UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For
the quarterly period ended June 30, 2007
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.
(a
Delaware Corporation)
20-4536774
601
Jefferson Street
Suite
3400
Houston,
Texas 77002
(Address
of Principal Executive Offices)
Telephone
Number – Area Code (713) 753-3011
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
at least the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o
|
|
Accelerated
filer o
|
|
Non-accelerated
filer x
|
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
As
of
July 27, 2007, 168,988,336 shares of KBR, Inc. common stock, $0.001 par value
per share, were outstanding.
Index
|
|
Page
No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
|
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
|
Item
2.
|
|
27
|
|
|
|
Item
3.
|
|
41
|
|
|
|
Item
4.
|
|
41
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
42
|
|
|
|
Item
1A.
|
|
42
|
|
|
|
Item
2.
|
|
43
|
|
|
|
Item
3.
|
|
43
|
|
|
|
Item
4.
|
|
43
|
|
|
|
Item
5.
|
|
43
|
|
|
|
Item
6.
|
|
44
|
|
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
Condensed
Consolidated Statements of Operations
(In
millions, except for per share data)
(Unaudited)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
2,114
|
|
|
$ |
2,228
|
|
|
$ |
4,143
|
|
|
$ |
4,308
|
|
Equity
in earnings (losses) of unconsolidated affiliates, net
|
|
|
38
|
|
|
|
8
|
|
|
|
36
|
|
|
|
(16 |
) |
Total
revenue
|
|
|
2,152
|
|
|
|
2,236
|
|
|
|
4,179
|
|
|
|
4,292
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
2,057
|
|
|
|
2,265
|
|
|
|
4,010
|
|
|
|
4,261
|
|
General
and administrative
|
|
|
30
|
|
|
|
24
|
|
|
|
59
|
|
|
|
41
|
|
Other
operating income
|
|
|
-
|
|
|
|
(6 |
) |
|
|
-
|
|
|
|
(6 |
) |
Total
operating costs and expenses
|
|
|
2,087
|
|
|
|
2,283
|
|
|
|
4,069
|
|
|
|
4,296
|
|
Operating
income (loss)
|
|
|
65
|
|
|
|
(47 |
) |
|
|
110
|
|
|
|
(4 |
) |
Interest
expense-related party
|
|
|
-
|
|
|
|
(11 |
) |
|
|
-
|
|
|
|
(28 |
) |
Interest
income, net
|
|
|
14
|
|
|
|
2
|
|
|
|
27
|
|
|
|
5
|
|
Foreign
currency losses, net
|
|
|
(2 |
) |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
Other
non-operating gains, net
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Income
(loss) from continuing operations before income taxes and minority
interest
|
|
|
78
|
|
|
|
(71 |
) |
|
|
133
|
|
|
|
(37 |
) |
Benefit
(provision) for income taxes
|
|
|
(32 |
) |
|
|
29
|
|
|
|
(58 |
) |
|
|
7
|
|
Minority
interest in net earnings (losses) of subsidiaries
|
|
|
4
|
|
|
|
46
|
|
|
|
(1 |
) |
|
|
47
|
|
Income
from continuing operations
|
|
|
50
|
|
|
|
4
|
|
|
|
74
|
|
|
|
17
|
|
Income
from discontinued operations, net of tax provision of $(128), $(52),
$(133) and $(60 )
|
|
|
90
|
|
|
|
88
|
|
|
|
94
|
|
|
|
101
|
|
Net
income
|
|
$ |
140
|
|
|
$ |
92
|
|
|
$ |
168
|
|
|
$ |
118
|
|
Basic
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.30
|
|
|
$ |
0.03
|
|
|
$ |
0.44
|
|
|
$ |
0.13
|
|
Discontinued
operations, net
|
|
|
0.54
|
|
|
|
0.65
|
|
|
|
0.56
|
|
|
|
0.74
|
|
Net
income per share
|
|
$ |
0.83
|
|
|
$ |
0.68
|
|
|
$ |
1.00
|
|
|
$ |
0.87
|
|
Diluted
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.30
|
|
|
$ |
0.03
|
|
|
$ |
0.44
|
|
|
$ |
0.13
|
|
Discontinued
operations, net
|
|
|
0.53
|
|
|
|
0.65
|
|
|
|
0.56
|
|
|
|
0.74
|
|
Net
income per share
|
|
$ |
0.83
|
|
|
$ |
0.68
|
|
|
$ |
0.99
|
|
|
$ |
0.87
|
|
Basic
weighted average common shares outstanding
|
|
|
168
|
|
|
|
136
|
|
|
|
168
|
|
|
|
136
|
|
Diluted
weighted average common shares outstanding
|
|
|
169
|
|
|
|
136
|
|
|
|
169
|
|
|
|
136
|
|
(1)
|
Due
to the effect of rounding, the sum of the individual per share
amounts may
not equal the total shown.
|
See
accompanying notes to condensed consolidated financial statements.
Condensed
Consolidated Balance Sheets
(In
millions, except share data)
(Unaudited)
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
Assets
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
2,016
|
|
|
$
|
1,410
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Notes
and accounts receivable (less allowance for bad debts of $76 and
$57)
|
|
|
815
|
|
|
|
761
|
|
Unbilled
receivables on uncompleted contracts
|
|
|
836
|
|
|
|
1,110
|
|
Total
receivables
|
|
|
1,651
|
|
|
|
1,871
|
|
Deferred
income taxes
|
|
|
132
|
|
|
|
120
|
|
Other
current assets
|
|
|
270
|
|
|
|
240
|
|
Current
assets of discontinued operations, net
|
|
|
11
|
|
|
|
257
|
|
Total
current assets
|
|
|
4,080
|
|
|
|
3,898
|
|
Property,
plant, and equipment, net of accumulated depreciation of $221 and
$205
|
|
|
215
|
|
|
|
211
|
|
Goodwill
|
|
|
251
|
|
|
|
251
|
|
Equity
in and advances to related companies
|
|
|
301
|
|
|
|
296
|
|
Noncurrent
deferred income taxes
|
|
|
139
|
|
|
|
156
|
|
Unbilled
receivables on uncompleted contracts
|
|
|
194
|
|
|
|
194
|
|
Other
assets
|
|
|
42
|
|
|
|
51
|
|
Noncurrent
assets of discontinued operations, net
|
|
|
-
|
|
|
|
357
|
|
Total
assets
|
|
$
|
5,222
|
|
|
$
|
5,414
|
|
Liabilities,
Minority Interest and Shareholders’ Equity
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,056
|
|
|
$
|
1,177
|
|
Due
to Halliburton, net
|
|
|
-
|
|
|
|
152
|
|
Advanced
billings on uncompleted contracts
|
|
|
968
|
|
|
|
767
|
|
Reserve
for estimated losses on uncompleted contracts
|
|
|
150
|
|
|
|
180
|
|
Employee
compensation and benefits
|
|
|
268
|
|
|
|
259
|
|
Other
current liabilities
|
|
|
313
|
|
|
|
174
|
|
Current
liabilities of discontinued operations, net
|
|
|
-
|
|
|
|
274
|
|
Total
current liabilities
|
|
|
2,755
|
|
|
|
2,983
|
|
Noncurrent
employee compensation and benefits
|
|
|
206
|
|
|
|
221
|
|
Other
noncurrent liabilities
|
|
|
155
|
|
|
|
149
|
|
Noncurrent
income tax payable
|
|
|
65
|
|
|
|
-
|
|
Noncurrent
deferred tax liability
|
|
|
33
|
|
|
|
44
|
|
Noncurrent
liabilities of discontinued operations, net
|
|
|
-
|
|
|
|
188
|
|
Total
liabilities
|
|
|
3,214
|
|
|
|
3,585
|
|
Minority
interest in consolidated subsidiaries (including $0 and $44 related
to
discontinued operations)
|
|
|
(33
|
|
|
|
35
|
|
Shareholders’
equity and accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 50,000,000 shares authorized, no shares
issued
and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
shares, $0.001 par value, 300,000,000 shares authorized, 168,939,043
and
167,772,410 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Paid-in
capital in excess of par value
|
|
|
2,066
|
|
|
|
2,058
|
|
Accumulated
other comprehensive loss
|
|
|
(210
|
)
|
|
|
(291
|
)
|
Retained
earnings
|
|
|
185
|
|
|
|
27
|
|
Total
shareholders’ equity and accumulated other comprehensive
loss
|
|
|
2,041
|
|
|
|
1,794
|
|
Total
liabilities, minority interest, shareholders’ equity and accumulated other
comprehensive loss
|
|
$
|
5,222
|
|
|
$
|
5,414
|
|
See
accompanying notes to condensed consolidated financial
statements.
Condensed
Consolidated Statements of Cash Flows
(In
millions)
(Unaudited)
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
168
|
|
|
$
|
118
|
|
Adjustments
to reconcile net income to cash provided by operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
24
|
|
|
|
23
|
|
Distribution
from (to) related companies, net of equity in earnings (losses)
of
unconsolidated affiliates
|
|
|
(18
|
)
|
|
|
-
|
|
Deferred
income taxes
|
|
|
22
|
|
|
|
(4
|
|
Gain
on sale of assets, net
|
|
|
(216
|
|
|
|
(129
|
|
Impairment
of equity method investments
|
|
|
18
|
|
|
|
36
|
|
Other
|
|
|
43
|
|
|
|
(26
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(85
|
)
|
|
|
291
|
|
Unbilled
receivables on uncompleted contracts
|
|
|
242
|
|
|
|
(85
|
|
Accounts
payable
|
|
|
(116
|
)
|
|
|
(199
|
)
|
Advanced
billings on uncompleted contracts
|
|
|
201
|
|
|
|
464
|
|
Reserve
for estimated loss on uncompleted contracts
|
|
|
(30
|
)
|
|
|
112
|
|
Employee
compensation and benefits
|
|
|
9
|
|
|
|
(90
|
)
|
Other
assets
|
|
|
(60
|
)
|
|
|
(90
|
)
|
Other
liabilities
|
|
|
272
|
|
|
|
40
|
|
Total
cash flows provided by operating activities
|
|
|
474
|
|
|
|
461
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(23
|
)
|
|
|
(42
|
)
|
Sales
of property, plant and equipment
|
|
|
1
|
|
|
|
4
|
|
Disposition
of businesses/investments, net of cash disposed
|
|
|
334
|
|
|
|
276
|
|
Other
investing activities
|
|
|
(1
|
)
|
|
|
-
|
|
Total
cash flows provided by investing activities
|
|
|
311
|
|
|
|
238
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments from
(to) Halliburton, net
|
|
|
(123
|
)
|
|
|
(172
|
)
|
Payments
on long-term borrowings
|
|
|
(7
|
)
|
|
|
(9
|
) |
Payments
of dividends to minority shareholders
|
|
|
(19
|
)
|
|
|
(4
|
)
|
Total
cash flows used in financing activities
|
|
|
(149
|
)
|
|
|
(185
|
|
Effect
of exchange rate changes
|
|
|
(81
|
)
|
|
|
22
|
|
Increase
in cash and equivalents
|
|
|
555
|
|
|
|
536
|
|
Cash
and equivalents at beginning of period
|
|
|
1,461
|
|
|
|
394
|
|
Cash
and equivalents at end of period
|
|
$
|
2,016
|
|
|
$
|
930
|
|
See
accompanying notes to condensed consolidated financial
statements.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1. Description of Business and Basis of
Presentation
KBR,
Inc.
and its subsidiaries (collectively, KBR or the Company) is a global engineering,
construction and services company supporting the energy, petrochemicals,
government services and civil infrastructure sectors. We offer our wide range
of
services through three business segments, Energy and Chemicals (“E&C”),
Government and Infrastructure (“G&I”) and Ventures. During the first quarter
of 2007, we reorganized our operating segments resulting in the
creation of Ventures as a new reportable segment. The business
activities included in the Ventures segment had previously been reported
as part
of the E&C and G&I segments.
Energy
and Chemicals. Our E&C segment designs and constructs energy
and petrochemical projects, including large, technically complex projects
in
remote locations around the world. Our expertise includes onshore oil and
gas
production facilities, offshore oil and gas production facilities, including
platforms, floating production and subsea facilities (which we refer to
collectively as our offshore projects), onshore and offshore pipelines,
liquefied natural gas (“LNG”) and gas-to-liquids (“GTL”) gas monetization
facilities (which we refer to collectively as our gas monetization projects),
refineries, petrochemical plants and synthesis gas (“Syngas”). We provide a wide
range of Engineering Procurement Construction—Commissioning Start-up (“EPC-CS”)
services, as well as program and project management, consulting and technology
services.
Government
and Infrastructure. Our G&I 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 customers worldwide. A significant
portion of our G&I segment’s current operations relate to the support of
United States government operations in the Middle East, which we refer to
as our
Middle East operations. Through June 28, 2007, we owned the majority of
Devonport Management Limited (“DML”), which owns and operates Devonport Royal
Dockyard, one of Western Europe’s largest naval dockyard
complexes. 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 $97 million,
net of tax of $119 million. In accordance with the provisions of
Statement of Financial Accounting Standards No. 144, “Accounting for Impairment
or Disposal of Long-Lived Assets,” the results of operations of DML for the
current and prior periods have been reported as discontinued
operations. See Note 17 Discontinued Operations.
Ventures. Our
Ventures segment develops, provides assistance in arranging financing for,
makes
equity and/or debt investments in and participates in managing entities owning
assets generally from projects in which one of our other business segments
has a
direct role in engineering, construction, and/or operations and
maintenance. The creation of the Ventures segment provides management
focus on our investments in the entities that own the
assets. Projects developed and under current management include
government services, such as defense procurement and operations and maintenance
services for equipment, military infrastructure construction and program
management, toll roads and railroads, and energy and chemical
plants.
KBR,
Inc., a Delaware corporation, was formed on March 21, 2006 as an indirect,
wholly owned subsidiary of Halliburton Company (“Halliburton”). KBR, Inc. was
formed to own and operate KBR Holdings, LLC (“KBR Holdings”), which was also
wholly owned by Halliburton. At inception, KBR, Inc. issued 1,000 shares
of
common stock. On October 27, 2006, KBR, Inc. effected 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 KBR, Inc. 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 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 2 for discussion concerning completion of our
separation from Halliburton.
Our
condensed consolidated financial statements include the accounts of
majority-owned, controlled subsidiaries and variable interest entities where
we
are the primary beneficiary. The equity method is used to account for
investments in affiliates in which we have the ability to exert significant
influence over the affiliates’ operating and financial policies. The
cost method is used when we do not have the ability to exert significant
influence. All material intercompany accounts and transactions are
eliminated.
Minority
interest in consolidated subsidiaries in our condensed consolidated balance
sheets principally represents minority shareholders’ proportionate share of the
equity in our consolidated subsidiaries. Minority interest in
consolidated subsidiaries is adjusted each period to reflect the minority
shareholders’ allocation of income, or the absorption of losses by the
minority shareholders on certain majority-owned, controlled investments
where the minority shareholders are obligated to fund the balance of their
share
of these losses.
Our
condensed consolidated financial statements reflect all costs of doing business,
including certain costs incurred by Halliburton on KBR’s behalf. Such
costs have been charged to KBR in accordance with Staff Accounting Bulletin
(“SAB”) No. 55, “Allocation of Expenses and Related Disclosure in Financial
Statements of Subsidiaries, Divisions or Lesser Business Components of Another
Entity.”
The
accompanying unaudited condensed consolidated financial statement have been
prepared, in accordance with the rules of the United States Securities and
Exchange commission (“SEC”) for interim financial statements and do not include
all annual disclosures required by accounting principles generally accepted
in
the United States. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the fiscal
year
ended December 31, 2006 filed with the SEC. We believe that the
presentation and disclosures herein are adequate to make the information
not
misleading, and the condensed consolidated financial statements reflect all
adjustments that management considers necessary for a fair presentation of
our
consolidated results of operations, financial position and cash
flows. Operating results for interim periods are not necessarily
indicative of results to be expected for the full fiscal year 2007 or any
other
future periods.
The
preparation of our condensed consolidated financial statements in conformity
with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the balance sheet dates and the reported amounts of revenue
and
costs during the reporting periods. Actual results could differ
materially from those estimates. On an ongoing basis, we review our
estimates based on information currently available, and changes in facts
and
circumstances may cause us to revise these estimates.
Note
2. Separation from Halliburton
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.
In
connection with the Offering in November 2006 and the separation of our business
from Halliburton, 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, subject to specified exceptions. 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 Foreign Corrupt Practices Act (“FCPA”)
investigations and the Barracuda-Caratinga project and for other litigation
matters related to Halliburton’s business. See Note 9 for further
discussion of the FCPA investigations and the Barracuda-Caratinga
project.
The
tax
sharing agreement, as amended, provides for certain allocations of U.S. income
tax liabilities and other agreements between us and Halliburton with respect
to
tax matters. As a result of the Offering, Halliburton will be
responsible for filing all U.S. income tax returns required to be filed through
April 5, 2007, the date KBR ceased to be a member of the Halliburton
consolidated tax group. Halliburton will also be responsible for
paying the taxes related to the returns it is responsible for
filing. We will pay Halliburton our allocable share of such
taxes. We are obligated to pay Halliburton for the utilization of net
operating losses, if any, generated by Halliburton prior to the deconsolidation
which we may use to offset our future consolidated federal income tax
liabilities.
Under
the
transition services agreements, Halliburton is expected to continue providing
various interim corporate support services to us and we will continue to
provide
various interim corporate support services to Halliburton. These
support services relate to, among other things, information technology, legal,
human resources, risk management and internal audit. The services
provided under the transition services agreement between Halliburton and
KBR are
substantially the same as the services historically
provided. Similarly, the related costs of such services will be
substantially the same as the costs incurred and recorded in our historical
financial statements.
