amount relates to our Escravos project, the majority of which is
expected to be funded in 2010.
Effective
December 24, 2009, we entered into a collaboration agreement with BP PLC to
market and license certain technology. In conjunction with this
arrangement, we acquired a 25-year license granting us the exclusive right to
the technology. As partial consideration for the license, we are obligated
to pay an initial fee of $20 million. This payment was made subsequent to
our year-end.
Other
factors affecting liquidity
Government
claims. Unapproved claims relate to contracts where our
costs have exceeded the customer’s funded value of the task order. Our
unapproved claims for costs incurred under various government contracts totaled
$113 million at December 31, 2009 and $73 million at December 31,
2008. The unapproved claims at December 31, 2009 include
approximately $59 million primarily the result of the de-obligation of 2004
funding on certain task orders including $49 million withheld from us related to
dining facilities and incurred costs that have been disputed by the DCAA and our
customer. We believe such disputed costs will be resolved in our
favor at which time the customer will be required to obligate funds from the
year in which resolution occurs. The unapproved claims outstanding at
December 31, 2009 and December 31, 2008 are considered to be probable of
collection and have been recognized as revenue.
Liquidated
damages. Many of our engineering and construction contracts
have milestone due dates that must be met or we may be subject to penalties for
liquidated damages if claims are asserted and we were responsible for the
delays. These generally relate to specified activities that must be
met within a project by a set contractual date or achievement of a specified
level of output or throughput of a plant we construct. Each contract
defines the conditions under which a customer may make a claim for liquidated
damages. However, in many instances, liquidated damages are not
asserted by the customer, but the potential to do so is used in negotiating
claims and closing out the contract.
In 2009,
one of our joint ventures experienced a delay that extended the expected
completion date of a plant. The joint venture is working with the
client to determine the exact cause of the delay and the amount of liability, if
any, the joint venture may have incurred with respect to schedule related
liquidated damages. We believe the joint venture is entitled to
a change order for an extension of time sufficient to alleviate its exposure to
liquidated damages related to this delay.
We had
not accrued for liquidated damages related to several projects, including the
exposure described in the above paragraph, totaling $18 million at December 31,
2009 (including amounts related to our share of unconsolidated subsidiaries),
that we could incur based upon completing the projects as
forecasted.
Halliburton
indemnities. Halliburton has agreed to indemnify us and
certain of our greater than 50%-owned subsidiaries for fines or other monetary
penalties or direct monetary damages, including disgorgement, as a result of
claims made or assessed against us by U.S. and certain foreign governmental
authorities or a settlement thereof, relating to investigations under the FCPA
or analogous applicable foreign statutes related investigations with respect to
the construction and subsequent expansion by TSKJ of a natural gas liquefaction
complex in Nigeria. Halliburton has also agreed to indemnify us for
out-of-pocket cash costs and expenses, or cash settlement or cash arbitration
awards in lieu thereof, we may incur as a result of the replacement of certain
subsea flow-line bolts installed in connection with the Barracuda-Caratinga
project. See Note 11 to our Condensed Consolidated Financial
Statements for further discussion.
In
February 2009, one of our subsidiaries plead guilty to violating and conspiring
to violate the FCPA arising from the intent to bribe various Nigerian officials
through commissions paid to agents working on behalf of TSKJ. The
terms of the plea agreement with the DOJ called for the payment of a criminal
penalty of $402 million, of which Halliburton was obligated to pay $382 million
under the terms of the indemnity while we were obligated to pay $20 million in
quarterly payments over a two-year period ending October 2010. We
also agreed to a judgment by the SEC requiring, Halliburton and us, jointly and
severally, to make payments totaling $177 million, all of which were paid by
Halliburton under the terms of the indemnity. During 2009,
Halliburton paid its first five installments to the DOJ in the amount of $240
million and paid in full the $177 million due to the SEC. We have
paid approximately $12 million related to our portion of the settlement
agreement.
We may
take or fail to take actions that could result in our indemnification from
Halliburton no longer being available with respect to certain other foreign
governmental investigations of the project in Nigeria or with respect to matters
relating to the Barracuda-Caratinga project as Halliburton’s indemnities do not
apply to all potential losses. Please read “Management Discussion and Analysis
of Financial Condition and Results of Operations - Legal Proceedings – Foreign Corrupt
Practices Act Investigations” and “Barracuda-Caratinga Project
Arbitration” as well as “Risk Factors” contained in
Part I of this Annual Report on Form 10-K for further discussion of these
matters.
Worldwide financial market condition
and economic recession. The worldwide financial market
condition and economic recession and the resulting current worldwide economic
downturn have significantly impacted the capital and credit
markets. Although it is presently not possible to determine the full
impact this situation may have on us in the future, to date we have not
experienced any significant impact to our business as a result of these
conditions. See Risk Factors for further discussion of some of the risks to our
business resulting from these conditions.
Financial
Instruments Market Risk
We invest
excess cash and equivalents in short-term securities, primarily overnight time
deposits, which carry a fixed rate of return per a given tenor. Additionally, a
substantial portion of our cash balances are maintained in foreign
countries.
We have
foreign currency exchange rate risk resulting from our international
operations. We do not comprehensively hedge the exposure to currency
rate changes; however, we selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these
exposures. The objective of our risk management program is to protect
our cash flows related to sales or purchases of goods and services from market
fluctuations in currency rates. We do not use derivative instruments
for speculative trading purposes. We generally utilize currency
options and forward exchange contracts to hedge foreign currency transactions
entered into in the ordinary course of business. As of December 31,
2009, we had forward foreign exchange contracts of up to 39 months in duration
to exchange major world currencies. The total gross notional amount
of these contracts at December 31, 2009, 2008 and 2007 was $406 million, $274
million and $332 million, respectively. These contracts had fair
value asset of $3 million at December 31, 2009, fair value liability of
approximately $1 million at December 31, 2008, and fair value asset of
approximately $1 million at December 31, 2007.
Environmental
Matters
We are
subject to numerous environmental, legal, and regulatory requirements related to
our operations worldwide. In the United States, these laws and regulations
include, among others: the Comprehensive Environmental Response, Compensation,
and Liability Act; the Resources Conservation and Recovery Act; the Clean Air
Act; the Federal Water Pollution Control Act; and the Toxic Substances Control
Act.
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. We do not expect
costs related to environmental matters will have a material adverse effect on
our consolidated financial position or our results of operations. Based on the
information presently available to us, we have accrued approximately $7 million
for the assessment and remediation costs associated with all environmental
matters, which represents the low end of the range of possible costs that could
be as much as $14 million.
Transactions
with Former Parent
In
connection with our initial public offering in November 2006 and the separation
of our business from Halliburton, we entered into various agreements, including,
among others, a master separation agreement, transition services agreements and
a tax sharing agreement. Pursuant to our master separation agreement, we agreed
to indemnify Halliburton for, among other matters, all past, present and future
liabilities related to our business and operations. We agreed to indemnify
Halliburton for liabilities under various outstanding and certain additional
credit support instruments relating to our businesses and for liabilities under
litigation matters related to our business. Halliburton agreed to indemnify us
for, among other things, liabilities unrelated to our business, for certain
other agreed matters relating to the investigation of FCPA and related
corruption allegations and the Barracuda-Caratinga project and for other
litigation matters related to Halliburton’s business. See “MD&A – Legal
Proceedings” for further discussion of matters related to the
investigation of FCPA and related corruption allegations and the
Barracuda-Caratinga project arbitration. Under the transition
services agreements, Halliburton provided various interim corporate support
services to us and we provided various interim corporate support services to
Halliburton. The tax sharing agreement provides for certain allocations of U.S.
income tax liabilities and other agreements between us and Halliburton with
respect to tax matters.
Costs for
all services provided by Halliburton were $2 million, $6 million, and $13
million for the years ended December 31, 2009, 2008 and 2007, respectively and
primarily related to risk management, information technology, legal and internal
audit. All of the charges described above have been included as costs
of our operations in our consolidated statements of income. It is possible that
the terms of these transactions may differ from those that would result from
transactions among third parties. Subsequent to our separation from Halliburton
and in accordance with our master separation agreement, Halliburton continues to
bear the direct costs associated with overseeing and directing the FCPA and
related corruption allegations. See Note 17 to our consolidated
financial statements for further information related to our transactions with
our former parent.
At
December 31, 2009 and 2008, KBR had a $53 million and a $54 million balance
payable to Halliburton, respectively, which consists of amounts KBR owes
Halliburton for estimated outstanding income taxes under the tax sharing
agreement and amounts owed pursuant to our transition services agreement for
credit support arrangements and information technology. See Note 12
for further discussion of amounts outstanding under the tax sharing
agreement.
Transactions
with Joint Ventures
We
perform many of our projects through incorporated and unincorporated joint
ventures. In addition to participating as a joint venture partner, we often
provide engineering, procurement, construction, operations or maintenance
services to the joint venture as a subcontractor. Where we provide services to a
joint venture that we control and therefore consolidate for financial reporting
purposes, we eliminate intercompany revenues and expenses on such transactions.
In situations where we account for our interest in the joint venture under the
equity method of accounting, we do not eliminate any portion of our revenues or
expenses. We recognize the profit on our services provided to joint ventures
that we consolidate and joint ventures that we record under the equity method of
accounting primarily using the percentage-of-completion method. Total revenue
from services provided to our unconsolidated joint ventures recorded in our
consolidated statements of income were $166 million, $202 million and $356
million for the years ended December 31, 2009, 2008 and 2007,
respectively. Profits on services provided to our joint ventures
recognized in our consolidated statements of income were $1 million, $28 million
and $30 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Recent
Accounting Pronouncements
In March
2008, the FASB issued accounting guidance related to employers’ disclosure about
postretirement benefit plan assets which is discussed under FASB ASC 715 -
Compensation - Retirement Benefits. This topic addresses concerns
from users of financial statements about their need for more information on
pension plan assets, obligations, benefit payments, contributions, and net
benefit cost. The disclosures about plan assets are intended to provide users of
employers’ financial statements with more information about the nature and
valuation of postretirement benefit plan assets, and are effective for fiscal
years ending after December 15, 2009. We implemented the disclosure
requirements of this standard in 2009.
Effective
January 1, 2009, we adopted guidance for participating securities and the
two-class method in accordance with FASB ASC 260 - Earnings Per Share related to
determining whether instruments granted in share-based payment transactions are
participating securities. The standard provides that unvested
share-based payment awards that contain rights to non-forfeitable dividends or
dividend equivalents (whether paid or unpaid) participate in undistributed
earnings with common shareholders. Certain KBR restricted stock units
and restricted stock awards are considered participating securities since the
share-based awards contain a non-forfeitable right to dividends irrespective of
whether the awards ultimately vest. The standard requires that the
two-class method of computing basic EPS be applied. Under the
two-class method, KBR stock options are not considered to be participating
securities. As a result of adopting FASB ASC 260, previously-reported
basic net income attributable to KBR per share decreased by $0.01 per share for
the year ended December 31, 2008 and 2007.
Effective
September 30, 2009, we adopted guidance for the accounting standards
codification and the hierarchy of generally accepted accounting principles in
accordance with FASB ASC 105 - Generally Accepted Accounting
Principles. The standard establishes the FASB Accounting Standards
CodificationTM
(“ASC”) as the single source of authoritative U.S. generally accepted
accounting principles (U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. The FASB ASC supersedes all existing non-SEC
accounting and reporting standards. This FASB ASC does not have an
impact on our financial position, results of operations or cash
flows.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. ASU
2009-13 addresses the accounting for multiple-deliverable arrangements to enable
vendors to account for products or services (deliverables) separately rather
than as a combined unit. Specifically, this guidance amends the criteria in
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for
separating consideration in multiple-deliverable arrangements. This guidance
establishes a selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific objective evidence; (b)
third-party evidence; or (c) estimates. This guidance also eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance significantly expands
required disclosures related to a vendor's multiple-deliverable revenue
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010. We are evaluating the impact that the adoption of ASU 2009-13 will
have on our financial position, results of operations, cash flows and
disclosures.
In
December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic
860) - Accounting for Transfers of Financial Assets, which codifies FASB
Statement No. 166, Accounting for Transfers of Financial Assets. ASU 2009-16
will require additional information regarding transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. ASU 2009-16
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures. ASU 2009-16 is effective for fiscal years beginning
after November 15, 2009. We are evaluating the impact that the
adoption of ASU 2009-16 will have on our financial position, results of
operations, cash flows and disclosures.
In
June 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB
Interpretation No. 46(R). ASU 2009-17 modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. ASU
2009-17 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. ASU 2009-17
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. ASU 2009-17 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. ASU
2009-17 is effective for fiscal years beginning after November 15,
2009. As a result of the adoption of ASU 2009-17 on January 1, 2010,
we concluded that we are the primary beneficiary of the Heavy Equity Transporter
(“HET”) joint venture in the United Kingdom which we have previously accounted
for using the equity method of accounting through December 31,
2009. This joint venture owns and operates heavy equipment transport
vehicles for the U.K. MoD and is funded by third party senior debt which is
nonrecourse to the joint venture partners. Upon consolidation of this
joint venture, consolidated current assets will increase by $26 million
primarily related to cash and equivalents, consolidated noncurrent assets will
increase by $89 million related to property, plant and equipment, consolidated
current liabilities will increase by $10 million primarily related to accounts
payable, and noncurrent liabilities will increase by $112 million related to the
outstanding senior bonds and subordinated debt issued to finance the joint
venture operations. The adoption of this standard is not expected to
change the consolidation accounting for any other of our currently existing
affiliated entities.
In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) – Accounting for
Distributions to Shareholders with Components of Stock and Cash. ASU
2010-01 clarifies that the stock portion of a distribution to shareholders that
allows them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate
is considered a share issuance that is reflected in earnings per share
prospectively and is not a stock dividend. ASU 2010-01 is effective
for interim and annual periods ending on or after December 15, 2009, and should
be applied on a retrospective basis. ASU 2010-01 does not have an
impact on our financial position, results of operations or cash
flows.
In
January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification. ASU 2010-02 clarifies the scope of the decrease in
ownership provisions of Subtopic 810-10 and related guidance. The
amendments in ASU 2010-02 expand the disclosure requirements about
deconsolidation of a subsidiary or derecognition of a group of
assets. ASU 2010-02 is effective beginning in the first interim or
annual reporting period ending on or after December 15, 2009, and should be
applied retrospectively to the first period that an entity adopts FASB Statement
No. 160, Noncontrolling Interests in Consolidated Financial Statements – an
Amendment of ARB 51 (now included in Subtopic 810-10). The adoption
of this standard did not have an impact on our financial position, results of
operations or cash flows.
U.S.
Government Matters
Award
fees
In
accordance with the provisions of the LogCAP III contract, we earn profits on
our services rendered based on a combination of a fixed fee plus award fees
granted by our customer. Both fees are measured as a percentage rate applied to
estimated and negotiated costs. The LogCAP III customer is
contractually obligated to periodically convene Award-Fee Boards, which are
comprised of individuals who have been designated to assist the Award Fee
Determining Official (“AFDO”) in making award fee
determinations. Award fees are based on evaluations of our
performance using criteria set forth in the contract, which include non-binding
monthly evaluations made by our customers in the field of operations. Although
these criteria have historically been used by the Award-Fee Boards in reaching
their recommendations, the amounts of award fees are determined at the sole
discretion of the ADFO.
During
the almost seven-year period that we have worked under the LogCap III contract,
we have been awarded 83 “excellent” ratings out of 106 total
ratings. We recognize award fees on the LogCAP III contract using an
estimated accrual of the amounts to be awarded. Once task orders
underlying the work are definitized and award fees are granted, we adjust our
estimate of award fees to the actual amounts earned. In 2007, we
reduced our award fee accrual rate on the LogCAP III contract from 84% to 80% of
the total amount of possible award fees, as a result of the rate of actual award
fees received in that year. In 2008, based on our assessments of
monthly non-binding customer evaluations of our performance and the request from
our customer to take corrective actions related to our electrical work and the
corrective actions that we did take in accordance with a plan agreed with our
customer, we reduced
our award fee accrual rate from 80% to 72% of the total possible award fees for
the performance period beginning in April 2008 resulting in a charge of
approximately $5 million in the fourth quarter of 2008. We continued
to use 72% as our accrual rate thereafter. No Award Fee Evaluation
Boards have been held for our Iraq based work on LogCAP III since the June 2008
meeting, which evaluated our performance for the period of January 2008 through
April 2008.
On
February 19, 2010, KBR was notified by the AFDO that a determination had been
made regarding the Company’s performance for the period January 1, 2008 to April
30, 2008 in Iraq. The notice stated that based on information received from
various Department of Defense individuals and organizations after the date of
the evaluation board in June 2008, the AFDO made a unilateral decision to grant
no award fees for the period from January 1 to April 30, 2008. The AFDO found
that KBR’s failure to document the poor conditions of the electrical system at
the Radwaniyah Palace complex, KBR’s failure to provide notice of unsafe life,
health and safety conditions and KBR’s failure to employ qualified personnel to
provide electrical services under task orders 139 and 151 across the KBR areas
of responsibility are failures to perform at a level deserving of an award fee
payment for the evaluated period January 1, 2008 through April 30, 2008. While
we disagree with the findings of the AFDO, we have not yet been
provided with all of the specific information used by the AFDO to reach his
decision. We intend to request access to all information used by the AFDO in
reaching his unilateral decision so that we are able to understand how he
arrived at his conclusions, and to determine whether there are additional
actions that we might take.
As a
result of the AFDO’s adverse determination, we reversed approximately $20
million of award fees that had previously been estimated as earned and
recognized as revenue for that period of performance. In addition, we
re-evaluated our assumptions used in the award fee estimation process related to
the remainder of the open performance periods from May 1, 2008 through December
31, 2009. Those estimates were also based on our historic experience,
and assumed that award fees would continue to be determined in large part on
scores from non-binding monthly evaluations made by our customers in the field
of operations. These scores were largely very good to excellent
during the open performance periods. However, in light of the
discretionary actions of the AFDO in February 2010 with respect to the January
through April 2008 period of performance, and our inability to obtain assurances
to the contrary, we concluded that we can no longer reliably estimate the fees
to be awarded. Accordingly, we reversed the remaining balance of accrued award
fees of approximately $112 million that had previously been estimated as earned
and recognized as revenue during the period from May 1, 2008 through December
31, 2009. If our
next award fee letter has performance scores and award rates at levels for which
we receive an award, our revenues and earnings will increase
accordingly.
DCAA
Audit Issues
The
negotiation, administration and settlement of our contracts with the U.S.
Government, consisting primarily of Department of Defense contracts, are subject
to audit by the Defense Contract Audit Agency (“DCAA”), which serves in an
advisory role to government administrative contracting officers who administer
our contracts. The scope of these audits include, among other things,
the allowability, allocability and reasonableness of incurred costs, approval of
annual overhead rates, compliance with the Federal Acquisition Regulation,
compliance with certain unique contract clauses, and audits of certain aspects
of our internal control systems. Issues identified during these audits are
typically discussed and reviewed with us, and certain matters are included in
audit reports issued by the DCAA, with its recommendations to our customer’s
administrative contracting officer. We attempt to resolve all issues identified
in audit reports by working directly with the DCAA and the administrative
contracting officer. When agreement cannot be reached, DCAA may issue a Form 1,
“Notice of Contract Costs Suspended and/or Disapproved,” which recommends
withholding the previously paid amounts or it may issue an advisory report to
the administrative contracting officer. KBR is permitted to respond
to these documents and provide additional support. At December 31, 2009, the
Company has open Form 1’s from DCAA recommending suspension of payments totaling
approximately $289 million associated with our contract costs incurred in prior
years, of which approximately $152 million has been withheld from our current
billings. As a consequence, for certain of these matters, we have withheld
approximately $106 million from our subcontractors under the payment terms of
those contracts. In addition, we have recently received demand letters from our
customer requesting that we remit a total of $121 million of disapproved costs
to which we have not yet responded. We continue to work with our administrative
contracting officers, the DCAA and our subcontractors to resolve these issues.
However, for certain of these matters, we have filed claims with the Armed
Services Board of Contract Appeals or the United States Court of
Claims.
We
self-disallow costs that are expressly not allowable or allocable to government
contracts per the relevant regulations. Our revenue recorded for government
contract work is reduced for our estimate of potentially refundable costs
related to issues that may be categorized as disputed or unallowable as a result
of cost overruns or the audit process.
Certain
issues raised as a result of contract audits and other investigations are
discussed below.
Security. In
February 2007, we received a Form 1 notice from the Department of the Army
informing us of their intent to adjust payments under the LogCAP III contract
associated with the cost incurred for the years 2003 through 2006 by certain of
our subcontractors to provide security to their employees. Based on that notice,
the Army withheld its initial assessment of $20 million. The Army based its
initial assessment on one subcontract wherein, based on communications with the
subcontractor, the Army estimated 6% of the total subcontract cost related to
the private security costs. The Army previously indicated that not all task
orders and subcontracts have been reviewed and that they may make additional
adjustments. In August 2009, we received a Form 1 notice from the
DCAA disapproving an additional $83 million of costs incurred by us and our
subcontractors to provide security during the same periods. At
that time, the Army withheld an additional $22 million in payments from us
bringing the total payments withheld to approximately $42 million as of December
31, 2009 out of the Form 1 notices issued to date of $103 million.
The Army
indicated that they believe our LogCAP III contract prohibits us and our
subcontractors from billing costs of privately acquired security. We believe
that, while the LogCAP III contract anticipates that the Army will provide force
protection to KBR employees, it does not prohibit us or any of our
subcontractors from using private security services to provide force protection
to KBR or subcontractor personnel. In addition, a significant portion of our
subcontracts are competitively bid fixed price subcontracts. As a result, we do
not receive details of the subcontractors’ cost estimate nor are we legally
entitled to it. Further, we have not paid our subcontractors any
additional compensation for security services. Accordingly, we
believe that we are entitled to reimbursement by the Army for the cost of
services provided by us or our subcontractors, even if they incurred costs for
private force protection services. Therefore, we believe that the Army’s
position that such costs are unallowable and that they are entitled to withhold
amounts incurred for such costs is wrong as a matter of law.
In
2007, we provided at the Army's request information that addresses the use of
armed security either directly or indirectly charged to LogCAP III. In October
2007, we filed a claim to recover the original $20 million that was withheld
which was deemed denied as a result of no response from the contracting
officer. In March 2008, we filed an appeal to the Armed Services
Board of Contract Appeals (“ASBCA”) to recover the initial $20 million withheld
from us, and that appeal is currently stayed pending discussions with the
Department of Justice (“DOJ”) as further described below.
This
matter is also the subject of an ongoing investigation by the Department of
Justice (“DOJ”) for possible violations of the False Claims Act. We
are cooperating fully with this investigation and are currently engaged in
discussions of the possibility of seeking an acceptable resolution of this
matter. We believe these sums were properly billed under our contract
with the Army. At this time, we believe the likelihood that a loss
related to this matter has been incurred is remote. We have not
adjusted our revenues or accrued any amounts related to this
matter.
Containers.
In June 2005, the DCAA recommended withholding certain costs associated with
providing containerized housing for soldiers and supporting civilian personnel
in Iraq. The DCMA recommended that the costs be withheld pending receipt of
additional explanation or documentation to support the subcontract costs. During
2006, we resolved approximately $26 million of the withheld amounts with our
contracting officer and payment was received in the first quarter of 2007. In
May of 2008, we received notice from the DCMA of their intention to rescind
their 2006 determination to allow the $26 million of costs pending additional
supporting information. We have not received a final determination by
the DCMA and continue to provide information as requested by the DCMA. As of
December 31, 2009, approximately $30 million of costs have been suspended under
Form 1 notices related to this matter of which $28 million has been withheld by
us from our subcontractors. In April 2008, we filed a counterclaim in
arbitration against one of our LogCAP III subcontractors, First Kuwaiti Trading
Company, to recover approximately $51 million paid to the subcontractor for
containerized housing as further described under the caption First Kuwaiti
Arbitration below. We will continue working with the government and our
subcontractors to resolve the remaining amounts. At this time, the likelihood
that a loss in excess of the amount accrued for this matter is
remote.
Dining
facilities. In
2006, the DCAA raised questions regarding costs related to dining facilities in
Iraq. We responded to the DCMA that our costs are reasonable. Since
2007, the DCAA has sent Form 1 notices totaling $120 million suspending costs
related to these dining facilities until such time we provide documentation to
support the price reasonableness of the rates negotiated with our subcontractor
and demonstrate that the amounts billed were in accordance with the contract
terms. We believe the prices obtained for these services were
reasonable and intend to vigorously defend ourselves on this matter. As of
December 31, 2009, we filed claims in the U.S. Court of Federal Claims to
recover $57 million of amounts withheld from us by the customer. With
respect to questions raised regarding billing in accordance with contract terms,
as of December 31, 2009, we believe it is reasonably possible that we could
incur losses in excess of the amount accrued for possible subcontractor costs
billed to the customer that were possibly not in accordance with contract terms.
However, we are unable to estimate an amount of possible loss or range of
possible loss in excess of the amount accrued related to any costs billed to the
customer that were not in accordance with the contract terms. As of
December 31, 2009, we had withheld $70 million in payments from our
subcontractors pending the resolution of these matters with our
customer.
Kosovo fuel.
In April 2007, the DOJ issued a letter alleging the theft in 2004 and
subsequent sale of diesel fuel by KBR employees assigned to Camp Bondsteel in
Kosovo. In addition, the letter alleges that KBR employees falsified records to
conceal the thefts from the Army. The total value of the fuel in question is
estimated by the DOJ at approximately $2 million based on an audit report issued
by the DCAA. We believe the volume of the alleged misappropriated fuel is
significantly less than the amount estimated by the DCAA. We responded to the
DOJ that we had maintained adequate programs to control, protect, and preserve
the fuel in question. We further believe that our contract with the Army
expressly limits KBR’s responsibility for such losses. In April 2009,
the DOJ informed us that they have closed their file on the matter and we
believe the matter is now resolved.
Transportation
costs. The DCAA, in performing its audit activities under the LogCAP III
contract, raised a question about our compliance with the provisions of the Fly
America Act. Subject to certain exceptions, the Fly America Act
requires Federal employees and others performing U.S. Government-financed
foreign air travel to travel by U.S. flag air carriers. There are
times when we transported personnel in connection with our services for the U.S.
military where we may not have been in compliance with the Fly America Act and
its interpretations through the Federal Acquisition Regulations and the
Comptroller General. As of December 31, 2009, we have accrued an
estimate of the cost incurred for these potentially non-compliant flights with a
corresponding reduction to revenue. The DCAA may consider additional
flights to be noncompliant resulting in potential larger amounts of disallowed
costs than the amount we have accrued. At this time, we cannot
estimate a range of reasonably possible losses that may have been incurred, if
any, in excess of the amount accrued. We will continue to work with
our customer to resolve this matter.
Construction
services. During the third quarter of 2009, we received a Form 1 notice
from the DCAA disapproving approximately $26 million in costs related to work
performed under our CONCAP III contract with the U.S. Navy to provide emergency
construction services primarily to Government facilities damaged by Hurricanes
Katrina and Wilma. The DCAA claims the costs billed to the U.S. Navy
primarily related to subcontracts costs that were either inappropriately bid,
included unallowable profit markup or were unreasonable. We believe
we undertook adequate and reasonable steps to ensure that bidding procedures
were followed and documented and that the amounts billed to the customer were
reasonable and justified. As of December 31, 2009, we believe that
the likelihood of further loss in excess of the amount accrued related to these
claims is remote.
Investigations,
Qui Tams and Litigation
The
following matters relate to ongoing litigation or investigations involving U.S.
government contracts.
Export
Compliance. We identified and reported to the U.S. Departments
of State and Commerce numerous exports of materials, including personal
protection equipment such as night vision goggles, body armor and chemical
protective suits that possibly were not in accordance with the terms of our
export license or applicable regulations. In October 2009 the
Department of Commerce responded by warning us that it believed that the
disclosed conduct constituted violations, but that the facts and circumstances
were such that it would not seek penalties. In December 2009, we
received a letter from the Department of State acknowledging our voluntary
disclosures and closing the case without taking action to impose a civil
penalty. The Department of State recommended actions to strengthen
our compliance processes and procedures. We will continue to work
with them on strengthening our compliance.
McBride Qui Tam
suit. In September 2006, we became aware of a qui tam action
filed against us by a former employee alleging various wrongdoings in the form
of overbillings of our customer on the LogCAP III contract. This case
was originally filed pending the government’s decision whether or not to
participate in the suit. In June 2006, the government formally
declined to participate. The principal allegations are that our
compensation for the provision of Morale, Welfare and Recreation (“MWR”)
facilities under LogCAP III is based on the volume of usage of those facilities
and that we deliberately overstated that usage. In accordance with
the contract, we charged our customer based on actual cost, not based on the
number of users. It was also alleged that, during the period from
November 2004 into mid-December 2004, we continued to bill the customer for
lunches, although the dining facility was closed and not serving
lunches. There are also allegations regarding housing containers and
our provision of services to our employees and contractors. On July 5, 2007, the
court granted our motion to dismiss the qui tam claims and to compel arbitration
of employment claims including a claim that the plaintiff was unlawfully
discharged. The majority of the plaintiff’s claims were dismissed but
the plaintiff was allowed to pursue limited claims pending discovery and future
motions. Substantially all employment claims were sent to arbitration under the
Company’s dispute resolution program and were subsequently resolved in our
favor. In January 2009, the relator filed an amended complaint which
is currently in the discovery process. We believe the relator’s claim
is without merit and that the likelihood that a loss has been incurred is
remote. As of December 31, 2009, no amounts have been
accrued.
Godfrey Qui Tam
suit. In December 2005, we became aware of a qui tam action
filed against us and several of our subcontractors by a former employee alleging
that we violated the False Claims Act by submitting overcharges to the
government for dining facility services provided in Iraq under the LogCAP III
contract. As required by the False Claims Act, the lawsuit was filed
under seal to permit the government to investigate the
allegations. In early April 2007, the court denied the government’s
motion for the case to remain under seal, and on April 23, 2007, the government
filed a notice stating that it was not participating in the suit. In
August 2007, the relator filed an amended complaint which added an additional
contract to the allegations and added retaliation claims. We filed
motions to dismiss and to compel arbitration which were granted on March 13,
2008 for all counts except as to the employment issues which were sent to
arbitration. The relator has filed an appeal and our position was
upheld at the Appellate Court level as of January 6, 2010. We are
unable to determine the likely outcome at this time with regard to the remaining
employment issues sent to arbitration. No amounts have been accrued
and we cannot determine any reasonable estimate of loss that may have been
incurred, if any.
ASCO
settlement. In 2003, Associated Construction Company WLL
(ASCO) was a subcontractor to KBR in Iraq related to work performed on our
LogCAP III contract. In 2008, a jury in Texas returned a verdict
against KBR awarding ASCO damages of $39 million with the court to determine
attorney’s fees and interest. In the fourth quarter of 2008, we
negotiated a final settlement with ASCO in the amount of $22 million, of which
we had previously concluded that $5 million was probable of reimbursement from
our customer. In the third quarter of 2009, we obtained approval from
the customer to bill the entire $22 million resulting in the recognition of an
additional $17 million of revenue.
First Kuwaiti
Trading Company arbitration. In April 2008 First Kuwaiti
Trading Company, one of our LogCAP III subcontractors, filed for arbitration of
a subcontract under which KBR had leased vehicles related to work performed on
our LogCAP III contract. First Kuwaiti alleged that we did not return
or pay rent for many of the vehicles and sought initial damages in the amount of
$39 million. We filed a counterclaim to recover amounts which may
ultimately be determined due to the Government for the $51 million in suspended
costs as discussed in the preceding section of this footnote titled
“Containers.” First Kuwaiti subsequently responded by adding
additional subcontract claims, increasing its total claim to approximately $134
million as of December 31, 2009. This matter is in the early stages
of the arbitration process. No amounts have been accrued and we are
unable to determine a reasonable estimate of loss, if any, at this
time.
