form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
T
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the fiscal year ended December 31, 2008
OR
£
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the transition period
from to
Commission
File Number 1-33146
KBR,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-4536774
|
(State or other jurisdiction
of incorporation
or organization)
|
(I.R.S. Employer Identification
No.)
|
601
Jefferson Street
Suite
3400
Houston,
Texas 77002
(Address
of principal executive offices)
Telephone
Number - Area code (713) 753-3011
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each Exchange on which registered
|
Common
Stock par value $0.001 per share
|
|
New
York Stock
Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes T No £
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer T
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
The
aggregate market value of the voting stock held by non-affiliates on June 30,
2008, was approximately $5,423,000,000, determined using the closing price of
shares of common stock on the New York Stock Exchange on that date of
$34.91.
As of
February 20, 2009, there were 161,811,707 shares of KBR, Inc. Common Stock,
$0.001 par value per share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the KBR, Inc. Company Proxy Statement for our 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
report.
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Forward-Looking
and Cautionary Statements
This
report contains certain statements that are, or may be deemed to be,
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward looking information. Some of the statements
contained in this annual report are forward-looking statements. All statements
other than statements of historical fact are, or may be deemed to be,
forward-looking statements. The words “believe,” “may,” “estimate,” “continue,”
“anticipate,” “intend,” “plan,” “expect” and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include
information concerning our possible or assumed future financial performance and
results of operations.
We
have based these statements on our assumptions and analyses in light of our
experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. Forward-looking statements by their nature involve substantial
risks and uncertainties that could significantly affect expected results, and
actual future results could differ materially from those described in such
statements. While it is not possible to identify all factors, factors that could
cause actual future results to differ materially include the risks and
uncertainties described under “Risk Factors” contained in Part I of this Annual
Report on Form 10-K.
Many
of these factors are beyond our ability to control or predict. Any of these
factors, or a combination of these factors, could materially and adversely
affect our future financial condition or results of operations and the ultimate
accuracy of the forward-looking statements. These forward-looking statements are
not guarantees of our future performance, and our actual results and future
developments may differ materially and adversely from those projected in the
forward-looking statements. We caution against putting undue reliance on
forward-looking statements or projecting any future results based on such
statements or present or prior earnings levels. In addition, each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statement.
General
KBR, Inc.
(“KBR”) is a leading global engineering, construction and services company
supporting the energy, petrochemicals, government services, industrial and civil
infrastructure sectors. We provide our wide range of services through six
business units; Government and Infrastructure (“G&I”), Upstream, Services,
Downstream, Technology and Ventures. See Note 7 to our consolidated
financial statements for financial information about our reportable business
segments.
KBR, Inc.
was incorporated in Delaware on March 21, 2006 as an indirect wholly-owned
subsidiary of Halliburton Company (“Halliburton”). KBR was formed to own and
operate KBR Holdings, LLC (“KBR Holdings”), which was contributed to KBR by
Halliburton in November 2006. KBR had no operations from the date of its
formation to the date of the contribution of KBR Holdings. In November 2006,
KBR, Inc. completed an initial public offering of 32,016,000 shares, or
approximately 19%, of its common stock (the “Offering”) at $17.00 per share.
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. 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 May
2006, we completed the sale of our Production Services group, which was part of
our Services business unit. The Production Services group delivers 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.
In
June 2007, we completed the disposition of our 51% interest in Devonport
Management Limited (“DML”) to Babcock International Group plc. DML owns and
operates Devonport Royal Dockyard, one of Western Europe’s largest naval
dockyard complexes. Our DML operations, which was part of our G&I business
unit, primarily involved refueling nuclear submarines and performing maintenance
on surface vessels for the U.K. Ministry of Defence as well as limited
commercial projects. In connection with the sale of our 51% interest in DML, we
received $345 million in cash proceeds, net of direct transaction costs,
resulting in a gain of approximately $101 million, net of tax of $115
million.
In April
2008, we acquired 100% of the outstanding common stock of Turnaround Group of
Texas, Inc. (“TGI”) and Catalyst Interactive for approximately $12 million. TGI
is a Houston-based turnaround management and consulting company that specializes
in the planning and execution of turnarounds and outages in the petrochemical,
power, and pulp & paper industries. Catalyst Interactive is an Australian
e-learning and training solution provider that specializes in the defense,
government and industry training sectors. TGI’s results of operations are
included in our Services business unit. Catalyst Interactive’s results of
operations are included in our Government & Infrastructure business
unit.
In July
2008, we acquired 100% of the outstanding common shares of BE&K, Inc.,
(“BE&K”) a privately held, Birmingham, Alabama-based engineering,
construction and maintenance services company. The acquisition of BE&K
enhances our ability to provide contractor and maintenance services in North
America. The agreed-upon purchase price was $550 million in cash subject to
certain indemnifications and stockholders equity adjustments as defined in the
stock purchase agreement. BE&K and its acquired divisions have been
integrated into our Services, Downstream and Government & Infrastructure
business units based upon the nature of the underlying projects
acquired.
In
October 2008, we acquired 100% of the outstanding common stock of Wabi
Development Corporation (“Wabi”) for approximately $20 million in cash. Wabi is
a privately held Canada-based general contractor, which provides services for
the energy, forestry and mining industries. Wabi currently employs over 120
people, providing maintenance, fabrication, construction and construction
management services to a variety of clients in Canada and Mexico. Wabi has been
integrated into our Services business unit and it provides additional growth
opportunities for our heavy hydrocarbon, forestry, oil sand, general industrial
and maintenance services business.
See Note
4 to our consolidated financial statements for further discussion of our recent
acquisitions.
Our
Business Units
Downstream. Our
Downstream business unit serves clients in the petrochemical, refining, coal
gasification and syngas markets, executing projects throughout the world. We
leverage our differentiated process technologies, some of which are the most
efficient ones available in the market today, and also execute projects using
non-KBR technologies, either alone or with joint venture or alliance partners to
a wide variety of customers. Downstream’s work with KBR’s Ventures business unit
has resulted in creative equity participation structures such as our Egypt Basic
Industries Corporation Ammonia plant which offers our customers unique solutions
to meet their project development needs. We are a leading contractor in the
markets that we serve delivering projects through a variety of service offerings
including front-end engineering design (“FEED”), detailed engineering,
engineering, procurement and construction (“EPC”), engineering, procurement and
construction management (“EPCM”) and program management. We are
dedicated to providing life cycle value to our customers.
Government and
Infrastructure. Our G&I business unit provides program and
project management, contingency logistics, operations and maintenance,
construction management, engineering and other services to military and civilian
branches of governments and private clients worldwide. We deliver on-demand
support services across the full military mission cycle from contingency
logistics and field support to operations and maintenance on military bases. A
significant portion of our G&I business unit’s current operations relate to
the support of the United States government operations in the Middle East, which
we refer to as our Middle East operations, and is one of the largest U.S.
military deployments since World War II. In the civil infrastructure market, we
operate in diverse sectors, including transportation, waste and water treatment
and facilities maintenance. We design, construct, maintain and operate and
manage civil infrastructure projects ranging from airport, rail, highway, water
and wastewater facilities, and mining and mineral processing to regional
development programs and major events. We provide many of these services to
foreign governments such as the United Kingdom and Australia.
Services. Our Services
business unit delivers full scope construction, construction management,
fabrication, maintenance, and turnaround expertise to customers
worldwide. Our experience is broad and based on 90 years of
successful project realization beginning with the founding of legacy company
Brown & Root in 1919. With the acquisition of BE&K, our reach
has expanded and now includes engineering as well as construction and
maintenance services to address power, alternate energy, pulp and paper,
industrial and manufacturing, and pharmaceutical industries in addition to our
base markets in the oil, gas, petrochemicals and hydrocarbon processing
industries. We provide construction related services to education,
food and beverage, healthcare, hospitality and entertainment, life science and
technology, and mixed use building clients through our Building Group. KBR
Services and its joint venture partner offer maintenance and construction
related services for offshore oil and gas producing facilities in the Bay of
Campeche through the use of semisubmersible vessels.
Technology. Our
Technology business unit offers differentiated process technologies, some of
which are the most efficient ones available in the market today, including
value-added technologies in the coal monetization, petrochemical, refining and
syngas markets. We offer technology licenses, and, in conjunction with our
Downstream business unit, offer project management and engineering, procurement
and construction for integrated solutions worldwide. We are one of a few
engineering and construction companies to possess a technology center, with 80
years of experience in technology research and development.
Upstream. Our
Upstream business unit provides a full range of services for large, complex
upstream projects, including liquefied natural gas (“LNG”), gas-to-liquids
(“GTL”), onshore oil and gas production facilities, offshore oil and gas
production facilities, including platforms, floating production and subsea
facilities, and onshore and offshore pipelines. In gas-to-liquids, we are
leading the construction of two of the world’s three gas-to-liquids projects
under construction or start-up, the size of which exceeds that of almost any
other in the industry. Our Upstream business unit has designed and constructed
some of the world’s most complex onshore facility and pipeline projects and, in
the last 30 years, more than half of the world's operating LNG liquefaction
capacity. In oil & gas, we provide integrated engineering and program
management solutions for offshore production facilities and subsea developments,
including the design of the largest floating production facility in the world to
date.
Ventures. Our
Ventures business unit assists clients to realize projects through innovative
commercial structures that lead to financed projects. The business unit invests
and manages KBR equity in certain projects where the Company’s other business
units provide engineering, procurement, construction, and/or operations and
maintenance services. Project equity investments under current management
include defense equipment and housing, toll roads and
petrochemicals.
Our
Significant Projects
The
following table summarizes several significant contracts under which business
units are currently providing or have recently provided services.
G&I-Middle
East
Project Name
|
|
Customer Name
|
|
Location
|
|
Contract Type
|
|
Description
|
LogCAP
III
|
|
U.S.
Army
|
|
Worldwide
|
|
Cost-reimbursable
|
|
Contingency
support services.
|
G&I-Americas
Project Name
|
|
Customer Name
|
|
Location
|
|
Contract Type
|
|
Description
|
CENTCOM
|
|
U.S.
Army
|
|
Middle
East
|
|
Fixed-price
and cost-reimbursable
|
|
Construction
of military infrastructure and support facilities.
|
|
|
|
|
|
|
|
|
|
U.S.
Embassy Macedonia
|
|
U.S.
Department of State
|
|
Macedonia
|
|
Fixed-price
|
|
Design
and construction of embassy.
|
|
|
|
|
|
|
|
|
|
DOCCC-Office
of Space Launch
|
|
NRO
Office of Space Launch
|
|
USA
|
|
Fixed-price
plus award fee
|
|
Provide
on call project management, construction management and related support
for mission critical facilities at Cape Canaveral and other
locations.
|
|
|
|
|
|
|
|
|
|
Qatar
Bahrain Causeway Phase I and II
|
|
Qatar
Bahrain Causeway Foundation
|
|
Qatar/Bahrain
|
|
Cost-reimbursable
|
|
Program
management contracting.
|
|
|
|
|
|
|
|
|
|
USAREUR
|
|
U.S.
Army
|
|
Europe
(Balkans)
|
|
Fixed-
price and cost-reimbursable
|
|
Contingency
support within the USAREUR AOR; Balkans
Support.
|
G&I-International
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
Aspire
Defence-Allenby & Connaught Accommodation Project
|
|
Aspire
Defence U.K. Ministry of Defence
|
|
U.K.
|
|
Fixed-price
and cost-reimbursable
|
|
Design,
build and finance the upgrade and service of army
facilities.
|
|
|
|
|
|
|
|
|
|
Temporary
Deployable Accommodations (“TDA”)
|
|
U.K.
Ministry of Defence
|
|
Worldwide
|
|
Fixed-price
|
|
Battlefield
infrastructure support.
|
|
|
|
|
|
|
|
|
|
CONLOG
|
|
U.K.
Ministry of Defence
|
|
Worldwide
|
|
Fixed-
price and cost-reimbursable
|
|
Provide
contingency support services to MOD.
|
|
|
|
|
|
|
|
|
|
Hope
Downs Iron Ore Project
|
|
Rio
Tinto IO
|
|
Western
Australia
|
|
Cost-reimbursable
|
|
Engineering,
Procurement & Construction Management.
|
|
|
|
|
|
|
|
|
|
Afghanistan
ISP UK
|
|
Ministry
of Defense (Defense Estates)
|
|
Afghanistan
|
|
Firm-fixed
price
|
|
Construction
of military infrastructure and support facilities.
|
|
|
|
|
|
|
|
|
|
Tier
3 Basra
|
|
UK
Ministry of Defense Basra
|
|
Iraq
|
|
Fixed-price
and cost-reimbursable
|
|
Construction
of Hardened Accommodation (Field Hospital,
DFAC)
|
Upstream- Gas
Monetization
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
Tangguh
LNG
|
|
BP
Berau Ltd.
|
|
Indonesia
|
|
Fixed-price
|
|
EPC-CS
services for two LNG liquefaction trains; joint venture with JGC and PT
Pertafenikki Engineering of Indonesia.
|
|
|
|
|
|
|
|
|
|
Yemen
LNG
|
|
Yemen
LNG Company Ltd.
|
|
Yemen
|
|
Fixed-price
|
|
EPC-CS
services for two LNG liquefaction trains; joint venture with JGC and
Technip.
|
|
|
|
|
|
|
|
|
|
NLNG
Train 6
|
|
Nigeria
LNG Ltd.
|
|
Nigeria
|
|
Fixed-price
|
|
EPC-CS
services for one LNG liquefaction train; working through TSKJ joint
venture.
|
|
|
|
|
|
|
|
|
|
Skikda
LNG
|
|
Sonatrach
|
|
Algeria
|
|
Fixed-price
and cost-reimbursable
|
|
EPC-CS
services for one LNG liquefaction train.
|
|
|
|
|
|
|
|
|
|
Escravos
GTL
|
|
Chevron
Nigeria Ltd & Nigeria National Petroleum Corp.
|
|
Nigeria
|
|
Cost-reimbursable
|
|
EPC-CS
services for a GTL plant producing diesel, naphtha and liquefied petroleum
gas; joint venture with JGC and Snamprogetti.
|
|
|
|
|
|
|
|
|
|
Pearl
GTL
|
|
Qatar
Shell GTL Ltd.
|
|
Qatar
|
|
Cost-reimbursable
|
|
Front-end
engineering design (“FEED”) work and project management for the overall
complex and EPCM for the GTL synthesis and utilities portions of the
complex; joint venture with JGC.
|
|
|
|
|
|
|
|
|
|
Gorgon
LNG
|
|
Chevron
Australia Pty Ltd
|
|
Australia
|
|
Cost-reimbursable
|
|
Front-end
engineering design (“FEED”) work and project management for a Liquefied
Natural Gas (LNG) facility on Barrow Island; joint venture with
KJVG.
|
Upstream-Offshore
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
Azeri-Chirag-
Gunashli
|
|
AIOC
|
|
Azerbaijan
|
|
Cost-reimbursable
|
|
Engineering
and procurement services for six offshore platforms, subsea facilities,
600 kilometers of offshore pipeline and onshore terminal
upgrades.
|
|
|
|
|
|
|
|
|
|
Kashagan
|
|
AGIP
|
|
Kazakhstan
|
|
Cost-reimbursable
|
|
Project
management services for the development of multiple facilities in the
Caspian Sea.
|
|
|
|
|
|
|
|
|
|
EOS
JV North Rankin 2 (NR2)
|
|
Woodside
Energy Limited
|
|
Australia
|
|
Fixed-price
|
|
Detailed
engineering and procurement management services to maintain gas supply to
its onshore LNG facility, principally by providing compression facilities
for the low pressure Perseus
reservoir.
|
Upstream-Other
|
|
|
|
|
|
|
|
|
KEP2010
|
|
Statoil
Hydro
|
|
Norway
|
|
Cost-reimbursable
|
|
Engineering
and support services for the overall construction of an upgrade to a gas
plant.
|
Services
Project Name
|
|
Customer Name
|
|
Location
|
|
Contract Type
|
|
Description
|
Georgia
Power
|
|
Georgia
Power
|
|
Georgia
|
|
Cost-reimbursable
|
|
Provision
of project management, procurement, and construction services for
coal-fired power generation plant and environmental
remediation.
|
|
|
|
|
|
|
|
|
|
Shell
Scotford
|
|
Shell
Canada
|
|
Canada
|
|
Cost-reimbursable
and fixed-price
|
|
Provision
of direct hire construction services and fixed-unit rate module/pipe
fabrication for oil sands upgrader project.
|
|
|
|
|
|
|
|
|
|
LCRA
|
|
Lower
Colorado River Authority
|
|
Texas
|
|
Cost-
reimbursable
|
|
Provision
of project management, procurement, and construction services of power
generation plant.
|
|
|
|
|
|
|
|
|
|
Hunt
Refining
|
|
Hunt
Refining
|
|
Alabama
|
|
Cost-reimbursable
|
|
Provision
of process construction services and project management for refinery
expansion.
|
|
|
|
|
|
|
|
|
|
Borger
|
|
ConocoPhillips
|
|
Texas
|
|
Cost-
reimbursable
|
|
Provision
of direct hire construction services for a Benzene
unit
|
Downstream
Project Name
|
|
Customer Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
Ethylene/Olefins
Facility
|
|
Saudi
Kayan Petrochemical Company
|
|
Saudi
Arabia
|
|
Fixed-price
|
|
Basic
process design and EPCM services for a new ethylene facility using
SCORE™
technology
|
|
|
|
|
|
|
|
|
|
Ras
Tanura Integrated Project
|
|
Dow
and Saudi Aramco
|
|
Saudi
Arabia
|
|
Cost-reimbursable
|
|
FEED
and PM/CM of an integrated refinery and Petrochemical
complex.
|
|
|
|
|
|
|
|
|
|
Yanbu
Export Refinery Project
|
|
Aramco
Services Co. and ConocoPhillips Yanbu Ltd.
|
|
Saudi
Arabia
|
|
Cost-reimbursable
|
|
Program
management services including FEED for a new 400,000 barrels per day green
field export refinery.
|
|
|
|
|
|
|
|
|
|
Ammonia
Plant
|
|
Egypt
Basic Industries Corporation
|
|
Egypt
|
|
Fixed-price
|
|
EPC-CS
services for an ammonia plant based on KBR Advanced Ammonia Process
technology.
|
Technology
|
|
|
|
|
|
|
|
|
Moron
Ammonia Plant
|
|
Ferrostaal/Pequiven
|
|
Venezuela
|
|
Fixed-price
|
|
Technology
license and engineering services.
|
|
|
|
|
|
|
|
|
|
Jose
Ammonia Facility LBEP
|
|
Pequiven
|
|
Venezuela
|
|
Fixed-price
|
|
Technology
license and basic engineering services.
|
|
|
|
|
|
|
|
|
|
Puerto
Nutrias Ammonia Facility LBEP
|
|
Pequiven
|
|
Venezuela
|
|
Fixed-price
|
|
Technology
license and basic engineering services.
|
|
|
|
|
|
|
|
|
|
Hazira
Ammonia Plant Revamp
|
|
KRIBHCO
|
|
India
|
|
Fixed-price
|
|
Technology
license and basic engineering
services.
|
Ventures
Project
Name
|
|
Customer
Name
|
|
Location
|
|
Contract
Type
|
|
Description
|
Egypt
Basic Industries (EBIC)-Ammonia Project
|
|
Various
|
|
Egypt
|
|
Market
rates
|
|
Design,
build, own, finance and operate an ammonia plant.
|
|
|
|
|
|
|
|
|
|
Aspire
Defence-Allenby & Connaught Defence Accommodation
Project
|
|
U.K.
Ministry of Defence
|
|
U.K.
|
|
Fixed-price
and cost-reimbursable
|
|
Design,
build and finance the upgrade and service of army
facilities.
|
See Note
7 to the consolidated financial statements for financial information about our
reportable business segments.
Our
Business Strategy
Our
business strategy is to create sustainable shareholder value by providing our
customers differentiated capital project and services offerings across the
entire engineering, construction and services project lifecycle. We
will execute our business strategy on a global scale through best in class risk
awareness, delivering consistent, predictable financial results in all markets
where we operate. Our core skills are conceptual design, FEED (front-end
engineering design), engineering, project management, procurement, construction,
construction management, operations and maintenance. Our primary
activities are scalable, which will enable us to grow the company organically.
We will complement organic growth by pursuing targeted merger and acquisition
opportunities with a focus on expanding our product and services offerings and
market coverage to accelerate implementation of individual Business Unit
strategies. Key features of our business unit strategies include:
|
·
|
The Government and
Infrastructure business unit will broaden our logistical design,
infrastructure and other service offerings to existing customers and
cross-sell to adjacent markets.
|
|
·
|
The Upstream business unit
will build on our world-class strength and experience in gas
monetization and seek to expand our footprint in offshore oil and gas
services.
|
|
·
|
The Services business
unit will expand existing operations while pursuing new offerings
that capitalize on our brand reputation and legacy core
competencies.
|
|
·
|
The Downstream business
unit will grow by leveraging our leading technologies and execution
excellence to provide life-cycle value to
customers.
|
|
·
|
The Technology business
unit will expand our range of differentiated process technologies
and increase our proprietary equipment and catalyst
offerings.
|
|
·
|
The Ventures business unit
will differentiate the offerings of our business units by investing
capital and arranging project
finance.
|
Competition
and Scope of Global Operations
We
operate in highly competitive markets throughout the world. The principal
methods of competition with respect to sales of our capital project and service
offerings include:
|
•
|
customer
relationships;
|
|
•
|
technical
excellence or differentiation;
|
|
•
|
service
delivery, including the ability to deliver personnel, processes, systems
and technology on an “as needed, where needed, when needed” basis with the
required local content and
presence;
|
|
•
|
health,
safety, and environmental standards and
practices;
|
|
•
|
breadth
of technology and technical
sophistication;
|
|
•
|
risk
management awareness and processes;
and
|
We
conduct business in over 45 countries. Based on the location of services
provided, our operations in countries other than the United States accounted for
85% of our consolidated revenue during 2008, 89% of our consolidated revenue
during 2007 and 85% of our consolidated revenue during 2006. Revenue from our
operations in Iraq, primarily related to our work for the U.S. government, was
43% of our consolidated revenue in 2008, 50% of our consolidated revenue in 2007
and 49% of our consolidated revenue in 2006. See Note 7 to our consolidated
financial statements for selected geographic information.
We market
substantially all of our capital project and service offerings through our
servicing and sales organizations. We serve highly competitive industries and we
have many substantial competitors in the markets that we serve. Some of our
competitors have greater financial and other resources and better access to
capital than we do, which may enable them to compete more effectively for
large-scale project awards. The companies competing in the markets that we serve
include but are not limited to AMEC, Bechtel Corporation, CH2M Hill Companies
Ltd., Chicago Bridge and Iron Co., N.V., Chiyoda, DynCorp, Fluor Corporation,
Foster Wheeler Ltd., Jacobs Engineering Group, Inc., Shaw Group, Inc., Technip,
URS Corporation, and Worley Parsons Ltd. Additionally, in April 2008, we were
selected as one of the executing contractors under the multiple service provider
LogCAP IV contract along with Fluor Corporation and DynCorp International. Since
the markets for our services are vast and cross numerous geographic lines, we
cannot make a meaningful estimate of the total number of our
competitors.
Our
operations in some countries may be adversely affected by unsettled political
conditions, acts of terrorism, civil unrest, force majeure, war or other armed
conflict, expropriation or other governmental actions, inflation, exchange
controls and currency fluctuations. Please read “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Financial
Instruments Market Risk” and Note 15 to our consolidated financial statements
for information regarding our exposures to foreign currency fluctuations, risk
concentration, and financial instruments used to manage our risks.
Joint
Ventures and Alliances
We enter
into joint ventures and alliances with other industry participants in order to
reduce and diversify risk, increase the number of opportunities that can be
pursued, capitalize on the strengths of each party, expand or create the
relationships of each party with different potential customers, and allow for
greater flexibility in choosing the preferred location for our services based on
the greatest cost and geographical efficiency. Several of our significant joint
ventures and alliances are described below. All joint venture ownership
percentages presented are as of December 31, 2008.
In 2002,
we entered into a cooperative agreement with ExxonMobil Research and Engineering
Company for licensing fluid catalytic cracking technology that was an extension
of a previous agreement with Mobil Oil Corporation. Under this alliance, we
offer to the industry certain fluid catalytic cracking technology that is
available from both parties. We lead the marketing effort under this
collaboration, and we co-develop certain new fluid catalytic cracking
technology.
M.W.
Kellogg Limited (“MWKL”) is a London-based joint venture that provides full
EPC-CS contractor services for LNG, GTL and onshore oil and gas projects. MWKL
is owned 55% by us and 45% by JGC. MWKL supports both of its parent companies,
on a stand-alone basis or through our gas alliance with JGC, and also provides
services to other third party customers. We consolidate MWKL for financial
accounting purposes.
TKJ Group
is a consortium consisting of several private limited liability companies
registered in Dubai, UAE. The TKJ Group was created for the purpose of trading
equipment and the performance of services required for the realization,
construction, and modification of maintenance of oil, gas, chemical, or other
installations in the Middle East. KBR holds a 33.3% interest in the TKJ Group
companies. We account for this investment using the equity method of
accounting.
TSKJ
Group is a joint venture consisting of several limited liability companies
formed to design and construct large-scale projects in Nigeria. TSKJ’s members
are Technip, SA of France, Snamprogetti Netherlands B.V., which is a subsidiary
of Saipem SpA of Italy, JGC and us, each of which has a 25% interest. TSKJ has
completed six LNG production facilities on Bonny Island, Nigeria and has
performed the engineering and design work on a seventh such facility. We account
for this investment using the equity method of accounting.
Aspire
Defence—Allenby & Connaught is a joint venture between us, Carillion Plc.
and a financial investor formed to contract with the U.K. Ministry of Defence to
upgrade and provide a range of services to the British Army’s garrisons at
Aldershot and around the Salisbury Plain in the United Kingdom. We own a 45%
interest in Aspire Defence. In addition, we own a 50% interest in each of the
two joint ventures that provide the construction and related support services to
Aspire Defence. We account for our investments in these entities using the
equity method of accounting.
MMM is a
joint venture formed under a Partners Agreement with Grupo R affiliated
entities. The principal Grupo R entity is Corporative Grupo R, S.A. de C.V. and
Discoverer ASA, Ltd a Cayman Islands company. The partners agreement covers five
joint venture entities related to the Mexico contract with PEMEX. The MMM joint
venture was set up under Mexican maritime law in order to hold navigation
permits to operate in Mexican waters. The scope of the business is to render
services of maintenance, repair and restoration of offshore oil and gas
platforms and provisions of quartering in the territorial waters of Mexico. We
own a 50% interest in MMM and in each of the four other joint ventures. We
account for our investment in these entities using the equity method of
accounting.
Backlog
Backlog
represents the dollar amount of revenue we expect to realize in the future as a
result of performing work under multi-period contracts that have been awarded to
us. Backlog is not a measure defined by generally accepted accounting
principles, and our methodology for determining backlog may not be comparable to
the methodology used by other companies in determining their backlog. Backlog
may not be indicative of future operating results. Not all of our revenue is
recorded in backlog for a variety of reasons, including the fact that some
projects begin and end within a short-term period. Many contracts do not provide
for a fixed amount of work to be performed and are subject to modification or
termination by the customer. The termination or modification of any one or more
sizeable contracts or the addition of other contracts may have a substantial and
immediate effect on backlog.
We
generally include total expected revenue in backlog when a contract is awarded
and/or the scope is definitized. For our projects related to unconsolidated
joint ventures, we have included in the table below our percentage ownership of
the joint venture’s revenue in backlog. However, because these projects are
accounted for under the equity method, only our share of future earnings from
these projects will be recorded in our revenue. Our backlog for projects related
to unconsolidated joint ventures totaled $2.4 billion at December 31, 2008 and
$3.1 billion at December 31, 2007. 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 and totaled $3.1 billion at
December 31, 2008 and $3.2 billion at December 31, 2007.
For
long-term contracts, the amount included in backlog is limited to five years. In
many instances, arrangements included in backlog are complex, nonrepetitive in
nature, and may fluctuate depending on expected revenue and timing. Where
contract duration is indefinite, projects included in backlog are limited to the
estimated amount of expected revenue within the following twelve months. Certain
contracts provide maximum dollar limits, with actual authorization to perform
work under the contract being agreed upon on a periodic basis with the customer.
In these arrangements, only the amounts authorized are included in backlog. For
projects where we act solely in a project management capacity, we only include
our management fee revenue of each project in backlog.
Backlog(1)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
G&I:
|
|
|
|
|
|
|
U.S.
Government - Middle East Operations
|
|
$ |
1,428 |
|
|
$ |
1,361 |
|
U.S.
Government - Americas Operations
|
|
|
600 |
|
|
|
548 |
|
International
Operations
|
|
|
1,446 |
|
|
|
2,339 |
|
Total
G&I
|
|
$ |
3,474 |
|
|
$ |
4,248 |
|
Upstream:
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
6,196 |
|
|
|
6,606 |
|
Offshore
Projects
|
|
|
148 |
|
|
|
173 |
|
Other
|
|
|
112 |
|
|
|
118 |
|
Total
Upstream
|
|
$ |
6,456 |
|
|
$ |
6,897 |
|
Services
|
|
|
2,810 |
|
|
|
765 |
|
Downstream
|
|
|
578 |
|
|
|
313 |
|
Technology
|
|
|
130 |
|
|
|
128 |
|
Ventures
|
|
|
649 |
|
|
|
700 |
|
Total
backlog
|
|
$ |
14,097 |
|
|
$ |
13,051 |
|
_________________________
(1)
|
Our
G&I business unit’s total backlog attributable to firm orders was $3.3
billion and $4.0 billion as of December 31, 2008 and 2007. Our G&I
business unit’s total backlog attributable to unfunded orders was $0.2
billion and $0.2 billion as of December 31, 2008 and 2007,
respectively.
|
We
estimate that as of December 31, 2008, 62% of our backlog will be complete
within one year. As of December 31, 2008, 20% of our backlog was attributable to
fixed-price contracts and 80% was attributable to cost-reimbursable contracts.
For contracts that contain both fixed-price and cost-reimbursable components, we
classify the components as either fixed-price or cost-reimbursable according to
the composition of the contract except for smaller contracts where we
characterize the entire contract based on the predominant
component.
As of
December 31, 2008, backlog in our G&I business unit includes approximately
$1.4 billion for our continued services under the LogCAP III contract in our
Middle East operations and $1.0 billion related to the Allenby & Connaught
for the U.K. Ministry of Defence.
Backlog
in our Upstream business unit decreased primarily as a result of work-off on
several Gas Monetization projects including the Pearl GTL, Tangguh LNG and Yemen
LNG projects. As of December 31, 2008, our Gas Monetization backlog
included $2.4 billion on the Escravos LNG project and $2.8 billion on the Skikda
LNG project.
Total KBR
backlog increased by approximately $2.0 billion as a result of the acquisition
of BE&K on July 1, 2008 of which $1.9 billion was added to our Services
business unit.
Contracts
Our
contracts can be broadly categorized as either cost-reimbursable or fixed-price,
the latter sometimes being referred to as lump-sum. Some contracts can involve
both fixed-price and cost-reimbursable elements.
Fixed-price
contracts are for a fixed sum to cover all costs and any profit element for a
defined scope of work. Fixed-price contracts entail more risk to us because they
require us to predetermine both the quantities of work to be performed and the
costs associated with executing the work. Although fixed-price contracts involve
greater risk than cost-reimbursable contracts, they also are potentially more
profitable since the owner/customer pays a premium to transfer more project risk
to us.
Cost-reimbursable
contracts include contracts where the price is variable based upon our actual
costs incurred for time and materials, or for variable quantities of work priced
at defined unit rates, including reimbursable labor hour contracts. Profit on
cost-reimbursable contracts may be based upon a percentage of costs incurred
and/or a fixed amount. Cost reimbursable contracts are generally less risky than
fixed-price contracts because the owner/customer retains many of the project
risks.
Our
G&I business unit provides substantial work under government contracts with
the Department of Defense (“DoD”), the Ministry of Defense (“MoD”)
and other governmental agencies. These contracts include our LogCAP contract and
contracts to rebuild Iraq’s petroleum industry such as the PCO Oil South
contract. If our customer or a government auditor finds that we improperly
charged any costs to a contract, these costs are not reimbursable or, if already
reimbursed, the costs must be refunded to the customer. If performance issues
arise under any of our government contracts, the government retains the right to
pursue remedies, which could include threatened termination or termination under
any affected contract. Furthermore, the government has the contractual right to
terminate or reduce the amount of work under our contracts at any
time.
Customers
We
provide services to a diverse customer base, including international and
national oil and gas companies, independent refiners, petrochemical producers,
fertilizer producers and domestic and foreign governments. Revenue from the U.S.
government, resulting primarily from work performed in the Middle East by our
G&I business unit, represented 53% of our 2008 consolidated revenue, 62% of
our 2007 consolidated revenue and 66% of our 2006 consolidated revenue. No other
customer represented more than 10% of consolidated revenue in any of these
periods. See “Risk Factors – Risk related to our customers and
contracts – 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.”
Raw
Materials
Equipment
and materials essential to our business are available from worldwide sources.
The principal equipment and materials we use in our business are subject to
availability and pricing fluctuations due to customer demand, producer capacity,
market conditions and material shortage. We monitor the availability
and pricing of equipment and materials on a regular basis. Our
procurement department actively leverages our size and buying power to ensure
that we have access to key equipment and materials at the best possible prices
and delivery schedule. Globally, current market conditions indicate
supply chain opportunities exist due to increases in fabrication capacity and
decreases in pricing for a wide array of equipment and materials as a result of
delays or cancellation of some major projects. While we do not
currently foresee the lack of availability of equipment and materials in the
near term, the availability of these items may vary significantly from year to
year and any prolonged unavailability or significant price increases for
equipment and materials necessary to our projects and services could have a
material adverse effect on our business. Please read, “Risk Factors—Risks Related to Our
Customers and Contracts—Difficulties in engaging third party subcontractors,
equipment manufacturers or materials suppliers or failures by third party
subcontractors, equipment manufacturers or materials suppliers to perform could
result in project delays and cause us to incur additional
costs.”
Intellectual
Property
We have
developed or otherwise have the right to license leading technologies, including
technologies held under license from third parties, used for the production of a
variety of petrochemicals and chemicals and in the areas of olefins, refining,
fertilizers and semi-submersible technology. Our petrochemical technologies
include SCORE™ and
SUPERFLEX™.
SCORE™ is a
process for the production of ethylene which includes technology developed with
ExxonMobil. SUPERFLEX™ is a
flexible proprietary technology for the production of high yields of propylene
using low value chemicals. We also license a variety of technologies for the
transformation of raw materials into commodity chemicals such as phenol and
aniline used in the production of consumer end-products. Our Residuum Oil
Supercritical Extraction (ROSE™) heavy
oil technology is designed to maximize the refinery production yield from each
barrel of crude oil. The by-products from this technology, known as asphaltenes,
can be used as a low-cost alternative fuel. We are also a licensor of ammonia
process technologies used in the conversion of Syngas to ammonia. KAAPplus™, our
ammonia process which combines the best features of the KBR Advanced Ammonia
Process, the KBR Reforming Exchanger System and the KBR Purifier technology,
offers ammonia producers reduced capital cost, lower energy consumption and
higher reliability. We believe our technology portfolio and experience in the
commercial application of these technologies and related know-how differentiates
us from other contractors, enhances our margins and encourages customers to
utilize our broad range of engineering, procurement, construction and
construction services (“EPC-CS”) services.
Our
rights to make use of technologies licensed to us are governed by written
agreements of varying durations, including some with fixed terms that are
subject to renewal based on mutual agreement. For example, our SCORE™ license
runs until 2028 while our rights to SUPERFLEX™
currently expire in 2013, which can be extended by mutual concurrence
indefinitely for 5-year periods. Each agreement may be further extended and we
have historically been able to renew existing agreements before they expire. We
expect these and other similar agreements to be extended so long as it is
mutually advantageous to both parties at the time of renewal. For technologies
we own, we protect our rights through patents and confidentiality agreements to
protect our know-how and trade secrets. KBR’s ammonia process technology is
continually protected through trade secrets and the patent process; currently,
KBR’s ammonia process consists of twenty-five US patents, eighteen US patent
applications, and corresponding foreign filings in at least twenty-five
different jurisdictions.
Technology
Development
We own
and operate a technology center in Houston, Texas, where we collaborate with our
customers to develop new technologies and improve existing ones. We license
these technologies to our customers for the design, engineering and construction
of oil and gas and petrochemical facilities. We are also working to identify new
technologically driven opportunities in emerging markets, including coal
gasification technologies to promote more environmentally friendly uses of
abundant coal resources and CO2
sequestration to reduce CO2 emissions
by capturing and injecting them underground. Our expenditures for research and
development activities were immaterial in each of the past three fiscal
years.
Seasonality
On an
overall basis, our operations are not generally affected by seasonality. Weather
and natural phenomena can temporarily affect the performance of our services,
but the widespread geographic scope of our operations mitigates those
effects.
Employees
As of
December 31, 2008, we had over 57,000 employees in our continuing operations, of
which approximately 4.9% were subject to collective bargaining agreements. Based
upon the geographic diversification of our employees, we believe any risk of
loss from employee strikes or other collective actions would not be material to
the conduct of our operations taken as a whole. We believe that our employee
relations are good.
Health
and Safety
We are
subject to numerous health and safety laws and regulations. In the United
States, these laws and regulations include: the Federal Occupation Safety and
Health Act and comparable state legislation, the Mine Safety and Health
Administration laws, and safety requirements of the Departments of State,
Defense, Energy and Transportation. We are also subject to similar requirements
in other countries in which we have extensive operations, including the United
Kingdom where we are subject to the various regulations enacted by the Health
and Safety Act of 1974.
These
regulations are frequently changing, and it is impossible to predict the effect
of such laws and regulations on us in the future. We actively seek to maintain a
safe, healthy and environmentally friendly work place for all of our employees
and those who work with us. However, we provide some of our services in
high-risk locations and, as a result, we may incur substantial costs to maintain
the safety of our personnel.
Environmental
Regulation
We are
subject to numerous environmental, legal, and regulatory requirements related to
our operations worldwide. In the United States, these laws and regulations
include, among others:
|
•
|
the
Comprehensive Environmental Response, Compensation and Liability
Act;
|
|
•
|
the
Resources Conservation and Recovery
Act;
|
|
•
|
the
Federal Water Pollution Control Act;
and
|
|
•
|
the
Toxic Substances Control Act.
|
In
addition to federal and state laws and regulations, other countries where we do
business often have numerous environmental regulatory requirements by which we
must abide in the normal course of our operations. The portions of our business
to which these requirements apply primarily relates to our Upstream, Downstream
and Services business units where we perform construction and industrial
maintenance services or operate and maintain facilities. For certain locations,
including our property at Clinton Drive, we have not completed our analysis of
the site conditions and until further information is available, we are only able
to estimate a possible range of remediation costs. These locations were
primarily utilized for manufacturing or fabrication work and are no longer in
operation. The use of these facilities created various environmental issues
including deposits of metals, volatile and semi-volatile compounds, and
hydrocarbons impacting surface and subsurface soils and groundwater. The range
of remediation costs could change depending on our ongoing site analysis and the
timing and techniques used to implement remediation activities. We do not expect
costs related to environmental matters will have a material adverse effect on
our consolidated financial position or our results of operations. Based on the
information presently available to us, we have accrued approximately $8 million
for the assessment and remediation costs associated with all environmental
matters, which represents the low end of the range of possible costs that could
be as much as $15 million. See Note 11 to our consolidated financial statements
for more information on environmental matters.
Website
Access
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act of 1934 are made available free of charge on
our internet website at www.kbr.com as soon
as reasonably practicable after we have electronically filed the material with,
or furnished it to, the SEC. The public may read and copy any materials we have
filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
internet site that contains our reports, proxy and information statements, and
our other SEC filings. The address of that site is www.sec.gov. We have
posted on our website our Code of Business Conduct, which applies to all of our
employees and Directors and serves as a code of ethics for our principal
executive officer, principal financial officer, principal accounting officer,
and other persons performing similar functions. Any amendments to our Code of
Business Conduct or any waivers from provisions of our Code of Business Conduct
granted to the specified officers above are disclosed on our website within four
business days after the date of any amendment or waiver pertaining to these
officers.
Risks
Related to Our Customers and Contracts
Our
G&I and Services business units are directly affected by spending and
capital expenditures by our customers and our ability to contract with our
customers.
A decrease in the magnitude of work
we perform for the U.S. government in Iraq and for the MoD or other decreases in
governmental spending and outsourcing for military and logistical support of the
type that we provide could have a material adverse effect on our business,
results of operations and cash flow. For example, the current level of
government services being provided in the Middle East will not likely continue
for an extended period of time. We are currently the sole service provider under
our LogCAP III contract to provide logistics support to U.S. Forces deployed in
the Middle East and elsewhere, under which certain task orders have been
extended by the DoD through the third quarter of 2009. In April 2008,
we were selected as one of the executing contractors under the LogCap IV
contract, a new competitively bid, multiple service provider contract to replace
the current LogCAP III contract. Despite the backlog under the current LogCAP
III contract and the award of a portion of the LOGCAP IV 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.
The loss of the U.S. government as a
customer would, and the loss of the MoD as a customer could, have a material
adverse effect on our business, results of operations and cash flow. The
loss of the U.S. government as a customer, or a significant reduction in our
work for it, would have a material adverse effect on our business, results of
operations and cash flow. Revenue from U.S. government agencies represented 53%
of our revenues in 2008, 62% of our revenues in 2007 and 66% of our revenues in
2006. The MoD is also a substantial customer, the loss of which could have a
material adverse effect on our business, results of operations and cash
flow.
In
our G&I and Services business units, a decrease in capital spending for
infrastructure and other projects of the type that we undertake could have a
material adverse effect on our business, results of operations and cash
flow.
Our
Upstream, Services, Downstream, and Technology business units depend on demand
and capital spending by customers in their target markets, many of which are
directly affected by trends in oil, gas and commodities prices as
well as other factors.
Demand
for many of our services depends on capital spending by oil and natural gas
companies, including national and international oil companies, and industrial
and power companies, which is directly affected by trends in oil, natural gas
and commodities prices. Capital expenditures for refining and distribution
facilities by large oil and gas companies have a significant impact on the
activity levels of our businesses. Demand for LNG facilities for which we
provide construction services would decrease in the event of a sustained
reduction in crude oil or natural gas prices. Perceptions of longer-term lower
oil and natural gas prices by oil and gas companies or longer-term higher
material and contractor prices impacting facility costs can similarly reduce or
defer major expenditures given the long-term nature of many large-scale
projects. Prices for oil, natural gas and commodities are subject to large
fluctuations in response to relatively minor changes in supply and demand,
market uncertainty, and a variety of other factors that are beyond our control.