The
employee matters agreement provides for the allocation of liabilities and
responsibilities to our current and former employees and their participation
in
certain benefit plans maintained by Halliburton. Among other items,
the employee matters agreement and the KBR, Inc. Transitional Stock Adjustment
Plan provide for the
conversion, upon the complete separation of KBR from Halliburton, of 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 (“1993 Plan”) to stock options and restricted
stock awards covering KBR common stock. On April 5, 2007,
immediately after our separation from Halliburton, the conversion of such
stock
options and restricted stock awards occurred. 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 million restricted stock awards with
a
weighted average grant-date fair value per share of $11.01. The
conversion of such stock options and restricted stock was accounted for as
a
modification in accordance with SFAS No. 123(R) and resulted in an incremental
charge to expense of less than $1 million, recognized in the three months
ended
June 30, 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. Stock-based compensation expense
recognized for all awards for the three and six months ended June 30, 2007
was
$3 million and $6 million, respectively. We estimate
approximately $5 million of stock-based compensation expense will be recognized
for the remainder of fiscal 2007.
See
Note
15 for further discussion of the above agreements and other related party
transactions with Halliburton.
Note
3. Percentage-of-Completion Contracts
Unapproved
claims and change orders
The
amounts of unapproved claims and change orders recorded as “Unbilled work on
uncompleted contracts” or “Other assets” as of June 30, 2007 and December 31,
2006 are as follows:
Energy
and Chemicals Division
Millions
of dollars
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
Probable
unapproved claims
|
|
$
|
176
|
|
|
$
|
178
|
|
Probable
unapproved change orders
|
|
|
4
|
|
|
|
51
|
|
Probable
unapproved claims related to unconsolidated subsidiaries
|
|
|
78
|
|
|
|
78
|
|
Probable
unapproved change orders related to unconsolidated
subsidiaries
|
|
|
22
|
|
|
|
-
|
|
Government
and Infrastructure Division
Millions
of dollars
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
Probable
unapproved claims
|
|
$
|
77
|
|
|
$
|
37
|
|
Probable
unapproved change orders
|
|
|
4
|
|
|
|
3
|
|
Probable
unapproved change orders related to unconsolidated
subsidiaries
|
|
|
3
|
|
|
|
3
|
|
As
of
June 30, 2007, the probable unapproved claims for the Energy and Chemicals
division, including those from unconsolidated subsidiaries, relate to five
contracts, most of which are complete or substantially
complete.
A
significant portion of the probable unapproved claims as of June 30, 2007
arose
from three completed projects with Petroleos Mexicanos (PEMEX) ($148 million
related to our consolidated subsidiaries and $45 million related to our
unconsolidated subsidiaries) that are currently subject to arbitration
proceedings. In addition, included in non-current “Unbilled
receivables on uncompleted contracts” is $64 million related to previously
approved services that are unpaid by PEMEX and are a part of these arbitration
proceedings. Actual amounts we are seeking from PEMEX in the
arbitration proceedings are in excess of these amounts. The remaining
arbitration proceedings are expected to extend through 2007. PEMEX
has asserted counterclaims the remaining in arbitrations; however, it is
premature based upon our current understanding of those counterclaims to
make
any assessment of their merits. As of June 30, 2007, we had not
accrued any amounts related to the PEMEX counterclaims in the
arbitrations.
In
July
2007, the arbitration committee awarded claims in favor of one of our three
projects for PEMEX which was performed by our unconsolidated
subsidiary. Although full interpretation and calculation of this
award is not complete, we estimate the amount awarded approximates the book
value of these claims recorded at June 30, 2007. The arbitration
proceedings with respect to a second PEMEX project have been conducted and
we
are awaiting the results. Regarding the third PEMEX project,
arbitration hearings are scheduled for the fourth quarter of 2007.
We
have
contracts with probable unapproved claims that will likely not be settled
within
one year totaling $176 million and $175 million at June 30, 2007 and December
31, 2006, respectively, included in the table above, which are reflected
as a
non-current asset in “Unbilled receivables on uncompleted contracts” on the
condensed consolidated balance sheets. Other probable unapproved claims that
we
believe will be settled within one year, included in the table above, have
been
recorded as a current asset in “Unbilled receivables on uncompleted contracts”
on the condensed consolidated balance sheets.
Note
4. Escravos Project
In
connection with our consolidated 50%-owned GTL project in
Escravos, Nigeria, during the first half of 2007, we and our joint venture
partner negotiated modifications to the contract terms and conditions resulting
in an executed contract amendment in July 2007. The contract has been
amended to convert 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. Also included in the
amended contract are client determined incentives that may be earned over
the
remaining life of the contract. The effect of the modifications for
the three months ended June 30, 2007 resulted in a $3 million increase to
operating income. In addition, minority interest shareholders’
absorption of losses increased by $15 million resulting in net income of
$12
million for the three months ended June 30, 2007. Because our amended
agreement with the client provides that we will be reimbursed for our actual
costs incurred, as defined, all amounts of probable unapproved change order
revenue that were previously included in the project estimated revenues are
now
considered approved.
Note
5. Business Segment Information
We
provide a wide range of services; however, the management of our business
is
heavily focused on major projects within each of our reportable segments.
At any
given time, relatively few of our projects and joint ventures represent a
substantial part of our operations.
As
a
result of changes in the monthly financial and operating information provided
to
our chief operating decision maker as defined by the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
during the first quarter of 2007 we redefined our reportable segments on
a basis
that is representative of how our chief operating decision maker evaluates
its
operating performance and makes resource allocation decisions. Accordingly,
KBR
has reorganized its operations, resulting in the Government and Infrastructure,
Energy and Chemicals, and Ventures reportable segments. Segment
information has been prepared in accordance with SFAS No. 131 and all prior
period amounts have been restated to conform to the current
presentation.
The
table
below presents information on our segments.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
1,482
|
|
|
$ |
1,691
|
|
|
$ |
2,939
|
|
|
$ |
3.242
|
|
Energy
and Chemicals
|
|
|
669
|
|
|
|
560
|
|
|
|
1,245
|
|
|
|
1,101
|
|
Ventures
|
|
|
1
|
|
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(51 |
) |
Total
|
|
$ |
2,152
|
|
|
$ |
2,236
|
|
|
$ |
4,179
|
|
|
$ |
4,292
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
25
|
|
|
$ |
58
|
|
|
$ |
63
|
|
|
$ |
93
|
|
Energy
and Chemicals
|
|
|
41
|
|
|
|
(97 |
) |
|
|
54
|
|
|
|
(53 |
) |
Ventures
|
|
|
(1 |
) |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(44 |
) |
Total
|
|
$ |
65
|
|
|
$ |
(47 |
) |
|
$ |
110
|
|
|
$ |
(4 |
) |
Intersegment
revenues included in the Government and Infrastructure segment were $4 million
and $8 million for the three and six months ended June 30, 2007,
respectively. Intersegment revenues included in the Government and
Infrastructure segment were $3 million and $7 million for the three and six
months ended June 30, 2006, respectively. Intersegment revenues
included in the Energy and Chemicals segment were $42 million and $89 million
for the three and six months ended June 30, 2007, respectively.
Intersegment
revenues included in the Energy and Chemicals segment were $51 million and
$82
million for the three and six months ended June 30, 2006,
respectively. Our equity in earnings (losses) of unconsolidated
affiliates that are accounted for by the equity method is included in revenue
and operating income of the applicable segment.
Note
6. Committed Cash
Cash
and
equivalents include cash from advanced payments related to contracts in progress
held by ourselves or our joint ventures that we consolidate for accounting
purposes. The use of these cash balances is limited to the specific
projects or joint venture activities and is not available for other projects,
general cash needs, or distribution to us without approval of the board of
directors of the respective joint venture or subsidiary. At June 30,
2007 and December 31, 2006, cash and equivalents include
approximately $771 million and $527 million, respectively, in cash
from advanced payments held by ourselves or our joint ventures that we
consolidate for accounting purposes.
Note
7. Comprehensive Income
The
components of other comprehensive income included the following:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
140
|
|
|
$ |
92
|
|
|
$ |
168
|
|
|
$ |
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cumulative translation adjustments
|
|
|
(17 |
) |
|
|
23
|
|
|
|
(18 |
) |
|
|
17
|
|
Pension
liability adjustment
|
|
|
95
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
Net
unrealized gains (losses) on investments and derivatives
|
|
|
-
|
|
|
|
6
|
|
|
|
(1 |
) |
|
|
13
|
|
Total
comprehensive income
|
|
$ |
218
|
|
|
$ |
121
|
|
|
$ |
249
|
|
|
$ |
148
|
|
Accumulated
other comprehensive income consisted of the following:
|
|
June
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
Cumulative
translation adjustments
|
|
$ |
25
|
|
|
$ |
43
|
|
Pension
liability adjustments
|
|
|
(235 |
) |
|
|
(335 |
) |
Unrealized
gains (losses) on investments and derivatives
|
|
|
-
|
|
|
|
1
|
|
Total
accumulated other comprehensive (loss)
|
|
$ |
(210 |
) |
|
$ |
(291 |
) |
Comprehensive
income for the three and six months ended June 30, 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 17 for further discussion.
Note
8. United States Government Contract Work
We
provide substantial work under our government contracts to the United States
Department of Defense (“DoD”) and other governmental agencies. These contracts
include our worldwide United States Army logistics contracts, known as LogCAP
and U.S. Army Europe, known as USAREAR. Our government services revenue related
to Iraq totaled approximately $1.1 billion and $2.1 billion for the three
and
six months ended June 30, 2007, respectively, compared to $1.3 billion and
$2.4
billion for the three and six months ended June 30, 2006,
respectively.
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 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 contractor
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. 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.
DCAA
audit issues
Our
operations under United States government contracts are regularly reviewed
and
audited by the Defense Contract Audit Agency (“DCAA”) and other governmental
agencies. The DCAA serves in an advisory role to our customer and when issues
are found during the audit process, these issues are typically discussed
and
reviewed with us. The DCAA then issues an audit report with its recommendations
to our customer’s contracting officer. In the case of management systems and
other contract administrative issues, the contracting officer is generally
with
the Defense Contract Management Agency (“DCMA”). We then work with our customer
to resolve the issues noted in the audit report. 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. Our revenue recorded for government contract work is reduced
for
our estimate of costs that may be categorized as disputed or unallowable
as a
result of cost overruns or the audit process.
Security.
In February 2007, we received a letter from the Department of the Army informing
us of their intent to adjust payments under the LogCAP III contract associated
with the cost incurred by the subcontractors to provide security to their
employees. Based on this letter, the DCAA withheld the Army’s initial assessment
of $20 million. The Army based its 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 indicated
that
not all task orders and subcontracts have been reviewed and that they may
make
additional adjustments. The Army indicated that, within 60 days, they intend
to
begin making further adjustments equal to 6% of prior and current subcontractor
costs unless we provide timely information sufficient to show that such action
is not necessary to protect the government’s interest. We continue to
provide additional information as requested by the Army.
The
Army
indicated that they believe our LogCAP III contract prohibits us 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 any of our subcontractors from using private
security services to provide force protection to subcontractor personnel.
In
addition, a significant portion of our subcontracts are competitively bid
lump
sum or fixed price subcontracts. As a result, we do not receive details of
the
subcontractors’ cost estimate nor are we legally entitled to it. Accordingly, we
believe that we are entitled to reimbursement by the Army for the cost of
services provided by 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.
If
we are
unable to demonstrate that such action by the Army is not necessary, a 6%
suspension of all subcontractor costs incurred to date could result in suspended
costs of approximately $400 million. The Army has asked us to provide
information that addresses the use of armed security either directly or
indirectly charged to LogCAP III. The actual costs associated with these
activities cannot be accurately estimated, but we believe that they should
be
substantially less than 6% of the total subcontractor costs. We will continue
working with the Army to resolve this issue. As of June 30, 2007, we
had not accrued any amounts related to this matter.
Dining
Facility Support
Services. In April 2007, DCAA recommended withholding
$13 million of payments from KBR alleging that Eurest Support Services (Cypress)
International Limited (“ESS”), a subcontractor to KBR providing dining facility
services in conjunction with our LogCAP III contract in Iraq, over-billed
for
the cost related to the use of power generators. We disagree with the
position taken by the DCAA and we are working to resolve the issue. We
have not accrued any amounts related to this matter as of June 30,
2007.
Laundry.
Prior to the fourth quarter of 2005, we received notice from the DCAA that
it
recommended withholding $18 million of subcontract costs related to the laundry
service for one task order in southern Iraq, for which it believed we and
our
subcontractors did not provide adequate levels of documentation supporting
the
quantity of the services provided. In the fourth quarter of 2005, the DCAA
issued a notice to disallow costs totaling approximately $12 million, releasing
$6 million of amounts previously withheld. In the second quarter of 2006,
we
successfully resolved this matter with the DCAA and received payment of the
remaining $12 million.
Containers.
In June 2005, the DCAA recommended withholding certain costs associated with
providing containerized housing for soldiers and supporting civilian personnel
in Iraq. The DCAA recommended that the costs be withheld pending receipt
of
additional explanation or documentation to support the subcontract costs.
Approximately $30 million has been withheld as of June 30, 2007, of which
we
withheld $17 million from our subcontractor. During 2006, we resolved
approximately $25 million of the withheld amounts with our contracting officer
which was received in the first quarter of 2007. We will continue working
with
the government and our subcontractors to resolve the remaining
amounts.
Dining
facilities. In September 2005, ESS filed suit against us alleging
various claims associated with its performance as a subcontractor in conjunction
with our LogCAP III contract in Iraq. The case was settled during the first
quarter of 2006 without material impact to us.
In
the
third quarter of 2006, the DCAA raised questions regarding $95 million of
costs
related to dining facilities in Iraq. We have responded to the DCAA that
our
costs are reasonable.
Fuel.
In December 2003, the DCAA issued a preliminary audit report that alleged
that
we may have overcharged the Department of Defense by $61 million in importing
fuel into Iraq. The DCAA questioned costs associated with fuel purchases
made in
Kuwait that were more expensive than buying and transporting fuel from Turkey.
We responded that we had maintained close coordination of the fuel mission
with
the Army Corps of Engineers (COE), which was our customer and oversaw the
project, throughout the life of the task orders and that the COE had directed
us
to use the Kuwait sources. After a review, the COE concluded that we obtained
a
fair price for the fuel. Nonetheless, Department of Defense officials referred
the matter to the agency’s inspector general, which we understand commenced an
investigation.
The
DCAA
issued various audit reports related to task orders under the RIO contract
that
reported $275 million in questioned and unsupported costs. The majority of
these
costs were associated with the humanitarian fuel mission. In these reports,
the
DCAA compared fuel costs we incurred during the duration of the RIO contract
in
2003 and early 2004 to fuel prices obtained by the Defense Energy Supply
Center
(“DESC”) in April 2004 when the fuel mission was transferred to that agency.
During the fourth quarter of 2005, we resolved all outstanding issues related
to
the RIO contract with our customer and settled the remaining questioned costs
under this contract.
Other
issues. The DCAA is continuously performing audits of costs
incurred for the foregoing and other services provided by us under our
government contracts. During these audits, there have been questions raised
by
the DCAA about the reasonableness or allowability of certain costs or the
quality or quantity of supporting documentation. The DCAA might recommend
withholding some portion of the questioned costs while the issues are being
resolved with our customer. Because of the intense scrutiny involving our
government contracts operations, issues raised by the DCAA may be more difficult
to resolve. We do not believe any potential withholding will have a significant
or sustained impact on our liquidity.
Investigations
In
the
first quarter of 2005, the Department of Justice (“DOJ”) issued two indictments
associated with overbilling issues we previously reported to the Department
of
Defense Inspector General’s office as well as to our customer, the Army Materiel
Command (“AMC”), against a former KBR procurement manager and a manager of La
Nouvelle Trading & Contracting Company, W.L.L. We provided information
to the DoD Inspector General’s office in February 2004 about other contacts
between former employees and our subcontractors. In March 2006, one
of these former employees pled guilty to taking money in exchange for awarding
work to a Saudi Arabian subcontractor. The Inspector General’s investigation of
these matters may continue.
In
October 2004, we reported to the DoD Inspector General’s office that two former
employees in Kuwait may have had inappropriate contacts with individuals
employed by or affiliated with two third-party subcontractors prior to the
award
of the subcontracts. The Inspector General’s office may investigate whether
these two employees may have solicited and/or accepted payments from these
third-party subcontractors while they were employed by us.
In
October 2004, a civilian contracting official in the COE asked for a review
of
the process used by the COE for awarding some of the contracts to us. We
understand that the DoD Inspector General’s office may review the issues
involved.
We
understand that the DOJ, an Assistant United States Attorney based in Illinois,
and others are investigating these and other matters we have reported related
to
our government contract work in Iraq. If criminal wrongdoing were found,
criminal penalties could range up to the greater of $500,000 in fines per
count
for a corporation or twice the gross pecuniary gain or loss. We also understand
that current and former employees of KBR have received subpoenas and have
given
or may give grand jury testimony related to some of these matters.
The
House
Oversight and Government Reform and Senate Armed Services Committees have
conducted hearings on the U.S. military’s reliance on civilian contractors,
including with respect to military operations in Iraq. We have provided
testimony and information for these hearings. We expect hearings with respect
to
operations in Iraq to continue in this and other Congressional committees,
including the House Armed Services Committee, and we expect to be asked to
testify and provide information for these hearings.
We
have
reported to the U.S. Department of State and Department of Commerce that
exports
of materials, including personal protection equipment such as helmets, goggles,
body armor and chemical protective suits, in connection with personnel deployed
to Iraq and Afghanistan may not have been in accordance with current licenses
or
may have been unlicensed. A failure to comply with export control 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. In addition, we
are
responding to a March 19, 2007, subpoena from the DoD Inspector General
concerning licensing for armor for convoy trucks and antiboycott issues.