Paul Morell, Inc.
d/b/a The Event Source vs. KBR, Inc. TES is a former LogCAP
III subcontractor who provided DFAC services at six sites in Iraq from mid-2003
to early 2004. TES sued KBR in Federal Court in Virginia for breach
of contract and tortious interference with TES’s subcontractors by awarding
subsequent DFAC contracts to the subcontractors. In addition, the
Government withheld funds from KBR that KBR had submitted for reimbursement of
TES invoices, and at that time, TES agreed that it was not entitled to payment
until KBR was paid by the Government. Eventually KBR and the
Government settled the dispute, and in turn KBR and TES agreed that TES would
accept, as payment in full with a release of all other claims, the amount the
Government paid to KBR for TES’s services. TES filed a suit to
overturn that settlement and release, claiming that KBR misrepresented the
facts. The trial was completed in June 2009. In January
2010, the Federal Court issued an order against us in favor of TES in the amount
of $15 million in actual damages and interest and $4 million in punitive damages
relating to the settlement and release entered into by the parties in May
2005. As of December 31, 2009, we accrued the full amount of the
damages and interest awarded to TES and continue to assess the merits of an
appeal of the order. The court ruled in our favor relating to the
breach of contract and tortious interference claims.
Electrocution
litigation. During 2008, two separate lawsuits were filed against KBR
alleging that the Company was responsible in two separate electrical incidents
which resulted in the deaths of two soldiers. One incident occurred at
Radwaniyah Palace Complex and the other occurred at Al Taqaddum. It is alleged
in each suit that the electrocution incident was caused by improper electrical
maintenance or other electrical work. We intend to vigorously defend these
matters. KBR denies that its conduct was the cause of either event and denies
legal responsibility. Both cases have been removed to Federal Court where
motions to dismiss have been filed. The plaintiffs voluntarily have dismissed
one suit. The court has issued a stay in the discovery of the other case.
The stay is pending an appeal of certain pre-trial motions to dismiss that
were previously denied. Hearings on the appeal are expected to occur in the
first half of 2010. We are unable to determine the likely outcome of the
remaining case at this time. As of December 31, 2009, no amounts have been
accrued.
Burn Pit
litigation. KBR has been served with 43 lawsuits in various
states alleging exposure to toxic materials resulting from the operation of burn
pits in Iraq or Afghanistan in connection with services provided by KBR under
the LogCAP III contract. Each lawsuit has multiple named plaintiffs
who purport to represent a large class of unnamed persons. The
lawsuits primarily allege negligence, willful and wanton conduct, battery,
intentional infliction of emotional harm, personal injury and failure to warn of
dangerous and toxic exposures which has resulted in alleged illnesses for
contractors and soldiers living and working in the bases where the pits are
operated. All of the pending cases have been removed to Federal Court
and will be consolidated for multi-district litigation treatment. We
intend to vigorously defend these matters. Due to the inherent
uncertainties of litigation and because the litigation is at a preliminary
stage, we cannot at this time accurately predict the ultimate outcome of these
matters, nor estimate the amounts of potential loss, if any.
Convoy Ambush
Litigation. In April 2004, a fuel convoy in route from Camp
Anaconda to Baghdad International Airport for the U.S. Army under our LogCAP III
contract was ambushed resulting in deaths and severe injuries to truck drivers
hired by KBR. In 2005, survivors of the drivers killed and those that were
injured in the convoy, filed suit in state court in Houston, Texas against KBR
and several of its affiliates, claiming KBR deliberately intended that the
drivers in the convoy would be attacked and injured or killed. The suit
also alleges KBR committed fraud in its hiring practices by failing to disclose
the dangers associated with working in the Iraq combat zone. In September
2006, the case was dismissed based upon the court’s ruling that it lacked
jurisdiction because the case presented a non-justiciable political
question. Subsequently, three additional suits were filed, arising out of
insurgent attacks on other convoys that occurred in 2004 and were likewise
dismissed as non-justiciable under the Political Question
Doctrine.
The
plaintiffs in all cases appealed the dismissals to the Fifth Circuit Court of
Appeals which reversed and remanded the remaining cases to trial court. In
July 2008, the Court directed substantive discovery to commence including the
re-submittal of dispositive motions on various grounds including the Defense
Base Act and Political Question Doctrine. In February 2010, the court
ruled in favor of the plaintiffs, denying our motions to dismiss the case.
The cases are set to proceed with trial in May 2010. We are unable to
determine the likely outcome of these cases at this time. As of December 31,
2009, no amounts have been accrued nor can we estimate the amount of potential
loss, if any.
Other
Matters
Claims. Unapproved claims relate to
contracts where our costs have exceeded the customer’s funded value of the task
order. Our unapproved claims for costs incurred under various
government contracts totaled $113 million at December 31, 2009 and $73 million
at December 31, 2008. The unapproved claims at December 31, 2009 include
approximately $59 million primarily the result of the de-obligation of
2004 funding on certain task orders that were also subject to Form 1 notices
relating to certain DCAA audit issues discussed above, primarily Dining
Facilities. We believe such disputed costs will be resolved in our
favor at which time the customer will be required to obligate funds from the
year in which resolution occurs. The unapproved claims outstanding at
December 31, 2009 are considered to be probable of collection and have been
recognized as revenue.
Legal
Proceedings
Foreign
Corrupt Practices Act investigations
On
February 11, 2009 KBR LLC, entered a guilty plea related to the Bonny Island
investigation in the United States District Court, Southern District of Texas,
Houston Division (the “Court”). KBR LLC plead guilty to one count of
conspiring to violate the FCPA and four counts of violating the FCPA, all
arising from the intent to bribe various Nigerian officials through commissions
paid to agents working on behalf of TSKJ on the Bonny Island
project. The plea agreement reached with the DOJ resolves all
criminal charges in the DOJ’s investigation into the conduct of KBR LLC relating
to the Bonny Island project, so long as the conduct was disclosed or known to
DOJ before the settlement, including previously disclosed allegations of
coordinated bidding. The plea agreement calls for the payment of a criminal
penalty of $402 million, of which Halliburton pays $382 million under the terms
of the indemnity in the master separation agreement, while we pay $20
million. The criminal penalties are to be paid in quarterly payments
over a two-year period ending October 2010. We also agreed to a
period of organizational probation of three years, during which we retain a
monitor who assesses our compliance with the plea agreement and evaluate our
FCPA compliance program over the three year period, with periodic reports to the
DOJ.
On the
same date, the SEC filed a complaint and we consented to the filing of a final
judgment against us in the Court. The complaint and the judgment were filed as
part of a settled civil enforcement action by the SEC, to resolve the civil
portion of the government’s investigation of the Bonny Island project. The
complaint alleges civil violations of the FCPA’s antibribery and
books-and-records provisions related to the Bonny Island project. The complaint
enjoins us from violating the FCPA’s antibribery, books-and-records, and
internal-controls provisions and requires Halliburton and KBR, jointly and
severally, to make payments totaling $177 million, all of which has been paid by
Halliburton pursuant to the indemnification under the master separation
agreement. The judgment also requires us to retain an independent
monitor on the same terms as the plea agreement with the DOJ.
Under
both the plea agreement and judgment, we have agreed to cooperate with the SEC
and DOJ in their investigations of other parties involved in TSKJ and the Bonny
Island project.
As a
result of the settlement, in the fourth quarter 2008 we recorded the $402
million obligation to the DOJ and, accordingly, recorded a receivable from
Halliburton for the $382 million that Halliburton will pay to the DOJ on our
behalf. The resulting charge of $20 million to KBR was recorded in
cost of sales of our Upstream business unit in the fourth quarter of 2008.
Likewise, we recorded an obligation to the SEC in the amount of $177 million and
a receivable from Halliburton in the same amount. Halliburton paid
their first five installments totaling $240 million to the DOJ and $177 million
to the SEC as of December 31, 2009, and such payments totaling $417 million have
been reflected in the accompanying statement of cash flows as noncash operating
activities in 2009. We have paid $12 million related to our portion
of the settlement agreement.
At
December 31, 2009, the remaining obligation to the DOJ of $150 million has been
classified on our consolidated balance sheet in “Other current
liabilities.” This classification is based on payment terms that
provide for quarterly installments of $50 million each due on the first day of
each subsequent quarter beginning on April 1, 2009 through October 1,
2010. Likewise, the remaining indemnification receivable from
Halliburton for the DOJ obligation of $143 million has been classified on our
consolidated balance sheet in “Other current assets.”
As part
of the settlement of the FCPA matters, we have agreed to the appointment of a
corporate monitor for a period of up to three years. We proposed the
appointment of a corporate monitor and received approval from the DOJ in the
third quarter of 2009. We are responsible for paying the fees and
expenses related to the monitor’s review and oversight of our policies and
activities relating to compliance with applicable anti-corruption laws and
regulations.
Because
of the guilty plea by KBR LLC, we are subject to possible suspension or
debarment of our ability to contract with governmental agencies of the United
States and of foreign countries. We received written confirmation from the U.S.
Department of the Army stating that it does not intend to suspend or debar KBR
from DoD contracting as a result of the guilty plea by KBR
LLC. Additionally, the MoD has indicated that it does not believe it
will debar KBR LLC or any related KBR entities under its
regulations. However, this decision is currently the subject of a
threatened legal challenge in the U.K. Although no formal proceedings have been
issued to date, it is too early to make a judgment as to the risk of debarment
from MoD contracting. Although we do not believe we will be suspended
or debarred of our ability to contract with other governmental agencies of the
United States or any other foreign countries, suspension or debarment from the
government contracts business would have a material adverse effect on our
business, results of operations, and cash flow.
Under the
terms of the Master Separation Agreement, Halliburton has agreed to indemnify
us, and any of our greater than 50%-owned subsidiaries, for our share of fines
or other monetary penalties or direct monetary damages, including disgorgement,
as a result of claims made or assessed by a governmental authority of the United
States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a
settlement thereof relating to FCPA and related corruption allegations, which
could involve Halliburton and us through The M. W. Kellogg Company, M. W.
Kellogg Limited (“MWKL”), or their or our joint ventures in projects both in and
outside of Nigeria, including the Bonny Island, Nigeria project. Halliburton’s
indemnity will not apply to any other losses, claims, liabilities or damages
assessed against us as a result of or relating to FCPA matters and related
corruption allegations or to any fines or other monetary penalties or direct
monetary damages, including disgorgement, assessed by governmental authorities
in jurisdictions other than the United States, the United Kingdom, France,
Nigeria, Switzerland or Algeria, or a settlement thereof, or assessed against
entities such as TSKJ, in which we do not have an interest greater than
50%.
We are
aware that the U.K. Serious Fraud Office (“SFO”) is conducting an investigation
of activities conducted by current or former employees of MWKL regarding the
Bonny Island project. Violations of corruption laws in the U.K. could
result in fines, restitution and confiscation of revenues, among other
penalties. MWKL has informed the SFO that it intends to self report
corporate liability for corruption-related offenses arising out of the Bonny
Island project and expects to enter into a plea negotiation process under the
“Attorney General’s Guidelines on Plea Discussions in Cases of Serious and
Complex Fraud” issued by the Attorney General for England and
Wales. MWKL is in the process of responding to inquiries and
providing information as requested by the SFO. As a result of the
unique factors associated with this matter and in light of MWKL’s cooperation,
the SFO has confirmed it is prepared to treat MWKL as making an early self
report in accordance with the SFO’s guidelines. Whether the SFO
pursues criminal prosecution or civil recovery, and the amount of any fines,
restitution, confiscation of revenues or other penalties that could be assessed
will depend on, among other factors, the SFO’s findings regarding the amount,
timing, nature and scope of any improper payments or other activities, whether
any such payments or other activities were authorized by or made with knowledge
of MWKL, the amount of revenue involved, and the level of cooperation provided
to the SFO during the investigations. Our indemnity from Halliburton
under the master separation agreement with respect to MWKL is limited to our 55%
beneficial ownership in MWKL. Due to the indemnity from Halliburton,
we believe any outcome of this matter will not have a material adverse impact to
our operating results or financial position.
Investigations
by other foreign governmental authorities are continuing. At this
time, other than the claims being considered by the SFO discussed above, no
claims by governmental authorities in foreign jurisdictions have been
asserted. Other foreign governmental authorities could conclude that
violations of applicable foreign laws analogous to the FCPA have occurred with
respect to the Bonny Island project and other projects in or outside of Nigeria.
In such circumstances, the resolution or disposition of these matters, even
after taking into account the indemnity from Halliburton with respect to any
liabilities for fines or other monetary penalties or direct monetary damages,
including disgorgement, that may be assessed by certain foreign governments or
governmental agencies against us or our greater than 50%-owned subsidiaries
could have a material adverse effect on our business, prospects, results or
operations, financial condition and cash flow. We currently do not
have sufficient information to estimate any liability related to ongoing
investigations.
Commercial
Agent Fees
We have
both before and after the separation from our former parent used commercial
agents on some of our large-scale international projects to assist in
understanding customer needs, local content requirements, vendor selection
criteria and processes and in communicating information from us regarding our
services and pricing. Prior to separation, it was identified by our
former parent in performing its investigation of anti-corruption activities that
certain of these agents may have engaged in activities that were in violation of
anti-corruption laws at that time and the terms of their agent agreements with
us. Accordingly, we have ceased the receipt of services from and
payment of fees to these agents. Fees for these agents are included
in the total estimated cost for these projects at their
completion. In connection with actions taken by U.S. Government
authorities, we have removed certain unpaid agent fees from the total estimated
costs in the period that we obtained sufficient evidence to conclude such agents
clearly violated the terms of their contracts with us. In the first
and third quarters of 2009, we reduced project cost estimates by $16 million and
$5 million, respectively, as a result of making such
determinations. As of December 31, 2009, agent fees of approximately
$89 million are included in our estimated costs for various
projects. We will make no payments to these agents until we are
assured that any payment complies with all applicable laws. In
addition, we will vigorously defend ourselves against any claims for payment
from such agents.
Barracuda-Caratinga
Project Arbitration
In June
2000, we entered into a contract with Barracuda & Caratinga Leasing Company
B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields,
which are located off the coast of Brazil. Petrobras is a contractual
representative that controls the project owner. In November 2007, we
executed a settlement agreement with the project owner to settle all outstanding
project issues except for the bolts arbitration discussed below.
At
Petrobras’ direction, we replaced certain bolts located on the subsea flowlines
that failed through mid-November 2005, and we understand that additional bolts
failed thereafter, which were replaced by Petrobras. These failed bolts were
identified by Petrobras when it conducted inspections of the
bolts. In March 2006, Petrobras notified us they submitted this
matter to arbitration claiming $220 million plus interest for the cost of
monitoring and replacing the defective stud bolts and, in addition, all of the
costs and expenses of the arbitration including the cost of attorneys'
fees. Petrobras has not provided any evidentiary support or analysis
for the amounts claimed as damages. The arbitration is being
conducted in New York under the guidelines of the United Nations Commission on
International Trade Law (“UNCITRAL”). Petrobras contends that all of the bolts
installed on the project are defective and must be replaced.
During
the time that we addressed outstanding project issues and during the conduct of
the arbitration, KBR believed the original design specification for the bolts
was issued by Petrobras, and as such, the cost resulting from any replacement
would not be our responsibility. A preliminary hearing on legal and
factual issues relating to liability with the arbitration panel was held in
April 2008. In June 2009, we received an unfavorable ruling from the
arbitration panel on the legal and factual issues as the panel decided the
original design specification for the bolts originated with KBR and its
subcontractors. The preliminary hearing concluded that KBR’s express
warranties in the contract regarding the fitness for use of the design
specifications for the bolts took precedence over any implied warranties
provided by the project owner. Our potential exposure would include
the nominal costs of the bolts replaced to date by Petrobras, any incremental
monitoring costs incurred by Petrobras and damages for any other bolts that are
subsequently found to be defective which damages and exposure we cannot quantify
at this time because such costs will be dependent upon the remaining legal and
factual issues to be determined in the final arbitration hearings which have not
yet been scheduled. It remains to be determined whether bolts that
have not failed are in fact defective. However, we believe that it is
probable that we have incurred some liability in connection with the replacement
of bolts that have failed to date but at this time cannot determine the amount
of that liability as noted above. For the remaining bolts at dispute
in the bolt arbitration with Petrobras, at this time we can not determine that
we have liability nor determine the amount of any such liability. As
a result, no amounts have been accrued. Under the master separation
agreement, Halliburton has agreed to indemnify us and any of our greater than
50%-owned subsidiaries as of November 2006, for all out-of-pocket cash costs and
expenses (except for ongoing legal costs), or cash settlements or cash
arbitration awards in lieu thereof, we may incur after the effective date of the
master separation agreement as a result of the replacement of the subsea
flowline bolts installed in connection with the Barracuda-Caratinga
project. Due to the indemnity from Halliburton, we believe any
outcome of this matter will not have a material adverse impact to our operating
results or financial position.
Derivative
Class Action Lawsuits
In the
second quarter of 2009, two shareholder derivative lawsuits were filed in the
District Court of Harris County, Texas, against certain current and former
officers and directors of Halliburton and KBR. The complaints
alleged, among other things, lack of internal controls to detect fraud and
wrongdoing that lead to the bribing of Nigerian officials and violation of the
FCPA, repeated overcharging of the government for its services under federal
government contracts, acceptance of illegal kickbacks and fraud as well as
violation of various other environmental and human rights laws. Most
of the purported allegations stemmed from activities relating to the DOJ’s and
SEC’s FCPA investigations in Nigeria. Both complaints sought
unspecified compensatory damages on behalf of Halliburton and/or KBR, interest,
and an award of attorney’s fees, expert’s fees, costs and other expenses of
litigation. The allegations concern events the vast majority of which
occurred prior to the formation of KBR, Inc. or the appointment of its officers
and directors. During January of 2010, the plaintiffs replead their
claims and consolidated the suits in response to our
objections. Neither KBR nor its directors were named in the new
consolidated complaint. We consider this matter to now be
closed.
Item 7A. Quantitative and Qualitative Discussion about Market
Risk
Information
relating to market risk is included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under the caption “Financial
Instrument Market Risk” and Note 15 of our consolidated financial statements and
the information discussed therein is incorporated by reference into this Item 7A
..
Item 8. Financial Statements and Supplementary Data
|
|
Page
No.
|
|
Report
of Independent Registered Public Accounting Firm
|
61 |
|
Consolidated
Statements of Income for years ended December 31, 2009, 2008, and
2007
|
62 |
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
63 |
| Consolidated Statements of Comprehensive Income for the years ended December 31, 2009, 2008, and 2007 | 64 |
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2009,
2008, and 2007
|
65 |
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008, and
2007
|
66 |
|
Notes
to Consolidated Financial Statements
|
67 |
The
related financial statement schedules are included under Part IV, Item 15 of
this annual report.
Report of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
KBR,
Inc.:
We have
audited the accompanying consolidated balance sheets of KBR, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of income, shareholders’ equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 2009.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of KBR, Inc. and subsidiaries
as of December 31, 2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), KBR, Inc.’s internal control over financial
reporting as of December 31, 2009, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated February 25, 2010
expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG
LLP
Houston,
Texas
February
25, 2010
KBR, Inc.
Consolidated
Statements of Income
(In
millions, except for per share data)
|
|
|
Years
ended December 31
|
|
|||||||||
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|||
|
Services
|
|
$
|
12,060
|
|
|
$
|
11,493
|
|
|
$
|
8,642
|
|
|
Equity
in earnings of unconsolidated affiliates, net
|
|
|
45
|
|
|
|
88
|
|
|
|
103
|
|
|
Total
revenue
|
|
|
12,105
|
|
|
|
11,581
|
|
|
|
8,745
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
11,348
|
|
|
|
10,820
|
|
|
|
8,225
|
|
|
General
and administrative
|
|
|
217
|
|
|
|
223
|
|
|
|
226
|
|
|
Impairment
of goodwill
|
6
|
—
|
—
|
|||||||||
|
Gain
on disposition of assets, net
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
Total
operating costs and expenses
|
|
|
11,569
|
|
|
|
11,040
|
|
|
|
8,451
|
|
|
Operating
income
|
|
|
536
|
|
|
|
541
|
|
|
|
294
|
|
|
Interest
income (expense), net
|
|
|
(1
|
)
|
|
|
35
|
|
|
|
62
|
|
|
Foreign
currency gains (losses), net
|
|
|
—
|
|
|
(8
|
)
|
|
|
(15
|
)
|
|
|
Other
non-operating income (expense)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
1
|
|
|
Income
from continuing operations before income taxes and noncontrolling
interests
|
|
|
532
|
|
|
|
568
|
|
|
|
342
|
|
|
Provision
for income taxes
|
|
|
(168
|
)
|
|
|
(212
|
)
|
|
|
(138
|
)
|
|
Income
from continuing operations, net of tax
|
|
|
364
|
|
|
|
356
|
|
|
|
204
|
|
|
Income
from discontinued operations, net of tax benefit (provision) of $0, $11,
and $(109)
|
|
|
—
|
|
|
|
11
|
|
|
|
132
|
|
|
Net
income
|
364
|
367
|
336
|
|||||||||
|
Less:
Net income attributable to noncontrolling interests
|
|
|
(74
|
)
|
|
|
(48
|
)
|
|
|
(34
|
)
|
|
Net
income attributable to KBR
|
|
$
|
290
|
|
|
$
|
319
|
|
|
$
|
302
|
|
|
Reconciliation
of net income attributable to KBR common shareholders:
|
||||||||||||
|
Continuing
operations
|
$
|
290
|
$
|
308
|
$
|
182
|
||||||
|
Discontinued
operations, net
|
—
|
11
|
120
|
|||||||||
|
Net
income attributable to KBR
|
$
|
290
|
$
|
319
|
$
|
302
|
||||||
|
Basic
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations – Basic
|
|
$
|
1.80
|
|
|
$
|
1.84
|
|
|
$
|
1.08
|
|
|
Discontinued
operations, net – Basic
|
|
|
—
|
|
|
|
0.07
|
|
|
|
0.71
|
|
|
Net
income attributable to KBR per share – Basic
|
|
$
|
1.80
|
|
|
$
|
1.91
|
|
|
$
|
1.79
|
|
|
Diluted
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
||
|
Continuing
operations - Diluted
|
|
$
|
1.79
|
|
|
$
|
1.84
|
|
|
$
|
1.08
|
|
|
Discontinued
operations, net – Diluted
|
|
|
—
|
|
|
|
0.07
|
|
|
|
0.71
|
|
|
Net
income attributable to KBR per share – Diluted
|
|
$
|
1.79
|
|
|
$
|
1.90
|
|
|
$
|
1.78
|
|
|
Basic weighted average common shares
outstanding
|
|
|
160
|
|
|
|
166
|
|
|
|
168
|
|
|
Diluted weighted average common shares
outstanding
|
|
|
161
|
|
|
|
167
|
|
|
|
169
|
|
|
Cash dividends declared per share (See Note
13)
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
—
|
|
_________________________
|
|
(1)
|
Due
to the effect of rounding, the sum of the individual per share amounts may
not equal the total shown.
|
See
accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated
Balance Sheets
(In
millions except share data)
|
|
|
December
31
|
|
|||||
|
|
|
2009
|
|
|
2008
|
|
||
|
Assets
|
|
|
|
|
|
|
||
|
Current
assets:
|
|
|
|
|
|
|
||
|
Cash
and equivalents
|
|
$
|
941
|
|
|
$
|
1,145
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net of allowance for bad debts of $26 and $19
|
|
|
1,243
|
|
|
|
1,312
|
|
|
Unbilled
receivables on uncompleted contracts
|
|
|
657
|
|
|
|
835
|
|
|
Total
receivables
|
|
|
1,900
|
|
|
|
2,147
|
|
|
Deferred
income taxes
|
|
|
192
|
|
|
|
107
|
|
|
Other
current assets
|
|
|
608
|
|
|
|
743
|
|
|
Total
current assets
|
|
|
3,641
|
|
|
|
4,142
|
|
|
Property,
plant, and equipment, net of accumulated depreciation of $264 and
$224
|
|
|
251
|
|
|
|
245
|
|
|
Goodwill
|
|
|
691
|
|
|
|
694
|
|
|
Intangible
assets, net
|
|
|
58
|
|
|
|
73
|
|
|
Equity
in and advances to related companies
|
|
|
164
|
|
|
|
185
|
|
|
Noncurrent
deferred income taxes
|
|
|
120
|
|
|
|
167
|
|
|
Noncurrent
unbilled receivables on uncompleted contracts
|
|
|
321
|
|
|
|
134
|
|
|
Other
assets
|
|
|
81
|
|
|
|
244
|
|
|
Total
assets
|
|
$
|
5,327
|
|
|
$
|
5,884
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,045
|
|
|
$
|
1,387
|
|
|
Due
to former parent, net
|
|
|
53
|
|
|
|
54
|
|
|
Advance
billings on uncompleted contracts
|
|
|
407
|
|
|
|
519
|
|
|
Reserve
for estimated losses on uncompleted contracts
|
|
|
40
|
|
|
|
76
|
|
|
Employee
compensation and benefits
|
|
|
191
|
|
|
|
320
|
|
|
Other
current liabilities
|
|
|
552
|
|
|
|
680
|
|
|
Current
liabilities related to discontinued operations, net
|
|
|
3
|
|
|
|
7
|
|
|
Total
current liabilities
|
|
|
2,291
|
|
|
|
3,043
|
|
|
Noncurrent
employee compensation and benefits
|
|
|
469
|
|
|
|
403
|
|
|
Other
noncurrent liabilities
|
|
|
106
|
|
|
|
333
|
|
|
Noncurrent
income tax payable
|
|
|
43
|
|
|
|
34
|
|
|
Noncurrent
deferred tax liability
|
|
|
122
|
|
|
|
37
|
|
|
Total
liabilities
|
|
|
3,031
|
|
|
|
3,850
|
|
|
KBR
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common
stock, $0.001 par value, 300,000,000 shares authorized, 170,686,531 and
170,125,715 shares issued, and 160,363,830 and 161,725,715 shares
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Paid-in
capital in excess of par
|
|
|
2,103
|
|
|
|
2,091
|
|
|
Accumulated
other comprehensive loss
|
|
|
(444
|
)
|
|
|
(439
|
)
|
|
Retained
earnings
|
|
|
854
|
|
|
|
596
|
|
|
Treasury
stock, 10,322,701 shares and 8,400,000 shares, at cost
|
|
|
(225
|
)
|
|
|
(196
|
)
|
|
Total
KBR shareholders’ equity
|
|
|
2,288
|
|
|
|
2,052
|
|
|
Noncontrolling
interests
|
8
|
(18
|
)
|
|||||
|
Total
shareholders’ equity
|
2,296
|
2,034
|
||||||
|
Total
liabilities and shareholders’ equity
|
|
$
|
5,327
|
|
|
$
|
5,884
|
|
See
accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated
Statements of Comprehensive Income
(In
millions)
|
|
|
Years
ended December 31
|
|
|||||||||
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
Net
income
|
|
|
364
|
|
|
367
|
|
|
|
336
|
|
|
|
Other
comprehensive income (loss), net of tax benefit
(provision):
|
|
|
|
|
|
|
|
|
|
|
||
|
Net
cumulative translation adjustments
|
|
|
18
|
|
|
(117
|
)
|
|
|
(11
|
)
|
|
|
Pension
liability adjustments, net of taxes of $(5), $(85) and
$116
|
|
|
(15
|
)
|
|
|
(226
|
)
|
|
|
178
|
|
|
Other
comprehensive gains (losses) on investments and
derivatives:
|
|
|
|
|
|
|
|
|
|
|
||
|
Unrealized
gains (losses) on derivatives
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
Reclassification
adjustments to net income
|
|
|
1
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
Income tax benefit (provision) on
derivatives
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Comprehensive
income
|
|
|
365
|
|
|
23
|
|
|
|
501
|
|
|
|
Less: Comprehensive income attributable
to noncontrolling interests
|
|
|
(80
|
)
|
|
|
(21
|
)
|
|
|
(30
|
)
|
|
Comprehensive income attributable to
KBR
|
285
|
2
|
471
|
|||||||||
See
accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated
Statements of Shareholders’ Equity
(In
millions)
|
|
|
December
31
|
|
|||||||||
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
Balance
at January 1,
|
|
$
|
2,034
|
|
$
|
2,235
|
|
|
$
|
1,829
|
|
|
|
Stock-based
compensation
|
|
|
17
|
|
|
16
|
|
|
|
11
|
|
|
|
Intercompany
stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
|
1
|
|
|
|
Cumulative
effect of initial adoption of accounting for uncertainty in income
taxes
|
|
|
—
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
Cumulative
effect of initial adoption of accounting for defined benefit pension and
other postretirement plans
|
|
|
—
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
Common
stock issued upon exercise of stock options
|
|
|
2
|
|
|
3
|
|
|
|
6
|
|
|
|
Tax
benefit increase (decrease) related to stock-based plans
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
11
|
|
|
Settlement
of taxes with former parent
|
|
|
—
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
Dividends
declared to shareholders
|
|
|
(32
|
)
|
|
|
(41
|
)
|
|
|
—
|
|
|
Repurchases
of common stock
|
|
|
(31
|
)
|
|
|
(196
|
)
|
|
|
—
|
|
|
Issuance
of ESPP shares from treasury stock
|
2
|
—
|
—
|
|||||||||
|
Distributions
to noncontrolling shareholders, net
|
(54
|
)
|
(21
|
)
|
(42
|
)
|
||||||
|
Acquisition
of noncontrolling interests related to purchase of
BE&K
|
—
|
2
|
—
|
|||||||||
|
Disposal
of noncontrolling interests related to sale of DML
|
—
|
—
|
(50
|
)
|
||||||||
|
Tax
adjustments to noncontrolling interests
|
—
|
12
|
(5
|
)
|
||||||||
|
Comprehensive
income
|
|
|
365
|
|
|
23
|
|
|
|
501
|
|
|
|
Balance
at December 31,
|
|
$
|
2,296
|
|
$
|
2,034
|
|
|
$
|
2,235
|
|
|
See
accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated
Statements of Cash Flows
(In
millions)
|
|
|
Years
ended December 31
|
|
|||||||||
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|||
|
Net
income
|
|
$
|
364
|
|
$
|
367
|
|
|
$
|
336
|
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Depreciation
and amortization
|
|
|
55
|
|
|
49
|
|
|
|
41
|
|
|
|
Equity
in earnings of unconsolidated affiliates
|
|
|
(45
|
)
|
|
|
(88
|
)
|
|
|
(103
|
)
|
|
Deferred
income taxes
|
|
|
65
|
|
|
88
|
|
|
|
(27
|
)
|
|
|
Gain
on sale of assets
|
|
|
—
|
|
|
—
|
|
|
|
(216
|
)
|
|
|
Impairment
of goodwill
|
|
|
6
|
|
|
—
|
|
|
|
—
|
|
|
|
Other
|
|
|
14
|
|
|
28
|
|
|
|
27
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Receivables
|
|
|
107
|
|
|
(124
|
)
|
|
|
(143
|
)
|
|
|
Unbilled
receivables on uncompleted contracts
|
|
|
156
|
|
|
(45
|
)
|
|
|
264
|
|
|
|
Accounts
payable
|
|
|
(355
|
)
|
|
|
214
|
|
|
|
(92
|
)
|
|
Advance
billings on uncompleted contracts
|
|
|
(98
|
)
|
|
|
(315
|
)
|
|
|
11
|
|
|
Accrued
employee compensation and benefits
|
|
|
(129
|
)
|
|
|
(40
|
)
|
|
|
57
|
|
|
Reserve
for loss on uncompleted contracts
|
|
|
(37
|
)
|
|
|
(41
|
)
|
|
|
(62
|
)
|
|
Collection
(repayment) of advances from (to) unconsolidated affiliates,
net
|
|
|
(18
|
)
|
|
|
68
|
|
|
|
(35
|
)
|
|
Distributions
of earnings from unconsolidated affiliates
|
|
|
54
|
|
|
121
|
|
|
|
131
|
|
|
|
Other
assets
|
|
|
(264
|
)
|
|
|
(149
|
)
|
|
|
(29
|
)
|
|
Other
liabilities
|
|
|
89
|
|
|
(9
|
)
|
|
|
88
|
|
|
|
Total
cash flows provided by (used in) operating
activities
|
|
|
(36
|
)
|
|
|
124
|
|
|
|
248
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Capital
expenditures
|
|
|
(41
|
)
|
|
|
(37
|
)
|
|
|
(43
|
)
|
|
Sales
of property, plant and equipment
|
|
|
—
|
|
|
7
|
|
|
|
3
|
|
|
|
Acquisition
of businesses, net of cash acquired
|
|
|
—
|
|
|
(526
|
)
|
|
|
—
|
|
|
|
Dispositions
of businesses, net of cash
|
|
|
—
|
|
|
—
|
|
|
|
334
|
|
|
|
Proceeds
from sale of investments
|
32
|
—
|
|
—
|
|
|||||||
|
Other
investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Total
cash flows provided by (used in) investing
activities
|
|
|
(9
|
)
|
|
|
(556
|
)
|
|
|
293
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Payments
to former parent, net
|
|
|
—
|
|
|
—
|
|
|
|
(120
|
)
|
|
|
Payments
on long-term borrowings
|
|
|
—
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
Payments
to reacquire common stock
|
|
|
(31
|
)
|
|
|
(196
|
)
|
|
|
—
|
|
|
Net
proceeds from issuance of stock
|
|
|
2
|
|
|
3
|
|
|
|
6
|
|
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(7)
|
|
|
2
|
|
|
|
6
|
|
|
|
Payments
of dividends to shareholders
|
|
|
(32
|
)
|
|
|
(25
|
)
|
|
|
—
|
|
|
Distributions
to noncontrolling shareholders, net
|
|
|
(54
|
)
|
|
|
(28
|
)
|
|
|
(35
|
)
|
|
Cash
collateralization of letters of credit, net
|
(44
|
)
|
—
|
—
|
||||||||
|
Total
cash flows used in financing activities
|
|
|
(166
|
)
|
|
|
(244
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Effect
of exchange rate changes on cash
|
|
|
7
|
|
|
(40
|
)
|
|
|
9
|
|
|
|
Increase
(decrease) in cash and equivalents
|
|
|
(204
|
)
|
|
|
(716
|
)
|
|
|
400
|
|
|
Cash
and equivalents at beginning of period
|
|
|
1,145
|
|
|
1,861
|
|
|
|
1,461
|
|
|
|
Cash
and equivalents at end of period
|
|
$
|
941
|
|
$
|
1,145
|
|
|
$
|
1,861
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash
paid for interest
|
|
$
|
7
|
|
$
|
5
|
|
|
$
|
4
|
|
|
|
Cash
paid for income taxes (net of refunds)
|
|
$
|
166
|
|
$
|
200
|
|
|
$
|
229
|
|
|
|
Noncash
operating activities
|
|
|
|
|
|
|
|
|
|
|
||
|
Other
assets (see Note 11)
|
|
$
|
417
|
|
$
|
(559
|
)
|
|
$
|
—
|
|
|
|
Other
liabilities (see Note 11)
|
|
$
|
(417
|
)
|
|
$
|
579
|
|
|
$
|
—
|
|
See
accompanying notes to consolidated financial statements.