Factors affecting the prices of oil, natural gas and other commodities
include:
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worldwide
political, military, and economic
conditions;
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the
cost of producing and delivering oil and natural
gas;
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the
level of demand for oil, natural gas, industrial services and power
generation;
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governmental
regulations or policies, including the policies of governments regarding
the use of energy and the exploration for and production and development
of their oil and natural gas
reserves;
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a
reduction in energy demand as a result of energy taxation or a change in
consumer spending patterns;
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global
economic growth or decline;
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the
level of oil production by non-OPEC countries and the available excess
production capacity within OPEC;
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global
weather conditions and natural
disasters;
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shifts
in end-customer preferences toward fuel efficiency and the use of natural
gas;
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potential
acceleration of the development and expanded use of alternative
fuels;
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environmental
regulation, including limitations on fossil fuel consumption based on
concerns about its relationship to climate change;
and
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reduction
in demand for pulp and paper.
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Historically,
the markets for oil and natural gas have been volatile and are likely to
continue to be volatile in the future.
Demand
for our services may also be materially and adversely affected by the
consolidation of our customers, which:
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could
cause customers to reduce their capital spending, which in turn reduces
the demand for our services; and
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could
result in customer personnel changes, which in turn affects the timing of
contract negotiations and settlements of claims and claim negotiations
with engineering and construction customers on cost variances and change
orders on major projects.
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Our
results of operations depend on the award of new contracts and the timing of the
performance of these contracts.
Because a substantial portion of our
revenue is generated from large-scale projects and the timing of new project
awards is unpredictable, our results of operations and cash flow may be subject
to significant periodic fluctuations. A substantial portion of our
revenue is directly or indirectly derived from large-scale international and
domestic projects. Delays in the timing of the awards or potential cancellations
of such prospects as a result of economic conditions, material and equipment
pricing and availability, or other factors could impact our long term projected
results. It is 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. Because a significant portion of our revenue is generated
from large projects, our results of operations and cash flow can fluctuate
significantly from quarter to quarter depending on the timing of our contract
awards and the commencement or progress of work under awarded contracts. In
addition, many of these contracts are subject to financing contingencies and, as
a result, we are subject to the risk that the customer will not be able to
secure the necessary financing for the project.
If we are unable to provide our
customers with bonds, letters of credit or other credit enhancements, we may be
unable to obtain new project awards. In addition, we cannot rely on Halliburton
to provide payment and performance guarantees of our bonds, letters of credit
and contracts entered into after our initial public offering as it has done in
the past, except to the extent Halliburton has agreed to do so under the terms
of the master separation agreement. Customers may require us to provide
credit enhancements, including bonds, letters of credit or performance or
financial guarantees. Consistent with industry practice, we are often required
to provide performance and surety bonds to customers. These bonds indemnify the
customer should we fail to perform our obligations under the contract. Since the
separation from Halliburton we have been engaged in discussions with surety
companies and have arranged lines with multiple firms for our own stand-alone
capacity. Since the arrangement of this stand alone capacity, we have been
sourcing our surety bonds from our own capacity without Halliburton credit
support. Due to events that affect the insurance and bonding markets generally,
bonding may be difficult to obtain or may only be available at significant cost.
In addition, future projects may require us to obtain letters of credit that
extend beyond the term of our current credit facility. Further, our credit
facility limits the amount of new letters of credit and other debt we can incur
outside of the credit facility to $250 million, which could adversely affect our
ability to bid or bid competitively on future projects if the credit facility is
not amended or replaced. Prior to our initial public offering, Halliburton
provided guarantees of most of our surety bonds and letters of credit as well as
most other payment and performance guarantees under our contracts. The credit
support arrangements in existence at the completion of our initial public
offering will remain in effect, but Halliburton is not expected to enter into
any new credit support arrangements on our behalf, except to the limited extent
Halliburton is obligated to do so under the master separation agreement. We have
agreed to indemnify Halliburton for all losses under our outstanding credit
support instruments and any additional credit support instruments for which
Halliburton may become obligated following our initial public offering, and
under the master separation agreement, we have agreed to use our reasonable best
efforts to attempt to release or replace Halliburton’s liability thereunder for
which such release or replacement is reasonably available. Any inability to
obtain adequate bonding and/or provide letters of credit or other customary
credit enhancements and, as a result, to bid on new work could have a material
adverse effect on our business prospects and future revenue.
The DoD awards its contracts through
a rigorous competitive process and our efforts to obtain future contract awards
from the DoD, including the LogCAP IV contract, may be unsuccessful, and the DoD
has recently favored multiple award task order contracts. The DoD
conducts a rigorous competitive process for awarding most contracts. In the
services arena, the DoD uses multiple contracting approaches. It uses omnibus
contract vehicles, such as LogCAP, for work that is done on a contingency, or
as-needed basis. In more predictable “sustainment” environments, contracts may
include both fixed-price and cost-reimbursable elements. The DoD has also
recently favored multiple award task order contracts, in which several
contractors are selected as eligible bidders for future work. Such processes
require successful contractors to continually anticipate customer requirements
and develop rapid-response bid and proposal teams as well as have supplier
relationships and delivery systems in place to react to emerging needs. We will
face rigorous competition for any additional contract awards from the DoD, and
we may be required to qualify or continue to qualify under the various multiple
award task order contract criteria. The DoD has awarded us a portion of the new
LogCAP IV contract, which will replace the current LogCAP III contract under
which we are the sole provider, which is a multiple award task order contract.
Despite being awarded a portion of the LogCAP IV contract, we may not be awarded
any task orders under the LogCAP IV contract, which may have a material adverse
effect on future results of operations. It may be more difficult for us to win
future awards from the DoD and we may have other contractors sharing in any DoD
awards that we win. In addition, negative publicity regarding findings out of
DCAA and Congressional investigations may adversely affect our ability to obtain
future awards. See “Management’s Discussion and
Analysis of Financial Condition and Results of Analysis – U.S. Government
Matters.”
The uncertainty of the timing of
future contract awards may inhibit our ability to recover our labor
costs. The uncertainty of our contract award timing can also present
difficulties in matching workforce size with contract needs. In some cases, we
maintain and bear the cost of a ready workforce that is larger than called for
under existing contracts in anticipation of future workforce needs for expected
contract awards. If an expected contract award is delayed or not received, we
may not be able to recover our labor costs, which could have a material adverse
effect on us.
A
portion of our projects are on a fixed-price basis, subjecting us to the risks
associated with cost over-runs, operating cost inflation and potential claims
for liquidated damages.
Our
long-term contracts to provide services are either on a cost-reimbursable basis
or on a fixed-price basis. At December 31, 2008, 20% of our backlog for
continuing operations was attributable to fixed-price contracts and 80% was
attributable to cost-reimbursable contracts. Our failure to accurately estimate
the resources and time required for a fixed-price project or our failure to
complete our contractual obligations within the time frame and costs committed
could have a material adverse effect on our business, results of operations and
financial condition. In connection with projects covered by fixed-price
contracts, we generally bear the risk of cost over-runs, operating cost
inflation, labor availability and productivity, and supplier and subcontractor
pricing and performance. Under both our fixed-price contracts and our
cost-reimbursable contracts, we generally rely on third parties for many support
services, and we could be subject to liability for engineering or systems
failures. Risks under our contracts include:
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Our
engineering, procurement and construction projects may encounter
difficulties in the design or engineering phases, related to the
procurement of supplies, and due to schedule changes, equipment
performance failures, and other factors that may result in additional
costs to us, reductions in revenue, claims or
disputes.
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We
may not be able to obtain compensation for additional work or expenses
incurred as a result of customer change orders or our customers providing
deficient design or engineering information or equipment or
materials.
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We
may be required to pay liquidated damages upon our failure to meet
schedule or performance requirements of our
contracts.
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Difficulties
in engaging third party subcontractors, equipment manufacturers or
materials suppliers or failures by third party subcontractors, equipment
manufacturers or materials suppliers to perform could result in project
delays and cause us to incur additional
costs.
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Our
projects expose us to potential professional liability, product liability,
warranty, performance and other claims that may exceed our available
insurance coverage.
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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. 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 have
identified issues for disclosure to the government, 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
applicable regulations. Please read “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – U.S. Government
Matters – Investigations Relating to Iraq, Kuwait and Afghanistan” for
more information. We expect to incur legal and other costs, which could include
penalties, in connection with these export control disclosures and
investigations.
We
are involved in a dispute with Petrobras with respect to responsibility for the
failure of subsea flow-line bolts on the 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. The construction manager and project
owner’s representative is Petrobras, the Brazilian national oil company. The
project consists of two converted supertankers, Barracuda and Caratinga, which
are being used as floating production, storage, and offloading units, commonly
referred to as FPSOs. At Petrobras’ direction, we have replaced certain bolts
located on the subsea flow-lines 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 that have failed was issued by Petrobras, and as such, we believe the cost
resulting from any replacement is not our responsibility. Petrobras has
indicated, however, that they do not agree with our conclusion. On March 9,
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 bolts and, in addition, all of the costs and expenses of the
arbitration including the cost of attorneys fees. The arbitration is being
conducted in New York under the guidelines of the United Nations Commission on
International Trade Law (“UNCITRAL”). Although we believe Petrobras is
responsible for any maintenance and replacement of the bolts, it is possible
that the arbitration panel could find against us on this issue. Consequences of
this matter could have a material adverse effect on our results of operations,
financial condition and cash flow. Please read “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Business Environment
and Results of Operations” for further discussion.
We
are actively engaged in claims negotiations with some of our customers, and a
failure to successfully resolve our unapproved claims may materially and
adversely impact our results of operations.
We report
revenue from contracts to provide construction, engineering, design or similar
services under the percentage-of-completion method of accounting. The recording
of profits and losses on long-term contracts requires an estimate of the total
profit or loss over the life of each contract. Total estimated profit is
calculated as the difference between total estimated contract value and total
estimated costs. When calculating the amount of total profit or loss, we include
unapproved claims as contract value when the collection is deemed probable based
upon the four criteria for recognizing unapproved claims under the American
Institute of Certified Public Accountants Statement of Position 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.” Including probable unapproved claims in this calculation increases
the operating income (or reduces the operating loss) that would otherwise be
recorded without consideration of the probable unapproved claims. For example,
we are involved in an arbitration matter with PEMEX as discussed in Note 11 to
our consolidated financial statements.
Risk
Factors relating to FCPA Matters and Investigations of Related Corruption
Allegations
We
pleaded guilty to violating provisions of the United States FCPA and agreed to
the entry of a civil judgment and injunction with the SEC relating to such
violations that could have a material adverse effect on our business, prospects,
results of operations, financial condition and cash flow.
On
February 11, 2009, Kellogg Brown and Root LLC, one of our subsidiaries, pleaded
guilty to one count of conspiring to violate the FCPA and four counts of
violating the FCPA, all arising from the intent to bribe various Nigerian
officials through commissions paid to agents working on behalf of TSKJ, a joint
venture in which one of our subsidiaries (a successor to The M.W. Kellogg
Company) had an approximate 25% interest at December 31, 2008, of a multibillion
dollar contract to construct a natural gas liquefaction complex and related
facilities at Bonny Island in Rivers State, Nigeria. On the same date, the SEC
filed a complaint, and we consented to the filing of a final judgment against us
in the Court. The complaint and the judgment were filed as part of a settled
civil enforcement action by the SEC, to resolve the civil portion of the
government’s investigation of the Bonny Island project. Please read “Risks Related to Our Relationship
With Halliburton—Halliburton’s indemnity for Foreign Corrupt Practices Act
matters does not apply to all potential losses, Halliburton’s actions may not be
in our stockholders’ best interests and we may take or fail to take actions that
could result in our indemnification from Halliburton with respect to related
corruption allegations no longer being available,” and “Management’s Discussion
and Analysis of Financial condition and Results of Operations—Legal
Proceedings—FCPA Investigations” for more information.
Potential
consequences arising out of our guilty plea to violations of the FCPA could
include suspension or debarment of our ability to contract with the United
States, state or local governments, U.S. government agencies or the MoD, third
party claims, loss of business, adverse financial impact, damage to reputation
and adverse consequences on financing for current or future
projects.
Potential
consequences of the guilty plea arising out of the investigations into FCPA
matters or related corruption allegations could include suspension of our
ability to contract with the United States, state or local governments, U.S.
government agencies or the MoD in the United Kingdom. We and our affiliates
could be debarred from future contracts or new orders under current contracts to
provide services to any such parties. During 2008, we had revenue of $6.2
billion from our government contracts work with agencies of the United States or
state or local governments. In addition, we may be excluded from bidding on MoD
contracts in the United Kingdom because the guilty plea involved corruption
allegations or if the MoD determines that our actions constituted grave
misconduct. During 2008, we had revenue of $234 million from our government
contracts work with the MoD. Suspension or debarment from the government
contracts business would have a material adverse effect on our business, results
of operations and cash flow. Please read “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Legal
Proceedings – FCPA Investigations” for more information.
Limitations on our use of agents as
part of our efforts to comply with applicable laws, including the FCPA, could
put us at a competitive disadvantage in pursuing large-scale international
projects. Most of our large-scale international projects are pursued and
executed using one or more agents to assist in understanding customer needs,
local content requirements, and vendor selection criteria and processes and in
communicating information from us regarding our services and pricing. As a
result of our settlement of the FCPA matters described below under “—Risks Relating to Investigations”
and “—Risks Related to Our Relationship With Halliburton” a monitor will
be appointed to review future practices for compliance with the FCPA, including
with respect to the retention of agents. Our compliance procedures and our
requirement to have a monitor may result in a more limited use of agents on
large-scale international projects than in the past. Accordingly, we could be at
a competitive disadvantage in successfully being awarded such future projects,
which could have a material adverse effect on our ability to win contracts and
our future revenue and business prospects.
Other
Risks Related to Our Business
Our revolving credit facility
imposes restrictions that limit our operating flexibility and may result in
additional expenses, and this credit facility will not be available if financial
covenants are not met or if an event of default
occurs.
Our
Revolving Credit Facility provides up to $930 million of borrowing and letters
of credit capacity and expires in December 2010. This facility serves to assist
us in providing working capital and letters of credit for our projects. The
revolving credit facility contains a number of covenants restricting, among
other things, incurrence of additional indebtedness and liens, sales of our
assets, the amount of investments we can make, and the amount of dividends we
can declare to pay or equity shares that can be repurchased. We are also subject
to certain financial covenants, including maintenance of ratios with respect to
consolidated debt to total consolidated capitalization, leverage and fixed
charge coverage. If we fail to meet the covenants or an event of default occurs,
we would not have available the liquidity that the facility
provides.
It is an
event of default if any person or two or more persons acting in concert, other
than Halliburton or our Company, directly or indirectly acquires 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, our wholly
owned subsidiary, the borrower under the credit facility. In the event of a
default, the banks under the facility could declare all amounts due and payable
and cease to provide additional advances and require cash collateralization for
all outstanding letters of credit. If we were unable to obtain a waiver from the
banks or negotiate an amendment or a replacement credit facility prior to an
event of default, it could have a material adverse effect on our liquidity,
financial condition and cash flow.
We
conduct a large portion of our engineering and construction operations through
joint ventures. As a result, we may have limited control over decisions and
controls of joint venture projects and have returns that are not proportional to
the risks and resources we contribute.
We
conduct a large portion of our engineering and construction operations through
joint ventures, where control may be shared with unaffiliated third parties. As
with any joint venture arrangement, differences in views among the joint venture
participants may result in delayed decisions or in failures to agree on major
issues. We also cannot control the actions of our joint venture partners,
including any nonperformance, default, or bankruptcy of our joint venture
partners, and we typically have joint and several liability with our joint
venture partners under these joint venture arrangements. These factors could
potentially materially and adversely affect the business and operations of a
joint venture and, in turn, our business and operations.
Operating
through joint ventures in which we are minority holders results in us having
limited control over many decisions made with respect to projects and internal
controls relating to projects. These joint ventures may not be subject to the
same requirements regarding internal controls and internal control reporting
that we follow. As a result, internal control issues may arise, which could have
a material adverse effect on our financial condition and results of operation.
When entering into joint ventures, in order to establish or preserve
relationships with our joint venture partners, we may agree to risks and
contributions of resources that are proportionately greater than the returns we
could receive, which could reduce our income and returns on these investments
compared to what we would have received if the risks and resources we
contributed were always proportionate to our returns.
We
make equity investments in privately financed projects on which we have
sustained losses and could sustain additional losses.
We
participate in privately financed projects that enable our government and other
customers to finance large-scale projects, such as railroads, and major military
equipment, capital project and service purchases. These projects typically
include the facilitation of non-recourse financing, the design and construction
of facilities, and the provision of operation and maintenance services for an
agreed to period after the facilities have been completed.
We may
incur contractually reimbursable costs and typically make an equity investment
prior to an entity achieving operational status or completing its full project
financing. If a project is unable to obtain financing, we could incur losses
including our contractual receivables and our equity investment. After
completion of these projects, our equity investments can be at risk, depending
on the operation of the project and market factors, which may not be under our
control. As a result, we could sustain a loss on our equity investment in these
projects. Current equity investments in projects of this type include the
Allenby & Connaught project in the U.K. and the Egypt Basic Industries
Corporation ammonia plant in Egypt. Please read Note 16 to our consolidated
financial statements for further discussion of these projects.
Intense
competition in the engineering and construction industry could reduce our market
share and profits.
We serve
markets that are highly competitive and in which a large number of multinational
companies compete. These highly competitive markets require substantial
resources and capital investment in equipment, technology and skilled personnel
whether the projects are awarded in a sole source or competitive bidding
process. Our projects are frequently awarded through a competitive bidding
process, which is standard in our industry. We are constantly competing for
project awards based on pricing and the breadth and technological sophistication
of our services. Any increase in competition or reduction in our competitive
capabilities could have a significant adverse impact on the margins we generate
from our projects or our ability to retain market share.
If
we are unable to attract and retain a sufficient number of affordable trained
engineers and other skilled workers, our ability to pursue projects may be
adversely affected and our costs may increase.
Our rate
of growth will be confined by resource limitations as competitors and customers
compete for increasingly scarce resources. We believe that our success depends
upon our ability to attract, develop and retain a sufficient number of
affordable trained engineers and other skilled workers that can execute our
services in remote locations under difficult working conditions. If we are
unable to attract and retain a sufficient number of skilled personnel, our
ability to pursue projects may be adversely affected and the costs of performing
our existing and future projects may increase, which may adversely impact our
margins.
We
ship a significant amount of cargo using seagoing vessels which expose us to
certain maritime risks.
We
execute different projects around the world that include remote
locations. Depending on the type of contract, location and the nature
of the work, we may charter vessels under time and bareboat charter parties that
assume certain risks typical of those agreements. Such risks may
include damage to the ship and liability for cargo and liability which
charterers and vessel operators have to third parties “at law”. In
addition, we ship a significant amount of cargo and are subject to hazards of
the shipping and transportation industry.
If
we are unable to enforce our intellectual property rights or if our intellectual
property rights become obsolete, our competitive position could be adversely
impacted.
We
utilize a variety of intellectual property rights in our services. We view our
portfolio of process and design technologies as one of our competitive strengths
and we use it as part of our efforts to differentiate our service offerings. We
may not be able to successfully preserve these intellectual property rights in
the future and these rights could be invalidated, circumvented, or challenged.
In addition, the laws of some foreign countries in which our services may be
sold do not protect intellectual property rights to the same extent as the laws
of the United States. Because we license technologies from third parties, there
is a risk that our relationships with licensors may terminate or expire or may
be interrupted or harmed. In some, but not all cases, we may be able to obtain
the necessary intellectual property rights from alternative sources. If we are
unable to protect and maintain our intellectual property rights, or if there are
any successful intellectual property challenges or infringement proceedings
against us, our ability to differentiate our service offerings could be reduced.
In addition, if our intellectual property rights or work processes become
obsolete, we may not be able to differentiate our service offerings, and some of
our competitors may be able to offer more attractive services to our customers.
As a result, our business and revenue could be materially and adversely
affected.
Our
current business strategy relies on acquisitions. Acquisitions of other
companies present certain risks and uncertainties.
We
see business merger and acquisition activities as an integral means of
broadening our offerings and capturing additional market opportunities by our
business units. As a result, we may incur certain additional risks accompanying
these activities. These risks include the following:
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We
may not identify or complete future acquisitions conducive to our current
business strategy;
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Any
future acquisition activities may not be completed successfully as a
result of potential strategy changes, competitor activities, and other
unforeseen elements associated with merger and acquisition
activities;
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Valuation
methodologies may not accurately capture the value
proposition;
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Future
completed acquisitions may not be integrated within our operations with
the efficiency and effectiveness initially expected resulting in a
potentially significant detriment to the associated product service line
financial results, and pose additional risks to our operations as a
whole;
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We
may have difficulty managing the growth from merger and acquisition
activities;
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Key
personnel within an acquired organization may resign from their related
positions resulting in a significant loss to our strategic and operational
efficiency associated with the acquired
company;
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The
effectiveness of our daily operations may be reduced by the redirection of
employees and other resources to acquisition
activities;
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We
may assume liabilities of an acquired business (e.g. litigation, tax
liabilities, contingent liabilities, environmental issues), including
liabilities that were unknown at the time the acquisition, that pose
future risks to our working capital needs, cash flows and the
profitability of related
operations;
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Business
acquisitions often may include unforeseen substantial transactional costs
to complete the acquisition that exceed the estimated financial and
operational benefits;
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We
may experience significant difficulties in integrating our current system
of internal controls into the acquired operations;
and
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Future
acquisitions may require us to obtain additional equity or debt financing,
which may not be available on attractive terms. Moreover, to the extent an
acquisition transaction results in additional goodwill, it will reduce our
tangible net worth, which might have an adverse effect on our credit
capacity.
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If we need to
sell or issue additional common shares to finance future acquisitions, our
existing shareholder ownership could be diluted.
Part of
our business strategy is to expand into new markets and enhance our position in
existing markets both domestically and internationally through the merging and
acquiring of complementary businesses. To successfully fund and complete such
identified, potential acquisitions, we may issue additional equity securities
that have the potential to dilute our earnings per share and our existing
shareholder ownership.
Risks
Related to Geopolitical and International Operations and Events
International
and political events may adversely affect our operations.
A
significant portion of our revenue is derived from our non-United States
operations, which exposes us to risks inherent in doing business in each of the
countries in which we transact business. The occurrence of any of the risks
described below could have a material adverse effect on our results of
operations and financial condition.
Our
operations in countries other than the United States accounted for approximately
85% of our consolidated revenue during 2008, 89% of our consolidated revenue
during 2007 and 85% of our consolidated revenue during 2006. Based on the
location of services provided, 43% of our consolidated revenue in 2008, 50% of
our consolidated revenue in 2007 and 49% in 2006 was from our operations in
Iraq, primarily related to our work for the United States government. Operations
in countries other than the United States are subject to various risks peculiar
to each country. With respect to any particular country, these risks may
include:
|
•
|
expropriation
and nationalization of our assets in that
country;
|
|
•
|
political
and economic instability;
|
|
•
|
civil
unrest, acts of terrorism, force majeure, war, or other armed
conflict;
|
|
•
|
natural
disasters, including those related to earthquakes and
flooding;
|
|
•
|
currency
fluctuations, devaluations, and conversion
restrictions;
|
|
•
|
confiscatory
taxation or other adverse tax
policies;
|
|
•
|
governmental
activities that limit or disrupt markets, restrict payments, or limit the
movement of funds;
|
|
•
|
governmental
activities that may result in the deprivation of contract rights;
and
|
|
•
|
governmental
activities that may result in the inability to obtain or retain licenses
required for operation.
|
Due to
the unsettled political conditions in many oil-producing countries and countries
in which we provide governmental logistical support, our revenue and profits are
subject to the adverse consequences of war, the effects of terrorism, civil
unrest, strikes, currency controls, and governmental actions. Countries where we
operate that have significant amounts of political risk include: Afghanistan,
Algeria, Indonesia, Iraq, Nigeria, Russia, and Yemen. In addition, military
action or continued unrest in the Middle East could impact the supply and
pricing for oil and gas, disrupt our operations in the region and elsewhere, and
increase our costs for security worldwide.
We
work in international locations where there are high security risks, which could
result in harm to our employees and contractors or substantial
costs.
Some of
our services are performed in high-risk locations, such as Iraq, Afghanistan,
Nigeria and Algeria where the country or location is suffering from political,
social or economic issues, or war or civil unrest. In those locations where we
have employees or operations, we may incur substantial costs to maintain the
safety of our personnel. Despite these precautions, the safety of our personnel
in these locations may continue to be at risk, and we have in the past and may
in the future suffer the loss of employees and contractors.
We
are subject to significant foreign exchange and currency risks that could
adversely affect our operations and our ability to reinvest earnings from
operations, and our ability to limit our foreign exchange risk through hedging
transactions may be limited.
A sizable
portion of our consolidated revenue and consolidated operating expenses are in
foreign currencies. As a result, we are subject to significant risks,
including:
|
•
|
foreign
exchange risks resulting from changes in foreign exchange rates and the
implementation of exchange controls;
and
|
|
•
|
limitations
on our ability to reinvest earnings from operations in one country to fund
the capital needs of our operations in other
countries.
|
In
particular, we conduct business in countries that have non-traded or “soft”
currencies which, because of their restricted or limited trading markets, may be
difficult to exchange for “hard” currencies. The national governments in some of
these countries are often able to establish the exchange rates for the local
currency. As a result, it may not be possible for us to engage in hedging
transactions to mitigate the risks associated with fluctuations of the
particular currency. We are often required to pay all or a portion of our costs
associated with a project in the local soft currency. As a result, we generally
attempt to negotiate contract terms with our customer, who is often affiliated
with the local government, to provide that we are paid in the local currency in
amounts that match our local expenses. If we are unable to match our costs with
matching revenue in the local currency, we would be exposed to the risk of an
adverse change in currency exchange rates.
Where
possible, we selectively use hedging transactions to limit our exposure to risks
from doing business in foreign currencies. Our ability to hedge is limited
because pricing of hedging instruments, where they exist, is often volatile and
not necessarily efficient.
In
addition, the value of the derivative instruments could be impacted
by:
|
•
|
adverse
movements in foreign exchange
rates;
|
|
•
|
the
value and time period of the derivative being different than the exposures
or cash flow being hedged.
|
Risks
Related to Our Relationship With Halliburton
Halliburton’s
indemnity for FCPA matters and related corruption allegations does not apply to
all potential losses, Halliburton’s actions may not be in our stockholders’ best
interests and we may take or fail to take actions that could result in our
indemnification from Halliburton with respect to corruption allegations no
longer being available.
Under the
terms of the master separation agreement entered into in connection with our
initial public offering, Halliburton has agreed to indemnify us for, 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 below), 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
does 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, in which we do not have an
interest greater than 50%. For purposes of the indemnity, “FCPA Matters” include
claims relating to alleged or actual violations occurring prior to the date of
the master separation agreement of the FCPA or particular, analogous applicable
statutes, laws, regulations and rules of U.S. and foreign governments and
governmental bodies identified in the master separation agreement in connection
with the Bonny Island project in Nigeria and in connection with any other
project, whether located inside or outside of Nigeria, including without
limitation the use of agents in connection with such projects, identified by a
governmental authority of the United States, the United Kingdom, France,
Nigeria, Switzerland or Algeria in connection with the current investigations in
those jurisdictions. Please read “—Risks Relating to
Investigations—We pleaded guilty to violating provisions of the FCPA and agreed
to the entry of a civil judgment and injunction with the SEC relating to such
violations that could have a material adverse affect on our business, prospects,
results of operations, financial conditions and cash flows.” and “Risks Related
to Our Relationship with Halliburton—Our indemnification from Halliburton for FCPA Matters
may not be enforceable as a result of being against governmental
policy.”
Either
before or after a settlement or disposition of any remaining corruption
allegations, we could incur losses as a result of or relating to such corruption
allegations for which Halliburton’s indemnity will not apply, and we may not
have the liquidity or funds to address those losses, in which case such losses
could have a material adverse effect on our business, prospects, results of
operations, financial condition and cash flow.
As part
of the master separation agreement, Halliburton has agreed to indemnify us for
certain FCPA Matters, but we had to agree that Halliburton will, in its sole
discretion, have and maintain control over the investigation, defense and/ or
settlement of FCPA Matters until such time, if any, that we exercise our right
to assume control of the investigation, defense and/or settlement of FCPA
Matters. We have also agreed, at Halliburton’s expense, to assist with
Halliburton’s full cooperation with any governmental authority in Halliburton’s
investigation of FCPA Matters and its investigation, defense and/or settlement
of any claim made by a governmental authority or court relating to FCPA Matters,
in each case even if we assume control of FCPA Matters.
Subject
to the exercise of our right to assume control of the investigation, defense
and/or settlement of FCPA Matters, Halliburton will have broad discretion to
investigate and defend FCPA Matters. We expect that Halliburton will take
actions that are in the best interests of its stockholders, which may not be in
our or our stockholders’ best interests, particularly in light of the potential
differing interests that Halliburton and we may have with respect to the matters
currently under investigation and their defense and/or settlement. In addition,
the manner in which Halliburton controls the investigation, defense and/or
settlement of FCPA Matters and our ongoing obligation to cooperate with
Halliburton in its investigation, defense and/or settlement thereof could
adversely affect us and our ability to defend or settle FCPA or other claims
against us, or result in other adverse consequences to us or our business that
would not be subject to Halliburton’s indemnification. We may take control over
the investigation, defense and/or settlement of FCPA Matters or we may refuse to
agree to a settlement of FCPA Matters negotiated by Halliburton. Notwithstanding
our decision, if any, to assume control or refuse to agree to a settlement of
FCPA Matters, we will have a continuing obligation to assist in Halliburton’s
full cooperation with any government or governmental agency, which may reduce
any benefit of our taking control over the investigation of FCPA Matters or
refusing to agree to a settlement. If we take control over the investigation,
defense and/or settlement of FCPA Matters, refuse a settlement of FCPA Matters
negotiated by Halliburton, enter into a settlement of FCPA Matters without
Halliburton’s consent, materially breach our obligation to cooperate with
respect to Halliburton’s investigation, defense and/or settlement of FCPA
Matters or materially breach our obligation to consistently implement and
maintain, for five years following our separation from Halliburton, currently
adopted business practices and standards relating to the use of foreign agents,
Halliburton may terminate the indemnity, which could have a material adverse
effect on our financial condition, results of operations and cash
flow.
Our
indemnification from Halliburton for FCPA matters or related corruption
allegations may not be enforceable as a result of being against governmental
policy.
Our
indemnification from Halliburton relating to FCPA matters and related corruption
allegations (as defined under “—Risks Related to Our Relationship With
Halliburton”) may not be enforceable as a result of being against governmental
policy. Under the indemnity with Halliburton, our share of any liabilities for
fines or other monetary penalties or direct monetary damages, including
disgorgement, as a result of U.S. or certain foreign governmental claims or
assessments relating to corruption allegations would be funded by Halliburton
and would not be borne by us and our public stockholders. If we are
assessed by or agree with U.S. or certain foreign governments or governmental
agencies to pay any such fines, monetary penalties or direct monetary damages,
including disgorgement, and Halliburton’s indemnity cannot be enforced or is
unavailable because of governmental requirements of a settlement, we may not
have the liquidity or funds to pay those penalties or damages, which would have
a material adverse effect on our business, prospects, results of operations,
financial condition and cash flow. Please read “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Transactions with former
Parent.”
Halliburton’s
indemnity for matters relating to the Barracuda-Caratinga project only applies
to the replacement of certain subsea bolts, and Halliburton’s actions may not be
in our stockholders’ best interests.
Under the
terms of the master separation agreement, Halliburton agreed to indemnify us and
any of our greater than 50%-owned subsidiaries as of November 20, 2006, the date
of the master separation agreement, for out-of-pocket cash costs and expenses,
or cash settlements or cash arbitration awards in lieu thereof, we incur as a
result of the replacement of certain subsea flow-line bolts installed in
connection with the Barracuda-Caratinga project, which we refer to as “B-C
Matters.” Please read “Risks
Related to Our Customers and Contracts—We are involved in a dispute with
Petrobras with respect to responsibility for the failure of subsea flow-line
bolts on the Barracuda-Caratinga Project.”
At our
cost, we will control the defense, counterclaim and/or settlement with respect
to B-C Matters, but Halliburton will have discretion to determine whether to
agree to any settlement or other resolution of B-C Matters. We expect
Halliburton will take actions that are in the best interests of its
stockholders, which may or may not be in our or our stockholders’ best
interests. Halliburton has the right to assume control over the defense,
counterclaim and/or settlement of B-C Matters at any time. If Halliburton
assumes control over the defense, counterclaim and/or settlement of B-C Matters,
or refuses a settlement proposed by us, it could result in material and adverse
consequences to us or our business that would not be subject to Halliburton’s
indemnification. In addition, if Halliburton assumes control over the defense,
counterclaim and/or settlement of B-C Matters, and we refuse a settlement
proposed by Halliburton, Halliburton may terminate the indemnity. Also, if we
materially breach our obligation to cooperate with Halliburton or we enter into
a settlement of B-C Matters without Halliburton’s consent, Halliburton may
terminate the indemnity.
If
the exchange fails to qualify as a tax-free transaction because of actions we
take or because of a change of control of us, we will be required to indemnify
Halliburton for any resulting taxes, and this potential obligation to indemnify
Halliburton may prevent or delay a change of control of us.
In
connection with the exchange offer, we and Halliburton will be required to
comply with representations that have been made to Halliburton’s tax counsel in
connection with the tax opinion that was issued to Halliburton regarding the
tax-free nature of the exchange offer and with representations that have been
made to the Internal Revenue Service in connection with the private letter
ruling that Halliburton has received. If we breach any representations with
respect to the opinion or any ruling request or takes any action that causes
such representations to be untrue and which causes the exchange offer to be
taxable, we will be required to indemnify Halliburton for any and all taxes
incurred by Halliburton or any of its affiliates resulting from the failure of
the exchange offer to qualify as tax-free transactions as provided in the tax
sharing agreement between us and Halliburton. Further, we have agreed not to
enter into transactions for two years after the completion of the exchange offer
and any that would result in a more than immaterial possibility of a change of
control of us pursuant to a plan unless a ruling is obtained from the Internal
Revenue Service or an opinion is obtained from a nationally recognized law firm
that the transaction will not affect the tax-free nature of the exchange offer.
For these purposes, certain transactions are deemed to create a more than
immaterial possibility of a change of control of us pursuant to a plan, and thus
require such a ruling or opinion, including, without limitation, the merger of
us with or into any other corporation, stock issuances (regardless of size)
other than in connection with our employee incentive plans, or the redemption or
repurchase of any of our capital stock (other than in connection with future
employee benefit plans or pursuant to a future market purchase program involving
5% or less of KBR’s publicly traded stock). If we take any action which results
in the exchange offer becoming a taxable transaction, we will be required to
indemnify Halliburton for any and all taxes incurred by Halliburton or any of
its affiliates, on an after-tax basis, resulting from such actions. The amounts
of any indemnification payments would be substantial and would have a material
adverse effect on our financial condition.
Depending
on the facts and circumstances, the exchange offer may be taxable to Halliburton
if KBR undergoes a 50% or greater change in stock ownership within two years
after the exchange offer and any subsequent spin-off distribution. Under the tax
sharing agreement, as amended, between KBR and Halliburton, Halliburton is
entitled to reimbursement of any tax costs incurred by Halliburton as a result
of a change in control of KBR after the exchange offer. Halliburton would be
entitled to such reimbursement even in the absence of any specific action by
KBR, and even if actions of Halliburton (or any of its officers, directors or
authorized representatives) contributed to a change in control of KBR. These
costs may be so great that they delay or prevent a strategic acquisition, a
change in control of KBR or an attractive business opportunity. Actions by a
third party after the exchange offer causing a 50% or greater change in KBR’s
stock ownership could also cause the exchange offer and any subsequent spin-off
distribution by Halliburton to be taxable and require reimbursement by
KBR.
Provisions
in our charter documents and Delaware law may inhibit a takeover or impact
operational control, since our separation from Halliburton, which could
adversely affect the value of our common stock.
Our
certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in
our management that a stockholder might consider favorable. These provisions
include, among others, a staggered board of directors, prohibiting stockholder
action by written consent, advance notice for raising business or making
nominations at meetings of stockholders and the issuance of preferred stock with
rights that may be senior to those of our common stock without stockholder
approval. Many of these provisions became effective following the exchange
offer. These provisions would apply even if a takeover offer may be considered
beneficial by some of our stockholders. If a change of control or change in
management is delayed or prevented, the market price of our common stock could
decline.
None.
We own or
lease properties in domestic and foreign locations. The following locations
represent our major facilities.
|
|
|
|
|
|
|
Houston,
Texas
|
|
Leased(1)
|
|
High-rise
office facility
|
|
All
and Corporate
|
|
|
|
|
|
|
|
Arlington,
Virginia
|
|
Leased
|
|
High-rise
office facility
|
|
G&I
|
|
|
|
|
|
|
|
Houston,
Texas
|
|
Owned
|
|
Campus
facility
|
|
All
and Corporate
|
|
|
|
|
|
|
|
Birmingham,
Alabama
|
|
Owned
|
|
Campus
facility
|
|
Services
|
|
|
|
|
|
|
|
Leatherhead,
United Kingdom
|
|
Owned
|
|
Campus
facility
|
|
All
|
|
|
|
|
|
|
|
Greenford,
Middlesex
United
Kingdom
|
|
Owned(2)
|
|
High-rise
office facility
|
|
Upstream,
Downstream and Technology
|
_________________________
(1)
|
At
December 31, 2008, we had a 50% interest in a joint venture which owns
this office facility.
|
(2)
|
At
December 31, 2008, we had a 55% interest in a joint venture which owns
this office facility.
|
We also
own or lease numerous small facilities that include our technology center, sales
offices and project offices throughout the world. We own or lease marine
fabrication facilities, which are currently for sale, covering approximately 300
acres in Scotland. All of our owned properties are unencumbered and we believe
all properties that we currently occupy are suitable for their intended
use.
Information
relating to various commitments and contingencies is described in “Risk Factors”
contained in Part I of this Annual Report on Form 10-K and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and in
Notes 10 and 11 to our consolidated financial statements and the information
discussed therein is incorporated by reference into this Item 3.
Item 4. Submission of Matters to a Vote of Security
Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Our
common stock is traded on the New York Stock Exchange under the symbol
“KBR.” The following table sets forth, on a per share basis for the
periods indicated, the high and low sale prices per share for our common stock
as reported by the New York Stock Exchange and dividends declared:
|
|
Common Stock Price Range
|
|
|
Dividends
Declared
|
|
|
|
High
|
|
|
Low
|
|
|
Per Share (a)
|
|
Fiscal
Year 2008
|
|
|
|
|
|
|
|
|
|
First
quarter ended March 31, 2008
|
|
$ |
41.95 |
|
|
$ |
24.00 |
|
|
$ |
0.05 |
|
Second
quarter ended June 30, 2008
|
|
|
38.41 |
|
|
|
27.79 |
|
|
|
0.05 |
|
Third
quarter ended September 30, 2008
|
|
|
35.30 |
|
|
|
13.50 |
|
|
|
0.05 |
|
Fourth
quarter ended December 31, 2008
|
|
|
18.59 |
|
|
|
9.78 |
|
|
|
0.05 |
|
Fiscal
Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter ended March 31, 2007
|
|
$ |
26.10 |
|
|
$ |
19.66 |
|
|
$ |
— |
|
Second
quarter ended June 30, 2007
|
|
|
29.32 |
|
|
|
20.13 |
|
|
|
— |
|
Third
quarter ended September 30, 2007
|
|
|
40.38 |
|
|
|
26.31 |
|
|
|
— |
|
Fourth
quarter ended December 31, 2007
|
|
|
45.24 |
|
|
|
33.76 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Dividends declared per share represents dividends declared and payable to
shareholders of record in our fiscal year ended December 31, 2008.
Excluded from the table are dividends declared of $0.05 per share, which
were declared in December 2008 for shareholders of record as of March 13,
2009.
|
At
February 20, 2009, there were 158 shareholders of record. In calculating the
number of shareholders, we consider clearing agencies and security position
listings as one shareholder for each agency or listing.
On August
6, 2008, our Board of Directors authorized a program to repurchase up to five
percent of our outstanding common shares. In the third quarter of 2008, we
repurchased 8.4 million shares at a cost of $196 million. The share repurchases
were funded through our current cash position. In December 2008, our Board of
Directors authorized a new share repurchase program pursuant to which we will
repurchase shares in the open market to reduce and maintain, over time, our
outstanding shares at approximately 160 million shares. No shares were
repurchased in 2008 under the new program.
Our $930
million revolving credit facility (“Revolving Credit Facility”) restricts, among
other things, the total dollar amount of we may pay for dividends and equity
repurchases of our common stock. During 2008, we expanded the capacity of our
Revolving Credit Facility by $80 million. This expansion increased the capacity
under the Revolving Credit Facility from $850 million to $930 million. On
January 17, 2008, we entered into an Agreement and Amendment to the Revolving
Credit Facility effective as of January 11, 2008, (the “Amendment”). The
Amendment, among other things, permits us to declare and pay shareholder
dividends and/or engage in equity repurchases not to exceed $400 million in the
aggregate. We have the capacity to pay additional dividends or repurchase shares
in the amount of $163 million after the declaration of dividends and shares
repurchased in 2008. See Note 9 to our consolidated financial
statements. The declaration and payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
future earnings, general financial condition and liquidity, success in business
activities, capital requirements, and general business conditions.
The
information required by this item regarding securities authorized for issuance
under equity compensation plans is incorporated by reference to the information
set forth in Item 12 of this Form 10-K and the information discussed therein is
incorporated by reference into this Item 5.