As of
June 30, 2007, we had not accrued any amounts related to this
matter.
Withholding
of payments
During
2004, the AMC issued a determination that a particular contract clause could
cause it to withhold 15% from our invoices until our task orders under the
LogCAP contract are definitized. The AMC delayed implementation of this
withholding pending further review. During the third quarter of 2004, we
and the
AMC identified three senior management teams to facilitate negotiation under
the
LogCAP task orders, and these teams concluded their effort by successfully
negotiating the final outstanding task order definitization on March 31,
2005. This made us current with regard to definitization of historical LogCAP
task orders and eliminated the potential 15% withholding issue under the
LogCAP
contract.
Upon
the
completion of the RIO contract definitization process, the COE released all
previously withheld amounts related to this contract in the fourth quarter
of
2005.
The
PCO
Oil South contract provides the customer the right to withhold payment of
15% of
the amount billed, thus remitting a net of 85% of costs incurred until a
task
order is definitized. Once a task order is definitized, this contract provides
that 100% of the costs billed will be paid pursuant to the “Allowable Cost and
Payment Clause” of the contract. The PCO Oil South project has definitized
substantially all of the task orders, and we have collected a significant
portion of any amounts previously withheld. We do not believe the withholding
will have a significant or sustained impact on our liquidity because the
withholding is temporary, and the definitization process is substantially
complete. The amount of payments withheld by the client under the PCO Oil
South
project was less than $1 million at June 30, 2007.
We
are
working diligently with our customers to proceed with significant new work
only
after we have a fully definitized task order, which should limit withholdings
on
future task orders for all government contracts.
Claims
We
had
unapproved claims totaling $74 million at June 30, 2007 and $36 million at
December 31, 2006 for the LogCAP contract. The unapproved claims outstanding
at
June 30, 2007 and December 31, 2006, are considered to be probable of collection
and have been recognized as revenue. These amounts are included in
the table of Government and Infrastructure unapproved claims and unapproved
change orders in Note 3.
In
addition, as of June 30, 2007, we had incurred approximately $126 million
of
costs under the LogCAP III contract that could not be billed to the government
due to lack of appropriate funding on various task orders. These amounts
were
associated with task orders that had sufficient funding in total, but the
funding was not appropriately allocated amongst the task orders. We
have submitted requests for reallocations of funding to the U.S. Army and
continue to work with them to resolve this matter. We anticipate the
negotiations will result in an appropriate distribution of funding by the
client
and collection of the full amounts due.
DCMA
system reviews
Report
on estimating system. In December 2004, the DCMA granted continued
approval of our estimating system, stating that our estimating system is
“acceptable with corrective action.” We are in the process of completing these
corrective actions. Specifically, based on the unprecedented level of support
that our employees are providing the military in Iraq, Kuwait, and Afghanistan,
we needed to update our estimating policies and procedures to make them better
suited to such contingency situations. Additionally, we have completed our
development of a detailed training program and have made it available to
all
estimating personnel to ensure that employees are adequately prepared to
deal
with the challenges and unique circumstances associated with a contingency
operation.
Report
on purchasing system. As a result of a Contractor Purchasing
System Review by the DCMA during the fourth quarter of 2005, the DCMA granted
the continued approval of our government contract purchasing system. The
DCMA’s
October 2005 approval letter stated that our purchasing system’s policies and
practices are “effective and efficient, and provide adequate protection of the
Government’s interest.” During the fourth quarter 2006, the DCMA granted, again,
continued approval of our government contract purchasing system.
Report
on accounting system. We received two draft reports on our
accounting system, which raised various issues and questions. We have responded
to the points raised by the DCAA, but this review remains open. In the fourth
quarter 2006, the DCAA finalized its report and submitted it to the DCMA,
who
will make a determination of the adequacy of our accounting systems for
government contracting. We have prepared an action plan considering the DCAA
recommendations and continue to meet with these agencies to discuss the ultimate
resolution. The DCMA has approved KBR’s accounting system as acceptable for
accumulating costs incurred under U.S. Government contracts.
SIGIR
Report
In
October 2006, the Special Inspector General for Iraq Reconstruction, or SIGIR,
issued a report stating that we have improperly labeled reports provided
to our
customer, AMC, as proprietary data, when data marked does not relate to internal
contractor information. We believe we have addressed the issues raised by
the
SIGIR report.
The
Balkans
We
have
had inquiries in the past by the DCAA and the civil fraud division of the
DOJ
into possible overcharges for work performed during 1996 through 2000 under
a
contract in the Balkans, for which inquiry has not been completed by the
DOJ.
Based on an internal investigation, we credited our customer approximately
$2 million during 2000 and 2001 related to our work in the Balkans as a
result of billings for which support was not readily available. We believe
that
the preliminary DOJ inquiry relates to potential overcharges in connection
with
a part of the Balkans contract under which approximately $100 million in
work
was done. We believe that any allegations of overcharges would be without
merit.
In the fourth quarter 2006, we reached a negotiated settlement with the DOJ.
KBR
was not accused of any wrongdoing and did not admit to any wrongdoing. KBR
is
not suspended or debarred from bidding for or performing work for the U.S.
government. The settlement did not have a material impact on our operating
results in 2006.
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. All
employment claims were sent to arbitration under the Company’s dispute
resolution program. As of June 30, 2007, no amounts were accrued in
connection with this matter.
Wilson
and Warren Qui Tam suit
During
November 2006, we became aware of a qui tam action filed against us alleging
that we overcharged the military $30 million by failing to adequately maintain
trucks used to move supplies in convoys and by sending empty trucks in convoys.
It was alleged that the purpose of these acts was to cause the trucks to
break
down more frequently than they would if properly maintained and to unnecessarily
expose them to the risk of insurgent attacks, both for the purpose of
necessitating their replacement thus increasing our revenue. The suit also
alleges that in order to silence the plaintiffs, who allegedly were attempting
to report those allegations and other alleged wrongdoing, we unlawfully
terminated them. On February 6, 2007, the court granted our motion to dismiss
the plaintiffs’ qui tam claims as legally insufficient and ordered the
plaintiffs to arbitrate their claims that they were unlawfully discharged.
The
final judgement in our favor was entered on April 30, 2007 and subsequently
appealed by the plaintiffs on May 3, 2007. As of June 30, 2007, we
had not accrued any amounts in connection with this matter.
Note
9. Other Commitments and Contingencies
Foreign
Corrupt Practices Act investigations
Halliburton
provided indemnification in favor of KBR under the master separation agreement
for certain contingent liabilities, including Halliburton’s indemnification of
KBR and any of its greater than 50%-owned subsidiaries as of November 20,
2006,
the date of the master separation agreement, for fines or other monetary
penalties or direct monetary damages, including disgorgement, as a result
of a
claim made or assessed by a governmental authority in the United States,
the
United Kingdom, France, Nigeria, Switzerland and/or Algeria, or a settlement
thereof, related to alleged or actual violations occurring prior to November
20,
2006 of the FCPA or particular, analogous applicable foreign statutes, laws,
rules, and regulations in connection with investigations pending as of that
date
including with respect to the construction and subsequent expansion by TSKJ
of a
natural gas liquefaction complex and related facilities at Bonny Island in
Rivers State, Nigeria. The following provides a detailed discussion on the
FCPA
investigation.
The
SEC
is conducting a formal investigation into whether improper payments were
made to
government officials in Nigeria through the use of agents or subcontractors
in
connection with the construction and subsequent expansion by TSKJ of a
multibillion dollar natural gas liquefaction complex and related facilities
at
Bonny Island in Rivers State, Nigeria. The DOJ is also conducting a related
criminal investigation. The SEC has also issued subpoenas seeking information,
which we are furnishing, regarding current and former agents used in connection
with multiple projects, including current and prior projects, over the past
20
years located both in and outside of Nigeria in which we, The M.W. Kellogg
Company, M.W. Kellogg Limited or their or our joint ventures are or were
participants. In September 2006, the SEC requested that we enter into a tolling
agreement with respect to its investigation. We anticipate that we will enter
into an appropriate tolling agreement with the SEC.
TSKJ
is a
private limited liability company registered in Madeira, Portugal whose members
are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of
Saipem
SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC
(a subsidiary of ours and successor to The M.W. Kellogg Company), each of
which
had an approximately 25% interest in the venture at June 30, 2007. TSKJ and
other similarly owned entities entered into various contracts to build and
expand the liquefied natural gas project for Nigeria LNG Limited, which is
owned
by the Nigerian National Petroleum Corporation, Shell Gas B.V., Cleag Limited
(an affiliate of Total), and Agip International B.V. (an affiliate of ENI
SpA of
Italy). M.W. Kellogg Limited is a joint venture in which we had a 55% interest
at June 30, 2007, and M.W. Kellogg Limited and The M.W. Kellogg Company were
subsidiaries of Dresser Industries before Halliburton’s 1998 acquisition of
Dresser Industries. The M.W. Kellogg Company was later merged with a
Halliburton subsidiary to form Kellogg Brown & Root LLC, one of our
subsidiaries.
The
SEC
and the DOJ have been reviewing these matters in light of the requirements
of
the FCPA. Halliburton and KBR have been cooperating with the SEC and DOJ
investigations and with other investigations into the Bonny Island project
in France, Nigeria and Switzerland. We also believe that the Serious Frauds
Office in the United Kingdom is conducting an investigation relating to the
Bonny Island project. Halliburton will continue to oversee and direct the
investigations. We will monitor the continuing investigations
directed by Halliburton.
The
matters under investigation relating to the Bonny Island project cover an
extended period of time (in some cases significantly before Halliburton’s 1998
acquisition of Dresser Industries and continuing through the current time
period). We have produced documents to the SEC and the DOJ both voluntarily
and
pursuant to company subpoenas from the files of numerous officers and employees,
including many current and former executives, and we are making our employees
available to the SEC and the DOJ for interviews. In addition, we understand
that
the SEC has issued a subpoena to A. Jack Stanley, who formerly served as
a
consultant and chairman of Kellogg Brown & Root LLC and to others,
including certain of our current and former employees, former executive officers
and at least one of our subcontractors. We further understand that the DOJ
issued subpoenas for the purpose of obtaining information abroad, and we
understand that other partners in TSKJ have provided information to the DOJ
and
the SEC with respect to the investigations, either voluntarily or under
subpoenas.
The
SEC
and DOJ investigations include an examination of whether TSKJ’s engagement of
Tri-Star Investments as an agent and a Japanese trading company as a
subcontractor to provide services to TSKJ were utilized to make improper
payments to Nigerian government officials. In connection with the
Bonny Island project, TSKJ entered into a series of agency agreements,
including with Tri-Star Investments, of which Jeffrey Tesler is a principal,
commencing in 1995 and a series of subcontracts with a Japanese trading company
commencing in 1996. We understand that a French magistrate has officially
placed
Mr. Tesler under investigation for corruption of a foreign public official.
In Nigeria, a legislative committee of the National Assembly and the Economic
and Financial Crimes Commission, which is organized as part of the executive
branch of the government, are also investigating these matters. Our
representatives have met with the French magistrate and Nigerian officials.
In
October 2004, representatives of TSKJ voluntarily testified before the Nigerian
legislative committee.
We
notified the other owners of TSKJ of information provided by the investigations
and asked each of them to conduct their own investigation. TSKJ has suspended
the receipt of services from and payments to Tri-Star Investments and the
Japanese trading company and has considered instituting legal proceedings
to
declare all agency agreements with Tri-Star Investments terminated and to
recover all amounts previously paid under those agreements. In February 2005,
TSKJ notified the Attorney General of Nigeria that TSKJ would not oppose
the
Attorney General’s efforts to have sums of money held on deposit in accounts of
Tri-Star Investments in banks in Switzerland transferred to Nigeria and to
have
the legal ownership of such sums determined in the Nigerian courts.
As
a
result of these investigations, information has been uncovered suggesting
that,
commencing at least 10 years ago, members of TSKJ planned payments to Nigerian
officials. We have reason to believe, based on the ongoing
investigations, that payments may have been made by agents of TSKJ to
Nigerian officials. In addition, information uncovered in the summer of 2006
suggests that, prior to 1998, plans may have been made by employees of The
M.W.
Kellogg Company to make payments to government officials in connection with
the
pursuit of a number of other projects in countries outside of Nigeria.
Halliburton is reviewing a number of recently discovered documents related
to
KBR’s activities in countries outside of Nigeria with respect to agents for
projects after 1998. Certain of these activities involve current or former
employees or persons who were or are consultants to us, and the investigation
is
continuing.
In
June
2004, all relationships with Mr. Stanley and another consultant and former
employee of M.W. Kellogg Limited were terminated. The termination of
Mr. Stanley occurred because of violations of Halliburton’s Code of
Business Conduct that allegedly involved the receipt of improper personal
benefits from Mr. Tesler in connection with TSKJ’s construction of the
Bonny Island project.
In
2006,
Halliburton suspended the services of another agent who, until such suspension,
had worked for us outside of Nigeria on several current projects and on numerous
older projects going back to the early 1980s. The suspension by Halliburton
will
continue until such time, if ever, as Halliburton can satisfy itself regarding
the agent’s compliance with applicable law and Halliburton’s Code of Business
Conduct. In addition, Halliburton suspended the services of an additional
agent
on a separate current Nigerian project with respect to which Halliburton
has
received from a joint venture partner on that project allegations of wrongful
payments made by such agent. Until such time as the agents’
suspensions are favorably resolved, KBR will continue the suspension of its
use
of both of the referenced agents.
If
violations of the FCPA were found, a person or entity found in violation
could
be subject to fines, civil penalties of up to $500,000 per violation, equitable
remedies, including disgorgement (if applicable) generally of profits, including
prejudgment interest on such profits, causally connected to the violation,
and
injunctive relief. Criminal penalties could range up to the greater of $2
million per violation and twice the gross pecuniary gain or loss from the
violation, which could be substantially greater than $2 million per violation.
It is possible that both the SEC and the DOJ could assert that there have
been
multiple violations, which could lead to multiple fines. The amount of any
fines
or monetary penalties which could be assessed would depend on, among other
factors, the findings regarding the amount, timing, nature and scope of any
improper payments, whether any such payments were authorized by or made with
knowledge of us or our affiliates, the amount of gross pecuniary gain or
loss
involved, and the level of cooperation provided the government authorities
during the investigations. Agreed dispositions of these types of violations
also
frequently result in an acknowledgement of wrongdoing by the entity and the
appointment of a monitor on terms negotiated with the SEC and the DOJ to
review
and monitor current and future business practices, including the retention
of
agents, with the goal of assuring compliance with the FCPA. Other potential
consequences could be significant and include suspension or debarment of
our
ability to contract with governmental agencies of the United States and of
foreign countries. In the second quarter of 2007, we had revenue of
approximately $1.4 billion from our government contracts work with agencies
of
the United States or state or local governments. If necessary, we would seek
to
obtain administrative agreements or waivers from the DoD and other agencies
to
avoid suspension or debarment. In addition, we may be excluded from bidding
on
MoD contracts in the United Kingdom if we are convicted for a corruption
offense
or if the MoD determines that our actions constituted grave misconduct. During
the second quarter of 2007, we had revenue of approximately $273 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.
These
investigations could also result in (1) third-party claims against us,
which may include claims for special, indirect, derivative or consequential
damages, (2) damage to our business or reputation, (3) loss of, or
adverse effect on, cash flow, assets, goodwill, results of operations, business,
prospects, profits or business value, (4) adverse consequences on our
ability to obtain or continue financing for current or future projects and/or
(5) claims by directors, officers, employees, affiliates, advisors,
attorneys, agents, debt holders or other interest holders or constituents
of us
or our subsidiaries. In this connection, we understand that the government
of
Nigeria gave notice in 2004 to the French magistrate of a civil claim as
an
injured party in that proceeding. We are not aware of any further developments
with respect to this claim. In addition, our compliance procedures or having
a
monitor required or agreed to be appointed at our cost as part of the
disposition of the investigations could result in a more limited use of agents
on large-scale international projects than in the past and put us at a
competitive disadvantage in pursuing such projects. Continuing negative
publicity arising out of these investigations could also result in our inability
to bid successfully for governmental contracts and adversely affect our
prospects in the commercial marketplace. In addition, we could incur costs
and
expenses for any monitor required by or agreed to with a governmental authority
to review our continued compliance with FCPA law.
The
investigations by the SEC and DOJ and foreign governmental authorities are
continuing. We do not expect these investigations to be concluded in the
immediate future. The various governmental authorities could conclude that
violations of the FCPA or applicable analogous foreign laws 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 the U.S. and 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.
Under
the
terms of the master separation agreement entered into in connection with
the
Offering, 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
Matters (as defined), which could involve Halliburton and us through The
M. W.
Kellogg Company, M. W. Kellogg Limited 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 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
or Brown & Root–Condor Spa, in which we do not have an interest greater than
50%.
As
of
June 30, 2007, we are unable to estimate an amount of probable loss or a
range
of possible loss related to these matters.
Bidding
practices investigation
In
connection with the investigation into payments relating to the
Bonny Island project in Nigeria, information has been uncovered suggesting
that Mr. Stanley and other former employees may have engaged in coordinated
bidding with one or more competitors on certain foreign construction projects,
and that such coordination possibly began as early as the
mid-1980s.
On
the
basis of this information, Halliburton and the DOJ have broadened their
investigations to determine the nature and extent of any improper bidding
practices, whether such conduct violated United States antitrust laws, and
whether former employees may have received payments in connection with bidding
practices on some foreign projects.
If
violations of applicable United States antitrust laws occurred, the range
of
possible penalties includes criminal fines, which could range up to the greater
of $10 million in fines per count for a corporation, or twice the gross
pecuniary gain or loss, and treble civil damages in favor of any persons
financially injured by such violations. Criminal prosecutions under applicable
laws of relevant foreign jurisdictions and civil claims by or relationship
issues with customers are also possible.