KBR, Inc.
Notes
to Consolidated Financial Statements
Note
1. Description of Business and Basis of Presentation
KBR, Inc.
and its subsidiaries (collectively, “KBR”) is a global engineering, construction
and services company supporting the energy, petrochemicals, government services,
industrial and civil infrastructure sectors. We offer a wide range of services
through six business units: Government and Infrastructure (“G&I”), Upstream,
Services, Downstream, Technology and Ventures. See Note 7 for financial
information about our reportable business segments.
KBR,
Inc., a Delaware corporation, was formed on March 21, 2006 as an indirect,
wholly owned subsidiary of Halliburton. KBR, Inc. was formed to own and operate
KBR Holdings, LLC (“KBR Holdings”). At inception, KBR, Inc. issued 1,000 shares
of common stock for $1 to Halliburton. On October 27, 2006, KBR affected a
135,627-for-one split of its common stock. In connection with the stock split,
the certificate of incorporation was amended and restated to increase the number
of authorized shares of common stock from 1,000 to 300,000,000 and to authorize
50,000,000 shares of preferred stock with a par value of $0.001 per share. All
share data of the company has been adjusted to reflect the stock
split.
In
November 2006, KBR, Inc. completed an initial public offering of 32,016,000
shares of its common stock (the “Offering”) at $17.00 per share. The Company
received net proceeds of $511 million from the Offering after underwriting
discounts and commissions. Halliburton retained all of the KBR shares owned
prior to the Offering and, as a result of the Offering, its 135,627,000 shares
of our common stock represented 81% of the outstanding common stock of KBR, Inc.
after the Offering. Simultaneous with the Offering, Halliburton contributed 100%
of the common stock of KBR Holdings to KBR, Inc. KBR, Inc. had no operations
from the date of its formation to the date of the contribution of KBR Holdings.
See Note 17 for a discussion related to our transactions with our former
parent.
On
February 26, 2007, Halliburton’s board of directors approved a plan under which
Halliburton would dispose of its remaining interest in KBR through a tax-free
exchange with Halliburton’s stockholders pursuant to an exchange offer. On April
5, 2007, Halliburton completed the separation of KBR by exchanging the
135,627,000 shares of KBR owned by Halliburton for publicly held shares of
Halliburton common stock pursuant to the terms of the exchange offer (the
“Exchange Offer”) commenced by Halliburton on March 2, 2007.
We have
evaluated subsequent events for potential recognition or disclosure in the
financial statements through our Form 10-K issuance date of February 25,
2010.
Note
2. Significant Accounting Policies
Principles
of consolidation
Our
consolidated financial statements include the accounts of majority-owned,
controlled subsidiaries and variable interest entities where we are the primary
beneficiary (see Note 16). The equity method is used to account for investments
in affiliates in which we have the ability to exert significant influence over
the affiliates’ operating and financial policies. The cost method is used when
we do not have the ability to exert significant influence. All material
intercompany accounts and transactions are eliminated.
Our
revenue includes both equity in the earnings of unconsolidated affiliates as
well as revenue from the sales of services into the joint ventures. We often
participate on larger projects as a joint venture partner and also provide
services to the venture as a subcontractor. The amount included in our revenue
represents total project revenue, including equity in the earnings from joint
ventures impairments of equity investments in joint ventures, if any, and
revenue from services provided to joint ventures.
Use
of estimates
Our
financial statements are prepared in conformity with accounting principles
generally accepted in the United States, requiring us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
Engineering
and construction contracts
Revenue
from contracts to provide construction, engineering, design or similar services
is reported on the percentage-of-completion method of accounting. 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. All known or
anticipated losses on contracts are provided for in the period they become
evident. Claims and change orders that are in the process of being negotiated
with customers for extra work or changes in the scope of work are included in
contract value when collection is deemed probable. 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.
We
recognize award fees on the LogCAP III contract using an estimated accrual of
the amounts to be awarded. Once task orders underlying the work are
definitized and award fees are granted, we adjust our estimate of award fees to
the actual amounts earned. In 2007, we reduced our award fee accrual
rate on the LogCAP III contract from 84% to 80% of the total amount of possible
award fees, as a result of the rate of actual award fees received in that
year. In 2008, based on our assessments of monthly non-binding
customer evaluations of our performance and the request from our customer to
take corrective actions related to our electrical work and the corrective
actions that we did take in accordance with a plan agreed with our
customer, we reduced
our award fee accrual rate from 80% to 72% of the total possible award fees for
the performance period beginning in April 2008 resulting in a charge of
approximately $5 million in the fourth quarter of 2008. We continued
to use 72% as our accrual rate thereafter. No Award Fee Evaluation
Boards have been held for our Iraq based work on LogCAP III since the June 2008
meeting, which evaluated our performance for the period of January 2008 through
April 2008.
On
February 19, 2010, KBR was notified by the AFDO that a determination had been
made regarding the Company’s performance for the period January 1, 2008 to April
30, 2008 in Iraq. The notice stated that based on information received from
various Department of Defense individuals and organizations after the date of
the evaluation board in June 2008, the AFDO made a unilateral decision to grant
no award fees for the period from January 1 to April 30, 2008. The
AFDO found that KBR’s failure to document the poor conditions of the electrical
system at the Radwaniyah Palace complex, KBR’s failure to provide notice of
unsafe life, health and safety conditions and KBR’s failure to employ qualified
personnel to provide electrical services under task orders 139 and 151 across
the KBR areas of responsibility are failures to perform at a level deserving of
an award fee payment for the evaluated period January 1, 2008 through April
30, 2008. While
we disagree with the findings of the AFDO, we have not yet been provided
with all of the specific information used by the AFDO to reach his decision. We
intend to request access to all information used by the AFDO in reaching his
unilateral decision so that we are able to understand how he arrived at his
conclusions, and to determine whether there are additional actions that we might
take.
As a
result of the AFDO’s adverse determination, we reversed approximately $20
million of award fees that had previously been estimated as earned and
recognized as revenue for that period of performance. In addition, we
re-evaluated our assumptions used in the award fee estimation process related to
the remainder of the open performance periods from May 1, 2008 through December
31, 2009. Those estimates were also based on our historic experience, and
assumed that award fees would continue to be determined in large part on scores
from non-binding monthly evaluations made by our customers in the field of
operations. These scores were largely very good to excellent during the open
performance periods. However, in light of the discretionary actions
of the AFDO in February 2010 with respect to the January through April 2008
period of performance, and our inability to obtain assurances to the contrary,
we concluded that we can no longer reliably estimate the fees to be
awarded. Accordingly, we reversed the remaining balance of accrued
award fees of approximately $112 million that had previously been estimated as
earned and recognized as revenue during the period from May 1, 2008 through
December 31, 2009. If our next award fee letter has performance
scores and award rates at levels for which we receive an award, our revenues and
earnings will increase accordingly.
For
contracts containing multiple deliverables entered into subsequent to June 30,
2003, we analyze each activity within the contract to ensure that we adhere to
the separation guidelines for revenue arrangements with multiple deliverables in
accordance with FASB ASC 605 - Revenue Recognition. For service-only
contracts and service elements of multiple deliverable arrangements, award fees
are recognized only when definitized and awarded by the customer. The LogCAP IV
contract would be an example of a contract in which award fees would be
recognized only when definitized and awarded by the customer. Award fees on
government construction contracts are recognized during the term of the contract
based on our estimate of the amount of fees to be awarded.
Accounting
for pre-contract costs
Pre-contract
costs incurred in anticipation of a specific contract award are deferred only if
the costs can be directly associated with a specific anticipated contract and
their recoverability from that contract is probable. Pre-contract costs related
to unsuccessful bids are written off no later than the period we are informed
that we are not awarded the specific contract. Costs related to one-time
activities such as introducing a new product or service, conducting business in
a new territory, conducting business with a new class of customer, or commencing
new operations are expensed when incurred.
Legal
expenses
We
expense legal costs in the period in which such costs are incurred.
Cash
and equivalents
We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents. Cash and equivalents include cash from advanced
payments related to contracts in progress held by our joint ventures that we
consolidate for accounting purposes. The use of these cash balances are limited
to the joint venture activities and are not available for other projects,
general cash needs or distribution to us without approval of the board of
directors of the respective joint ventures. Cash held by our joint ventures that
we consolidate for accounting purposes totaled approximately $236 million and
$175 million at December 31, 2009 and 2008, respectively.
Included
in “Other current assets” and “Other assets” at December 31, 2009 is restricted
cash in the amounts of $35 million and $11 million,
respectively. Restricted cash consists of amounts held in deposit
with certain banks to collateralize standby letters of credit.
Allowance
for bad debts
We
establish an allowance for bad debts through a review of several factors
including historical collection experience, current aging status of the customer
accounts, financial condition of our customers, and whether the receivables
involve retentions.
Goodwill
and other intangibles
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.
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 and 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.
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.
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 the foreign goodwill balances and
purchase price adjustments.
Net
intangible assets totaled $58 million and $73 million at December 31, 2009 and
2008, respectively. Our gross and net intangibles balances are
presented below:
|
At December 31,
|
||||||||
|
(In millions)
|
2009
|
2008
|
||||||
|
Intangibles
not subject to amortization
|
$ | 10 | $ | 10 | ||||
|
Intangibles subject to
amortization
|
106 | 106 | ||||||
|
Total
intangibles
|
116 | 116 | ||||||
|
Accumulated amortization of other
intangibles
|
(58 | ) | (43 | ) | ||||
|
Net intangibles
|
$ | 58 | $ | 73 | ||||
Intangibles
subject to amortization are amortized over their estimated useful lives of up to
15 years. Intangible amortization expense was $15 million, $11
million and $3 million for the years ended December 31, 2009, 2008 and
2007. Amortization expense is estimated to be approximately $12
million in 2010, $8 million in 2011, $6 million in 2012, $5 million in 2013, $4
million for 2014 and $13 million thereafter.
Impairments
When
events or changes in circumstances indicate that long-lived assets other than
goodwill may be impaired, an evaluation is performed. For an asset classified as
held for use, the estimated future undiscounted cash flow associated with the
asset are compared to the asset’s carrying amount to determine if a write-down
to fair value is required. When an asset is classified as held for sale, the
asset’s book value is evaluated and adjusted to the lower of its carrying amount
or fair value less cost to sell. Depreciation or amortization is
ceased when an asset is classified as held for sale.
KBR
evaluates its equity method investment for impairment when events or changes in
circumstances indicate, in management’s judgment, that the carrying value of
such investment may have experienced an other-than-temporary decline in value.
When evidence of loss in value has occurred, management compares the estimated
fair value of the investment to the carrying value of the investment to
determine whether an impairment has occurred. Management assesses the fair value
of its equity method investment using commonly accepted techniques, and may use
more than one method, including, but not limited to, recent third party
comparable sales, internally developed discounted cash flow analysis and
analysis from outside advisors. If the estimated fair value is less than the
carrying value and management considers the decline in value to be other than
temporary, the excess of the carrying value over the estimated fair value is
recognized in the financial statements as an impairment.
Income
taxes
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 valuation allowance is provided for deferred tax assets if it is
more likely than not that these items will not 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. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, we believe it is more likely than not that
we will realize the benefits of these deductible differences, net of the
existing valuation allowances.
Derivative
instruments
At times,
we enter into derivative financial transactions to hedge existing or projected
exposures to changing foreign currency exchange rates. We do not enter into
derivative transactions for speculative or trading purposes. We recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
accounted for as hedges under FASB ASC 815 – Derivatives and Hedging, are
adjusted to fair value and such changes are reflected through the results of
operations. If the derivative is designated as a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings.
The
ineffective portion of a derivative’s change in fair value is recognized in
earnings. Recognized gains or losses on derivatives entered into to manage
foreign exchange risk are included in foreign currency gains and losses in the
consolidated statements of income.
Concentration
of credit risk
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.
Our
receivables are generally not collateralized. At December 31, 2009 and 2008,
receivables related to our United States government contracts were 44% and 45%
of our total receivables, respectively. Receivables from the Chevron
Corporation represented 7% of our total receivables at December 31,
2009.
Noncontrolling
interest
Noncontrolling
interest in consolidated subsidiaries in our consolidated balance sheets
principally represents noncontrolling shareholders’ proportionate share of the
equity in our consolidated subsidiaries. Noncontrolling interest in consolidated
subsidiaries is adjusted each period to reflect the noncontrolling shareholders’
allocation of income, or the absorption of losses by noncontrolling shareholders
on certain majority-owned, controlled investments where the noncontrolling
shareholders are obligated to fund the balance of their share of these
losses.
Foreign
currency translation
Our
foreign entities for which the functional currency is the United States dollar
translate monetary assets and liabilities at year-end exchange rates, and
non-monetary items are translated at historical rates. Income and expense
accounts are translated at the average rates in effect during the year, except
for depreciation and expenses associated with non-monetary balance sheet
accounts which are translated at historical rates. Adjustments
resulting from these translations are recognized in income. Our
foreign entities for which the functional currency is not the United States
dollar translate net assets at year-end rates and income and expense accounts at
average exchange rates. Adjustments resulting from these translations are
reflected in accumulated other comprehensive income in shareholders’
equity. Foreign currency transaction gains or losses are recognized
in income in the year of occurrence.
Stock-based
compensation
We apply
the fair value recognition provisions of FASB ASC 718-10 for share-based
payments to account for and report equity-based compensation. FASB
ASC 718-10 requires equity-based compensation expense to be measured based on
the grant-date fair value of the award. For performance-based awards,
compensation expense is measured based on the grant-date fair value of the award
and the fair value of that award is remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the
requisite service period or the vesting period are recognized as compensation
cost on a straight line basis over that period. Compensation expense
was recognized for restricted stock awards.
The
grant-date fair value of employee share options is estimated using
option-pricing models. If an award is modified after the grant date,
incremental compensation cost is recognized immediately before the
modification. The benefits of tax deductions in excess of the
compensation cost recognized for the options (excess tax benefits) are
classified as addition to paid-in-capital, and cash retained as a result of
these excess tax benefits is presented in the statement of cash flows as
financing cash inflows.
Total
stock-based compensation expense was $17 million in 2009, $16 million in 2008
and $11 million in 2007. Total income tax benefit recognized in net
income for stock-based compensation arrangements was $6 million in 2009, $5
million in 2008 and $4 million in 2007. Incremental compensation cost resulting
from modifications of previously granted stock-based awards which allowed
certain employees to retain their awards after leaving the company was $1
million in 2009, and less than $1 million in 2008 and 2007. In 2007, we also
recognized less than $1 million in incremental compensation cost from
modifications of previously granted stock-awards due to the conversion of
Halliburton stock options and restricted stock awards granted to KBR employees
to KBR awards of stock options and restricted stock, after our separation from
Halliburton on April 5, 2007. Effective upon our complete separation
from Halliburton, the Halliburton ESPP plan was terminated to KBR employees.
Halliburton shares previously purchased under the ESPP plan remained Halliburton
common stock and did not convert to KBR common stock at the date of separation.
See Note 17 for details related to transactions with our former
parent.
Excess
tax benefits realized from the exercise of stock-based compensation awards
decreased by $7 million for 2009, and increased by $2 million and $6 million for
2008 and 2007, respectively, which has been recognized as paid-in capital in
excess of par. See Note 14 for detailed information on stock-based
compensation and incentive plans.
Additional
Balance Sheet Information
Included
in “Other current assets” on our Consolidated Balance Sheets were advances to
subcontractors of approximately $200 million in 2009 and $120
million in 2008. Included in “Other current liabilities” on our
Consolidated Balance Sheets were retainage payables to subcontractors of
approximately $217 million in 2009 and $120 million in 2008.
Correction
of errors
During
the fourth quarter of the fiscal year ended December 31, 2009, we corrected
errors, originating in periods prior to the fourth quarter, resulting in a
decrease to net income for the quarter of approximately $12 million, net of tax
of $6 million. The majority of these errors related to legal fees
incurred on certain ongoing lawsuits that were improperly recorded as revenues
pursuant to the reimbursable LogCAPIII contract and in billed and unbilled
receivables. These legal costs and other adjustments should have been
recorded in our income statements in each of the quarters during the three year
period ended December 31, 2009. We evaluated the cumulative errors on
both a quantitative and qualitative basis under the guidance of FASB ASC 250 –
Accounting Changes and Error Corrections. We determined that the
cumulative impact of these errors did not affect the trend of net income, cash
flows, or liquidity and therefore did not have a material impact to previously
issued consolidated financial statements for the fiscal years ended December 31,
2007 and 2008. Additionally, we determined our consolidated financial
statements for the fiscal year ended December 31, 2009 and for each of the
previously issued quarters in 2009 were not materially impacted by these error
corrections.
Note
3. Income per Share
Basic
income per share is based upon the weighted average number of common shares
outstanding during the period. Dilutive income per share includes additional
common shares that would have been outstanding if potential common shares with a
dilutive effect had been issued, using the treasury stock method. A
reconciliation of the number of shares used for the basic and diluted income per
share calculations is as follows:
|
Millions of Shares
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
Basic
weighted average common shares outstanding
|
|
|
160
|
|
|
|
166
|
|
|
|
168
|
|
|
Stock options and restricted
shares
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
Diluted weighted average common shares
outstanding
|
|
|
161
|
|
|
|
167
|
|
|
|
169
|
|
For
purposes of applying the two-class method in computing earnings per share, net
earnings allocable to participating securities was approximately $2 million, or
$0.01 per share, for the fiscal years 2009, 2008 and 2007. The
diluted earnings per share calculation did not include 2.0 million, 0.8 million,
and 0.5 million antidilutive weighted average shares for the years ended
December 31, 2009, 2008, and 2007, respectively.
Note
4. Acquisitions
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. The acquisition of BE&K
enhances our ability to provide contractor and maintenance services in North
America. The agreed-upon purchase price was $550 million in cash subject to
certain indemnifications and stockholder’s equity adjustments as defined in the
stock purchase agreement. 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 for
December 31, 2008, include the results of operations of BE&K since the date
of acquisition.
In
accordance with FASB ASC 805 – Business Combinations, (“ASC 805”), the
acquisition was accounted for using the purchase method. For accounting
purposes, the purchase consideration paid was approximately $559 million, which
included $550 million in cash paid at closing and $7 million in cash paid
related to stockholder’s equity based purchase price adjustments, and $2 million
of direct transaction costs. We conducted an external valuation of certain
acquired assets for inclusion in our balance sheet at the date of acquisition.
Long-lived assets such as property, plant and equipment largely reflect a value
of replacing the assets, which takes into account changes in technology, usage,
and relative obsolescence and depreciation of the assets. In addition, assets
that would not normally be recorded in ordinary operations (i.e., customer
relationships and other intangibles) were recorded at their estimated fair
values. The excess of preliminary purchase price over the estimated fair values
of the net assets acquired was recorded as goodwill.
Our
allocation of the purchase price to the fair value of the major assets acquired
and liabilities assumed at the date of acquisition which has been adjusted to
reflect the agreed upon stockholder’s equity and final asset valuation
adjustments. Adjustments primarily related to the estimates used in the opening
balance sheet valuation for certain intangibles, accounts receivables, accounts
payables and other assets and liabilities, as well as the settlement of escrow
obligations. In 2009, we decreased goodwill related to BE&K by
approximately $7 million due to an impairment charge of $6 million and purchase
price allocation adjustments of $1 million related to the completion of our
BE&K asset valuation.
Goodwill
related to the BE&K acquisition was allocated among our business segments
and we currently have $371 million recognized in Services, $50
million in Other and $6 million in our Government & Infrastructure
segments. The intangible assets recognized apart from Goodwill
consist primarily of customer relationships, tradename and backlog which are
amortized over their estimated remaining life.
Turnaround Group
of Texas, Inc. In April 2008, we acquired 100% of the
outstanding common stock of Turnaround Group of Texas, Inc. (“TGI”). 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. The total purchase consideration for
this stock purchase transaction was approximately $7 million. As a result of the
acquisition, we recognized goodwill of $5 million and other intangible assets of
$2 million. Beginning in April 2008, TGI’s results of operations were
included in our Services business unit.
Catalyst
Interactive. In April 2008, we acquired 100% of the
outstanding common stock of Catalyst Interactive, an Australian e-learning and
training solution provider that specializes in the defense, government and
industry training sectors. The total purchase consideration for this stock
purchase transaction was approximately $5 million. As a result of the
acquisition, we recognized goodwill of approximately $3 million and other
intangible assets of approximately $2 million. Beginning in April 2008, Catalyst
Interactive’s results of operations were included in our Government &
Infrastructure business unit.
Wabi Development
Corporation. In October 2008, we
acquired 100% of the outstanding common stock of Wabi Development Corporation
(“Wabi”) for approximately $20 million in cash. As a result of the acquisition,
we initially recognized goodwill of $3 million and other intangible assets of $5
million. In 2009, we made adjustments primarily related to the
estimates used in the opening balance sheet valuation for certain accounts
receivables resulting in goodwill of approximately $5 million. Wabi
is 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. The integration of Wabi into our
Services business provides additional growth opportunities for our heavy
hydrocarbon, forest products, oil sand, general industrial and maintenance
services business.
Note
5. Percentage-of-Completion Contracts
Revenue
from contracts to provide construction, engineering, design, or similar services
is reported on the percentage-of-completion method of accounting using
measurements of progress toward completion appropriate for the work performed.
Commonly used measurements are physical progress, man-hours, and costs
incurred.
Billing
practices for these projects are governed by the contract terms of each project
based upon costs incurred, achievement of milestones, or pre-agreed schedules.
Billings do not necessarily correlate with revenue recognized using the
percentage-of-completion method of accounting. Billings in excess of recognized
revenue are recorded in “Advance billings on uncompleted contracts.” When
billings are less than recognized revenue, the difference is recorded in
“Unbilled receivables on uncompleted contracts.” With the exception of claims
and change orders that are in the process of being negotiated with customers,
unbilled receivables are usually billed during normal billing processes
following achievement of the contractual requirements.
Recording
of profits and losses on percentage-of-completion contracts requires an estimate
of the total profit or loss over the life of each contract. This estimate
requires consideration of contract value, change orders and claims reduced by
costs incurred and estimated costs to complete. Anticipated losses on contracts
are recorded in full in the period they become evident. Except in a limited
number of projects that have significant uncertainties in the estimation of
costs, we do not delay income recognition until projects have reached a
specified percentage of completion. Generally, profits are recorded from the
commencement date of the contract based upon the total estimated contract profit
multiplied by the current percentage complete for the contract.
When
calculating the amount of total profit or loss on a percentage-of-completion
contract, we include unapproved claims in total estimated contract value when
the collection is deemed probable based upon the four criteria for recognizing
unapproved claims in accordance with FASB ASC 605-35 related to accounting for
performance of construction-type and certain production-type contracts.
Including 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.
When
recording the revenue and the associated unbilled receivable for unapproved
claims, we only accrue an amount equal to the costs incurred related to probable
unapproved claims. The amounts of unapproved claims and change orders recorded
as “Unbilled work on uncompleted contracts” or “Other assets” for each period
are as follows:
|
|
|
Years
ended December 31,
|
|
|||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
||
|
Probable
unapproved claims
|
|
$
|
33
|
|
|
$
|
133
|
|
|
Probable
unapproved change orders
|
|
|
61
|
|
|
|
5
|
|
|
Probable
unapproved claims related to unconsolidated
subsidiaries
|
|
|
—
|
|
|
|
33
|
|
|
Probable
unapproved change orders related to unconsolidated
subsidiaries
|
|
|
2
|
|
|
|
5
|
|
As of
December 31, 2009, the probable unapproved claims, including those from
unconsolidated subsidiaries, primarily related to two contracts. See
Note 10 for a discussion of U.S. government contract claims, which are not
included in the table above.
Included
in the table above are contracts with probable unapproved claims that will
likely not be settled within one year totaling $20 million and $130 million at
December 31, 2009 and 2008, respectively, which are reflected as a non-current
asset in “Unbilled receivables on uncompleted contracts” on the condensed
consolidated balance sheets. Other probable unapproved claims that we believe
will be settled within one year, have been recorded as a current asset in
“Unbilled receivables on uncompleted contracts” on the condensed consolidated
balance sheets.
PEMEX
Arbitration. In 1997 and 1998 we entered into three contracts
with PEMEX, the project owner, to build offshore platforms, pipelines and
related structures in the Bay of Campeche offshore Mexico. The three
contracts were known as Engineering, Procurement and Construction (“EPC”) 1, EPC
22 and EPC 28. All three projects encountered significant schedule
delays and increased costs due to problems with design work, late delivery and
defects in equipment, increases in scope and other changes. PEMEX
took possession of the offshore facilities of EPC 1 in March 2004 after having
achieved oil production but prior to our completion of our scope of work
pursuant to the contract. We filed for arbitration with the
International Chamber of Commerce (“ICC”) in 2004 and 2005 claiming recovery of
damages for EPC 22 and 28. We received favorable arbitration awards
for EPC 22 and 28 in 2007 and 2008, and subsequently negotiated settlements and
received payment from PEMEX in 2008. In the first quarter of 2008, we
recognized a gain of $51 million related to our settlement of EPC 28 with
PEMEX.
We filed
for arbitration with the ICC in 2004 claiming recovery of damages of $323
million for EPC 1 and PEMEX subsequently filed counterclaims totaling $157
million. The EPC 1 arbitration hearings were held in November 2007.
In December 2009, the ICC ruled in our favor and we were awarded a total of
approximately $351 million including legal and administrative recovery fees as
well as interest. PEMEX was awarded approximately $6 million on counterclaims,
plus interest on a portion of that sum. The amount of the award
exceeded the book value of our claim receivable resulting in our recognition of
a $183 million of operating income and $117 million of net
income. The arbitration award is legally binding and we have filed a
proceeding in U.S. Federal Court to recognize the award. We believe
collection of the award is not likely to occur in the next twelve months and
therefore, we have classified the amount due from PEMEX for EPC 1 as a long term
receivable included in “Noncurrent unbilled receivable on long term contracts”
as of December 31, 2009.
Escravos
Project. In July 2007, we and our joint venture partner
modified the contract terms and conditions converting the project from a
fixed-price to a reimbursable contract whereby we will be paid our actual cost
incurred less a credit that approximates the charge we identified in the second
quarter of 2006. The unamortized balance of the charge of $34 million
is included as a component of the “Reserve for estimated losses on uncompleted
contracts” in the accompanying condensed consolidated balance
sheets. “Advanced billings on uncompleted contracts” related to this
project was $20 million and $1 million at December 31, 2009 and 2008,
respectively.
Skopje Embassy
Project. In 2005, we were awarded a fixed-price contract to
design and build a U.S. embassy in Skopje, Macedonia. We recorded
losses of $21 million in 2008, bringing our total losses to $60
million. On March 31, 2009 we received notice of substantial
completion from our customer which ended our exposure to liquidated
damages. The customer took control of the facility on April 27,
2009. We have not incurred any further losses since
2008. Although we do not expect to incur additional losses on this
project, it is possible that additional losses could be incurred if we exceed
the amounts currently estimated for warranty type items. The warranty
period expires in March 2010 per the terms of the
contract. Additionally, we are pursuing claims filed with the
Department of State to recover a portion of the losses we incurred primarily
related to certain schedule delays and errors included in the bid for this
project.
In Amenas
Project. We own a 50% interest in an unconsolidated joint
venture which began construction of a gas processing facility in Algeria in
early 2003 known as the In Amenas project which was completed in
2006. Five months after the contract was awarded in 2003, the client
requested the joint venture to relocate to a new construction site as a result
of soil conditions discovered at the original site. The joint venture
subsequently filed for arbitration with the ICC claiming recovery of $129
million. During the first quarter of 2009, we received a ruling on
the claim brought forth by the joint venture against the
client. Although the joint venture was awarded recovery of relocation
costs thereon of approximately $33 million, it did not prevail on the claim for
extension of time for filing of liquidated damages and other damage
claims. As a result of the ruling, we recognized a loss of
approximately $15 million during the first quarter of 2009 which is recorded in
“Equity in earnings of unconsolidated affiliates.” The loss
represents the difference in the amount awarded by the ICC and the amount
initially recorded in 2006.
Other
Projects. Our unconsolidated joint ventures in our gas
monetization operations include the results of three major LNG projects which
had significant activity during 2009. We incurred additional costs
due to equipment failures, subcontractor claims and schedule delays related to
these projects, all of which are now commercially operational. As a
result, “Equity in earnings (loss) of unconsolidated subsidiaries, net” includes
net losses of $49 million for the year ended December 31, 2009 for these
projects.