Performance
Graph
The chart
below compares the cumulative total shareholder return on our common shares from
November 16, 2006 (the date of our initial public offering) to the end of the
year with the cumulative total return on the Dow Jones Heavy Construction
Industry Index and the Russell 1000 Index for the same period. The comparison
assumes the investment of $100 on November 16, 2006, and reinvestment of all
dividends. The shareholder return is not necessarily indicative of future
performance.
|
|
11/16/2006
|
|
|
12/29/2006
|
|
|
6/29/2007
|
|
|
12/31/2007
|
|
|
6/30/2008
|
|
|
12/31/2008
|
|
KBR
|
|
$ |
100.00 |
|
|
$ |
126.07 |
|
|
$ |
126.41 |
|
|
$ |
187.01 |
|
|
$ |
168.77 |
|
|
$ |
73.93 |
|
Dow
Jones Heavy Construction
|
|
|
100.00 |
|
|
|
103.62 |
|
|
|
153.21 |
|
|
|
196.48 |
|
|
|
204.10 |
|
|
|
87.91 |
|
Russell
1000
|
|
|
100.00 |
|
|
|
101.31 |
|
|
|
107.64 |
|
|
|
105.22 |
|
|
|
92.51 |
|
|
|
64.17 |
|
The
following table presents selected financial data for the last five years. You
should read the following information in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and the related notes to the consolidated
financial statements.
|
|
Years Ended
December 31, (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except for per share amounts)
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
11,581 |
|
|
$ |
8,745 |
|
|
$ |
8,805 |
|
|
$ |
9,291 |
|
|
$ |
11,173 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
10,820 |
|
|
|
8,225 |
|
|
|
8,433 |
|
|
|
8,858 |
|
|
|
11,427 |
|
General
and administrative
|
|
|
223 |
|
|
|
226 |
|
|
|
226 |
|
|
|
158 |
|
|
|
161 |
|
Gain
on sale of assets, net
|
|
|
(3 |
) |
|
|
— |
|
|
|
(6 |
) |
|
|
(110 |
) |
|
|
— |
|
Operating
income (loss)
|
|
|
541 |
|
|
|
294 |
|
|
|
152 |
|
|
|
385 |
|
|
|
(415 |
) |
Interest
income (expense), net
|
|
|
35 |
|
|
|
62 |
|
|
|
27 |
|
|
|
(1 |
) |
|
|
5 |
|
Interest
expense—related party
|
|
|
— |
|
|
|
— |
|
|
|
(36 |
) |
|
|
(24 |
) |
|
|
(15 |
) |
Foreign
currency gains (losses), net
|
|
|
(8 |
) |
|
|
(15 |
) |
|
|
(16 |
) |
|
|
2 |
|
|
|
6 |
|
Foreign
currency gains, net—related party
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
3 |
|
|
|
(18 |
) |
Other,
net
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(2 |
) |
Income
(loss) from continuing operations before income taxes and minority
interest
|
|
|
568 |
|
|
|
342 |
|
|
|
128 |
|
|
|
364 |
|
|
|
(439 |
) |
Benefit
(provision) for income taxes
|
|
|
(212 |
) |
|
|
(138 |
) |
|
|
(94 |
) |
|
|
(160 |
) |
|
|
113 |
|
Minority
interest in net (income) loss of consolidated subsidiaries
|
|
|
(48 |
) |
|
|
(22 |
) |
|
|
20 |
|
|
|
(19 |
) |
|
|
(7 |
) |
Income
(loss) from continuing operations
|
|
|
308 |
|
|
|
182 |
|
|
|
54 |
|
|
|
185 |
|
|
|
(333 |
) |
Income
from discontinued operations, net of tax provisions
|
|
|
11 |
|
|
|
120 |
|
|
|
114 |
|
|
|
55 |
|
|
|
30 |
|
Net
income (loss)
|
|
$ |
319 |
|
|
$ |
302 |
|
|
$ |
168 |
|
|
$ |
240 |
|
|
$ |
(303 |
) |
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Continuing
operations
|
|
$ |
1.86 |
|
|
$ |
1.08 |
|
|
$ |
0.39 |
|
|
$ |
1.36 |
|
|
$ |
(2.45 |
) |
—Discontinued
operations
|
|
|
0.07 |
|
|
|
0.71 |
|
|
|
0.81 |
|
|
|
0.40 |
|
|
|
0.22 |
|
Basic
income (loss) per share
|
|
$ |
1.92 |
|
|
$ |
1.80 |
|
|
$ |
1.20 |
|
|
$ |
1.76 |
|
|
$ |
(2.23 |
) |
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Continuing
operations
|
|
$ |
1.84 |
|
|
$ |
1.08 |
|
|
$ |
0.39 |
|
|
$ |
1.36 |
|
|
$ |
(2.45 |
) |
—Discontinued
operations
|
|
|
0.07 |
|
|
|
0.71 |
|
|
|
0.81 |
|
|
|
0.40 |
|
|
|
0.22 |
|
Diluted
income (loss) per share
|
|
$ |
1.91 |
|
|
$ |
1.79 |
|
|
$ |
1.20 |
|
|
$ |
1.76 |
|
|
$ |
(2.23 |
) |
Basic
weighted average shares outstanding
|
|
|
166 |
|
|
|
168 |
|
|
|
140 |
|
|
|
136 |
|
|
|
136 |
|
Diluted
weighted average shares outstanding
|
|
|
167 |
|
|
|
169 |
|
|
|
140 |
|
|
|
136 |
|
|
|
136 |
|
Cash
dividends declared per share (b)
|
|
$ |
0.20 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures (c)
|
|
$ |
37 |
|
|
$ |
36 |
|
|
$ |
47 |
|
|
$ |
51 |
|
|
$ |
56 |
|
Depreciation
and amortization expense (d)
|
|
|
49 |
|
|
|
31 |
|
|
|
29 |
|
|
|
29 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
1,145 |
|
|
$ |
1,861 |
|
|
$ |
1,410 |
|
|
$ |
362 |
|
|
$ |
220 |
|
Net
working capital
|
|
|
1,099 |
|
|
|
1,433 |
|
|
|
915 |
|
|
|
944 |
|
|
|
765 |
|
Property,
plant and equipment, net
|
|
|
245 |
|
|
|
220 |
|
|
|
211 |
|
|
|
185 |
|
|
|
178 |
|
Total
assets
|
|
|
5,884 |
|
|
|
5,203 |
|
|
|
5,414 |
|
|
|
5,182 |
|
|
|
5,487 |
|
Total
debt (including due to and notes payable to former parent)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
774 |
|
|
|
1,189 |
|
Shareholders’
equity
|
|
|
2,052 |
|
|
|
2,267 |
|
|
|
1,794 |
|
|
|
1,256 |
|
|
|
812 |
|
(a)
|
In
May 2006 we completed the sale of our Production Services group and in
June 2007 we completed the disposition of our 51% interest in DML. The
results of operations of Production Services group and DML for all periods
presented have been reported as discontinued operations. See Note 22 to
the consolidated financial statements for information about discontinued
operations.
|
(b)
|
Dividends
declared per share represents dividends declared and payable to
shareholders of record in our fiscal year ended December 31, 2008.
Excluded from the table are dividends declared of $0.05 per share, which
were declared in December 2008 for shareholders of record as of March 13,
2009.
|
(c)
|
Capital
expenditures do not include capital expenditures for DML, which was sold
in the second quarter of 2007 and is accounted for as discontinued
operations. Capital expenditures for DML were $7 million, $10 million, $25
million and $18 million for the years ended December 31,
2007, 2006, 2005 and 2004,
respectively.
|
(d)
|
Depreciation
and amortization expense does not include depreciation and amortization
expense for DML, which was sold in the second quarter of 2007 and is
accounted for as discontinued operations. Depreciation and amortization
expense for DML was $10 million, $18 million, $27 million and $24 million
for the years ended December 31, 2007, 2006, 2005 and 2004,
respectively.
|
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
The
purpose of management’s discussion and analysis (“MD&A”) is to increase the
understanding of the reasons for material changes in our financial condition,
results of operations, liquidity and certain other factors that may affect our
future results. The MD&A should be read in conjunction with the consolidated
financial statements and related notes included in Item 8 of this Annual Report
on Form 10-K.
Executive
Overview
Summary
of Consolidated Results
Consolidated
revenues in 2008 were $11.6 billion as compared to $8.7 billion in 2007. Revenue
was significantly impacted by our Middle East operations in our G&I business
unit where we provide support services to the U.S. military primarily in Iraq.
Revenues from our Middle East Operations were up approximately $736 million in
2008 largely as a result of higher volume on U.S. military support activities in
Iraq under our LogCAP III contract due to a U.S. military troop surge in the
second half of 2007 that continues to positively impact our 2008
revenue. In 2008, the total number of employees working in the Middle
East increased by approximately 11% to just over 72,000 including direct hires,
subcontractors and local hires. Although total DoD spending increased
throughout 2008, we continue to believe overall spending in the long term is
likely to decline. Revenues from our Gas Monetization operations in our Upstream
business unit increased approximately $755 million in 2008 due to increased
progress on a number of GTL and LNG projects. Although we continue to
experience increased activity on existing LNG and GTL projects, we are seeing
indication that our customers are delaying investment decisions pending
stabilization in the marketplace. Revenues from our Services business
unit increased significantly during 2008 by approximately $1.1
billion. The majority of this increase relates to the business we
obtained through the acquisition of BE&K which contributed approximately
$825 million of revenue during 2008. Also contributing to the
increase in 2008 in our Services business unit were increases in activity from
direct construction and modular fabrication services in our Canadian and North
American construction operations.
Consolidated
operating income in 2008 was $541 million as compared to $294 million in 2007.
All of our business units had improvements in business unit income primarily due
to increased revenue from work performed. Income from our Services
business unit increased significantly both as a result of continued growth in
our legacy operations and as a result of the business we obtained through the
acquisition of BE&K. In addition, our Offshore operations in the Upstream
business unit recognized increased income as a result of a $51 million favorable
arbitration award on the EPC 28 PEMEX project in the first quarter of 2008. Our
Downstream income increased primarily due to increased activity on several large
petrochemical projects in Saudi Arabia and newly awarded refining projects as
well as a result of the work we obtained in the BE&K acquisition. We also
reduced our labor cost absorption and our corporate general and administrative
expenses during 2008.
Consolidated
revenues in 2007 were $8.7 billion as compared to $8.8 billion in 2006. Revenue
decreased in 2007 by approximately $480 million in our Middle East operations
largely due to the lower volume of activities on our LogCAP III and PCO Oil
contracts as our customer continued to scale back the construction and
procurement related to military sites in Iraq. The decrease in
revenue from our Middle East operations was partially offset by continued
revenue growth on several of our Gas Monetization projects, including our
Escravos LNG and Pearl GTL projects.
Consolidated
operating income in 2007 was $294 million as compared to $152 million in 2006.
Operating income in 2007 includes positive contributions from a number of Gas
Monetization projects including our Pearl GTL, Yemen LNG, Nigeria LNG and the
Skikda LNG projects and various offshore projects, including Kashagan, in our
Upstream business unit. Operating income also included positive
contributions from our LOGCAP III contract in our G&I business unit.
Our operating income in 2006 was negatively impacted by $157 million in charges
related to our Escravos GTL project in Nigeria.
Acquisition
of BE&K, Inc.
On July
1, 2008, we acquired 100% of the outstanding common shares of BE&K, Inc.,
(“BE&K”) a privately held, Birmingham, Alabama-based engineering,
construction and maintenance services company. BE&K serves both domestic and
international customers, and employs roughly 9,000 people. BE&K’s
international operations are located in Poland and Russia. The
acquisition of BE&K enhances our ability to provide contractor and
maintenance services in North America. The agreed-upon purchase price was $550
million in cash subject to certain indemnifications and stockholders equity
adjustments as defined in the stock purchase agreement. BE&K and its
acquired divisions have been integrated into our Services, Downstream and
Government & Infrastructure business units based upon the nature of the
underlying projects acquired. As a result of the acquisition, the condensed
consolidated statements of income for December 31, 2008, include the results of
operations of BE&K since the date of acquisition. See Note 4 to our
consolidated financial statements for further discussion of the BE&K
acquisition.
Acquisition
of Wabi Development Corporation.
In
October 2008, we acquired 100% of the outstanding common stock of Wabi
Development Corporation (“Wabi”) for approximately $20 million in cash. Wabi is
a privately held Canada-based general contractor, which provides services for
the energy, forestry and mining industries. Wabi currently employs over 120
people, providing maintenance, fabrication, construction and construction
management services to a variety of clients in Canada and Mexico. Wabi has been
integrated into our Services business unit. The integration of Wabi into our
Services business will provide additional growth opportunities for our heavy
hydrocarbon, forestry, oil sand, general industrial and maintenance services
business. See Note 4 to our consolidated financial statements for
further discussion of the Wabi acquisition.
Acquisition
of TGI and Catalyst Interactive
In April
2008, we acquired 100% of the outstanding common stock of Turnaround Group of
Texas, Inc. (“TGI”) and Catalyst Interactive for approximately $12 million. TGI
is a Houston-based turnaround management and consulting company that specializes
in the planning and execution of turnarounds and outages in the petrochemical,
power, and pulp & paper industries. Catalyst Interactive is an Australian
e-learning and training solution provider that specializes in the defense,
government and industry training sectors. TGI’s results of operations are
included in our Services business unit. Catalyst Interactive’s results of
operations are included in our Government & Infrastructure business
unit.
Business
Environment and Results of Operations
Business
Environment
Government
business. A significant portion of our G&I business unit’s
current operations relate to the support of the United States government
operations in the Middle East, which we refer to as our Middle East operations,
one of the largest U.S. military deployments since World War II. These services
are provided under our LogCAP III contract with the DoD. Revenues under the
LogCAP III project were approximately $5.5 billion, $4.7 billion, and $5.0
billion for the years ended December 31, 2008, 2007 and 2006,
respectively. Revenue from our Middle East Operations has
historically been impacted by the level of DoD spending which has increased
significantly in recent years primarily as a result of the current military
operations in Iraq, Afghanistan and elsewhere in the region. However,
we expect the overall DoD spending to decline because of troop reductions in the
Middle East region and the current economic conditions in the United
States.
In the
civil infrastructure sector, we operate in diverse sectors, including
transportation, waste and water treatment and facilities
maintenance. In addition to the U.S government, we provide many of
these services to foreign governments such as the United Kingdom and Australia.
There has been a general trend of historic under-investment in the sector. 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 privately financed project activities where our ability to assist with
arranging financing and our desire to participate in project ownership make us
an attractive partner for state and local governments undertaking important
infrastructure projects. However, it is difficult to predict the availability of
funding and timing for such projects and programs both domestically and
internationally as a result of the current financial market crisis and overall
worldwide economic conditions.
Engineering and Construction
business. We provide a full range of engineering and
construction services for large and complex upstream and downstream projects,
including LNG and GTL facilities, onshore and offshore oil and gas production
facilities, industrial, power generation and other projects. We serve
customers in the gas monetization, oil and gas, petrochemical, refining, and
chemical markets throughout the world. 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 market conditions, financing
arrangements, governmental approvals and environmental matters. Demand for our
services depends primarily on our customers’ capital expenditures and budgets
for construction services. We have benefited in recent years from increased
capital expenditures from our petroleum and petrochemical customers driven by
historically high crude oil and natural gas prices and general global economic
expansion. However, the recent worldwide economic conditions,
volatility in oil and gas prices and current financial market crisis has
resulted in the delay of several major projects currently under
development. Many of our customers have decreased their capital
expenditure budgets in the short term until the economic conditions become more
favorable. Additionally, some customers are deferring projects to
take advantage of what they believe will be decreasing equipment, material and
labor costs. Although it is presently not possible to determine the
impact these conditions may have on us in the future, to date we have not
experienced any significant impact to our business.
Results
of Operations
LogCap Project. Backlog
related to the LogCAP III contract at December 31, 2008 was $1.4 billion.
During the almost seven-year period we have worked under the LogCAP III
contract, we have been awarded 82 “excellent” ratings out of 104 total ratings.
Our award fees on the LogCAP III contract are recognized based on our
estimate of the amounts to be awarded. Once the task orders
underlying the work are definitized and award fees are granted, we adjust our
estimate of award fees to the actual amounts earned. In 2007, we
reduced our award fee accrual rate on the LogCAP III contract from 84% to 80% as
a result of award fee scores received in that year resulting in a charge of
approximately $2 million in 2007. In 2008, based upon the
self evaluations of our performance, we reduced the award fee accrual rate on
this project from 80% to 72% for the performance period beginning in April 2008,
resulting in a charge of approximately $5 million in the fourth quarter of 2008.
As of December 31, 2008, we have recognized approximately $65 million in
unbilled receivables as our estimate of award fees earned since the April 2008
performance period. If our next award fee letter has performance
scores and award rates higher or lower than our historical rates, our accrual
will be adjusted accordingly
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 third
quarter of 2009. 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. The LogCAP IV contract award was
reevaluated by the GAO as a result of actions brought by various unsuccessful
bidders. In April 2008, the DoD again selected KBR as one of the executing
contractors. Despite the award of a portion of the LogCAP IV contract, we
expect our overall volume of work to decline in the long term as our customer
scales back its requirement for the types and the amounts of services we
provide. However, although we continue to experience increased activity as a
result of the surge of additional troops in late 2007 and extended tours of duty
in Iraq, we expect the decline may occur more slowly than we previously
expected.
Skopje Embassy
Project. In 2005, we were awarded a fixed-price contract to
design and build a U.S. embassy in Skopje, Macedonia. In the fourth
quarter of 2006, 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. Subsequently, we recorded additional losses on this project of
approximately $27 million in 2007 and approximately $21 million in 2008,
bringing our total estimated losses to approximately $60 million. These
additional costs are a result of identifying increased costs of materials and
the related costs of freight, installation and other costs. We could incur
additional costs and losses on this project if our cost estimation processes
identify new costs not previously included in our total estimated costs or if
our plans to make up lost schedule are not achieved.
Escravos
project. In connection with our review of a consolidated
50%-owned GTL project in Escravos, Nigeria, during the second quarter of 2006,
we identified increases in the overall cost to complete this four-plus year
project, which resulted in our recording a $148 million charge before minority
interest and taxes during the second quarter of 2006. These cost increases were
caused primarily by schedule delays related to civil unrest and security on the
Escravos River, changes in the scope of the overall project, engineering
and construction changes due to necessary front-end engineering design changes
and increases in procurement cost due to project delays. The increased costs
were identified as a result of our first check estimate process.
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 was 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. The unamortized balance of the charge is included as a
component of the “Reserve for estimated losses on uncompleted contracts” in the
accompanying condensed consolidated balance sheets. Also included in the amended
contract are client determined incentives that may be earned over the remaining
life of the contract. Under the terms of the amended contract, the first $21
million of incentives earned over the remaining life of the contract are not
payable to us. Since the contract was amended in July 2007, we have earned in
the aggregate $21 million in client determined incentives. Any future incentives
will be recognized if and when they are earned. Our Advanced billings on
uncompleted contracts included in our condensed consolidated balance sheets
related to this project, was $1 million at December 31, 2008 and $236 million at
December 31, 2007.
For
purposes of presenting our results of operations, we supplementally provide
financial results for each of our six business units and certain product service
lines. The business units presented are consistent with our reportable operating
segments discussed in Note 7 (Business Segment Information) to our consolidated
financial statements. We also present the results of operations for product
service lines (“PSL”). While certain of the business units and product service
lines presented below do not meet the criteria for reportable segments in
accordance with SFAS No. 131, we believe this supplemental information is
relevant and meaningful to our investors for various reasons including
monitoring our progress and growth in certain markets and product
lines.
For
purposes of reviewing the results of operations, “business unit income” is
calculated as revenue less cost of services managed and reported by the business
unit and are directly attributable to the business unit. Business unit income
excludes corporate general and administrative expenses and other non-operating
income and expense items.
In
millions
|
|
Years Ended
December 31,
|
|
Revenue (1)
|
|
2008
|
|
|
2007
|
|
|
Increase (Decrease)
|
|
|
Percentage Change
|
|
|
2006
|
|
|
Increase (Decrease)
|
|
|
Percentage Change
|
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government – Middle East Operations
|
|
$ |
5,518 |
|
|
$ |
4,782 |
|
|
$ |
736 |
|
|
|
15 |
% |
|
$ |
5,262 |
|
|
$ |
(480 |
) |
|
|
(9 |
%) |
U.S.
Government – Americas Operations
|
|
|
618 |
|
|
|
721 |
|
|
|
(103 |
) |
|
|
(14 |
%) |
|
|
837 |
|
|
|
(116 |
) |
|
|
(14 |
%) |
International
Operations
|
|
|
802 |
|
|
|
590 |
|
|
|
212 |
|
|
|
36 |
% |
|
|
407 |
|
|
|
183 |
|
|
|
45 |
% |
Total
G&I
|
|
|
6,938 |
|
|
|
6,093 |
|
|
|
845 |
|
|
|
14 |
% |
|
|
6,506 |
|
|
|
(413 |
) |
|
|
(6 |
%) |
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
2,157 |
|
|
|
1,402 |
|
|
|
755 |
|
|
|
54 |
% |
|
|
1,012 |
|
|
|
390 |
|
|
|
39 |
% |
Offshore
|
|
|
413 |
|
|
|
338 |
|
|
|
75 |
|
|
|
22 |
% |
|
|
388 |
|
|
|
(50 |
) |
|
|
(13 |
%) |
Other
|
|
|
112 |
|
|
|
147 |
|
|
|
(35 |
) |
|
|
(24 |
%) |
|
|
300 |
|
|
|
(153 |
) |
|
|
(51 |
%) |
Total
Upstream
|
|
|
2,682 |
|
|
|
1,887 |
|
|
|
795 |
|
|
|
42 |
% |
|
|
1,700 |
|
|
|
187 |
|
|
|
11 |
% |
Services
|
|
|
1,373 |
|
|
|
322 |
|
|
|
1,051 |
|
|
|
326 |
% |
|
|
314 |
|
|
|
8 |
|
|
|
3 |
% |
Downstream
|
|
|
484 |
|
|
|
361 |
|
|
|
123 |
|
|
|
34 |
% |
|
|
315 |
|
|
|
46 |
|
|
|
15 |
% |
Technology
|
|
|
84 |
|
|
|
90 |
|
|
|
(6 |
) |
|
|
(7 |
%) |
|
|
62 |
|
|
|
28 |
|
|
|
45 |
% |
Ventures
|
|
|
(2 |
) |
|
|
(8 |
) |
|
|
6 |
|
|
|
75 |
% |
|
|
(92 |
) |
|
|
84 |
|
|
|
91 |
% |
Other
|
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
revenue
|
|
$ |
11,581 |
|
|
$ |
8,745 |
|
|
$ |
2,836 |
|
|
|
32 |
% |
|
$ |
8,805 |
|
|
$ |
(60 |
) |
|
|
(1 |
%) |
_________________________
(1)
|
Our
revenue includes both equity in the earnings of unconsolidated affiliates
and revenue from the sales of services into the joint ventures. We often
participate on larger projects as a joint venture partner and also provide
services to the venture as a subcontractor. The amount included in our
revenue represents our share of total project revenue, including equity in
the earnings (loss) from joint ventures and revenue from services provided
to joint ventures.
|
In
millions
|
|
Years Ending
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase (Decrease)
|
|
|
Percentage Change
|
|
|
2006
|
|
|
Increase (Decrease)
|
|
|
Percentage Change
|
|
Business
unit income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government – Middle East Operations
|
|
$ |
242 |
|
|
$ |
231 |
|
|
$ |
11 |
|
|
|
5 |
% |
|
$ |
350 |
|
|
$ |
(119 |
) |
|
|
(34 |
%) |
U.S.
Government – Americas Operations
|
|
|
36 |
|
|
|
68 |
|
|
|
(32 |
) |
|
|
(47 |
%) |
|
|
83 |
|
|
|
(15 |
) |
|
|
(18 |
%) |
International
Operations
|
|
|
170 |
|
|
|
116 |
|
|
|
54 |
|
|
|
47 |
% |
|
|
73 |
|
|
|
43 |
|
|
|
59 |
% |
Total
job income
|
|
|
448 |
|
|
|
415 |
|
|
|
33 |
|
|
|
8 |
% |
|
|
506 |
|
|
|
(91 |
) |
|
|
(18 |
%) |
Divisional
overhead
|
|
|
(116 |
) |
|
|
(136 |
) |
|
|
20 |
|
|
|
15 |
% |
|
|
(179 |
) |
|
|
43 |
|
|
|
24 |
% |
Total
G&I business unit income
|
|
|
332 |
|
|
|
279 |
|
|
|
53 |
|
|
|
19 |
% |
|
|
327 |
|
|
|
(48 |
) |
|
|
(15 |
%) |
Upstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Monetization
|
|
|
165 |
|
|
|
161 |
|
|
|
4 |
|
|
|
2 |
% |
|
|
(4 |
) |
|
|
165 |
|
|
|
4,125 |
% |
Offshore
|
|
|
116 |
|
|
|
59 |
|
|
|
57 |
|
|
|
97 |
% |
|
|
60 |
|
|
|
(1 |
) |
|
|
(2 |
%) |
Other
|
|
|
25 |
|
|
|
22 |
|
|
|
3 |
|
|
|
14 |
% |
|
|
28 |
|
|
|
(6 |
) |
|
|
(21 |
%) |
Total
job income
|
|
|
306 |
|
|
|
242 |
|
|
|
64 |
|
|
|
26 |
% |
|
|
84 |
|
|
|
158 |
|
|
|
188 |
% |
Divisional
overhead
|
|
|
(44 |
) |
|
|
(54 |
) |
|
|
10 |
|
|
|
19 |
% |
|
|
(44 |
) |
|
|
(10 |
) |
|
|
(23 |
%) |
Total
Upstream business unit income
|
|
|
262 |
|
|
|
188 |
|
|
|
74 |
|
|
|
39 |
% |
|
|
40 |
|
|
|
148 |
|
|
|
370 |
% |
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
151 |
|
|
|
67 |
|
|
|
84 |
|
|
|
125 |
% |
|
|
50 |
|
|
|
17 |
|
|
|
34 |
% |
Gain
on sale of assets
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Divisional
overhead
|
|
|
(42 |
) |
|
|
(11 |
) |
|
|
(31 |
) |
|
|
(282 |
%) |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(120 |
%) |
Total
Services business unit income
|
|
|
110 |
|
|
|
56 |
|
|
|
54 |
|
|
|
96 |
% |
|
|
45 |
|
|
|
11 |
|
|
|
24 |
% |
Downstream:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
72 |
|
|
|
26 |
|
|
|
46 |
|
|
|
177 |
% |
|
|
54 |
|
|
|
(28 |
) |
|
|
(52 |
%) |
Divisional
overhead
|
|
|
(21 |
) |
|
|
(16 |
) |
|
|
(5 |
) |
|
|
(31 |
%) |
|
|
(13 |
) |
|
|
(3 |
) |
|
|
(23 |
%) |
Total
Downstream business unit income
|
|
|
51 |
|
|
|
10 |
|
|
|
41 |
|
|
|
410 |
% |
|
|
41 |
|
|
|
(31 |
) |
|
|
(76 |
%) |
Technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
41 |
|
|
|
39 |
|
|
|
2 |
|
|
|
5 |
% |
|
|
28 |
|
|
|
11 |
|
|
|
39 |
% |
Divisional
overhead
|
|
|
(22 |
) |
|
|
(20 |
) |
|
|
(2 |
) |
|
|
(10 |
%) |
|
|
(18 |
) |
|
|
(2 |
) |
|
|
(11 |
%) |
Total
Technology business unit income
|
|
|
19 |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
9 |
|
|
|
90 |
% |
Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
loss
|
|
|
(4 |
) |
|
|
(9 |
) |
|
|
5 |
|
|
|
56 |
% |
|
|
(91 |
) |
|
|
82 |
|
|
|
90 |
% |
Gain
on sale of assets
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
6 |
|
|
|
(6 |
) |
|
|
(100 |
%) |
Divisional
overhead
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
1 |
|
|
|
33 |
% |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(200 |
%) |
Total
Ventures business unit income (loss)
|
|
|
(5 |
) |
|
|
(12 |
) |
|
|
7 |
|
|
|
58 |
% |
|
|
(86 |
) |
|
|
74 |
|
|
|
86 |
% |
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Job
income
|
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gain
on sale of assets
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Divisional
overhead
|
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
Other business unit income
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
business unit income
|
|
|
772 |
|
|
|
540 |
|
|
|
232 |
|
|
|
43 |
% |
|
|
377 |
|
|
|
163 |
|
|
|
43 |
% |
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
cost absorption (1)
|
|
|
(8 |
) |
|
|
(20 |
) |
|
|
12 |
|
|
|
60 |
% |
|
|
1 |
|
|
|
(21 |
) |
|
|
(2,100 |
%) |
Corporate
general and administrative
|
|
|
(223 |
) |
|
|
(226 |
) |
|
|
3 |
|
|
|
1 |
% |
|
|
(226 |
) |
|
|
— |
|
|
|
— |
|
Total
operating income
|
|
$ |
541 |
|
|
$ |
294 |
|
|
$ |
247 |
|
|
|
84 |
% |
|
$ |
152 |
|
|
$ |
142 |
|
|
|
93 |
% |
_________________________
|
(1)
|
Labor
cost absorption represents costs incurred by our central labor and
resource groups (above) or under the amounts charged to the operating
business units.
|
Government and
Infrastructure. Revenue from our Middle East Operations
increased in 2008 largely as a result of higher volume on U.S. military support
activities in Iraq under our LogCAP III contract due to a U.S. military troop
surge in the second half of 2007 that continues to positively impact our 2008
revenue. Revenue from the LogCAP III project increased approximately $748
million in 2008 over the prior year. We expect to provide services under our
LogCAP III contract through the third quarter of 2009. In April 2008, we were
selected as one of the executing contractors of the LogCAP IV contract and the
US Army is currently developing a transition plan from the LogCAP III to the
LogCAP IV contract. However, we expect our overall volume of work to
decrease. Revenue from our Americas Operations decreased in 2008 primarily as a
result of reduced activity on several domestic cost-reimbursable U.S. Government
projects including the CENTCOM, CONCAP and Los Alamos projects. The increase in
revenue in 2008 from our International Operations is largely due to a project to
design, procure and construct facilities for the U.K. MoD in Basra, southern
Iraq and several engineering projects in Australia.
The
decline in revenues from our Middle East Operations in 2007 was primarily the
result of a decrease in U.S. military support activities Iraq under our
LogCAP III contract and our oilfield restoration activities under our PCO
Oil South contract. In 2007, revenues under our LogCAP III contract
declined by $293 million and revenues under our PCO Oil South contract decreased
$185 million.
Job
income from our Middle East Operations increased in 2008 primarily as a result
of the increase in work volume, which was partially offset by the $17 million
net charge recognized during 2008 related to an unfavorable judgment from
litigation with one of our subcontractors for work performed on our LogCAP III
contract in 2003. We believe the judgment is billable to our customer. However,
we will not recognize such amount as revenue until such time as we are
reasonably assured of collection. The increase in job income from our Middle
East Operations in 2008 due to increased volume, which was further offset due to
a reduction in our award fee accrual rate and provisions for potentially
unallowable costs. Job income from our Americas Operations in 2008 decreased as
a result of lower activity on the CENTCOM, CONCAP and several other government
projects. Job income from our International Operations increased in 2008 due to
several projects including increased earnings from the Allenby & Connaught
project and the recently awarded project to design, procure and construct
facilities for the U.K. MoD in southern Iraq.
The
decrease in job income from our Middle East Operations in 2007 relates to lower
job income on our LogCAP III project resulting from a lower volume of
activities and slightly lower award fees as compared to 2006. In addition, we
recorded charges in 2007 of approximately $22 million representing potentially
unallowable costs incurred under government contracts for activities dating from
2003.
Divisional
overhead expenses incurred in 2008 and 2007 by the G&I business unit
decreased primarily as a result of certain office closures in the Middle East
and other cost reduction activities, which had a positive impact on total
business unit income.
Upstream. Revenues
for 2008 in our Gas Monetization Operations increased significantly primarily
due to increased activity from several Gas Monetization projects including the
Escravos GTL, Pearl GTL, Gorgon LNG and Skikda LNG projects. Revenue from
these four projects increased an aggregate $837 million during 2008. Partially
offsetting these 2008 increases in Gas Monetization revenues were decreases in
revenue of approximately $95 million in the aggregate for the Yemen LNG, Nigeria
LNG and Tangguh LNG projects primarily due to lower activity in 2008 as compared
to 2007 as these projects are nearing completion. In our Offshore Operations, in
the first quarter of 2008 we recognized revenue in the amount of $51 million
related to the favorable arbitration award related to one of our three projects
performed for PEMEX, EPC 28, which contributed significantly to the increase in
2008 revenues.
Revenues
for 2007 in our Gas Monetization Operations increased an aggregate of $514
million as a result of the increased activity on the Escravos LNG, Pearl GTL,
Yemen LNG and Skikda LNG projects. The increased activity on these projects was
generally because they either started in 2006 and had a full year of operations
in 2007 or began operations in 2007. These revenue increases in 2007 were
partially offset by decreases in revenues in our Gas Monetization Operations
related to several front-end engineering and design (“FEED”) and other recently
completed projects.
Job
income in our Gas Monetization Operations for 2008 was largely driven by a
combined $76 million on the Skikda LNG, Pearl GTL and Gorgon LNG projects due to
increased activity as compared to the prior year. These increases in 2008 job
income were partially offset by lower activity on other recently completed Gas
Monetization projects as well as a decrease in recognized profits on one of our
LNG projects caused by increases in estimated costs of our joint venture. We
decreased our recognized profits from this LNG project by $24 million during the
second quarter of 2008 and subsequently executed a change order to recover these
cost increases which were partially offset by further cost increases of
approximately $7 million. Additionally, we recognized a $20 million charge in
2008 related to our estimated liability for the prospective settlement of the
FCPA and bidding practices investigations in Nigeria, which was charged to our
Gas Monetization Operations job income and, accordingly, the charge is
classified as a component of cost of services in the accompanying consolidated
statements of income. In our Offshore Operations, job income increased in 2008
primarily as a result of the $51 million favorable arbitration award related to
the EPC 28 project performed for PEMEX.
The
increase in 2007 Gas Monetization job income is largely due to the $157 million
charge related to our Escravos GTL project in Nigeria in 2006. No further losses
were incurred on the project and in 2007, we executed an amendment with our
customer to convert the contract from a fixed price to a cost reimbursable
basis. In 2007, job income from our Gas Monetization Operations primarily was
driven by our Pearl GTL, Skikda LNG, Yemen LNG and Tangguh LNG projects, which
contributed approximately $101 million to job income in the
aggregate.
Services. The 2008 increase
in Services revenue is primarily due to business we obtained through the
acquisition of BE&K on July 1, 2008, which contributed approximately $825
million of revenue from the date of our acquisition through December 31, 2008.
Additionally, revenue in 2008 from Services legacy operations increased
significantly as a result of continued growth in our Canadian and North American
Construction operations. Revenue in 2008 from our Canadian operations
was up approximately $125 million over the prior year primarily as a result of
increased construction services on the Shell Scotford Upgrader project. North
American Construction revenues in 2008 increased approximately $81 million as a
result of newly awarded domestic construction projects as well as growth on
projects awarded in 2007.
Increases
in Services revenue in 2007 were primarily related to increases in awards for
direct hire construction and modular fabrication services on the Shell Scotford
Upgrader project in our Canadian operations Partially offsetting
these increases were reductions in activity from other projects in our Canadian
operations and from our Industrial Services operations as a result of the
completion of a number of projects in 2007.
Job
income from Services increased in 2008 primarily due to of the business we
obtained through the acquisition of BE&K which contributed approximately $65
million to job income. In our Canadian operations, job income was up in 2008 on
the Shell Scotford Upgrader project offset by decreases in other projects in our
Canadian operations that were completed in 2007. Job income was positively
impacted in 2008 as a result of an actuarially determined insurance adjustment
of $4 million. Divisional overhead of the Services business unit in 2008
increased primarily as a result of the BE&K acquisition.
Job
income from Services in 2007 increased due to the increases related to modular
fabrication services in our Canada operations. Job income in 2007 also increased
as a result of our MMM joint venture which provides marine vessel support
services in the Gulf of Mexico. This joint venture was contributed to us in the
second quarter of 2006 by our former parent company, Halliburton. Job income was
also positively impacted by actuarially determined insurance adjustments of $11
million for the year ended December 31, 2007. These increases were partially
offset by decreases in job income from our Industrial Services
operations.
Downstream. During 2008
revenue from our operations increased by approximately $92 million on the Saudi
Kayan olefin and the Ras Tanura projects in Saudi Arabia due to increased
activity. Downstream revenue for the year ended December 31, 2008 increased an
additional $64 million as a result of the BE&K acquisition on July 1,
2008. Downstream refining operations was awarded a number of new
refining projects in 2008 which also contributed approximately $37 million to
the increase in revenue. Increases in revenue related to these and other
projects were partially offset by a $90 million decline in revenue during 2008
on the EBIC ammonia plant project in Egypt as it nears completion.
For 2007,
the increase in Downstream revenue is primarily attributable to the Yanbu export
refinery and Saudi Kayan olefin projects in Saudi Arabia. Revenue related to
these two projects increased an aggregate of $107 million due to a higher volume
of work in 2007. Offsetting these increases were decreases in revenues on
various other projects.
The
increases in Downstream job income in 2008 are primarily due to an aggregate $25
million increase in job income in our petrochemicals operations from program
management services for the Ras Tanura project and construction management
services on the Saudi Kayan project in Saudi Arabia. Additionally,
during 2008, we reversed $8 million of the previously recognized losses on the
Saudi Kayan resulting from the effects of change orders executed during the
second quarter of 2008. Furthermore, job income from the business we
obtained through the acquisition of BE&K on July 1, 2008, contributed
approximately $9 million to the increase in job income in 2008 and primarily
related to our chemical operations. Job income from our refining
operations increased approximately $14 million as a result of the award of
several new refining projects and increases in scope on two existing refining
projects.
Job
income from Downstream in 2007 includes a $7 million loss recorded on the Saudi
Kayan olefin project in Saudi Arabia. Additionally, job income related to an
ammonia plant construction project in Egypt was $23 million higher in 2006 as a
result of higher progress achieved in 2006 and the project was nearing
completion in late 2007.
Technology. The 2008 decrease
in Technology revenue of $6 million is primarily attributable to several
projects in China and South America with lower activity as they are completed or
nearly completed in 2008. The 2008 increase in Technology job income of $2
million is primarily attributable to contributions from an ammonia project in
Venezuela, a refinery fluid catalytic cracking revamp project in Colombia, and a
royalty payment for a technology license in India. The decreases in 2008 revenue
from these projects are partially offset by increases from technology licensed
to an ammonia plant in Venezuela and an aniline plant in China awarded in early
2008. The increase in revenues and job income in 2007 is largely due to syngas
technologies deployed on projects in the South American region and Superflex
technology project in China.
Ventures. Ventures job loss
was $4 million, $9 million and $91 million for the years ended December 31,
2008, 2007 and 2006, respectively. Job loss for 2008 and 2007 are
primarily driven by continued operating losses generated on our investment in
APT/FreightLink, the Alice Springs-Darwin railroad project in Australia. At
December 31, 2008, our investment in APT/Freightlink had been written-off and no
further losses are expected. These losses in 2008 and 2007 were partially
mitigated by income generated by the Aspire Defence (Allenby & Connaught)
project. The loss in 2006 included $58 million of impairment charges 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 United Kingdom.
Labor cost absorption. Labor
cost absorption expense was $8 million in 2008, $20 million in 2007 and we had
labor cost absorption benefits of $1 million in 2006. Labor cost absorption
represents costs incurred by our central labor and resource groups (above) or
under the amounts charged to the operating business units. The decrease in labor
cost absorption in 2008 was primarily due to chargeability and utilization.
Partially offsetting the 2008 reduction was a $6 million charge recorded in 2008
related to the impact of Hurricane Ike in Houston, Texas. The increase in labor
cost absorption in 2007 compared to 2006 was primarily due to an increase in
incentive compensation and the issuance of performance based award units during
2007.
General and Administrative expense.
General and administrative expense was $223 million, $226 million and
$226 million for the years ended December 31, 2008, 2007 and 2006, respectively.
The slight decline in 2008 was due to lower activity related to our deployment
of our HR/Payroll instance of SAP and lower associated charges from Halliburton
for access to their HR/Payroll system, decreases in incentive compensation as
compared to the same period of the prior year, and lower costs from acquisition
related activities for transactions not closed. These decreases in costs for
2008 were offset by incremental general and administrative expense of $8 million
since our acquisition of BE&K on July 1, 2008, as well as $5 million in
charges recognized related to the impact of Hurricane Ike in Houston, Texas. As
a result of the net impact of these activities and other cost reductions, our
general and administrative expense in 2008 remained relatively flat with 2007.
In 2007, we substantially completed the financial systems implementation
project. Costs related to the financial systems implementation project decreased
approximately $17 million in 2007. This decrease was offset by increases
in costs from acquisition related activities as well as incentive
compensation as we increased the number of participants in and the number of
awards issued under our incentive compensation plans.
Non-operating
items
Net
interest income was $35 million, $62 million and $27 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Interest income
decreased significantly in 2008 as a result of the decrease in our cash and
equivalents balance from $1.9 billion at December 31, 2007 to $1.1 billion as of
December 31, 2008. Additionally, interest rates earned on our
invested cash declined significantly in 2008 as a result of the current economic
conditions which further contributed to the decrease in interest
income. The decrease in our cash and equivalents balance is largely
attributable to the acquisition of BE&K on July 1, 2008 with a purchase
price of approximately $559 million and stock repurchase totaling $196 million
in 2008. In addition, as a result of the July 2007 conversion of
Escravos contract from fixed price to cost reimbursable, we were no longer
entitled to interest income earned on advanced funds from the project
owner. Interest income in 2007 increased compared to 2006 primarily
as a result of the continued growth of our cash and equivalents balance
throughout 2006 resulting from customer advances and proceeds from our initial
public offering in later 2006.
Related
party interest expense was zero for the years ended December 31, 2008 and 2007
and $36 million for the year ended December 31, 2006. The related party interest
expense in 2006 was primarily due to the conversion of the non-interest bearing
potion of our intercompany payable to Halliburton into $774 million interest
bearing subordinated intercompany notes to subsidiaries of Halliburton, which
occurred in December 2005. The subordinated intercompany notes were paid in full
during the fourth quarter of 2006.
Foreign
currency losses were $8 million, $15 million and $16 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The foreign currency losses
incurred in 2008 were primarily related to losses on the Mexican peso
denominated receivable due from PEMEX on the EPC 28 arbitration award and
weakening of the Indonesian currency against positions that were not fully
hedged. These losses were partially offset by strengthening of the
U.S. Dollar against the British Pound in 2008. The foreign currency losses
incurred in 2007 and 2006 primarily related to impact of the weakening of the
U.S. dollar against the British Pound on certain of our U.K. subsidiaries with a
British Pound functional currency that held significant U.S. dollar cash
balances related to the proceeds from the sale of our Production Services group
in 2006 and sale of DML in 2007.
Provision
for income taxes was $212 million, $138 million and $94 million for the years
ended December 31, 2008, 2007 and 2006, respectively. Our effective tax rate was
37%, 40% and 73% for the years ended December 31, 2008, 2007 and 2006,
respectively. Our U.S. statutory tax rate for all years is 35%. Our effective
tax rate for 2008 exceeded our statutory rate primarily due to certain dividends
from foreign affiliates, the non-deductible fine resulting from our settlement
of the FCPA investigation in Nigeria and domestic state taxes. For
the year ended December 31, 2008, our valuation allowance was reduced from $33
million to $19 million primarily as a result of utilizing foreign
branch net operating losses for which a valuation allowance had been
previously established in prior years.
Our 2007
effective tax rate was higher than the statutory rate primarily as a result of
certain non-deductible losses in foreign jurisdictions, operating losses from
our railroad investment in Australia, and state and other taxes. Our 2006
effective tax rate was higher than the statutory rate primarily as a result of
not receiving a tax benefit for the impairment charges taken on our investment
in the Alice Springs-Darwin railroad project in Australia (“ASD”),
non-deductible operations losses from ASD, and tax return-to-accrual adjustments
in various tax jurisdictions.