The
results of these investigations may have a material adverse effect on our
business and results of operations. As of June 30, 2007, we are unable to
estimate an amount of probable loss or range of possible loss related to
these
matters.
Possible
Algerian investigation
We
believe that an investigation by a magistrate or a public prosecutor in Algeria
may be pending with respect to sole source contracts awarded to Brown &
Root-Condor Spa, a joint venture among Kellogg Brown & Root Ltd UK,
Centre de Recherche Nuclear de Draria and Holding Services para Petroliers
Spa.
We had a 49% interest in this joint venture as of June 30, 2007.
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. We have been in
negotiations with the project owner since 2003 to settle the various issues
that
have arisen and have entered into several agreements to resolve those issues.
In
April 2006, we executed an agreement with Petrobras that enabled us to achieve
conclusion of the Lenders’ Reliability Test and final acceptance of the floating
production, storage, and offloading units, commonly referred to as FPSOs.
These
acceptances eliminated any further risk of liquidated damages being assessed
but
did not address the bolt arbitration discussed below. Our remaining obligation
under the April 2006 agreement is primarily for warranty on the two
vessels.
At
Petrobras’ direction, we replaced certain bolts located on the subsea flowlines
that failed through mid-November 2005, and we understand that additional
bolts
have failed thereafter, which have been replaced by Petrobras. These failed
bolts were identified by Petrobras when it conducted inspections of the bolts.
The original design specification for the bolts was issued by Petrobras,
and as
such, we believe the cost resulting from any replacement is not our
responsibility. In March 2006, Petrobras notified us that they have 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.
We
disagree with Petrobras’ claim since the bolts met Petrobras’ design
specifications, and we believe there is no basis for the amount claimed by
Petrobras. We intend to vigorously defend this matter and pursue recovery
of the
costs we have incurred to date through the arbitration process. The arbitration
hearing is not expected to begin until the first quarter of 2008. As
of June 30, 2007, we had not accrued any amounts related to this
arbitration.
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.
Improper
payments reported to the SEC
During
the second quarter of 2002, we reported to the SEC that one of our foreign
subsidiaries operating in Nigeria made improper payments of approximately
$2.4
million to entities owned by a Nigerian national who held himself out as
a tax
consultant, when in fact he was an employee of a local tax authority. The
payments were made to obtain favorable tax treatment and clearly violated
our
Code of Business Conduct and our internal control procedures. The payments
were
discovered during our audit of the foreign subsidiary. We conducted an
investigation assisted by outside legal counsel, and, based on the findings
of
the investigation, we terminated several employees. None of our senior officers
were involved. We are cooperating with the SEC in its review of the matter.
We
took further action to ensure that our foreign subsidiary paid all taxes
owed in
Nigeria. During 2003, we filed all outstanding tax returns and paid the
associated taxes.
Litigation
brought by La Nouvelle
In
October 2004, La Nouvelle, a subcontractor to us in connection with our
government services work in Kuwait and Iraq, filed suit alleging breach of
contract and interference with contractual and business relations. The relief
sought included $224 million in damages for breach of contract, which included
$34 million for wrongful interference and an unspecified sum for consequential
and punitive damages. The dispute arose from our termination of a master
agreement pursuant to which La Nouvelle operated a number of dining facilities
in Kuwait and Iraq and the replacement of La Nouvelle with ESS, which, prior
to
La Nouvelle’s termination, had served as La Nouvelle’s subcontractor. In
addition, La Nouvelle alleged that we wrongfully withheld from La Nouvelle
certain sums due La Nouvelle under its various subcontracts. During the second
quarter of 2005, this litigation was settled without material impact to
us.
Iraq
overtime litigation
During
the fourth quarter of 2005, a group of present and former employees working
on
the LogCAP contract in Iraq and elsewhere filed a class action lawsuit alleging
that KBR wrongfully failed to pay time and a half for hours worked in excess
of
40 per work week and that “uplift” pay, consisting of a foreign service
bonus, an area differential, and danger pay, was only applied to the first
40
hours worked in any work week. The class alleged by plaintiffs consists of
all
current and former employees on the LogCAP contract from December 2001 to
present. The basis of plaintiffs’ claims is their assertion that they are
intended third party beneficiaries of the LogCAP contract and that the LogCAP
contract obligated KBR to pay time and a half for all overtime hours. We
have
moved to dismiss the case on a number of bases. On September 26, 2006, the
court granted the motion to dismiss insofar as claims for overtime pay and
“uplift” pay are concerned, leaving only a contractual claim for miscalculation
of employees’ pay. That claim remains pending. It is premature to assess the
probability of an adverse result on that remaining claim. However, because
the
LogCAP contract is cost-reimbursable, we believe that we could charge any
adverse award to the customer. It is our intention to continue to vigorously
defend the remaining claim. As of June 30, 2007, 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:
|
Ÿ
|
the
Comprehensive Environmental
Response, Compensation and Liability
Act;
|
|
Ÿ
|
the
Resources Conservation and
Recovery Act;
|
|
Ÿ
|
the
Federal Water Pollution
Control Act; and
|
|
Ÿ
|
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 comply 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.
Our
Health, Safety and Environment group has several programs in place to maintain
environmental leadership and to prevent the occurrence of environmental
contamination. 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.
Letters
of credit
In
connection with certain projects, we are required to provide letters of credit,
surety bonds or other financial and performance guarantees to our customers.
As
of June 30, 2007, we had approximately $766 million in letters of credit
and
financial guarantees outstanding, of which $133 million were issued under
our
Revolving Credit Facility. Approximately $630 million of the remaining $633
million were issued under various Halliburton facilities and are irrevocably
and
unconditionally guaranteed by Halliburton.
In
addition, we and Halliburton have agreed that until December 31, 2009,
Halliburton will issue additional guarantees, indemnification and reimbursement
commitments for our benefit in connection with (a) letters of credit necessary
to comply with our EBIC contract, our Allenby & Connaught project and all
other contracts that were in place as of December 15, 2005; (b) surety bonds
issued to support new task orders pursuant to the Allenby & Connaught
project, two job order contracts for our G&I segment and all other contracts
that were in place as of December 25, 2005; and (c) performance guarantees
in
support of these contracts. Each credit support instrument outstanding at
November 20, 2006, the time of our initial public offering, and any additional
guarantees, indemnification and reimbursement commitments will remain in
effect
until the earlier of: (1) the termination of the underlying project contract
or
our obligations thereunder or (2) the expiration of the relevant credit support
instrument in accordance with its terms or release of such instrument by
our
customer. In addition, we have agreed to use our reasonable best efforts
to
attempt to release or replace Halliburton’s liability under the outstanding
credit support instruments and any additional credit support instruments
relating to our business for which Halliburton may become obligated for which
such release or replacement is reasonably available. For so long as Halliburton
or its affiliates remain liable with respect to any credit support instrument,
we have agreed to pay the underlying obligation as and when it becomes due.
Furthermore, we agreed to pay to Halliburton a quarterly carry charge 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
the second quarter of 2007, a £20 million letter of credit was issued on our
behalf by a bank in connection with our Allenby & Connaught
project. The letter of credit supports a building contract guarantee
executed between KBR and certain project joint venture company to provide
additional credit support as a result of our separation from
Halliburton. The letter of credit issued by the bank is guaranteed by
Halliburton.
Other
commitments
As
of
June 30, 2007, we had commitments to provide funds of $124 million to related
companies, including $115 million related to our privately financed projects.
As
of December 31, 2006, these commitments were approximately $156 million,
including $119 million to fund our privately financed projects. These
commitments arose primarily during the start-up of these entities or due
to
losses incurred by them. We expect approximately $8 million of the commitments
at June 30, 2007 to be paid during the remainder of 2007. In addition, we
continue to fund operating cash shortfalls on the Barracuda-Caratinga project
and are obligated to fund total shortages over the remaining life of the
project. The remaining estimated project costs, net of revenue to be received,
was $6 million at June 30, 2007.
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 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 most 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. We had not accrued for liquidated damages
of $34 million and $38 million at June 30, 2007 and December 31, 2006,
respectively (including amounts related to our share of unconsolidated
subsidiaries), that we could incur based upon completing the projects as
forecasted.
Leases
We
are
obligated under operating leases, principally for the use of land, offices,
equipment, field facilities, and warehouses. We recognize minimum rental
expenses over the term of the lease. When a lease contains a fixed escalation
of
the minimum rent or rent holidays, we recognize the related rent expense
on a
straight-line basis over the lease term and record the difference between
the
recognized rental expense and the amounts payable under the lease as deferred
lease credits. We have certain leases for office space where we receive
allowances for leasehold improvements. We capitalize these leasehold
improvements as property, plant, and equipment and deferred lease credits.
Leasehold improvements are amortized over the shorter of their economic useful
lives or the lease term.
Note
10. Income Taxes
The
effective tax rate for the second quarter of 2007 and 2006 was approximately
41%. Our effective tax rate for the second quarter of 2007 exceeded
our statutory rate of 35% primarily due to not receiving a tax benefit for
a
portion of our impairment charge related to our investment in BRC,
non-deductible operating losses from our railroad investment
in Australia, and state and other taxes. Our effective tax
rate in the second quarter of 2006 exceeded our statutory rate of 35% primarily
due to not receiving a tax benefit for a portion of our impairment charge
related to our railroad investment in Australia, non-deductible operating
losses
from our railroad investment in Australia, and adjustments for prior year
taxes
in various tax jurisdictions. Our effective tax rate for continuing
operations for 2007 is forecasted to be approximately 43%.
Effective
January 1, 2007, KBR adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109
(“FIN
48” or the “Interpretation”). The Interpretation 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. As a result of the implementation of FIN
48, we recognized no change in the liability for unrecognized tax benefits
and
an increase of approximately $10 million for accrued interest and penalties,
which was accounted for as a reduction to the January 1, 2007 balance of
retained earnings.
As
of
January 1, 2007, we had total unrecognized tax benefits of $61
million. During the three and six months ended June 30, 2007, we had
no significant changes in these tax positions related to the current reporting
or prior reporting periods, changes in settlements with taxing authorities,
nor
as a result of the lapse of any applicable statutes of
limitations. As of January 1, 2007 and June 30, 2007, KBR estimates
that $24 million in unrecognized tax benefits, if recognized, would affect
the
effective tax rate.
KBR
recognizes interest and penalties related to unrecognized tax benefits within
the provision for income taxes in our consolidated statement of
operations. As of June 30, 2007, we had accrued approximately $14
million in interest and penalties. During the quarter ended June 30,
2007, we recognized approximately $1 million in interest and penalties charges
related to unrecognized tax benefits.
As
of
January 1, 2007, we believe that no current tax positions that have resulted
in
unrecognized tax benefits will significantly increase or decrease within
one
year. As of the quarter ended June 30, 2007, no material changes have
occurred in our estimates or expected events related to anticipated changes
in
our unrecognized tax benefits.
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 U.S. federal, state and local, or non-U.S. income tax
examination by tax authorities for years before 1998.
Income
tax expense for KBR through the date of separation from Halliburton is
calculated on a pro rate basis. Under this method, income tax expense
is determined based on KBR operations and their contributions to income tax
expense of the Halliburton consolidated group. For the period
subsequent to the date of our separation from Halliburton, income tax expense
is
calculated based solely on KBR’s own operations.
Note
11. Income per Share
Basic
income per share is based upon the weighted average number of common shares
outstanding during the period. Dilutive income per share includes
additional common shares that would have been outstanding if potential common
shares with a dilutive effect had been issued. A reconciliation of
the number of shares used for the basic and diluted income per share
calculations is as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Millions
of shares
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
weighted average common shares outstanding
|
|
|
168
|
|
|
|
136
|
|
|
|
168
|
|
|
|
136
|
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Restricted
shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted
weighted average common shares
outstanding
|
|
|
169
|
|
|
|
136
|
|
|
|
169
|
|
|
|
136
|
|
No
adjustments to net income were made in calculating diluted earnings per share
for the three and six months ended June 30, 2007 and 2006.
Note
12. 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.
Alice
Springs-Darwin (“ASD”). ASD is a joint venture
consortium consisting of general partnerships registered in Australia and
was
created for the purpose of operating a railroad between Alice Springs and
Darwin
in Australia. KBR owns a 36.7% interest in the partnership accounted
for using the equity method of accounting. At the end of the first
quarter of 2006, we recorded a $26 million impairment charge to our investment
due to sustained losses, lower than anticipated freight volume, and a slowdown
in the planned expansion of the Port of Darwin. The impairment charge
is classified as a component of “Equity in losses of unconsolidated
affiliates” in our condensed consolidated statements of
operations. Summarized financial information for the underlying
business of ASD is as follows for the six months ended June 30, 2007 and
2006:
Statements
of Operations (in millions)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$ |
62
|
|
|
$ |
42
|
|
|
$ |
108
|
|
|
$ |
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$ |
(13 |
) |
|
$ |
(5 |
) |
|
$ |
(14 |
) |
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(7 |
) |
|
$ |
(12 |
) |
|
$ |
(19 |
) |
|
$ |
(21 |
) |
Brown
& Root Condor Spa (“BRC”). During the first quarter
of 2007, BRC experienced a decline in new work awarded from various sources
including Sonatrach, which is a significant customer of BRC and also owns
a 51%
interest in the business along with its Algerian government
affiliates. In addition, Sonatrach has canceled work previously
awarded to BRC and has indicated to us that they wish to dissolve BRC. We
are discussing ways to dissolve BRC with Sonatrach including a sale of our
interest in BRC to Sonatrach. As a result of its ongoing operating losses
and
the lack of new project awards, BRC's projected cash flows indicate that
BRC
will have difficulty in paying its obligations as they become due in
2007. As a result, during the first quarter of 2007 KBR determined
that it was unlikely that the carrying amount of its net investment in BRC
would
be recovered and, consequently recorded an $18 million impairment charge
during
the first quarter of 2007. Of the $18 million charge, approximately
$16 million is classified as a component of “Equity in losses of unconsolidated
affiliates” and $2 million as a component of “Cost of services” in our condensed
consolidated statements of operations. During the first quarter of
2007, we billed approximately $2 million of services to BRC, which we expensed
as a component of “Cost of services”. During the second quarter of
2007, our discussions with Sonatrach continued. Should our
discussions with Sonatrach result in a sale of our equity interest in BRC,
any net proceeds would result in a gain and reversal of a portion of the
impairment charges recorded in the first quarter of 2007.
Note
13. Retirement Plans
The
components of net periodic benefit cost related to pension benefits for the
three and six months ended June 30, 2007 and 2006 were as follows:
|
|
Three
Months Ended (1)
|
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
-
|
|
|
$ |
2
|
|
|
$ |
-
|
|
|
$ |
2
|
|
Interest
cost
|
|
|
1
|
|
|
|
21
|
|
|
|
1
|
|
|
|
16
|
|
Expected
return on plan assets
|
|
|
(1 |
) |
|
|
(24 |
) |
|
|
(1 |
) |
|
|
(18 |
) |
Recognized
actuarial loss
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
4
|
|
Net
periodic benefit cost
|
|
$ |
-
|
|
|
$ |
4
|
|
|
$ |
-
|
|
|
$ |
4
|
|
|
|
Six
Months Ended (1)
|
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
-
|
|
|
$ |
5
|
|
|
$ |
-
|
|
|
$ |
4
|
|
Interest
cost
|
|
|
1
|
|
|
|
41
|
|
|
|
1
|
|
|
|
33
|
|
Expected
return on plan assets
|
|
|
(1 |
) |
|
|
(47 |
) |
|
|
(1 |
) |
|
|
(37 |
) |
Recognized
actuarial loss
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
7
|
|
Net
periodic benefit cost
|
|
$ |
-
|
|
|
$ |
9
|
|
|
$ |
-
|
|
|
$ |
7
|
|
|
(1)
|
The
components of net periodic benefit cost for both the current and
prior
period exclude pension benefits associated with DML, which was
sold in the
second quarter of 2007 and is accounted for as discontinued
operations.
|
We
currently expect to contribute approximately $25 million to our international
pension plans in 2007. As of June 30, 2007, we contributed $15
million of the $25 million to our international pension plans. We do
not have a required minimum contribution for our domestic plans. We do not
expect to make additional contributions to our domestic plans in
2007.
The
components of net periodic benefit cost related to other postretirement benefits
were immaterial for the three and six months ended June 30, 2007 and
2006.
Note
14. Reorganization of Business Operations
In
the
fourth quarter of 2006, we committed to a restructuring plan that included
broad
based headcount reductions deemed necessary to reduce overhead and better
position us for the future. In connection with this reorganization, we recorded
restructuring charges totaling $5 million for severance, incentives, and
other employee benefit costs for personnel whose employment was involuntarily
terminated. These termination benefits were offered to approximately
139 personnel, with 66 receiving enhanced termination benefits. The
terminated personnel were located in the United States and United
Kingdom. Of this amount, $3 million related to our Energy and
Chemicals segment and $2 million related to our Government and
Infrastructure segment. The restructuring charge was included in “General and
administrative” expense in our consolidated statements of operations for the
year ended December 31,
2006. During the three and six months ended June 30, 2007,
approximately $2 million and $4 million, respectively, of the termination
benefits were paid. The remaining balance in the restructuring
reserve account included in “Accounts payable” was immaterial as of June 30,
2007.