Note
6. Dispositions
Devonport
Management Limited. On June 28, 2007, we consummated the sale
of our 51% ownership interest in DML for cash proceeds of approximately $345
million, net of direct transaction costs, resulting in a gain of approximately
$101 million, net of tax of $115 million. Our DML operations were part of our
G&I business unit. See Note 20 (Discontinued
Operations).
Note
7. Business Segment Information
We
provide a wide range of services, but the management of our business is heavily
focused on major projects within each of our reportable segments. At any given
time, a relatively few number of projects and joint ventures represent a
substantial part of our operations.
Our
reportable segments are consistent with the financial information that our chief
executive officer (“CEO”), who is our chief operating decision maker, reviews to
evaluate operating performance and make resource allocation decisions. Our
reportable segments are Government and Infrastructure, Upstream and Services.
Our segment information has been prepared in accordance with FASB ASC 280 –
Segment Reporting.
We have
reorganized our internal reporting structure based on similar products and
services. The following is a description of our three reportable
segments:
Government and
Infrastructure. Our G&I reportable segment delivers
on-demand support services across the full military mission cycle from
contingency logistics and field support to operations and maintenance on
military bases. In the civil infrastructure market, we operate in diverse
sectors, including transportation, waste and water treatment, and facilities
maintenance. We provide 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.
Upstream. Our Upstream reportable
segment designs and constructs energy and petrochemical projects, including
large, technically complex projects in remote locations around the world. Our
expertise includes LNG and GTL gas monetization facilities, refineries,
petrochemical plants, onshore and offshore oil and gas production facilities
(including platforms, floating production and subsea facilities), onshore and
offshore pipelines. We provide a complete range of EPC-CS services, as well as
program and project management, consulting and technology services.
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, power cogeneration, 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.
Certain
of our operating segments do not individually meet the quantitative thresholds
as a reportable segment nor do they share a majority of the aggregation criteria
with another operating segment. These operating segments are reported on a
combined basis as “Other” and include our Downstream, Technology and Ventures
operating segments as well as corporate expenses not included in the operating
segments’ results.
Our
reportable segments follow the same accounting policies as those described in
Note 2 (Significant Accounting Policies). Our equity in pretax earnings and
losses of unconsolidated affiliates that are accounted for using the equity
method of accounting is included in revenue and operating income of the
applicable segment.
The
tables below present information on our business segments.
Operations
by Business Segment
|
|
|
Years
ended December 31
|
|
|||||||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|||
|
Government
and Infrastructure
|
|
$
|
5,879
|
|
$
|
6,938
|
|
|
$
|
6,093
|
|
|
|
Upstream
|
|
|
3,330
|
|
|
2,682
|
|
|
|
1,887
|
|
|
|
Services
|
|
|
2,266
|
|
|
1,373
|
|
|
|
322
|
|
|
|
Other
|
|
|
630
|
|
|
588
|
|
|
|
443
|
|
|
|
Total
|
|
$
|
12,105
|
|
$
|
11,581
|
|
|
$
|
8,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Operating
segment income:
|
|
|
|
|
|
|
|
|
|
|
||
|
Government
and Infrastructure
|
|
$
|
141
|
|
$
|
332
|
|
|
$
|
279
|
|
|
|
Upstream
|
|
|
406
|
|
|
262
|
|
|
|
188
|
|
|
|
Services
|
|
|
144
|
|
|
110
|
|
|
|
56
|
|
|
|
Other
|
|
|
73
|
|
|
68
|
|
|
|
17
|
|
|
|
Operating
segment income (a)
|
|
|
764
|
|
|
772
|
|
|
|
540
|
|
|
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
|
||
|
Labor
cost absorption (b)
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
|
(20
|
)
|
|
Corporate
general and administrative
|
|
|
(217
|
)
|
|
|
(223
|
)
|
|
|
(226
|
)
|
|
Total
|
|
$
|
536
|
|
$
|
541
|
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$
|
9
|
|
$
|
11
|
|
|
$
|
3
|
|
|
|
Upstream
|
|
|
—
|
|
|
—
|
|
|
|
4
|
|
|
|
Services
|
|
|
4
|
|
|
4
|
|
|
|
—
|
|
|
|
Other
|
|
|
2
|
|
|
1
|
|
|
|
—
|
|
|
|
General
corporate
|
|
|
26
|
|
|
21
|
|
|
|
29
|
|
|
|
Total
(c)
|
|
$
|
41
|
|
$
|
37
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Equity
in earnings (losses) of unconsolidated affiliates, net:
|
|
|
|
|
|
|
|
|
|
|
||
|
Government
and Infrastructure
|
|
$
|
27
|
|
$
|
47
|
|
|
$
|
47
|
|
|
|
Upstream
|
|
|
(31
|
)
|
|
|
25
|
|
|
|
49
|
|
|
Services
|
|
|
28
|
|
|
20
|
|
|
|
18
|
|
|
|
Other
|
|
|
21
|
|
|
(4
|
)
|
|
|
(11
|
)
|
|
|
Total
|
|
$
|
45
|
|
$
|
88
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
||
|
Government
and Infrastructure
|
|
$
|
5
|
|
$
|
5
|
|
|
$
|
3
|
|
|
|
Upstream
|
|
|
—
|
|
|
1
|
|
|
|
1
|
|
|
|
Services
|
|
|
20
|
|
|
10
|
|
|
|
1
|
|
|
|
Other
|
|
|
3
|
|
|
3
|
|
|
|
2
|
|
|
|
General
corporate (d)
|
|
|
27
|
|
|
30
|
|
|
|
24
|
|
|
|
Total
(e)
|
|
$
|
55
|
|
$
|
49
|
|
|
$
|
31
|
|
|
_______________________
|
|
(a)
|
Operating
segment performance is evaluated by our chief operating decision maker
using operating segment income which is defined as operating segment
revenue less the cost of services and segment overhead directly
attributable to the operating segment. Operating segment income excludes
certain cost of services and general and administrative expenses directly
attributable to the operating segment that is managed and reported at the
corporate level, and corporate general and administrative expenses. We
believe this is the most accurate measure of the ongoing profitability of
our operating segments.
|
|
|
(b)
|
Labor
cost absorption represents costs incurred by our central service labor and
resource groups (above) or under the amounts charged to the operating
segments.
|
|
|
(c)
|
Capital
expenditures does not include $7 million related to the discontinued
operations of DML for the year ended December 31, 2007. We sold
our 51% interest in DML in June 2007. See Note 20 to the
consolidated financial statements for further
information.
|
|
|
(d)
|
Depreciation
and amortization associated with corporate assets is allocated to our six
operating segments for determining operating income or
loss.
|
|
|
(e)
|
Depreciation
and amortization expense does not include $10 million of expenses related
to the discontinued operation of DML for the year ended December 31,
2007.
|
Within
KBR, not all assets are associated with specific segments. Those assets specific
to segments include receivables, inventories, certain identified property, plant
and equipment and equity in and advances to related companies, and goodwill. The
remaining assets, such as cash and the remaining property, plant and equipment,
are considered to be shared among the segments and are therefore reported as
General corporate assets.
Balance
Sheet Information by Operating Segment
|
|
|
December
31
|
|
|||||
|
Millions
of dollars
|
|
2007
|
|
|
2008
|
|
||
|
|
|
|
|
|
|
|
||
|
Total
assets:
|
|
|
|
|
|
|
||
|
Government
and Infrastructure
|
|
$
|
2,462
|
|
|
$
|
2,668
|
|
|
Upstream
|
|
|
1,659
|
|
|
|
2,125
|
|
|
Services
|
|
|
715
|
|
|
|
599
|
|
|
Other
|
|
|
491
|
|
|
|
492
|
|
|
Total
assets
|
|
$
|
5,327
|
|
|
$
|
5,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in/advances to related companies:
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$
|
8
|
|
|
$
|
8
|
|
|
Upstream
|
|
|
7
|
|
|
|
53
|
|
|
Services
|
|
|
30
|
|
|
|
47
|
|
|
Other
|
|
|
119
|
|
|
|
77
|
|
|
Total
|
|
$
|
164
|
|
|
$
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$
|
32
|
|
|
$
|
31
|
|
|
Upstream
|
|
|
159
|
|
|
|
159
|
|
|
Services
|
|
|
404
|
|
|
|
397
|
|
|
Other
|
|
|
96
|
|
|
|
107
|
|
|
Total
|
|
$
|
691
|
|
|
$
|
694
|
|
Revenue
by country is determined based on the location of services provided. Long-lived
assets by country are determined based on the location of tangible
assets.
Selected
Geographic Information
|
|
|
Years
ended December 31
|
|
|||||||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|||
|
United
States
|
|
$
|
2,550
|
|
|
$
|
1,761
|
|
|
$
|
961
|
|
|
Iraq
|
|
|
4,239
|
|
|
|
5,033
|
|
|
|
4,329
|
|
|
Africa
|
2,260
|
1,538
|
1,034
|
|||||||||
|
Other
Middle East
|
1,224
|
1,337
|
1,123
|
|||||||||
|
Asia
Pacific (includes Australia)
|
624
|
719
|
467
|
|||||||||
|
Europe
|
607
|
815
|
660
|
|||||||||
|
Other
|
|
|
601
|
378
|
171
|
|
||||||
|
Total
|
|
$
|
12,105
|
|
|
$
|
11,581
|
|
|
$
|
8,745
|
|
|
|
|
December
31
|
|
|||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
||
|
|
|
|
|
|
|
|
||
|
Long-Lived
Assets:
|
|
|
|
|
|
|
||
|
United
States
|
|
$
|
141
|
|
|
$
|
151
|
|
|
United
Kingdom
|
|
|
42
|
|
|
|
34
|
|
|
Other
Countries
|
|
|
68
|
|
|
|
60
|
|
|
Total
|
|
$
|
251
|
|
|
$
|
245
|
|
Note
8. Property, Plant and Equipment
Other
than those assets that have been written down to their fair values due to
impairment, property, plant, and equipment are reported at cost less accumulated
depreciation, which is generally provided on the straight-line method over the
estimated useful lives of the assets. Some assets are depreciated on accelerated
methods. Accelerated depreciation methods are also used for tax purposes,
wherever permitted. Upon sale or retirement of an asset, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized.
Property,
plant and equipment are composed of the following:
|
|
|
Estimated
Useful
|
|
|
December
31
|
|
||||||
|
Millions
of dollars
|
|
Lives
in Years
|
|
|
2009
|
|
|
2008
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Land
|
|
|
N/A
|
|
|
$
|
31
|
|
$
|
30
|
|
|
|
Buildings
and property improvements
|
|
|
5-44
|
|
|
|
203
|
|
|
185
|
|
|
|
Equipment
and other
|
|
|
3-20
|
|
|
|
281
|
|
|
254
|
|
|
|
Total
|
|
|
|
|
|
|
515
|
|
|
469
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
(264
|
)
|
|
|
(224
|
)
|
|
Net
property, plant and equipment
|
|
|
|
|
|
$
|
251
|
|
$
|
245
|
|
|
Note
9. Debt and Other Credit Facilities
On
November 3, 2009, we entered into a new syndicated, unsecured $1.1 billion
three-year revolving credit agreement (the “Revolving Credit Facility”), with
Citibank, N.A., as agent, and a group of banks and institutional lenders
replacing our previous facility, which was terminated when we entered into the
new Revolving Credit Facility. The Revolving Credit Facility will be
used for working capital and letters of credit for general corporate purposes
and expires in November 2012. While there is no sublimit for letters
of credit under this facility, letters of credit fronting commitments at
December 31, 2009 totaled $830 million and was expanded in January 2010
to $880 million, which we would seek to expand if
necessary. Amounts drawn under the Revolving Credit Facility will
bear interest at variable rates based either on the London interbank offered
rate plus 3%, or a base rate plus 2%, with the base rate being equal to the
highest of reference bank’s publicly announced base rate, the Federal Funds Rate
plus 0.5%, or the London interbank offered rate plus 1%. The
Revolving Credit Facility provides for fees on the undrawn amounts of letters of
credit issued under the Revolving Credit Facility of 1.5% for performance and
commercial letters of credit and 3% for all others. We are also
charged an issuance fee of 0.05% for the issuance of letters of credit, a per
annum commitment fee of 0.625% for any unused portion of the credit line, and a
per annum fronting commitment fee of 0.25%. As of December 31, 2009
and 2008, there were zero borrowings/cash drawings and $371 million and $510
million, respectively, in letters of credit issued and outstanding under the
applicable facilities.
The
Revolving Credit Facility includes financial covenants requiring maintenance of
a ratio of consolidated debt to consolidated EBITDA of 3.5 to 1 and a minimum
consolidated net worth of $2 billion plus 50% of consolidated net income for
each quarter ending after September 30, 2009 plus 100% of any increase in
shareholders equity attributable to the sale of equity securities.
The
Revolving Credit Facility contains a number of covenants restricting, among
other things, our ability to incur additional liens and sales of our assets, as
well as limiting the amount of investments we can make. The Revolving
Credit Facility also permits us, among other things, to declare and pay
shareholder dividends and/or engage in equity repurchases not to exceed $400
million in the aggregate and to incur indebtedness in respect of purchase money
obligations, capitalized leases and refinancing or renewals secured by liens
upon or in property acquired, constructed or improved in an aggregate principal
amount not to exceed $200 million. Our subsidiaries may incur
unsecured indebtedness not to exceed $100 million in aggregate outstanding
principal amount at any time.
Letters
of credit
In
connection with certain projects, we are required to provide letters of credit
or surety bonds to our customers. Letters of credit are provided to
customers in the ordinary course of business to guarantee advance payments from
certain customers, support future joint venture funding commitments and to
provide performance and completion guarantees on engineering and construction
contracts. We have $1.5 billion in committed and uncommitted lines of
credit to support letters of credit and as of December 31, 2009, and we had
utilized $497 million of our credit capacity. We have an additional
$289 million in letters of credit issued and outstanding under various
Halliburton facilities and are irrevocably and unconditionally guaranteed by
Halliburton. Surety bonds are also posted under the terms of certain
contracts primarily related to state and local government projects to guarantee
our performance.
The $497
million in letters of credit outstanding on KBR lines of credit was comprised of
$371 million issued under our Revolving Credit Facility and $126 million issued
under uncommitted bank lines at December 31, 2009. Of the total
letters of credit outstanding, $308 million relate to our joint venture
operations and $75 million of the letters of credit have terms that could
entitle a bank to require cash collateralization on
demand. Approximately $256 million of the $371 million letters of
credit issued under our Revolving Credit Facility have expiry dates close to or
beyond the maturity date of the facility. Under the terms of the
Revolving Credit Facility, if the original maturity date of November 2, 2012 is
not extended then the issuing banks may require that we provide cash collateral
for these extended letters of credit no later than 95 days prior to the original
maturity date. As the need arises, future projects will be supported
by letters of credit issued under our Revolving Credit Facility or arranged on a
bilateral basis. We believe we have adequate letter of credit
capacity under our existing Revolving Credit Facility and bilateral lines of
credit to support our operations for the next twelve months.
Halliburton
has guaranteed certain letters of credit and surety bonds and provided parent
company guarantees primarily related to our financial commitments on certain
projects. We expect to cancel these letters of credit and surety
bonds as we complete the underlying projects. Since the separation from
Halliburton, we have arranged lines with multiple surety companies for our own
standalone capacity. Since the arrangement of this stand alone
capacity, we have been sourcing surety bonds from our own capacity without
additional Halliburton credit support. We agreed to
pay Halliburton a quarterly carry charge, which has increased in accordance
with our extension provisions, for its guarantees of our outstanding letters of
credit and surety bonds and agreed to indemnify Halliburton for all losses in
connection with the outstanding credit support instruments and any new credit
support instruments relating to our business for which Halliburton may become
obligated following the separation. During 2009 we paid an annual fee to
Halliburton calculated at 0.40% of the outstanding performance-related letters
of credit, 0.80% of the outstanding financial-related letters of credit
guaranteed by Halliburton and 0.25% of the outstanding guaranteed surety bonds.
Effective January 1, 2010, the annual fee increases to 0.90%, 1.65% and 0.50% of
the outstanding performance-related and financial-related outstanding issued
letters of credit and the outstanding guaranteed surety bonds,
respectively.
Note
10. United States Government Contract Work
We
provide substantial work under our government contracts to the United States
Department of Defense and other governmental agencies. These contracts include
our worldwide United States Army logistics contracts, known as LogCAP, and the
U.S. Army Europe (“USAREUR”) contract.
Given the
demands of working in Iraq and elsewhere for the United States government, we
expect that from time to time we will have disagreements or experience
performance issues with the various government customers for which we work. If
performance issues arise under any of our government contracts, the government
retains the right to pursue remedies, which could include threatened termination
or termination, under any affected contract. If any contract were so terminated,
we may not receive award fees under the affected contract, and our ability to
secure future contracts could be adversely affected, although we would receive
payment for amounts owed for our allowable costs under cost-reimbursable
contracts. Other remedies that could be sought by our government customers for
any improper activities or performance issues include sanctions such as
forfeiture of profits, suspension of payments, fines, and suspensions or
debarment from doing business with the government. Further, the negative
publicity that could arise from disagreements with our customers or sanctions as
a result thereof could have an adverse effect on our reputation in the industry,
reduce our ability to compete for new contracts, and may also have a material
adverse effect on our business, financial condition, results of operations, and
cash flow.
We have
experienced and expect to be a party to various claims against us by employees,
third parties, soldiers, subcontractors and others that have arisen out of our
work in Iraq such as claims for wrongful termination, assaults against
employees, personal injury claims by third parties and army personnel, and
subcontractor claims. While we believe we conduct our operations safely, the
environments in which we operate often lead to these types of claims. We believe
the vast majority of these types of claims are governed by the Defense Base Act
or precluded by other defenses. We have a dispute resolution program under which
most of these employee claims are subject to binding arbitration. However, an
unfavorable resolution or disposition of these matters could have a material
adverse effect on our business, results of operations, financial condition and
cash flow.
Award
Fees
In
accordance with the provisions of the LogCAP III contract, we earn profits on
our services rendered based on a combination of a fixed fee plus award fees
granted by our customer. Both fees are measured as a percentage rate applied to
estimated and negotiated costs. The LogCAP III customer is
contractually obligated to periodically convene Award-Fee Boards, which are
comprised of individuals who have been designated to assist the Award Fee
Determining Official (“AFDO”) in making award fee
determinations. Award fees are based on evaluations of our
performance using criteria set forth in the contract, which include non-binding
monthly evaluations made by our customers in the field of operations. Although
these criteria have historically been used by the Award-Fee Boards in reaching
their recommendations, the amounts of award fees are determined at the sole
discretion of the ADFO.
We
recognize award fees on the LogCAP III contract using an estimated accrual of
the amounts to be awarded. Once task orders underlying the work are
definitized and award fees are granted, we adjust our estimate of award fees to
the actual amounts earned. In 2007, we reduced our award fee accrual
rate on the LogCAP III contract from 84% to 80% of the total amount of possible
award fees, as a result of the rate of actual award fees received in that
year. In 2008, based on our assessments of monthly non-binding
customer evaluations of our performance and the request from our customer to
take corrective actions related to our electrical work and the corrective
actions that we did take in accordance with a plan agreed with our
customer, we reduced
our award fee accrual rate from 80% to 72% of the total possible award fees for
the performance period beginning in April 2008 resulting in a charge of
approximately $5 million in the fourth quarter of 2008. We continued
to use 72% as our accrual rate thereafter. No Award Fee Evaluation
Boards have been held for our Iraq based work on LogCAP III since the June 2008
meeting, which evaluated our performance for the period of January 2008 through
April 2008.
On
February 19, 2010, KBR was notified by the AFDO that a determination had been
made regarding the Company’s performance for the period January 1, 2008 to April
30, 2008 in Iraq. The notice stated that based on information received from
various Department of Defense individuals and organizations after the date of
the evaluation board in June 2008, the AFDO made a unilateral decision to grant
no award fees for the period from January 1 to April 30, 2008. The
AFDO found that KBR’s failure to document the poor conditions of the electrical
system at the Radwaniyah Palace complex, KBR’s failure to provide notice of
unsafe life, health and safety conditions and KBR’s failure to employ qualified
personnel to provide electrical services under task orders 139 and 151 across
the KBR areas of responsibility are failures to perform at a level deserving of
an award fee payment for the evaluated period January 1, 2008 through
April 30, 2008. While
we disagree with the findings of the AFDO, we have not yet been provided
with all of the specific information used by the AFDO to reach his decision. We
intend to request access to all information used by the AFDO in reaching his
unilateral decision so that we are able to understand how he arrived at his
conclusions, and to determine whether there are additional actions that we might
take.
As a
result of the AFDO’s adverse determination, we reversed approximately $20
million of award fees that had previously been estimated as earned and
recognized as revenue for that period of performance. In addition, we
re-evaluated our assumptions used in the award fee estimation process related to
the remainder of the open performance periods from May 1, 2008 through December
31, 2009. Those estimates were also based on our historic experience,
and assumed that award fees would continue to be determined in large part on
scores from non-binding monthly evaluations made by our customers in the field
of operations. These scores were largely very good to excellent during the open
performance periods. However, in light of the discretionary actions
of the AFDO in February 2010 with respect to the January through April 2008
period of performance, and our inability to obtain assurances to the contrary,
we concluded that we can no longer reliably estimate the fees to be
awarded. Accordingly, we reversed the remaining balance of accrued
award fees of approximately $112 million that had previously been estimated as
earned and recognized as revenue during the period from May 1, 2008 through
December 31, 2009. If our next award fee letter has performance
scores and award rates at levels for which we receive an award, our revenues and
earnings will increase accordingly.
DCAA
Audit Issues
The
negotiation, administration and settlement of our contracts with the U.S.
Government, consisting primarily of Department of Defense contracts, are subject
to audit by the Defense Contract Audit Agency (“DCAA”), which serves in an
advisory role to government administrative contracting officers who administer
our contracts. The scope of these audits include, among other things,
the allowability, allocability and reasonableness of incurred costs, approval of
annual overhead rates, compliance with the Federal Acquisition Regulation,
compliance with certain unique contract clauses, and audits of certain aspects
of our internal control systems. Issues identified during these audits are
typically discussed and reviewed with us, and certain matters are included in
audit reports issued by the DCAA, with its recommendations to our customer’s
administrative contracting officer. We attempt to resolve all issues identified
in audit reports by working directly with the DCAA and the administrative
contracting officer. When agreement cannot be reached, DCAA may issue a Form 1,
“Notice of Contract Costs Suspended and/or Disapproved,” which recommends
withholding the previously paid amounts or it may issue an advisory report to
the administrative contracting officer. KBR is permitted to respond
to these documents and provide additional support. At December 31, 2009, the
Company has open Form 1’s from DCAA recommending suspension of payments totaling
approximately $289 million associated with our contract costs incurred in prior
years, of which approximately $152 million has been withheld from our current
billings. As a consequence, for certain of these matters, we have withheld
approximately $106 million from our subcontractors under the payment terms of
those contracts. In addition, we have recently received demand letters from our
customer requesting that we remit a total of $121 million of disapproved costs
to which we have not yet responded. We continue to work with our administrative
contracting officers, the DCAA and our subcontractors to resolve these issues.
However, for certain of these matters, we have filed claims with the Armed
Services Board of Contract Appeals or the United States Court of
Claims.
We
self-disallow costs that are expressly not allowable or allocable to government
contracts per the relevant regulations. Our revenue recorded for government
contract work is reduced for our estimate of potentially refundable costs
related to issues that may be categorized as disputed or unallowable as a result
of cost overruns or the audit process.
Certain
issues raised as a result of contract audits and other investigations are
discussed below.
Security. In
February 2007, we received a Form 1 notice from the Department of the Army
informing us of their intent to adjust payments under the LogCAP III contract
associated with the cost incurred for the years 2003 through 2006 by certain of
our subcontractors to provide security to their employees. Based on that notice,
the Army withheld its initial assessment of $20 million. The Army based its
initial assessment on one subcontract wherein, based on communications with the
subcontractor, the Army estimated 6% of the total subcontract cost related to
the private security costs. The Army previously indicated that not all task
orders and subcontracts have been reviewed and that they may make additional
adjustments. In August 2009, we received a Form 1 notice from the
DCAA disapproving an additional $83 million of costs incurred by us and our
subcontractors to provide security during the same periods. At
that time, the Army withheld an additional $22 million in payments from us
bringing the total payments withheld to approximately $42 million as of December
31, 2009 out of the Form 1 notices issued to date of $103
million.
The Army
indicated that they believe our LogCAP III contract prohibits us and our
subcontractors from billing costs of privately acquired security. We believe
that, while the LogCAP III contract anticipates that the Army will provide force
protection to KBR employees, it does not prohibit us or any of our
subcontractors from using private security services to provide force protection
to KBR or subcontractor personnel. In addition, a significant portion of our
subcontracts are competitively bid fixed price subcontracts. As a result, we do
not receive details of the subcontractors’ cost estimate nor are we legally
entitled to it. Further, we have not paid our subcontractors any
additional compensation for security services. Accordingly, we
believe that we are entitled to reimbursement by the Army for the cost of
services provided by us or our subcontractors, even if they incurred costs for
private force protection services. Therefore, we believe that the Army’s
position that such costs are unallowable and that they are entitled to withhold
amounts incurred for such costs is wrong as a matter of law.
In
2007, we provided at the Army's request information that addresses the use of
armed security either directly or indirectly charged to LogCAP III. In October
2007, we filed a claim to recover the original $20 million that was withheld
which was deemed denied as a result of no response from the contracting
officer. In March 2008, we filed an appeal to the Armed Services
Board of Contract Appeals (“ASBCA”) to recover the initial $20 million withheld
from us, and that appeal is currently stayed pending discussions with the
Department of Justice (“DOJ”) as further described below.
This
matter is also the subject of an ongoing investigation by the Department of
Justice (“DOJ”) for possible violations of the False Claims Act. We
are cooperating fully with this investigation and are currently engaged in
discussions of the possibility of seeking an acceptable resolution of this
matter. We believe these sums were properly billed under our contract
with the Army. At this time, we believe the likelihood that a loss
related to this matter has been incurred is remote. We have not
adjusted our revenues or accrued any amounts related to this
matter.
Containers.
In June 2005, the DCAA recommended withholding certain costs associated with
providing containerized housing for soldiers and supporting civilian personnel
in Iraq. The DCMA recommended that the costs be withheld pending receipt of
additional explanation or documentation to support the subcontract costs. During
2006, we resolved approximately $26 million of the withheld amounts with our
contracting officer and payment was received in the first quarter of 2007. In
May of 2008, we received notice from the DCMA of their intention to rescind
their 2006 determination to allow the $26 million of costs pending additional
supporting information. We have not received a final determination by
the DCMA and continue to provide information as requested by the DCMA. As of
December 31, 2009, approximately $30 million of costs have been suspended under
Form 1 notices related to this matter of which $28 million has been withheld by
us from our subcontractors. In April 2008, we filed a counterclaim in
arbitration against one of our LogCAP III subcontractors, First Kuwaiti Trading
Company, to recover approximately $51 million paid to the subcontractor for
containerized housing as further described under the caption First Kuwaiti
Arbitration below. We will continue working with the government and our
subcontractors to resolve the remaining amounts. At this time, the likelihood
that a loss in excess of the amount accrued for this matter is
remote.
Dining
facilities. In
2006, the DCAA raised questions regarding costs related to dining facilities in
Iraq. We responded to the DCMA that our costs are reasonable. Since
2007, the DCAA has sent Form 1 notices totaling $120 million suspending costs
related to these dining facilities until such time we provide documentation to
support the price reasonableness of the rates negotiated with our subcontractor
and demonstrate that the amounts billed were in accordance with the contract
terms. We believe the prices obtained for these services were
reasonable and intend to vigorously defend ourselves on this matter. As of
December 31, 2009, we filed claims in the U.S. Court of Federal Claims to
recover $57 million of amounts withheld from us by the customer. With
respect to questions raised regarding billing in accordance with contract terms,
as of December 31, 2009, we believe it is reasonably possible that we could
incur losses in excess of the amount accrued for possible subcontractor costs
billed to the customer that were possibly not in accordance with contract terms.
However, we are unable to estimate an amount of possible loss or range of
possible loss in excess of the amount accrued related to any costs billed to the
customer that were not in accordance with the contract terms. As of
December 31, 2009, we had withheld $70 million in payments from our
subcontractors pending the resolution of these matters with our
customer.
Kosovo fuel.
In April 2007, the DOJ issued a letter alleging the theft in 2004 and
subsequent sale of diesel fuel by KBR employees assigned to Camp Bondsteel in
Kosovo. In addition, the letter alleges that KBR employees falsified records to
conceal the thefts from the Army. The total value of the fuel in question is
estimated by the DOJ at approximately $2 million based on an audit report issued
by the DCAA. We believe the volume of the alleged misappropriated fuel is
significantly less than the amount estimated by the DCAA. We responded to the
DOJ that we had maintained adequate programs to control, protect, and preserve
the fuel in question. We further believe that our contract with the Army
expressly limits KBR’s responsibility for such losses. In April 2009,
the DOJ informed us that they have closed their file on the matter and we
believe the matter is now resolved.
Transportation
costs. The DCAA, in performing its audit activities under the LogCAP III
contract, raised a question about our compliance with the provisions of the Fly
America Act. Subject to certain exceptions, the Fly America Act
requires Federal employees and others performing U.S. Government-financed
foreign air travel to travel by U.S. flag air carriers. There are
times when we transported personnel in connection with our services for the U.S.
military where we may not have been in compliance with the Fly America Act and
its interpretations through the Federal Acquisition Regulations and the
Comptroller General. As of December 31, 2009, we have accrued an
estimate of the cost incurred for these potentially non-compliant flights with a
corresponding reduction to revenue. The DCAA may consider additional
flights to be noncompliant resulting in potential larger amounts of disallowed
costs than the amount we have accrued. At this time, we cannot
estimate a range of reasonably possible losses that may have been incurred, if
any, in excess of the amount accrued. We will continue to work with
our customer to resolve this matter.
Construction
services. During the third quarter of 2009, we received a Form 1 notice
from the DCAA disapproving approximately $26 million in costs related to work
performed under our CONCAP III contract with the U.S. Navy to provide emergency
construction services primarily to Government facilities damaged by Hurricanes
Katrina and Wilma. The DCAA claims the costs billed to the U.S. Navy
primarily related to subcontracts costs that were either inappropriately bid,
included unallowable profit markup or were unreasonable. We believe
we undertook adequate and reasonable steps to ensure that bidding procedures
were followed and documented and that the amounts billed to the customer were
reasonable and justified. As of December 31, 2009, we believe that
the likelihood of further loss in excess of the amount accrued related to these
claims is remote.
Investigations,
Qui Tams and Litigation
The
following matters relate to ongoing litigation or investigations involving U.S.
government contracts.
Export
Compliance. We identified and reported to the U.S. Departments
of State and Commerce numerous exports of materials, including personal
protection equipment such as night vision goggles, body armor and chemical
protective suits, that possibly were not in accordance with the terms of our
export license or applicable regulations. In October 2009 the
Department of Commerce responded by warning us that it believed that the
disclosed conduct constituted violations, but that the facts and circumstances
were such that it would not seek penalties. In December 2009, we
received a letter from the Department of State acknowledging our voluntary
disclosures and closing the case without taking action to impose a civil
penalty. The Department of State recommended actions to strengthen
our compliance processes and procedures. We will continue to work
with them on strengthening our compliance.