Income
from discontinued operations was $11 million, $120 million and $114 million for
the years ended December 31, 2008, 2007 and 2006, respectively. Discontinued
operations primarily represent revenues and gain on the sale of our Productions
Services group in May 2006 and the disposition of our 51% interest in DML in
June 2007. In 2008, we recognized a tax benefit of $11 million related to
foreign tax credits upon completion of a tax pool study related to DML. We sold
our 51% interest in DML in June 2007. Revenues from our discontinued operations
were $449 million and $1.1 billion for 2007 and 2006, respectively, while
income from discontinued operations, net of tax, was $120 million and $114
million for the same periods, respectively. Income from discontinued operations
included a gain on sale, net of tax, of approximately $101 million in 2007 and
$77 million in 2006.
Liquidity
and Capital Resources
Cash and
equivalents totaled $1.1 billion at December 31, 2008 and $1.9 billion December
31, 2007, which included $175 million and $483 million, respectively, of cash
and equivalents from advanced payments related to contracts in progress held by
our joint ventures and that we consolidate for accounting purposes. The use of
these cash balances in consolidated joint ventures is limited to the joint
venture activities and is not available for other projects, general cash needs
or distribution to us without approval of the board of directors of the
respective joint ventures. In addition, cash and equivalents includes $179
million and $213 million as of December 31, 2008 and 2007, respectively, from
advanced payments related to a contract in progress that was approximately 37%
complete at December 31, 2008. We expect to use the cash and equivalents
advanced on this project to pay project costs.
Historically,
our primary sources of liquidity were cash flows from operations, including cash
advance payments from our customers and borrowings from our former parent,
Halliburton. In October 2005, Halliburton capitalized $300 million of the then
outstanding intercompany balance to equity through a capital contribution. On
December 1, 2005, our intercompany balance of $774 million payable to
Halliburton was converted into Subordinated Intercompany Notes to
Halliburton. Effective December 16, 2005, we entered into a bank
syndicated unsecured $850 million five-year revolving credit facility (Revolving
Credit Facility), which extends through 2010. In October 2006, we repaid $324
million in aggregate principal amount of the $774 million of indebtedness we
owed under the Subordinated Intercompany Notes. In November 2006, we completed
an initial public offering of our common stock which generated net proceeds of
$511 million. In connection with the initial public offering, we
repaid the remaining $450 million in aggregate principal amount of the
Subordinated Intercompany Notes.
During
2008, we expanded the capacity of our Revolving Credit Facility from $850
million to $930 million. Our Revolving Credit Facility is available for cash
working capital needs and letters of credit to support our operations. Amounts
drawn under the Revolving Credit Facility bear interest at variable rates based
on a base rate (equal to the higher of Citibank’s publicly announced base rate,
the Federal Funds rate plus 0.5% or a calculated rate based on the certificate
of deposit rate) or the Eurodollar Rate, plus, in each case, the applicable
margin. The applicable margin will vary based on our utilization spread. At
December 31, 2008, we had zero cash draws and $510 million in letters of credit
issued and outstanding, which reduced the availability under the Revolving
Credit Facility to $420 million. In addition, we pay a commitment fee on any
unused portion of the credit line under the Revolving Credit Facility ranging
from 0.15% to 0.25% per annum depending upon the level of total capacity
utilized.
Debt covenants. The Revolving
Credit Facility contains a number of covenants restricting, among other things,
our ability to incur additional indebtedness and liens, sales of our assets and
payment of dividends, as well as limiting the amount of investments we can make.
Further, the Revolving Credit Facility limits the amount of new letters of
credit and other debt we can incur outside of the credit facility to $250
million, which could adversely affect our ability to bid or bid competitively on
future projects if the credit facility is not amended or replaced. In January
2008, we entered into an Agreement and Amendment to the Revolving Credit
Facility effective (the “Amendment”), which (i) permits us to elect whether any
increase in the aggregate commitments under the Revolving Credit Facility used
solely for the issuance of letters of credit are to be funded from existing
banks or from one or more eligible assignees; and (ii) permits us to declare and
pay shareholder dividends and/or engage in equity repurchases not to exceed a
total of $400 million in the aggregate.
The
Revolving Credit Facility also requires us to maintain certain financial ratios,
as defined by the Revolving Credit Facility agreement, including a
debt-to-capitalization ratio that does not exceed 50%; a leverage ratio that
does not exceed 3.5; and a fixed charge coverage ratio of at least 3.0. At
December 31, 2008 and 2007, we were in compliance with these ratios and other
covenants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Cash
flows provided by operating activities
|
|
$ |
124 |
|
|
$ |
248 |
|
|
$ |
931 |
|
Cash
flows (used in) provided by investing activities
|
|
|
(556 |
) |
|
|
293 |
|
|
|
225 |
|
Cash
flows used in financing activities
|
|
|
(244 |
) |
|
|
(150 |
) |
|
|
(139 |
) |
Effect
of exchange rate changes on cash
|
|
|
(40 |
) |
|
|
9 |
|
|
|
50 |
|
Increase
(decrease) in cash and equivalents
|
|
$ |
(716 |
) |
|
$ |
400 |
|
|
$ |
1,067 |
|
Operating
activities. Cash provided by operations was $124 million for
the year ended December 31, 2008 compared to cash provided by operations of $248
million for the year ended December 31, 2007. We received payments from PEMEX
related to the EPC 22 and EPC 28 arbitration awards totaling $185 million in
2008. Additionally, we received $121 million in dividends from
unconsolidated joint ventures, which are accounted for using the equity method
of accounting. Our working capital requirements for our Iraq-related work
decreased from $239 at December 31, 2007 to $76 at December 31, 2008, generating
cash of approximately $163 million. Offsetting these cash increases
were decreases in cash of approximately $342 million on our consolidated joint
venture projects and a contract in progress. We also made
contribution to our international and domestic pension plans of $74 million
during 2008.
Operating
cash flows in 2007 decreased significantly compared to 2006 due to lower
advanced billings on uncompleted contracts and a higher volume of accounts
receivable billing on other projects than in 2006. Operating cash flows in 2007
also included tax payments related to the gain on the sale of our 51% interest
in DML of approximately $115 million. Operating cash flows in 2006 includes $304
million of cash advances on several consolidated joint venture projects
including our Escravos project and a $248 million increase as a result of the
reduction in our working capital for Iraq related work.
Our cash
flows from operations can vary significantly from year to year and are affected
by the mix, percentage of completion and terms of our engineering and
construction projects. We often receive cash through advanced billings on our
larger projects and those of our consolidated joint ventures such as Escravos.
These cash advances are generally only available for use on a specific project
and not available for other purposes. As the advances are used in project
execution, our cash position is reduced on the project. In the event the net
investment in the operating assets of a project is greater than available
project cash balance, we may utilize other cash on hand or availability under
our Revolving Credit Facility to satisfy any periodic net operating cash
outflows.
Investing
activities. Cash used in investing activities for the year
ended December 31, 2008 totaled $556 million compared to cash provided by
investing activities of $293 million and $225 million for the years ended
December 31, 2007 and 2006, respectively. Cash used in investing activities in
2008 were primarily for business acquisitions. In July 2008, we acquired
BE&K for $494 million, net of cash acquired and post closing purchase price
adjustments. We also acquired TGI, Catalyst Interactive and Wabi Development
Corporation for a combined purchase price of approximately $32 million, net of
cash received. Capital expenditures in 2008 were $37 million as compared to $43
million and $57 million in 2007 and 2006, respectively. In 2007, we
sold our 51% interest in DML for cash proceeds of approximately $345 million,
net of direct transaction costs. In 2006, we completed the sale of our
Production Services group, in which we received net proceeds of $265
million.
Financing
activities. Cash used in financing activities for the year
ended December 31, 2008 totaled $244 million which was almost entirely related
to $196 million of payments to reacquire 8.4 million shares of our common stock
and $53 million related to dividend payments to our shareholders and to minority
shareholders of several of our consolidated joint ventures.
Cash used
in financing activities for the year ended December 31, 2007 totaled $150
million and is primarily related to net payments of $120 million made to
Halliburton for various support services provided by Halliburton under our
transition services agreement and other amounts incurred prior to our separation
from Halliburton. Cash flows used in financing activities for the year ended
December 31, 2006 were $139 million and primarily relates to net repayment of
$629 million in borrowings from Halliburton as previously discussed and $25
million repayment of other long term borrowings. We completed an initial public
offering of the common stock of KBR in November 2006 resulting in net proceeds
of $511 million.
Future sources of
cash. Future sources of cash include cash flows from
operations, including cash advance payments from our customers, and borrowings
under our Revolving Credit Facility. The Revolving Credit Facility is available
for cash advances required for working capital and letters of credit to support
our operations. However, to meet our short- and long-term liquidity
requirements, we will primarily look to our existing cash balances and cash
generated from future operating activities.
Future uses of
cash. Future uses of cash will primarily relate to working
capital requirements for our operations. In addition, we will use cash to fund
capital expenditures, pension obligations, operating leases, cash dividends,
share repurchases and various other obligations, including the commitments
discussed in the table below, as they arise. The capital expenditures
budget for 2009 is approximately $73 million, and primarily relates to
information technology, real estate and equipment/facilities to be used in our
business units. See “Off
balance sheet arrangements – commitments and other contractual
obligations” below for a schedule of contractual obligations and other
long-term liabilities that will require the use of cash.
Off
balance sheet arrangements
Letters of credit, surety bonds and
bank guarantees. In connection with certain projects, we are
required to provide letters of credit and surety bonds to our customers. Letters
of credit are provided to customers in the ordinary course of business to
guarantee advance payments from certain customers, support future joint venture
funding commitments and to provide performance and completion guarantees on
engineering and construction contracts. We have $1.4 billion in committed and
uncommitted lines of credit to support letters of credit and as of December 31,
2008, we had utilized $645 million of our credit capacity. Surety
bonds are also posted under the terms of certain contracts primarily related to
state and local government projects to guarantee our performance.
As of
December 31, 2008, we had approximately $1.0 billion in letters of credit
outstanding, of which $510 million were issued under our Revolving Credit
Facility and $363 million were issued under various Halliburton facilities
and/or are irrevocably and unconditionally guaranteed by Halliburton. Of the
total outstanding, $357 million relate to our joint venture operations. At
December 31, 2008, $212 million of the $1.0 billion outstanding letters of
credit have triggering events that would entitle a bank to require cash
collateralization. Approximately $433 million of the $510 million
relates to letters of credit issued under our Revolving Credit Facility which
have expiry dates close to or beyond the maturity date of the facility. Under
the terms of the Revolving Credit Facility, if the original maturity date of
December 16, 2010 is not extended then the issuing banks may require that we
provide cash collateral for these extended letters of credit no later than 95
days prior to the original maturity date. Currently, our intention is to further
increase the capacity of and extend the original maturity date of the Revolving
Credit Facility which we intend to complete in 2009. As the need
arises, future projects will be supported by letters of credit issued under our
Revolving Credit Facility or arranged on a bilateral basis. We
believe we have adequate letter of credit capacity under our existing Revolving
Credit Facility and bilateral lines of credit to support our operations for the
next twelve months.
Halliburton
has guaranteed letters of credit and surety bonds and provided parents company
guarantees primarily related to our financial commitments. We expect to cancel
these letters of credit and surety bonds as we complete the underlying projects.
Since the separation from Halliburton we have been engaged in discussions with
surety companies and have arranged lines with multiple firms for our own
standalone capacity. Since the arrangement of this stand alone capacity, we have
been primarily sourcing surety bonds from our own capacity without additional
Halliburton credit support. We believe our current surety bond capacity is
adequate to support our current backlog of projects and prospective projects for
the next twelve months.
We and
Halliburton agreed that the existing letters of credit and surety bonds
guaranteed by Halliburton will remain in full force and effect following the
separation of our companies. In addition, we and Halliburton 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 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 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
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. We
currently pay a quarterly fee to Halliburton calculated at an annual rate of
0.40% of the outstanding performance-related letters of credit, 0.80% of the
outstanding financial-related letters of credit guaranteed by Halliburton and
0.25% of the outstanding guaranteed surety bonds. Effective January 1, 2010, the
annual fee increases to 0.90%, 1.65% and 0.50% of the outstanding
performance-related and financial-related outstanding issued letters of
credit and the outstanding guaranteed surety bonds, respectively.
We are
also pursuing several large projects that, if awarded to us will likely require
us to issue letters of credit that could be large in amount. The current
capacity of our Revolving Credit Facility is not adequate for us to issue
letters of credit necessary to replace all outstanding letters of credit issued
under the various Halliburton facilities or those guaranteed by Halliburton and
issue letters of credit for projects that we are currently pursuing should they
be awarded to us. In addition, we would not be able to make working capital
borrowings against the Revolving Credit Facility if the availability is fully
reduced by issued letters of credit. We are currently working to increase our
credit capacity.
Commitments and other contractual
obligations. The following table summarizes our
significant contractual obligations and other long-term liabilities as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Operating
leases
|
|
|
52 |
|
|
|
47 |
|
|
|
42 |
|
|
|
38 |
|
|
|
32 |
|
|
|
101 |
|
|
|
312 |
|
Purchase
obligations(a)
|
|
|
20 |
|
|
|
15 |
|
|
|
3 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
40 |
|
Pension
funding obligation
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
Total
(b)
|
|
|
89 |
|
|
|
62 |
|
|
|
45 |
|
|
|
40 |
|
|
|
32 |
|
|
|
101 |
|
|
|
369 |
|
_________________________
(a)
|
The
purchase obligations disclosed above do not include purchase obligations
that we enter into with vendors in the normal course of business that
support existing contracting arrangements with our customers. The purchase
obligations with our vendors can span several years depending on the
duration of the projects. In general, the costs associated with those
purchase obligations are expensed to correspond with the revenue earned on
the related projects.
|
(b)
|
Excluded
from the table is $35 million which includes, $13 million in interest and
penalties, related to unrecognized tax benefits recorded pursuant to
Financial Accounting Standards Board Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes.” Refer to Note 12 in our
consolidated financial statements.
|
Other
obligations. We had commitments to provide funds to our
privately financed projects of $64 million as of December 31, 2008, and $113
million as of December 31, 2007 and primarily related to future equity funding
on our Allenby and Connaught project. Our commitments to fund our privately
financed projects are supported by letters of credit as described
above. At December 31, 2008, approximately $16 million of the $64
million commitments are current.
We have
an obligation to fund estimated losses on our uncompleted contracts which
totaled $76 million at December 31, 2008. Approximately $60 million
of this amount relates to our Escravos project, the majority of which is
expected to be funded in 2009.
Other
factors affecting liquidity
Government
claims. We had unapproved claims for costs incurred
under various government contracts totaling $73 million at December 31, 2008.
The unapproved claims outstanding are considered to be probable of collection
and have been recognized as revenue. These unapproved claims related to
contracts where our costs have exceeded the customer’s funded value of the task
order and therefore could not be billed. We understand that our customer is
actively seeking funds that have been or will be appropriated to the Department
of Defense that can be obligated on our contract.
Halliburton
indemnities. Halliburton has agreed to indemnify us and
certain of our greater than 50%-owned subsidiaries for fines or other monetary
penalties or direct monetary damages, including disgorgement, as a result of
claims made or assessed against us by U.S. and certain foreign governmental
authorities or a settlement thereof, relating to investigations under the FCPA
or analogous applicable foreign statutes related investigations with respect to
the construction and subsequent expansion by TSKJ of a natural gas liquefaction
complex in Nigeria. Halliburton has also agreed to indemnify us for
out-of-pocket cash costs and expenses, or cash settlement or cash arbitration
awards in lieu thereof, we may incur as a result of the replacement of certain
subsea flow-line bolts installed in connection with the Barracuda-Caratinga
project.
In
February 2009, one of our subsidiaries pleaded guilty to violating and
conspiring to violate the FCPA arising from the intent to bribe various Nigerian
officials through commissions paid to agents working on behalf of
TSKJ. The terms of the plea agreement with the DOJ call for the
payment of a criminal penalty of $402 million, of which Halliburton will pay
$382 million under the terms of the indemnity while we will pay $20 million in
quarterly payments over the next two years. We also agreed to a
judgment by the SEC requiring, Halliburton and us, jointly and severally, to
make payments totaling $177 million, all of which will be paid by Halliburton
under the terms of the indemnity.
We may
take or fail to take actions that could result in our indemnification from
Halliburton no longer being available with respect to certain other foreign
governmental investigations of the project in Nigeria or with respect to matters
relating to the Barracuda-Caratinga project as Halliburton’s indemnities do not
apply to all potential losses. Please read “Management Discussion and Analysis
of Financial Condition and Results of Operations - Legal Proceedings – Foreign Corrupt
Practices Act Investigations” and “-Barracuda-Caratinga Project
Arbitration” as well as “Risk Factors” contained in
Part I of this Annual Report on Form 10-K for further discussion of these
matters.
Worldwide economic conditions and
financial market crisis. The financial market credit crisis
and the resulting current worldwide economic downturn have significantly
impacted the capital and credit markets. Although it is presently not
possible to determine the full impact this situation may have on us in the
future, to date we have not experienced any significant impact to our business
as a result of these conditions. The following is a discussion of some of the
risks and possible consequences:
|
·
|
The
economic downturn and resulting decrease in energy prices may cause
clients to postpone or cancel their capital projects. Accordingly, we may
experience a decrease in the demand for our engineering procurement,
construction and construction management services in the future. This may
negatively impact the future operating results and cash flows of our
Upstream, Downstream, Technology and Services business units. In addition,
the economic downturn may result in a decrease in client capital
expenditures for U.S. industrial, commercial healthcare and governmental
buildings in the future. This may negatively impact the future operating
results and cash flows of our Services and Government and Infrastructure
business units.
|
|
·
|
In
addition, the economic downturn and financial market credit crisis may
cause our vendors to experience financial difficulty which could impact
their ability to perform pursuant to their contractual obligations to
provide goods or services to us which may in turn require us to incur
additional costs or delays in meeting our contractual commitments to our
customers. Likewise, our customers may experience financial
difficulty resulting in delays or the inability for us to collect any
trade receivables that are owed to us. If either or both of these
situations occur, it could have a significant impact on our future
operating results and cash flows.
|
|
·
|
The
economic downturn could adversely affect our future operating results and
cash flows resulting in future impairments of our goodwill. At December
31, 2008 we had goodwill of $694 million. We test goodwill for impairment
annually or more frequently if a triggering event occurs. Our impairment
testing in 2008 indicates that our goodwill has not been impaired. See our
“Critical Accounting
Estimates” for further discussion of our goodwill impairment
testing policy.
|
|
·
|
The
economic downturn has negatively impacted the value of the assets in the
defined benefit pension plans that we sponsor and we expect increased
funding requirements to these pension plans in the future. As a result of
our actuarial valuations for these plans at December 31, 2008, we recorded
a $209 million increase to our pension liability and charge to our other
comprehensive income, net of tax.
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Our
Revolving Credit Facility is provided by a syndicate of 23 banks, one of
which was the subject of a recent bankruptcy as a result of the recent
financial market credit crisis. This bank provides $40 million, or
approximately 4%, of the total credit under this facility. To date, there
have been no performance demands made on this participating bank either by
us or the syndicate agent bank. We are currently working to
replace this participating bank in our Revolving Credit Facility with
another existing syndicate bank or a new bank. Although we have
$420 million remaining capacity under this facility at December 31, 2008,
we rely on this facility to help fund our letter of credit needs as well
as a potential source of funding for acquisition transactions and working
capital. The inability of one or more banks in the consortium to meet its
commitment under the credit facility could impede our future growth. After
reviewing the credit worthiness of the banks in the consortium, we have no
reason to believe that access to the credit facility is materially
at-risk.
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Critical
Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to select
appropriate accounting policies and to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses. Our
critical accounting policies are described below to provide a better
understanding of how we develop our assumptions and judgments about future
events and related estimations and how they can impact our financial statements.
A critical accounting estimate is one that requires our most difficult,
subjective, or complex estimates and assessments and is fundamental to our
results of operations.
We base
our estimates on historical experience and on various other assumptions we
believe to be reasonable according to the current facts and circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. We
believe the following are the critical accounting policies used in the
preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States, as well as the
significant estimates and judgments affecting the application of these policies.
This discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes.
Percentage of
completion. Revenue from long-term contracts to provide
construction, engineering, design or similar services are reported on the
percentage-of-completion method of accounting. This method of accounting
requires us to calculate job profit to be recognized in each reporting period
for each job based upon our projections of future outcomes, which include
estimates of the total cost to complete the project; estimates of the project
schedule and completion date; estimates of the extent of progress toward
completion; and amounts of any probable unapproved claims and change orders
included in revenue. Progress is generally based upon physical progress,
man-hours or costs incurred depending on the type of job. Physical progress is
determined as a combination of input and output measures as deemed appropriate
by the circumstances.
At the
outset of each contract, we prepare a detailed analysis of our estimated cost to
complete the project. Risks relating to service delivery, usage, productivity,
and other factors are considered in the estimation process. Our project
personnel periodically evaluate the estimated costs, claims, change orders, and
percentage of completion at the project level. The recording of profits and
losses on long-term contracts requires an estimate of the total profit or loss
over the life of each contract. This estimate requires consideration of total
contract value, change orders, and claims, less costs incurred and estimated
costs to complete. We also take into account liquidated damages when determining
total contract profit or loss. Our contracts often require us to pay
liquidated damages should we not meet certain performance requirements,
including completion of the project in accordance with a scheduled time. We
include an estimate of liquidated damages in contract costs when it is deemed
probable that they will be paid. Anticipated losses on contracts are
recorded in full in the period in which they become evident. Profits are
recorded based upon the product of estimated contract profit at completion times
the current percentage-complete for the contract.
When
calculating the amount of total profit or loss on a long-term contract, we
include unapproved claims in contract value when the collection is deemed
probable based upon the four criteria for recognizing unapproved claims under
the American Institute of Certified Public Accountants Statement of Position
(“SOP”) 81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.” Including probable unapproved claims in this
calculation increases the operating income (or reduces the operating loss) that
would otherwise be recorded without consideration of the probable unapproved
claims. Probable unapproved claims are recorded to the extent of costs incurred
and include no profit element. In all cases, the probable unapproved claims
included in determining contract profit or loss are less than the actual claim
that will be or has been presented to the customer. We are actively engaged in
claims negotiations with our customers, and the success of claims negotiations
has a direct impact on the profit or loss recorded for any related long-term
contract. Unsuccessful claims negotiations could result in decreases in
estimated contract profits or additional contract losses, and successful claims
negotiations could result in increases in estimated contract profits or recovery
of previously recorded contract losses.
At least
quarterly, significant projects are reviewed in detail by senior management. We
have a long history of working with multiple types of projects and in preparing
cost estimates. However, there are many factors that impact future costs,
including but not limited to weather, inflation, labor and community
disruptions, timely availability of materials, productivity, and other factors
as outlined in our “Risk Factors” contained in Part I of this Annual Report on
Form 10-K. These factors can affect the accuracy of our estimates and materially
impact our future reported earnings.
Accounting for government
contracts. Most of the services provided to the United States
government are governed by cost-reimbursable contracts. Services under our
LogCAP and Balkans support contracts are examples of these types of
arrangements. Generally, these contracts contain both a base fee (a fixed profit
percentage applied to our actual costs to complete the work) and an award fee (a
variable profit percentage applied to definitized costs, which is subject to our
customer’s discretion and tied to the specific performance measures defined in
the contract, such as adherence to schedule, health and safety, quality of work,
responsiveness, cost performance, and business management).
Revenue
is recorded at the time services are performed, and such revenues include base
fees, actual direct project costs incurred and an allocation of indirect costs.
Indirect costs are applied using rates approved by our government customers. The
general, administrative, and overhead cost reimbursement rates are estimated
periodically in accordance with government contract accounting regulations and
may change based on actual costs incurred or based upon the volume of work
performed. Revenue is reduced for our estimate of costs that either are in
dispute with our customer or have been identified as potentially unallowable per
the terms of the contract or the federal acquisition regulations.
Award
fees are generally evaluated and granted periodically by our customer. For
contracts entered into prior to June 30, 2003, award fees are recognized during
the term of the contract based on our estimate of amounts to be awarded. Once
award fees are granted and task orders underlying the work are definitized, we
adjust our estimate of award fees to actual amounts earned. Our estimates are
often based on our past award experience for similar types of work. We have been
receiving award fees on the Balkans project since 1995, and our estimates for
award fees for this project have generally been accurate in the periods
presented. We periodically, receive LogCAP award fee scores and, based on these
actual amounts, we adjust our accrual rate for future awards, if necessary. The
controversial nature of this contract may cause actual awards to vary
significantly from past experience.
For
contracts containing multiple deliverables entered into subsequent to June 30,
2003 (such as PCO Oil South), we analyze each activity within the contract to
ensure that we adhere to the separation guidelines of Emerging Issues Task Force
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and the
revenue recognition guidelines of Staff Accounting Bulletin No. 104 “Revenue
Recognition.” For service-only contracts and service elements of multiple
deliverable arrangements, award fees are recognized only when definitized and
awarded by the customer. The LogCAP IV contract would be an example of a
contract in which award fees would be recognized only when definitized and
awarded by the customer. Award fees on government construction contracts are
recognized during the term of the contract based on our estimate of the amount
of fees to be awarded.
Similar
to many cost-reimbursable contracts, these government contracts are typically
subject to audit and adjustment by our customer. Each contract is unique;
therefore, the level of confidence in our estimates for audit adjustments varies
depending on how much historical data we have with a particular contract.
Further, the significant size and controversial nature of our contracts may
cause actual awards to vary significantly from past experience.
Estimated Losses on Uncompleted
Contracts and Changes in Contract Estimates. We record
provisions for estimated losses on uncompleted contracts in the period in which
such losses are identified. The cumulative effects of revisions to contract
revenue and estimated completion costs are recorded in the accounting period in
which the amounts become evident and can be reasonably estimated. These
revisions can include such items as the effects of change orders and claims,
warranty claims, liquidated damages or other contractual penalties, adjustments
for audit findings on US government contracts and contract closeout
settlements. Our
contracts often require us to pay liquidated damages should we not meet certain
performance requirements, including completion of the project in accordance with
a scheduled time. We include an estimate of liquidated damages in contract costs
when it is deemed probable that they will be paid.
Goodwill
Impairment. We operate our business through six business units
which are also our operating segments as defined by FASB No. 131 Disclosures about Segments of an
Enterprise and Related
Information. These operating segments form the basis for our
reporting units used in our goodwill impairment testing. These
reporting units include the Upstream, Downstream, Services, Government &
Infrastructure, Technology, and Ventures business
units. Additionally, we identified an additional reporting unit
related to a small staffing business acquired in the acquisition of
BE&K.
We test
the reporting unit goodwill for impairment on an annual basis, and more
frequently when negative conditions or other triggering events arise, such as
when significant current or projected operating losses exist or are
forecasted. The annual impairment test for goodwill is a two-step
process that involves comparing the estimated fair value of each reporting unit
to the reporting unit’s carrying value, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, the goodwill of the
reporting unit is not considered impaired; therefore, the second step of the
impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, we perform the second step of the goodwill
impairment test to measure the amount of impairment loss to be recorded, as
necessary.
The fair values of
reporting units in 2008 were determined using two methods, one based on market
earnings multiples of peer companies for each reporting unit, and the other
based on discounted cash flow models with estimated cash flows based on internal
forecasts of revenues and expenses. We believe these two approaches are
appropriate valuation techniques and we generally weight the two values equally
as an estimate of reporting unit fair value for the purposes of our impairment
testing. However, we may weigh one value more heavily than the other
when conditions merit doing so. For example, in instances when
historic results are believed to be higher than forecast results, we weigh the
discounted cash flow method more heavily than our historic earnings
method. The earnings multiples for
the first method ranged between 7.4 times and 9.0 times. The second method used
market-based discount rates ranging from 8.8 percent to 13.5
percent. The fair value derived from the weighting of these two methods provided
appropriate valuations that, in aggregate, reasonably reconciled to our market
capitalization, taking into account observable control
premiums. Therefore, we used the valuations in evaluating goodwill
for possible impairment and noted that none of our goodwill was
impaired. Subsequent to our September 30, 2008 annual goodwill
impairment testing we monitored the changes in our business and other factors
that could represent indicators of impairment. No such indicators of
impairment were noted. Although our traded stock price declined
significantly during 2008, and for a brief period traded at levels below our
book value, these declines did not produce an indication that our goodwill was
impaired.
Income tax
accounting. We are included in the consolidated U.S. federal
income tax return of Halliburton up through the date of separation (April 5,
2007). Our income tax expense, prior to the separation from
Halliburton, is calculated on a pro rata basis. Under this method, income tax
expense is determined based on KBR’s operations and its contributions to the
income tax expense of the Halliburton consolidated group. For the period post
separation from Halliburton, income tax expense is calculated on stand alone
basis. Additionally, KBR’s U.K.-based subsidiaries and divisions were members of
a U.K. tax group, which allowed the sharing of tax losses and other tax
attributes among the KBR and Halliburton U.K.-based affiliates up through the
date of separation. As part of the separation, KBR and Halliburton entered into
a tax sharing agreement, which generally provides that KBR will indemnify
Halliburton for any additional taxes attributable to KBR’s business for periods
prior to the separation.
Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. We apply the following basic principles in accounting for our
income taxes: a current tax liability or asset is recognized for the estimated
taxes payable or refundable on tax returns for the current year; a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards; the measurement of
current and deferred tax liabilities and assets is based on provisions of the
enacted tax law, and the effects of potential future changes in tax laws or
rates are not considered; and the value of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these items will not be
realized. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment.
Our
methodology for recording income taxes requires a significant amount of judgment
in the use of assumptions and estimates. Additionally, we use forecasts of
certain tax elements such as taxable income and foreign tax credit utilization,
as well as evaluate the feasibility of implementing tax planning strategies.
Given the inherent uncertainty involved with the use of such variables, there
can be significant variation between anticipated and actual results. Unforeseen
events may significantly impact these variables, and changes to these variables
could have a material impact on our income tax accounts related to both
continuing and discontinued operations.
We have
operations in a number of countries other than the United States. Consequently,
we are subject to the jurisdiction of a significant number of taxing
authorities. The income earned in these various jurisdictions is taxed on
differing bases, including income actually earned, income deemed earned, and
revenue-based tax withholding. The final determination of our tax liabilities
involves the interpretation of local tax laws, tax treaties, and related
authorities in each jurisdiction. Changes in the operating environment,
including changes in tax law and currency/repatriation controls, could impact
the determination of our tax liabilities for a tax year.
Tax
filings of our subsidiaries, unconsolidated affiliates, and related entities are
routinely examined in the normal course of business by tax authorities. These
examinations may result in assessments of additional taxes, which we work to
resolve with the tax authorities and through the judicial process. Predicting
the outcome of disputed assessments involves some uncertainty. Factors such as
the availability of settlement procedures, willingness of tax authorities to
negotiate, and the operation and impartiality of judicial systems vary across
the different tax jurisdictions and may significantly influence the ultimate
outcome. We review the facts for each assessment, and then utilize assumptions
and estimates to determine the most likely outcome and provide taxes, interest,
and penalties as needed based on this outcome.
Legal and Investigation
Matters. As discussed in Notes 10 and 11 of our consolidated
financial statements, as of December 31, 2008 and December 31, 2007, we have
accrued an estimate of the probable and estimable costs for the resolution of
some of our legal and investigation matters. For other matters for which the
liability is not probable and reasonably estimable, we have not accrued any
amounts. Attorneys in our legal department monitor and manage all claims filed
against us and review all pending investigations. Generally, the estimate of
probable costs related to these matters is developed in consultation with
internal and outside legal counsel representing us. Our estimates are based upon
an analysis of potential results, assuming a combination of litigation and
settlement strategies. The precision of these estimates is impacted by the
amount of due diligence we have been able to perform. We attempt to resolve
these matters through settlements, mediation, and arbitration proceedings when
possible. If the actual settlement costs, final judgments, or fines, after
appeals, differ from our estimates, our future financial results may be
materially and adversely affected. We have in the past recorded significant
adjustments to our initial estimates of these types of
contingencies.
Pensions. Our
pension benefit obligations and expenses are calculated using actuarial models
and methods, in accordance with Statement of Financial Accounting Standards No.
158 (“SFAS No. 158”), “Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
123(R).” Two of the more critical assumptions and estimates used in the
actuarial calculations are the discount rate for determining the current value
of plan benefits and the expected rate of return on plan assets. Other critical
assumptions and estimates used in determining benefit obligations and plan
expenses, including demographic factors such as retirement age, mortality, and
turnover, are also evaluated periodically and updated accordingly to reflect our
actual experience.
Discount
rates are determined annually and are based on rates of return of high-quality
fixed income investments currently available and expected to be available during
the period to maturity of the pension benefits. Expected long-term rates of
return on plan assets are determined annually and are based on an evaluation of
our plan assets, historical trends, and experience, taking into account current
and expected market conditions. Plan assets are comprised primarily of equity
and debt securities. As we have both domestic and international plans, these
assumptions differ based on varying factors specific to each particular country
or economic environment.
The
discount rate utilized to determine the projected benefit obligation at the
measurement date for our U.S. pension plan decreased from 6.30% at
October 31, 2007 to 6.15% at December 31, 2008. The discount rate utilized to
determine the projected benefit obligation at the measurement date for our U.K.
pension plans, which constitutes all of our international plans and 95% of all
plans increased from 5.70% at September 30, 2007 to 5.98% at December 31, 2008.
An additional future decrease in the discount rate of 25 basis points for our
U.K. pension plans would increase our projected benefit obligation by an
estimated $58 million, while a similar increase in the discount rate would
reduce our projected benefit obligation by an estimated $55
million. Our expected long-term rates of return on plan assets
utilized at the measurement date decreased from 8.25% to 7.81% for our U.S.
pension plan and remained unchanged at 7.0% for our international
plans.
Our
defined benefit plans reduced pretax earnings by $7 million, $18 million and $16
million for the years ended December 31, 2008, 2007 and 2006, respectively.
Included in the amounts were earnings from our expected pension returns of $106
million, $100 million and $82 million for the years ended December 31, 2008,
2007 and 2006, respectively. Unrecognized actuarial gains and losses are
generally being recognized over a period of 10 to 15 years, which represents the
expected remaining service life of the employee group. Our unrecognized
actuarial gains and losses arise from several factors, including experience and
assumptions changes in the obligations and the difference between expected
returns and actual returns on plan assets. Actual returns were $(275) million,
$133 million and $148 million for the years ended December 31, 2008, 2007 and
2006, respectively. The difference between actual and expected returns is
deferred as an unrecognized actuarial gain or loss and is recognized as future
pension expense. Our unrecognized actuarial loss at December 31, 2008 was $563
million, of which $13 million will be recognized as a component of our expected
2009 pension expense. During 2008, we made contributions to fund our defined
benefit plans of $74 million. We currently expect to make
contributions in 2009 of approximately $17 million.
The
actuarial assumptions used in determining our pension benefits may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates, and longer or shorter life spans of
participants. While we believe that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may materially affect
our financial position or results of operations.
Financial
Instruments Market Risk
We invest
excess cash and equivalents in short-term securities, primarily overnight time
deposits, which carry a fixed rate of return per a given tenor. Additionally, a
substantial portion of our cash balances are maintained in foreign
countries.
We have
foreign currency exchange rate risk resulting from our international
operations. We do not comprehensively hedge the exposure to currency
rate changes; however, we selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these
exposures. The objective of our risk management program is to protect
our cash flows related to sales or purchases of goods and services from market
fluctuations in currency rates. We do not use derivative instruments
for trading purposes. We generally utilize currency options and
forward exchange contracts to hedge foreign currency transactions entered into
in the ordinary course of business. As of December 31, 2008, we had
forward foreign exchange contracts of 13 months duration, to exchange major
world currencies. The total gross national amount of these contracts
at December 31, 2008 and 2007 was $274 million and $332 million,
respectively. The fair value liability of these contracts was
approximately $1 million as of December 31, 2008. The fair value asset of these
contracts was approximately $1 million at December 31, 2007.
Environmental
Matters
We are
subject to numerous environmental, legal, and regulatory requirements related to
our operations worldwide. In the United States, these laws and regulations
include, among others: the Comprehensive Environmental Response, Compensation,
and Liability Act; the Resources Conservation and Recovery Act; the Clean Air
Act; the Federal Water Pollution Control Act; and the Toxic Substances Control
Act.
In
addition to federal and state laws and regulations, other countries where we do
business often have numerous environmental regulatory requirements by which we
must abide in the normal course of our operations. The portions of our business
to which these requirements apply primarily relates to our Upstream, Downstream
and Services business units where we perform construction and industrial
maintenance services or operate and maintain facilities. For certain locations,
including our property at Clinton Drive, we have not completed our analysis of
the site conditions and until further information is available, we are only able
to estimate a possible range of remediation costs. These locations were
primarily utilized for manufacturing or fabrication work and are no longer in
operation. The use of these facilities created various environmental issues
including deposits of metals, volatile and semi-volatile compounds, and
hydrocarbons impacting surface and subsurface soils and groundwater. The range
of remediation costs could change depending on our ongoing site analysis and the
timing and techniques used to implement remediation activities. We do not expect
costs related to environmental matters will have a material adverse effect on
our consolidated financial position or our results of operations. Based on the
information presently available to us, we have accrued approximately $8 million
for the assessment and remediation costs associated with all environmental
matters, which represents the low end of the range of possible costs that could
be as much as $15 million.
Transactions
with Former Parent
In
connection with our initial public offering in November 2006 and the separation
of our business from Halliburton, we entered into various agreements, including,
among others, a master separation agreement, transition services agreements and
a tax sharing agreement. Pursuant to our master separation agreement, we agreed
to indemnify Halliburton for, among other matters, all past, present and future
liabilities related to our business and operations. We agreed to indemnify
Halliburton for liabilities under various outstanding and certain additional
credit support instruments relating to our businesses and for liabilities under
litigation matters related to our business. Halliburton agreed to indemnify us
for, among other things, liabilities unrelated to our business, for certain
other agreed matters relating to the investigation of FCPA and related
corruption allegations and the Barracuda-Caratinga project and for other
litigation matters related to Halliburton’s business. See “MD&A – Legal
Proceedings” for further discussion of matters related to the
investigation of FCPA and related corruption allegations and the
Barracuda-Caratinga project arbitration. Under the transition
services agreements, Halliburton 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. 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 are substantially the same as the costs incurred and recorded in
our historical financial statements. The tax sharing agreement provides for
certain allocations of U.S. income tax liabilities and other agreements between
us and Halliburton with respect to tax matters.
Prior to
our separation from Halliburton, Halliburton and certain of its subsidiaries
provided various support services to including risk management, information
technology, legal and internal audit. Costs for information
technology, including payroll processing services were allocated to KBR based on
a combination of factors including relative revenues, assets and payroll which
were subject to negotiation of the reasonableness of the charge. Costs for risk
management, legal and internal audit services were primarily charged to us based
on direct usage of the service. Costs allocated to KBR using a method other than
direct usage were not significant individually or in the aggregate and we
believe the allocation methods used were reasonable. 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 and primarily
represent fees for credit support arrangements and information
technology. Costs for all services provided by Halliburton were $6
million, $13 million and $40 million for the years ended December 31, 2008, 2007
and 2006, respectively.
All of
the charges described above have been included as costs of our operations in our
consolidated statements of income. It is possible that the terms of these
transactions may differ from those that would result from transactions among
third parties. Halliburton incurred approximately $14 million for the year ended
December 31, 2006 for expenses relating to the FCPA and bidding practices
investigations. Halliburton incurred $1 million as such costs for the quarter
ended March 31, 2007. We do not know the amount of costs incurred by
Halliburton following our separation from Halliburton as none of these costs
were charged to us. These expenses were incurred for the benefit of both
Halliburton and us, and we and Halliburton have no reasonable basis for
allocating these costs between us. Subsequent to our separation from
Halliburton and in accordance with the Master Separation Agreement, Halliburton
continues to bear the direct costs associated with overseeing and directing the
FCPA and bidding practices investigations. See Note 17 to our
consolidated financial statements for further information related to our
transactions with our former parent.
At
December 31, 2008 and 2007, KBR had a $54 million and a $16 million balance
payable to Halliburton, respectively, which consists of amounts KBR owes
Halliburton for estimated outstanding income taxes under the tax sharing
agreement and amounts owed pursuant to our transition services agreement for
credit support arrangements and information technology.
On April
1, 2006, Halliburton contributed to us its interest in three joint ventures,
which are accounted for using the equity method of accounting. These joint
ventures own and operate offshore vessels equipped to provide various services,
including accommodations, catering and other services to sea-based oil and gas
platforms and rigs off the coast of Mexico. At March 31, 2006, the contributed
interest in the three joint ventures had a book value of approximately $26
million.
Transactions
with Joint Ventures
We
perform many of our projects through incorporated and unincorporated joint
ventures. In addition to participating as a joint venture partner, we often
provide engineering, procurement, construction, operations or maintenance
services to the joint venture as a subcontractor. Where we provide services to a
joint venture that we control and therefore consolidate for financial reporting
purposes, we eliminate intercompany revenues and expenses on such transactions.
In situations where we account for our interest in the joint venture under the
equity method of accounting, we do not eliminate any portion of our revenues or
expenses. We recognize the profit on our services provided to joint ventures
that we consolidate and joint ventures that we record under the equity method of
accounting primarily using the percentage-of-completion method. Total revenue
from services provided to our unconsolidated joint ventures recorded in our
consolidated statements of income were $202 million, $356 million and $450
million for the years ended December 31, 2008, 2007 and 2006, respectively.
Profit on transactions with our joint ventures recognized in our consolidated
statements of income were $28 million, $30 million and $62 million for the years
ended December 31, 2008, 2007 and 2006, respectively.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
141(R)”), which replaces FASB Statement No. 141. SFAS 141(R), establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. This
Statement also established disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008, early
adoptions is prohibited. Currently this statement is not expected to have a
significant impact to our financial position, results of operations or cash
flows. A significant impact may however be realized on any future acquisitions
by the company. The amounts of such impact cannot be currently determined and
will depend on the nature and terms of such future acquisitions, if
any.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statement-amendments of ARB No. 51,” (“SFAS 160”). SFAS
160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. The Statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective for fiscal years beginning after December 15, 2008, early adoption
is prohibited. We do not believe the adoption of SFAS 160 will have a
significant impact on our financial position, results of operations or cash
flows.
In March
2008, the FASB issued SFAS 132R-a, “Employer’s Disclosure about Pensions and
Other Postretirement Benefits” which replaces SFAS 132. This
Statement was developed in response to concerns expressed by users of financial
statements about their need for more information about pension plan assets,
obligations, benefit payments, contributions, and net benefit
cost. The FSP is intended to provide users of employers’ financial
statements with more informative disclosures about the nature and valuation of
postretirement benefit plan assets. The disclosures about plan assets
would be effective for fiscal years beginning after December 15,
2008. Early adoption is prohibited. We are currently
evaluating the potential impact of adopting FSP SFAS 132R-a.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets.” This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB Statement No. 141 (Revised 2007), “Business
Combinations,” and other U.S. generally accepted accounting principles (GAAP).
This FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. Currently, this statement is not expected to have a
significant impact to our financial position, results of operations or cash
flows.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating
Securities.” This FSP provides that unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. The FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior period
earnings per share data presented shall be adjusted retrospectively. Early
application of this FSP is prohibited. We are currently evaluating the potential
impact of adopting FSP EITF 03-6-1.