Note
15. Related Party
Halliburton
and certain of its subsidiaries provide various interim support services
to KBR,
including information technology, legal and internal audit. Costs for
information technology, including payroll processing services, which totaled
$3
million and $5 million for the three and six months ended June 30, 2007,
respectively, and $2 million and $5 million for the three and six months
ended
June 30, 2006, respectively, are allocated to KBR based on a combination
of
factors of Halliburton and KBR, including relative revenues, assets and payroll,
and negotiation of the reasonableness of the charge. Costs for other services
allocated to us prior to KBR’s separation from Halliburton were $7 million and
$10 million for the three and six months ended June 30, 2007, respectively,
compared with $5 million and $11 million for the three and six months ended
June
30, 2006, respectively. Costs for these other services, including
legal services and audit services, are primarily charged to us based on direct
usage of the service. Costs allocated to KBR using a method other than direct
usage are not significant individually or in the aggregate. We believe the
allocation methods are reasonable. In addition, KBR leases office space to
Halliburton at its Leatherhead, U.K. location. Subsequent to our
separation from Halliburton, costs are no longer allocated but are charged
to
KBR pursuant to the terms of the transition services agreement.
Historically,
Halliburton had centrally developed, negotiated and administered our risk
management process. This insurance program had included broad, all-risk coverage
of worldwide property locations, excess worker’s compensation, general,
automobile and employer liability, director’s and officer’s and fiduciary
liability, global cargo coverage and other standard business coverages. Net
expenses of $5 million and $9 million, representing our share of these risk
management coverages and related administrative costs, had been allocated
to us
for the three and six months ended June 30, 2006. These expenses are
included in cost of services in the condensed consolidated statements of
operations for the period ended June 30, 2006. Historically, we have been
self
insured, or have participated in a Halliburton self-insured plan, for certain
insurable risks, such as general liability, property damage and workers’
compensation. However, subject to specific limitations, Halliburton had umbrella
insurance coverage for some of these risk exposures. As a result of our complete
separation from Halliburton, we have implemented our own stand-alone insurance
and risk management programs with policies that provide substantially the
same
coverage as we had under Halliburton, with the exception of property
coverage. Our property coverage differs from prior coverage as
appropriate to reflect the nature of our properties, as compared to
Halliburton’s properties.
The
balances for the related party transactions described above are reflected
in the
consolidated balance sheets as “Due to Halliburton, net”. KBR had a
$0 and $152 million balance payable to Halliburton at June 30, 2007 and December
31, 2006, respectively, which consisted of amounts KBR owed Halliburton for
estimated current year outstanding income taxes, amounts owed pursuant to
our
transition services agreement and other amounts. The average
intercompany balance for the six months ended June 30, 2007 and 2006 was
$80
million and $560 million, respectively.
All
of
the charges described above have been included as costs of our operation
in
these condensed consolidated statements of operations. It is possible that
the
terms of these transactions may differ from those that would result from
transactions among third parties.
In
connection with certain projects, we are required to provide letters of credit,
surety bonds or other financial and performance guarantees to our customers.
As
of June 30, 2007, we had approximately $766 million in letters of credit
and
financial guarantees outstanding of which $553 million related to our joint
venture operations, including $205 million issued in connection with the
Allenby
& Connaught project. Of the total $766 million, approximately
$630 million in letters of credit were irrevocably and unconditionally
guaranteed by Halliburton. In addition, Halliburton has guaranteed
surety bonds and provided direct guarantees primarily related to our
performance. Under certain reimbursement agreements, if we were unable to
reimburse a bank under a paid letter of credit and the amount due is paid
by
Halliburton, we would be required to reimburse Halliburton for any amounts
drawn
on those letters of credit or guarantees in the future. The
Halliburton performance guarantees and letter of credit guarantees that are
currently in place in favor of KBR’s customers or lenders will continue until
the earlier of (a) the termination of the underlying project contract or
KBR’s
obligations thereunder or (b) the expiration of the relevant credit support
instrument in accordance with its terms or release of such instrument by
the
customer. Furthermore, we agreed to pay to Halliburton a quarterly carry
charge
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.
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 operations was $94 million and $203 million
for the
three and six months ended June 30, 2007, respectively. Total revenue
from services provided to our unconsolidated joint ventures recorded in
our
consolidated statements of operations was $116 million and $218 million
for the
three and six months ended June 30, 2006, respectively. Profit on
transactions with our unconsolidated joint ventures recognized in our
consolidated statements of operations was $2 million and $13 million for
the
three and six months ended June 30, 2007, respectively and $3 million and
$46
million for the three and six months ended June 30, 2006,
respectively.
Note
16. New Accounting Standards
In
September 2006, the Financial Accounting Standards Board (“FASB”) Staff issued
FASB Staff Position (“FSP”) No. AUG AIR-1, “Accounting for Planned Major
Maintenance Activities.” The FSP prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance
activities. The FSP also requires disclosures regarding the method of
accounting for planned major maintenance activities and the effects of
implementing the FSP. The guidance in this FSP is effective January
1, 2007 and is to be retrospectively applied for all periods
presented. The guidance in this FSP affects KBR with regard to a
50%-owned joint venture that leases offshore vessels requiring periodic major
maintenance. This joint venture was contributed to KBR by Halliburton
on April 1, 2006. KBR accounts for its investment in this joint
venture under the equity method of accounting. As a result, KBR has
retroactively applied the required change in accounting, electing the deferral
method of accounting for planned major maintenance activities. The
deferral method requires the capitalization of planned major maintenance
costs
at the point they occur and the depreciation of these costs over an estimated
period until future maintenance activities are repeated. The result
is an increase to KBR’s investment in the equity of this joint venture and an
increase to additional paid-in capital of approximately $7 million as of
April
1, 2006. The effect of the change in accounting on KBR’s operating
results for the year ended December 31, 2006 was immaterial.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). This
statement defines fair value, establishes a framework for using fair value
to
measure assets and liabilities, and expands disclosures about fair value
measurements. The statement applies whenever other statements require
or permit assets or liabilities to be measured at fair value. SFAS
157 is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact that the adoption of
SFAS 157 will have on our financial position, results of operations and cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115,” (“SFAS 159”). SFAS 159 provides companies with an
option to measure certain financial instruments and other items at fair value
with changes in fair value reported in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We are
currently evaluating the impact that the adoption of SFAS 159 will have on
our
financial position, results of operations and cash flows.
Note
17. Discontinued Operations
In
May
2006, we completed the sale of our Production Services group, which was part
of
our E&C segment. The Production Services group delivered a range of support
services, including asset management and optimization; brownfield projects;
engineering; hook-up, commissioning and start-up; maintenance management
and
execution; and long-term production operations, to oil and gas exploration
and
production customers. In connection with the sale, we received net proceeds
of
$265 million. The sale of Production Services resulted in a pre-tax gain
of
approximately $120 million in the year ended December 31,
2006. During the three and six months ended June 30, 2007, we
settled certain claims and provided an allowance against certain receivables
from the Production Services group resulting in a charge of approximately
$11
million and $15 million, respectively. We expect to collect all
remaining net receivables from the Production Services group during
2007.
On
June
28, 2007, we completed the disposition of our 51% interest in 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 was part of our G&I segment,
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 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 $97 million,
net of tax of $119 million, calculated as follows:
Millions
of dollars
|
|
|
|
Proceeds,
net of direct transaction costs
|
|
$ |
345
|
|
Less: Net
book value of DML
|
|
|
(129 |
) |
Gain
on sale of DML before income tax
|
|
|
216
|
|
Less: Income
tax
|
|
|
(119 |
) |
|
|
|
|
|
Gain
on sale of DML, net of income tax
|
|
$ |
97
|
|
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 in our condensed consolidated statements of
operations. The major classes of assets and liabilities of
discontinued operations in the condensed consolidated balance sheet at June
30,
2007 and December 31, 2006 are as follows:
|
|
June
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
-
|
|
|
$ |
51
|
|
Accounts
receivable—related party
|
|
|
11
|
|
|
|
62
|
|
Accounts
receivable and unbilled receivables on uncompleted contracts,
net
|
|
|
-
|
|
|
|
112
|
|
Other
current assets
|
|
|
-
|
|
|
|
32
|
|
Total
current assets related to discontinued operations
|
|
|
11
|
|
|
|
257
|
|
Property,
plant, and equipment, net
|
|
|
-
|
|
|
|
281
|
|
Goodwill
|
|
|
-
|
|
|
|
38
|
|
Other
noncurrent assets
|
|
|
-
|
|
|
|
38
|
|
Total
noncurrent assets related to discontinued operations
|
|
|
-
|
|
|
|
357
|
|
Total
assets related to discontinued operations
|
|
$ |
11
|
|
|
$ |
614
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
-
|
|
|
$ |
99
|
|
Advance
billings on incomplete contracts
|
|
|
-
|
|
|
|
136
|
|
Other
current liabilities
|
|
|
-
|
|
|
|
39
|
|
Total
current liabilities related to discontinued operations
|
|
|
-
|
|
|
|
274
|
|
Employee
compensation and benefits
|
|
|
-
|
|
|
|
191
|
|
Long-term
debt
|
|
|
-
|
|
|
|
2
|
|
Other
long-term liabilities
|
|
|
-
|
|
|
|
(5 |
) |
Total
noncurrent liabilities related to discontinued operations
|
|
|
-
|
|
|
|
188
|
|
Total
liabilities related to discontinued operations
|
|
$ |
-
|
|
|
$ |
462
|
|
Minority
interest in consolidated subsidiaries
|
|
$ |
-
|
|
|
$ |
44
|
|
The
consolidated operating results of our Production Services group and DML,
which
are classified as discontinued operations in our condensed consolidated
statements of operations, are summarized in the following table:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$ |
225
|
|
|
$ |
286
|
|
|
$ |
449
|
|
|
$ |
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
11
|
|
|
$ |
24
|
|
|
$ |
22
|
|
|
$ |
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
income
|
|
$ |
5
|
|
|
$ |
19
|
|
|
$ |
11
|
|
|
$ |
38
|
|
The
operating results of DML, which are classified as discontinued operations,
and
included in our consolidated operating results table above, are summarized
in
the following table:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$ |
225
|
|
|
$ |
203
|
|
|
$ |
449
|
|
|
$ |
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
22
|
|
|
$ |
17
|
|
|
$ |
37
|
|
|
$ |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
income
|
|
$ |
16
|
|
|
$ |
12
|
|
|
$ |
26
|
|
|
$ |
23
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
purpose of management’s discussion and analysis (“MD&A”) is to increase the
understanding of the reasons for material changes in our financial condition
since the most recent fiscal year-end and results of operations during the
current fiscal period as compared to the corresponding period of the preceding
fiscal year. The MD&A should be read in conjunction with the
condensed consolidated financial statements and accompanying notes and our
2006
Annual Report on Form 10-K.
Forward-Looking
Information
This
report contains certain statements that are, or may be deemed to be,
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934,
as amended. The Private Securities Litigation Reform Act of 1995
provides safe harbor provisions for forward-looking information. The words
“believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “plan,”
“expect” and similar expressions are intended to identify forward-looking
statements. All statements other than statements of historical fact
are, or may be deemed to be, forward-looking statements. Forward-looking
statements include information concerning our possible or assumed future
financial performance and results of operation and backlog
information.
We
have
based these statements on our assumptions and analyses in light of our
experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. Although we believe that the forward-looking statements contained
in this report are based upon reasonable assumptions, forward-looking statements
by their nature involve substantial risks and uncertainties that could
significantly affect expected results, and actual future results could differ
materially from those described in such statements. While it is not possible
to
identify all factors, factors that could cause actual future results to differ
materially include the risks and uncertainties described under “Risk Factors”
and those risk factors previously disclosed in our 2006 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.
Separation
from Halliburton
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 the Exchange
Offer. On March 2, 2007, KBR filed with the SEC a registration
statement on Form S-4 with respect to the terms and conditions of the 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 shares
of
Halliburton common stock pursuant to the terms of the Exchange
Offer.
In
connection with the Offering in November 2006 and the separation of our business
from Halliburton, we entered into various agreements 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, subject to specified exceptions. 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 FCPA investigations and the
Barracuda-Caratinga project and for other litigation matters related to
Halliburton’s business. See Note 9 to our condensed consolidated
financial statements for further discussion of the FCPA investigations and
the
Barracuda-Caratinga project.
The
tax
sharing agreement, as amended, provides for certain allocations of U.S. income
tax liabilities and other agreements between us and Halliburton with respect
to
tax matters. As a result of the Offering, Halliburton will
be responsible for filing all U.S. income tax returns required to be filed
through April 5, 2007, the date KBR ceased to be a member of the Halliburton
consolidated tax group. Halliburton will also be responsible for
paying the taxes related to the returns it is responsible for
filing. We will pay Halliburton our allocable share of such
taxes. We are obligated to pay Halliburton for the utilization of net
operating losses, if any, generated by Halliburton prior to the deconsolidation
to offset our consolidated federal income tax liability.
Under
the
transition services agreements, Halliburton is expected to continue providing
various interim corporate support services to us and we will continue to
provide
various interim corporate support services to Halliburton. These
support services relate to, among other things, information technology, legal,
human resources, risk management and internal audit. The services
provided under the transition services agreement between Halliburton and
KBR are
substantially the same as the services historically
provided. Similarly, the related costs of such services will be
substantially the same as the costs incurred and recorded in our historical
financial statements.
The
employee matters agreement provides for the allocation of liabilities and
responsibilities to our current and former employees and their participation
in
certain benefit plans maintained by Halliburton. Among other items,
the employee matters agreement and the KBR, Inc. Transitional Stock Adjustment
Plan provide for the
conversion, upon the complete separation of KBR from Halliburton, of 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 (“1993 Plan”) to stock options and restricted
stock awards covering KBR common stock. On April 5, 2007,
immediately after our separation from Halliburton, the conversion of such
stock
options and restricted stock awards occurred. 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 million restricted stock awards with
a
weighted average grant-date fair value per share of $11.01. The
conversion of such stock options and restricted stock was accounted for as
a
modification in accordance with SFAS No. 123(R) and resulted in an incremental
charge to expense of less than $1 million, recognized in the three months
ended
June 30, 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. Stock-based compensation expense
recognized for all awards for the three and six months ended June 30, 2007
was
$3 million and $6 million, respectively. We estimate
approximately $5 million of stock-based compensation expense will be recognized
for the remainder of fiscal 2007.
See
Notes
2 and 15 to our condensed consolidated financial statements for further
discussion of the above agreements and other related party transactions with
Halliburton.
Business
Environment and Results of Operations
Business
Environment
We
are a
leading global engineering, construction and services company supporting
the
energy, petrochemicals, government services and civil infrastructure sectors.
We
are a leader in many of the growing end-markets that we serve, particularly
gas
monetization, having designed and constructed, alone or with joint venture
partners, more than half of the world’s operating LNG production capacity over
the past 30 years. In addition, we are one of the ten largest government
defense
contractors worldwide according to a Defense News ranking based on fiscal
2005
revenue and, accordingly, we believe we are the world’s largest government
defense services provider. For fiscal year 2005, we were the sixth largest
contractor for the DoD based on its prime contract awards.
We
offer
our wide range of services through three business segments, E&C, G&I and
Ventures. Although we provide a wide range of services, our business in each
of
our segments is heavily focused on major projects. At any given time, a
relatively few number of projects and joint ventures represent a substantial
part of our operations. Our projects are generally long term in nature and
are
impacted by factors including local economic cycles, introduction of new
governmental regulation, and governmental outsourcing of services. Demand
for
our services depends primarily on our customers’ capital expenditures and
budgets for construction and defense services. We have benefitted from increased
capital expenditures by our petroleum and petrochemical customers driven
by high
crude oil and natural gas prices and general global economic expansion.
Additionally, the heightened focus on global security and major military
force
realignments, particularly in the Middle East, as well as a global expansion
in
government outsourcing, have all contributed to increased demand for the
type of
services that we provide.
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, or currency fluctuations.
Contract
Structure
Engineering
and construction contracts can be broadly categorized as either
cost-reimbursable or fixed-price, sometimes 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 as we must predetermine both the quantities of work to be performed and
the
costs associated with executing the work. While fixed-price contracts involve
greater risk, they also are potentially more profitable for us, since the
owner/customer pays a premium to transfer many risks 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. Profit on cost-reimbursable contracts may be based
upon a
percentage of costs incurred and/or a fixed amount. Cost-reimbursable contracts
are generally less risky to us, since the owner/customer retains many of
the
risks.
E&C
Segment Activity
Our
E&C segment designs and constructs energy and petrochemical projects,
including large, technically complex projects in remote locations around
the
world. Our expertise includes onshore oil and gas production facilities,
offshore oil and gas production facilities, including platforms, floating
production and subsea facilities (which we refer to collectively as our offshore
projects), onshore and offshore pipelines, LNG and GTL gas monetization
facilities (which we refer to collectively as our gas monetization projects),
refineries, petrochemical plants (such as ethylene and propylene) and Syngas,
primarily for fertilizer-related facilities. We provide a wide range of
Engineering Procurement Construction – Commissioning Start-up (“EPC-CS”)
services, as well as program and project management, consulting and technology
services.
In
order
to meet growing energy demands, oil and gas companies are increasing their
exploration, production, and transportation spending to increase production
capacity and supply. We are currently targeting reimbursable EPC and
engineering, procurement, and construction management opportunities in northern
and western Africa, the Middle East, the Caspian area, Asia Pacific, Latin
America, and the North Sea.
Outsourcing
of operations and maintenance work by industrial and energy companies has
been
increasing worldwide. Additional opportunities in this area are anticipated
as
the aging infrastructure in United States refineries and chemical plants
requires more maintenance and repairs to minimize production downtime. More
stringent industry safety standards and environmental regulations also lead
to
higher maintenance standards and costs.
During
the second quarter of 2006, we were awarded the engineering, procurement
and
construction (“EPC”) contract for the Sonatrach Skikda LNG project, to be
constructed at Skikda, Algeria. In addition to performing the EPC
work for the 4.5 million metric tons per annum LNG train, we will execute
the
pre-commissioning and commissioning portion of the contract. The
contract has an approximate value of $2.8 billion.