McBride Qui Tam
suit. In September 2006, we became aware of a qui tam action
filed against us by a former employee alleging various wrongdoings in the form
of overbillings of our customer on the LogCAP III contract. This case
was originally filed pending the government’s decision whether or not to
participate in the suit. In June 2006, the government formally
declined to participate. The principal allegations are that our
compensation for the provision of Morale, Welfare and Recreation (“MWR”)
facilities under LogCAP III is based on the volume of usage of those facilities
and that we deliberately overstated that usage. In accordance with
the contract, we charged our customer based on actual cost, not based on the
number of users. It was also alleged that, during the period from
November 2004 into mid-December 2004, we continued to bill the customer for
lunches, although the dining facility was closed and not serving
lunches. There are also allegations regarding housing containers and
our provision of services to our employees and contractors. On July 5, 2007, the
court granted our motion to dismiss the qui tam claims and to compel arbitration
of employment claims including a claim that the plaintiff was unlawfully
discharged. The majority of the plaintiff’s claims were dismissed but
the plaintiff was allowed to pursue limited claims pending discovery and future
motions. Substantially all employment claims were sent to arbitration under the
Company’s dispute resolution program and were subsequently resolved in our
favor. In January 2009, the relator filed an amended complaint which
is currently in the discovery process. We believe the relator’s claim
is without merit and that the likelihood that a loss has been incurred is
remote. As of December 31, 2009, no amounts have been
accrued.
Godfrey Qui Tam
suit. In December 2005, we became aware of a qui tam action
filed against us and several of our subcontractors by a former employee alleging
that we violated the False Claims Act by submitting overcharges to the
government for dining facility services provided in Iraq under the LogCAP III
contract. As required by the False Claims Act, the lawsuit was filed
under seal to permit the government to investigate the
allegations. In early April 2007, the court denied the government’s
motion for the case to remain under seal, and on April 23, 2007, the government
filed a notice stating that it was not participating in the suit. In
August 2007, the relator filed an amended complaint which added an additional
contract to the allegations and added retaliation claims. We filed
motions to dismiss and to compel arbitration which were granted on March 13,
2008 for all counts except as to the employment issues which were sent to
arbitration. The relator has filed an appeal and our position was
upheld at the Appellate Court level as of January 6, 2010. We are
unable to determine the likely outcome at this time with regard to the remaining
employment issues sent to arbitration. No amounts have been accrued
and we cannot determine any reasonable estimate of loss that may have been
incurred, if any.
ASCO
settlement. In 2003, Associated Construction Company WLL
(ASCO) was a subcontractor to KBR in Iraq related to work performed on our
LogCAP III contract. In 2008, a jury in Texas returned a verdict
against KBR awarding ASCO damages of $39 million with the court to determine
attorney’s fees and interest. In the fourth quarter of 2008, we
negotiated a final settlement with ASCO in the amount of $22 million, of which
we had previously concluded that $5 million was probable of reimbursement from
our customer, resulting in a net charge of $17 million in 2008. In
the third quarter of 2009, we obtained approval from the customer to bill the
entire $22 million resulting in the recognition of an additional $17 million of
revenue.
First Kuwaiti
Trading Company arbitration. In April 2008 First Kuwaiti
Trading Company, one of our LogCAP III subcontractors, filed for arbitration of
a subcontract under which KBR had leased vehicles related to work performed on
our LogCAP III contract. First Kuwaiti alleged that we did not return
or pay rent for many of the vehicles and sought initial damages in the amount of
$39 million. We filed a counterclaim to recover amounts which may
ultimately be determined due to the Government for the $51 million in suspended
costs as discussed in the preceding section of this footnote titled
“Containers.” First Kuwaiti subsequently responded by adding
additional subcontract claims, increasing its total claim to approximately $134
million as of December 31, 2009. This matter is in the early stages
of the arbitration process. No amounts have been accrued
and we are unable to determine a reasonable estimate of loss, if any, at this
time.
Paul Morell, Inc.
d/b/a The Event Source vs. KBR, Inc. TES is a former LogCAP
III subcontractor who provided DFAC services at six sites in Iraq from mid-2003
to early 2004. TES sued KBR in Federal Court in Virginia for breach
of contract and tortious interference with TES’s subcontractors by awarding
subsequent DFAC contracts to the subcontractors. In addition, the
Government withheld funds from KBR that KBR had submitted for reimbursement of
TES invoices, and at that time, TES agreed that it was not entitled to payment
until KBR was paid by the Government. Eventually KBR and the
Government settled the dispute, and in turn KBR and TES agreed that TES would
accept, as payment in full with a release of all other claims, the amount the
Government paid to KBR for TES’s services. TES filed a suit to
overturn that settlement and release, claiming that KBR misrepresented the
facts. The trial was completed in June 2009 and in January 2010, the
Federal Court issued an order against us in favor of TES in the amount of $15
million in actual damages and interest and $4 million in punitive damages
relating to the settlement and release entered into by the parties in May
2005. As of December 31, 2009, we accrued the full amount of the
damages and interest awarded to TES and continue to assess the merits of an
appeal of the order. The court ruled in our favor relating to the
breach of contract and tortious interference claims.
Electrocution
litigation. During 2008, two separate lawsuits were filed
against KBR alleging that the Company was responsible in two separate electrical
incidents which resulted in the deaths of two soldiers. One incident
occurred at Radwaniyah Palace Complex and the other occurred at Al
Taqaddum. It is alleged in each suit that the electrocution incident
was caused by improper electrical maintenance or other electrical
work. We intend to vigorously defend these matters. KBR
denies that its conduct was the cause of either event and denies legal
responsibility. Both cases have been removed to Federal Court where motions to
dismiss have been filed. The plaintiffs voluntarily have dismissed
one suit. The court issued a stay in the discovery of the other
case. The stay is pending an appeal of certain pre-trial motions to
dismiss that were previously denied. Hearings on the appeal are expected to
occur in the first half of 2010. We are unable to determine the likely outcome
of the remaining case at this time. As of December 31, 2009, no
amounts have been accrued.
Burn Pit
litigation. KBR has been served with 43 lawsuits in various
states alleging exposure to toxic materials resulting from the operation of burn
pits in Iraq or Afghanistan in connection with services provided by KBR under
the LogCAP III contract. Each lawsuit has multiple named plaintiffs
who purport to represent a large class of unnamed persons. The
lawsuits primarily allege negligence, willful and wanton conduct, battery,
intentional infliction of emotional harm, personal injury and failure to warn of
dangerous and toxic exposures which has resulted in alleged illnesses for
contractors and soldiers living and working in the bases where the pits are
operated. All of the pending cases have been removed to Federal Court
and will be consolidated for multi-district litigation treatment. We
intend to vigorously defend these matters. Due to the inherent
uncertainties of litigation and because the litigation is at a preliminary
stage, we cannot at this time accurately predict the ultimate outcome of these
matters, nor estimate the amounts of potential loss, if any.
Convoy Ambush
Litigation. In April 2004, a fuel convoy in route from Camp
Anaconda to Baghdad International Airport for the U.S. Army under our LogCAP III
contract was ambushed resulting in deaths and severe injuries to truck drivers
hired by KBR. In 2005, survivors of the drivers killed and those that were
wounded in the convoy, filed suit in state court in Houston, Texas against KBR
and several of its affiliates, claiming KBR deliberately intended that the
drivers in the convoy would be attacked and wounded or killed. The suit
also alleges KBR committed fraud in its hiring practices by failing to disclose
the dangers associated with working in the Iraq combat zone. In September
2006, the case was dismissed based upon the court’s ruling that it lacked
jurisdiction because the case presented a non-justiciable political
question. Subsequently, three additional suits were filed, arising out of
insurgent attacks on other convoys that occurred in 2004 and were likewise
dismissed as non-justiciable under the Political Question
Doctrine.
The
plaintiffs in all cases appealed the dismissals to the Fifth Circuit Court of
Appeals which reversed and remanded the remaining cases to trial court. In
July 2008, the Court directed substantive discovery to commence including the
re-submittal of dispositive motions on various grounds including the Defense
Base Act and Political Question Doctrine. In February 2010, the court
ruled in favor of the plaintiffs, denying our motions to dismiss the case.
The cases are set to proceed with trial in May 2010. We are unable to
determine the likely outcome of these cases at this time. As of
December 31, 2009, no amounts have been accrued nor can we estimate the amount
of potential loss, if any.
Other
Matters
Claims. Unapproved claims relate to
contracts where our costs have exceeded the customer’s funded value of the task
order. Included in unbilled receivables in the accompanying
balance sheets are unapproved claims for costs incurred under various government
contracts totaling $113 million at December 31, 2009 and $73 million at December
31, 2008. The unapproved claims at December 31, 2009 include
approximately $59 million primarily the result of the de-obligation of
2004 funding on certain task orders that were also subject to Form 1 notices
relating to certain DCAA audit issues discussed above primarily Dining
Facilities. We believe such disputed costs will be resolved in our
favor at which time the customer will be required to obligate funds from the
year in which resolution occurs. The unapproved claims outstanding at
December 31, 2009 are considered to be probable of collection and have been
recognized as revenue.
Note
11. Other Commitments and Contingencies
Foreign
Corrupt Practices Act investigations
On
February 11, 2009 KBR LLC, entered a guilty plea related to the Bonny Island
investigation in the United States District Court, Southern District of Texas,
Houston Division (the “Court”). KBR LLC pled guilty to one count of
conspiring to violate the FCPA and four counts of violating the FCPA, all
arising from the intent to bribe various Nigerian officials through commissions
paid to agents working on behalf of TSKJ on the Bonny Island
project. The plea agreement reached with the DOJ resolves all
criminal charges in the DOJ’s investigation into the conduct of KBR LLC relating
to the Bonny Island project, so long as the conduct was disclosed or known to
DOJ before the settlement, including previously disclosed allegations of
coordinated bidding. The plea agreement called for the payment of a criminal
penalty of $402 million, of which Halliburton was obligated to pay $382 million
under the terms of the indemnity in the master separation agreement, while we
were obligated to pay $20 million. The criminal penalties are to be
paid in quarterly payments over a two-year period ending October
2010. We also agreed to a period of organizational probation of three
years, during which we retain a monitor who assesses our compliance with the
plea agreement and evaluate our FCPA compliance program over the three year
period, with periodic reports to the DOJ.
On the
same date, the SEC filed a complaint and we consented to the filing of a final
judgment against us in the Court. The complaint and the judgment were filed as
part of a settled civil enforcement action by the SEC, to resolve the civil
portion of the government’s investigation of the Bonny Island project. The
complaint alleges civil violations of the FCPA’s antibribery and
books-and-records provisions related to the Bonny Island project. The complaint
enjoins us from violating the FCPA’s antibribery, books-and-records, and
internal-controls provisions and requires Halliburton and KBR, jointly and
severally, to make payments totaling $177 million, all of which has been paid by
Halliburton pursuant to the indemnification under the master separation
agreement. The judgment also requires us to retain an independent
monitor on the same terms as the plea agreement with the DOJ.
Under
both the plea agreement and judgment, we have agreed to cooperate with the SEC
and DOJ in their investigations of other parties involved in TSKJ and the Bonny
Island project.
As a
result of the settlement, in the fourth quarter 2008 we recorded the $402
million obligation to the DOJ and, accordingly, recorded a receivable from
Halliburton for the $382 million that Halliburton will pay to the DOJ on our
behalf. The resulting charge of $20 million to KBR was recorded in
cost of sales of our Upstream business unit in the fourth quarter of 2008.
Likewise, we recorded an obligation to the SEC in the amount of $177 million and
a receivable from Halliburton in the same amount. Halliburton paid
their first five installments totaling $240 million to the DOJ and $177 million
to the SEC as of December 31, 2009, and such payments totaling $417 million have
been reflected in the accompanying statement of cash flows as noncash operating
activities in 2009. We have paid approximately $12 million related to
our portion of the settlement agreement.
At
December 31, 2009, the remaining obligation to the DOJ of $150 million has been
classified on our consolidated balance sheet in “Other current
liabilities.” This classification is based on payment terms that
provide for quarterly installments of $50 million each due on the first day of
each subsequent quarter beginning on April 1, 2009 through October 1,
2010. Likewise, the remaining indemnification receivable from
Halliburton for the DOJ obligation of $143 million has been classified on our
consolidated balance sheet in “Other current assets.”
As part
of the settlement of the FCPA matters, we have agreed to the appointment of a
corporate monitor for a period of up to three years. We proposed the
appointment of a corporate monitor and received approval from the DOJ in the
third quarter of 2009. We are responsible for paying the fees and
expenses related to the monitor’s review and oversight of our policies and
activities relating to compliance with applicable anti-corruption laws and
regulations.
Because
of the guilty plea by KBR LLC, we are subject to possible suspension or
debarment of our ability to contract with governmental agencies of the United
States and of foreign countries. We received written confirmation from the U.S.
Department of the Army stating that it does not intend to suspend or debar KBR
from DoD contracting as a result of the guilty plea by KBR
LLC. Additionally, the MoD has indicated that it does not believe it
will debar KBR LLC or any related KBR entities under its
regulations. However, this decision is currently the subject of a
threatened legal challenge in the U.K. Although no formal proceedings have been
issued to date, it is too early to make a judgment as to the risk of debarment
from MoD contracting. Although we do not believe we will be suspended
or debarred of our ability to contract with other governmental agencies of the
United States or any other foreign countries, suspension or debarment from the
government contracts business would have a material adverse effect on our
business, results of operations, and cash flow.
Under the
terms of the Master Separation Agreement, Halliburton has agreed to indemnify
us, and any of our greater than 50%-owned subsidiaries, for our share of fines
or other monetary penalties or direct monetary damages, including disgorgement,
as a result of claims made or assessed by a governmental authority of the United
States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a
settlement thereof relating to FCPA and related corruption allegations, which
could involve Halliburton and us through The M. W. Kellogg Company, M. W.
Kellogg Limited (“MWKL”), or their or our joint ventures in projects both in and
outside of Nigeria, including the Bonny Island, Nigeria project. Halliburton’s
indemnity will not apply to any other losses, claims, liabilities or damages
assessed against us as a result of or relating to FCPA matters and related
corruption allegations or to any fines or other monetary penalties or direct
monetary damages, including disgorgement, assessed by governmental authorities
in jurisdictions other than the United States, the United Kingdom, France,
Nigeria, Switzerland or Algeria, or a settlement thereof, or assessed against
entities such as TSKJ, in which we do not have an interest greater than
50%.
We are
aware that the U.K. Serious Fraud Office (“SFO”) is conducting an investigation
of activities conducted by current or former employees of MWKL regarding the
Bonny Island project. Violations of corruption laws in the U.K. could
result in fines, restitution and confiscation of revenues, among other
penalties. MWKL has informed the SFO that it intends to self report
corporate liability for corruption-related offenses arising out of the Bonny
Island project and expects to enter into a plea negotiation process under the
“Attorney General’s Guidelines on Plea Discussions in Cases of Serious and
Complex Fraud” issued by the Attorney General for England and
Wales. MWKL is in the process of responding to inquiries and
providing information as requested by the SFO. As a result of the
unique factors associated with this matter and in light of MWKL’s cooperation,
the SFO has confirmed it is prepared to treat MWKL as making an early self
report in accordance with the SFO’s guidelines. Whether the SFO
pursues criminal prosecution or civil recovery, and the amount of any fines,
restitution, confiscation of revenues or other penalties that could be assessed
will depend on, among other factors, the SFO’s findings regarding the amount,
timing, nature and scope of any improper payments or other activities, whether
any such payments or other activities were authorized by or made with knowledge
of MWKL, the amount of revenue involved, and the level of cooperation provided
to the SFO during the investigations. Our indemnity from Halliburton
under the master separation agreement with respect to MWKL is limited to our 55%
beneficial ownership in MWKL. Due to the indemnity from Halliburton,
we believe any outcome of this matter will not have a material adverse impact to
our operating results or financial position.
Investigations
by other foreign governmental authorities are continuing. At this
time, other than the claims being considered by the SFO discussed above, no
claims by governmental authorities in foreign jurisdictions have been
asserted. Other foreign governmental authorities could conclude that
violations of applicable foreign laws analogous to the FCPA have occurred with
respect to the Bonny Island project and other projects in or outside of Nigeria.
In such circumstances, the resolution or disposition of these matters, even
after taking into account the indemnity from Halliburton with respect to any
liabilities for fines or other monetary penalties or direct monetary damages,
including disgorgement, that may be assessed by certain foreign governments or
governmental agencies against us or our greater than 50%-owned subsidiaries
could have a material adverse effect on our business, prospects, results or
operations, financial condition and cash flow. We currently do not
have sufficient information to estimate any liability related to ongoing
investigations.
Commercial
Agent Fees
We have
both before and after the separation from our former parent used commercial
agents on some of our large-scale international projects to assist in
understanding customer needs, local content requirements, vendor selection
criteria and processes and in communicating information from us regarding our
services and pricing. Prior to separation, it was identified by our
former parent in performing its investigation of anti-corruption activities that
certain of these agents may have engaged in activities that were in violation of
anti-corruption laws at that time and the terms of their agent agreements with
us. Accordingly, we have ceased the receipt of services from and
payment of fees to these agents. Fees for these agents are included
in the total estimated cost for these projects at their
completion. In connection with actions taken by U.S. Government
authorities, we have removed certain unpaid agent fees from the total estimated
costs in the period that we obtained sufficient evidence to conclude such agents
clearly violated the terms of their contracts with us. In the first
and third quarters of 2009, we reduced project cost estimates by $16 million and
$5 million, respectively, as a result of making such
determinations. As of December 31, 2009, agent fees of approximately
$89 million are included in our estimated costs for various
projects. We will make no payments to these agents until we are
assured that any payment complies with all applicable laws. In
addition, we will vigorously defend ourselves against any claims for payment
from such agents.
Barracuda-Caratinga
Project Arbitration
In June
2000, we entered into a contract with Barracuda & Caratinga Leasing Company
B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields,
which are located off the coast of Brazil. Petrobras is a contractual
representative that controls the project owner. In November 2007, we
executed a settlement agreement with the project owner to settle all outstanding
project issues except for the bolts arbitration discussed below.
At
Petrobras’ direction, we replaced certain bolts located on the subsea flowlines
that failed through mid-November 2005, and we understand that additional bolts
failed thereafter, which were replaced by Petrobras. These failed bolts were
identified by Petrobras when it conducted inspections of the
bolts. In March 2006, Petrobras notified us they submitted this
matter to arbitration claiming $220 million plus interest for the cost of
monitoring and replacing the defective stud bolts and, in addition, all of the
costs and expenses of the arbitration including the cost of attorneys'
fees. Petrobras has not provided any evidentiary support or analysis
for the amounts claimed as damages. The arbitration is being
conducted in New York under the guidelines of the United Nations Commission on
International Trade Law (“UNCITRAL”). Petrobras contends that all of the bolts
installed on the project are defective and must be replaced.
During
the time that we addressed outstanding project issues and during the conduct of
the arbitration, KBR believed the original design specification for the bolts
was issued by Petrobras, and as such, the cost resulting from any replacement
would not be our responsibility. A preliminary hearing on legal and
factual issues relating to liability with the arbitration panel was held in
April 2008. In June 2009, we received an unfavorable ruling from the
arbitration panel on the legal and factual issues as the panel decided the
original design specification for the bolts originated with KBR and its
subcontractors. The preliminary hearing concluded that KBR’s express
warranties in the contract regarding the fitness for use of the design
specifications for the bolts took precedence over any implied warranties
provided by the project owner. Our potential exposure would include
the nominal costs of the bolts replaced to date by Petrobras, any incremental
monitoring costs incurred by Petrobras and damages for any other bolts that are
subsequently found to be defective which damages and exposure we cannot quantify
at this time because such costs will be dependent upon the remaining legal and
factual issues to be determined in the final arbitration hearings which have not
yet been scheduled. It remains to be determined whether bolts that
have not failed are in fact defective. However, we believe that it is
probable that we have incurred some liability in connection with the replacement
of bolts that have failed to date but at this time cannot determine the amount
of that liability as noted above. For the remaining bolts at dispute
in the bolt arbitration with Petrobras, at this time we can not determine that
we have liability nor determine the amount of any such liability. As
a result, no amounts have been accrued. Under the master separation
agreement, Halliburton has agreed to indemnify us and any of our greater than
50%-owned subsidiaries as of November 2006, for all out-of-pocket cash costs and
expenses (except for ongoing legal costs), or cash settlements or cash
arbitration awards in lieu thereof, we may incur after the effective date of the
master separation agreement as a result of the replacement of the subsea
flowline bolts installed in connection with the Barracuda-Caratinga
project. Due to the indemnity from Halliburton, we believe any
outcome of this matter will not have a material adverse impact to our operating
results or financial position.
Derivative
Class Action Lawsuits
In the
second quarter of 2009, two shareholder derivative lawsuits were filed in the
District Court of Harris County, Texas, against certain current and former
officers and directors of Halliburton and KBR. The complaints
alleged, among other things, lack of internal controls to detect fraud and
wrongdoing that lead to the bribing of Nigerian officials and violation of the
FCPA, repeated overcharging of the government for its services under federal
government contracts, acceptance of illegal kickbacks and fraud as well as
violation of various other environmental and human rights laws. Most
of the purported allegations stemmed from activities relating to the DOJ’s and
SEC’s FCPA investigations in Nigeria. Both complaints sought
unspecified compensatory damages on behalf of Halliburton and/or KBR, interest,
and an award of attorney’s fees, expert’s fees, costs and other expenses of
litigation. The allegations concern events the vast majority of which
occurred prior to the formation of KBR, Inc. or the appointment of its officers
and directors. During January of 2010, the plaintiffs replead their
claims and consolidated the suits in response to our
objections. Neither KBR nor its directors were named in the new
consolidated complaint. We consider this matter to now be
closed.
Foreign
tax laws
We
conduct operations in many tax jurisdictions throughout the world. Tax laws in
certain of these jurisdictions are not as mature as those found in highly
developed economies. As a consequence, although we believe we are in
compliance with such laws, interpretations of these laws could be challenged by
the foreign tax authorities. In many of these jurisdictions,
non-income based taxes such as property taxes, sales and use taxes, and
value-added taxes are assessed on our operations in that particular location.
While we strive to ensure compliance with these various non-income based tax
filing requirements, there have been instances where potential non-compliance
exposures have been identified. In accordance with accounting
principles generally accepted in the United States of America, we make a
provision for these exposures when it is both probable that a liability has been
incurred and the amount of the exposure can be reasonably
estimated. To date, such provisions have been immaterial, and we
believe that, as of December 31, 2009, we adequately provided for such
contingencies. However, it is possible that our results of
operations, cash flows, and financial position could be adversely impacted if
one or more non-compliance tax exposures are asserted by any of the
jurisdictions where we conduct our operations.
In the
third quarter of 2009, the Mexican tax authorities proposed an unfavorable tax
adjustment to one of our Mexican wholly-owned subsidiaries in connection with
the audit of its Mexican tax returns for the years 2000 and 2001. We
disagree with the adjustment and are working with the tax authorities to resolve
the matter. We believe the applicable statutes of limitations have
expired and as such, we do not believe any tax assessment would be enforceable
against us for those tax years. As of December 31, 2009, we have not
accrued any amounts related to this matter.
Environmental
We are
subject to numerous environmental, legal and regulatory requirements related to
our operations worldwide. In the United States, these laws and regulations
include, among others:
|
|
·
|
the
Comprehensive Environmental Response, Compensation and Liability
Act;
|
|
|
·
|
the
Resources Conservation and Recovery
Act;
|
|
|
·
|
the
Clean Air Act;
|
|
|
·
|
the
Federal Water Pollution Control Act;
and
|
|
|
·
|
the
Toxic Substances Control Act.
|
In
addition to the federal laws and regulations, states and other countries where
we do business often have numerous environmental, legal and regulatory
requirements by which we must abide. We evaluate and address the environmental
impact of our operations by assessing and remediating contaminated properties in
order to avoid future liabilities and by complying with environmental, legal and
regulatory requirements. On occasion, we are involved in specific environmental
litigation and claims, including the remediation of properties we own or have
operated as well as efforts to meet or correct compliance-related matters. We
make estimates of the amount of costs associated with known environmental
contamination that we will be required to remediate and record accruals to
recognize those estimated liabilities. Our estimates are based on the best
available information and are updated whenever new information becomes known.
For certain locations, including our property at Clinton Drive, we have not
completed our analysis of the site conditions and until further information is
available, we are only able to estimate a possible range of remediation costs.
This range of costs could change depending on our ongoing site analysis and the
timing and techniques used to implement remediation activities. We do not expect
costs related to environmental matters will have a material adverse effect on
our consolidated financial position or our results of operations. At December
31, 2009 our accrual for the estimated assessment and remediation costs
associated with all environmental matters was approximately $7 million, which
represents the low end of the range of possible costs that could be as much as
$14 million.
Other
commitments
We had
commitments to provide funds to our privately financed projects of $52 million
as of December 31, 2009 and $64 million as of December 31, 2008. Our
commitments to fund our privately financed projects are supported by letters of
credit as described above. These commitments arose primarily during
the start-up of these entities. At December 31, 2009, approximately
$17 million of the $52 million in commitments will become due within one
year.
Effective
December 24, 2009, we entered into a collaboration agreement with BP p.l.c. to
market and license certain technology. In conjunction with this
arrangement, we acquired a 25-year license granting us the exclusive right to
the technology. As partial consideration for the license, we are obligated
to pay an initial fee of $20 million. This payment was made subsequent to
our year-end.
Liquidated
damages
Many of
our engineering and construction contracts have milestone due dates that must be
met or we may be subject to penalties for liquidated damages if claims are
asserted and we were responsible for the delays. These generally relate to
specified activities that must be met within a project by a set contractual date
or achievement of a specified level of output or throughput of a plant we
construct. Each contract defines the conditions under which a customer may make
a claim for liquidated damages. However, in some instances, liquidated damages
are not asserted by the customer, but the potential to do so is used in
negotiating claims and closing out the contract.
During
the first quarter of 2009, one of our joint ventures experienced a delay that
extended the expected completion date of a plant. The joint venture is working
with the client to determine the exact cause of the delay and the amount of
liability, if any, the joint venture may have incurred with respect to schedule
related liquidated damages. We believe the joint venture is entitled to a
change order for an extension of time sufficient to alleviate its exposure to
liquidated damages related to this delay.
We have
not accrued for liquidated damages related to several projects, including the
exposure described in the above paragraph, totaling $18 million at December 31,
2009 and $31 million at December 31, 2008 (including amounts related to our
share of unconsolidated subsidiaries), that we could incur based upon completing
the projects as forecasted.
Leases
We are
obligated under operating leases, principally for the use of land, offices,
equipment, field facilities, and warehouses. We recognize minimum
rental expenses over the term of the lease. When a lease contains a
fixed escalation of the minimum rent or rent holidays, we recognize the related
rent expense on a straight-line basis over the lease term and record the
difference between the recognized rental expense and the amounts payable under
the lease as deferred lease credits. We have certain leases for
office space where we receive allowances for leasehold
improvements. We capitalize these leasehold improvements as property,
plant, and equipment and deferred lease credits. Leasehold
improvements are amortized over the shorter of their economic useful lives or
the lease term. Total rent expense was $233 million, $203 million and
$158 million in 2009, 2008 and 2007, respectively. Future total
rentals on noncancelable operating leases are as follows: $56 million in 2010;
$46 million in 2011; $41 million in 2012; $34 million in 2013; $30 million in
2014 and $76 million thereafter. Excluded from future total rentals
on noncancelable operating lease are rentals for the lease amendments described
below, which occurred subsequent to December 31, 2009.
In February 2010, we
executed two lease amendments for our high-rise offices facilities in Houston,
Texas to significantly expand the leased office space and extend the original
term of the leases to June 30, 2030 The new term of each lease is for
20 years commencing on July 1, 2010. The future total rentals on
noncancelable operating leases described above will increase in the aggregate by
approximately $263 million as a result of these lease
amendments.
Note
12. Income Taxes
The
components of the (provision) benefit for income taxes are as
follows:
|
|
|
Years
ended December 31
|
|
|||||||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Current
income taxes:
|
|
|
|
|
|
|
|
|
|
|||
|
Federal
|
|
$
|
3
|
|
$
|
41
|
|
$
|
(101
|
)
|
||
|
Foreign
|
|
|
(99
|
)
|
|
|
(165
|
)
|
|
|
(58
|
)
|
|
State
|
|
|
(7
|
)
|
|
|
—
|
|
|
(6
|
)
|
|
|
Total
current
|
|
|
(103
|
)
|
|
|
(124
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Deferred
income taxes:
|
|
|
|
|
|
|
|
|
|
|
||
|
Federal
|
|
|
39
|
|
|
(107
|
)
|
|
|
30
|
|
|
|
Foreign
|
|
|
(105
|
)
|
|
|
13
|
|
|
(6
|
)
|
|
|
State
|
|
|
1
|
|
|
6
|
|
|
|
3
|
||
|
Total
deferred
|
|
|
(65
|
)
|
|
|
(88
|
)
|
|
|
27
|
|
|
Provision
for income taxes
|
|
$
|
(168
|
)
|
|
$
|
(212
|
)
|
|
$
|
(138
|
)
|
Prior to
the separation from Halliburton, income tax expense for KBR, Inc. was calculated
on a pro rata basis. Under this method, income tax expense was
determined based on KBR, Inc. operations and their contributions to income tax
expense of the Halliburton consolidated group. For the period post
separation from Halliburton, income tax expense is calculated on a stand alone
basis. Payments made to or received from Halliburton to settle tax
assets and liabilities are classified as contributions to capital in the
accompanying financial statements. KBR is subject to a tax sharing
agreement primarily covering periods prior to the separation from
Halliburton. The tax sharing agreement provides, in part, that KBR
will be responsible for any audit settlements related to its business activity
for periods prior to its separation from Halliburton for which KBR recorded a
charge to equity of $17 million in 2007. As of December 31, 2009, KBR has
recorded a $53 million payable to Halliburton for tax related items under the
tax sharing agreement. See Note 17 for further discussion related to
our transactions with Halliburton.
The
United States and foreign components of income from continuing operations before
income taxes and noncontrolling interests were as follows:
|
|
|
Years
ended December 31
|
|
|||||||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
United
States
|
|
$
|
(128
|
)
|
|
$
|
(50
|
)
|
|
$
|
(42
|
)
|
|
Foreign
|
|
|
660
|
|
|
618
|
|
|
|
384
|
|
|
|
Total
|
|
$
|
532
|
|
$
|
568
|
|
|
$
|
342
|
|
|
The
reconciliations between the actual provision for income taxes on continuing
operations and that computed by applying the United States statutory rate to
income from continuing operations before income taxes and noncontrolling
interests are as follows:
|
|
|
Years
ended December 31
|
|
|||||||||
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
United
States Statutory Rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
Rate
differentials on foreign earnings
|
|
|
(2.3
|
)
|
|
|
1.6
|
|
|
|
7.3
|
|
|
Non-deductible
loss
|
|
|
0.4
|
|
|
|
1.6
|
|
|
|
—
|
|
|
State
income taxes
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
1.0
|
|
|
Prior
year foreign, federal and state taxes
|
|
|
(1.0
|
)
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
|
Valuation
allowance
|
|
|
1.7
|
|
|
|
0.1
|
|
|
(2.3
|
)
|
|
|
Tax
on unincorporated joint ventures
|
|
|
(2.0
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
(1.2
|
)
|
|
|
0.1
|
|
|
|
0.5
|
|
|
Total
effective tax rate on continuing operations
|
|
|
31.5
|
%
|
|
|
37.3
|
%
|
|
|
40.2
|
%
|
We
generally do not provide U.S. income taxes on the undistributed earnings of
non-United States subsidiaries except for certain entities in Mexico and certain
joint ventures in Yemen, Egypt, Nigeria and Indonesia. Taxes are
provided as necessary with respect to earnings that are not permanently
reinvested. For all other non-U.S. subsidiaries, no U.S. taxes are provided
because such earnings are intended to be reinvested indefinitely to finance
foreign activities.