In
December 2008, the FASB issued FSP FIN 46R-8, “Interests in Variable Interest
Entities.” The FSP was issued by the FASB to expeditiously meet the
need for enhanced information about transferred financial assets and an
enterprise’s involvement with a variable interest entity (VIE). The
FSP requires extensive additional disclosures by public entities with continuing
involvement in transfers of financial assets to special-purpose entities and
with VIEs, including sponsors that have a variable interest in a
VIE. The FSP is effective for fiscal periods ending after December
15, 2008. The adoption of FSP FIN 46R-8 did not have a
significant impact to our financial position, results of operations or cash
flows.
U.S. government
Matters
DCAA
Audit Issues
Our
operations under United States government contracts are regularly reviewed and
audited by the Defense Contract Audit Agency (“DCAA”) and other governmental
agencies. The DCAA serves in an advisory role to our customer. When issues are
identified during the governmental agency audit process, these issues are
typically discussed and reviewed with us. The DCAA then issues an audit report
with its recommendations to our customer’s contracting officer. In the case of
management systems and other contract administrative issues, the contracting
officer is generally with the Defense Contract Management Agency (“DCMA”). We
then work with our customer to resolve the issues noted in the audit report. We
self-disallow costs that are expressly not allocable to government contracts per
the relevant regulations. However, if our customer or a government auditor forms
an opinion that we improperly charged any costs to a contract, these costs,
depending on facts and circumstances and the issue resolution process, could
become non-reimbursable and in such instances if already reimbursed, the costs
must be refunded to the customer. Our revenue recorded for government contract
work is reduced for our estimate of potentially refundable costs related to
dispute issues that may be categorized as disputed or unallowable as a result of
cost overruns or the audit process.
Security.
In February 2007, we received a letter from the Department of the Army informing
us of their intent to adjust payments under the LogCAP III contract associated
with the cost incurred by the subcontractors to provide security to their
employees. Based on this letter, the Army withheld its 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 would
begin making further adjustments equal to 6% of prior and current subcontractor
costs unless we provided timely information sufficient to show that such action
was not necessary to protect the government’s interest. The Army has
taken no further action with respect to further adjustments of prior and current
subcontractor costs.
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. We provided at the Army's request
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
less than 6% of the total subcontractor costs. In October 2007, we filed a claim
to recover the amounts withheld which was deemed denied as a result of no
response from the DCMA. In March 2008, we filed an appeal to the Armed Services
Board of Contract Appeals to recover the amounts withheld and that appeal
is currently in the discovery process. The matter is also the subject of an
ongoing investigation by the DOJ. At this time, the likelihood that a loss
related to this matter has been incurred is remote. As of December 31, 2008, we
had not adjusted our revenues or accrued any amounts related to this
matter.
Containers.
In June 2005, the DCAA recommended withholding certain costs associated with
providing containerized housing for soldiers and supporting civilian personnel
in Iraq. The DCAA recommended that the costs be withheld pending receipt of
additional explanation or documentation to support the subcontract costs. During
2006, we resolved approximately $26 million of the withheld amounts with our
contracting officer and payment was received in the first quarter of 2007. In
May of 2008, we received notice from the DCMA of their intention to rescind
their 2006 determination to allow the $26 million of costs pending additional
supporting information. As of December 31, 2008, approximately $55 million of
costs have been suspended related to this matter of which $32 million has been
withheld by us from our subcontractors. In April 2008, we filed a counterclaim
in arbitration against one of our LogCAP III subcontractors, First Kuwaiti
Trading Company, to recover approximately $51 million paid to the subcontractor
for containerized housing as further described under the caption First Kuwaiti
Arbitration below. We will continue working with the government and our
subcontractors to resolve the remaining amounts. At this time, the likelihood
that a loss in excess of the amount accrued for this matter is
remote.
Dining
facilities. In
the third quarter of 2006, the DCAA raised questions regarding $95 million of
costs related to dining facilities in Iraq. We responded to the DCAA that our
costs are reasonable. In the fourth quarter of 2007, the DCAA suspended payment
for $11 million of costs related to these dining facilities until such time we
provide documentation to support the price reasonableness of the rates
negotiated with our subcontractor and demonstrate that the amounts billed were
in accordance with the contract terms. In the first quarter of 2008, the DCAA
suspended payment for an additional $53 million of costs until such time we
provide documentation to support the price reasonableness of the rates
negotiated with the subcontractor. We believe the prices obtained for these
services were reasonable and intend to vigorously defend ourselves on this
matter. In 2008, we filed four claims to recover approximately $56 million of
amounts previously withheld from us by the DCAA. With respect to questions
raised regarding billing in accordance with contract terms, as of December 31,
2008, we believe it is reasonably possible that we could incur losses in excess
of the amount accrued for possible subcontractor costs billed to the customer
that were possibly not in accordance with contract terms. However, we are unable
to estimate an amount of possible loss or range of possible loss in excess of
the amount accrued related to any costs billed to the customer that were not in
accordance with the contract terms.
Kosovo fuel.
In April 2007, the DOJ issued a letter alleging the theft in 2004 and
subsequent sale of diesel fuel by KBR employees assigned to Camp Bondsteel in
Kosovo. In addition, the letter alleges that KBR employees falsified records to
conceal the thefts from the Army. The total value of the fuel in question is
estimated by the DOJ at approximately $2 million based on an audit report issued
by the DCAA. We believe the volume of the alleged misappropriated fuel is
significantly less than the amount estimated by the DCAA. We responded to the
DOJ that we had maintained adequate programs to control, protect, and preserve
the fuel in question. We further believe that our contract with the Army
expressly limits KBR’s responsibility for such losses. Our discussions with the
DOJ are ongoing and have included items ranging from settlement of this matter
for de minimus amounts to the DOJ reserving their rights to litigate. Should
litigation occur, we believe we have meritorious defenses and intend to
vigorously defend ourselves. Neither our client nor the DCMA has indicated any
intent to withhold payments from us relating to this matter. We believe the
likelihood that a loss has been incurred related to this matter is remote and
accordingly, no amounts have been accrued.
Transportation
costs. The DCMA, in performing its audit activities under the
LogCAP III contract, raised a question about our compliance with the
provisions of the Fly America Act. Subject to certain exceptions, the Fly
America Act requires Federal employees and others performing U.S. Government
financed foreign air travel to travel by U.S. flag air carriers. There are times
when we transported personnel in connection with our services for the U.S.
military where we may not have been in compliance with the Fly America Act and
its interpretations through the Federal Acquisition Regulations and the
Comptroller General. As of December 31, 2008, we have accrued an estimate of the
cost incurred for these potentially non-compliant flights with a corresponding
reduction to revenue. The DCAA may consider additional flights to be
noncompliant resulting in potential larger amounts of disallowed costs than the
amount we have accrued. At this time, we cannot estimate a range of reasonably
possible losses that may have been incurred, if any, in excess of the amount
accrued. We will continue to work with our customer to resolve this
matter.
Dining Facility
Support Services. In April 2007, DCMA 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. Payments of $13 million were
withheld from us. In the first quarter of 2008, we favorably resolved this
matter with the DCAA resulting in the DCAA rescinding its previously issued
withholding.
Other
issues. The DCMA 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.
Investigations
relating to Iraq, Kuwait, Afghanistan and Other
In the
first quarter of 2005, the 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, 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. There has been no further action taken by the DoD Inspector
General with regard to this matter.
We
understand that the DOJ, an Assistant United States Attorney based in Illinois,
and others are investigating these and other individually immaterial 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 or trial testimony
related to some of these and other matters.
Various
Congressional 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 continue to
provide information and testimony with respect to operations in Iraq in these
Congressional committees, including the House Armed Services Committee. During
the first quarter of 2008, we received Congressional inquiries regarding our
offshore payroll structure and whether FICA taxes should have been withheld. We
have responded to those inquiries and we believe we have substantially complied
with the applicable laws and regulations that pertain to our payroll
withholdings. In June 2008, the Heroes Earnings Assistance and Relief Tax
(HEART) Act was signed into law and is effective beginning August 1, 2008. We
believe our employees that are U.S. citizens or residents performing services on
U.S. government contracts are subject to the HEART Act. Accordingly, at the
effective date we began withholding FICA taxes, pay the employer matching of
such taxes and charge such costs to our reimbursable contract. We do not believe
that the change in law will have a material impact to our financial position,
results of operations, or cash flows.
We have
identified and reported to the U.S. Departments of State and Commerce numerous
exports of materials, including personal protection equipment such as helmets,
goggles, body armor and chemical protective suits, that possibly were not in
accordance with the terms of our export license or applicable regulations.
However, we believe that the facts and circumstances leading to our conclusion
of possible non-compliance relating to our Iraq and Afghanistan activities are
unique and potentially mitigate any possible fines and penalties because the
bulk of the exported items are the property of the U.S. government and are used
or consumed in connection with services rendered to the U.S. government. In
addition, we have responded to a March 19, 2007, subpoena from the DoD Inspector
General concerning licensing for armor for convoy trucks and antiboycott issues.
We continue to comply with the requests to provide information under the
subpoena. Whereas it is reasonably possible that we may be subject to fines and
penalties for possible acts that are not in compliance with our export licenses
or regulations, at this time it is not possible to estimate an amount of loss or
range of losses that may have been incurred. A failure to comply with applicable
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. We are in ongoing
communications with the appropriate authorities with respect to these matters.
There can be no assurances that we will not be subject to any sanctions nor
that, if any such sanctions are imposed, they will not have a material adverse
impact on us.
Claims
We had
unapproved claims for costs incurred under various government contracts totaling
$73 million at December 31, 2008 and $82 million at December 31, 2007. The
unapproved claims outstanding at December 31, 2008 and December 31, 2007 are
considered to be probable of collection and have been recognized as revenue.
These unapproved claims relate to contracts where our costs have exceeded the
customer’s funded value of the task order and therefore could not be billed. We
understand that our customer is actively seeking funds that have been or will be
appropriated to the Department of Defense that can be obligated on our
contract.
SIGIR
Report
The
Special Inspector General for Iraq Reconstruction, or SIGIR, was created by
Congress to provide oversight of the Iraq Relief and Reconstruction Fund (IRRF)
and all obligations, expenditures, and revenues associated with reconstruction
and rehabilitation activities in Iraq. SIGIR reports, from time to time, make
reference to KBR regarding various matters. We believe we have addressed all
issues raised by prior SIGIR reports and we will continue to do so as new issues
are raised.
McBride
Qui Tam suit
In
September 2006, we became aware of a qui tam action filed against us by a former
employee alleging various wrongdoings in the form of overbillings of our
customer on the LogCAP III contract. This case was originally filed pending the
government’s decision whether or not to participate in the suit. In June 2006,
the government formally declined to participate. The principal allegations are
that our compensation for the provision of Morale, Welfare and Recreation
(“MWR”) facilities under LogCAP III is based on the volume of usage of those
facilities and that we deliberately overstated that usage. In accordance with
the contract, we charged our customer based on actual cost, not based on the
number of users. It was also alleged that, during the period from November 2004
into mid-December 2004, we continued to bill the customer for lunches, although
the dining facility was closed and not serving lunches. There are also
allegations regarding housing containers and our provision of services to our
employees and contractors. On July 5, 2007, the court granted our motion to
dismiss the qui tam claims and to compel arbitration of employment claims
including a claim that the plaintiff was unlawfully discharged. The majority of
the plaintiff’s claims were dismissed but the plaintiff was allowed to pursue
limited claims pending discovery and future motions. Substantially all
employment claims were sent to arbitration under the Company’s dispute
resolution program which were subsequently resolved in our favor. On October 29,
2008, we filed motions to dismiss the remaining claims and to compel arbitration
on all remaining counts of the complaint, which are currently pending. We
believe the relator’s claim is without merit and that the likelihood that a loss
has been incurred is remote. As of December 31, 2008, no amounts have been
accrued.
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 judgment in our favor was entered on April 30, 2007 and subsequently
appealed by the plaintiffs on May 3, 2007. The appellate court affirmed the
lower courts dismissal in May 2008. As of December 31, 2008, we
consider the matter to be concluded.
Godfrey Qui Tam
suit
In
December 2005, we became aware of a qui tam action filed against us and several
of our subcontractors by a former employee alleging that we violated the False
Claims Act by submitting overcharges to the government for dining facility
services provided in Iraq under the LogCAP III contract. As required by the
False Claims Act, the lawsuit was filed under seal to permit the government to
investigate the allegations. In early April 2007, the court denied the
government’s motion for the case to remain under seal, and on April 23, 2007,
the government filed a notice stating that it was not participating in the suit.
In August 2007, the relator filed an amended complaint which added an additional
contract to the allegations and added retaliation claims. We filed motions to
dismiss and to compel arbitration which were granted on March 13, 2008 for all
counts except as to the employment issues which were sent to arbitration. The
relator has filed an appeal. We are unable to determine the likely outcome at
this time. No amounts have been accrued and we cannot determine any reasonable
estimate of loss that may have been incurred, if any.
ASCO
Litigation
On July
23, 2008, a jury in Texas returned a verdict against KBR awarding Associated
Construction Company WLL (ASCO) damages of $39 million with the court to
determine attorneys fees and interest. In 2003, ASCO was a subcontractor to KBR
in Iraq related to work performed on our LogCAP III contract. On August 25, 2008
the court entered a judgment which included damages of approximately $18
million, interest of approximately $3 million and attorney’s fees of $6 million
bringing the total judgment to $27 million. As a result of the final
judgment, we reduced our previous accrual from $40 million to $27 million during
the third quarter of 2008. In the fourth quarter of 2008, we negotiated a final
settlement with ASCO in the amount of $22 million. We believe the
entire amount is billable to the customer and recognized revenue of $5 million
for unpaid work performed by ASCO. However, we will not recognize the remaining
amount as revenue until such time as we are reasonably assured of
collection.
First
Kuwaiti Arbitration
In April
2008 First Kuwaiti Trading Company, one of our LogCAP III subcontractors, filed
for arbitration of a subcontract under which KBR had leased vehicles related to
work performed on our LogCAP III contract. First Kuwaiti alleged that we did not
return or pay rent for many of the vehicles and sought damages in the amount of
$39 million. We filed a counterclaim to recover amounts which may ultimately be
determined due to the Government for the $51 million in suspended costs as
discussed in the preceding section of this footnote titled “Containers.” First
Kuwaiti subsequently responded by adding additional subcontract claims,
increasing its total claim to approximately $96 million. This matter is in the
early stages of the arbitration process and no amounts have been accrued and we
are unable to determine a reasonable estimate of loss, if any, at this
time.
Paul
Morell, Inc. d/b/a The Event Source vs. KBR, Inc.
TES is a
former LogCAPIII subcontractor who provided DFAC services at six sites in Iraq
from mid-2003 to early 2004. TES has sued KBR in Federal Court in Virginia for
breach of contract and tortuous interference with TES’s subcontractors by
awarding subsequent DFAC contracts to the subcontractors. KBR denies
these allegations. In addition, the Government withheld funds from KBR that KBR
had submitted for reimbursement of TES invoices, and at that time, TES agreed
that it was not entitled to payment until KBR was paid by the Government.
Eventually KBR and the Government settled the dispute, and in turn KBR and TES
agreed that TES would accept, as payment in full with a release of all other
claims, the amount the Government paid to KBR for TES’s services. TES now seeks
to overturn that settlement and release, claiming that KBR misrepresented the
facts. TES has other minor claims for services provided that are not
material. TES seeks $89 million in compensatory damages and an
unspecified amount of punitive damages in its suit. Trial is expected to take
place in the second quarter of 2009. We are unable to determine the
likely outcome in excess of the amount accrued for this suit at this
time.
Electrocution
Litigation
During
2008, two separate lawsuits were filed against KBR alleging that the Company was
responsible in two separate electrical incidents which resulted in the deaths of
two soldiers. One incident occurred at Radwaniyah Palace Complex and the other
occurred at Al Taqaddum. It is alleged in each suit that the electrocution
incident was caused by improper electrical maintenance or other electrical work.
KBR denies that its conduct was the cause of either event and denies legal
responsibility. Both cases have been removed to Federal Court where motions to
dismiss have been filed and are currently pending. Discovery has not yet begun
in one case, and is in early stages in the other case. We are unable to
determine the likely outcome of these cases at this time. As of December 31,
2008, no amounts have been accrued.
Legal
Proceedings
Foreign
Corrupt Practices Act investigations
As
previously disclosed, the SEC was 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
was also conducting a related criminal investigation. 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 December 31, 2008. 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 December 31, 2008, 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, (“KBR LLC”)
which is the predecessor company to our current subsidiary KBR Holdings
LLC.
On
February 11, 2009 KBR LLC, entered a guilty plea related to the
Bonny Island investigation in the United States District Court, Southern
District of Texas, Houston Division (the “Court”). KBR LLC plead
guilty to one count of conspiring to violate the FCPA and four counts of
violating the FCPA, all arising from the intent to bribe various Nigerian
officials through commissions paid to agents working on behalf of TSKJ on the
Bonny Island project. The plea agreement reached with the DOJ
resolves all criminal charges in the DOJ’s investigation into the conduct of KBR
LLC relating to the Bonny Island project, so long as the conduct was
disclosed or known to DOJ before the settlement, including previously disclosed
allegations of coordinated bidding described below. The plea agreement calls for
the payment of a criminal penalty of $402 million, of which Halliburton will pay
$382 million under the terms of the indemnity in the master separation
agreement, while we will pay $20 million. The criminal penalties will
be paid in quarterly payments over the next two years. We also agreed
to a period of organizational probation of three years, during which we will
retain a monitor who will assess our compliance with the plea agreement and
evaluate our FCPA compliance program over the three year period, with periodic
reports to the DOJ. Halliburton paid their share of the initial installment of
$49 million to the DOJ on February 17, 2009. We paid our share of the
initial installment of $3 million to the DOJ on February 17, 2009.
On the
same date, the SEC filed a complaint and we consented to the filing of a final
judgment against us in the Court. The complaint and the judgment were filed as
part of a settled civil enforcement action by the SEC, to resolve the civil
portion of the government’s investigation of the Bonny Island project. The
complaint alleges civil violations of the FCPA’s antibribery and books and
records provisions related to the Bonny Island project. The complaint
enjoins us from violating the FCPA’s antibribery, books-and-records, and
internal-controls provisions and requires Halliburton and KBR, jointly and
severally, to make payments totaling $177 million, all of which will be paid by
Halliburton pursuant to the indemnification under the master separation
agreement. The judgment also requires us to retain an independent
monitor on the same terms as the plea agreement with the DOJ.
Under
both the plea agreement and judgment, we have agreed to cooperate with the SEC
and DOJ in their investigations of other parties involved in TSKJ and the
Bonny Island project.
As a
result of the settlement, in the fourth quarter 2008 we recorded the $402
million obligation to the DOJ and, accordingly, have recorded a receivable from
Halliburton for the $382 million that Halliburton will pay to the DOJ on our
behalf. The resulting charge of $20 million to KBR is recorded in
cost of sales of our Upstream business unit in the fourth quarter of 2008.
Likewise, we recorded an obligation to the SEC in the amount of $177 million and
a receivable from Halliburton in the same amount.
As part
of the settlement of the FCPA matters relating to projects in Bonny Island,
Nigeria (see “Foreign Corrupt Practices Act investigations”), we have agreed to
the appointment of a corporate monitor for a period of up to three years.
We are responsible for paying the fees and expenses related to the
monitor’s review and oversight of our policies and activities relating to
compliance with applicable anti-corruption laws and regulations. We
cannot at this time provide a reasonable estimate of the cost of the
retention of the monitor as the monitor’s work and needed expenses will be
impacted by his or her initial assessment of our policies and procedures
and will vary over the period of the appointment reflecting periods of increased
work, such as during the preparation of periodic reports, as compared to
the day to day work of monitoring our compliance.
Because
of the guilty plea by KBR LLC, we are subject to possible suspension or
debarment of our ability to contract with governmental agencies of the United
States and of foreign countries. For the years ended December 31, 2008 and 2007,
we had revenue of approximately $ 6.2 billion and $ 5.4 billion, respectively,
from our government contracts work with agencies of the United States or state
or local governments. We have received written confirmation from the U.S.
Department of the Army stating that it does not intend to suspend or debar KBR
from DoD contracting as a result of the guilty plea by KBR LLC. We
are discussing these matters with other officials in agencies for purpose of
obtaining agreement that will prevent suspension or debarment. In addition, we
may be excluded from bidding on MoD contracts in the United Kingdom if the MoD
determines that our actions constituted grave misconduct and we are in
discussions with the MoD to avoid exclusion. For the years ended December 31,
2008, and 2007 we had revenue of approximately $234 million and $224 million,
respectively, from our government contracts work with the MoD. Although we
currently believe that we will successfully conclude these discussions with no
suspension, debarment or exclusion actions taken against us, there can be no
assurance that such agreements will be reached. We expect to conclude
these discussions in the first half of 2009. Suspension or debarment from the
government contracts business would have a material adverse effect on our
business, results of operations, and cash flow.
The
settlement and plea 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 and the
appointment of a monitor at our cost as part of the disposition of the
investigations have resulted in a more limited use of agents on large-scale
international projects than in the past and may put us at a competitive
disadvantage in pursuing such projects. Continuing negative publicity arising
out of the settlement and plea could also result in our inability to bid
successfully for governmental contracts and adversely affect our prospects in
the commercial marketplace.
In
September 2008, A. Jack Stanley, who formerly served as a consultant and
chairman of Kellogg Brown & Root, pled guilty to various violations of the
FCPA and wire and mail fraud statutes involving a bribery scheme and
causing a consultant to pay kickbacks to Mr. Stanley in connection with the
Bonny Island and other liquefied natural gas projects of Kellogg Brown
& Root. In a related action, the SEC charged Mr. Stanley with violating
various provisions of the FCPA. Mr. Stanley has consented to the
entry of a final judgment that permanently enjoins him from violating the
anti-bribery, record-keeping and internal control provisions of the FCPA.
Mr. Stanley also has agreed to cooperate with the ongoing
investigations. In June 2004, all relationships with
A. Jack Stanley were terminated by Halliburton and KBR.
The
investigations by foreign governmental authorities are continuing. Other foreign
governmental authorities could conclude that violations of applicable foreign
laws analogous to the FCPA have occurred with respect to the Bonny Island
project and other projects in or outside of Nigeria. In such circumstances, the
resolution or disposition of these matters, even after taking into account the
indemnity from Halliburton with respect to any liabilities for fines or other
monetary penalties or direct monetary damages, including disgorgement, that may
be assessed by certain foreign governments or governmental agencies against us
or our greater than 50%-owned subsidiaries could have a material adverse effect
on our business, prospects, results or operations, financial condition and cash
flow.
Under the
terms of the Master Separation Agreement, Halliburton has agreed to indemnify
us, and any of our greater than 50%-owned subsidiaries, for our share of fines
or other monetary penalties or direct monetary damages, including disgorgement,
as a result of claims made or assessed by a governmental authority of the United
States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a
settlement thereof relating to FCPA and related corruption allegations, which
could involve Halliburton and us through The M. W. Kellogg Company, M. W.
Kellogg Limited or, their or our joint ventures in projects both in and outside
of Nigeria, including the Bonny Island, Nigeria project. Halliburton’s indemnity
will not apply to any other losses, claims, liabilities or damages assessed
against us as a result of or relating to FCPA matters and related corruption
allegations or to any fines or other monetary penalties or direct monetary
damages, including disgorgement, assessed by governmental authorities in
jurisdictions other than the United States, the United Kingdom, France, Nigeria,
Switzerland or Algeria, or a settlement thereof, or assessed against entities
such as TSKJ, in which we do not have an interest greater than
50%.
Halliburton
provided indemnification in favor of KBR under the master separation agreement
for certain contingent liabilities, including matters arising from the
investigations of the FCPA and related corruption allegations arising from the
Bonny Island project, as more fully described above in Risks Related to Our Relationship
With Halliburton - Halliburton’s indemnity for FCPA matters and related
corruption allegations does not apply to all potential losses, Halliburton’s
actions may not be in our stockholders’ best interests and we may take or fail
to take actions that could result in our indemnification from Halliburton with
respect to corruption allegations no longer being available.
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. In connection with KBR LLC’s agreeing to enter into the
plea agreement described above, the DOJ has agreed not to pursue any further
investigation or penalties relating to the coordinated bidding
allegations.
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 recorded losses on the project of
$19 million in 2006 and $8 million in 2005. No losses were recorded on the
project in 2008 and 2007. 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. We funded approximately $3 million
in cash shortfalls during 2007.
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. In November 2007, we executed a settlement agreement with the project
owner to settle all outstanding project issues except for the bolts arbitration
discussed below. The agreement resulted in the project owner assuming
substantially all remaining work on the project and the release of us from any
further warranty obligations. The settlement agreement did not have a material
impact to our results of operations or financial position.
At
Petrobras’ direction, we 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 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. The
arbitration is being conducted in New York under the guidelines of the United
Nations Commission on International Trade Law (“UNCITRAL”). We do not believe
that it is probable that we have incurred a liability in connection with the
claim in the bolt arbitration with Petrobras and therefore, no amounts have been
accrued. We disagree with Petrobras’ claim since the bolts met the design
specification provided by Petrobras. Although we believe Petrobras is
responsible for any maintenance and replacement of the bolts, it is possible
that the arbitration panel could find against us on this issue. In addition,
Petrobras has not provided any evidentiary support or analysis for the amounts
claimed as damages. A preliminary hearing on legal and factual issues relating
to liability with the arbitration panel was held in April 2008. The final
arbitration hearings have not yet been scheduled. Therefore, at this time, we
cannot conclude that the likelihood that a loss has been incurred is remote. Due
to the indemnity from Halliburton, we believe any outcome of this matter will
not have a material adverse impact to our operating results or financial
position. KBR has incurred legal fees and related expenses of $2 million, $4
million and $1 million for the years ended December 31, 2008, 2007 and 2006,
respectively, related to this matter.
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.
Item 7A. Quantitative and Qualitative Discussion about Market
Risk
Information
relating to market risk is included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under the caption “Financial
Instrument Market Risk” and Note 15 of our consolidated financial statements and
the information discussed therein is incorporated by reference into this Item 7A
..
Item 8. Financial Statements and Supplementary Data
|
Page No.
|
Report
of Independent Registered Public Accounting Firm
|
61
|
Consolidated
Statements of Income for years ended December 31, 2008, 2007, and
2006
|
62
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
63
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the years
ended December 31, 2008, 2007, and 2006
|
64
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
|
65
|
Notes
to Consolidated Financial Statements
|
66
|
The
related financial statement schedules are included under Part IV, Item 15 of
this annual report.
Report of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
KBR,
Inc.:
We have
audited the accompanying consolidated balance sheets of KBR, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders’ equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31,
2008. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of KBR, Inc. and subsidiaries
as of December 31, 2008 and 2007, and the results of their operations and
their cash flows for each of the years in the three-year period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Notes 2, 18 and 12, respectively, to the consolidated financial
statements, the Company changed its method of accounting for stock-based
compensation plans as of January 1, 2006, its method of accounting for defined
benefit and other post retirement plans as of December 31, 2006, and its method
of accounting for uncertainty in income taxes as of January 1,
2007.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), KBR, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated February 25, 2009
expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG
LLP
Houston,
Texas
February
25, 2009
Consolidated
Statements of Income
(In millions, except for per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
11,493 |
|
|
$ |
8,642 |
|
|
$ |
8,798 |
|
Equity
in earnings of unconsolidated affiliates, net
|
|
|
88 |
|
|
|
103 |
|
|
|
7 |
|
Total
revenue
|
|
|
11,581 |
|
|
|
8,745 |
|
|
|
8,805 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
10,820 |
|
|
|
8,225 |
|
|
|
8,433 |
|
General
and administrative
|
|
|
223 |
|
|
|
226 |
|
|
|
226 |
|
Gain
on sale of assets, net
|
|
|
(3 |
) |
|
|
— |
|
|
|
(6 |
) |
Total
operating costs and expenses
|
|
|
11,040 |
|
|
|
8,451 |
|
|
|
8,653 |
|
Operating
income
|
|
|
541 |
|
|
|
294 |
|
|
|
152 |
|
Interest
income, net
|
|
|
35 |
|
|
|
62 |
|
|
|
27 |
|
Interest
expense—related party
|
|
|
— |
|
|
|
— |
|
|
|
(36 |
) |
Foreign
currency losses, net
|
|
|
(8 |
) |
|
|
(15 |
) |
|
|
(16 |
) |
Foreign
currency gain—related party
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Other,
net
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Income
from continuing operations before income taxes and minority
interest
|
|
|
568 |
|
|
|
342 |
|
|
|
128 |
|
Provision
for income taxes
|
|
|
(212 |
) |
|
|
(138 |
) |
|
|
(94 |
) |
Minority
interest in net (income) loss of subsidiaries
|
|
|
(48 |
) |
|
|
(22 |
) |
|
|
20 |
|
Income
from continuing operations
|
|
|
308 |
|
|
|
182 |
|
|
|
54 |
|
Income
from discontinued operations, net of tax benefit (provision) of $11,
$(109) and $(82)
|
|
|
11 |
|
|
|
120 |
|
|
|
114 |
|
Net
income
|
|
$ |
319 |
|
|
$ |
302 |
|
|
$ |
168 |
|
Basic
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.86 |
|
|
$ |
1.08 |
|
|
$ |
0.39 |
|
Discontinued
operations, net
|
|
|
0.07 |
|
|
|
0.71 |
|
|
|
0.81 |
|
Net
income per share
|
|
$ |
1.92 |
|
|
$ |
1.80 |
|
|
$ |
1.20 |
|
Diluted
income per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.84 |
|
|
$ |
1.08 |
|
|
$ |
0.39 |
|
Discontinued
operations, net
|
|
|
0.07 |
|
|
|
0.71 |
|
|
|
0.81 |
|
Net
income per share
|
|
$ |
1.91 |
|
|
$ |
1.79 |
|
|
$ |
1.20 |
|
Basic
weighted average shares outstanding
|
|
|
166 |
|
|
|
168 |
|
|
|
140 |
|
Diluted
weighted average shares outstanding
|
|
|
167 |
|
|
|
169 |
|
|
|
140 |
|
Cash
dividends declared per share (See Note 13)
|
|
$ |
0.20 |
|
|
$ |
— |
|
|
$ |
— |
|
_________________________
|
(1)
|
Due
to the effect of rounding, the sum of the individual per share amounts may
not equal the total shown.
|
See
accompanying notes to consolidated financial statements.
Consolidated
Balance Sheets
(In
millions except share data)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
1,145 |
|
|
$ |
1,861 |
|
Receivables:
|
|
|
|
|
|
|
|
|
Notes
and accounts receivable (less allowance for bad debts of $19 and
$23)
|
|
|
1,312 |
|
|
|
927 |
|
Unbilled
receivables on uncompleted contracts
|
|
|
835 |
|
|
|
820 |
|
Total
receivables
|
|
|
2,147 |
|
|
|
1,747 |
|
Deferred
income taxes
|
|
|
107 |
|
|
|
165 |
|
Other
current assets
|
|
|
743 |
|
|
|
282 |
|
Current
assets related to discontinued operations
|
|
|
— |
|
|
|
1 |
|
Total
current assets
|
|
|
4,142 |
|
|
|
4,056 |
|
Property,
plant, and equipment, net of accumulated depreciation of $224 and
$227
|
|
|
245 |
|
|
|
220 |
|
Goodwill
|
|
|
694 |
|
|
|
251 |
|
Intangible
assets, net
|
|
|
73 |
|
|
|
15 |
|
Equity
in and advances to related companies
|
|
|
185 |
|
|
|
294 |
|
Noncurrent
deferred income taxes
|
|
|
167 |
|
|
|
139 |
|
Unbilled
receivables on uncompleted contracts
|
|
|
134 |
|
|
|
196 |
|
Other
assets
|
|
|
244 |
|
|
|
32 |
|
Total
assets
|
|
$ |
5,884 |
|
|
$ |
5,203 |
|
Liabilities,
Minority Interest and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,387 |
|
|
$ |
1,117 |
|
Due
to former parent, net
|
|
|
54 |
|
|
|
16 |
|
Advance
billings on uncompleted contracts
|
|
|
519 |
|
|
|
794 |
|
Reserve
for estimated losses on uncompleted contracts
|
|
|
76 |
|
|
|
117 |
|
Employee
compensation and benefits
|
|
|
320 |
|
|
|
316 |
|
Other
current liabilities
|
|
|
680 |
|
|
|
262 |
|
Current
liabilities related to discontinued operations, net
|
|
|
7 |
|
|
|
1 |
|
Total
current liabilities
|
|
|
3,043 |
|
|
|
2,623 |
|
Noncurrent
employee compensation and benefits
|
|
|
403 |
|
|
|
79 |
|
Other
noncurrent liabilities
|
|
|
333 |
|
|
|
151 |
|
Noncurrent
income tax payable
|
|
|
34 |
|
|
|
78 |
|
Noncurrent
deferred tax liability
|
|
|
37 |
|
|
|
37 |
|
Total
liabilities
|
|
|
3,850 |
|
|
|
2,968 |
|
Minority
interest in consolidated subsidiaries
|
|
|
(18 |
) |
|
|
(32 |
) |
Shareholders’
equity and accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and
outstanding
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.001 par value, 300,000,000 shares authorized, 170,125,715 issued
and 169,709,601 issued and outstanding
|
|
|
— |
|
|
|
— |
|
Paid-in
capital in excess of par
|
|
|
2,091 |
|
|
|
2,070 |
|
Accumulated
other comprehensive loss
|
|
|
(439 |
) |
|
|
(122 |
) |
Retained
earnings
|
|
|
596 |
|
|
|
319 |
|
Treasury
stock, 8,400,000 shares and zero shares, at cost
|
|
|
(196 |
) |
|
|
— |
|
Total
shareholders’ equity and accumulated other comprehensive
loss
|
|
|
2,052 |
|
|
|
2,267 |
|
Total
liabilities, minority interest and shareholders’ equity and accumulated
other comprehensive loss
|
|
$ |
5,884 |
|
|
$ |
5,203 |
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1,
|
|
$ |
2,267 |
|
|
$ |
1,794 |
|
|
$ |
1,256 |
|
Net
proceeds from initial public offering
|
|
|
— |
|
|
|
— |
|
|
|
511 |
|
Stock-based
compensation
|
|
|
16 |
|
|
|
11 |
|
|
|
17 |
|
Intercompany
stock-based compensation
|
|
|
— |
|
|
|
1 |
|
|
|
(16 |
) |
Contributions
from parent and other activities
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
Adoption
of FIN No. 48
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
Adoption
of FSP No. AUG AIR-1
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
Adoption
of SFAS No. 158
|
|
|
— |
|
|
|
— |
|
|
|
(152 |
) |
FAS
158 re-measurement date change
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
Common
stock issued upon exercise of stock options
|
|
|
3 |
|
|
|
6 |
|
|
|
— |
|
Tax
benefit related to stock-based plans
|
|
|
2 |
|
|
|
11 |
|
|
|
— |
|
Intercompany
settlement of taxes
|
|
|
— |
|
|
|
(17 |
) |
|
|
(1 |
) |
Dividends
declared to shareholder’s
|
|
|
(41 |
) |
|
|
— |
|
|
|
— |
|
Repurchases
of common stock
|
|
|
(196 |
) |
|
|
— |
|
|
|
— |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
319 |
|
|
|
302 |
|
|
|
168 |
|
Other
comprehensive income (loss), net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustments
|
|
|
(107 |
) |
|
|
(5 |
) |
|
|
31 |
|
Pension
liability adjustments, net of taxes of $(85), $116 and
$(24)
|
|
|
(209 |
) |
|
|
176 |
|
|
|
(57 |
) |
Other
comprehensive gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on derivatives
|
|
|
(1 |
) |
|
|
1 |
|
|
|
19 |
|
Reclassification
adjustments to net income (loss)
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
1 |
|
Income
tax benefit (provision) on derivatives
|
|
|
1 |
|
|
|
1 |
|
|
|
(5 |
) |
Total
comprehensive income
|
|
|
2 |
|
|
|
471 |
|
|
|
157 |
|
Balance
at December 31,
|
|
$ |
2,052 |
|
|
$ |
2,267 |
|
|
$ |
1,794 |
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Cash Flows (In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
319 |
|
|
$ |
302 |
|
|
$ |
168 |
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
49 |
|
|
|
41 |
|
|
|
47 |
|
Equity
in earnings of unconsolidated affiliates
|
|
|
(88 |
) |
|
|
(103 |
) |
|
|
(77 |
) |
Deferred
income taxes
|
|
|
88 |
|
|
|
(27 |
) |
|
|
12 |
|
Gain
on sale of assets
|
|
|
— |
|
|
|
(216 |
) |
|
|
(126 |
) |
Impairment
of equity method investments
|
|
|
— |
|
|
|
— |
|
|
|
68 |
|
Other
|
|
|
76 |
|
|
|
61 |
|
|
|
48 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(124 |
) |
|
|
(143 |
) |
|
|
281 |
|
Unbilled
receivables on uncompleted contracts
|
|
|
(45 |
) |
|
|
264 |
|
|
|
232 |
|
Accounts
payable
|
|
|
214 |
|
|
|
(92 |
) |
|
|
(187 |
) |
Advance
billings on uncompleted contracts
|
|
|
(315 |
) |
|
|
11 |
|
|
|
209 |
|
Accrued
employee compensation and benefits
|
|
|
(40 |
) |
|
|
57 |
|
|
|
19 |
|
Reserve
for loss on uncompleted contracts
|
|
|
(41 |
) |
|
|
(62 |
) |
|
|
140 |
|
Collection
(repayment) of advances from (to) unconsolidated affiliates,
net
|
|
|
68 |
|
|
|
(35 |
) |
|
|
(16 |
) |
Distributions
of earnings from unconsolidated affiliates
|
|
|
121 |
|
|
|
131 |
|
|
|
52 |
|
Other
assets
|
|
|
(149 |
) |
|
|
(29 |
) |
|
|
(38 |
) |
Other
liabilities
|
|
|
(9 |
) |
|
|
88 |
|
|
|
99 |
|
Total
cash flows provided by operating activities
|
|
|
124 |
|
|
|
248 |
|
|
|
931 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(37 |
) |
|
|
(43 |
) |
|
|
(57 |
) |
Sales
of property, plant and equipment
|
|
|
7 |
|
|
|
3 |
|
|
|
6 |
|
Acquisition
of businesses, net of cash acquired
|
|
|
(526 |
) |
|
|
— |
|
|
|
— |
|
Dispositions
of businesses, net of cash
|
|
|
— |
|
|
|
334 |
|
|
|
276 |
|
Other
investing activities
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
Total
cash flows provided by investing activities
|
|
|
(556 |
) |
|
|
293 |
|
|
|
225 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
to Halliburton, net
|
|
|
— |
|
|
|
(120 |
) |
|
|
(629 |
) |
Net
repayments of short-term borrowings
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
Proceeds
from long-term borrowings
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
Payments
on long-term borrowings
|
|
|
— |
|
|
|
(7 |
) |
|
|
(25 |
) |
Payments
to reacquire common stock
|
|
|
(196 |
) |
|
|
— |
|
|
|
— |
|
Net
proceeds from issuance of stock
|
|
|
3 |
|
|
|
6 |
|
|
|
512 |
|
Excess
tax benefits from stock-based compensation
|
|
|
2 |
|
|
|
6 |
|
|
|
— |
|
Payments
of dividends to shareholders
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
Payments
of dividends to minority shareholders
|
|
|
(28 |
) |
|
|
(35 |
) |
|
|
(3 |
) |
Total
cash flows used in financing activities
|
|
|
(244 |
) |
|
|
(150 |
) |
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(40 |
) |
|
|
9 |
|
|
|
50 |
|
Increase
in cash and equivalents
|
|
|
(716 |
) |
|
|
400 |
|
|
|
1,067 |
|
Cash
and equivalents at beginning of period
|
|
|
1,861 |
|
|
|
1,461 |
|
|
|
394 |
|
Cash
and equivalents at end of period
|
|
$ |
1,145 |
|
|
$ |
1,861 |
|
|
$ |
1,461 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
payments for interest paid to third party
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
11 |
|
Cash
payments for income taxes
|
|
$ |
200 |
|
|
$ |
229 |
|
|
$ |
57 |
|
Noncash
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification
receivables
|
|
$ |
559 |
|
|
$ |
— |
|
|
$ |
— |
|
Government
obligations
|
|
$ |
579 |
|
|
$ |
— |
|
|
$ |
— |
|
Noncash
financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
from parent and other activities
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15 |
|
See
accompanying notes to consolidated financial statements.
Notes
to Consolidated Financial Statements
Note
1. Description of Business and Basis of Presentation
KBR, Inc.
and its subsidiaries (collectively, KBR) is a global engineering, construction
and services company supporting the energy, petrochemicals, government services,
industrial and civil infrastructure sectors. We offer a wide range of services
through six business units; Government and Infrastructure (“G&I”), Upstream,
Services, Downstream, Technology and Ventures. See Note 7 for financial
information about our reportable business segments.
KBR,
Inc., a Delaware corporation, was formed on March 21, 2006 as an indirect,
wholly owned subsidiary of Halliburton. KBR, Inc. was formed to own and operate
KBR Holdings, LLC (“KBR Holdings”). At inception, KBR, Inc. issued 1,000 shares
of common stock for $1 to Halliburton. On October 27, 2006, KBR affected a
135,627-for-one split of its common stock. In connection with the stock split,
the certificate of incorporation was amended and restated to increase the number
of authorized shares of common stock from 1,000 to 300,000,000 and to authorize
50,000,000 shares of preferred stock with a par value of $0.001 per share. All
share data of the company has been adjusted to reflect the stock
split.
In
November 2006, KBR, Inc. completed an initial public offering of 32,016,000
shares of its common stock (the “Offering”) at $17.00 per share. The Company
received net proceeds of $511 million from the Offering after underwriting
discounts and commissions. Halliburton retained all of the KBR shares owned
prior to the Offering and, as a result of the Offering, its 135,627,000 shares
of our common stock represented 81% of the outstanding common stock of KBR, Inc.
after the Offering. Simultaneous with the Offering, Halliburton contributed 100%
of the common stock of KBR Holdings to KBR, Inc. KBR, Inc. had no operations
from the date of its formation to the date of the contribution of KBR Holdings.
See Note 17 for a discussion related to our transactions with our former
parent.
On
February 26, 2007, Halliburton’s board of directors approved a plan under which
Halliburton would dispose of its remaining interest in KBR through a tax-free
exchange with Halliburton’s stockholders pursuant to an exchange offer. On April
5, 2007, Halliburton completed the separation of KBR by exchanging the
135,627,000 shares of KBR owned by Halliburton for publicly held shares of
Halliburton common stock pursuant to the terms of the exchange offer (the
“Exchange Offer”) commenced by Halliburton on March 2, 2007.
Our
consolidated financial statements include the accounts of majority-owned,
controlled subsidiaries and variable interest entities where we are the primary
beneficiary (see Note 16). The equity method is used to account for investments
in affiliates in which we have the ability to exert significant influence over
the affiliates’ operating and financial policies. The cost method is used when
we do not have the ability to exert significant influence. All material
intercompany accounts and transactions are eliminated.