The
engineering and construction industry, particularly in the oil and gas sector,
continues to experience escalating material and equipment prices, and ongoing
supply chain pricing pressures which could cause some delays in awards of
and,
in other cases, cancellations of major gas monetization and upstream
prospects. Any further delays could impact our long term projected
results. However, we believe the risk of a material negative impact
to our results in the near term is low due to recent awards for
KBR. It is generally very difficult to predict whether or when we
will receive such awards 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, financing arrangements, governmental approvals
and
environmental matters.
Escravos
Project. In connection with our consolidated 50%-owned GTL project in
Escravos, Nigeria, during the first half of 2007, we and our joint venture
partner negotiated modifications to the contract terms and conditions resulting
in an executed contract amendment in July 2007. The contract has been
amended to convert 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. Also included in the
amended contract are client determined incentives that may be earned over
the
remaining life of the contract. The effect of the modifications for
the three months ended June 30, 2007 resulted in a $3 million increase to
operating income. In addition, minority interest shareholders’
absorption of losses increased by $15 million resulting in net income of
$12
million for the three months ended June 30, 2007. Because our amended
agreement with the client provides that we will be reimbursed for our actual
costs incurred, all amounts of probable unapproved change order revenue that
were previously included in the project estimated revenues are now considered
approved.
Brown
& Root Condor Spa (“BRC”). During the first quarter of 2007, BRC
experienced a decline in new work awarded from various sources including
Sonatrach which is a significant customer of BRC and also owns a 51% interest
in
the business along with its Algerian government affiliates. In
addition, Sonatrach has canceled work previously awarded to BRC and has
indicated to us that they wish to dissolve BRC. We are discussing ways to
dissolve BRC with Sonatrach including a sale of our interest in BRC to
Sonatrach. As a result of its ongoing operating losses and the lack of new
project awards, BRC's projected cash flows indicate that BRC will have
difficulty in paying its obligations as they become due in 2007. As a
result, during the first quarter of 2007 KBR determined that it was unlikely
that the carrying amount of its net investment in BRC would be recovered
and,
consequently recorded an $18 million impairment charge during the first quarter
of 2007. During the first quarter of 2007 we billed approximately $2 million
of
services to BRC which we expensed as incurred. During the second quarter
of
2007, our discussions with Sonatrach continued. Should our
discussions with Sonatrach result in a sale of our equity interest in BRC,
any
net proceeds would result in a gain and reversal of a portion of the impairment
charges recorded in the first quarter of 2007.
Barracuda-Caratinga
project. 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. We
have
been in negotiations with the project owner since 2003 to settle the various
issues that have arisen and have entered into several agreements to resolve
those issues. In April 2006, we executed an agreement with Petrobras that
enabled us to achieve conclusion of the Lenders’ Reliability Test and final
acceptance of the FPSOs. These acceptances eliminated any further risk of
liquidated damages being assessed but did not address the bolt arbitration
discussed below. Our remaining obligation under the April 2006 agreement
is
primarily for warranty on the two vessels.
At
Petrobras’ direction, we have replaced certain bolts located on the subsea
flowlines that have failed through mid-November 2005, and we understand that
additional bolts have failed thereafter, which have been replaced by Petrobras.
These failed bolts were identified by Petrobras when it conducted inspections
of
the bolts. The original design specification for the bolts was issued by
Petrobras, and as such, we believe the cost resulting from any replacement
is
not our responsibility. In March 2006, Petrobras 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. We disagree
with Petrobras’ claim since the bolts met Petrobras’ design specifications, and
we believe there is no basis for the amount claimed by Petrobras. We intend
to
vigorously defend this matter and pursue recovery of the costs we have incurred
to date through the arbitration process. Under the master
separation agreement we entered into with Halliburton in connection with
the
Offering, Halliburton agreed, subject to certain conditions, to indemnify
us and
hold us harmless from all cash costs and expenses incurred as a result of
the
replacement of the subsea bolts. As of June 30, 2007, we have not accrued
any
amounts related to this arbitration.
PEMEX
Arbitration Settlement. In July 2007, the arbitration committee
awarded claims in favor of one of our three projects for PEMEX which was
performed by our unconsolidated subsidiary. Although full
interpretation and calculation of this award is not complete, we estimate
the
amount awarded approximates the book value of these claims recorded at June
30,
2007. The arbitration proceedings with respect to a second PEMEX
project have been conducted and we are awaiting the
results. Regarding the third PEMEX project, arbitration hearings are
scheduled for the fourth quarter of 2007.
G&I
Segment Activity
Our
G&I 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
customers worldwide. We currently provide these services in the Middle East
to
support one of the largest U.S. military deployments since World War II,
as well
as in other global locations where military personnel are stationed. A
significant portion of our G&I segment’s current operations relate to the
support of United States government operations in the Middle East, which
we
refer to as our Middle East operations.
Through
June 28, 2007, we were the majority owner of Devonport Management Limited
(“DML”), the owner and operator of one of Western Europe’s largest naval
dockyard complexes. Our DML shipyard operations are primarily involved refueling
nuclear submarines and performing maintenance on surface vessels for the
MoD as
well as limited commercial projects. On June 28, 2007, we completed the
disposition of our 51% interest in DML to Babcock International Group
plc. DML owns and operates Devonport Royal Dockyard, one of Western
Europe’s largest naval dockyard complexes. 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 $97 million, net of tax of $119 million.
In
the
civil infrastructure sector, there has been a general trend of historic
under-investment. In particular, infrastructure related to the quality of
water,
wastewater, roads and transit, airports, and educational facilities has declined
while demand for expanded and improved infrastructure continues to outpace
funding. As a result, we expect increased opportunities for our engineering
and
construction services and for our privately financed project activities as
our
financing structures make us an attractive partner for state and local
governments undertaking important infrastructure projects.
Skopje
Embassy Project. In 2005, we were awarded a fixed-price
contract to design and build a U.S. embassy in Skopje, Macedonia. As
a result of a project estimate update and progress achieved on design drawings,
we recorded a $12 million loss in connection with this project during the
fourth
quarter of 2006. We identified additional increases in cost on this
project due to escalating material, labor and other costs including schedule
delays. As a result of these cost increases, we recorded an
additional loss on this project of approximately $24 million during the second
quarter of 2007 which we believe are not recoverable under the
contract. We could incur additional costs and losses on this project
if our plan to make up lost schedule are not achieved or if material, labor
or
other costs incurred exceed the amounts we have estimated.
LogCap
Project. In August 2006, we were awarded a $3.5 billion task
order under our LogCAP III contract for additional work through 2007. Backlog
related to the LogCAP III contract at June 30, 2007 was $1.5
billion. During the almost five-year period we have worked
under the LogCAP III contract, we have been awarded 64 “excellent” ratings out
of 76 total ratings. We expect to complete all open task orders under
our LogCAP III contract during 2008.
In
August
2006, the DoD issued a request for proposals on a new competitively bid,
multiple service provider LogCAP IV contract to replace the current LogCAP
III
contract. We are currently the sole service provider under our LogCAP III
contract, which has been extended by the DoD through the fourth quarter of
2007.
In June 2007, we were selected as one of the executing contractors under
the
LogCap IV contract to provide logistics support to U.S. Forces deployed in
the
Middle East. Since the award of the LogCAP IV contract, unsuccessful
bidders have brought actions at the Government Accountability Office protesting
the contract award. Until these protests are resolved, the DoD is
unable to proceed with the transition of the LogCAP III to the LogCAP IV
contract. Despite the award of of a portion of the LogCAP IV
contract and extension of our LogCAP III contract, we expect our overall
volume of work to decline as our customer scales back its requirement for
the
types and the amounts of services we provide. However, as a result of the
recently announced surge of additional troops and extended tours of duty
in
Iraq, we expect the decline to occur more slowly than we previously
expected.
Ventures
Activity
As
a
result of changes in the monthly financial and operating information provided
to
our chief operating decision maker, during the first quarter of 2007, we
redefined our reportable segments to now include the Ventures
segment. Our Ventures segment develops, provides assistance in
arranging financing for, makes equity and debt investments in, and participates
in managing entities owning assets generally from projects in which one of
our
other business segments has a direct role in the engineering, construction,
and/or operations and maintenance. The creation of the Ventures
segment provides management focus on our investments in the entities that
owns
the assets. Projects developed and under current management include
government services such as defense procurement and operations and maintenance
services for equipment, military infrastructure construction and program
management, toll roads and railroads, and energy and chemical plants. The
results of our Ventures segment are primarily generated by investments accounted
for under the equity method.
Results
of Operations
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(In
millions of dollars)
|
|
|
|
|
Revenue:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
E&C—Gas
Monetization Projects
|
|
$ |
331
|
|
|
$ |
180
|
|
|
$ |
151
|
|
|
|
84 |
% |
E&C—Offshore
Projects
|
|
|
61
|
|
|
|
71
|
|
|
|
(10 |
) |
|
|
(14 |
)% |
E&C—Other
|
|
|
277
|
|
|
|
309
|
|
|
|
(32 |
) |
|
|
(10 |
)% |
Total
Energy and Chemicals
|
|
|
669
|
|
|
|
560
|
|
|
|
109
|
|
|
|
19 |
% |
G&I—Middle
East Operations
|
|
|
1,170
|
|
|
|
1,409
|
|
|
|
(239 |
) |
|
|
(17 |
)% |
G&I—Other
|
|
|
312
|
|
|
|
282
|
|
|
|
30
|
|
|
|
11 |
% |
Total
Government and Infrastructure
|
|
|
1,482
|
|
|
|
1,691
|
|
|
|
(209 |
) |
|
|
(12 |
)% |
Ventures
|
|
|
1
|
|
|
|
(15 |
) |
|
|
16
|
|
|
|
107 |
% |
Total
revenue
|
|
$ |
2,152
|
|
|
$ |
2,236
|
|
|
$ |
(84 |
) |
|
|
(4 |
)% |
Operating
Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E&C—Gas
Monetization Projects
|
|
$ |
1
|
|
|
$ |
(130 |
) |
|
|
131
|
|
|
|
101 |
% |
E&C—Offshore
Projects
|
|
|
3
|
|
|
|
9
|
|
|
|
(6 |
) |
|
|
(67 |
)% |
E&C—Other
|
|
|
37
|
|
|
|
24
|
|
|
|
13
|
|
|
|
54 |
% |
Total
Energy and Chemicals
|
|
|
41
|
|
|
|
(97 |
) |
|
|
138
|
|
|
|
142 |
% |
G&I—Middle
East Operations
|
|
|
29
|
|
|
|
45
|
|
|
|
(16 |
) |
|
|
(36 |
)% |
G&I—Other
|
|
|
(4 |
) |
|
|
13
|
|
|
|
(17 |
) |
|
|
(131 |
)% |
Total
Government and Infrastructure
|
|
|
25
|
|
|
|
58
|
|
|
|
(33 |
) |
|
|
(57 |
)% |
Ventures
|
|
|
(1 |
) |
|
|
(8 |
) |
|
|
7
|
|
|
|
88 |
% |
Total
operating income (loss)
|
|
$ |
65
|
|
|
$ |
(47 |
) |
|
$ |
112
|
|
|
|
238 |
% |
(1)
|
Our
revenue includes both equity
in the earnings of unconsolidated affiliates as well as revenue
from the
sales of services into the joint ventures. We often participate
on larger
projects as a joint venture partner and also provide services to
the
venture as a subcontractor. The amount included in our revenue
represents
our share of total project revenue, including equity in the earnings
from
joint ventures and revenue from services provided to joint
ventures.
|
Three
months ended June 30, 2007 compared to three months ended June 30,
2006
Revenue.
E&C revenue increased $109 million to $669 million for second quarter
of 2007 compared to $560 million for the second quarter of 2006. This
increase in revenue was primarily due to a $151 million increase in revenue
from
our gas monetization projects. These increases were partially offset by
decreases in revenue from offshore and other projects.
E&C
revenue from our gas monetization projects for the second quarter of 2007
was
$331 million compared to $180 million for the same period in 2006. This increase
is primarily due to the start-up of several projects awarded in 2005 or early
2006, including the work performed by us on the Pearl GTL project and revenue
earned on the Escravos GTL project. Revenue related to these two projects
was
$168 million higher in the second quarter of 2007 compared to the same period
in
2006.
E&C
revenue from our offshore projects for the second quarter of 2007 was $61
million compared to $71 million for the second quarter of 2006. This decrease
in
revenue is primarily due to the substantial completion of our lump-sum EPIC
projects and decrease in the manhours incurred on projects in the Caspian
Sea as
two of the three projects in this area are near in completion.
E&C
other projects includes our North American industrial services and domestic
construction businesses, several joint ventures including BRC and MMM, which
provides marine vessel support services in the Gulf of Mexico, and many
other projects. E&C other projects for the second quarter of 2007
decreased by $32 million from the second quarter of 2006. The
decrease was primarily due to the decline in work of approximately $18 million
from a substantially complete crude oil project in Canada.
G&I
revenue decreased $209 million in the second quarter of 2007 compared to
the
second quarter of 2006. This decrease is primarily due to a $239 million
decrease in revenue from our Middle East operations partially offset by a
$30
million increase in revenue from other projects.
G&I
revenue from our Middle East operations for the second quarter of 2007 was
$1.2
billion compared to $1.4 billion for the second quarter of 2006. The decrease
was primarily due to lower activity on our LogCAP III contract as our customer
continued to scale back the construction and procurement related to military
sites in Iraq.
G&I
revenue from other projects increased from $282 million in the second quarter
of
2006 to $312 million in the second quarter of 2007. The increase is
primarily due to an increase task orders related to the program management
of a
U.S. government facility in Florida.
Ventures
revenue increased $16 million to $1 million for the second quarter of 2007
compared to $(15) million for the second quarter of 2006. The second
quarter of 2006 included operating losses of approximately $17 million related
to our equity investments in the Alice-Springs Darwin and U.K. roads projects
which includes a $10 million impairment charge recorded on our investment
in the
U.K. roads project.
Operating
income. E&C operating income for the second quarter of 2007 was $41
million compared to operating loss of $(97) million in the first three months
of
2006. Operating loss for the second quarter of 2006 was caused by
charges of $148 million related to our Escravos GTL project in Nigeria. We
and our client have amended the Escravos contract converting the payment
terms
from fixed price to reimbursable whereby we will be reimbursed for our actual
costs incurred in connection with the project less a credit that approximates
the charge that we identified in the second quarter of 2006. As a
result of the amendment, we recorded $3 million of operating income on the
Escravos project during the second quarter of 2007.
E&C
operating income from gas monetization for the second quarter of 2007 was
$1
million compared to operating loss of $(130) million for the second quarter
of
2006. In the second quarter of 2006, we identified a $148 million
dollar charge, before income taxes and minority interest, related to the
Escravos GTL project. In 2006, the project experienced delays
relating to civil unrest and security on the Escravos River, near the
project site and further delays resulting from scope changes and engineering
and
construction modifications. During the second quarter of 2007, we
earned job income of $35 million on our gas monetization projects including
the
Pearl GTL project, $3 million resulting from the Escravos contract conversion
and various gas monetization FEED projects that we have
underway. These job results were partially offset by $34 million of
division and general and administrative expenses allocated to gas
monetization.
E&C
operating income from our offshore projects for the second quarter of 2007
was
$3 million compared to operating income of $9 million for the second quarter
of
2006. The operating income decrease was primarily due to a decrease in the
work
on two of our three projects nearing completion in the Caspian Sea.
E&C
operating income from other projects increased from $24 million in the second
quarter of 2006 to $37 million in the second quarter of 2007. Equity
in earnings from the MMM joint venture that provides vessel support
services in the Gulf of Mexico increased $6 million. The remaining
increase is primarily due to a favorable allocation of general and
administrative expenses. Operating income for the second quarter of 2007
included positive contributions from our EBIC ammonia project and an export
refinery in Saudi Arabia.
G&I
operating income decreased $33 million to $25 million for the second quarter
of
2007 compared to $58 million for the second quarter of
2006. Operating income from our Middle East Operations was
approximately $16 million lower in the second quarter of 2007 compared to
the
same period in 2006 primarily due to the lower volume of activity in
Iraq. Additionally, we recorded a $24 million charge in the second
quarter of 2007 related to our U.S. Embassy project in Macedonia due to
escalating material, labor and other costs including schedule
delays.
G&I
operating income from our Middle East operations was $29 million for the
second
quarter of 2007 compared to $45 million in second quarter of
2006. Operating income on our LogCAP III contract decreased in the
second quarter of 2007 as compared to the same period in 2006 as the volume
of
activity has decreased in Iraq.
G&I
operating income from other projects decreased from $13 million in the second
quarter of 2006 to an operating loss of $(4) million in the second
quarter of 2007. This decrease is largely due to the $24 million
charge taken in the second quarter of 2007 related to our U.S. Embassy project
in, Macedonia.
Ventures
operating loss for the second quarter of 2007 was $(1) million compared to
an
operating loss of $(8) million in the second quarter of 2006. Operating loss
in
the second quarter of 2006 included operating losses of approximately $17
million related to our equity investments in the Alice-Springs Darwin and
U.K.
Roads projects which includes a $10 million impairment charge recorded on
our
investment in the U.K. roads project.. Theses losses were offset
partially by a $6 million gain on the sale of a portion of our interest in
the
Allenby & Connaught project.
Non-operating
items. Related party interest expense was zero for the second quarter of
2007 compared to $11 million for the second quarter of 2006. The
decrease is due to the repayment of our $774 million interest bearing
subordinated intercompany notes in November 2006.
Net
interest income increased $12 million to $14 million for the second quarter
of
2007 compared to net interest income of $2 million for the second quarter
of
2006. The increase in net interest income is primarily due to additional
interest earned on higher cash balances during the second quarter of
2007. As of June 30, 2007, we had total cash and equivalents of
approximately $2.0 billion (including restricted and committed cash of $771
million) compared to $585 million as of June 30, 2006.