The
primary components of our deferred tax assets and liabilities and the related
valuation allowances are as follows:
|
|
|
Years
ended December 31
|
|
|||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
||
|
Gross
deferred tax assets:
|
|
|
|
|
|
|
||
|
Depreciation
and amortization
|
|
$
|
2
|
|
|
$
|
4
|
|
|
Employee
compensation and benefits
|
|
|
182
|
|
|
|
178
|
|
|
Foreign
tax credit carryforwards
|
|
|
16
|
|
|
|
—
|
|
|
Deferred
foreign tax credit
|
|
|
1
|
|
|
|
24
|
|
|
Construction
contract accounting
|
|
|
104
|
|
|
|
67
|
|
|
Loss
carryforwards
|
|
|
44
|
|
|
|
35
|
|
|
Insurance
accruals
|
|
|
18
|
|
|
|
21
|
|
|
Allowance
for bad debt
|
|
|
10
|
|
|
|
7
|
|
|
Accrued
liabilities
|
|
|
18
|
|
|
|
8
|
|
|
Other
|
|
|
8
|
|
|
|
—
|
|
|
Total
|
|
$
|
403
|
|
|
$
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Construction
contract accounting
|
|
$
|
(101
|
)
|
|
$
|
(54
|
)
|
|
Intangibles
|
|
|
(30
|
)
|
|
|
(29
|
)
|
|
Depreciation
and amortization
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
All
other
|
|
|
(54
|
)
|
|
|
(12
|
)
|
|
Total
|
|
$
|
(196
|
)
|
|
$
|
(105
|
)
|
|
|
|
|
|
|
|
|
||
|
Valuation
Allowances:
|
|
|
|
|
|
|
||
|
Loss
carryforwards
|
|
|
(30
|
)
|
|
|
(19
|
)
|
|
Total
|
|
$
|
(30
|
)
|
|
$
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred income tax asset
|
|
$
|
177
|
|
|
$
|
220
|
|
At
December 31, 2009, we had $158 million of net operating loss carryforwards that
expire from 2010 through 2019 and loss carryforwards of $52 million with
indefinite expiration dates.
For the
year ended December 31, 2009, our valuation allowance was increased from $19
million to $30 million primarily as a result of net operating losses for which
we do not believe we will be able to utilize in certain foreign
locations.
Foreign
tax credit carryforwards of $15 million recorded in the financial statements
reflect the credits generated in 2009 by KBR operations that we
expect will be utilized in our carryforward period.
KBR is
the parent of a group of our domestic companies which are in the U.S.
consolidated federal income tax return of Halliburton through April 5, 2007, the
date of our separation from Halliburton. We also file income tax returns in
various states and foreign jurisdictions. With few exceptions, we are no longer
subject to examination by tax authorities for U.S. federal or state and local
income tax for years before 2003, or for non-U.S. income tax for years before
1998.
KBR
followed guidance in FASB ASC 740 related to “Income Taxes.” The
topic prescribes the minimum recognition threshold a tax position taken or
expected to be taken in a tax return is required to meet before being recognized
in the financial statements. It also provides guidance for derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
|
In
millions
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
$
|
22
|
|
|
Additions
based on tax positions related to the current year
|
|
|
—
|
|
|
Additions
based on tax positions related to prior years
|
|
|
24
|
|
|
Reductions
for tax positions related to the current year
|
|
|
—
|
|
|
Reductions
for tax positions of prior years
|
|
|
(3
|
)
|
|
Settlements
|
|
|
(2
|
)
|
|
Reductions
related to a lapse of statute of limitations
|
|
|
—
|
|
|
Balance
at December 31, 2009
|
|
$
|
41
|
|
As of
December 31, 2009, KBR estimates that $41 million in unrecognized tax benefits,
if recognized, would affect the effective tax rate. We do not anticipate any
significant changes to the unrecognized tax benefits within the next twelve
months.
KBR
recognizes interest and penalties related to unrecognized tax benefits within
the provision for income taxes in our consolidated statement of income. As of
December 31, 2009, we had accrued approximately $14 million in interest and
penalties. During the year ended December 31, 2009, we recognized approximately
$1 million in net interest and penalties charges related to unrecognized tax
benefits.
As of
December 31, 2009, the unrecognized tax benefits and accrued interest and
penalties were not expected to be settled within one year and therefore are
classified in noncurrent income tax payable. We do not believe our
current tax positions that have resulted in unrecognized tax benefits will
significantly increase or decrease within one year. As of December
31, 2009, no material changes have occurred in our estimates or expected events
related to an Algeria tax assessment for the years 2003 through
2005. The audit exposure relates to the In Salah and In Amenas gas
monetization projects, for which KBR has a 50% joint venture
interest. The current audit assessment is based, in large part, on
what we believe is an erroneous interpretation of the tax law. We
will appeal the tax assessment, and we believe, the final amount determined to
be owed will be substantially less than the amount that has been
assessed. Nevertheless, there is no certainty that KBR will sustain
its position or appeal. If the government prevails, there would be a
substantial charge to the joint venture. KBR has recorded the amount
that it believes the joint venture will have to pay to settle this tax
audit. We will continue to evaluate the tax situation in Algeria, and
if warranted, adjust the reserve recorded accordingly.
Note
13. Shareholders’ Equity
The
following tables summarize our shareholders’ equity activity:
|
Millions
of dollars
|
|
Total
|
|
|
Paid-in Capital in Excess of par
|
|
|
Retained Earnings
|
|
|
Treasury Stock
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Noncontrolling
Interests
|
|
||||||
|
Balance
at December 31, 2006
|
|
$
|
1,829
|
|
|
$
|
2,058
|
|
|
$
|
27
|
|
|
|
—
|
|
|
$
|
(291
|
)
|
|
$
|
35
|
|
|
Cumulative
effect of initial adoption of accounting for uncertainty in income
taxes
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock-based
compensation
|
|
|
11
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Intercompany
stock-based compensation
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Settlement
of taxes with former parent
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common
stock issued upon exercise of stock options
|
|
|
6
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Tax
benefit increase related to stock-based plans
|
|
|
11
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Distributions
to noncontrolling interests
|
(42
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(42
|
)
|
|||
|
Disposal
of noncontrolling interests related to sale of DML
|
(50
|
)
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
(50
|
)
|
||||||||
|
Tax
adjustments to noncontrolling interests
|
(5
|
)
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
(5
|
)
|
||||||||
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
336
|
|
|
|
—
|
|
|
|
302
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
Pension
liability adjustment, net of tax of $116
|
|
|
178
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
176
|
|
|
|
2
|
|
|
Other
comprehensive gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Unrealized
gains (losses) on derivatives
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
Reclassification
adjustments to net income (loss)
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
Income
tax benefit (provision) on derivatives
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
Comprehensive income,
total
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
2,235
|
|
|
$
|
2,070
|
|
|
$
|
319
|
|
|
|
—
|
|
|
$
|
(122
|
)
|
|
$
|
(32
|
)
|
|
Cumulative
effect of initial adoption of accounting for defined benefit pension and
other postretirement plans
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock-based
compensation
|
|
|
16
|
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common
stock issued upon exercise of stock options
|
|
|
3
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Tax
benefit increase related to stock-based plans
|
|
|
2
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividends
declared to shareholders
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Repurchases
of common stock
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Distributions
to noncontrolling interests
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(21
|
)
|
|||
|
Acquisition
of noncontrolling interests related to purchase of
BE&K
|
2
|
—
|
—
|
—
|
—
|
2
|
||||||||||||||||||
|
Tax
adjustments to noncontrolling interests
|
12
|
—
|
—
|
—
|
—
|
12
|
||||||||||||||||||
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
367
|
|
|
|
—
|
|
|
|
319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48
|
|
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
(117
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(107
|
)
|
|
|
(10
|
)
|
|
Pension
liability adjustment, net of tax of $(85)
|
|
|
(226
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(209
|
)
|
|
|
(17
|
)
|
|
Other
comprehensive gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on derivatives
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
Reclassification
adjustments to net income (loss)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
Income
tax benefit (provision) on derivatives
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
Comprehensive
income, total
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
2,034
|
|
|
$
|
2,091
|
|
|
$
|
596
|
|
|
(196
|
)
|
|
$
|
(439
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
17
|
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common
stock issued upon exercise of stock options
|
|
|
2
|
2
|
||||||||||||||||||||
|
Tax
benefit decrease related to stock-based plans
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividends
declared to shareholders
|
|
|
(32
|
)
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Repurchases
of common stock
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Issuance
of ESPP shares from treasury stock
|
|
|
2
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
—
|
|
|
|
—
|
|||||
|
Distributions
to noncontrolling interests
|
|
|
(66
|
)
|
—
|
|
|
|
—
|
—
|
|
|
|
—
|
(66
|
)
|
||||||||
|
Investments
by noncontrolling interests
|
|
|
12
|
—
|
—
|
—
|
—
|
12
|
||||||||||||||||
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
364
|
|
|
|
—
|
|
|
|
290
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74
|
|
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
3
|
||
|
Pension
liability adjustment, net of tax of $(5)
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(18
|
)
|
|
|
3
|
|
|
Other
comprehensive gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on derivatives
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
Reclassification
adjustments to net income (loss)
|
|
|
1
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
—
|
|||
|
Income
tax benefit (provision) on derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Comprehensive
income, total
|
|
|
365
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$
|
2,296
|
|
|
$
|
2,103
|
|
|
$
|
854
|
|
|
$
|
(225
|
)
|
|
$
|
(444
|
)
|
|
$
|
8
|
|
Accumulated
other comprehensive income (loss)
|
|
|
December
31
|
|
|||||||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cumulative
translation adjustments
|
|
$
|
(54
|
)
|
|
$
|
(69
|
)
|
|
$
|
38
|
|
|
Pension
liability adjustments
|
|
|
(386
|
)
|
|
|
(368
|
)
|
|
|
(159
|
)
|
|
Unrealized
gains (losses) on derivatives
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
Total
accumulated other comprehensive loss
|
|
$
|
(444
|
)
|
|
$
|
(439
|
)
|
|
$
|
(122
|
)
|
Accumulated
comprehensive loss for both years ended December 31, 2009 and 2008 include
approximately $8 million for the amortization of actuarial loss, net of
taxes. The year ended December 31, 2008 also includes the
amortization of prior service cost of $1 million. Comprehensive
income (loss) for the year ended December 31, 2007 includes the elimination of
net cumulative translation and pension liability adjustments of $(22) million
and $90 million, respectively, related to the disposition of our 51% interest in
DML. See Note 20 for further discussion.
Shares
of common stock
|
Millions
of shares
|
|
Shares
|
|
|
Amount
|
|
||
|
Balance
at December 31, 2007
|
|
|
170
|
|
|
$
|
—
|
|
|
Common
stock issued
|
|
|
—
|
|
|
|
—
|
|
|
Balance
at December 31, 2008
|
|
|
170
|
|
|
|
—
|
|
|
Common
stock issued
|
|
|
1
|
|
|
|
—
|
|
|
Balance
at December 31, 2009
|
|
|
171
|
|
|
$
|
—
|
|
Shares
of treasury stock
|
Millions
of shares
|
|
Shares
|
|
|
Amount
|
|
||
|
Balance
at December 31, 2007
|
|
|
—
|
|
|
$
|
—
|
|
|
Common
stock repurchased
|
|
|
8
|
|
|
|
196
|
|
|
Balance
at December 31, 2008
|
8
|
196
|
||||||
|
Common
stock repurchased, net of ESPP shares issued
|
|
|
2
|
|
|
|
29
|
|
|
Balance
at December 31, 2009
|
|
|
10
|
|
|
$
|
225
|
|
Dividends
We
declared dividends totaling $32 million in 2009 and $41 million in
2008. As of December 31, 2009, we had accrued dividends of $16
million. We made three dividend declarations of $0.05 per share
during 2009 which were payable to 2009 shareholders of record. On
December 21, 2009, we made a fourth dividend declaration of $0.05 per share for
shareholders of record as of March 15, 2010.
Note
14. Stock-based Compensation and Incentive Plans
Stock
Plans
In 2009,
2008 and 2007 stock-based compensation awards were granted to employees under
KBR stock-based compensation plans.
KBR
2006 Stock and Incentive Plan
In
November 2006, KBR established the KBR 2006 Stock and Incentive Plan (KBR 2006
Plan) which provides for the grant of any or all of the following types of
stock-based awards:
|
|
·
|
stock
options, including incentive stock options and nonqualified stock
options;
|
|
|
·
|
stock
appreciation rights, in tandem with stock options or
freestanding;
|
|
|
·
|
restricted
stock;
|
|
|
·
|
restricted
stock unit;
|
|
|
·
|
performance
awards; and
|
|
|
·
|
stock
value equivalent awards.
|
Under the
terms of the KBR 2006 Plan, 10 million shares of common stock have been reserved
for issuance to employees and non-employee directors. The plan specifies that no
more than 3.5 million shares can be awarded as restricted stock or restricted
stock units or pursuant to performance awards. At December 31, 2009,
approximately 5.7 million shares were available for future grants under the KBR
2006 Plan, of which approximately 1.2 million shares remained available for
restricted stock awards or restricted stock unit awards.
KBR
Transitional Stock Adjustment Plan
The KBR
Transitional Stock Adjustment Plan was adopted solely for the purpose to convert
Halliburton equity awards to KBR equity awards. No new awards can be
made under this plan. Upon our separation from Halliburton on April
5, 2007, Halliburton stock options and restricted stock awards (with
restrictions that have not yet lapsed as of the final separation date) granted
to KBR employees under Halliburton’s 1993 Stock and Incentive Plan were
converted to KBR stock options and restricted stock awards. A total
of 1,217,095 Halliburton stock options and 612,857 Halliburton restricted stock
awards were converted into 1,966,061 KBR stock options with a weighted average
exercise price per share of $9.35 and 990,080 restricted stock awards with a
weighted average grant-date fair value per share of $11.01. The
conversion ratio for restricted stock was based on comparative KBR and
Halliburton share prices. The conversion ratio was based upon the volume
weighted average stock price of KBR and Halliburton shares for a three-day
average.
The
converted equity awards are subject to substantially the same terms as they were
under the Halliburton 1993 Stock and Incentive Plan prior to
conversion. All stock options under Halliburton’s 1993 Stock and
Incentive Plan were granted at the fair market value of the common stock at the
grant date. Employee stock options vest ratably over a three- or
four-year period and generally expire 10 years from the grant date. There were
no Halliburton stock options granted to KBR employees in 2009, 2008 or
2007.
The
conversion of such stock options and restricted stock was accounted for as a
modification in accordance with FASB ASC 718-10 and resulted in an incremental
charge to expense of less than $1 million, recognized in 2007, representing the
change in fair value of the converted awards from Halliburton stock options and
restricted stock awards to KBR stock options and restricted stock
awards.
In
accordance with the accounting guidance for share-based compensation, in the
event of an option modification, the terms or conditions of an equity award
shall be treated as an exchange of the original award for a new award, and both
awards are remeasured based on the share price and other pertinent factors at
the modification date. The fair value of each option was estimated based on the
date of grant using the Black-Scholes Merton option pricing model. The following
assumptions were used in estimating the fair value of the Halliburton stock
options exchanged for KBR stock options for KBR employees at the date of
modification:
|
Halliburton
Options
|
|
|||
|
|
|
|||
|
Expected
term (in years)
|
0.25 – 4.5 | |||
|
Expected
volatility range
|
21.06 – 30.63 | % | ||
|
Expected
dividend yield
|
0.96 | % | ||
|
Risk-free
interest rate
|
4.5 – 5.07 | % | ||
|
|
||||
|
KBR
Options
|
||||
|
|
||||
|
Expected
term (in years)
|
0.25 – 5.5 | |||
|
Expected
volatility range
|
29.03 – 37.43 | % | ||
|
Expected
dividend yield
|
0.00 | % | ||
|
Risk-free
interest rate
|
4.5 – 5.07 | % | ||
The
expected term of Halliburton options was based on the historical exercise data
of Halliburton and KBR employees and the various original grant dates.
Volatility was based on the historical and implied volatility of Halliburton
common stock. Expected dividend yield was based on cash dividends paid by
Halliburton in 2006 divided by the closing share price at December 31,
2006. The expected term of KBR options was based upon the
average of the life of the option and the vesting period of the option. The
simplified estimate of expected term was utilized as we lack sufficient history
to estimate an expected term for KBR options. Volatility for KBR options was
based upon a blended rate that used the historical and implied volatility of
common stock for KBR and selected peers. The risk-free interest rate applied to
both Halliburton and KBR options was based on the U.S. Treasury yield curve in
effect at the date of modification.
KBR
Stock Options
Under
KBR’s 2006 Plan, effective as of the closing date of the KBR initial public
offering, stock options are granted with an exercise price not less than the
fair market value of the common stock on the date of the grant and a term no
greater than 10 years. The term and vesting periods are established at the
discretion of the Compensation Committee at the time of each
grant. We amortize the fair value of the stock options over the
vesting period on a straight-line basis. Options are granted from
shares authorized by our board of directors. There were 1.4 million
stock options granted to KBR employees in 2009. The assumptions used
to determine the fair value of options granted were as follows:
|
|
|
Years
ended December 31
|
|
|||||||||
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
KBR
Options
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Expected
term (in years)
|
|
|
6.5
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Expected
volatility
|
|
|
50.05
– 68.40
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Expected
dividend yield
|
|
|
1.72
– 0.88
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Risk-free
interest rate
|
|
|
2.18
– 2.95
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Weighted
average grant-date fair value per share
|
|
$
|
6.57
|
|
|
|
N/A
|
|
|
N/A
|
|
|
No KBR
stock options were granted in 2008 or 2007. For KBR stock options granted in
2009, the fair value of options at the date of grant was estimated using the
Black-Scholes Merton option pricing model. The expected volatility of KBR
options granted in 2009 is based upon a blended rate that uses the historical
and implied volatility of common stock for selected peers. The expected term of
KBR options granted in 2009 is based upon the average of the life of the option
and the vesting period of the option. The simplified estimate of expected term
is utilized as we lack sufficient history to estimate an expected term for KBR
options.
The
following table presents stock options granted, exercised, forfeited and expired
under KBR stock-based compensation plans for the year ended December 31,
2009.
|
Stock
Options
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate Intrinsic
Value (in
millions)
|
|
||||
|
Outstanding
at December 31, 2008
|
|
|
1,706,377
|
|
|
$
|
14.54
|
|
|
5.38
|
|
|
5.79
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Granted
|
|
|
1,361,651
|
|
|
|
12.02
|
|
|
|
|
|
|
|
||
|
Exercised
|
|
|
(168,775
|
)
|
|
|
11.26
|
|
|
|
|
|
|
|
||
|
Forfeited
|
|
|
(106,604
|
)
|
|
|
13.74
|
|
|
|
|
|
|
|
||
|
Expired
|
|
|
(76,814
|
)
|
|
|
15.49
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Outstanding
at December 31, 2009
|
|
|
2,715,835
|
|
|
$
|
13.55
|
|
|
|
6.75
|
|
|
$
|
15.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
|
1,441,585
|
|
|
$
|
14.78
|
|
|
|
4.86
|
|
|
$
|
7.88
|
|
The total
intrinsic values of options exercised in 2009, 2008 and 2007 were $1 million, $4
million, and $18 million, respectively. As of December 31, 2009,
there was $6 million of unrecognized compensation cost, net of estimated
forfeitures, related to non-vested KBR stock options, expected to be recognized
over a weighted average period of approximately 2.2 years. Stock
option compensation expense was $4 million in 2009, $3 million in 2008 and $4
million in 2007. Total income tax benefit recognized in net income for
stock-based compensation arrangements was $1 million in 2009, 2008 and
2007.
KBR
Restricted stock
Restricted
shares issued under the KBR’s 2006 Plan are restricted as to sale or
disposition. These restrictions lapse periodically over an extended period of
time not exceeding 10 years. Restrictions may also lapse for early retirement
and other conditions in accordance with our established policies. Upon
termination of employment, shares on which restrictions have not lapsed must be
returned to us, resulting in restricted stock forfeitures. The fair market value
of the stock on the date of grant is amortized and ratably charged to income
over the period during which the restrictions lapse on a straight-line basis.
For awards with performance conditions, an evaluation is made each quarter as to
the likelihood of the performance criteria being met. Stock-based compensation
is then adjusted to reflect the number of shares expected to vest and the
cumulative vesting period met to date.
The
following table presents the restricted stock awards and restricted stock units
granted, vested, and forfeited during 2009 under KBR’s 2006 Stock and Incentive
Plan.
|
Restricted
Stock
|
|
Number
of Shares
|
|
|
Weighted
Average Grant-Date Fair Value per Share
|
|
||
|
Nonvested
shares at December 31, 2008
|
|
|
1,857,499
|
|
|
$
|
24.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
500,505
|
|
|
|
12.34
|
|
|
Vested
|
|
|
(673,208
|
)
|
|
|
21.86
|
|
|
Forfeited
|
|
|
(174,276
|
)
|
|
|
21.99
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
shares at December 31, 2009
|
|
|
1,510,520
|
|
|
$
|
21.35
|
|
The
weighted average grant-date fair value per share of restricted KBR shares
granted to employees during 2009, 2008 and 2007 were $12.34, $30.54 and $29.63,
respectively. Restricted stock compensation expense was $13 million
in both 2009 and 2008, and $7 million in 2007. Total income tax benefit
recognized in net income for stock-based compensation arrangements was $5
million in 2009, $4 million in 2008 and $3 million in 2007. As of
December 31, 2009, there was $25 million of unrecognized compensation cost, net
of estimated forfeitures, related to KBR’s nonvested restricted stock and
restricted stock units, which is expected to be recognized over a weighted
average period of 3.8 years. The total fair value of shares vested
was $12 million in 2009, $14 million in 2008 and $12 million in 2007 based on
the weighted-average fair value on the vesting date. The total fair value of
shares vested was $15 million in 2009, $10 million in 2008 and $6 million in
2007 based on the weighted-average fair value on the date of grant.
KBR
Performance Award Units
Under
KBR’s 2006 Plan, performance is based 50% on Total Shareholder Return (“TSR”),
as compared to our peer group and 50% on KBR’s Return on Capital (“ROC”). The
performance award units may only be paid in cash. In accordance with the
provisions of FASB ASC 718-10, the TSR portion of the performance award units
are classified as liability awards and remeasured at the end of each reporting
period at fair value until settlement. The fair value approach uses the Monte
Carlo valuation method which analyzes the companies comprising KBR’s peer group,
considering volatility, interest rate, stock beta and TSR through the grant
date. The ROC calculation is based on the company’s weighted average net income
from continuing operations plus (interest expense x (1-effective tax rate)),
divided by average monthly capital from continuing operations. The ROC portion
of the Performance Award is also classified as a liability award and remeasured
at the end of each reporting period based on our estimate of the amount to be
paid at the end of the vesting period.
Under
KBR’s 2006 Plan, in 2009 we granted 20.4 million performance based award units
(“Performance Awards”) with a performance period from January 1, 2009 to
December 31, 2011. In 2008, we granted 24.3 million performance based
award units (“Performance Awards”) with a performance period from January 1,
2008 to December 31, 2010. In 2007, we granted 24.5 million
Performance Awards with a performance period from July 1, 2007 to December 31,
2009. Performance Awards forfeited were approximately 4 million in
both 2009 and 2008 and 1 million and 2007, respectively. At December 31, 2009,
the outstanding balance for performance based award units was 59.8
million. No Performance Awards will vest until such earned
Performance Awards, if any, are paid, subject to approval of the performance
results by the certification committee.
Cost for
the Performance Awards is accrued over the requisite service
period. For the years ended December 31, 2009, 2008 and 2007, we
recognized $30 million, $16 million and $5 million, respectively, in expense for
the Performance Awards. The expense associated with these options is
included in cost of services and general and administrative expense in our
consolidated statements of income. The liability awards are included in
“Employee compensation and benefits” on the consolidated balance sheet at
December 31, 2009 and 2008 in the amounts of $51 million and $21 million,
respectively.
KBR Employee
Stock Purchase Plan
Under the
ESPP, eligible employees may withhold up to 10% of their earnings, subject to
some limitations, to purchase shares of KBR’s common stock. Unless KBR’s Board
of Directors shall determine otherwise, each six-month offering period commences
on January 1 and July 1 of each year. Employees who participate in
the ESPP will receive a 5% discount on the stock price at the end of each
six-month purchase period. As of December 31, 2009, our employees
purchased 73 thousand shares through the KBR ESPP. These shares were
reissued from our treasury share account.
Note
15. Financial Instruments and Risk Management
Foreign currency
risk. Techniques in managing foreign currency risk include, but are not
limited to, foreign currency borrowing and investing and the use of currency
derivative instruments. We selectively manage significant exposures to potential
foreign exchange losses considering current market conditions, future operating
activities and the associated cost in relation to the perceived risk of loss.
The purpose of our foreign currency risk management activities is to protect us
from the risk that the eventual dollar cash flow resulting from the sale and
purchase of products and services in foreign currencies will be adversely
affected by changes in exchange rates.
We manage
our foreign currency exposure through the use of currency derivative instruments
as it relates to the major currencies, which are generally the currencies of the
countries for which we do the majority of our international business. These
contracts generally have an expiration date of two years or less. Forward
exchange contracts, which are commitments to buy or sell a specified amount of a
foreign currency at a specified price and time, are generally used to manage
identifiable foreign currency commitments. Forward exchange contracts and
foreign exchange option contracts, which convey the right, but not the
obligation, to sell or buy a specified amount of foreign currency at a specified
price, are generally used to manage exposures related to assets and liabilities
denominated in a foreign currency. None of the forward or option contracts are
exchange traded. While derivative instruments are subject to fluctuations in
value, the fluctuations are generally offset by the value of the underlying
exposures being managed. The use of some contracts may limit our ability to
benefit from favorable fluctuations in foreign exchange rates.
Foreign
currency contracts are not utilized to manage exposures in some currencies due
primarily to the lack of available markets or cost considerations (non-traded
currencies). We attempt to manage our working capital position to minimize
foreign currency commitments in non-traded currencies and recognize that pricing
for the services and products offered in these countries should cover the cost
of exchange rate devaluations. We have historically incurred transaction losses
in non-traded currencies.
Assets,
liabilities and forecasted cash flow denominated in foreign currencies.
We utilize the derivative instruments described above to manage the foreign
currency exposures related to specific assets and liabilities, that are
denominated in foreign currencies; however, we have not elected to account for
these instruments as hedges for accounting purposes. Additionally, we utilize
the derivative instruments described above to manage forecasted cash flow
denominated in foreign currencies generally related to long-term engineering and
construction projects. Since 2003, we have designated these contracts related to
engineering and construction projects as cash flow hedges. The ineffective
portion of these hedges is included in operating income in the accompanying
consolidated statements of income. During 2009, 2008 and 2007 no hedge
ineffectiveness was recognized. We had approximately $1 million in
unrealized net losses, $1 million in unrealized net gains, and less than $1
million in unrealized net losses on these cash flow hedges as of December 31,
2009, 2008 and 2007, respectively. These unrealized gains and losses include
amounts attributable to cash flow hedges placed by our consolidated and
unconsolidated subsidiaries and are included in other comprehensive income in
the accompanying consolidated balance sheets. Changes in the timing or amount of
the future cash flow being hedged could result in hedges becoming ineffective
and, as a result, the amount of unrealized gain or loss associated with that
hedge would be reclassified from other comprehensive income into earnings. At
December 31, 2009, the maximum length of time over which we are hedging our
exposure to the variability in future cash flow associated with foreign currency
forecasted transactions is 39 months. Estimated amounts to be
recognized in earnings in 2010 are not significant. These contracts
had a fair value asset of approximately $3 million at December 31, 2009, a fair
value liability of $1 million at December 31, 2008, and a fair value asset of
approximately $1 million at December 31, 2007.
Notional amounts
and fair market values. The notional amounts of open forward contracts
and options held by our consolidated subsidiaries was $406 million, $274 million
and $332 million at December 31, 2009, 2008 and 2007, respectively. The notional
amounts of our foreign exchange contracts do not generally represent amounts
exchanged by the parties, and thus, are not a measure of our exposure or of the
cash requirements relating to these contracts. The amounts exchanged are
calculated by reference to the notional amounts and by other terms of the
derivatives, such as exchange rates.
Credit
risk. Financial instruments that potentially subject us to concentrations
of credit risk are primarily cash equivalents, investments and trade
receivables. It is our practice to place our cash equivalents and investments in
high-quality securities with various investment institutions. We derive the
majority of our revenues from engineering and construction services to the
energy industry and services provided to the United States government. There are
concentrations of receivables in the United States and the United Kingdom. We
maintain an allowance for losses based upon the expected collectibility of all
trade accounts receivable.
There are
no significant concentrations of credit risk with any individual counterparty
related to our derivative contracts. We select counterparties based on their
profitability, balance sheet and a capacity for timely payment of financial
commitments which is unlikely to be adversely affected by foreseeable
events.
Interest rate
risk. Certain of our unconsolidated subsidiaries and joint-ventures are
exposed to interest rate risk through their variable rate borrowings. We manage
our exposure to this variable-rate debt with interest rate swaps that are
jointly owned through our investments. We had unrealized net losses on the
interest rate cash flow hedges held by our unconsolidated subsidiaries and
joint-ventures of approximately $4 million, $3 million and less than $1 million
as of December 31, 2009, 2008 and 2007, respectively.
Fair market value
of financial instruments. The carrying amount of variable rate long-term
debt approximates fair market value because these instruments reflect market
changes to interest rates. The carrying amount of short-term financial
instruments, cash and equivalents, receivables, and accounts payable, as
reflected in the consolidated balance sheets, approximates fair market value due
to the short maturities of these instruments. The currency derivative
instruments are carried on the balance sheet at fair value and are based upon
third party quotes.
FASB ASC
820-10 addresses fair value measurements and disclosures, defining fair value,
establishing a framework for using fair value to measure assets and liabilities,
and expanding disclosures about fair value measurements. This standard applies
whenever other standards require or permit assets or liabilities to be measured
at fair value. ASC 820-10 establishes a three-tier value hierarchy,
categorizing the inputs used to measure fair value. The hierarchy can be
described as follows:
|
|
·
|
Level
1 – Observable inputs such as unadjusted quoted prices for identical
assets or liabilities in active
markets.
|
|
|
·
|
Level
2 –Inputs other than the quoted prices in active markets that are
observable either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices that are in inactive markets;
inputs other than quoted prices that are observable for the asset or
liability; and inputs that are derived principally from or corroborated by
observable market data by correlation or other
means.
|
|
|
·
|
Level
3 – Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own
assumptions.
|
The
financial assets and liabilities measured at fair value on a recurring basis are
included below:
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|||||||||||||
|
Millions
of dollars
|
|
December
31, 2009
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
||||
|
Pension
plan assets
|
|
$
|
1,288
|
|
|
$
|
658
|
|
|
$
|
610
|
|
|
$
|
20
|
|
|
Marketable
securities
|
|
$
|
18
|
|
|
$
|
13
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
Derivative
liabilities
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
See Note
18 for additional details related to the fair values of our pension plan
asset.
Note
16. Equity Method Investments and Variable Interest
Entities
We
conduct some of our operations through joint ventures which are in partnership,
corporate, undivided interest and other business forms and are principally
accounted for using the equity method of accounting. Additionally,
the majority of our joint ventures are also variable interest entities which are
further described under “Variable Interest Entities”. The following
is a description of our significant investments accounted for on the equity
method of accounting that are not variable interest entities.
Brown & Root Condor Spa
(“BRC”) BRC is a joint venture in which we owned 49% interest. During the
third quarter of 2007, we sold our 49% interest and other rights in BRC to
Sonatrach for approximately $24 million resulting in a pre-tax gain of
approximately $18 million which is included in “Equity in earnings (losses) of
unconsolidated affiliates”. As of December 31, 2009, we have not collected the
remaining $18 million due from Sonatrach for the sale of our interest in BRC,
which is included in “Accounts receivable.” In the fourth quarter of 2008, we
filed for arbitration in an attempt to force collection and we will take other
actions, as deemed necessary, to collect the remaining amounts.
MMM. MMM
is a joint venture formed under a Partners Agreement 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. KBR holds a 50% interest in the MMM joint
venture. In 2009, the MMM joint venture repurchased outstanding
equity interests from each of the joint venture partners on a pro-rata
basis. We accounted for the transaction as a return of our initial
investment resulting in a $28 million reduction of “Equity in and advances to
related companies” in our Consolidated Balance Sheet.