Our
revenue includes both equity in the earnings of unconsolidated affiliates as
well as revenue from the sales of services into the joint ventures. We often
participate on larger projects as a joint venture partner and also provide
services to the venture as a subcontractor. The amount included in our revenue
represents total project revenue, including equity in the earnings from joint
ventures impairments of equity investments in joint ventures, if any, and
revenue from services provided to joint ventures.
Our
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.”
Note
2. Significant Accounting Policies
Use
of estimates
Our
financial statements are prepared in conformity with accounting principles
generally accepted in the United States, requiring us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. Ultimate
results could differ from those estimates.
Engineering and
construction contracts. Revenue from contracts to provide construction,
engineering, design, or similar services is reported on the
percentage-of-completion method of accounting. Progress is generally based upon
physical progress, man-hours, or costs incurred, depending on the type of job.
Physical progress is determined as a combination of input and output measures as
deemed appropriate by the circumstances. All known or anticipated losses on
contracts are provided for when they become evident. Claims and change orders
that are in the process of being negotiated with customers for extra work or
changes in the scope of work are included in contract value when collection is
deemed probable. Our
contracts often require us to pay liquidated damages should we not meet certain
performance requirements, including completion of the project in accordance with
a scheduled time. We include an estimate of liquidated damages in contract costs
when it is deemed probable that they will be paid.
Accounting for
government contracts. Most of the services provided to the United States
government are governed by cost-reimbursable contracts. Services under our
LogCAP, RIO, PCO Oil South, and Balkans support contracts are examples of these
types of arrangements. Generally, these contracts contain both a base fee (a
fixed profit percentage applied to our actual costs to complete the work) and an
award fee (a variable profit percentage applied to definitized costs, which is
subject to our customer’s discretion and tied to the specific performance
measures defined in the contract, such as adherence to schedule, health and
safety, quality of work, responsiveness, cost performance and business
management).
Revenue
is recorded at the time services are performed, and such revenues include base
fees, actual direct project costs incurred and an allocation of indirect costs.
Indirect costs are applied using rates approved by our government customers. The
general, administrative, and overhead cost reimbursement rates are estimated
periodically in accordance with government contract accounting regulations and
may change based on actual costs incurred or based upon the volume of work
performed. Revenue is reduced for our estimate of costs that either are in
dispute with our customer or have been identified as potentially unallowable per
the terms of the contract or the federal acquisition regulations.
Our award
fees on the LogCAP III contract are recognized based on our estimate of the
amounts to be awarded. Once task orders underlying the work are
definitized and award fees are granted, we adjust our estimate of award fees to
the actual amounts earned. In 2007, we reduced our award fee accrual
rate on the LogCAP III contract from 84% to 80% as a result of award fee scores
received in that year resulting in a charge of approximately $2 million in
2007. In 2008, based up the self evaluations of our performance, we
reduced our award fee accrual rate on this project from 80% to 72% for the
performance period beginning in April 2008, resulting in a charge of
approximately $5 million in the fourth quarter of 2008. As of
December 31, 2008, we have recognized approximately $65 million in unbilled
receivables as our estimate of award fees earned since the April 2008
performance period. If our next award fee letter has performance
scores and award rates higher or lower than our historical rates, our accrual
will be adjusted accordingly.
For
contracts containing multiple deliverables entered into subsequent to June 30,
2003, we analyze each activity within the contract to ensure that we adhere to
the separation guidelines of Emerging Issues Task Force Issue (“EITF”) No.
00-21, “Revenue Arrangements with Multiple Deliverables,” and the revenue
recognition guidelines of SAB No. 104, “Revenue Recognition.” For service-only
contracts, and service elements of multiple deliverable arrangements, award fees
are recognized only when definitized and awarded by the customer. Award fees on
government construction contracts are recognized during the term of the contract
based on our estimate of the amount of fees to be awarded.
Accounting
for pre-contract costs
Pre-contract
costs incurred in anticipation of a specific contract award are deferred only if
the costs can be directly associated with a specific anticipated contract and
their recoverability from that contract is probable. Pre-contract costs related
to unsuccessful bids are written off no later than the period we are informed
that we are not awarded the specific contract. Costs related to one-time
activities such as introducing a new product or service, conducting business in
a new territory, conducting business with a new class of customer, or commencing
new operations are expensed when incurred.
Legal
expenses
We
expense legal costs in the period in which such costs are incurred.
Cash
and equivalents
We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents. Cash and equivalents include cash from advanced
payments related to contracts in progress held by our joint ventures that we
consolidate for accounting purposes. The use of these cash balances are limited
to the joint venture activities and are not available for other projects,
general cash needs or distribution to us without approval of the board of
directors of the respective joint ventures. At December 31, 2008 and 2007, cash
and equivalents included approximately $175 million and $483 million,
respectively, in cash from advanced payments held by our joint ventures that we
consolidate for accounting purposes. In addition, cash and equivalents includes
$179 million and $213 million as of December 31, 2008 and 2007, respectively,
from advanced payments related to a contract in progress that was approximately
37% complete at December 31, 2008. We expect to use the cash and equivalents
advanced on this project to pay project costs.
Allowance
for bad debts
We
establish an allowance for bad debts through a review of several factors
including historical collection experience, current aging status of the customer
accounts, financial condition of our customers, and whether the receivables
involve retentions.
Goodwill
and other intangibles
We
operate our business through six business units which are also our operating
segments as defined by FASB No. 131 Disclosures about Segments of an
Enterprise and Related
Information. These operating segments form the basis for our
reporting units used in our goodwill impairment testing. These
reporting units include the Upstream, Downstream, Services, Government &
Infrastructure, Technology, and Ventures business
units. Additionally, we identified an additional reporting unit
related to a small staffing business acquired in the acquisition of
BE&K.
We test
the reporting unit goodwill for impairment on an annual basis, and more
frequently when negative conditions or other triggering events arise, such as
when significant current or projected operating losses exist or are
forecasted. The annual impairment test for goodwill is a two-step
process that involves comparing the estimated fair value of each reporting unit
to the reporting unit’s carrying value, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, the goodwill of the
reporting unit is not considered impaired; therefore, the second step of the
impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, we perform the second step of the goodwill
impairment test to measure the amount of impairment loss to be recorded, as
necessary.
The fair values of
reporting units in 2008 were determined using two methods, one based on market
earnings multiples of peer companies for each reporting unit, and the other
based on discounted cash flow models with estimated cash flows based on internal
forecasts of revenues and expenses. We believe these two approaches are
appropriate valuation techniques and we generally weight the two values equally
as an estimate of reporting unit fair value for the purposes of our impairment
testing. However, we may weigh one value more heavily than the other
when conditions merit doing so. For example, in instances when
historic results are believed to be higher than forecast results, we weigh the
discounted cash flow method more heavily than our historic earnings
method. The earnings multiples for
the first method ranged between 7.4 times and 9.0 times. The second method used
market-based discount rates ranging from 8.8 percent to 13.5
percent. The fair value derived from the weighting of these two methods provided
appropriate valuations that, in aggregate, reasonably reconciled to our market
capitalization, taking into account observable control
premiums. Therefore, we used the valuations in evaluating goodwill
for possible impairment and noted that none of our goodwill was
impaired. Subsequent to our September 30, 2008 annual goodwill
impairment testing we monitored the changes in our business and other factors
that could represent indicators of impairment. No such indicators of
impairment were noted. Although our traded stock price declined
significantly during 2008, and for a brief period traded at levels below our
book value, these declines did not produce an indication that our goodwill was
impaired. Our annual impairment tests resulted in no goodwill or
intangible asset impairment in fiscal 2008, 2007 or 2006. See Note 7 for further
discussion of our reportable operating segments and related
goodwill.
Net
intangible assets totaled $73 million at December 31, 2008 and $15 million at
December 31, 2007. Net intangible assets increase by approximately $58 million
in 2008 as a result of the acquisitions of BE&K, TGI, Catalyst and Wabi as
further discussed in Note 4 to the consolidated financial statements.
Intangibles assets not subject to amortization totaled $10 million at December
31, 2008 and 2007. Gross other intangibles totaled $106 million at December 31,
2008 and $39 million at December 31, 2007. Other intangibles are amortized over
their estimated useful lives of up to 15 years. Related accumulated amortization
was $43 million and $34 million at December 31, 2008 and 2007, respectively.
Other intangible amortization expense was $11 million for the year ended
December 31, 2008 and $3 million for the years ended December 31, 2007 and 2006.
Amortization expense is estimated to be approximately $15 million in 2009, $13
million in 2010, $11 million in 2011, $5 million in 2012, $4 million for 2013
and $15 million thereafter.
Evaluating
impairment of long-lived assets
When
events or changes in circumstances indicate that long-lived assets other than
goodwill may be impaired, an evaluation is performed. For an asset classified as
held for use, the estimated future undiscounted cash flow associated with the
asset are compared to the asset’s carrying amount to determine if a write-down
to fair value is required. When an asset is classified as held for sale, the
asset’s book value is evaluated and adjusted to the lower of its carrying amount
or fair value less cost to sell. In addition, depreciation or amortization is
ceased while it is classified as held for sale.
Impairment
of equity method investments
KBR
evaluates its equity method investment for impairment when events or changes in
circumstances indicate, in management’s judgment, that the carrying value of
such investment may have experienced an other-than-temporary decline in value.
When evidence of loss in value has occurred, management compares the estimated
fair value of the investment to the carrying value of the investment to
determine whether an impairment has occurred. Management assesses the fair value
of its equity method investment using commonly accepted techniques, and may use
more than one method, including, but not limited to, recent third party
comparable sales, internally developed discounted cash flow analysis and
analysis from outside advisors. If the estimated fair value is less than the
carrying value and management considers the decline in value to be other than
temporary, the excess of the carrying value over the estimated fair value is
recognized in the financial statements as an impairment.
Income
taxes
For the
period prior to the separation from Halliburton, income tax expense for KBR was
calculated on a pro rata basis. Under this method, income tax expense was
determined based on KBR operations and its contributions to income tax expense
of the Halliburton consolidated group. For the period post separation from
Halliburton, income tax expense is calculated solely on KBR’s standalone
operations.
KBR was
included in the consolidated U.S. federal income tax return of Halliburton up
through the date of separation. Additionally, KBR’s U.K.-based subsidiaries and
divisions were members of a U.K. tax group, which allowed the sharing of tax
losses and other tax attributes among the KBR and Halliburton U.K.-based
affiliates, up through the date of separation. As part of the separation, KBR
and Halliburton entered into a tax sharing agreement, which generally provides
that KBR will indemnify Halliburton for any additional taxes attributable to
KBR’s business for periods prior to the separation.
Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. A valuation allowance is provided for deferred tax assets if it is
more likely than not that these items will not be realized.
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, we believe it is more likely than not that
we will realize the benefits of these deductible differences, net of the
existing valuation allowances.
Derivative
instruments
At times,
we enter into derivative financial transactions to hedge existing or projected
exposures to changing foreign currency exchange rates. We do not enter into
derivative transactions for speculative or trading purposes. We recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
accounted for as hedges under Statement of Financial Accounting Standard
(“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities”
are adjusted to fair value and such changes are reflected through the results of
operations. If the derivative is designated as a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings.
The
ineffective portion of a derivative’s change in fair value is recognized in
earnings. Recognized gains or losses on derivatives entered into to manage
foreign exchange risk are included in foreign currency gains and losses in the
consolidated statements of income.
Concentration
of credit risk
Revenue
from the United States government, which was derived almost entirely from our
G&I business unit, totaled $6.2 billion, or 53% of consolidated revenue, in
2008, $5.4 billion, or 62% of consolidated revenue, in 2007, and $5.8 billion,
or 66% of consolidated revenue, in 2006. No other customers represented 10% or
more of consolidated revenues in any of the periods presented.
Our
receivables are generally not collateralized. At December 31, 2008, 45% of our
total receivables were related to our United States government contracts. At
December 31, 2007, 64% of our total receivables were related to our United
States government contracts.
Minority
Interest
Minority
interest in consolidated subsidiaries in our 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 minority shareholders on certain
majority-owned, controlled investments where the minority shareholders are
obligated to fund the balance of their share of these losses.
Foreign
currency translation
Our
foreign entities for which the functional currency is the United States dollar
translate monetary assets and liabilities at year-end exchange rates, and
non-monetary items are translated at historical rates. Income and expense
accounts are translated at the average rates in effect during the year, except
for depreciation and expenses associated with non-monetary balance sheet
accounts which are translated at historical rates. Foreign currency transaction
gains or losses are recognized in income in the year of occurrence. Our foreign
entities for which the functional currency is not the United States dollar
translate net assets at year-end rates and income and expense accounts at
average exchange rates. Adjustments resulting from these translations are
reflected in accumulated other comprehensive income in member’s
equity.
Stock-based
compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of Financial
Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard
No. 123 (revised 2004), “Share Based Payment (“SFAS No. 123(R)”), using the
modified prospective application. Accordingly, compensation expense is
recognized for all newly granted awards and awards modified, repurchased, or
cancelled after January 1, 2006 based on their fair values. Compensation cost
for the unvested portion of awards that were outstanding as of January 1, 2006
is recognized ratably over the remaining vesting period based on the fair value
at date of grant. Also, beginning with the January 1, 2006 purchase period,
compensation expense for Halliburton’s ESPP was being recognized. The cumulative
effect of this change in accounting principle related to stock-based awards was
immaterial. Prior to January 1, 2006, we accounted for these plans under the
recognition and measurement provisions of APB Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations. Under APB Opinion No.
25, no compensation expense was recognized for stock options or the ESPP.
Compensation expense was recognized for restricted stock awards.
Total
stock-based compensation expense, net of related tax effects, was $10 million in
2008, $7 million in 2007, and $11 million in 2006. Total income tax benefit
recognized in net income for stock-based compensation arrangements was $5
million in 2008, $4 million in 2007, and $6 million in 2006. Incremental
compensation cost resulting from modifications of previously granted stock-based
awards which allowed certain employees to retain their awards after leaving the
company, was less than $1 million in 2008 and 2007, and $6 million in 2006. In
2007, we also recognized less than $1 million in incremental compensation cost
from modifications of previously granted stock-awards due to the conversion of
Halliburton stock options and restricted stock awards granted to KBR employees
to KBR awards of stock options and restricted stock, after our separation from
Halliburton on April 5, 2007. Effective upon our complete separation
from Halliburton, the Halliburton ESPP plan was terminated to KBR employees.
Halliburton shares previously purchased under the ESPP plan remained Halliburton
common stock and did not convert to KBR common stock at the date of separation.
See Note 17 for details related to transactions with our former
parent.
SFAS No.
123(R) requires the benefits of tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as
financing cash flows. Excess tax benefits realized from the exercise of
stock-based compensation awards was $2 million for 2008 and $6 million for 2007.
The exercise of stock-based compensation awards resulted in a tax benefit to us
of $3 million in 2008 and $6 million in 2007, which has been recognized as
paid-in capital in excess of par.
Stock
Options
No KBR
stock options were granted in 2008 or 2007. For KBR stock options granted in
2006, the fair value of options at the date of grant was estimated using the
Black-Scholes Merton option pricing model. The expected volatility of KBR
options granted in 2006 is based upon a blended rate that uses the historical
and implied volatility of common stock for selected peers. The expected term of
Halliburton stock options in 2005 is based upon historical observation of actual
time elapsed between date of grant and exercise of options for all employees.
The expected term of KBR options granted in 2006 is based upon the
average of the life of the option and the vesting period of the option. The
simplified estimate of expected term is utilized as we lack sufficient history
to estimate an expected term for KBR options. The assumptions and resulting fair
values of options granted were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KBR
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
6.00 |
|
Expected
volatility
|
|
|
N/A |
|
|
|
N/A |
|
|
|
35 |
% |
Expected
dividend yield
|
|
|
N/A |
|
|
|
N/A |
|
|
|
0 |
% |
Risk-free
interest rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
4.6 |
% |
Weighted
average grant-date fair value per share
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
9.34 |
|
Conversion
of shares from Halliburton common stock awards to KBR common stock
awards
Upon our
separation from Halliburton, our Transitional Stock Adjustment Plan provided for
the conversion 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 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 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 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. See Note 14 for information
regarding stock incentive plans.
In
accordance with SFAS 123(R), in the event of an option modification, the terms
or conditions of an equity award shall be treated as an exchange of the original
award for a new award, and both awards are remeasured based on the share price
and other pertinent factors at the modification date. The fair value of each
option was estimated based on the date of grant using the Black-Scholes Merton
option pricing model. The following assumptions were used in estimating the fair
value of the Halliburton stock options exchanged for KBR stock options for KBR
employees at the date of modification:
Halliburton
Options
|
|
|
|
Expected
term (in years)
|
0.25
– 4.5
|
Expected
volatility range
|
21.06
– 30.63%
|
Expected
dividend yield
|
0.96%
|
Risk-free
interest rate
|
4.5
– 5.07%
|
|
|
KBR
Options
|
|
|
|
Expected
term (in years)
|
0.25
– 5.5
|
Expected
volatility range
|
29.03
– 37.43%
|
Expected
dividend yield
|
0.00%
|
Risk-free
interest rate
|
4.5
– 5.07%
|
The
expected term of Halliburton options is based on the historical exercise data of
Halliburton and KBR employees and the various original grant dates. Volatility
is based on the historical and implied volatility of Halliburton common stock.
Expected dividend yield is based on cash dividends paid by Halliburton in 2006
divided by the closing share price at December 31,
2006. The expected term of KBR options is based upon the
average of the life of the option and the vesting period of the option. The
simplified estimate of expected term is utilized as we lack sufficient history
to estimate an expected term for KBR options. Volatility for KBR options is
based upon a blended rate that uses the historical and implied volatility of
common stock for KBR and selected peers. The risk-free interest rate applied to
both Halliburton and KBR options is based on the U.S. Treasury yield curve in
effect at the date of modification.
The
conversion ratio for restricted stock was calculated under the Transitional
Stock Adjustment Plan (refer to Note 14) and was based on comparative KBR and
Halliburton share prices. The conversion ratio was based upon the volume
weighted average stock price of KBR and Halliburton shares for a three-day
average.
Halliburton
ESPP Plan
The fair
value of Halliburton’s ESPP shares for 2006 was estimated using the
Black-Scholes Merton option pricing model. No shares were purchased by KBR
employees in 2008 or 2007 under the Halliburton ESPP plan and therefore, no
stock-based compensation expense was recorded in 2008 or 2007. The expected
volatility is a one-year historical volatility of Halliburton common stock.
There are no assumptions and resulting fair values of options granted for 2008
and 2007. The assumptions and resulting fair values of options granted for 2006
were as follows:
|
|
Offering
Period July 1 to December 31
|
|
|
|
|
|
Expected
term (in years)
|
|
|
0.5 |
|
Expected
volatility
|
|
|
37.77 |
% |
Expected
dividend yield
|
|
|
0.80 |
% |
Risk-free
interest rate
|
|
|
5.29 |
% |
Weighted
average grant-date fair value per share
|
|
$ |
9.32 |
|
|
|
Offering
Period July 1 to June 30
|
|
|
|
|
|
Expected
term (in years)
|
|
|
0.5 |
|
Expected
volatility
|
|
|
35.65 |
% |
Expected
dividend yield
|
|
|
0.75 |
% |
Risk-free
interest rate
|
|
|
4.38 |
% |
Weighted
average grant-date fair value per share
|
|
$ |
7.91 |
|
Performance
Award Units
In 2008
we granted 24,325,249 performance based award units (“Performance Awards”) with
a performance period from July 1, 2008 to December 31, 2010. In 2007 we granted
24,549,000 performance based award units (“Performance Awards”) with a
performance period from July 1, 2007 to December 31, 2009. Performance is based
50% on Total Shareholder Return (“TSR”), as compared to our peer group and 50%
on KBR’s Return on Capital (“ROC”). The performance award units may only be paid
in cash. In accordance with the provisions of SFAS No. 123(R), the TSR portion
of the performance award units are classified as liability awards and remeasured
at the end of each reporting period at fair value until settlement. The fair
value approach uses the Monte Carlo valuation method which analyzes the
companies comprising KBR’s peer group, considering volatility, interest rate,
stock beta and TSR through the grant date. The ROC calculation is based on the
company’s weighted average net income from continuing operations plus (interest
expense x (1-effective tax rate)), divided by average monthly capital from
continuing operations. The ROC portion of the Performance Award is also
classified as a liability award and remeasured at the end of each reporting
period based on our estimate of the amount to be paid at the end of the vesting
period.
Cost for
the Performance Awards is accrued over the requisite service
period. For the years ended December 31, 2008 and 2007 we recognized
$16 million and $5 million, respectively, in expense for the Performance
Awards. The expense associated with these options is included in cost
of services and general and administrative expense in our consolidated
statements of income. The liability awards are included in “Employee
compensation and benefits” on the consolidated balance sheet at December 31,
2008 and 2007 in the amounts of $21 million and $5 million,
respectively. See Note 14 for further detail on stock incentive
plans.
Note 3. Income per
Share
Basic
income per share is based upon the weighted average number of common shares
outstanding during the period. Dilutive income per share includes additional
common shares that would have been outstanding if potential common shares with a
dilutive effect had been issued, using the treasury stock method. A
reconciliation of the number of shares used for the basic and diluted income per
share calculations is as follows:
Millions of Shares
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Basic
weighted average common shares outstanding
|
|
|
166 |
|
|
|
168 |
|
|
|
140 |
|
Stock
options and restricted shares
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
Diluted
weighted average common shares outstanding
|
|
|
167 |
|
|
|
169 |
|
|
|
140 |
|
No
adjustments to net income were made in calculating diluted earnings per share
for the fiscal years 2008, 2007 and 2006.
Note
4. Acquisitions
BE&K,
Inc. On
July 1, 2008, we acquired 100% of the outstanding common shares of BE&K,
Inc., (“BE&K”) a privately held, Birmingham, Alabama-based engineering,
construction and maintenance services company. The acquisition of BE&K
enhances our ability to provide contractor and maintenance services in North
America. The agreed-upon purchase price was $550 million in cash subject to
certain indemnifications and stockholder’s equity adjustments as defined in the
stock purchase agreement. BE&K and its acquired divisions have been
integrated into our Services, Downstream and Government & Infrastructure
business units based upon the nature of the underlying projects acquired. As a
result of the acquisition, the condensed consolidated statements of income for
December 31, 2008, include the results of operations of BE&K since the date
of acquisition.
In
accordance with Statement of Financial Accounting Standards No. 141, “Business
Combinations”, (“FAS 141”), the acquisition was accounted for using the purchase
method. For accounting purposes, the purchase consideration paid was
approximately $559 million, which included $550 million in cash paid at closing
and $7 million in cash paid related to stockholder’s equity based purchase price
adjustments, and $2 million of direct transaction costs. We conducted an
external valuation of certain acquired assets for inclusion in our balance sheet
at the date of acquisition. Long-lived assets such as property, plant and
equipment largely reflect a value of replacing the assets, which takes into
account changes in technology, usage, and relative obsolescence and depreciation
of the assets. In addition, assets that would not normally be recorded in
ordinary operations (i.e., customer relationships and other intangibles) were
recorded at their estimated fair values. The excess of preliminary purchase
price over the estimated fair values of the net assets acquired was recorded as
goodwill.
The
following is a condensed balance sheet reflecting our allocation of the purchase
price to the fair value of the major assets acquired and liabilities assumed at
the date of acquisition which has been adjusted to reflect the agreed upon
stockholder’s equity and final asset valuation adjustments. Adjustments
primarily related to the estimates used in the opening balance sheet valuation
for certain intangibles, accounts receivables, accounts payables and other
assets and liabilities, as well as the settlement of escrow
obligations.
Allocation
of purchase price:
|
|
|
|
(In
millions)
|
|
Adjusted
|
|
|
|
Balance
|
|
Net
tangible assets acquired:
|
|
|
|
Cash
and equivalents
|
|
$ |
66 |
|
Notes
and accounts receivable
|
|
|
313 |
|
Other
current assets
|
|
|
60 |
|
Property,
plant, and equipment, net
|
|
|
55 |
|
Other
assets
|
|
|
20 |
|
Accounts
payable and advanced billings
|
|
|
(257 |
) |
Deferred
tax liabilities
|
|
|
(18 |
) |
Other
current liabilities
|
|
|
(105 |
) |
Other
noncurrent liabilities
|
|
|
(67 |
) |
Minority interest in unconsolidated
subsidiaries
|
|
|
(3 |
) |
Total
net tangible assets
|
|
|
64 |
|
Identifiable
intangible assets:
|
|
|
|
|
Customer relationships
and backlog
|
|
|
48 |
|
Tradenames
|
|
|
12 |
|
Other
|
|
|
1 |
|
Total
amount allocated to identifiable intangible assets
|
|
|
61 |
|
Goodwill
|
|
|
434 |
|
Total purchase price
|
|
$ |
559 |
|
Goodwill
has been allocated among our business segments with $367 million in Services,
$61 million in Other and $6 million in our Government & Infrastructure
segments. The acquired intangible assets consist primarily of customer
relationships and backlog which are amortized over their estimated remaining
life. The customer relationships and backlog acquired, with a value of
approximately $48 million, have a weighted average useful life of approximately
6 years. Tradenames and other intangible assets subject to amortization have a
weighted average useful life of 3 years.
The
following pro forma information presents the Company’s revenues, net income and
earnings per share as if the BE&K acquisition had occurred on the first day
of the years presented below.
|
|
Twelve
Months Ended
|
|
|
|
December 31,
|
|
Millions of dollars
|
|
2008
|
|
|
2007
|
|
Total
revenue
|
|
$ |
12,462 |
|
|
$ |
10,759 |
|
Income
from continuing operations (1)
|
|
$ |
300 |
|
|
$ |
197 |
|
Discontinued
operations (2)
|
|
|
25 |
|
|
|
115 |
|
Net
income
|
|
$ |
325 |
|
|
$ |
312 |
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$ |
1.96 |
|
|
$ |
1.86 |
|
Diluted income per share
|
|
$ |
1.95 |
|
|
$ |
1.85 |
|
|
(1)
|
The
pro forma income from continuing operations for the year ended December
31, 2008 and 2007 include approximately $6 and $12 million, respectively,
of incremental depreciation and amortization, net of the related tax
effects. The pro forma income from continuing operations for the year
ended December 31, 2008 included approximately $17 million in incremental
non-recurring stock-based and other compensation expenses and
approximately $9 million of seller-incurred transaction fees and expenses,
both net of the applicable tax, and were incurred in contemplation of sale
to KBR.
|
|
(2)
|
Pro
forma discontinued operations for the year ended December 31, 2008
includes the sale of certain business units by BE&K prior to our
acquisition of BE&K.
|
The pro
forma supplemental information is not necessarily indicative of actual results
had the acquisition occurred on the first day of the respective period, nor is
it necessarily indicative of future results. The pro forma supplemental
information does not reflect potential synergies, integration costs, or other
such costs or savings.
Turnaround Group
of Texas, Inc. In April 2008, we acquired 100% of the
outstanding common stock of Turnaround Group of Texas, Inc. (“TGI”). TGI is a
Houston-based turnaround management and consulting company that specializes in
the planning and execution of turnarounds and outages in the petrochemical,
power, and pulp & paper industries. The total purchase consideration for
this stock purchase transaction was approximately $7 million. As a result of the
acquisition, we recognized goodwill of $5 million and other intangible assets of
$2 million. Beginning in April 2008, TGI’s results of operations are included in
our Services business unit.
Catalyst
Interactive. In April 2008, we acquired 100% of the
outstanding common stock of Catalyst Interactive, an Australian e-learning and
training solution provider that specializes in the defense, government and
industry training sectors. The total purchase consideration for this stock
purchase transaction was approximately $5 million. As a result of the
acquisition, we recognized goodwill of approximately $3 million and other
intangible assets of approximately $2 million. Beginning in April 2008, Catalyst
Interactive’s results of operations are included in our Government &
Infrastructure business unit.
Wabi Development
Corporation. In October 2008, we
acquired 100% of the outstanding common stock of Wabi Development Corporation
(“Wabi”) for approximately $20 million in cash. As a result of the acquisition,
we recognized goodwill of $3 million and other intangible assets of $5 million.
Wabi is a privately held Canada-based general contractor, which provides
services for the energy, forestry and mining industries. Wabi currently employs
over 120 people, providing maintenance, fabrication, construction and
construction management services to a variety of clients in Canada and Mexico.
Wabi will be integrated into our Services business unit. The integration of Wabi
into our Services business will provide additional growth opportunities for our
heavy hydrocarbon, forestry, oil sand, general industrial and maintenance
services business. We have not yet completed our allocation of the purchase
price to the fair values of the acquired assets and
liabilities.
Note
5. Percentage-of-Completion Contracts
Revenue
from contracts to provide construction, engineering, design, or similar services
is reported on the percentage-of-completion method of accounting using
measurements of progress toward completion appropriate for the work performed.
Commonly used measurements are physical progress, man-hours, and costs
incurred.
Billing
practices for these projects are governed by the contract terms of each project
based upon costs incurred, achievement of milestones, or pre-agreed schedules.
Billings do not necessarily correlate with revenue recognized using the
percentage-of-completion method of accounting. Billings in excess of recognized
revenue are recorded in “Advance billings on uncompleted contracts.” When
billings are less than recognized revenue, the difference is recorded in
“Unbilled receivables on uncompleted contracts.” With the exception of claims
and change orders that are in the process of being negotiated with customers,
unbilled receivables are usually billed during normal billing processes
following achievement of the contractual requirements.
Recording
of profits and losses on percentage-of-completion contracts requires an estimate
of the total profit or loss over the life of each contract. This estimate
requires consideration of contract value, change orders and claims reduced by
costs incurred, and estimated costs to complete. Anticipated losses on contracts
are recorded in full in the period they become evident. Except in a limited
number of projects that have significant uncertainties in the estimation of
costs, we do not delay income recognition until projects have reached a
specified percentage of completion. Generally, profits are recorded from the
commencement date of the contract based upon the total estimated contract profit
multiplied by the current percentage complete for the contract.
When
calculating the amount of total profit or loss on a percentage-of-completion
contract, we include unapproved claims in total estimated contract value when
the collection is deemed probable based upon the four criteria for recognizing
unapproved claims under the American Institute of Certified Public Accountants
(“AICPA”) Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.” Including unapproved
claims in this calculation increases the operating income (or reduces the
operating loss) that would otherwise be recorded without consideration of the
probable unapproved claims. Probable unapproved claims are recorded to the
extent of costs incurred and include no profit element. In all cases, the
probable unapproved claims included in determining contract profit or loss are
less than the actual claim that will be or has been presented to the
customer.
When
recording the revenue and the associated unbilled receivable for unapproved
claims, we only accrue an amount equal to the costs incurred related to probable
unapproved claims. The amounts of unapproved claims and change orders recorded
as “Unbilled work on uncompleted contracts” or “Other assets” for each period
are as follows:
|
|
Years ended
December 31,
|
|
Millions of dollars
|
|
2008
|
|
|
2007
|
|
Probable
unapproved claims
|
|
$ |
133 |
|
|
$ |
178 |
|
Probable
unapproved change orders
|
|
|
5 |
|
|
|
4 |
|
Probable
unapproved claims related to unconsolidated
subsidiaries
|
|
|
33 |
|
|
|
36 |
|
Probable unapproved change
orders related to unconsolidated
subsidiaries
|
|
|
5 |
|
|
|
15 |
|
As of
December 31, 2008, the probable unapproved claims, including those from
unconsolidated subsidiaries, related to three contracts, which are
complete. See Note 10 for a discussion of U.S. government contract claims, which
are not included in the table above.
Included
in the table above are contracts with probable unapproved claims that will
likely not be settled within one year totaling $130 million and $178
million at December 31, 2008 and 2007, respectively, which are reflected as
a non-current asset in “Unbilled receivables on uncompleted contracts” on the
condensed consolidated balance sheets. Other probable unapproved claims that we
believe will be settled within one year, have been recorded as a current asset
in “Unbilled receivables on uncompleted contracts” on the condensed consolidated
balance sheets.
Escravos
Project
In
connection with our review of a consolidated 50%-owned GTL project in Escravos,
Nigeria, during the second quarter of 2006, we identified increases in the
overall cost to complete this four-plus year project, which resulted in our
recording a $148 million charge before minority interest and taxes during the
second quarter of 2006. These cost increases were caused primarily by schedule
delays related to civil unrest and security on the Escravos River, changes
in the scope of the overall project, engineering and construction changes due to
necessary front-end engineering design changes and increases in procurement cost
due to project delays. The increased costs were identified as a result of our
first check estimate process.
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 was 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. The unamortized balance of the charge is included as a
component of the “Reserve for estimated losses on uncompleted contracts” in the
accompanying condensed consolidated balance sheets. Also included in the amended
contract are client determined incentives that may be earned over the remaining
life of the contract. Under the terms of the amended contact, the first $21
million of incentives earned over the remaining life of the contract are not
payable to us. Since the contract was amended in July 2007, we have earned in
the aggregate $21 million in client determined incentives. Any future incentives
will be recognized if and when they are earned. Our Advanced billings on
uncompleted contracts included in our condensed consolidated balance sheets
related to this project, was $1 million at December 31, 2008 and $236 million at
December 31, 2007.
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. Subsequently, we recorded
additional losses on this project of approximately $27 million in 2007 and $21
million in 2008, bringing our total estimated losses to $60 million. These
additional costs are a result of identifying increased costs of materials and
the related costs of freight, installation and other costs. We could incur
additional costs and losses on this project if our cost estimation processes
identify new costs not previously included in our total estimated costs or if
our plans to make up lost schedule are not achieved.
PEMEX
Arbitration
In 1997
and 1998 we entered into three contracts with PEMEX, the project owner, to build
offshore platforms, pipelines and related structures in the Bay of Campeche
offshore Mexico. The three contracts are known as EPC 1, EPC 22 and EPC 28,
respectively. All three projects encountered significant schedule delays and
increased costs due to problems with design work that was the contractual
responsibility of PEMEX, late delivery and defects in equipment provided by
PEMEX, increases in scope and other changes made by PEMEX. We completed work on
EPC 28 and EPC 22 in August 2002 and March 2004, respectively. PEMEX took
possession of the offshore facilities of EPC 1 in March 2004 after having
achieved oil production and prior to our completion of our scope of work
pursuant to the contract.
In
accordance with the terms of each of the contracts, we filed for arbitration
with the International Chamber of Commerce (ICC) in 2004 and 2005 claiming
recovery of damages of $323 million, $215 million and $142 million for EPC 1, 22
and 28, respectively. PEMEX subsequently filed counterclaims totaling $157
million, $42 million and $2 million for EPC 1, 22 and 28, respectively. The
arbitration hearings were held in 2006 for EPC 22 and EPC 28 and in November
2007 for EPC 1.
In
January 2008, we negotiated a settlement and received payment from PEMEX related
to the EPC 22 arbitration award of the ICC panel which was sufficient for
recovery of our investment in the note receivable for this contract, as well as
$4 million in interest income in 2007. We received notice in February 2008, that
the ICC approved the arbitration panel’s decision to award in favor of KBR on
the EPC 28 arbitration. The net award in our favor was approximately $76 million
plus accrued interest since 2002 resulting in increase to revenue and a gain of
$51 million in the first quarter of 2008. In December 2008, we negotiated a
final settlement with PEMEX for payment of the EPC 28 arbitration award and
received payment from PEMEX of approximately 1.4 billion Mexican pesos, or $106
million U.S. dollars. As a result of the settlement, all previously pending
legal proceedings related to the EPC 28 arbitration award were
dismissed.
The
decision from the ICC is expected to be reached regarding the EPC 1 arbitration
in the first quarter of 2009. The costs incurred related to EPC 1 continues to
be classified as a probable claim receivable. There have been no significant
adjustments to the EPC 1 claim amount since 2004. Based on facts known by us as
of December 31, 2008, we believe that the remaining EPC 1 counterclaims referred
to above, filed by PEMEX, are without merit and have concluded there is no
reasonable possibility that a loss has been incurred. No amounts have been
accrued for these counterclaims at December 31, 2008.
In
Amenas Project
We own a
50% interest in a joint venture which began construction of a gas processing
facility in Algeria in early 2003 known as the In Amenas
project. Five months after the contract was awarded in 2003, the
client requested the joint venture to relocate to a new construction site as a
result of soil conditions discovered at the original site. In May
2006, the joint venture filed for arbitration with the International Chamber of
Commerce (“ICC”) claiming recovery of $129 million and extension of time for
filing of liquidated damages and a damage claim totaling $30
million. The arbitration hearing occurred in 2006. On February 24,
2009, we received information provided by outside counsel for the joint venture
in the arbitration indicating that the ICC panel had rendered a decision. The
written decision has not yet been received by the Company. Based on the limited
information provided by the joint venture’s attorney, we believe it is possible
that the Company may have incurred some amount of loss as a result of the
ruling. However, we are unable to reliably estimate the amount of the loss
because we have not received the written decision, performed any analysis on the
basis for the decisions, or determined any tax or other
consequences.
We
believe that in the first quarter of 2009, we will have more information
enabling us to determine the amount of loss resulting from the award. Our
share of the costs incurred in connection with the In Amenas project of $33
million is classified as a claim at December 31, 2008. There have
been no significant adjustments to the In Amenas claim since
2006.
Note
6. Dispositions
Production
Services. In May 2006, we completed the sale of our Production Services
group, which was part of our Services business unit. 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, net of post-closing
adjustments. See Note 22 (Discontinued Operations).
Devonport
Management Limited. On June 28, 2007, we consummated the sale of our 51%
ownership interest in DML for cash proceeds of approximately $345 million, net
of direct transaction costs, resulting in a gain of approximately $101 million,
net of tax of $115 million. Our DML operations were part of our G&I business
unit. See Note 22 (Discontinued Operations).
Note
7. Business Segment Information
We
provide a wide range of services, but the management of our business is heavily
focused on major projects within each of our reportable segments. At any given
time, a relatively few number of projects and joint ventures represent a
substantial part of our operations.
Our
reportable segments are consistent with the financial information that our chief
executive officer (“CEO”) , who is our chief operating decision maker, reviews
to evaluate operating performance and make resource allocation decisions. Our
reportable segments are Government and Infrastructure, Upstream and Services.
Our segment information has been prepared in accordance SFAS No. 131
“Disclosures About Segments of an Enterprise and Related
Information.”
We have
reorganized our internal reporting structure based on similar products and
services. The following is a description of our three reportable
segments:
Government and
Infrastructure. Our G&I
reportable segment delivers on-demand support services across the full military
mission cycle from contingency logistics and field support to operations and
maintenance on military bases. In the civil infrastructure market, we operate in
diverse sectors, including transportation, waste and water treatment, and
facilities maintenance. We provide program and project management, contingency
logistics, operations and maintenance, construction, management, engineering,
and other services to military and civilian branches of governments and private
clients worldwide.
Upstream. Our Upstream reportable
segment designs and constructs energy and petrochemical projects, including
large, technically complex projects in remote locations around the world. Our
expertise includes LNG and GTL gas monetization facilities, refineries,
petrochemical plants, onshore and offshore oil and gas production facilities
(including platforms, floating production and subsea facilities), onshore and
offshore pipelines. We provide a complete range of EPC-CS services, as well as
program and project management, consulting and technology services.
Services. Our
Services business unit delivers full scope construction, construction
management, fabrication, maintenance, and turnaround expertise to customers
worldwide. Our experience is broad and based on 90 years of
successful project realization beginning with the founding of legacy company
Brown & Root in 1919. With the acquisition of BE&K, our reach
has expanded and now includes power, power cogeneration, pulp and paper,
industrial and manufacturing, and pharmaceutical industries in addition to our
base markets in the oil, gas, and hydrocarbon processing
industries. We provide construction related services to education,
food and beverage, healthcare, hospitality and entertainment, life science and
technology, and mixed use building clients through our Building Group. KBR
Services and its joint venture partner offer maintenance and construction
related services for offshore oil and gas producing facilities in the Bay of
Campeche through the use of semisubmersible vessels.
Certain
of our operating segments do not individually meet the quantitative thresholds
as a reportable segment nor do they share a majority of the aggregation criteria
with another operating segment. These operating segments are reported on a
combined basis as “Other” and include our Downstream, Technology and Ventures
operating segments as well as corporate expenses not included in the operating
segments’ results.
Our
reportable segments follow the same accounting policies as those described in
Note 2 (Significant Accounting Policies). Our equity in pretax earnings and
losses of unconsolidated affiliates that are accounted for using the equity
method of accounting is included in revenue and operating income of the
applicable segment.
The
tables below present information on our business segments.
Operations
by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
6,938 |
|
|
$ |
6,093 |
|
|
$ |
6,506 |
|
Upstream
|
|
|
2,682 |
|
|
|
1,887 |
|
|
|
1,700 |
|
Services
|
|
|
1,373 |
|
|
|
322 |
|
|
|
314 |
|
Other
|
|
|
588 |
|
|
|
443 |
|
|
|
285 |
|
Total
|
|
$ |
11,581 |
|
|
$ |
8,745 |
|
|
$ |
8,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
segment income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
332 |
|
|
$ |
279 |
|
|
$ |
327 |
|
Upstream
|
|
|
262 |
|
|
|
188 |
|
|
|
40 |
|
Services
|
|
|
110 |
|
|
|
56 |
|
|
|
45 |
|
Other
|
|
|
68 |
|
|
|
17 |
|
|
|
(35 |
) |
Operating
segment income (a)
|
|
|
772 |
|
|
|
540 |
|
|
|
377 |
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
cost absorption (b)
|
|
|
(8 |
) |
|
|
(20 |
) |
|
|
1 |
|
Corporate
general and administrative
|
|
|
(223 |
) |
|
|
(226 |
) |
|
|
(226 |
) |
Total
|
|
$ |
541 |
|
|
$ |
294 |
|
|
$ |
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
11 |
|
|
$ |
3 |
|
|
$ |
9 |
|
Upstream
|
|
|
— |
|
|
|
4 |
|
|
|
4 |
|
Services
|
|
|
4 |
|
|
|
— |
|
|
|
1 |
|
Other
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
General
corporate
|
|
|
21 |
|
|
|
29 |
|
|
|
33 |
|
Total
(c)
|
|
$ |
37 |
|
|
$ |
36 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings (losses) of unconsolidated affiliates, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
47 |
|
|
$ |
47 |
|
|
$ |
21 |
|
Upstream
|
|
|
25 |
|
|
|
49 |
|
|
|
59 |
|
Services
|
|
|
20 |
|
|
|
18 |
|
|
|
13 |
|
Other
|
|
|
(4 |
) |
|
|
(11 |
) |
|
|
(86 |
) |
Total
|
|
$ |
88 |
|
|
$ |
103 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
5 |
|
|
$ |
3 |
|
|
$ |
3 |
|
Upstream
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
Services
|
|
|
10 |
|
|
|
1 |
|
|
|
1 |
|
Other
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
General
corporate (d)
|
|
|
30 |
|
|
|
24 |
|
|
|
22 |
|
Total
(e)
|
|
$ |
49 |
|
|
$ |
31 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charge (Note 19):
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
1 |
|
Upstream
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
General
corporate
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Total
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
5 |
|
_________________________
|
(a)
|
Operating
segment performance is evaluated by our chief operating decision maker
using operating segment income which is defined as operating segment
revenue less the cost of services and segment overhead directly
attributable to the operating segment. Operating segment income excludes
certain cost of services and general and administrative expenses directly
attributable to the operating segment that is managed and reported at the
corporate level, and corporate general and administrative expenses. We
believe this is the most accurate measure of the ongoing profitability of
our operating segments.
|
|
(b)
|
Labor
cost absorption represents costs incurred by our central service labor and
resource groups (above) or under the amounts charged to the operating
segments.
|
|
(c)
|
Capital
expenditures for 2007 and 2006 did not include capital expenditures for
DML, which was sold in the second quarter of 2007 and is accounted for as
discontinued operations. Capital expenditures for DML were $7 million and
$10 million for the year ended December 31, 2007 and 2006,
respectively.
|
|
(d)
|
Depreciation
and amortization associated with corporate assets is allocated to our six
operating segments for determining operating income or
loss.
|
|
(e)
|
These
amounts for 2007 and 2006 did not include depreciation and amortization
expense for DML, which was sold in the second quarter of 2007 and is
accounted for as discontinued operations. Depreciation and amortization
expense for DML was $10 million and $18 million for the year ended
December 31, 2007 and 2006,
respectively.
|
Within
KBR, not all assets are associated with specific segments. Those assets specific
to segments include receivables, inventories, certain identified property, plant
and equipment and equity in and advances to related companies, and goodwill. The
remaining assets, such as cash and the remaining property, plant and equipment,
are considered to be shared among the segments and are therefore reported as
General corporate assets.