Provision
for income taxes from continuing operations in the second quarter of 2007
was
$32 million compared to a benefit of $29 million in the second quarter of
2006. The effective tax rate for the second quarter of 2007 and 2006
was approximately 41%. Our effective tax rate for the second quarter
of 2007 exceeded our statutory rate of 35% primarily due to not receiving
a tax
benefit for a portion of our impairment charge related to our investment
in BRC,
non-deductible operating losses from our railroad investment
in Australia, and state and other taxes. Our effective tax
rate in the second quarter of 2006 exceeded our statutory rate of 35% primarily
due to not receiving a tax benefit for a portion of our impairment charge
related to our railroad investment in Australia, non-deductible operating
losses
from our railroad investment in Australia, and adjustments for prior year
taxes
in various tax jurisdictions. .
Discontinued
operations. Discontinued operations consists of the sale of
our Production Services group in May 2006 and the
disposition of our 51% interest in DML on June 28,
2007. Revenues from our discontinued operations for the three
months ended June 30, 2007 and 2006 were $225 million and $286 million,
respectively, while income from discontinued operations, net of
tax was $90 million and $88 million for the three months ended June
30, 2007 and 2006, respectively. Income from our discontinued
operations for the three months ended June 30, 2007 and June 30, 2006 included
a
gain, net of tax of approximately $97 million and $79 million,
respectively. See Note 17 to the Condensed Consolidated
Financial Statements for additional information.
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(In
millions of dollars)
|
|
|
|
|
Revenue:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
E&C—Gas
Monetization Projects
|
|
$
|
588
|
|
|
$
|
345
|
|
|
$
|
243
|
|
|
|
70
|
%
|
E&C—Offshore
Projects
|
|
|
122
|
|
|
|
160
|
|
|
|
(38)
|
|
|
|
(24
|
)%
|
E&C—Other
|
|
|
535
|
|
|
|
596
|
|
|
|
(61)
|
|
|
|
(10
|
)%
|
Total
Energy and Chemicals
|
|
|
1,245
|
|
|
|
1,101
|
|
|
|
144
|
|
|
|
13
|
%
|
G&I—Middle
East Operations
|
|
|
2,312
|
|
|
|
2,603
|
|
|
|
(291)
|
|
|
|
(11
|
)%
|
G&I—Other
|
|
|
627
|
|
|
|
639
|
|
|
|
(12)
|
|
|
|
(2)
|
%
|
Total
Government and Infrastructure
|
|
|
2,939
|
|
|
|
3,242
|
|
|
|
(303)
|
|
|
|
(9
|
)%
|
Ventures
|
|
|
(5)
|
|
|
|
(51)
|
|
|
|
46
|
|
|
|
90
|
%
|
Total
revenue
|
|
$
|
4,179
|
|
|
$
|
4,292
|
|
|
$
|
(113)
|
|
|
|
(3)
|
%
|
Operating
Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E&C—Gas
Monetization Projects
|
|
$
|
7
|
|
|
$
|
(121)
|
|
|
$
|
128
|
|
|
|
106
|
%
|
E&C—Offshore
Projects
|
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
|
|
400
|
%
|
E&C—Other
|
|
|
42
|
|
|
|
67
|
|
|
|
(25)
|
|
|
|
(37
|
)%
|
Total
Energy and Chemicals
|
|
|
54
|
|
|
|
(53)
|
|
|
|
107
|
|
|
|
202
|
%
|
G&I—Middle
East Operations
|
|
|
53
|
|
|
|
72
|
|
|
|
(19)
|
|
|
|
(26)
|
%
|
G&I—Other
|
|
|
10
|
|
|
|
21
|
|
|
|
(11)
|
|
|
|
(52)
|
%
|
Total
Government and Infrastructure
|
|
|
63
|
|
|
|
93
|
|
|
|
(30)
|
|
|
|
(32)
|
%
|
Ventures
|
|
|
(7)
|
|
|
|
(44)
|
|
|
|
37
|
|
|
|
84
|
%
|
Total
operating income (loss)
|
|
$
|
110
|
|
|
$
|
(4)
|
|
|
$
|
114
|
|
|
|
2,850
|
%
|
(1)
|
Our
revenue includes both equity in the earnings of unconsolidated
affiliates
as well as revenue from the sales of services into the joint ventures.
We
often participate on larger projects as a joint venture partner
and also
provide services to the venture as a subcontractor. The amount
included in
our revenue represents our share of total project revenue, including
equity in the earnings from joint ventures and revenue from services
provided to joint ventures.
|
Six
months ended June 30, 2007 compared to six months ended June 30,
2006
Revenue.
E&C revenue increased $144 million to $1.2 billion for the first six
months of 2007 compared to $1.1 billion for the first six months of 2006.
This
increase in revenue was primarily due to a $243 million increase in revenue
from
our gas monetization projects. These increases were partially offset by a
$21
million decrease in revenue from a substantially complete crude oil
project in Canada, a decrease of $16 million related to the substantially
complete Barracuda-Caratinga project in Brazil and decreases of $93 million
on
several other gas projects in Algeria and Canada.
E&C
revenue from our gas monetization projects for the first six months of 2007
was
$588 million compared to $345 million for the same period in 2006. This increase
is primarily due to the start-up of several projects awarded in 2005 or early
2006, including the work performed by us on the Pearl GTL project and revenue
earned on the Escravos GTL project. Revenue related to these two projects
was
$269 million higher in the six months ended June 30, 2007 compared to the
same
period in 2006.
E&C
revenue from our offshore projects for the first six months of 2007 was $122
million compared to $160 million for the first six months of 2006. This decrease
in revenue is primarily due to reduced activity on our lump-sum EPIC projects,
Barracuda-Caratinga and Belanak. In April of 2006, we received acceptance
of the
FPSOs on the Barracuda-Carratinga project. Revenue related to work we
are performing for several projects in the Caspian Sea also decreased by
approximately $15 million during the second quarter of 2007 because work
on
certain portions of these projects is nearing completion.
E&C
revenue from other projects decreased by $61 million to $535 million in the
first six months of 2007 compared to $596 million in the first six months
of
2006. The decrease includes $21 million from a substantially complete
crude oil project and $36 million from the Syncrude project in
Canada. Revenue from our BRC joint venture decreased during the first
six months of 2007. See Note 12 to the Condensed Consolidated
Financial Statements for additional information.
G&I
revenue decreased $303 million in the first six months of 2007 compared to
the
first six months of 2006. This decrease is primarily due to a $291 million
decrease in revenue from Middle East operations, a $45 million decrease in
revenue under our Balkans support contract and a $72 million decrease in
revenue
related to worldwide U.S. Naval assessment and repair work under the under
our
CONCAP III contract. These decreases were partially offset by an
increase of $28 million on our U.S. government support services contract
in
Europe and $29 million related to increases in task orders on a program
management project for a U.S. government facility in Florida.
G&I
revenue from our Middle East operations for the first six months of 2007
was
$2.3 billion compared to $2.6 billion for the first six months of 2006. The
$291
million decrease was primarily due to lower activity on our LogCAP III contract
as our customer continued to scale back the construction and procurement
related
to military sites in Iraq.
G&I
revenue from other projects in the first six months of 2007 was consistent
with
revenue from the same period in 2006.
Ventures
revenue increased $46 million to $(5) million for the first six months of
2007
compared to $(51) million for the first six months of 2006. The first six
months
of 2006 included a $26 million impairment charge that was recorded on our
equity
investment in the Alice Springs-Darwin railroad project and $17 million in
losses, including a $10 million impairment charge, recorded on an equity
investment in a joint venture road project in the U.K.
Operating
income. E&C operating income
for the first
six months of 2007 was $54 million compared to operating loss of $(53) million
in the first six months of 2006. During the first quarter of 2007, we
recorded $20
million in
charges
recorded related to our investment in
BRC. During the first six months of 2006, we identified a $144
million charge, before minority interest and income tax, related to our Escravos
GTL Project. Additionally, operating income in the first six months
of 2006 related to an ammonia plant construction project in Egypt
was higher as a result of the
completion of the front end engineering and design work for the
plant.
E&C
operating income from gas monetization for the first six months of 2007 was
$7 million compared to an operating loss of $(121) million for the first
six months of 2006. In the second quarter of 2006, we identified a
$148 million dollar charge, before income taxes and minority interest, related
to the Escravos GTL project. In 2006, the project experienced delays
relating to civil unrest and security on the Escravos River, near the
project site and further delays resulting from scope changes and engineering
and
construction modifications.
E&C
operating income from our offshore projects for the first six months of 2007
was
$5 million compared to operating income of $1 million for the first six months
of 2006. The operating income increase was primarily due to $15 million of
additional charges for our Barracuda-Carratinga project recorded in the first
quarter of 2006.
E&C
operating income from other projects decreased from $67 million in the first
six
months of 2006 to $42 million in the first six months of
2007. Operating income for the first six months of 2006 related to an
ammonia plant construction project in Egypt was $22 million higher as a result
of the completion of the front end engineering and design work for the
plant. In addition, operating income in the first six months of 2007
includes $20 million in charges recorded on our investment in the BRC joint
venture in Algeria.
G&I
operating income decreased $30 million to $63 million for the first six months
of 2007 compared to $93 million for the first six months of
2006. Operating income from our Middle East operations was
approximately $27 million lower in the six months ended June 30, 2007 compared
to the same period in 2006. This decrease was partially offset by
higher operating income on various other infrastructure projects.
G&I
operating income from our Middle East operations decreased $19 million to
$53
million for the first six months of 2007 from to $72 million in first six
months
of 2006. Operating income on our LogCAP III contract decreased by $23
million in the six months ended June 30, 2007 as compared to the same period
in
2006 due to the lower volume of activity in Iraq as the customer continued
to
scale back the construction and procurement related to military sites in
Iraq.
G&I
operating income from other projects decreased by $11 million in the first
six
months of 2007 compared to the same period in 2006 primarily due to the $24
million loss taken in the second quarter of 2007 on the U.S. embassy project
in
Skopje, Macedonia. This loss was partially offset by increases in
operating income from our Allenby & Connaught project and a windfarm project
in the United Kingdom.
Ventures
operating loss for the first six months of 2007 was $(7) million compared
to an
operating loss of $(44) million in the first six months of 2006. The
first six months of 2006 included a $26 million impairment charge that was
recorded on our equity investment in the Alice Springs-Darwin railroad project
and $17 million in charges recorded on an equity investment in a joint venture
road project in the U.K.
Non-operating
items. Related party interest expense was zero for the first six months of
2007 compared to $28 million for the first six months of 2006. The
decrease is due to the repayment of our $774 million interest bearing
subordinated intercompany notes in November 2006.
Net
interest income increased $22 million to $27 million for the first six months
of
2007 compared to net interest income of $5 million for the first six months
of
2006. The increase in net interest income is primarily due to additional
interest earned on higher cash balances during the six months ended June
30,
2007. As of June 30, 2007, we had total cash and equivalents of
approximately $2.0 billion (including restricted and committed cash of $771
million) compared to $585 million as of June 30, 2006.
Provision
for income taxes from continuing operations in the first six months of 2007
was
$58 million compared to a benefit of $7 million in the first six months of
2006. The effective tax rate for the six months ended June 30, 2007
was approximately 44% as compared to a rate of 19% for the six months
ended June 30, 2006. Our effective tax rate for the six months ended
June 30, 2007 exceeded our statutory rate of 35% primarily due to not receiving
a tax benefit for a portion of our impairment charge related to our investment
in BRC, operating losses from our railroad investment in Australia, and
state and other taxes. Our effective tax rate for the six months
ended June 30, 2006 was below the statutory rate primarily due to the benefit
incurred on the loss from continuing operations, offset by not receiving
a tax
benefit for the impairment charge on our investment in the Alice Spring-Darwin
railroad in Australia.
Discontinued
operations. Discontinued operations consists of the sale of our
Production Services group in May 2006 and the disposition of our 51%
interest in DML on June 28, 2007. Revenues from our
discontinued operations for the six months ended June 30, 2007 and 2006 were
$449 million and $693 million, respectively, while income from discontinued
operations, net of tax was $94 million and $101 million for the six months
ended
June 30, 2007 and 2006, respectively. Income from our discontinued
operations for the six months ended June 30, 2007 and June 30, 2006 included
a
gain, net of tax of approximately $97 million and $79 million,
respectively. See Note 17 in the Notes to Condensed
Consolidated Financial Statements for additional information.
Backlog
Backlog
represents the dollar amount of revenue we expect to realize in the future
as a
result of performing work under multi-period contracts that have been awarded
to
us. Backlog is not a measure defined by generally accepted accounting
principles, and our methodology for determining backlog may not be comparable
to
the methodology used by other companies in determining their backlog. Backlog
may not be indicative of future operating results. Not all of our revenue
is
recorded in backlog for a variety of reasons, including the fact that some
projects begin and end within a short-term period. Many contracts do not
provide
for a fixed amount of work to be performed and are subject to modification
or
termination by the customer. The termination or modification of any one or
more
sizeable contracts or the addition of other contracts may have a substantial
and
immediate effect on backlog.
We
generally include total expected revenue in backlog when a contract is awarded
and/or the scope is definitized. For our projects related to unconsolidated
joint ventures, we have included in the table below our percentage ownership
of
the joint venture’s 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 As of June 30, 2007, our backlog for projects
related to unconsolidated joint ventures was $0.9 billion in the E&C
segment, $1.9 billion in the G&I segment, and $0.6 billion in the Ventures
segment. As of December 31, 2006, our backlog for projects related to
unconsolidated joint ventures was $1.6 billion in the E&C segment, $2.1
billion in the G&I segment, and $0.7 billion in the Ventures segment. 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 minority interest includes 100% of the backlog associated with those
joint
ventures. As of June 30, 2007, our backlog related to consolidated joint
ventures with minority interest was $2.5 billion in the E&C segment, $0.1
billion in the G&I segment, and zero in the Ventures segment. As
of December 31, 2006, our backlog for projects related to joint ventures
with
minority interest was $2.8 billion in the E&C segment, $0.1 billion in the
G&I segment, and $0 in the Ventures segment.
For
long-term contracts, the amount included in backlog is limited to five years.
In
many instances, arrangements included in backlog are complex, nonrepetitive
in
nature, and may fluctuate depending on expected revenue and timing. Where
contract duration is indefinite, projects included in backlog are limited
to the
estimated amount of expected revenue within the following twelve months.
Certain
contracts provide maximum dollar limits, with actual authorization to perform
work under the contract being agreed upon on a periodic basis with the customer.
In these arrangements, only the amounts authorized are included in backlog.
For
projects where we act solely in a project management capacity, we only include
our management fee revenue of each project in backlog.
Backlog(1)
(in
millions)
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
E&C—Gas
Monetization
|
|
$
|
3,438
|
|
|
$
|
3,883
|
|
E&C—Offshore
Projects
|
|
|
173
|
|
|
|
130
|
|
E&C—Other
|
|
|
1,156
|
|
|
|
1,700
|
|
Total
E&C
|
|
|
4,767
|
|
|
|
5,713
|
|
G&I—Middle
East Operations
|
|
|
1,515
|
|
|
|
3,066
|
|
G&I—Other
|
|
|
2,728
|
|
|
|
2,998
|
|
Total
G&I
|
|
|
4,243
|
|
|
|
6,064
|
|
Ventures
|
|
|
620
|
|
|
|
660
|
|
Total
backlog for continuing operations (2)
|
|
$
|
9,630
|
|
|
$
|
12,437
|
|
|
(1)
|
Our
G&I and Ventures segment’s total backlog from continuing operations
attributable to firm orders was $4.1 billion and $620 million,
respectively, as of June 30, 2007 and $4.0 billion and $660 million,
respectively, as of December 31, 2006, respectively. Our G&I segment
total backlog from continuing operations attributable to unfunded
orders
was $144 million as of June 30, 2007 and $2.1 billion as of December
31,
2006.
|
|
(2)
|
This
amount represents backlog for continuing operations and does not
include
backlog associated with DML, which was sold in the second quarter
of 2007
and is accounted for as discontinued operations. Backlog for
DML was $1.1 billion as of December 31,
2006.
|
We
estimate that as of June 30, 2007, 46% of our E&C segment backlog, 58% of
our G&I segment backlog and 16% of our Ventures segment backlog will be
complete within one year. As of June 30, 2007, 29% of our backlog for continuing
operations was attributable to fixed-price contracts and 71% was attributable
to
cost-reimbursable contracts. For contracts that contain both fixed-price
and
cost-reimbursable components, we characterize the entire contract based on
the
predominant component. In August 2006, we were awarded a task order for
approximately $3.5 billion for our continued services in Iraq through March
2008
under the LogCAP III contract. As of June 30, 2007, our backlog under the
LogCAP
III contract was $1.5 billion.
Liquidity
and Capital Resources
At
June
30, 2007 and December 31, 2006, cash and equivalents totaled $2.0 billion
and
$1.4 billion, respectively. These balances include cash and cash from advanced
payments related to contracts in progress held by ourselves or our joint
ventures that we consolidate for accounting purposes and which totaled $771
million at June 30, 2007 and $527 million at December 31, 2006. The use of
these cash balances is limited to the specific projects or 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 venture or subsidiary.
Significant
sources of cash
Cash
flow
provided by operations was $474 million for the first six months of
2007. Our working capital requirements for our Iraq-related work,
excluding cash and equivalents, decreased from $248 million at December 31,
2006 to $214 million at June30, 2007. Cash flow provided by
operations for the six months ended June 30, 2007 includes $358 million related
to collections of accounts receivable and a significant milestone payment
from
one of our joint ventures.