Consolidated
summarized financial information for all jointly owned operations including
variable interest entities that are accounted for using the equity method of
accounting is as follows:
Balance
Sheets
|
|
|
December
31,
|
|
|||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
||
|
Current
assets
|
|
$
|
3,217
|
|
|
$
|
3,618
|
|
|
Noncurrent
assets
|
|
|
3,973
|
|
|
|
3,342
|
|
|
Total
assets
|
|
$
|
7,190
|
|
|
$
|
6,960
|
|
|
Current
liabilities
|
|
$
|
1,804
|
|
|
$
|
2,013
|
|
|
Noncurrent
liabilities
|
|
|
5,550
|
|
|
|
4,971
|
|
|
Member’s
equity
|
|
|
(164
|
)
|
|
|
(24
|
)
|
|
Total
liabilities and member’s equity
|
|
$
|
7,190
|
|
|
$
|
6,960
|
|
Statements
of Operations
|
|
|
Years
ended December 31,
|
|
|||||||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
|
Revenue
|
|
$
|
2,535
|
|
|
$
|
2,642
|
|
|
$
|
3,426
|
|
|
Operating
income
|
|
$
|
221
|
|
|
$
|
79
|
|
|
$
|
343
|
|
|
Net
income (loss)
|
|
$
|
63
|
|
|
$
|
(45
|
)
|
|
$
|
227
|
|
Variable
Interest Entities
We
account for variable interest entities in accordance with FASB ASC 810-10, which
requires the consolidation of entities in which a company absorbs a majority of
another entity’s expected losses, receives a majority of the other entity’s
expected residual returns, or both, as a result of ownership, contractual, or
other financial interests in the other entity. Previously, entities were
generally consolidated based upon a controlling financial interest through
ownership of a majority voting interest in the entity. ASC 810-10 –
Consolidation of Variable Interest Entities also requires expanded information
about an enterprise’s involvement with a variable interest entity and such
required disclosure is included below.
We assess
all newly created entities and those with which we become involved to determine
whether such entities are variable interest entities and, if so, whether or not
we are the primary beneficiary of such entities. Most of the entities
we assess are incorporated or unincorporated joint ventures formed by us and our
partner(s) for the purpose of executing a project or program for a customer,
such as a governmental agency or a commercial enterprise, and are generally
dissolved upon completion of the project or program. Many of our
long-term energy-related construction projects in our Upstream business unit are
executed through such joint ventures. Typically, these joint ventures
are funded by advances from the project owner, and accordingly, require little
or no equity investment by the joint venture partners but may require
subordinated financial support from the joint venture partners such as letters
of credit, performance and financial guarantees or obligations to fund losses
incurred by the joint venture. Other joint ventures, such as
privately financed initiatives in our Ventures business unit, generally require
the partners to invest equity and take an ownership position in an entity that
manages and operates an asset post construction.
We
primarily perform a qualitative assessment in determining whether we are the
primary beneficiary once an entity is identified as a variable interest
entity. A qualitative assessment begins with an understanding of
nature of the risks in the entity as well as the nature of the entity’s
activities including terms of the contracts entered into by the entity,
interests issued by the entity and how they were marketed, and the parties
involved in the design of the entity. We then identify all of the
variable interests held by parties involved with the variable interest entity
including, among other things, equity investments, subordinated debt financing,
letters of credit, and financial and performance guarantees, and in some cases
service subcontracts. Once we identify the variable interests, we
gain understanding of the variability in the risks and rewards created by the
entity and how such variability is absorbed by the identified variable
interests. Most of the variable interest entities with which we are
involved have relatively few variable interests and are primarily related to our
equity investment and other subordinated financial
support. Generally, a qualitative assessment is sufficient for us to
determine which party, if any, involved with the entity is the primary
beneficiary. In certain circumstances where there are complex
arrangements involving numerous variable interests such as senior and
subordinated project financing, equity interests, or service contracts, we
perform a quantitative assessment using expected cash flows of the entity to
determine the primary beneficiary, if any.
We often
are involved in joint ventures with partners that are deemed to be de-facto
agency related parties primarily due to shareholder agreements with terms
prohibiting a partner from selling, transferring or otherwise encumbering its
interest in the joint venture without the prior approval of other
partners. In situations the related party group is deemed to be the
primary beneficiary, we generally look to the relationship and significance of
the activities of the variable interest entity to the parties in the related
party group to identify which party is the primary beneficiary of the
entity. These activities primarily relate to the amount of effort in
terms of man hours contributed and the scope and significance of expertise
contributed to the project by each party.
The
following is a summary of the significant variable interest entities in which we
are either the primary beneficiary or in which we have a significant variable
interest:
|
|
·
|
During
2001, we formed a joint venture, in which we own a 50% equity interest
with an unrelated partner, that owns and operates heavy equipment
transport vehicles in the United Kingdom. This variable
interest entity was formed to construct, operate, and service certain
assets for a third party, and was funded with third party debt which is
nonrecourse to the joint venture partners. The construction of
the assets was completed in the second quarter of 2004, and the operating
and service contract related to the assets extends through
2023. The proceeds from the debt financing were used to
construct the assets and will be paid down with cash flow generated during
the operation and service phase of the contract. As of December
31, 2009 and 2008, the joint venture had total assets of $117 million and
$114 million, and total liabilities of $124 million and $121 million,
respectively. Our aggregate maximum exposure to loss as a result of our
involvement with this joint venture is represented by our investment in
the entity which was $6 million at December 31, 2009, and any future
losses related to the operation of the assets. We are not the primary
beneficiary and account for this joint venture using the equity method of
accounting. Effective January 1, 2010, we will consolidate this
joint venture as a result of the adoption of ASU 2009-17. See
Note 19 for further discussion of the impact of adopting this
standard;
|
|
|
·
|
We
are involved in four privately financed projects, executed through joint
ventures, to design, build, operate, and maintain roadways for certain
government agencies in the United Kingdom. We have a 25%
ownership interest in each of these joint ventures and account for them
using the equity method of accounting. The joint ventures have
obtained financing through third parties that is nonrecourse to the joint
venture partners. These joint ventures are variable interest
entities however, we are not the primary beneficiary of these joint
ventures. As of December 31, 2009, these joint ventures had
total assets of $1.7 billion and total liabilities of $1.6
billion. As of December 31, 2008, these joint ventures had
total assets and total liabilities of both $1.6 billion. Our
maximum exposure to loss was $34 million at December 31, 2009, which
consists primarily of our investment balance of $34
million.
|
During
the first quarter of 2008, we acquired an additional 8% interest in one of the
joint ventures related to the U.K. road projects described above for
approximately $8 million in cash which increased our ownership interest to
33%. In the second quarter of 2008, we sold the additional 8%
interest in the joint venture to an unrelated party for approximately $9
million, leaving us with a 25% interest in the joint venture. In the
first quarter of 2009, we negotiated and settled with the purchaser an
additional $2 million in sales proceeds which was contingent upon certain tax
rulings in the United Kingdom. The additional sales proceeds were
recorded as “Gain on sale of assets.”
|
|
·
|
We
participate in a privately financed project executed through certain joint
ventures formed to design, build, operate, and maintain a toll road in
southern Ireland. The joint ventures were funded through debt
and were formed with minimal equity. These joint ventures are
variable interest entities; however, we are not the primary beneficiary of
the joint ventures. We have up to a 25% ownership interest in
the project’s joint ventures, and we are accounting for these interests
using the equity method of accounting. As of December 31, 2009
and 2008, the joint ventures had combined total assets of $271 million for
both years, and total liabilities of $295 million and $286 million,
respectively. Our maximum exposure to loss was $2 million at December 31,
2009;
|
|
|
·
|
In
April 2006, Aspire Defence, a joint venture between us, Carillion Plc. and
two financial investors, was awarded a privately financed project
contract, the Allenby & Connaught project, by the MoD to upgrade and
provide a range of services to the British Army’s garrisons at Aldershot
and around Salisbury Plain in the United Kingdom. In addition
to a package of ongoing services to be delivered over 35 years, the
project includes a nine-year construction program to improve soldiers’
single living, technical and administrative accommodations, along with
leisure and recreational facilities. Aspire Defence manages the existing
properties and is responsible for design, refurbishment, construction and
integration of new and modernized facilities. We indirectly own
a 45% interest in Aspire Defence, the project company that is the holder
of the 35-year concession contract. In addition, we own a 50%
interest in each of two joint ventures that provide the construction and
the related support services to Aspire Defence. Our performance
through the construction phase is supported by $104 million in letters of
credit and surety bonds totaling approximately $21 million as of December
31, 2009, both of which have been guaranteed by
Halliburton. Furthermore, our financial and performance
guarantees are joint and several, subject to certain limitations, with our
joint venture partners. The project is funded through equity
and subordinated debt provided by the project sponsors and the issuance of
publicly held senior bonds which are nonrecourse to us. The
entities we hold an interest in are variable interest entities; however,
we are not the primary beneficiary of these entities. We
account for our interests in each of the entities using the equity method
of accounting. As of December 31, 2009, the aggregate total
assets and total liabilities of the variable interest entities were both
$3.0 billion. As of December 31, 2008, the aggregate total
assets and total liabilities of the variable interest entities were $2.8
billion and $2.7 billion, respectively. Our maximum exposure to project
company losses as of December 31, 2009 was $78 million. Our
maximum exposure to construction and operating joint venture losses is
limited to the funding of any future losses incurred by those entities
under their respective contracts with the project company. As
of December 31, 2009, our assets and liabilities associated with our
investment in this project, within our consolidated balance sheet, were
$48 million and $21 million, respectively. The $57 million
difference between our recorded liabilities and aggregate maximum exposure
to loss was primarily related to our $52 million remaining commitment to
fund subordinated debt to the project in the
future;
|
|
|
·
|
During
2005, we formed a joint venture to engineer and construct a gas
monetization facility. We own 50% equity interest and determined that we
are the primary beneficiary of the joint venture which is consolidated for
financial reporting purposes. At December 31, 2009 and December 31, 2008,
the joint venture had $387 million and $716 million in total assets and
$482 million and $861 million in total liabilities, respectively. There
are no consolidated assets that collateralize the joint venture’s
obligations. However, at December 31, 2009 and December 31, 2008, the
joint venture had approximately $128 million and $81 million of cash,
respectively, which mainly relate to advanced billings in connection with
the joint venture’s obligations under the EPC
contract;
|
|
|
·
|
We
have equity ownership in three joint ventures to execute EPC
projects. Our equity ownership ranges from 33% to 50%, and
these joint ventures are variable interest entities. We are not
the primary beneficiary and thus account for these joint ventures using
the equity method of accounting. At December 31, 2009 and
December 31, 2008, these joint ventures had aggregate assets of $430
million and $798 million and aggregate liabilities of $712 million and
$904 million, respectively. As of December 31, 2009, total
assets and liabilities recorded within our balance sheets were $22 million
and $34 million, respectively. Our aggregate, maximum exposure
to loss related to these entities was $22 million at December 31, 2009,
and comprises our equity investment and contract receivables with all
joint ventures;
|
|
·
|
We
have an investment in a development corporation that has an indirect
interest in the Egypt Basic Industries Corporation (“EBIC”) ammonia plant
project located in Egypt. We are performing the engineering, procurement
and construction (“EPC”) work for the project and operations and
maintenance services for the facility. We own 65% of this development
corporation and consolidate it for financial reporting purposes. The
development corporation owns a 25% ownership interest in a company that
consolidates the ammonia plant which is considered a variable interest
entity. The development corporation accounts for its investment in the
company using the equity method of accounting. The variable interest
entity is funded through debt and equity. Indebtedness of EBIC under its
debt agreement is non-recourse to us. We are not the primary
beneficiary of the variable interest entity. As of December 31,
2009, the variable interest entity had total assets of $598 million and
total liabilities of $489 million. As of December 31, 2008, the
variable interest entity had total assets of $507 million and total
liabilities of $409 million. Our maximum exposure to loss related to
our involvement with this project at December 31, 2009 was $47
million. As of December 31, 2009, our assets and liabilities
associated with our investment in this project, within our consolidated
balance sheet, were $44 million and $6, respectively. The $42
million difference between our recorded liabilities and aggregate maximum
exposure to loss was related to our investment balance and other
receivables in the project as of December 31,
2009;
|
|
|
·
|
In
July 2006, we were awarded, through a 50%-owned joint venture, a contract
with Qatar Shell GTL Limited to provide project management and
cost-reimbursable engineering, procurement and construction management
services for the Pearl GTL project in Ras Laffan, Qatar. The
project, which is expected to be completed by 2011, consists of gas
production facilities and a GTL plant. The joint venture is
considered a variable interest entity. We consolidate the joint
venture for financial reporting purposes because we are the primary
beneficiary. As of December 31, 2009, the Pearl joint venture
had total assets of $157 million and total liabilities of $138 million. As
of December 31, 2008, the Pearl joint venture had total assets of $146
million and total liabilities of $109
million.
|
|
|
·
|
We
have a 30% ownership in an Australian joint venture which was awarded a
contract by Chevron for cost-reimbursable FEED and EPCM services to
construct a LNG plant. The joint venture is considered a
variable interest entity, and, as a result of our being the primary
beneficiary, we consolidate this joint venture for financial reporting
purposes. As of December 31, 2009, the joint venture had total
assets and total liabilities of $109 million. As of December
31, 2008, the joint venture had total assets of $35 million and total
liabilities of $27 million.
|
Note
17. Transactions with Former Parent and Other Related Party
Transactions
In
connection with the initial public offering in November 2006 and the separation
of our business from Halliburton, in April 2007, we entered into various
agreements with Halliburton including, among others, a master separation
agreement, tax sharing agreement, transition services agreements and an employee
matters agreement. Pursuant to our master separation agreement, we
agreed to indemnify Halliburton for, among other matters, all past, present and
future liabilities related to our business and operations. We agreed
to indemnify Halliburton for liabilities under various outstanding and certain
additional credit support instruments relating to our businesses and for
liabilities under litigation matters related to our
business. Halliburton agreed to indemnify us for, among other things,
liabilities unrelated to our business, for certain other agreed matters relating
to the investigation of FCPA and related corruption allegations and the
Barracuda-Caratinga project and for other litigation matters related to
Halliburton’s business. Under the transition services agreements,
Halliburton provided various interim corporate support services to us and we
provided various interim corporate support services to
Halliburton. The tax sharing agreement provides for certain
allocations of U.S. income tax liabilities and other agreements between us and
Halliburton with respect to tax matters.
Costs for
all services provided by Halliburton were $2 million, $6 million, and $13
million for the years ended December 31, 2009, 2008 and 2007, respectively and
primarily related to risk management, information technology, legal and internal
audit. All of the charges described above have been included as costs
of our operations in our consolidated statements of income. It is possible that
the terms of these transactions may differ from those that would result from
transactions among third parties. Subsequent to our separation from Halliburton
and in accordance with the Master Separation Agreement, Halliburton continues to
bear the direct costs associated with overseeing and directing the FCPA and
related corruption allegations.
At
December 31, 2009 and 2008, we had a $53 million and a $54 million balance
payable to Halliburton, respectively, which consists of amounts KBR owes
Halliburton for estimated outstanding income taxes under the tax sharing
agreement and amounts owed pursuant to our transition services agreement for
credit support arrangements and information technology. See Note 12
for further discussion of amounts outstanding under the tax sharing
agreement.
We
perform many of our projects through incorporated and unincorporated joint
ventures. In addition to participating as a joint venture partner, we often
provide engineering, procurement, construction, operations or maintenance
services to the joint venture as a subcontractor. Where we provide services to a
joint venture that we control and therefore consolidate for financial reporting
purposes, we eliminate intercompany revenues and expenses on such transactions.
In situations where we account for our interest in the joint venture under the
equity method of accounting, we do not eliminate any portion of our revenues or
expenses. We recognize the profit on our services provided to joint ventures
that we consolidate and joint ventures that we record under the equity method of
accounting primarily using the percentage-of-completion method. Total revenue
from services provided to our unconsolidated joint ventures recorded in our
consolidated statements of income were $166 million, $202 million and $356
million for the years ended December 31, 2009, 2008 and 2007,
respectively. Profits on transactions for services provided to our
joint ventures recognized in our consolidated statements of income were $1
million, $28 million and $30 million for the years ended December 31, 2009, 2008
and 2007, respectively.
Note
18. Retirement Plans
We have
various plans that cover a significant number of our employees. These plans
include defined contribution plans, defined benefit plans, and other
postretirement plans:
|
|
·
|
Our
defined contribution plans provide retirement benefits in return for
services rendered. These plans provide an individual account for each
participant and have terms that specify how contributions to the
participant’s account are to be determined rather than the amount of
pension benefits the participant is to receive. Contributions to these
plans are based on pretax income and/or discretionary amounts determined
on an annual basis. Our expense for the defined contribution plans totaled
$61 million in 2009, $47 million in 2008 and $44 million in 2007.
Additionally, we participate in a Canadian multi-employer plan to which we
contributed $17 million in 2009, $9 million in 2008 and $7 million in
2007;
|
|
|
·
|
Our
defined benefit plans are funded pension plans, which define an amount of
pension benefit to be provided, usually as a function of age, years of
service, or compensation; and
|
|
|
·
|
Our
postretirement medical plan is offered to specific eligible employees.
This plan is contributory. Our liability is limited to a fixed
contribution amount for each participant or dependent. The plan
participants share the total cost for all benefits provided above our
fixed contributions. Participants’ contributions are adjusted as required
to cover benefit payments. We have made no commitment to adjust the amount
of our contributions; therefore, the computed accumulated postretirement
benefit obligation amount is not affected by the expected future health
care cost inflation rate. The components of benefit obligation
and plan assets and other activities related to other postretirement
benefits were immaterial for the year ended December 31, 2009, 2008 and
2007.
|
We
account for our defined benefit pension and other postretirement plans in
accordance with FASB ASC 715 – Compensation – Retirement Benefits, which
requires an employer to:
|
|
·
|
recognize
on its balance sheet the funded status (measured as the difference between
the fair value of plan assets and the benefit obligation) of pension and
other postretirement benefit plans;
|
|
|
·
|
recognize,
through comprehensive income, certain changes in the funded status of a
defined benefit and postretirement plan in the year in which the changes
occur;
|
|
|
·
|
measure
plan assets and benefit obligations as of the end of the employer’s fiscal
year; and
|
|
|
·
|
disclose
additional information.
|
Benefit
obligation and plan assets
We used a
December 31 measurement date for all plans in 2009 and 2008. Plan
asset, expenses, and obligation for retirement plans are presented in the
following tables.
|
|
|
Pension
Benefits
|
|
|||||||||||||
|
Benefit
obligation
|
|
United
States
|
|
|
Int’l
|
|
|
United
States
|
|
|
Int’l
|
|
||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
||||||||||
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Benefit
obligation at beginning of period
|
|
$
|
73
|
|
|
$
|
1,256
|
|
|
$
|
45
|
|
|
$
|
1,689
|
|
|
Service
cost
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
8
|
|
|
Interest
cost
|
|
|
5
|
|
|
|
77
|
|
|
|
4
|
|
|
|
90
|
|
|
Plan
Amendments
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
Curtailment
|
—
|
(8)
|
—
|
—
|
||||||||||||
|
Currency
fluctuations
|
|
|
—
|
|
|
|
93
|
|
|
—
|
|
|
|
(439
|
)
|
|
|
Actuarial
(gain) loss
|
|
|
8
|
|
|
|
153
|
|
|
1
|
|
|
(52
|
)
|
||
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
27
|
|
|
|
—
|
|
|
Transfers
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
Benefits
paid
|
|
|
(6)
|
|
|
(46)
|
|
|
(4
|
)
|
|
|
(60
|
)
|
||
|
Effects
of eliminating early measurement date
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27
|
|
|
Benefit
obligation at end of period
|
|
$
|
80
|
|
|
$
|
1,528
|
|
|
$
|
73
|
|
|
$
|
1,256
|
|
|
Accumulated
benefit obligation at end of period
|
|
$
|
80
|
|
|
$
|
1,528
|
|
|
$
|
73
|
|
|
$
|
1,234
|
|
|
|
|
Pension
Benefits
|
|
|||||||||||||
|
Plan
assets
|
|
United
States
|
|
|
Int’l
|
|
|
United
States
|
|
|
Int’l
|
|
||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
||||||||||
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Fair
value of plan assets at beginning of period
|
|
$
|
46
|
|
|
$
|
985
|
|
|
$
|
45
|
|
|
$
|
1,658
|
|
|
Actual
return on plan assets
|
|
|
12
|
|
|
200
|
|
|
(18
|
)
|
|
|
(257
|
)
|
||
|
Employer
contributions
|
|
|
5
|
|
|
|
18
|
|
|
|
3
|
|
|
|
71
|
|
|
Settlements
and transfers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Plan
participants’ contributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Currency
fluctuations
|
|
|
—
|
|
|
|
74
|
|
|
—
|
|
|
|
(448
|
)
|
|
|
Benefits
paid
|
|
(6
|
)
|
|
|
(46
|
)
|
|
(4
|
)
|
|
|
(60
|
)
|
||
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
|
Transfers
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
Effects
of eliminating early measurement date
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
|
Fair
value of plan assets at end of period
|
|
$
|
57
|
|
|
$
|
1,231
|
|
|
$
|
46
|
|
|
$
|
985
|
|
|
Funded
status
|
|
$
|
(23
|
)
|
|
$
|
(297
|
)
|
|
$
|
(27
|
)
|
|
$
|
(271
|
)
|
|
Employer
contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net
amount recognized
|
|
$
|
(23
|
)
|
|
$
|
(297
|
)
|
|
$
|
(27
|
)
|
|
$
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Amounts
recognized on the consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total
assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Current
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Noncurrent
liabilities
|
|
|
(23
|
)
|
|
|
(297
|
)
|
|
|
(27
|
)
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Weighted-average
assumptions used to determine benefit obligations at measurement
date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Discount
rate
|
|
|
5.35
|
%
|
|
|
5.84
|
%
|
|
|
6.15
|
%
|
|
|
5.98
|
%
|
|
Rate
of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
4.00
|
%
|
|
|
Pension
Benefits
|
||||||||||||||||
|
Plan
assets
|
United
States
|
Int’l
|
United
States
|
Int’l
|
||||||||||||
|
Millions
of dollars
|
2009
|
2008
|
||||||||||||||
|
Allocation
of plan assets at December 31
|
|
|
|
|
||||||||||||
|
Asset
category
|
|
|
|
|
||||||||||||
|
Equity
securities
|
61 | % | 45 | % | 51 | % | 43 | % | ||||||||
|
Debt
securities
|
37 | % | 50 | % | 41 | % | 56 | % | ||||||||
|
Other
|
2 | % | 5 | % | 8 | % | 1 | % | ||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Assumed
long-term rates of return on plan assets, discount rates for estimating benefit
obligations, and rates of compensation increases vary for the different plans
according to the local economic conditions. 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. The discount rate was
determined 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.
Plan
fiduciaries of the Company’s retirement plans set investment policies and
strategies and oversee its investment direction, which includes selecting
investment managers, commissioning asset-liability studies and setting long-term
strategic targets. Long-term strategic investment objectives include
preserving the funding status of the plan and balancing risk and return and have
a wide diversification of asset types, fund strategies and fund managers.
Targeted asset allocation ranges are guidelines, not limitations, and
occasionally plan fiduciaries will approve allocations above or below a target
range. The targeted asset allocations for the Company’s international
plans are 15-23 percent UK based equity securities, 25-37 percent equities based
outside the UK, 26-39 percent fixed interest government and corporate bonds,
11-17 percent inflation indexed government and corporate bonds and 4 percent
cash equivalents and other assets. The targeted asset allocations for
Company’s domestic plans are 34-51 percent US equity securities, 15-22 percent
non-US equity securities, 30-44 percent government, corporate and
mortgage-backed bonds and 2 percent cash equivalents.
The
inputs and methodology used for valuing securities are not an indication of the
risk associated with investing in those securities. The following is a
description of the primary valuation methodologies used for assets measured at
fair value:
|
|
·
|
Common
Stocks and Corporate Bonds: Valued at the closing price reported on the
active market on which the individual securities are
traded.
|
|
|
·
|
Corporate
Bonds, Government Bonds and Mortgage Backed Securities: Valued at quoted
prices in markets that are not active, broker dealer quotations, or other
methods by which all significant inputs are observable, either directly or
indirectly.
|
|
|
·
|
Common
Collective Trust Funds: Valued at the net asset value per unit held at
year end as quoted by the funds.
|
|
|
·
|
Mutual
Funds: Valued at the net asset value of shares held at year end as quoted
in the active market.
|
|
|
·
|
Real
Estate: Valued at net asset value per unit held at year end as quoted by
the manager.
|
|
|
·
|
Annuities:
Valued by computing the present value of the expected benefits based on
the demographic information of the
participants.
|
|
|
·
|
Other:
Estimated income to be received on the Plan assets as computed by our
trustee
|
The
methods described above may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values.
Furthermore, while the Plan believes its valuation methods are appropriate and
consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different fair value measurement as of the reporting
date.
The fair
value of the Company’s pension plan assets were as follows:
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
Millions
of dollars
|
Total
at December 31, 2009
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
||||||||||||
|
Asset
Category
|
||||||||||||||||
|
United States plan assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 1 | $ | 1 | $ | — | $ | — | ||||||||
|
Equity
securities:
|
||||||||||||||||
|
Non-U.S.
companies
|
10 | 10 | — | — | ||||||||||||
|
U.S.
companies
|
25 | 25 | — | — | ||||||||||||
|
Bonds:
|
||||||||||||||||
|
Government
bonds
|
4 | — | 4 | — | ||||||||||||
|
Corporate
bonds
|
15 | 8 | 7 | — | ||||||||||||
|
Mortgage
backed securities
|
1 | — | 1 | — | ||||||||||||
|
Other
|
1 | — | 1 | — | ||||||||||||
|
Total
U.S. plan assets
|
$ | 57 | $ | 44 | $ | 13 | $ | — | ||||||||
|
International plan assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 44 | $ | 44 | $ | — | $ | — | ||||||||
|
Equity
securities:
|
||||||||||||||||
|
Non-U.S.
companies
|
433 | 433 | — | — | ||||||||||||
|
U.S.
companies
|
123 | 123 | — | — | ||||||||||||
|
Bonds:
|
||||||||||||||||
|
Government
bonds
|
266 | — | 266 | — | ||||||||||||
|
Corporate
bonds
|
344 | 14 | 330 | — | ||||||||||||
|
Other
bonds
|
1 | — | 1 | — | ||||||||||||
|
Annuity
contracts
|
6 | — | — | 6 | ||||||||||||
|
Real
estate
|
7 | — | — | 7 | ||||||||||||
|
Other
|
7 | — | — | 7 | ||||||||||||
|
Total
international plan assets
|
$ | 1,231 | $ | 614 | $ | 597 | $ | 20 | ||||||||
|
Total
plan assets
|
$ | 1,288 | $ | 658 | $ | 610 | $ | 20 | ||||||||
The fair
value measurement of plan assets using significant unobservable inputs (level 3)
changed during 2009 due to the following:
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3)
|
||||||||||||||||
|
Millions
of dollars
|
Total
|
Annuity
Contracts
|
Real
Estate
|
Other
|
||||||||||||
|
International
|
||||||||||||||||
|
Balance
at December 31, 2008
|
$ | 15 | $ | 6 | $ | 6 | $ | 3 | ||||||||
|
Actual
return on plan assets
|
||||||||||||||||
|
Assets
held at end of year
|
1 | — | 1 | — | ||||||||||||
|
Assets
sold during the year
|
— | — | — | — | ||||||||||||
|
Purchases,
sales and settlements
|
4 | — | — | 4 | ||||||||||||
|
Transfers
|
— | — | — | — | ||||||||||||
|
Balance
at December 31, 2009
|
$ | 20 | $ | 6 | $ | 7 | $ | 7 | ||||||||
The
amounts in accumulated other comprehensive loss that have not yet been
recognized as components of net periodic benefit cost at December 31, 2009 were
as follows:
|
|
|
Pension
Benefits
|
|
|||||
|
|
|
United
States
|
|
|
Int’l
|
|
||
|
Millions
of dollars
|
|
2009
|
|
|||||
|
Net
actuarial loss
|
|
$
|
18
|
|
|
$
|
368
|
|
|
Prior
service cost
|
|
|
—
|
|
|
|
—
|
|
|
Total
in accumulated other comprehensive loss
|
|
$
|
18
|
|
|
$
|
368
|
|
The
amounts in accumulated other comprehensive loss that have not yet been
recognized as components of net periodic benefit cost at December 31, 2009 for
other postretirement benefits were immaterial.
Expected
cash flows
Contributions. Funding
requirements for each plan are determined based on the local laws of the country
where such plan resides. In certain countries the funding requirements are
mandatory while in other countries they are discretionary. We expect to
contribute $11 million to our international pension plans and $3 million to our
domestic plan in 2010. However, we are currently discussing future
funding requirements with the plan trustees of one of our U.K. pension plans
regarding its tri-annual valuation and are uncertain how the results of the
valuation will impact our future funding obligations.
Benefit payments. The
following table presents the expected benefit payments over the next 10
years.
|
|
|
Pension
Benefits
|
|
|||||
|
Millions
of dollars
|
|
United States
|
|
|
Int’l
|
|
||
|
2010
|
|
$
|
6
|
|
|
$
|
50
|
|
|
2011
|
|
|
7
|
|
|
|
52
|
|
|
2012
|
|
|
6
|
|
|
|
55
|
|
|
2013
|
|
|
6
|
|
|
|
56
|
|
|
2014
|
|
|
6
|
|
|
|
58
|
|
|
Years
2015 – 2019
|
|
|
31
|
|
|
|
319
|
|
Expected
benefit payments for other postretirement benefits are immaterial.
Net
periodic cost
|
|
|
Pension
Benefits
|
|
|||||||||||||||||||||
|
|
|
United
States
|
|
|
Int’l
|
|
|
United
States
|
|
|
Int’l
|
|
|
United
States
|
|
|
Int’l
|
|
||||||
|
Millions
of dollars
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||||||||||||||
|
Components of net periodic benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Service
cost
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
Interest
cost
|
|
|
5
|
|
|
|
77
|
|
|
|
4
|
|
|
|
90
|
|
|
|
3
|
|
|
|
85
|
|
|
Expected
return on plan assets
|
|
|
(4
|
)
|
|
|
(84
|
)
|
|
|
(4
|
)
|
|
|
(102
|
)
|
|
|
(3
|
)
|
|
|
(97
|
)
|
|
Amortization
of prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
Settlements/curtailments
|
1
|
(4
|
)
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Recognized
actuarial loss
|
|
|
1
|
|
|
|
11
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net
periodic benefit cost
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
18
|
|
For other
postretirement plans, net periodic cost was immaterial for the years ended
December 31, 2009, 2008, and 2007.
|
Weighted-average assumptions used to
determine net periodic
benefit cost for years ended December 31
|
|
Pension
Benefits
|
|
|||||||||||||||||||||
|
|
|
United States
|
|
|
Int’l
|
|
|
United States
|
|
|
Int’l
|
|
|
United States
|
|
|
Int’l
|
|
||||||
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||||||||||||||
|
Discount
rate
|
|
|
6.15
|
%
|
|
|
5.98
|
%
|
|
|
6.13
|
%
|
|
|
5.70
|
%
|
|
|
5.75
|
%
|
|
|
5.00
|
%
|
|
Expected
return on plan assets
|
|
|
7.63
|
%
|
|
|
7.00
|
%
|
|
|
7.81
|
%
|
|
|
7.00
|
%
|
|
|
8.25
|
%
|
|
|
7.00
|
%
|
|
Rate
of compensation increase
|
|
|
N/A
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
4.30
|
%
|
|
|
N/A
|
|
|
|
3.75
|
%
|
Estimated
amounts that will be amortized from accumulated other comprehensive income, net
of tax, into net periodic benefit cost in 2010 are as follows:
|
|
|
Pension
Benefits
|
|
|||||
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
||
|
Actuarial
(gain) loss
|
|
$
|
1
|
|
|
$
|
13
|
|
|
Prior
service (benefit) cost
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
1
|
|
|
$
|
13
|
|
The
majority of our postretirement benefit plans are not subjected to risk
associated with fluctuations in the medical trend rates because the company
subsidy is capped. We expect the amortization from other comprehensive income to
be immaterial. Assumed health care cost trend rates are not expected to have a
significant impact on the amounts reported for the total of the health care
plans. A one-percentage-point change in assumed health care cost trend rates
would not have a material impact on total of service and interest cost
components or the postretirement benefit obligation.