Balance
Sheet Information by Operating Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets:
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
2,668 |
|
|
$ |
2,347 |
|
Upstream
|
|
|
2,125 |
|
|
|
1,888 |
|
Services
|
|
|
599 |
|
|
|
148 |
|
Other
|
|
|
492 |
|
|
|
819 |
|
Assets
related to discontinued operations
|
|
|
— |
|
|
|
1 |
|
Total
assets
|
|
$ |
5,884 |
|
|
$ |
5,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in/advances to related companies:
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
8 |
|
|
$ |
21 |
|
Upstream
|
|
|
53 |
|
|
|
158 |
|
Services
|
|
|
47 |
|
|
|
46 |
|
Other
|
|
|
77 |
|
|
|
69 |
|
Total
|
|
$ |
185 |
|
|
$ |
294 |
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Government
and Infrastructure
|
|
$ |
31 |
|
|
$ |
23 |
|
Upstream
|
|
|
159 |
|
|
|
159 |
|
Services
|
|
|
397 |
|
|
|
23 |
|
Other
|
|
|
107 |
|
|
|
46 |
|
Total
|
|
$ |
694 |
|
|
$ |
251 |
|
Revenue
by country is determined based on the location of services provided. Long-lived
assets by country are determined based on the location of tangible
assets.
Selected
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,761 |
|
|
$ |
961 |
|
|
$ |
1,351 |
|
Iraq
|
|
|
5,033 |
|
|
|
4,329 |
|
|
|
4,331 |
|
Kuwait
|
|
|
180 |
|
|
|
11 |
|
|
|
217 |
|
United
Kingdom
|
|
|
430 |
|
|
|
316 |
|
|
|
302 |
|
Other
Countries
|
|
|
4,177 |
|
|
|
3,128 |
|
|
|
2,604 |
|
Total
|
|
$ |
11,581 |
|
|
$ |
8,745 |
|
|
$ |
8,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived
Assets:
|
|
|
|
|
|
|
United
States
|
|
$ |
151 |
|
|
$ |
114 |
|
United
Kingdom
|
|
|
34 |
|
|
|
48 |
|
Other
Countries
|
|
|
60 |
|
|
|
58 |
|
Total
|
|
$ |
245 |
|
|
$ |
220 |
|
Note
8. Property, Plant and Equipment
Other
than those assets that have been written down to their fair values due to
impairment, property, plant, and equipment are reported at cost less accumulated
depreciation, which is generally provided on the straight-line method over the
estimated useful lives of the assets. Some assets are depreciated on accelerated
methods. Accelerated depreciation methods are also used for tax purposes,
wherever permitted. Upon sale or retirement of an asset, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized.
Property,
plant and equipment are composed of the following:
|
|
Estimated Useful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
N/A |
|
|
$ |
30 |
|
|
$ |
28 |
|
Buildings
and property improvements
|
|
|
5-44 |
|
|
|
185 |
|
|
|
180 |
|
Machinery,
equipment and other
|
|
|
3-20 |
|
|
|
254 |
|
|
|
239 |
|
Total
|
|
|
|
|
|
|
469 |
|
|
|
447 |
|
Less
accumulated depreciation
|
|
|
|
|
|
|
(224 |
) |
|
|
(227 |
) |
Net
property, plant and equipment
|
|
|
|
|
|
$ |
245 |
|
|
$ |
220 |
|
Note
9. Debt and Other Credit Facilities
Effective
December 16, 2005, we entered into an unsecured $850 million five year revolving
credit facility (“Revolving Credit Facility”) with Citibank, N.A., as agent, and
a group of banks and institutional lenders. During 2008, we expanded the
capacity of our Revolving Credit Facility in the amount of $80 million. This
expansion increased the capacity under the Revolving Credit Facility from $850
million to $930 million. This facility, which extends through December 2010,
serves to assist in providing our working capital and letters of credit to
support our operations. Amounts drawn under the Revolving Credit Facility bear
interest at variable rates based on a base rate (equal to the higher of
Citibank’s publicly announced base rate, the Federal Funds rate plus 0.5% or a
calculated rate based on the certificate of deposit rate) or the Eurodollar
Rate, plus, in each case, the applicable margin. The applicable margin will vary
based on our utilization spread. We are also charged an issuance fee for the
issuance of letters of credit, a per annum charge for outstanding letters of
credit and a per annum commitment fee for any unused portion of the credit line.
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. Furthermore, 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 Revolving Credit Facility and a wholly owned subsidiary of KBR. The
Revolving Credit Facility requires us to maintain certain financial ratios, as
defined by the Revolving Credit Facility agreement, including a
debt-to-capitalization ratio that does not exceed 50%; a leverage ratio that
does not exceed 3.5; and a fixed charge coverage ratio of at least 3.0. At
December 31, 2008 and December 31, 2007, we were in compliance with these ratios
and other covenants. As of December 31, 2008 and December 31, 2007, there were
zero borrowings and $510 million and $508 million, respectively, in letters of
credit issued and outstanding under this facility.
On
January 17, 2008, we entered into an Agreement and Amendment to the Revolving
Credit Facility effective as of January 11, 2008, (the “Amendment”). The
Amendment (i) permits us to elect whether any increase in the aggregate
commitments under the Revolving Credit Facility used solely for the issuance of
letters of credit are to be funded from existing banks or from one or more
eligible assignees; and (ii) permits us to declare and pay shareholder dividends
and/or engage in equity repurchases not to exceed a total of $400 million in the
aggregate.
Letters
of credit
In
connection with certain projects, we are required to provide letters of credit
and surety bonds to our customers. Letters of credit are provided to customers
in the ordinary course of business to guarantee advance payments from certain
customers, support future joint venture funding commitments and to provide
performance and completion guarantees on engineering and construction contracts.
We have $1.4 billion in committed and uncommitted lines of credit to support
letters of credit and as of December 31, 2008, we had utilized $645 million of
our credit capacity. Surety bonds are also posted under the terms of
certain contracts primarily related to state and local government projects to
guarantee our performance.
As of
December 31, 2008, we had approximately $1.0 billion in letters of credit
outstanding, of which $510 million were issued under our Revolving Credit
Facility and $363 million were issued under various Halliburton facilities
and/or are irrevocably and unconditionally guaranteed by Halliburton. Of the
total outstanding, $357 million relate to our joint venture operations. At
December 31, 2008, $212 million of the $1.0 billion outstanding letters of
credit have triggering events that would entitle a bank to require cash
collateralization. Approximately $433 million of the $510 million
relates to letters of credit issued under our Revolving Credit Facility which
have expiry dates close to or beyond the maturity date of the facility. Under
the terms of the Revolving Credit Facility, if the original maturity date of
December 16, 2010 is not extended then the issuing banks may require that we
provide cash collateral for these extended letters of credit no later than 95
days prior to the original maturity date. Currently, our intention is to further
increase the capacity of and extend the original maturity date of the Revolving
Credit Facility which we intend to complete in 2009. As the need arises, future
projects will be supported by letters of credit issued under our Revolving
Credit Facility or arranged on a bilateral basis. We believe we have
adequate letter of credit capacity under our existing Revolving Credit Facility
and bilateral line of credit to support our operations for the next twelve
months.
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 business unit 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. We currently pay an annual fee to Halliburton calculated at
0.40% of the outstanding performance-related letters of credit, 0.80% of the
outstanding financial-related letters of credit guaranteed by Halliburton and
0.25% of the outstanding guaranteed surety bonds. Effective January 1, 2010, the
annual fee increases to 0.90%, 1.65% and 0.50% of the outstanding
performance-related and financial-related outstanding issued letters of
credit and the outstanding guaranteed surety bonds, respectively.
Note
10. United States Government Contract Work
We
provide substantial work under our government contracts to the United States
Department of Defense and other governmental agencies. These contracts include
our worldwide United States Army logistics contracts, known as LogCAP and U.S.
Army Europe (“USAREUR”).
Given the
demands of working in Iraq and elsewhere for the United States government, we
expect that from time to time we will have disagreements or experience
performance issues with the various government customers for which we work. If
performance issues arise under any of our government contracts, the government
retains the right to pursue remedies, which could include threatened termination
or termination, under any affected contract. If any contract were so terminated,
we may not receive award fees under the affected contract, and our ability to
secure future contracts could be adversely affected, although we would receive
payment for amounts owed for our allowable costs under cost-reimbursable
contracts. Other remedies that could be sought by our government customers for
any improper activities or performance issues include sanctions such as
forfeiture of profits, suspension of payments, fines, and suspensions or
debarment from doing business with the government. Further, the negative
publicity that could arise from disagreements with our customers or sanctions as
a result thereof could have an adverse effect on our reputation in the industry,
reduce our ability to compete for new contracts, and may also have a material
adverse effect on our business, financial condition, results of operations, and
cash flow.
We have
experienced and expect to be a party to various claims against us by employees,
third parties, soldiers, subcontractors and others that have arisen out of our
work in Iraq such as claims for wrongful termination, assaults against
employees, personal injury claims by third parties and army personnel, and
subcontractor claims. While we believe we conduct our operations safely, the
environments in which we operate often lead to these types of claims. We believe
the vast majority of these types of claims are governed by the Defense Base Act
or precluded by other defenses. We have a dispute resolution program under which
most of these employee claims are subject to binding arbitration. However, an
unfavorable resolution or disposition of these matters could have a material
adverse effect on our business, 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. When issues are
identified during the governmental agency audit process, these issues are
typically discussed and reviewed with us. The DCAA then issues an audit report
with its recommendations to our customer’s contracting officer. In the case of
management systems and other contract administrative issues, the contracting
officer is generally with the Defense Contract Management Agency (“DCMA”). We
then work with our customer to resolve the issues noted in the audit report. We
self-disallow costs that are expressly not allocable to government contracts per
the relevant regulations. However, if our customer or a government auditor forms
an opinion that we improperly charged any costs to a contract, these costs,
depending on facts and circumstances and the issue resolution process, could
become non-reimbursable and in such instances if already reimbursed, the costs
must be refunded to the customer. Our revenue recorded for government contract
work is reduced for our estimate of potentially refundable costs related to
dispute issues that may be categorized as disputed or unallowable as a result of
cost overruns or the audit process.
Security.
In February 2007, we received a letter from the Department of the Army informing
us of their intent to adjust payments under the LogCAP III contract associated
with the cost incurred by the subcontractors to provide security to their
employees. Based on this letter, the Army withheld its 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 would
begin making further adjustments equal to 6% of prior and current subcontractor
costs unless we provided timely information sufficient to show that such action
was not necessary to protect the government’s interest. The Army has
taken no further action with respect to further adjustments of prior and current
subcontractor costs.
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. We provided at the Army's request
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
less than 6% of the total subcontractor costs. In October 2007, we filed a
claim to recover the amounts withheld which was deemed denied as a result of no
response from the DCMA. In March 2008, we filed an appeal to the Armed Services
Board of Contract Appeals to recover the amounts withheld, and that appeal is
currently in the discovery process. The matter is also the subject of an ongoing
investigation by the DOJ. At this time, the likelihood that a loss
related to this matter has been incurred is remote. As of December 31, 2008, we
had not adjusted our revenues or accrued any amounts related to this
matter.
Containers.
In June 2005, the DCAA recommended withholding certain costs associated with
providing containerized housing for soldiers and supporting civilian personnel
in Iraq. The DCMA recommended that the costs be withheld pending receipt of
additional explanation or documentation to support the subcontract costs. During
2006, we resolved approximately $26 million of the withheld amounts with our
contracting officer and payment was received in the first quarter of 2007. In
May of 2008, we received notice from the DCAA of their intention to rescind
their 2006 determination to allow the $26 million of costs pending additional
supporting information. As of December 31, 2008, approximately $55 million of
costs have been suspended related to this matter of which $32 million has been
withheld by us from our subcontractors. In April 2008, we filed a counterclaim
in arbitration against one of our LogCAP III subcontractors, First Kuwaiti
Trading Company, to recover approximately $51 million paid to the subcontractor
for containerized housing as further described under the caption First Kuwaiti
Arbitration below. We will continue working with the government and our
subcontractors to resolve the remaining amounts. At this time, the likelihood
that a loss in excess of the amount accrued for this matter is
remote.
Dining
facilities. In
the third quarter of 2006, the DCAA raised questions regarding $95 million of
costs related to dining facilities in Iraq. We responded to the DCMA that our
costs are reasonable. In the fourth quarter of 2007, the DCAA suspended payment
for $11 million of costs related to these dining facilities until such time we
provide documentation to support the price reasonableness of the rates
negotiated with our subcontractor and demonstrate that the amounts billed were
in accordance with the contract terms. In the first quarter of 2008, the DCAA
suspended payment for an additional $53 million of costs until such time we
provide documentation to support the price reasonableness of the rates
negotiated with the subcontractor. We believe the prices obtained for these
services were reasonable and intend to vigorously defend ourselves on this
matter. In 2008, we filed four claims to recover approximately $56 million of
amounts previously withheld from us by the DCAA. With respect to questions
raised regarding billing in accordance with contract terms, as of December 31,
2008, we believe it is reasonably possible that we could incur losses in excess
of the amount accrued for possible subcontractor costs billed to the customer
that were possibly not in accordance with contract terms. However, we are unable
to estimate an amount of possible loss or range of possible loss in excess of
the amount accrued related to any costs billed to the customer that were not in
accordance with the contract terms.
Kosovo fuel.
In April 2007, the DOJ issued a letter alleging the theft in 2004 and
subsequent sale of diesel fuel by KBR employees assigned to Camp Bondsteel in
Kosovo. In addition, the letter alleges that KBR employees falsified records to
conceal the thefts from the Army. The total value of the fuel in question is
estimated by the DOJ at approximately $2 million based on an audit report issued
by the DCAA. We believe the volume of the alleged misappropriated fuel is
significantly less than the amount estimated by the DCAA. We responded to the
DOJ that we had maintained adequate programs to control, protect, and preserve
the fuel in question. We further believe that our contract with the Army
expressly limits KBR’s responsibility for such losses. Our discussions with the
DOJ are ongoing and have included items ranging from settlement of this matter
for de minimus amounts to the DOJ reserving their rights to litigate. Should
litigation occur, we believe we have meritorious defenses and intend to
vigorously defend ourselves. Neither our client nor the DCMA has indicated any
intent to withhold payments from us relating to this matter. We believe the
likelihood that a loss has been incurred related to this matter is remote and
accordingly, no amounts have been accrued.
Transportation
costs. The DCMA, in performing its audit activities under the
LogCAP III contract, raised a question about our compliance with the
provisions of the Fly America Act. Subject to certain exceptions, the Fly
America Act requires Federal employees and others performing U.S. Government
financed foreign air travel to travel by U.S. flag air carriers. There are times
when we transported personnel in connection with our services for the U.S.
military where we may not have been in compliance with the Fly America Act and
its interpretations through the Federal Acquisition Regulations and the
Comptroller General. As of December 31, 2008, we have accrued an estimate of the
cost incurred for these potentially non-compliant flights with a corresponding
reduction to revenue. The DCAA may consider additional flights to be
noncompliant resulting in potential larger amounts of disallowed costs than the
amount we have accrued. At this time, we cannot estimate a range of reasonably
possible losses that may have been incurred, if any, in excess of the amount
accrued. We will continue to work with our customer to resolve this
matter.
Dining Facility
Support Services. In April 2007, DCMA 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. Payments of $13 million were
withheld from us. In the first quarter of 2008, we favorably resolved this
matter with the DCAA resulting in the DCAA rescinding its previously issued
withholding.
Other
issues. The DCMA 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.
Investigations
relating to Iraq, Kuwait, Afghanistan and Other
In the
first quarter of 2005, the 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, 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. There has been no further action taken by the DoD Inspector
General with regard to this matter.
We
understand that the DOJ, an Assistant United States Attorney based in Illinois,
and others are investigating these and other individually immaterial 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 or trial testimony
related to some of these and other matters.
Various
Congressional 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 continue to
provide information and testimony with respect to operations in Iraq in these
Congressional committees, including the House Armed Services Committee. During
the first quarter of 2008, we received Congressional inquiries regarding our
offshore payroll structure and whether FICA taxes should have been withheld. We
have responded to those inquiries and we believe we have substantially complied
with the applicable laws and regulations that pertain to our payroll
withholdings. In June 2008, the Heroes Earnings Assistance and Relief Tax
(HEART) Act was signed into law and is effective beginning August 1, 2008. We
believe our employees that are U.S. citizens or residents performing services on
U.S. government contracts are subject to the HEART Act. Accordingly, at the
effective date we began withholding FICA taxes, pay the employer matching of
such taxes and charge such costs to our reimbursable contract. We do not believe
that the change in law will have a material impact to our financial position,
results of operations, or cash flows.
We have
identified and reported to the U.S. Departments of State and Commerce numerous
exports of materials, including personal protection equipment such as helmets,
goggles, body armor and chemical protective suits, that possibly were not in
accordance with the terms of our export license or applicable regulations.
However, we believe that the facts and circumstances leading to our conclusion
of possible non-compliance relating to our Iraq and Afghanistan activities are
unique and potentially mitigate any possible fines and penalties because the
bulk of the exported items are the property of the U.S. government and are used
or consumed in connection with services rendered to the U.S. government. In
addition, we have responded to a March 19, 2007, subpoena from the DoD Inspector
General concerning licensing for armor for convoy trucks and antiboycott issues.
We continue to comply with the requests to provide information under the
subpoena. Whereas it is reasonably possible that we may be subject to fines and
penalties for possible acts that are not in compliance with our export licenses
or regulations, at this time it is not possible to estimate an amount of loss or
range of losses that may have been incurred. A failure to comply with applicable
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. We are in ongoing
communications with the appropriate authorities with respect to these matters.
There can be no assurances that we will not be subject to any sanctions nor
that, if any such sanctions are imposed, they will not have a material adverse
impact on us.
Claims
We had
unapproved claims for costs incurred under various government contracts totaling
$73 million at December 31, 2008 and $82 million at December 31, 2007. The
unapproved claims outstanding at December 31, 2008 and December 31, 2007 are
considered to be probable of collection and have been recognized as revenue.
These unapproved claims relate to contracts where our costs have exceeded the
customer’s funded value of the task order and therefore could not be billed. We
understand that our customer is actively seeking funds that have been or will be
appropriated to the Department of Defense that can be obligated on our
contract.
SIGIR
Report
The
Special Inspector General for Iraq Reconstruction, or SIGIR, was created by
Congress to provide oversight of the Iraq Relief and Reconstruction Fund (IRRF)
and all obligations, expenditures, and revenues associated with reconstruction
and rehabilitation activities in Iraq. SIGIR reports, from time to time, make
reference to KBR regarding various matters. We believe we have addressed all
issues raised by prior SIGIR reports and we will continue to do so as new issues
are raised.
McBride
Qui Tam suit
In
September 2006, we became aware of a qui tam action filed against us by a former
employee alleging various wrongdoings in the form of overbillings of our
customer on the LogCAP III contract. This case was originally filed pending the
government’s decision whether or not to participate in the suit. In June 2006,
the government formally declined to participate. The principal allegations are
that our compensation for the provision of Morale, Welfare and Recreation
(“MWR”) facilities under LogCAP III is based on the volume of usage of those
facilities and that we deliberately overstated that usage. In accordance with
the contract, we charged our customer based on actual cost, not based on the
number of users. It was also alleged that, during the period from November 2004
into mid-December 2004, we continued to bill the customer for lunches, although
the dining facility was closed and not serving lunches. There are also
allegations regarding housing containers and our provision of services to our
employees and contractors. On July 5, 2007, the court granted our motion to
dismiss the qui tam claims and to compel arbitration of employment claims
including a claim that the plaintiff was unlawfully discharged. The majority of
the plaintiff’s claims were dismissed but the plaintiff was allowed to pursue
limited claims pending discovery and future motions. Substantially all
employment claims were sent to arbitration under the Company’s dispute
resolution program which were subsequently resolved in our favor. On October 29,
2008, we filed motions to dismiss the remaining claims and to compel arbitration
on all remaining counts of the complaint, which are currently
pending. We believe the relator’s claim is without merit and that the
likelihood that a loss has been incurred is remote. As of December 31, 2008, no
amounts have been accrued.
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 judgment in our favor was entered on April 30, 2007 and subsequently
appealed by the plaintiffs on May 3, 2007. The appellate court affirmed the
lower courts dismissal in May 2008. As of December 31, 2008, we consider the
matter to be concluded.
Godfrey Qui Tam
suit
In
December 2005, we became aware of a qui tam action filed against us and several
of our subcontractors by a former employee alleging that we violated the False
Claims Act by submitting overcharges to the government for dining facility
services provided in Iraq under the LogCAP III contract. As required by the
False Claims Act, the lawsuit was filed under seal to permit the government to
investigate the allegations. In early April 2007, the court denied the
government’s motion for the case to remain under seal, and on April 23, 2007,
the government filed a notice stating that it was not participating in the suit.
In August 2007, the relator filed an amended complaint which added an additional
contract to the allegations and added retaliation claims. We filed motions to
dismiss and to compel arbitration which were granted on March 13, 2008 for all
counts except as to the employment issues which were sent to arbitration. The
relator has filed an appeal. We are unable to determine the likely outcome at
this time. No amounts have been accrued and we cannot determine any reasonable
estimate of loss that may have been incurred, if any.
ASCO
Litigation
On July
23, 2008, a jury in Texas returned a verdict against KBR awarding Associated
Construction Company WLL (ASCO) damages of $39 million with the court to
determine attorney’s fees and interest. In 2003, ASCO was a subcontractor to KBR
in Iraq related to work performed on our LogCAP III contract. On August 25, 2008
the court entered a judgment which included damages of approximately $18
million, interest of approximately $3 million and attorney’s fees of $6 million
bringing the total judgment to $27 million. As a result of the final
judgment, we reduced our previous accrual from $40 million to $27 million during
the third quarter of 2008. In the fourth quarter of 2008, we negotiated a final
settlement with ASCO in the amount of $22 million. We believe the entire amount
is billable to the customer and recognized revenue of $5 million for unpaid work
performed by ASCO. However, we will not recognize the remaining amount as
revenue until such time as we are reasonably assured of collection.
First
Kuwaiti Arbitration
In April
2008 First Kuwaiti Trading Company, one of our LogCAP III subcontractors, filed
for arbitration of a subcontract under which KBR had leased vehicles related to
work performed on our LogCAP III contract. First Kuwaiti alleged that we did not
return or pay rent for many of the vehicles and sought damages in the amount of
$39 million. We filed a counterclaim to recover amounts which may ultimately be
determined due to the Government for the $51 million in suspended costs as
discussed in the preceding section of this footnote titled “Containers.” First
Kuwaiti subsequently responded by adding additional subcontract claims,
increasing its total claim to approximately $96 million. This matter is in the
early stages of the arbitration process and no amounts have been accrued and we
are unable to determine a reasonable estimate of loss, if any, at this
time.
Paul
Morell, Inc. d/b/a The Event Source vs. KBR, Inc.
TES is a
former LogCAPIII subcontractor who provided DFAC services at six sites in Iraq
from mid-2003 to early 2004. TES has sued KBR in Federal Court in Virginia for
breach of contract and tortuous interference with TES’s subcontractors by
awarding subsequent DFAC contracts to the subcontractors. KBR denies these
allegations. In addition, the Government withheld funds from KBR that KBR had
submitted for reimbursement of TES invoices, and at that time, TES agreed that
it was not entitled to payment until KBR was paid by the Government. Eventually
KBR and the Government settled the dispute, and in turn KBR and TES agreed that
TES would accept, as payment in full with a release of all other claims, the
amount the Government paid to KBR for TES’s services. TES now seeks to overturn
that settlement and release, claiming that KBR misrepresented the facts. TES has
other minor claims for services provided that are not material. TES
seeks $89 million in compensatory damages and an unspecified amount of punitive
damages in its suit. Trial is expected to take place in the second quarter of
2009. We are unable to determine the likely outcome in excess of the
amount accrued for this suit at this time.
Electrocution
Litigation
During
2008, two separate lawsuits were filed against KBR alleging that the Company was
responsible in two separate electrical incidents which resulted in the deaths of
two soldiers. One incident occurred at Radwaniyah Palace Complex and the other
occurred at Al Taqaddum. It is alleged in each suit that the electrocution
incident was caused by improper electrical maintenance or other electrical work.
KBR denies that its conduct was the cause of either event and denies legal
responsibility. Both cases have been removed to Federal Court where motions to
dismiss have been filed and are currently pending. Discovery has not yet begun
in one case, and is in early stages in the other case. We are unable to
determine the likely outcome of these cases at this time. As of December 31,
2008, no amounts have been accrued.
Note
11. Other Commitments and Contingencies
Foreign
Corrupt Practices Act investigations
As
previously disclosed, the SEC was 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
was also conducting a related criminal investigation. 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 December 31, 2008. 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 December 31, 2008, 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, (“KBR LLC”)
which is the predecessor company to our current subsidiary KBR Holdings
LLC.
On
February 11, 2009 KBR LLC, entered a guilty plea related to the
Bonny Island investigation in the United States District Court, Southern
District of Texas, Houston Division (the “Court”). KBR LLC plead
guilty to one count of conspiring to violate the FCPA and four counts of
violating the FCPA, all arising from the intent to bribe various Nigerian
officials through commissions paid to agents working on behalf of TSKJ on the
Bonny Island project. The plea agreement reached with the DOJ
resolves all criminal charges in the DOJ’s investigation into the conduct of KBR
LLC relating to the Bonny Island project, so long as the conduct was
disclosed or known to DOJ before the settlement, including previously disclosed
allegations of coordinated bidding described below. The plea agreement calls for
the payment of a criminal penalty of $402 million, of which Halliburton will pay
$382 million under the terms of the indemnity in the master separation
agreement, while we will pay $20 million. The criminal penalties will
be paid in quarterly payments over the next two years. We also agreed
to a period of organizational probation of three years, during which we will
retain a monitor who will assess our compliance with the plea agreement and
evaluate our FCPA compliance program over the three year period, with periodic
reports to the DOJ.
On the
same date, the SEC filed a complaint and we consented to the filing of a final
judgment against us in the Court. The complaint and the judgment were filed as
part of a settled civil enforcement action by the SEC, to resolve the civil
portion of the government’s investigation of the Bonny Island project. The
complaint alleges civil violations of the FCPA’s antibribery and books and
records provisions related to the Bonny Island project. The complaint
enjoins us from violating the FCPA’s antibribery, books-and-records, and
internal-controls provisions and requires Halliburton and KBR, jointly and
severally, to make payments totaling $177 million, all of which will be paid by
Halliburton pursuant to the indemnification under the master separation
agreement. The judgment also requires us to retain an independent
monitor on the same terms as the plea agreement with the DOJ.
Under
both the plea agreement and judgment, we have agreed to cooperate with the SEC
and DOJ in their investigations of other parties involved in TSKJ and the
Bonny Island project.
As a
result of the settlement, in the fourth quarter 2008 we recorded the $402
million obligation to the DOJ and, accordingly, have recorded a receivable from
Halliburton for the $382 million that Halliburton will pay to the DOJ on our
behalf. The resulting charge of $20 million to KBR is recorded in
cost of sales of our Upstream business unit in the fourth quarter of 2008.
Likewise, we recorded an obligation to the SEC in the amount of $177 million and
a receivable from Halliburton in the same amount.
At
December 31, 2008, the obligation to the DOJ of $402 million has been classified
on our consolidated balance sheet as $202 million in “Other current liabilities”
and the remaining $200 million in “Other noncurrent
liabilities.” This classification is based on payment terms that
provide for an initial installment of $52 million due within 5 business days of
the imposition of sentencing and seven quarterly installments of $50 million
each made on the first day of each subsequent quarter beginning on April 1, 2009
through October 1, 2010. Likewise, the indemnification receivable
from Halliburton for the DOJ obligation of $382 million has been classified on
our consolidated balance sheet as $192 million in “Current portion of
indemnification receivable” and the remaining $190 million in “Noncurrent
portion of indemnification receivable”. Halliburton paid their share
of the initial installment of $49 million to the DOJ on February 17,
2009. We paid our share of the initial installment of $3 million to
the DOJ on February 17, 2009
At
December 31, 2008, the joint and several obligation to the SEC and the related
indemnification receivable from Halliburton of $177 million has been classified
on our consolidated balance sheet as “Other current assets” and a
corresponding amounts as “Other Assets.” This
classification is based on payment terms in the final judgment of the SEC
investigation that provide for payment in full of the $177 million within 10
days of the final judgment.
As part
of the settlement of the FCPA matters relating to projects in Bonny Island,
Nigeria (see “Foreign Corrupt Practices Act investigations”), we have agreed to
the appointment of a corporate monitor for a period of up to three years.
We are responsible for paying the fees and expenses related to the
monitor’s review and oversight of our policies and activities relating to
compliance with applicable anti-corruption laws and regulations. We
cannot at this time provide a reasonable estimate of the cost of the
retention of the monitor as the monitor’s work and needed expenses will be
impacted by his or her initial assessment of our policies and procedures
and will vary over the period of the appointment reflecting periods of increased
work, such as during the preparation of periodic reports, as compared to
the day to day work of monitoring our compliance.
Because
of the guilty plea by KBR LLC, we are subject to possible suspension or
debarment of our ability to contract with governmental agencies of the United
States and of foreign countries. For the years ended December 31, 2008 and 2007,
we had revenue of approximately $ 6.2 billion and $ 5.4 billion, respectively,
from our government contracts work with agencies of the United States or state
or local governments. We have received written confirmation from the U.S.
Department of the Army stating that it does not intend to suspend or debar KBR
from DoD contracting as a result of the guilty plea by KBR LLC. We
are discussing these matters with other officials in agencies for purpose of
obtaining agreement that will prevent suspension or debarment. In addition, we
may be excluded from bidding on MoD contracts in the United Kingdom if the MoD
determines that our actions constituted grave misconduct and we are in
discussions with the MoD to avoid exclusion. For the years ended December 31,
2008, and 2007 we had revenue of approximately $234 million and $224 million,
respectively, from our government contracts work with the MoD. Although we
currently believe that we will successfully conclude these discussions with no
suspension, debarment or exclusion actions taken against us, there can be no
assurance that such agreements will be reached. We expect to conclude
these discussions in the first half of 2009. Suspension or debarment from the
government contracts business would have a material adverse effect on our
business, results of operations, and cash flow.
The
settlement and plea 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 and the
appointment of a monitor at our cost as part of the disposition of the
investigations have resulted in a more limited use of agents on large-scale
international projects than in the past and may put us at a competitive
disadvantage in pursuing such projects. Continuing negative publicity arising
out of the settlement and plea could also result in our inability to bid
successfully for governmental contracts and adversely affect our prospects in
the commercial marketplace.
In
September 2008, A. Jack Stanley, who formerly served as a consultant and
chairman of Kellogg Brown & Root, pled guilty to various violations of the
FCPA and wire and mail fraud statutes involving a bribery scheme and
causing a consultant to pay kickbacks to Mr. Stanley in connection with the
Bonny Island and other liquefied natural gas projects of Kellogg Brown
& Root. In a related action, the SEC charged Mr. Stanley with violating
various provisions of the FCPA. Mr. Stanley has consented to the
entry of a final judgment that permanently enjoins him from violating the
anti-bribery, record-keeping and internal control provisions of the FCPA.
Mr. Stanley also has agreed to cooperate with the ongoing
investigations. In June 2004, all relationships with
A. Jack Stanley were terminated by Halliburton and KBR.
The
investigations by foreign governmental authorities are continuing. Other foreign
governmental authorities could conclude that violations of applicable foreign
laws analogous to the FCPA have occurred with respect to the Bonny Island
project and other projects in or outside of Nigeria. In such circumstances, the
resolution or disposition of these matters, even after taking into account the
indemnity from Halliburton with respect to any liabilities for fines or other
monetary penalties or direct monetary damages, including disgorgement, that may
be assessed by certain foreign governments or governmental agencies against us
or our greater than 50%-owned subsidiaries could have a material adverse effect
on our business, prospects, results or operations, financial condition and cash
flow.
Under the
terms of the Master Separation Agreement, Halliburton has agreed to indemnify
us, and any of our greater than 50%-owned subsidiaries, for our share of fines
or other monetary penalties or direct monetary damages, including disgorgement,
as a result of claims made or assessed by a governmental authority of the United
States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a
settlement thereof relating to FCPA and related corruption allegations, which
could involve Halliburton and us through The M. W. Kellogg Company, M. W.
Kellogg Limited or, their or our joint ventures in projects both in and outside
of Nigeria, including the Bonny Island, Nigeria project. Halliburton’s indemnity
will not apply to any other losses, claims, liabilities or damages assessed
against us as a result of or relating to FCPA matters and related corruption
allegations or to any fines or other monetary penalties or direct monetary
damages, including disgorgement, assessed by governmental authorities in
jurisdictions other than the United States, the United Kingdom, France, Nigeria,
Switzerland or Algeria, or a settlement thereof, or assessed against entities
such as TSKJ, in which we do not have an interest greater than 50%.
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.
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. In connection with KBR LLC’s agreeing to enter into the
plea agreement described above, the DOJ has agreed not to pursue any further
investigation or penalties relating to the coordinated bidding
allegations.
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 recorded losses on the project of
$19 million in 2006 and $8 million in 2005. No losses were recorded on the
project in 2008 and 2007. 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. We funded approximately $3 million
in cash shortfalls during 2007.
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. In November 2007, we executed a settlement agreement with the project
owner to settle all outstanding project issues except for the bolts arbitration
discussed below. The agreement resulted in the project owner assuming
substantially all remaining work on the project and the release of us from any
further warranty obligations. The settlement agreement did not have a material
impact to our results of operations or financial position.
At
Petrobras’ direction, we 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 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. The
arbitration is being conducted in New York under the guidelines of the United
Nations Commission on International Trade Law (“UNCITRAL”). We do not believe
that it is probable that we have incurred a liability in connection with the
claim in the bolt arbitration with Petrobras and therefore, no amounts have been
accrued. We disagree with Petrobras’ claim since the bolts met the design
specification provided by Petrobras. Although we believe Petrobras is
responsible for any maintenance and replacement of the bolts, it is possible
that the arbitration panel could find against us on this issue. In addition,
Petrobras has not provided any evidentiary support or analysis for the amounts
claimed as damages. A preliminary hearing on legal and factual issues relating
to liability with the arbitration panel was held in April 2008. The final
arbitration hearings have not yet been scheduled. Therefore, at this time, we
cannot conclude that the likelihood that a loss has been incurred is remote. Due
to the indemnity from Halliburton, we believe any outcome of this matter will
not have a material adverse impact to our operating results or financial
position. KBR has incurred legal fees and related expenses of $2 million, $4
million and $1 million for the years ended December 31, 2008, 2007 and 2006,
respectively, related to this matter.
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.
Foreign
tax laws
We
conduct operations in many tax jurisdictions throughout the world. Tax laws in
certain of theses jurisdictions are not as mature as those found in highly
developed economies. As a consequence, although we believe we are in
compliance with such laws, interpretations of these laws could be challenged by
the foreign tax authorities. In many of these jurisdictions,
non-income based taxes such as property taxes, sales and use taxes, and
value-added taxes are assessed on the our operations in that particular
location. While we strive to ensure compliance with these various
non-income based tax filing requirements, there have been instances where
potential non-compliance exposures have been identified. In
accordance with accounting principles generally accepted in the United States of
America, we make a provision for these exposures when it is both probable that a
liability has been incurred and the amount of the exposure can be easily
estimated. To date, such provisions have been immaterial, and we
believe that, as of December 31, 2008, we adequately provided for such
contingencies. However, it is possible that the our results of
operations, cash flows, and financial position could adversely impacted if one
or more non-compliance tax exposures are asserted by any of the jurisdictions
where we conduct our operations.
On
October 1, 2007, Mexico enacted a new tax law. The new tax law introduces a flat
tax, which replaces Mexico’s asset tax and requires Mexican taxpayers to pay the
greater of its flat tax or regular corporation income tax liability. Currently,
we do not believe that the expected arbitration awards will be subject to the
flat tax. However, in the event the flat tax is later determined to be
applicable to the arbitration awards, we believe that the flat tax should not
have a material impact on our financial statements after considering the flat
tax will be a creditable tax for U.S foreign tax credit purposes. The new tax
law in Mexico will not have an impact on our financial position, results of
operations or cash flows.
Environmental
We are
subject to numerous environmental, legal and regulatory requirements related to
our operations worldwide. In the United States, these laws and regulations
include, among others:
|
•
|
the
Comprehensive Environmental Response, Compensation and Liability
Act;
|
|
•
|
the
Resources Conservation and Recovery
Act;
|
|
•
|
the
Federal Water Pollution Control Act;
and
|
|
•
|
the
Toxic Substances Control Act.
|
In
addition to the federal laws and regulations, states and other countries where
we do business often have numerous environmental, legal and regulatory
requirements by which we must abide. We evaluate and address the environmental
impact of our operations by assessing and remediating contaminated properties in
order to avoid future liabilities and by complying with environmental, legal and
regulatory requirements. On occasion, we are involved in specific environmental
litigation and claims, including the remediation of properties we own or have
operated as well as efforts to meet or correct compliance-related matters. We
make estimates of the amount of costs associated with known environmental
contamination that we will be required to remediate and record accruals to
recognize those estimated liabilities. Our estimates are based on the best
available information and are updated whenever new information becomes known.
For certain locations, including our property at Clinton Drive, we have not
completed our analysis of the site conditions and until further information is
available, we are only able to estimate a possible range of remediation costs.
This range of costs could change depending on our ongoing site analysis and the
timing and techniques used to implement remediation activities. We do not expect
costs related to environmental matters will have a material adverse effect on
our consolidated financial position or our results of operations. At December
31, 2008 our accrual for the estimated assessment and remediation costs
associated with all environmental matters was approximately $8 million, which
represents the low end of the range of possible costs that could be as much as
$15 million.
Other
commitments
We had
commitments to provide funds to our privately financed projects of $64 million
as of December 31, 2008, and $113 million as of December 31, 2007. Our
commitments to fund our privately financed projects are supported by letters of
credit as described above. These commitments arose primarily during the start-up
of these entities or due to losses incurred by them. At December 31, 2008,
approximately $16 million of the $64 million commitments are
current.
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 $31 million and $28 million at December 31, 2008 and December 31, 2007,
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. Total rent expense was $203 million, $158 million and
$178 million in 2008, 2007 and 2006, respectively.
Future
total rentals on noncancelable operating leases are as follows: $52 million in
2009; $47 million in 2010; $42 million in 2011; $38 million in 2012; $32 million
in 2013 and $101 million thereafter.
Note
12. Income Taxes
The
components of the provision for income taxes on continuing operations
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
income taxes:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
41 |
|
|
$ |
(101 |
) |
|
$ |
(56 |
) |
Foreign
|
|
|
(165 |
) |
|
|
(58 |
) |
|
|
(54 |
) |
State
|
|
|
— |
|
|
|
(6 |
) |
|
|
(2 |
) |
Total
current
|
|
|
(124 |
) |
|
|
(165 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(107 |
) |
|
|
30 |
|
|
|
27 |
|
Foreign
|
|
|
13 |
|
|
|
(6 |
) |
|
|
(8 |
) |
State
|
|
|
6 |
|
|
|
3 |
|
|
|
(1 |
) |
Total
deferred
|
|
|
(88 |
) |
|
|
27 |
|
|
|
18 |
|
Provision
for income taxes
|
|
$ |
(212 |
) |
|
$ |
(138 |
) |
|
$ |
(94 |
) |
Prior to
the separation from Halliburton, income tax expense for KBR, Inc. was calculated
on a pro rata basis. Under this method, income tax expense was determined based
on KBR, Inc. operations and their contributions to income tax expense of the
Halliburton consolidated group. For the period post separation from Halliburton,
income tax expense is calculated on a stand alone basis. Payments made to or
received from Halliburton to settle tax assets and liabilities are classified as
contributions to capital in the accompanying financial statements. KBR is
subject to a tax sharing agreement primarily covering periods prior to the
separation from Halliburton. The tax sharing agreement provides, in part, that
KBR will be responsible for any audit settlements related to its business
activity for periods prior to its separation from Halliburton. As a result, KBR
recorded a charge to equity of $17 million in 2007 and $1 million in 2006.
As of December 31, 2008, KBR has recorded a $54 million payable to Halliburton
for tax related items under the tax sharing agreement.
As noted
above, we have calculated income tax expense based on a pro rata method up
through the date of separation. A second method which is available for
determining tax expense is the separate return method. Under the separate return
method, KBR income tax expense is calculated as if we had filed tax returns for
its own operations, excluding other Halliburton operations. If we had calculated
income tax expense from continuing operations using the separate return method
as of January 1, 2006, the income tax expense from continuing operations
recorded in 2006 would have been $73 million resulting in an effective tax rate
of 57% under the separate return method. The income tax expense from
discontinued operations recorded in 2006 would have been $80 million resulting
in an effective tax rate of 35% under the separate return method.