Cash
flow
provided by investing activities was $311 million for the first six months
of
2007. During the second quarter of 2007, we sold our 51% interest in
DML for cash proceeds of approximately $345 million, net of direct transaction
costs.
Further
available sources of cash. We have available an unsecured $850
million five-year revolving credit facility. Letters of credit that
totaled $133 million were issued under the revolving credit facility, thus
reducing the availability under the credit facility to approximately $717
million at June 30, 2007. There were no cash drawings under the
revolving credit facility as of June 30, 2007.
Significant
uses of cash
During
the six months ended June 30, 2007, we made net payments of $123 million
to
Halliburton. The payments to Halliburton relate to various
support services provided by Halliburton under our transition services agreement
and other amounts prior to our separation from Halliburton. The
amount due to Halliburton was $152 million at December 31, 2006. Amounts
due to Halliburton at the date of our separation were settled or classified
as
normal operating activities with an unrelated party elsewhere in our balance
sheet.
In
the
first six months of 2007, we contributed a total of $15 million to our United
Kingdom pension plans, excluding DML.
Capital
expenditures of $23 million in the first six months of 2007 were $19 million
lower than the first six months of 2006.
Future
uses of cash. Future uses of cash will primarily relate to
working capital requirements for our operations. In addition, we
expect to use committed cash advanced from customers in 2007, to pay project
costs resulting in the use of a significant portion of our committed cash
in
2007. We are reviewing alternatives for the potential strategic uses
of our cash including opportunistic acquisitions, increased technology
development or investments, project equity investments and returning capital
to
our shareholders.
As
of
June 30, 2007, we had commitments to fund approximately $124 million to related
companies. These commitments arose primarily during the start-up of
these entities due to the losses incurred by them. We expect
approximately $8 million of commitments to be paid during the remainder of
2007.
We
currently expect to contribute approximately $25 million to our international
pension plans in 2007, excluding DML.
Capital
spending for 2007 is expected to be approximately $69 million, excluding
DML. Capital spending for the remainder relates primarily to
information technology and real estate.
Letters
of credit, bonds and financial and performance guarantees. In connection
with certain projects, we are required to provide letters of credit, surety
bonds or other financial and performance guarantees to our customers. As
of June
30, 2007, we had approximately $766 million in letters of credit and financial
guarantees outstanding of which $133 million were issued under our Revolving
Credit Facility. Approximately $630 million of the remaining $633
million were issued under various Halliburton facilities and are irrevocably
and
unconditionally guaranteed by Halliburton. In addition, we and
Halliburton have agreed that until December 31, 2009, Halliburton will issue
additional guarantees, indemnification and reimbursement commitments for
our
benefit in connection with (a) letters of credit necessary to comply
with our EBIC contract, our Allenby & Connaught project and all other
contracts that were in place as of December 15, 2005; (b) surety bonds issued
to
support new task orders pursuant to the Allenby & Connaught project, two job
order contracts for our G&I segment and all other contracts that were in
place as of December 25, 2005; and (c) performance guarantees in support
of
these contracts. Each credit support instrument outstanding at November 20,
2006, the time of our initial public offering, and any additional guarantees,
indemnification and reimbursement commitments will remain in effect until
the
earlier of: (1) the termination of the underlying project contract or our
obligations thereunder or (2) the expiration of the relevant credit support
instrument in accordance with its terms or release of such instrument by
the
customer. In addition, we have agreed to use our reasonable best
efforts to attempt to release or replace Halliburton’s liability under the
outstanding credit support instruments and any additional credit support
instruments relating to our business for which Halliburton may become obligated
for which such release or replacement is reasonably available. For so long
as
Halliburton or its affiliates remain liable with respect to any credit support
instrument, we have agreed to pay the underlying obligation as and when it
becomes due. Furthermore, we agreed to pay to Halliburton a quarterly carry
charge 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.
Halliburton
is no longer obligated to provide credit support for our letters of credit,
surety bonds and other guarantees, except to the limited extent it has agreed
to
do so under the terms of the master separation agreement entered into in
connection with the Offering. We have obtained a limited amount of stand-alone
surety capacity and are engaged in discussions with surety companies to obtain
additional stand-alone capacity.
During
the second quarter of 2007, a £20 million letter of credit was issued on our
behalf by a bank in connection with our Allenby & Connaught
project. The letter of credit supports a building contract guarantee
executed between KBR and certain project joint venture company to provide
additional credit support as a result of our separation from
Halliburton. The letter of credit issued by the bank is guaranteed by
Halliburton.
Debt
covenants. The Revolving Credit Facility contains a number of covenants
restricting, among other things, our ability to incur additional indebtedness
and liens, sales of our assets and payment of dividends, as well as limiting
the
amount of investments we can make. We are limited in the amount of additional
letters of credit and other debt we can incur outside of the Revolving Credit
Facility. Also, under the current provisions of the Revolving Credit Facility,
it is an event of default if any person or two or more persons acting in
concert, other than Halliburton or us, directly or indirectly acquire 25%
or
more of the combined voting power of all outstanding equity interests ordinarily
entitled to vote in the election of directors of KBR Holdings, LLC, the borrower
under the facility and a wholly owned subsidiary of KBR. We are generally
prohibited from purchasing, redeeming, retiring, or otherwise acquiring any
of
our common stock unless it is in connection with a compensation plan, program,
or practice provided that the aggregate price paid for such transactions
does
not exceed $25 million in any fiscal year.
The
Revolving Credit Facility also requires us to maintain certain financial
ratios,
as defined by the Revolving Credit Facility agreement, including a
debt-to-capitalization ratio that does not exceed 55% until June 30, 2007
and 50% thereafter; a leverage ratio that does not exceed 3.5; and a fixed
charge coverage ratio of at least 3.0. At June 30, 2007 and
December 31, 2006, we were in compliance with these ratios and other
covenants.
Off
balance sheet arrangements and other factors affecting
liquidity
We
participate, generally through an equity investment in a joint venture,
partnership or other entity, in privately financed projects that enable our
government customers to finance large-scale projects, such as railroads,
and
major military equipment purchases. We evaluate the entities that are created
to
execute these projects following the guidelines of Financial Accounting
Standards Board (“FASB”) Interpretation No. 46R. These projects
typically include the facilitation of non-recourse financing, the design
and
construction of facilities, and the provision of operations and maintenance
services for an agreed period after the facilities have been completed. The
carrying value of our investments in privately financed project entities
totaled
$62 million and $3 million at June 30, 2007 and December 31, 2006, respectively.
Our equity in earnings (losses) from privately financed project entities
totaled
$5
million and $4 million for the three and six months ended June 30, 2007,
respectively. Our equity in earnings (losses) from privately financed
project entities totaled $(40) million and $(45) million for the three and
six
months ended June 30, 2006, respectively.
As
of
June 30, 2007, we had incurred $126 million of costs under the LogCAP III
contract that could not be billed to the government due to lack of appropriate
funding on various task orders. These amounts were associated with task orders
that had sufficient funding in total, but the funding was not appropriately
allocated within the task order. We have submitted requests for reallocations
of
funding to the U.S. Army and continue to work with them to resolve this
matter. We believe the negotiations will result in an appropriate
distribution of funding by the U.S. Army and collection of the full amounts
due.
Security.
In February 2007, we received a letter from the Department of the Army informing
us of their intent to adjust payments under the LogCAP III contract associated
with the cost incurred by the subcontractors to provide security to their
employees. Based on this letter, the DCAA withheld the Army’s initial assessment
of $20 million. The Army based its 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 indicated
that
not all task orders and subcontracts have been reviewed and that they may
make
additional adjustments. The Army indicated that, within 60 days, they intend
to
begin making further adjustments equal to 6% of prior and current subcontractor
costs unless we can provide timely information sufficient to show that such
action is not necessary to protect the government’s interest. We
continue to provide additional information as requested by the Army. As of
April
20, 2007, the Army has not issued any further payment adjustments regarding
security costs.
The
Army
indicated that they believe our LogCAP III contract prohibits us from billing
costs of privately acquired security. We believe that, while LogCAP III contract
anticipates that the Army will provide force protection to KBR employees,
it
does not prohibit any of our subcontractors from using private security services
to provide force protection to subcontractor personnel. In addition, a
significant portion of our subcontracts are competitively bid lump sum or
fixed
price subcontracts. As a result, we do not receive details of the
subcontractors’ cost estimate nor are we legally entitled to it. Accordingly, we
believe that we are entitled to reimbursement by the Army for the cost of
services provided by 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.
If
we are
unable to demonstrate that such action by the Army is not necessary, a 6%
suspension of all subcontractor costs incurred to date could result in suspended
costs of approximately $400 million. The Army has asked us to provide
information that addresses the use of armed security either directly or
indirectly charged to LogCAP III. The actual costs associated with these
activities cannot be accurately estimated at this time, but we believe that
they
should be substantially less than 6% of the total subcontractor costs. We
will
continue working with the Army to resolve this issue. As of June 30,
2007, no amounts have been accrued for suspended security billings.
Legal
Proceedings
We
have
reported to the U.S. Department of State and Department of Commerce that
exports
of materials, including personal protection equipment such as helmets, goggles,
body armor and chemical protective suits, in connection with personnel deployed
to Iraq and Afghanistan may not have been in accordance with current licenses
or
may have been unlicensed. In addition, we are responding to a March
19, 2007 subpoena from the DoD Inspector General concerning licensing for
armor
for convoy trucks and antiboycott issues. A failure to comply with export
control 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.
As of
June 30, 2007, we had not accrued any amounts related to this
matter. Please read Risk Factors - Our government contracts work
is regularly reviewed and audited by our customer, government auditors and
other, 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” in this quarterly report.
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 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 comply 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.
Our
Health, Safety and Environment group has several programs in place to maintain
environmental leadership and to prevent the occurrence of environmental
contamination. We do not expect costs related to environmental matters to
have a
material adverse effect on our consolidated financial position or our results
of
operations.
New
Accounting Standards
In
September 2006, the Financial Accounting Standards Board (“FASB”) Staff issued
FASB Staff Position (“FSP”) No. AUG AIR-1, “Accounting for Planned Major
Maintenance Activities.” The FSP prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance
activities. The FSP also requires disclosures regarding the method of
accounting for planned major maintenance activities and the effects of
implementing the FSP. The guidance in this FSP is effective January
1, 2007 and is to be retrospectively applied for all periods
presented. The guidance in this FSP affects KBR with regard to a
50%-owned joint venture that leases offshore vessels requiring periodic major
maintenance. This joint venture was contributed to KBR by Halliburton
on April 1, 2006. KBR accounts for its investment in this joint
venture under the equity method of accounting. As a result, KBR has
retroactively applied the required change in accounting, electing the deferral
method of accounting for planned major maintenance activities. The
deferral method requires the capitalization of planned major maintenance
costs
at the point they occur and the depreciation of these costs over an estimated
period until future maintenance activities are repeated. The result
is an increase to KBR’s investment in the equity of this joint venture and an
increase to additional paid-in capital of approximately $7 million as of
April
1, 2006. The effect of the change in accounting on KBR’s operating
results for the year ended December 31, 2006 was immaterial.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). This
statement defines fair value, establishes a framework for using fair value
to
measure assets and liabilities, and expands disclosures about fair value
measurements. The statement applies whenever other statements require
or permit assets or liabilities to be measured at fair value. SFAS
157 is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact that the adoption of
SFAS 157 will have on our financial position, results of operations and cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115,” (“SFAS 159”). SFAS 159 provides companies with an
option to measure certain financial instruments and other items at fair value
with changes in fair value reported in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We are
currently evaluating the impact that the adoption of SFAS 159 will have on
our
financial position, results of operations and cash flows.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
We
are
exposed to financial instrument market risk from changes in foreign currency
exchange rates and interest rates. We selectively manage these exposures
through
the use of derivative instruments to mitigate our market risk from these
exposures. The objective of our risk management is to protect our
cash flows related to sales or purchases of goods or services from market
fluctuations in currency rates. Our use of derivative instruments
includes the following types of market risk:
|
-
|
volatility
of the currency
rates;
|
|
-
|
time
horizon of the derivative
instruments;
|
|
-
|
the
type of derivative
instruments used.
|
We
do not
use derivative instruments for trading purposes. We do not consider
any of these risk management activities to be material.
Item
4. Controls and Procedures
In
accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15,
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 June 30, 2007 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.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Information
related to various commitments and contingencies is described in Notes 8
and 9
to the condensed consolidated financial statements and in Managements’
Discussion and Analysis of Financial Condition and Results of Operations
– Legal
Proceedings.
Please
refer to Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Risk Factors on pages 53-79 of our 2006 Annual
Report on Form 10-K, which is incorporated herein by reference. The risk
factors
discussed below update those risk factors previously disclosed in our 2006
Annual Report on Form 10-K.
Our
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.
Given
the
demands of working in Iraq 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.
To
the extent that we export products, technical data and services outside the
United States, we are subject to U.S. laws and regulations governing
international 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 Assets 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.
From
time
to time, we identify certain inadvertent or potential export or related
violations. These violations may include, for example, transfers without
required governmental authorizations. Although we do not currently anticipate
that any past export practice will have a material adverse effect on our
business, financial condition or results of operations, we can give no assurance
as to whether we will ultimately be subject to sanctions as a result of such
practices or the disclosure thereof, or the extent or effect thereof, if
any
sanctions are imposed, or whether individually or in the aggregate such
practices or the disclosure thereof will have a material adverse effect on
our
business, financial condition or results of operations.
We
continue to enhance our export control procedures and educate our executives
and
other employees who manage our exports concerning the requirements of applicable
U.S. law. An effective control system regarding these matters is among our
highest priorities. Nonetheless, a control system, no matter how well designed
and operated, cannot provide absolute assurance that the objectives of the
control system are met or that all violations have been or will be
detected.
We
have
identified issues for disclosure, and it is possible that we will identify
additional issues for disclosure. Specifically, we have reported to
the U.S. Department of State and Department of Commerce that exports of
materials, including personal protection equipment such as helmets, goggles,
body armor and chemical protective suits, in connection with personnel deployed
to Iraq and Afghanistan may not have been in accordance with current licenses
or
may have been unlicensed. In addition, on March 19, 2007, the
Department of Defense, Office of the Inspector General, issued a subpoena
through the Defense Criminal Investigative Service for information concerning
items exported in connection with the our contract to support military
operations in Iraq. The subpoena requests documents that relate to
licensing for armor for convoy trucks and antiboycott issues. We are
in the process of responding to that subpoena. A determination that
we have failed to comply with one or more of these export controls 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. Any one or more of such sanctions could have a
material adverse effect on our business, financial condition or results of
operations. We expect to incur legal and other costs, which could include
penalties, in connection with these export control disclosures and
investigations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior
Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
*
|
|
3.1
|
|
Amended
and Restated Bylaws of KBR, Inc. (filed only to show date of
adoption).
|
|
|
|
|
|
*
|
|
10.1+
|
|
KBR,
Inc. 2006 Stock and Incentive Plan (as amended June 27,
2007).
|
|
|
|
|
|
*
|
|
10.2+
|
|
Restricted
Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan.
|
|
|
|
|
|
*
|
|
10.3+
|
|
Stock
Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan.
|
|
|
|
|
|
*
|
|
10.4+
|
|
KBR
Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and
Incentive
Plan.
|
|
|
|
|
|
*
|
|
10.5+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Stock Option
Award.
|
|
|
|
|
|
*
|
|
10.6+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Restricted Stock
Award.
|
|
|
|
|
|
*
|
|
10.7
|
|
Agreement
relating to the sale and purchase of the entire issued share capital
of
Devonport Management Limited by and among KBR, Inc., Kellogg Brown
&
Root Holdings (U.K.) Limited, Balfour Beatty plc, The Weir Group
plc, and
Babcock International Group plc, dated May 10, 2007.
|
|
|
|
|
|
*
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
*
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
**
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
**
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Filed
with this Form 10-Q
|
|
|
**
|
|
Furnished
with this Form 10-Q
|
|
|
+
|
|
Management
contracts or compensatory plans or
arrangements
|
As
required by the Securities Exchange Act of 1934, the registrant
has authorized this report to be signed on behalf of the registrant by the
undersigned authorized individuals.
KBR,
INC.
|
|
|
|
|
|
/s/ CEDRIC
W. BURGHER
|
|
/s/ JOHN
W. GANN, JR.
|
Cedric
W. Burgher
|
|
John
W. Gann, Jr.
|
Senior
Vice President and Chief Financial Officer
|
|
Vice
President and Chief Accounting Officer
|
|
|
|
|
|
|
Date:
August 2, 2007
|
|
|
Exhibit
Index
*
|
|
|
|
Amended
and Restated Bylaws of KBR, Inc. (filed only to show date of
adoption).
|
|
|
|
|
|
*
|
|
|
|
KBR,
Inc. 2006 Stock and Incentive Plan (as amended June 27,
2007).
|
|
|
|
|
|
*
|
|
|
|
Restricted
Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan.
|
|
|
|
|
|
*
|
|
|
|
Stock
Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan.
|
|
|
|
|
|
*
|
|
|
|
KBR
Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and
Incentive
Plan.
|
|
|
|
|
|
*
|
|
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Stock Option
Award.
|
|
|
|
|
|
*
|
|
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Restricted Stock
Award.
|
|
|
|
|
|
*
|
|
|
|
Agreement
relating to the sale and purchase of the entire issued share capital
of
Devonport Management Limited by and among KBR, Inc., Kellogg Brown
&
Root Holdings (U.K.) Limited, Balfour Beatty plc, The Weir Group
plc, and
Babcock International Group plc, dated May 10, 2007.
|
|
|
|
|
|
*
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
*
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
**
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
**
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Filed
with this Form 10-Q
|
|
|
**
|
|
Furnished
with this Form 10-Q
|
|
|
+
|
|
Management
contracts or compensatory plans or
arrangements
|