Note
19. Recent Accounting Pronouncements
In March
2008, the FASB issued accounting guidance related to employers’ disclosure about
postretirement benefit plan assets which is discussed under FASB ASC 715 -
Compensation - Retirement Benefits. This topic addresses concerns
from users of financial statements about their need for more information on
pension plan assets, obligations, benefit payments, contributions, and net
benefit cost. The disclosures about plan assets are intended to provide users of
employers’ financial statements with more information about the nature and
valuation of postretirement benefit plan assets, and are effective for fiscal
years ending after December 15, 2009.
Effective
January 1, 2009, we adopted guidance for participating securities and the
two-class method in accordance with FASB ASC 260 - Earnings Per Share related to
determining whether instruments granted in share-based payment transactions are
participating securities. The standard provides that unvested
share-based payment awards that contain rights to non-forfeitable dividends or
dividend equivalents (whether paid or unpaid) participate in undistributed
earnings with common shareholders. Certain KBR restricted stock units
and restricted stock awards are considered participating securities since the
share-based awards contain a non-forfeitable right to dividends irrespective of
whether the awards ultimately vest. The standard requires that the
two-class method of computing basic EPS be applied. Under the
two-class method, KBR stock options are not considered to be participating
securities. As a result of adopting FASB ASC 260, previously-reported
basic net income attributable to KBR per share decreased by $0.01 per share for
the year ended December 31, 2008 and 2007.
Effective
September 30, 2009, we adopted guidance for the accounting standards
codification and the hierarchy of generally accepted accounting principles in
accordance with FASB ASC 105 - Generally Accepted Accounting
Principles. The standard establishes the FASB Accounting Standards
CodificationTM
(“ASC”) as the single source of authoritative U.S. generally accepted
accounting principles (U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. The FASB ASC supersedes all existing non-SEC
accounting and reporting standards. The FASB ASC does not have an
impact on our financial position, results of operations or cash
flows.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. ASU
2009-13 addresses the accounting for multiple-deliverable arrangements to enable
vendors to account for products or services (deliverables) separately rather
than as a combined unit. Specifically, this guidance amends the criteria in
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for
separating consideration in multiple-deliverable arrangements. This guidance
establishes a selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific objective evidence; (b)
third-party evidence; or (c) estimates. This guidance also eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance significantly expands
required disclosures related to a vendor's multiple-deliverable revenue
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010. We are evaluating the impact that the adoption of ASU 2009-13 will
have on our financial position, results of operations, cash flows and
disclosures.
In
December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic
860) - Accounting for Transfers of Financial Assets, which codifies FASB
Statement No. 166, Accounting for Transfers of Financial Assets. ASU 2009-16
will require additional information regarding transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. ASU 2009-16
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures. ASU 2009-16 is effective for fiscal years beginning
after November 15, 2009. We are evaluating the impact that the
adoption of ASU 2009-16 will have on our financial position, results of
operations, cash flows and disclosures.
In
June 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB
Interpretation No. 46(R). ASU 2009-17 modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. ASU
2009-17 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. ASU 2009-17
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. ASU 2009-17 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. ASU
2009-17 is effective for fiscal years beginning after November 15,
2009. As a result of the adoption of ASU 2009-17 on January 1, 2010,
we concluded that we are the primary beneficiary of the Heavy Equity Transporter
(“HET”) joint venture in the United Kingdom which we have accounted for using
the equity method of accounting through December 31, 2009. This joint
venture owns and operates heavy equipment transport vehicles for the U.K. MoD
and is funded by third party senior debt which is nonrecourse to the joint
venture partners. Upon consolidation of this joint venture,
consolidated current assets will increase by $26 million primarily related to
cash and equivalents, consolidated noncurrent assets will increase by $89
million related to property, plant and equipment, consolidated current
liabilities will increase by $10 million primarily related to accounts payable,
and noncurrent liabilities will increase by $112 million related to the
outstanding senior bonds and subordinated debt issued to finance the joint
venture operations.
In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) – Accounting for
Distributions to Shareholders with Components of Stock and Cash. ASU
2010-01 clarifies that the stock portion of a distribution to shareholders that
allows them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate
is considered a share issuance that is reflected in earnings per share
prospectively and is not a stock dividend. ASU 2010-01 is effective
for interim and annual periods ending on or after December 15, 2009, and should
be applied on a retrospective basis. ASU 2010-01 does not have an
impact on our financial position, results of operations or cash
flows.
In
January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification. ASU 2010-02 clarifies the scope of the decrease in
ownership provisions of Subtopic 810-10 and related guidance. The
amendments in ASU 2010-02 expand the disclosure requirements about
deconsolidation of a subsidiary or derecognition of a group of
assets. ASU 2010-02 is effective beginning in the first interim or
annual reporting period ending on or after December 15, 2009, and should be
applied retrospectively to the first period that an entity adopts FASB Statement
No. 160, Noncontrolling Interests in Consolidated Financial Statements – an
Amendment of ARB 51 (now included in Subtopic 810-10). The adoption
of this standard did not have an impact on our financial position, results of
operations or cash flows.
Note
20. Discontinued Operations
During
2007, we settled certain claims and provided an allowance against certain
receivables from the Production Services group resulting in a charge of
approximately $15 million. In the fourth quarter of 2007, we recognized a tax
benefit of $23 million in discontinued operations primarily related to a
previously uncertain tax position associated with the sale of Production
Services group.
On June
28, 2007, we completed the disposition of our 51% interest in DML to Babcock
International Group plc. In connection with the sale, we received $345 million
in cash proceeds, net of direct transaction costs for our 51% interest in
DML. The sale of DML resulted in a gain of approximately $101
million, net of tax of $115 million, in the year ended December 31,
2007. During the preparation of our 2007 tax return in 2008, we
identified additional foreign tax credits upon completion of a tax pool study
resulting from the sale of our interest in DML in the U.K. Approximately $11
million of the foreign tax credits were recorded as a tax benefit in
discontinued operations in the third quarter of 2008.
In
accordance with the provisions of SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets,” the results of operations of the Production
Services group and DML for the current and prior periods have been reported as
discontinued operations. Total liabilities of discontinued operations were $3
million and $7 million in the consolidated balance sheet at December 31, 2009
and 2008, respectively.
The
consolidated operating results of our Production Services group and DML, which
are classified as discontinued operations in our consolidated statements of
income, are summarized in the following table:
|
|
Year ended
December 31,
|
|||
|
Millions
of dollars
|
2007
|
|||
|
Revenue
|
$ | 449 | ||
|
Operating
profit
|
$ | 22 | ||
|
Pretax
income
|
$ | 11 | ||
Note 21. Quarterly Data
(Unaudited)
Summarized
quarterly financial data for the years ended December 31, 2009 and 2008 are as
follows
|
|
|
Quarter
|
|
|||||||||||||||||
|
(in
millions, except per share amounts)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
(3)
|
|
|
Year
|
|
|||||
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue
|
|
$
|
3,200
|
|
|
$
|
3,101
|
|
|
$
|
2,840
|
|
|
$
|
2,964
|
|
|
$
|
12,105
|
|
|
Operating
income
|
|
|
144
|
|
|
|
137
|
|
|
|
131
|
|
|
|
124
|
|
|
|
536
|
|
|
Income
from continuing operations, net of tax
|
95
|
83
|
97
|
89
|
364
|
|||||||||||||||
|
Net
income attributable to KBR
|
|
|
77
|
|
|
|
67
|
|
|
|
73
|
|
|
|
73
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net
income attributable to KBR per share (1)
(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net
income attributable to KBR per share – Basic
|
|
$
|
0.48
|
|
|
$
|
0.42
|
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
1.80
|
|
|
Net
income attributable to KBR per share – Diluted
|
|
$
|
0.48
|
|
|
$
|
0.42
|
|
|
$
|
0.45
|
|
|
$
|
0.45
|
|
|
$
|
1.79
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenue
|
|
$
|
2,519
|
|
|
$
|
2,
658
|
|
|
$
|
3,018
|
|
|
$
|
3,386
|
|
|
$
|
11,581
|
|
|
Operating
income
|
|
|
154
|
|
|
|
90
|
|
|
|
144
|
|
|
|
153
|
|
|
|
541
|
|
|
Income
from continuing operations, net of tax
|
107
|
64
|
96
|
89
|
356
|
|||||||||||||||
|
Income
from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
|
—
|
|
|
|
11
|
|
|
Net
income attributable to KBR
|
|
|
98
|
|
|
|
48
|
|
|
|
85
|
|
|
|
88
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to KBR per share – Basic (1)
(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations - Basic
|
|
$
|
0.58
|
|
|
$
|
0.28
|
|
|
$
|
0.45
|
|
|
$
|
0.54
|
|
|
$
|
1.84
|
|
|
Discontinued
operations, net - Basic
|
|
|
—
|
|
|
|
—
|
|
|
|
0.07
|
|
|
|
—
|
|
|
|
0.07
|
|
|
Net
income attributable to KBR per share - Basic
|
|
$
|
0.58
|
|
|
$
|
0.28
|
|
|
$
|
0.51
|
|
|
$
|
0.54
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to KBR per share – Diluted (1)
(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations - Diluted
|
|
$
|
0.58
|
|
|
$
|
0.28
|
|
|
$
|
0.44
|
|
|
$
|
0.54
|
|
|
$
|
1.84
|
|
|
Discontinued
operations, net - Diluted
|
|
|
—
|
|
|
|
—
|
|
|
|
0.07
|
|
|
|
—
|
|
|
|
0.07
|
|
|
Net
income attributable to KBR per share - Diluted
|
|
$
|
0.58
|
|
|
$
|
0.28
|
|
|
$
|
0.51
|
|
|
$
|
0.54
|
|
|
$
|
1.90
|
|
_______________________
|
(1)
|
The
sum of income (loss) per share for the four quarters may differ from the
annual amounts due to the required method of computing weighted average
number of shares in the respective
periods.
|
|
(2)
|
Due
to the effect of rounding, the sum of the individual per share amounts may
not equal the total shown.
|
|
(3)
|
Net
income attributable to KBR for the quarter ended December 31, 2009
includes a correction of errors related to prior periods which resulted in
a decrease to net income of approximately $12 million, net of tax of $6
million, or approximately $0.08 per share. See Note 2 for
further discussion.
|
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosures
None
Item 9A. Controls and Procedures
Managements
Evaluation of Disclosure Controls and Procedures
In
accordance with Rules 13a-15 and 15d-15 under the Securities and Exchange Act of
1934 as amended (the “Exchange Act”), we carried out an evaluation, under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of December 31, 2009 to provide reasonable assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
Our disclosure controls and procedures include controls and procedures designed
to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting
There has
been no change in our internal control over financial reporting that occurred
during the three months ended December 31, 2009 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Managements
Annual Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in the Securities Exchange Act Rule 13a-15(f).
Internal control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions, the
effectiveness of internal control over financial reporting may vary over
time.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation to
assess the effectiveness of our internal control over financial reporting as of
December 31, 2009, based upon criteria set forth in the Internal
Control–Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our assessment, we have concluded that, as
of December 31, 2009, our internal control over financial reporting is
effective. Our independent registered public accounting firm, KPMG LLP, has
issued its report on the effectiveness of our internal control over financial
reporting as of December 31, 2009, which follows.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
KBR,
Inc.:
We have
audited KBR, Inc.’s internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
KBR, Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, KBR, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of KBR, Inc. as
of December 31, 2009 and 2008, and the related consolidated statements of
income, shareholders’ equity and comprehensive income, and cash flows for each
of the years in the three-year period ended December 31, 2009, and our report
dated February 25, 2010 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Houston,
TX
February
25, 2010
Item 9B. Other Information
None.
PART
III
Item 10. Directors, Executive Officers and Corporate
Governance
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2010 Annual Meeting of
Stockholders.
Item 11. Executive
Compensation
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2010 Annual Meeting of
Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2010 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2010 Annual Meeting of
Stockholders.
Item 14. Principal Accounting Fees and Services
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2010 Annual Meeting of
Stockholders.
PART IV
Item
15. Exhibits and Financial Statement Schedules.
|
|
1.
|
Financial
Statements:
|
|
|
|
|
(a)
|
The
report of the Independent Registered Public Accounting Firm and the
financial statements of the Company as required by Part II, Item 8, are
included on page 61 and pages 62 through 115 of this annual report. See
index on page 60.
|
|
|
|
|
|
|
|
|
|
|
2.
|
Financial
Statement Schedules:
|
Page No.
|
|
|
|
|
|
|
|
|
|
(a)
|
KPMG
LLP Report on supplemental schedule
|
120
|
|
|
|
|
|
||
|
|
(b)
|
Schedule
II—Valuation and qualifying accounts for the three years ended December
31, 2009
|
121
|
|
|
|
|
|
||
|
|
Note:
All schedules not filed with this report required by Regulations S-X have
been omitted as not applicable or not required, or the information
required has been included in the notes to financial
statements.
|
|
||
3.
Exhibits:
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated as of May 6, 2008, by and among KBR, Inc.,
BE&K, Inc., and Whitehawk Sub, Inc., (incorporated by reference to
Exhibit 2.1 to KBR’s Current Report on Form 8-K; File No.
001-33416)
|
|
|
|
|
|
3.1
|
|
KBR
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to KBR’s registration statement on Form S-1;
Registration No. 333-133302)
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of KBR, Inc. (incorporated by reference to Exhibit 3.1
to KBR’s Form 10-Q for the period ended June 30, 2008; File No.
1-33146)
|
|
|
|
|
|
4.1
|
|
Form
of specimen KBR common stock certificate (incorporated by reference to
Exhibit 4.1 to KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
|
|
10.1
|
|
Master
Separation Agreement between Halliburton Company and KBR, Inc. dated as of
November 20, 2006 (incorporated by reference to Exhibit 10.1 to KBR’s
current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
|
|
10.2
|
|
Tax
Sharing Agreement, dated as of January 1, 2006, by and between Halliburton
Company, KBR Holdings, LLC and KBR, Inc., as amended effective February
26, 2007 (incorporated by reference to Exhibit 10.2 to KBR’s Annual Report
on Form 10-K for the year ended December 31, 2006; File No.
001-33146)
|
|
|
|
|
|
10.3
|
|
Amended
and Restated Registration Rights Agreement, dated as of February 26, 2007,
between Halliburton Company and KBR, Inc. (incorporated by reference to
Exhibit 10.3 to KBR’s Annual Report on Form 10-K for the year ended
December 31, 2006; File No. 001-33146)
|
|
|
|
|
|
10.4
|
|
Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (KBR as service provider)
(incorporated by reference to Exhibit 10.4 to KBR’s current report on Form
8-K dated November 20, 2006; File No. 001-33146)
|
|
|
|
|
|
10.5
|
|
Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (Halliburton as service
provider) (incorporated by reference to Exhibit 10.5 to KBR’s current
report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
|
|
10.6
|
|
Employee
Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.6 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
|
|
10.7
|
|
Intellectual
Property Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.7 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
|
|
10.8+
|
|
Employment
Agreement, dated as of April 3, 2006, between William P. Utt and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.15 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
10.9
|
|
Form
of Indemnification Agreement between KBR, Inc. and its directors
(incorporated by reference to Exhibit 10.18 to KBR’s registration
statement on Form S-1; Registration No. 333-133302)
|
|
10.10+
|
|
KBR,
Inc. 2006 Stock and Incentive Plan (as amended June 27, 2007)
(incorporated by reference to Exhibit 10.1 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
10.11+
|
|
KBR,
Inc. Senior Executive Performance Pay Plan (incorporated by reference to
Exhibit 10.21 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
|
|
|
|
10.12+
|
|
KBR,
Inc. Management Performance Pay Plan (incorporated by reference
to Exhibit 10.22 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
10.13+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan (incorporated by reference to
Exhibit 10.23 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
|
|
|
|
10.14+
|
|
KBR
Dresser Deferred Compensation Plan (incorporated by reference to Exhibit
4.5 to KBR’s Registration Statement on Form S-8 filed on April 13,
2007)
|
|
|
|
|
|
10.15+
|
|
KBR
Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10.3 to KBR’s current report on Form 8-K dated April 9, 2007; File
No. 1-33146).
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
10.16+
|
|
KBR
Benefit Restoration Plan (incorporated by reference to Exhibit 10.4 to
KBR’s current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
|
|
|
|
|
10.17+
|
|
KBR
Elective Deferral Plan (incorporated by reference to Exhibit 10.5 to KBR’s
current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
|
|
|
|
|
10.18+
|
|
Restricted
Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.2 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.19+
|
|
Stock
Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.3 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.20+
|
|
KBR
Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan (incorporated by reference to Exhibit 10.4 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.21+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Stock Option Award (incorporated
by reference to Exhibit 10.5 to KBR’s Form 10-Q for the quarter ended June
30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.22+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Restricted Stock Award
(incorporated by reference to Exhibit 10.6 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.23+
|
|
Form
of Restricted Stock Agreement between KBR, Inc. and William P. Utt
pursuant to KBR, Inc. 2006 Stock and Incentive Plan (incorporated by
reference to Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended
September 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.24+
|
|
Form
of KBR Performance Award Agreement pursuant to KBR, Inc. 2006 Stock and
Incentive Plan (incorporated by reference to Exhibit 10.5 to KBR’s Form
10-Q for the quarter ended September 30, 2007; File No.
1-33146)
|
|
10.25+
|
|
KBR,
Inc., 2009 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended June 30, 2008; File
No. 1-33146)
|
|
|
|
|
|
10.26
|
|
Form
of Severance and Change in Control Agreement (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended September 30, 2008;
File No. 1-33146)
|
|
|
|
|
|
10.27+
|
|
Severance
and change in control agreement with William P. Utt, President and Chief
Executive Officer of KBR. (incorporated by reference to Exhibit 10.7 to
KBR’s current report on Form 8-K dated January 7, 2009; File No.
1-33146)
|
|
10.28
|
Three
Year Revolving Credit Agreement dated as of November 3, 2009 among KBR,
Inc., the Lenders party thereto, BBVA Compass, as Syndication Agent, The
Royal Bank of Scotland PLC, Bank of America, N.A. and Regions Bank, as
Co-Documentation Agents, Citigroup Global Markets Inc. and RBS Securities
Inc., as Co-Lead Arrangers, and Citibank, N.A. as Administrative Agent
(incorporated by reference to Exhibit 10.1 to KBR’s current report on Form
8-K dated November 3, 2009; File No. 1-33146)
|
|
|
10.29+
|
Severance
and Change of Control Agreement, between KBR Technical Services, Inc., a
Delaware corporation, KBR, Inc., and Susan K. Carter (incorporated by
reference to Exhibit 10.1 to KBR’s current report on Form 8-K dated
October 26, 2009; File No. 1-33146)
|
|
|
|
|
|
|
21.1
|
|
List
of subsidiaries
|
|
|
|
|
|
23.1
|
|
Consent
of KPMG LLP - Houston, Texas
|
|
|
|
|
|
*31.1
|
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
|
|
*31.2
|
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
|
|
**32.1
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
**32.2
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
Exhibit
Number
|
|
Description
|
|
***101.INS XBRL
Instance Document
|
||
|
***101.SCH XBRL
Taxonomy Extension Schema Document
|
||
|
***101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document
|
||
|
***101.LAB XBRL
Taxonomy Extension Labels Linkbase Document
|
||
|
***101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document
|
||
|
*
|
Filed
with this Form 10-K
|
|
|
**
|
Furnished
with this Form 10-K
|
|
|
***
|
In
accordance with Rule 406T of Regulation S-T, the XBRL related information
in Exhibit 101 to this Quarterly Report on Form 10-Q shall
not be deemed to be “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that section, and
shall not be part of any registration statement or other document filed
under the Securities Act or the Exchange Act, except as shall be expressly
set forth by specific reference in such
filing.
|
|
_________________________
|
+
|
Management
contracts or compensatory plans or
arrangements
|
Report
of Independent Registered Public Accounting Firm on Supplementary
Information
The Board
of Directors and Shareholders
KBR,
Inc.:
Under the
date of February 25, 2010, we reported on the consolidated balance sheets of
KBR, Inc. and subsidiaries as of December 31, 2009 and 2008 and the related
consolidated statements of income, shareholders’ equity and comprehensive
income, and cash flows, for each of the years in the three-year period ended
December 31, 2009, which reports appear in the December 31, 2009, Annual Report
on Form 10-K of KBR, Inc. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule (Schedule II) included in the Company’s Annual
Report on Form 10-K. The financial statement schedule is the responsibility of
the Company’s management. Our responsibility is to express an opinion on the
consolidated financial statement schedule based on our audits.
In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG
LLP
Houston,
Texas
February
25, 2010
KBR,
Inc.
Schedule
II - Valuation and Qualifying Accounts (Millions of Dollars)
The table
below presents valuation and qualifying accounts for continuing
operations.
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
||||||||
|
Descriptions
|
|
Balance
at Beginning Period
|
|
|
Charged
to Costs and Expenses
|
|
|
Charged
to Other Accounts
|
|
|
Deductions
|
|
|
Balance
at End of Period
|
|
|||||
|
Year
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from accounts and notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for bad debts
|
|
$
|
57
|
|
|
$
|
19
|
|
|
$
|
2
|
|
|
$
|
(55
|
)(a)
|
|
$
|
23
|
|
|
Reserve
for losses on uncompleted contracts
|
|
$
|
180
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
(89
|
)
|
|
$
|
117
|
|
|
Reserve
for potentially disallowable costs incurred under government
contracts
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
34
|
(b)
|
|
$
|
(12
|
)
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from accounts and notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for bad debts
|
|
$
|
23
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(6
|
)(a)
|
|
$
|
19
|
|
|
Reserve
for losses on uncompleted contracts
|
|
$
|
117
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
(68
|
)
|
|
$
|
76
|
|
|
Reserve
for potentially disallowable costs incurred under government
contracts
|
|
$
|
99
|
|
|
$
|
—
|
|
|
$
|
18
|
(b)
|
|
$
|
(5
|
)
|
|
$
|
112
|
|
|
Year
ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from accounts and notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for bad debts
|
|
$
|
19
|
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
(2)
|
(a)
|
|
$
|
26
|
||
|
Reserve
for losses on uncompleted contracts
|
|
$
|
76
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
(39)
|
|
$
|
40
|
|||
|
Reserve
for potentially disallowable costs incurred under government
contracts
|
|
$
|
112
|
|
$
|
—
|
|
|
$
|
9
|
(b)
|
|
$
|
(5)
|
|
$
|
116
|
|||
_________________________
|
(a)
|
Receivable
write-offs, net of recoveries, and
reclassifications.
|
|
(b)
|
Reserves
have been recorded as reductions of revenue, net of reserves no longer
required.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated:
February 25, 2010
|
|
KBR,
INC.
|
|
|
|
|
|
|
|
By:
|
/s/
William P. Utt
|
|
|
|
William
P. Utt
|
|
|
|
|
|
|
|
President
and Chief Executive Officer
|
Dated:
February 25, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
Signature
|
|
Title
|
|
|
|
|
|
/s/
William P. Utt
|
|
President,
Chief Executive Officer and Director
|
|
William
P. Utt
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
/s/
Susan K. Carter
|
|
Senior
Vice President and Chief Financial Officer
|
|
Susan
K. Carter
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
/s/
John W. Gann, Jr.
|
|
Vice
President and Chief Accounting Officer
|
|
John
W. Gann, Jr.
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
/s/
W. Frank Blount
|
|
Director
|
|
W.
Frank Blount
|
|
|
|
|
|
|
|
/s/
Loren K. Carroll
|
|
Director
|
|
Loren
K. Carroll
|
|
|
|
|
|
|
|
/s/
Jeffrey E. Curtiss
|
|
Director
|
|
Jeffrey
E. Curtiss
|
|
|
|
|
|
|
|
/s/
John R. Huff
|
|
Director
|
|
John
R. Huff
|
|
|
|
|
|
|
|
/s/
Lester L. Lyles
|
|
Director
|
|
Lester
L. Lyles
|
|
|
|
|
|
|
|
/s/
Richard J. Slater
|
|
Director
|
|
Richard
J. Slater
|
|
|
EXHIBIT
INDEX
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated as of May 6, 2008, by and among KBR, Inc.,
BE&K, Inc., and Whitehawk Sub, Inc., (incorporated by reference to
Exhibit 2.1 to KBR’s Current Report on Form 8-K; File No.
001-33416)
|
|
|
|
|
|
3.1
|
|
KBR
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to KBR’s registration statement on Form S-1;
Registration No. 333-133302)
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of KBR, Inc. (incorporated by reference to Exhibit 3.1
to KBR’s Form 10-Q for the period ended June 30, 2008; File No.
1-33146)
|
|
|
|
|
|
4.1
|
|
Form
of specimen KBR common stock certificate (incorporated by reference to
Exhibit 4.1 to KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
|
|
10.1
|
|
Master
Separation Agreement between Halliburton Company and KBR, Inc. dated as of
November 20, 2006 (incorporated by reference to Exhibit 10.1 to KBR’s
current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
|
|
10.2
|
|
Tax
Sharing Agreement, dated as of January 1, 2006, by and between Halliburton
Company, KBR Holdings, LLC and KBR, Inc., as amended effective February
26, 2007 (incorporated by reference to Exhibit 10.2 to KBR’s Annual Report
on Form 10-K for the year ended December 31, 2006; File No.
001-33146)
|
|
|
|
|
|
10.3
|
|
Amended
and Restated Registration Rights Agreement, dated as of February 26, 2007,
between Halliburton Company and KBR, Inc. (incorporated by reference to
Exhibit 10.3 to KBR’s Annual Report on Form 10-K for the year ended
December 31, 2006; File No. 001-33146)
|
|
|
|
|
|
10.4
|
|
Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (KBR as service provider)
(incorporated by reference to Exhibit 10.4 to KBR’s current report on Form
8-K dated November 20, 2006; File No. 001-33146)
|
|
|
|
|
|
10.5
|
|
Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (Halliburton as service
provider) (incorporated by reference to Exhibit 10.5 to KBR’s current
report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
|
|
10.6
|
|
Employee
Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.6 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
|
|
10.7
|
|
Intellectual
Property Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.7 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
10.8+
|
|
Employment
Agreement, dated as of April 3, 2006, between William P. Utt and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.15 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
|
|
10.9
|
|
Form
of Indemnification Agreement between KBR, Inc. and its directors
(incorporated by reference to Exhibit 10.18 to KBR’s registration
statement on Form S-1; Registration No. 333-133302)
|
|
|
|
|
|
10.10+
|
|
KBR,
Inc. 2006 Stock and Incentive Plan (as amended June 27, 2007)
(incorporated by reference to Exhibit 10.1 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.11+
|
|
KBR,
Inc. Senior Executive Performance Pay Plan (incorporated by reference to
Exhibit 10.21 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
|
|
|
|
10.12+
|
|
KBR,
Inc. Management Performance Pay Plan (incorporated by reference to Exhibit
10.22 to KBR’s Form 10-K for the fiscal year ended December 31, 2006; File
No. 1-33146)
|
|
|
|
|
|
10.13+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan (incorporated by reference to
Exhibit 10.23 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
|
|
|
|
10.14+
|
|
KBR
Dresser Deferred Compensation Plan (incorporated by reference to Exhibit
4.5 to KBR’s Registration Statement on Form S-8 filed on April 13,
2007)
|
|
|
|
|
|
10.15+
|
|
KBR
Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10.3 to KBR’s current report on Form 8-K dated April 9, 2007; File
No. 1-33146).
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
10.16+
|
|
KBR
Benefit Restoration Plan (incorporated by reference to Exhibit 10.4 to
KBR’s current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
|
|
|
|
|
10.17+
|
|
KBR
Elective Deferral Plan (incorporated by reference to Exhibit 10.5 to KBR’s
current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
|
|
|
|
|
10.18+
|
|
Restricted
Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.2 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.19+
|
|
Stock
Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.3 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.20+
|
|
KBR
Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan (incorporated by reference to Exhibit 10.4 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.21+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Stock Option Award (incorporated
by reference to Exhibit 10.5 to KBR’s Form 10-Q for the quarter ended June
30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.22+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Restricted Stock Award
(incorporated by reference to Exhibit 10.6 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
|
|
10.23+
|
|
Form
of Restricted Stock Agreement between KBR, Inc. and William P. Utt
pursuant to KBR, Inc. 2006 Stock and Incentive Plan (incorporated by
reference to Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended
September 30, 2007; File No.
1-33146)
|
|
10.24+
|
|
Form
of KBR Performance Award Agreement pursuant to KBR, Inc. 2006 Stock and
Incentive Plan (incorporated by reference to Exhibit 10.5 to KBR’s Form
10-Q for the quarter ended September 30, 2007; File No.
1-33146)
|
|
|
|
|
|
10.25+
|
|
KBR,
Inc., 2009 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended June 30, 2008; File
No. 1-33146)
|
|
|
|
|
|
10.26
|
|
Form
of Severance and Change in Control Agreement (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended September 30, 2008;
File No. 1-33146)
|
|
|
|
|
|
10.27+
|
|
Severance
and change in control agreement with William P. Utt, President and Chief
Executive Officer of KBR. (incorporated by reference to Exhibit 10.7 to
KBR’s current report on Form 8-K dated January 7, 2009; File No.
1-33146)
|
|
10.28
|
Three
Year Revolving Credit Agreement dated as of November 3, 2009 among KBR,
Inc., the Lenders party thereto, BBVA Compass, as Syndication Agent, The
Royal Bank of Scotland PLC, Bank of America, N.A. and Regions Bank, as
Co-Documentation Agents, Citigroup Global Markets Inc. and RBS Securities
Inc., as Co-Lead Arrangers, and Citibank, N.A. as Administrative Agent
(incorporated by reference to Exhibit 10.1 to KBR’s current report on Form
8-K dated November 3, 2009; File No. 1-33146)
|
|
|
10.29+
|
Severance
and Change of Control Agreement, between KBR Technical Services, Inc., a
Delaware corporation, KBR, Inc., and Susan K. Carter (incorporated by
reference to Exhibit 10.1 to KBR’s current report on Form 8-K dated
October 26, 2009; File No. 1-33146)
|
|
|
|
|
|
|
|
List
of subsidiaries
|
|
|
|
|
|
|
|
Consent
of KPMG LLP - Houston, Texas
|
|
|
|
|
|
|
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
|
|
|
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
|
|
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
Exhibit
Number
|
|
Description
|
|
***101.INS XBRL
Instance Document
|
||
|
***101.SCH XBRL
Taxonomy Extension Schema Document
|
||
|
***101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document
|
||
|
***101.LAB XBRL
Taxonomy Extension Labels Linkbase Document
|
||
|
***101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document
|
||
|
*
|
Filed
with this Form 10-K
|
|
|
**
|
Furnished
with this Form 10-K
|
|
|
***
|
In
accordance with Rule 406T of Regulation S-T, the XBRL related information
in Exhibit 101 to this Quarterly Report on Form 10-Q shall
not be deemed to be “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that section, and
shall not be part of any registration statement or other document filed
under the Securities Act or the Exchange Act, except as shall be expressly
set forth by specific reference in such
filing.
|
|
______________________________
+ Management
contracts or compensatory plans or arrangements
125