The
United States and foreign components of income from continuing operations before
income taxes and minority interest were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
(49 |
) |
|
$ |
(42 |
) |
|
$ |
59 |
|
Foreign
|
|
|
618 |
|
|
|
384 |
|
|
|
69 |
|
Total
|
|
$ |
569 |
|
|
$ |
342 |
|
|
$ |
128 |
|
The
reconciliations between the actual provision for income taxes on continuing
operations and that computed by applying the United States statutory rate to
income from continuing operations before income taxes and minority interest are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States Statutory Rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Rate
differentials on foreign earnings
|
|
|
1.6 |
|
|
|
7.3 |
|
|
|
(15.0 |
) |
Non-deductible
loss
|
|
|
1.6 |
|
|
|
— |
|
|
|
15.8 |
|
State
income taxes
|
|
|
0.1 |
|
|
|
1.0 |
|
|
|
1.0 |
|
Prior
year foreign taxes
|
|
|
2.1 |
|
|
|
(1.3 |
) |
|
|
16.2 |
|
Prior
year federal & state taxes
|
|
|
(3.3 |
) |
|
|
— |
|
|
|
13.8 |
|
Valuation
allowance
|
|
|
0.1 |
|
|
|
(2.3 |
) |
|
|
(1.8 |
) |
Foreign
tax credit displacement
|
|
|
— |
|
|
|
— |
|
|
|
8.3 |
|
Other
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
(0.1 |
) |
Total
effective tax rate on continuing operations
|
|
|
37.3 |
% |
|
|
40.2 |
% |
|
|
73.2 |
% |
We
generally do not provide U.S. income taxes on the undistributed earnings of
non-United States subsidiaries except for certain entities in Mexico that are
parties to the PEMEX arbitration and certain joint ventures in Yemen, Egypt,
Nigeria and Indonesia. Taxes are provided as necessary with respect
to earnings that are not permanently reinvested. For all other non-U.S.
subsidiaries, no U.S. taxes are provided because such earnings are intended to
be reinvested indefinitely to finance foreign activities.
We
conduct operations in many tax jurisdictions throughout the world. Tax laws in
certain of theses jurisdictions are not as mature as those found in highly
developed economies. As a consequence, although we believe we are in
compliance with such laws, interpretations of these laws could be challenged by
the foreign tax authorities. We believe we have adequately provided for all
known challenges that are more likely than not to be sustained by such
taxing authorities.
The
primary components of our deferred tax assets and liabilities and the related
valuation allowances are as follows:
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax assets:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
4 |
|
|
$ |
14 |
|
Employee
compensation and benefits
|
|
|
178 |
|
|
|
76 |
|
Deferred
foreign tax credit
|
|
|
24 |
|
|
|
— |
|
Construction
contract accounting
|
|
|
67 |
|
|
|
118 |
|
Loss
carryforwards
|
|
|
35 |
|
|
|
94 |
|
Insurance
accruals
|
|
|
21 |
|
|
|
18 |
|
Allowance
for bad debt
|
|
|
7 |
|
|
|
7 |
|
Accrued
liabilities
|
|
|
8 |
|
|
|
17 |
|
Total
|
|
$ |
344 |
|
|
$ |
344 |
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Construction
contract accounting
|
|
$ |
(54 |
) |
|
$ |
(68 |
) |
Intangibles
|
|
|
(29 |
) |
|
|
— |
|
Depreciation
and amortization
|
|
|
(10 |
) |
|
|
— |
|
All
other
|
|
|
(12 |
) |
|
|
(1 |
) |
Total
|
|
$ |
(105 |
) |
|
$ |
(69 |
) |
|
|
|
|
|
|
|
|
|
Valuation
Allowances:
|
|
|
|
|
|
|
|
|
Foreign
tax credit carryforward
|
|
$ |
— |
|
|
$ |
— |
|
Loss
carryforwards
|
|
|
(19 |
) |
|
|
(33 |
) |
Total
|
|
$ |
(19 |
) |
|
$ |
(33 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred income tax asset
|
|
$ |
220 |
|
|
$ |
242 |
|
At
December 31, 2008, we had $102 million of net operating loss carryforwards that
expire from 2009 through 2018 and loss carryforwards of $31 million with
indefinite expiration dates.
For the
year ended December 31, 2008, our valuation allowance was reduced from $33
million to $19 million primarily as a result of utilization of foreign
branch net operating losses for which a valuation allowance had been previously
established in prior years.
Foreign
tax credit carryforwards recorded in the financial statements reflect the
credits actually generated by KBR operations, reduced for the amount considered
utilized pursuant to the tax sharing agreement with
Halliburton. Upon KBR’s separation from the Halliburton
U.S. consolidated group in 2007, the amount of foreign tax credit carryforward
allocated to KBR was determined by operation of U.S. tax law. The amount of such
carryforward allocated to KBR is not expected to be significant. Prior to
December 31, 2007, we had established a valuation allowance for certain foreign
tax credit carryforwards on the basis that we believed these assets would not be
utilized in the statutory carryover period. These foreign tax credit carryovers
of $67 million have been derecognized as we do not expect them to be available
to KBR. Consequently, the related valuation allowance of $67 million
was reversed in 2007.
KBR is
the parent of a group of our domestic companies which are in the U.S.
consolidated federal income tax return of Halliburton through April 5, 2007, the
date of our separation from Halliburton. We also file income tax returns in
various states and foreign jurisdictions. With few exceptions, we are no longer
subject to examination by tax authorities for U.S. federal or state and local
income tax for years before 2003, or for non-U.S. income tax for years before
1998.
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. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
In
millions
|
|
|
|
Balance
at January 1, 2008
|
|
$ |
63 |
|
Additions
based on tax positions related to the current year
|
|
|
— |
|
Additions
based on tax positions related to prior years
|
|
|
5 |
|
Reductions
for tax positions related to the current year
|
|
|
— |
|
Reductions
for tax positions of prior years
|
|
|
(7 |
) |
Settlements
|
|
|
(39 |
) |
Reductions
related to a lapse of statute of limitations
|
|
|
— |
|
Balance
at December 31, 2008
|
|
$ |
22 |
|
As of
December 31, 2008, KBR estimates that $22 million in unrecognized tax benefits,
if recognized, would affect the effective tax rate. We do not anticipate any
significant changes to the unrecognized tax benefits within the next twelve
months.
KBR
recognizes interest and penalties related to unrecognized tax benefits within
the provision for income taxes in our consolidated statement of income. As of
December 31, 2008, we had accrued approximately $13 million in interest and
penalties. During the year ended December 31, 2008, we recognized approximately
$1 million in net interest and penalties charges related to unrecognized tax
benefits.
During
2008, we reduced our liability in the amount of $39 million for an unrecognized
tax benefit related to deductions taken on a Halliburton consolidated tax return
for prior years as a result of the conclusion of and IRS audit in 2008. As a
result, we reclassified the liability for this unrecognized tax benefit to “Due
to former parent” on our consolidated balance sheets, as the deduction was taken
in Halliburton’s consolidated tax return for periods governed by the tax sharing
agreement.
As of
December 31, 2008, the unrecognized tax benefits and accrued interest and
penalties were not expected to be settled within one year and therefore are
classified in noncurrent income tax payable. We do not believe our
current tax positions that have resulted in unrecognized tax benefits will
significantly increase or decrease within one year. As of December
31, 2008, no material changes have occurred in our estimates or expected events
related to an Algeria tax assessment for the years 2003 through
2005. The audit exposure relates to the In Salah and In Amenas gas
monetization projects, for which KBR has a 50% joint venture
interest. The current audit assessment is based, in large part, on
what we believe is an erroneous interpretation of the tax law. We
will appeal the tax assessment, and we believe, the final amount determined to
be owed will be substantially less than the amount that has been
assessed. Nevertheless, there is no certainty that KBR will sustain
its position or appeal. If the government prevails, there would be a
substantial charge to the joint venture. KBR has recorded the amount
that it believes the joint venture will have to pay to settle this tax
audit. We will continue to evaluate the tax situation in Algeria, and
if warranted, adjust the reserve recorded accordingly.
Note
13. Shareholders’ Equity
The
following tables summarize our shareholders’ equity activity:
|
|
|
|
|
|
|
|
Paid-in Capital in Excess of
par
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income
(Loss)
|
|
Balance
at December 31, 2005
|
|
$ |
— |
|
|
$ |
1,384 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
from parent and other activities
|
|
|
— |
|
|
|
26 |
|
|
|
(11 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Transfer
to common stock and paid-in capital in excess of par
|
|
|
— |
|
|
|
(1,551 |
) |
|
|
1,551 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Initial
public offering
|
|
|
— |
|
|
|
— |
|
|
|
511 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Intercompany
stock-based compensation
|
|
|
— |
|
|
|
— |
|
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adoption
of FSP No. AUG AIR-1
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Intercompany
settlement of taxes
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
141 |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
|
|
— |
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
Pension
liability adjustment, net of tax of $(24)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(57 |
) |
Other
comprehensive gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on derivatives
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
Reclassification
adjustments to net income (loss)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Income
tax benefit (provision) on derivatives
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
— |
|
|
|
141 |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
|
|
(11 |
) |
Adoption
of SFAS No. 158, net of tax of $(107)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(152 |
) |
Balance
at December 31, 2006
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,058 |
|
|
|
— |
|
|
$ |
27 |
|
|
$ |
(291 |
) |
Adoption
of FIN No. 48
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Intercompany
stock-based compensation
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Intercompany
settlement of taxes
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common
stock issued upon exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Tax
benefit related to stock-based plans
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
302 |
|
|
|
— |
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Pension
liability adjustment, net of tax of $116
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
176 |
|
Other
comprehensive gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized
gains (losses) on derivatives
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Reclassification
adjustments to net income (loss)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
Income
tax benefit (provision) on derivatives
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
302 |
|
|
|
169 |
|
Balance
at December 31, 2007
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,070 |
|
|
|
— |
|
|
$ |
319 |
|
|
$ |
(122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS
158 remeasurement date
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common
stock issued upon exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Tax
benefit related to stock-based plans
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Dividends
declared to shareholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41 |
) |
|
|
— |
|
Repurchases
of common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(196 |
) |
|
|
— |
|
|
|
— |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
319 |
|
|
|
— |
|
Other
comprehensive income, net of tax (provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(107 |
) |
Pension
liability adjustment, net of tax of $(85)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(209 |
) |
Other
comprehensive gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on derivatives
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Reclassification
adjustments to net income (loss)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Income
tax benefit (provision) on derivatives
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
319 |
|
|
|
(317 |
) |
Balance
at December 31, 2008
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,091 |
|
|
$ |
(196 |
) |
|
$ |
596 |
|
|
$ |
(439 |
) |
Accumulated
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustments
|
|
$ |
(69 |
) |
|
$ |
38 |
|
|
$ |
43 |
|
Pension
liability adjustments
|
|
|
(368 |
) |
|
|
(159 |
) |
|
|
(335 |
) |
Unrealized
gains (losses) on derivatives
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
accumulated other comprehensive income
|
|
$ |
(439 |
) |
|
$ |
(122 |
) |
|
$ |
(291 |
) |
Comprehensive
income for the year ended December 31, 2008 includes the amortization of
actuarial loss of approximately $8 million and the amortization of prior service
cost of $1 million.
Comprehensive
income for the year ended December 31, 2007 includes the elimination of net
cumulative translation and pension liability adjustments of $(22) million and
$90 million, respectively, related to the disposition of our 51% interest in
DML. See Note 22 for further discussion.
Shares
of common stock
Millions of shares
|
|
Shares
|
|
|
Amount
|
|
Balance
at December 31, 2006
|
|
|
168 |
|
|
$ |
— |
|
Common
stock issued
|
|
|
2 |
|
|
|
— |
|
Balance
at December 31, 2007
|
|
|
170 |
|
|
|
— |
|
Common
stock issued
|
|
|
— |
|
|
|
— |
|
Balance
at December 31, 2008
|
|
|
170 |
|
|
$ |
— |
|
Shares
of treasury stock
Millions of shares
|
|
Shares
|
|
|
Amount
|
|
Balance
at December 31, 2007
|
|
|
— |
|
|
$ |
— |
|
Common
stock repurchased
|
|
|
8 |
|
|
|
196 |
|
Balance
at December 31, 2008
|
|
|
8 |
|
|
$ |
196 |
|
Dividends
In 2008,
we declared dividends totaling $41 million of which $16 million remained unpaid
as of December 31, 2008. Dividends declared per share in our
consolidated statements of income for the year ended December 31, 2008
represents dividends declared and payable to shareholders of record in our 2008
fiscal year and excludes dividends declared of $0.05 per share declared in
December 2008 for shareholders of record as of March 13, 2009.
Note
14. Stock Incentive Plans
Stock
Plans
In 2008,
2007 and 2006 stock-based compensation awards were granted to employees under
KBR stock-based compensation plans. In addition, in 2005, KBR employees
participated in Halliburton compensation plans and received grants under these
plans.
KBR
2006 Stock and Incentive Plan
In
November 2006, KBR established the KBR 2006 Stock and Incentive Plan (KBR 2006
Plan) which provides for the grant of any or all of the following types of
stock-based awards:
|
•
|
stock
options, including incentive stock options and nonqualified stock
options;
|
|
•
|
stock
appreciation rights, in tandem with stock options or
freestanding;
|
|
•
|
performance
awards; and
|
|
•
|
stock
value equivalent awards.
|
Under the
terms of the KBR 2006 Plan, 10 million shares of common stock have been reserved
for issuance to employees and non-employee directors. The plan specifies that no
more than 3.5 million shares can be awarded as restricted stock or restricted
stock units or pursuant to performance awards. At December 31, 2008,
approximately 7.3 million shares were available for future grants under the KBR
2006 Plan, of which approximately 1.6 million shares remained available for
restricted stock awards or restricted stock unit awards.
KBR
Transitional Stock Adjustment Plan
The
Transitional Stock Adjustment Plan provides for stock options to purchase the
common stock of KBR and restricted shares of the Company’s common stock to
holders of outstanding options and restricted shares under the Halliburton 1993
Stock and Incentive Plan. The plan was adopted solely for the purpose to convert
Halliburton equity awards to KBR equity awards. No new awards can be made under
the plan. The converted equity awards are subject to substantially the same
terms as they were under the Halliburton 1993 Stock and Incentive Plan prior to
conversion.
KBR
Stock Options
Under
KBR’s 2006 Plan, effective as of the closing date of the KBR initial public
offering, stock options are granted with an exercise price not less than the
fair market value of the common stock on the date of the grant and a term no
greater than 10 years. The term and vesting periods are established at the
discretion of the Compensation Committee at the time of each
grant. We amortize the fair value of the stock options over the
vesting period on a straight-line basis.
The
following table presents stock options granted, exercised, forfeited and expired
under KBR stock-based compensation plans.
|
|
|
|
|
Weighted Average Exercise Price per
Share
|
|
|
Weighted Average Remaining Contractual Term
(years)
|
|
|
Aggregate Intrinsic
Value (in
millions)
|
|
Outstanding
at December 31, 2007
|
|
|
2,123,294 |
|
|
$ |
14.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(280,627 |
) |
|
|
12.21 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(96,465 |
) |
|
|
21.26 |
|
|
|
|
|
|
|
Expired
|
|
|
(39,825 |
) |
|
|
11.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
1,706,377 |
|
|
$ |
14.54 |
|
|
|
5.38 |
|
|
$ |
5.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2008
|
|
|
1,467,472 |
|
|
$ |
13.36 |
|
|
|
4.97 |
|
|
$ |
5.79 |
|
The total
intrinsic value of options exercised in 2008 was $4 million. As of December 31,
2008, there was $2 million of unrecognized compensation cost, net of estimated
forfeitures, related to non-vested KBR stock options, expected to be recognized
over a weighted average period of approximately 0.9 years.
KBR
Restricted stock
Restricted
shares issued under the KBR’s 2006 Plan are restricted as to sale or
disposition. These restrictions lapse periodically over an extended period of
time not exceeding 10 years. Restrictions may also lapse for early retirement
and other conditions in accordance with our established policies. Upon
termination of employment, shares on which restrictions have not lapsed must be
returned to us, resulting in restricted stock forfeitures. The fair market value
of the stock on the date of grant is amortized and ratably charged to income
over the period during which the restrictions lapse on a straight-line basis.
For awards with performance conditions, an evaluation is made each quarter as to
the likelihood of the performance criteria being met. Stock-based compensation
is then adjusted to reflect the number of shares expected to vest and the
cumulative vesting period met to date.
The
following table presents the restricted stock awards and restricted stock units
granted, vested, and forfeited during 2008 under KBR’s 2006 Stock and Incentive
Plan.
|
|
|
|
|
Weighted Average Grant-Date Fair Value per
Share
|
|
Nonvested
shares at December 31, 2007
|
|
|
1,996,217 |
|
|
$ |
19.75 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
706,976 |
|
|
|
30.54 |
|
Vested
|
|
|
(573,437 |
) |
|
|
18.00 |
|
Forfeited
|
|
|
(272,257 |
) |
|
|
20.75 |
|
|
|
|
|
|
|
|
|
|
Nonvested
shares at December 31, 2008
|
|
|
1,857,499 |
|
|
$ |
24.25 |
|
_________________________
The
weighted average grant-date fair value of restricted KBR shares granted to
employees during 2008 and 2007 and was $30.54 and $29.63, respectively. As of
December 31, 2008, there was $34 million of unrecognized compensation cost, net
of estimated forfeitures, related to KBR’s nonvested restricted stock and
restricted stock units, which is expected to be recognized over a weighted
average period of 3.6 years. As of December 31, 2007, there was $31 million of
unrecognized compensation cost, net of estimated forfeitures, related to KBR’s
nonvested restricted stock and restricted stock units, which is expected to be
recognized over a weighted average period of 4.0 years. The total fair value of
shares vested was $14 million in 2008 and $12 million in 2007 based on the
weighted-average fair value on the vesting date. The total fair value of shares
vested was $10 million in 2008 and $6 million in 2007 based on the
weighted-average fair value on the date of grant.
KBR
Performance Award Units
Under
KBR’s 2006 Plan, in 2008 we granted 24,325,249 performance based award units
(“Performance Awards”) with a performance period from March 1, 2008 to December
31, 2010. In 2007 we granted 24,549,000 Performance Awards with a performance
period from July 1, 2007 to December 31, 2009. Performance Awards vested in 2008
were 15,919,445 and 4,978,737 in 2007. Performance Awards forfeited in 2008 were
4,048,449 and 837,407 in 2007. At December 31, 2008 the outstanding balance for
performance based award units was 23,090,212. No Performance Awards will vest
until such earned Performance Awards, if any, are paid, subject to approval of
the performance results by the certification committee. Refer to Note 2 for
additional information regarding the performance award units.
Halliburton
Awards
Halliburton
has stock-based employee compensation plans in which, prior to our separation
from Halliburton, on April 5,
2007, certain key employees of KBR participated. In accordance with
our Transitional Stock Adjustment Plan and upon our complete separation from
Halliburton, stock options and restricted stock awards granted to KBR employees
under Halliburton’s 1993 Stock and Incentive Plan were converted to stock
options and restricted stock awards covering KBR common stock. Refer to Note 2
for additional information regarding the conversion of these
awards.
Halliburton
Stock options
All stock
options under Halliburton’s 1993 Stock and Incentive Plan were granted at the
fair market value of the common stock at the grant date. Employee stock options
vest ratably over a three- or four-year period and generally expire 10 years
from the grant date. There were no Halliburton stock options granted to KBR
employees in 2008, 2007 or 2006. The total intrinsic value of options exercised
by KBR, Inc.’s employees in 2006 was $31 million.
Halliburton
Restricted stock
Restricted
shares issued under Halliburton’s 1993 Plan are restricted as to sale or
disposition. These restrictions lapse periodically over an extended period of
time not exceeding 10 years. Restrictions may also lapse for early retirement
and other conditions in accordance with Halliburton’s established policies. Upon
termination of employment, shares on which restrictions have not lapsed must be
returned to Halliburton, resulting in restricted stock forfeitures. The fair
market value of the stock on the date of grant is amortized and ratably charged
to income over the period during which the restrictions lapse.
The
weighted average grant-date fair value of restricted shares granted to our
employees during 2006 and 2005 was $33.77 and $22.14, respectively. There were
no Halliburton restricted shares granted to KBR employees in 2007. The total
fair value of shares vested during 2006 and 2005 was $12 million and $16
million, respectively.
Halliburton
2002 Employee Stock Purchase Plan
Under the
ESPP, eligible employees may have up to 10% of their earnings withheld, subject
to some limitations, to be used to purchase shares of Halliburton’s common
stock. Unless Halliburton’s Board of Directors shall determine otherwise, each
six-month offering period commences on January 1 and July 1 of each year. The
price at which Halliburton’s common stock may be purchased under the ESPP is
equal to 85% of the lower of the fair market value of Halliburton’s common stock
on the commencement date or last trading day of each offering period. Under this
plan, 24 million shares of Halliburton’s common stock have been reserved for
issuance, which may be authorized but unissued shares or treasury shares. As of
December 31, 2006, 3.7 million shares have been sold to our employees through
the ESPP.
Effective
upon our complete separation from Halliburton, the Halliburton ESPP plan was
terminated for KBR employees. No shares were purchased by KBR employees in 2007
under the Halliburton ESPP plan. Halliburton shares previously purchased under
the ESPP plan remained Halliburton common stock and did not convert to KBR
common stock at the date of separation.
Note
15. Financial Instruments and Risk Management
Foreign exchange
risk. Techniques in managing foreign exchange risk include, but are not
limited to, foreign currency borrowing and investing and the use of currency
derivative instruments. We selectively manage significant exposures to potential
foreign exchange losses considering current market conditions, future operating
activities and the associated cost in relation to the perceived risk of loss.
The purpose of our foreign currency risk management activities is to protect us
from the risk that the eventual dollar cash flow resulting from the sale and
purchase of products and services in foreign currencies will be adversely
affected by changes in exchange rates.
We manage
our currency exposure through the use of currency derivative instruments as it
relates to the major currencies, which are generally the currencies of the
countries for which we do the majority of our international business. These
contracts generally have an expiration date of two years or less. Forward
exchange contracts, which are commitments to buy or sell a specified amount of a
foreign currency at a specified price and time, are generally used to manage
identifiable foreign currency commitments. Forward exchange contracts and
foreign exchange option contracts, which convey the right, but not the
obligation, to sell or buy a specified amount of foreign currency at a specified
price, are generally used to manage exposures related to assets and liabilities
denominated in a foreign currency. None of the forward or option contracts are
exchange traded. While derivative instruments are subject to fluctuations in
value, the fluctuations are generally offset by the value of the underlying
exposures being managed. The use of some contracts may limit our ability to
benefit from favorable fluctuations in foreign exchange rates.
Foreign
currency contracts are not utilized to manage exposures in some currencies due
primarily to the lack of available markets or cost considerations (non-traded
currencies). We attempt to manage our working capital position to minimize
foreign currency commitments in non-traded currencies and recognize that pricing
for the services and products offered in these countries should cover the cost
of exchange rate devaluations. We have historically incurred transaction losses
in non-traded currencies.
Assets,
liabilities and forecasted cash flow denominated in foreign currencies.
We utilize the derivative instruments described above to manage the foreign
currency exposures related to specific assets and liabilities, that are
denominated in foreign currencies; however, we have not elected to account for
these instruments as hedges for accounting purposes. Additionally, we utilize
the derivative instruments described above to manage forecasted cash flow
denominated in foreign currencies generally related to long-term engineering and
construction projects. Since 2003, we have designated these contracts related to
engineering and construction projects as cash flow hedges. The ineffective
portion of these hedges is included in operating income in the accompanying
consolidated statements of income and was not material in 2006. During 2008 and
2007 no hedge ineffectiveness was recognized. As of December 31, 2008, we had
unrealized gains on cash flow hedges of $1 million and at December 31, 2007, we
had less than $1 million in unrealized net losses on these cash flow hedges.
These unrealized gains and losses include amounts attributable to cash flow
hedges placed by our consolidated and unconsolidated subsidiaries and are
included in other comprehensive income in the accompanying consolidated balance
sheets. Changes in the timing or amount of the future cash flow being hedged
could result in hedges becoming ineffective and, as a result, the amount of
unrealized gain or loss associated with that hedge would be reclassified from
other comprehensive income into earnings. At December 31, 2008, the maximum
length of time over which we are hedging our exposure to the variability in
future cash flow associated with foreign currency forecasted transactions is 13
months. Estimated amounts to be recognized in earnings in 2009 are
not significant. The fair value liability of these contracts was approximately
$1 million as of December 31, 2008. The fair value asset of these contracts was
approximately $1 million at December 31, 2007.
Notional amounts
and fair market values. The notional amounts of open forward contracts
and options held by our consolidated subsidiaries was $274 million, $332 million
and $134 million at December 31, 2008, 2007 and 2006, respectively. The notional
amounts of our foreign exchange contracts do not generally represent amounts
exchanged by the parties, and thus, are not a measure of our exposure or of the
cash requirements relating to these contracts. The amounts exchanged are
calculated by reference to the notional amounts and by other terms of the
derivatives, such as exchange rates.
Credit
risk. Financial instruments that potentially subject us to concentrations
of credit risk are primarily cash equivalents, investments and trade
receivables. It is our practice to place our cash equivalents and investments in
high-quality securities with various investment institutions. We derive the
majority of our revenues from engineering and construction services to the
energy industry and services provided to the United States government. There are
concentrations of receivables in the United States and the United Kingdom. We
maintain an allowance for losses based upon the expected collectibility of all
trade accounts receivable.
There are
no significant concentrations of credit risk with any individual counterparty
related to our derivative contracts. We select counterparties based on their
profitability, balance sheet and a capacity for timely payment of financial
commitments which is unlikely to be adversely affected by foreseeable
events.
Interest rate
risk. Certain of our unconsolidated subsidiaries and joint-ventures are
exposed to interest rate risk through their variable rate borrowings. We manage
our exposure to this variable-rate debt with interest rate swaps that are
jointly owned through our investments. We had unrealized net losses on the
interest rate cash flow hedges held by our unconsolidated subsidiaries and
joint-ventures of approximately $2 million and less than $1 million as of
December 31, 2008 and 2007, respectively.
Fair market value
of financial instruments. The carrying amount of variable rate long-term
debt approximates fair market value because these instruments reflect market
changes to interest rates. The carrying amount of short-term financial
instruments, cash and equivalents, receivables, and accounts payable, as
reflected in the consolidated balance sheets, approximates fair market value due
to the short maturities of these instruments. The currency derivative
instruments are carried on the balance sheet at fair value and are based upon
third party quotes.
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 interim
periods and fiscal years beginning after November 15, 2007. In February 2008,
the FASB issued FASB Staff Position No. 157-2 that provides for a one-year
deferral for the implementation of SFAS 157 for non-financial assets and
liabilities. SFAS 157 does not require any new fair value measurements, but
rather, it provides enhanced guidance to other pronouncements that require or
permit assets or liabilities to be measured at fair value.
With its
disclosure requirements, SFAS 157 establishes a three-tier value hierarchy,
categorizing the inputs used to measure fair value. The hierarchy can be
described as follows: (Level 1) observable inputs such as quoted prices in
active markets; (Level 2) inputs other than the quoted prices in active markets
that are observable either directly or indirectly; and (Level 3) unobservable
inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions.
The
financial assets and liabilities measured at fair value on a recurring basis are
included below:
|
|
Fair Value Measurements at Reporting Date
Using
|
|
Millions of dollars
|
|
December 31, 2008
|
|
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level
2)
|
|
|
Significant Unobservable Inputs (Level
3)
|
|
Marketable
securities
|
|
$ |
18 |
|
|
$ |
18 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
$ |
6 |
|
|
$ |
— |
|
|
$ |
6 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$ |
7 |
|
|
$ |
— |
|
|
$ |
7 |
|
|
$ |
— |
|
We manage
our currency exposures through the use of foreign currency derivative
instruments denominated in our major currencies, which are generally the
currencies of the countries for which we do the majority of our international
business. We utilize derivative instruments to manage the foreign currency
exposures related to specific assets and liabilities that are denominated in
foreign currencies, and to manage forecasted cash flows denominated in foreign
currencies generally related to long-term engineering and construction projects.
The purpose of our foreign currency risk management activities is to protect us
from the risk that the eventual dollar cash flow resulting from the sale and
purchase of products and services in foreign currencies will be adversely
affected by changes in exchange rates. The currency derivative instruments are
carried on the condensed consolidated balance sheet at fair value and are based
upon market observable inputs.
Note
16. Equity Method Investments and Variable Interest
Entities
We
conduct some of our operations through joint ventures which are in partnership,
corporate, undivided interest and other business forms and are principally
accounted for using the equity method of accounting.
The
following is a description of our significant unconsolidated subsidiaries that
are accounted for using the equity method of accounting:
|
•
|
TSKJ
Group is a joint venture consortium consisting of several private limited
liability companies registered in Madeira, Portugal. TSKJ Group entered
into various contracts to design and construct large-scale projects in
Nigeria. KBR has an approximate 25% interest in the TSKJ
Group.
|
|
•
|
TKJ
Group is a joint venture consortium consisting of several private limited
liability companies registered in Dubai, UAE. The TKJ Group was created
for the purpose of trading equipment and the performance of services
required for the realization, construction, and modification of
maintenance of oil, gas, chemical, or other installations in the Middle
East. KBR holds a 33.3% interest in the TKJ Group
companies.
|
|
•
|
MMM
is a joint venture formed under a Partners Agreement related to the Mexico
contract with PEMEX. The MMM joint venture was set up under Mexican
maritime law in order to hold navigation permits to operate in Mexican
waters. The scope of the business is to render services of maintenance,
repair and restoration of offshore oil and gas platforms and provisions of
quartering in the territorial waters of Mexico. KBR holds a 50%
interest in the MMM joint venture.
|
|
•
|
Aspire
Defence—Allenby & Connaught is a joint venture between us, Carillion
Plc. and a financial investor formed to contract with the U.K. Ministry of
Defence to upgrade and provide a range of services to the British Army’s
garrisons at Aldershot and around the Salisbury Plain in the United
Kingdom. We own a 45% interest in Aspire Defence. In addition, we own a
50% interest in each of the two joint ventures that provide the
construction and related support services to Aspire Defence. We account
for our investments in these entities using the equity method of
accounting.
|
Brown
& Root Condor Spa (“BRC”) is a joint venture in which we owned 49% interest.
During the third quarter of 2007, we sold our 49% interest and other rights in
BRC to Sonatrach for approximately $24 million resulting in a pre-tax gain of
approximately $18 million which is included in “Equity in earnings (losses) of
unconsolidated affiliates”. As of December 31, 2008, we have not collected the
remaining $18 million due from Sonatrach for the sale of our interest in BRC,
which is included in “Notes and accounts receivable.” In the fourth quarter of
2008, we filed for arbitration in an attempt to force collection and we will
take other actions, as deemed necessary, to collect the remaining
amounts.
Summarized
financial information for the underlying businesses of our significant equity
method investments are as follows:
Balance
Sheets
|
|
For the Year Ended December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
128 |
|
|
$ |
584 |
|
|
$ |
68 |
|
|
$ |
24 |
|
Noncurrent
assets
|
|
$ |
41 |
|
|
$ |
34 |
|
|
$ |
50 |
|
|
$ |
351 |
|
Total
assets
|
|
$ |
169 |
|
|
$ |
618 |
|
|
$ |
118 |
|
|
$ |
375 |
|
Current
liabilities
|
|
$ |
110 |
|
|
$ |
606 |
|
|
$ |
29 |
|
|
$ |
94 |
|
Noncurrent
liabilities
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
501 |
|
Total
liabilities
|
|
$ |
110 |
|
|
$ |
606 |
|
|
$ |
31 |
|
|
$ |
595 |
|
Statements
of Operations
|
|
For the Year Ended December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
35 |
|
|
$ |
573 |
|
|
$ |
248 |
|
|
$ |
70 |
|
Operating
income (loss)
|
|
$ |
14 |
|
|
$ |
(26 |
) |
|
$ |
39 |
|
|
$ |
(169 |
) |
Net
income (loss)
|
|
$ |
12 |
|
|
$ |
(11 |
) |
|
$ |
36 |
|
|
$ |
(207 |
) |
Balance
Sheets
|
|
For the Year Ended December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
255 |
|
|
$ |
666 |
|
|
$ |
78 |
|
|
$ |
33 |
|
Noncurrent
assets
|
|
$ |
30 |
|
|
$ |
110 |
|
|
$ |
45 |
|
|
$ |
640 |
|
Total
assets
|
|
$ |
285 |
|
|
$ |
776 |
|
|
$ |
123 |
|
|
$ |
673 |
|
Current
liabilities
|
|
$ |
177 |
|
|
$ |
723 |
|
|
$ |
35 |
|
|
$ |
69 |
|
Noncurrent
liabilities
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
618 |
|
Total
liabilities
|
|
$ |
177 |
|
|
$ |
723 |
|
|
$ |
35 |
|
|
$ |
687 |
|
Statements of
Operations
|
|
For the Year Ended December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
291 |
|
|
$ |
844 |
|
|
$ |
150 |
|
|
$ |
229 |
|
Operating
income (loss)
|
|
$ |
50 |
|
|
$ |
63 |
|
|
$ |
30 |
|
|
$ |
(4 |
) |
Net
income (loss)
|
|
$ |
60 |
|
|
$ |
87 |
|
|
$ |
32 |
|
|
$ |
(41 |
) |
Statements
of Operations
|
|
For the Year Ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
339 |
|
|
$ |
483 |
|
|
$ |
943 |
|
|
$ |
172 |
|
|
$ |
158 |
|
Operating
income (loss)
|
|
$ |
20 |
|
|
$ |
21 |
|
|
$ |
83 |
|
|
$ |
32 |
|
|
$ |
(13 |
) |
Net
income (loss)
|
|
$ |
32 |
|
|
$ |
14 |
|
|
$ |
96 |
|
|
$ |
24 |
|
|
$ |
(57 |
) |
Consolidated
summarized financial information for all other jointly owned operations that are
accounted for using the equity method of accounting is as follows:
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
2,814 |
|
|
$ |
4,025 |
|
Noncurrent
assets
|
|
|
2,866 |
|
|
|
3,041 |
|
Total
|
|
$ |
5,680 |
|
|
$ |
7,066 |
|
Current
liabilities
|
|
$ |
1,174 |
|
|
$ |
1,273 |
|
Noncurrent
liabilities
|
|
|
4,468 |
|
|
|
5,719 |
|
Member’s
equity
|
|
|
38 |
|
|
|
74 |
|
Total
|
|
$ |
5,680 |
|
|
$ |
7,066 |
|
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,716 |
|
|
$ |
1,912 |
|
|
$ |
1,898 |
|
Operating
income (loss)
|
|
$ |
221 |
|
|
$ |
204 |
|
|
$ |
1 |
|
Net
income (loss)
|
|
$ |
125 |
|
|
$ |
89 |
|
|
$ |
33 |
|
The FASB
issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51” (FIN 46), in January 2003. In December 2003,
the FASB issued FIN 46R, a revision which supersedes the original
interpretation. We adopted FIN 46R effective January 1, 2004. FIN 46R requires
the consolidation of entities in which a company absorbs a majority of another
entity’s expected losses, receives a majority of the other entity’s expected
residual returns, or both, as a result of ownership, contractual, or other
financial interests in the other entity. Previously, entities were generally
consolidated based upon a controlling financial interest through ownership of a
majority voting interest in the entity. In December 2008, the FASB
issued FSP FIN46 R-8, “Interest in Variable Interest Entities,” which requires
expanded information about an enterprise’s involvement with a variable interest
entity and such required disclosure is included below.
We assess
all newly created entities and those with which we become involved to determine
whether such entities are variable interest entities and, if so, whether or not
we are the primary beneficiary of such entities. Most of the entities
we assess are incorporated or unincorporated joint ventures formed by us and our
partner(s) for the purpose of executing a project or program for a customer,
such as a governmental agency or a commercial enterprise, and are generally
dissolved upon completion of the project or program. Many of our
long-term energy-related construction projects in our Upstream business unit are
executed through such joint ventures. Typically, these joint ventures
are funded by advances from the project owner, and accordingly, require little
or no equity investment by the joint venture partners but may require
subordinated financial support from the joint venture partners such as letters
of credit, performance and financial guarantees or obligations to fund losses
incurred by the joint venture. Other joint ventures, such as
privately financed initiatives in our Ventures business unit, generally require
the partners to invest equity and take an ownership position in an entity that
manages and operates an asset post construction.
We
primarily perform a qualitative assessment in determining whether we are the
primary beneficiary once an entity is identified as a variable interest
entity. A qualitative assessment begins with an understanding of
nature of the risks in the entity as well as the nature of the entity’s
activities including terms of the contracts entered into by the entity,
interests issued by the entity and how they were marketed, and the parties
involved in the design of the entity. We then identify all of the
variable interests held by parties involved with the variable interest entity
including, among other things, equity investments, subordinated debt financing,
letters of credit, and financial and performance guarantees, and in some cases
service contracts. Once we identify the variable interests, we gain
understanding of the variability in the risks and rewards created by the entity
and how such variability is absorbed by the identified variable
interests. Most of the variable interest entities with which we are
involved have relatively few variable interests and are primarily related to our
equity investment and other subordinated financial
support. Generally, a qualitative assessment is sufficient for us to
determine which party, if any, involved with the entity is the primary
beneficiary. In certain circumstances where there are complex
arrangements involving numerous variable interests such as senior and
subordinated project financing, equity interests, or service contracts, we
perform a quantitative assessment using expected cash flows of the entity to
determine the primary beneficiary, if any.
We often
are involved in joint ventures with partners that are deemed to be de-facto
agency related parties primarily due to shareholder agreements with terms
prohibiting a partner from selling, transferring or otherwise encumbering its
interest in the joint venture without the prior approval of other
partners. In situations the related party group is deemed to be the
primary beneficiary, we generally look to the relationship and significance of
the activities of the variable interest entity to the parties in the related
party group to identify which party is the primary beneficiary of the
entity. These activities primarily relate to the amount of effort in
terms of man hours contributed and the scope and significance of expertise
contributed to the project by each party.
The
following is a summary of the significant variable interest entities in which we
are either the primary beneficiary or in which we have a significant variable
interest:
|
•
|
during
2001, we formed a joint venture, in which we own a 50% equity interest
with an unrelated partner, that owns and operates heavy equipment
transport vehicles in the United Kingdom. This variable interest entity
was formed to construct, operate, and service certain assets for a third
party, and was funded with third party debt. The construction of the
assets was completed in the second quarter of 2004, and the operating and
service contract related to the assets extends through 2023. The proceeds
from the debt financing were used to construct the assets and will be paid
down with cash flow generated during the operation and service phase of
the contract. As of December 31, 2008 and 2007, the joint venture had
total assets of $114 million and $158 million and total liabilities of
$121 million and $167 million, respectively. Our aggregate maximum
exposure to loss as a result of our involvement with this joint venture is
represented by our investment in the entity which was $6 million at
December 31, 2008, and any future losses related to the operation of the
assets. We are not the primary beneficiary. We account for this joint
venture using the equity method of
accounting;
|
|
•
|
we
are involved in four privately financed projects, executed through joint
ventures, to design, build, operate, and maintain roadways for certain
government agencies in the United Kingdom. We have a 25% ownership
interest in each of these joint ventures and account for them by the
equity method of accounting. The joint ventures have obtained financing
through third parties that is nonrecourse to us. These joint ventures are
considered variable interest entities. However, we are not the primary
beneficiary of these joint ventures and therefore, account for them using
the equity method of accounting. As of December 31, 2008, these joint
ventures had total assets of $1.6 billion and total liabilities of $1.6
billion. As of December 31, 2007, these joint ventures had total assets of
$2.2 billion and total liabilities of $2.2 billion. Our maximum exposure
to loss was $22 million at December 31, 2008, which consists primarily of
our investment balance of $21 million and other receivables due from the
venture;
|
|
•
|
we
participate in a privately financed project formed for operating and
maintaining a railroad freight business in Australia. We own 36.7% of the
joint venture and operating company and we account for these investments
using the equity method of accounting. These joint ventures are funded
through senior and subordinated debt and equity contributions from the
joint ventures’ partners. In October 2006, the joint venture incurred an
event of default under its loan agreement by failing to make an interest
and principal payment. These loans are non-recourse to us. During 2006, we
recorded a total of $58 million in impairment charges on our equity
investment as a result of continued losses incurred by the joint venture
and its unsuccessful attempts to raise additional equity from third
parties. In December 2006, the senior lenders agreed to waive existing
defaults and concede certain rights under the existing indenture under a
Standstill Agreement. Among these were a reduction in the joint venture’s
debt service reserve and the relinquishment of the right to receive
principal payments for 27 months, through March 2009. In exchange for
these concessions, the shareholders of the joint venture committed
approximately $12 million of new subordinated financing, of which $6
million was committed by us. At the time of the additional
shareholder funding, the shareholders expected to continue the ramp-up
activities so that they would be in a position to either sell the business
or restructure or refinance its debt. Early in 2008, the board
of directors of the joint venture determined that a voluntary sale of the
business was the most appropriate course of action for the shareholders to
comply with their obligations under the Standstill
agreements. In August of 2008, final bids were received from
interested parties and the board selected a preferred bidder in September
2008. An offer was received to acquire the business for an
amount that would have been sufficient to pay the senior lenders in full
and make partial payment to subordinated lenders. However, the
required consents were not received from a minority of the subordinated
lenders resulting in a lapse of the offer. As such, on November
6, 2008, the board of the joint venture voted to put the business into
administration and appointed a voluntary administrator following its
failure to complete a voluntary sale of the business. The board’s
appointment of a voluntary administrator triggered the senior lenders to
appoint a receiver pursuant to the loan agreements. The amount of senior
borrowings became immediately payable thereafter. Currently, the receivers
are conducting a sale process and continue to operate the business as
usual.
|
|
These
joint ventures are considered variable interest entities; however, we are
not the primary beneficiary of the joint ventures. As
a result of the appointed administrator and receiver over the business, we
have very limited influence, if any, over the joint
venture. The receiver has presented the joint venture assets
and liabilities at December 31, 2008 based on a going concern assumption
and no adjustments have been made that might be necessary if the entity is
unable to continue operating as a going concern. As of December 31,
2008 and 2007, the joint venture had combined total assets of $375 million
and $673 million and total liabilities of $595 million and $687 million,
respectively. We have funded approximately $5.3 million of the total
$6 million committed by us under the Standstill Agreement. We
funded the remaining $0.7 million in the first quarter of 2009. We
have no further obligation of any kind related to our involvement in this
joint venture;
|
|
•
|
we
participate in a privately financed project executed through certain joint
ventures formed to design, build, operate, and maintain a toll road in
southern Ireland. The joint ventures were funded through debt and were
formed with minimal equity. These joint ventures are considered variable
interest entities, however, we are not the primary beneficiary of the
joint ventures. We have up to a 25% ownership interest in the project’s
joint ventures, and we are accounting for these interests using the equity
method of accounting. As of December 31, 2008 and 2007, the joint ventures
had combined total assets of $271 million and $313 million and total
liabilities of $286 million and $307 million, respectively. Our maximum
exposure to loss was zero at December 31, 2008, and our share of any
future losses resulting from the
project;
|
|
•
|
in
April 2006, Aspire Defence, a joint venture between us, Carillion Plc. and
a financial investor, was awarded a privately financed project contract,
the Allenby & Connaught project, by the MoD to upgrade and provide a
range of services to the British Army’s garrisons at Aldershot and around
Salisbury Plain in the United Kingdom. In addition to a package of ongoing
services to be delivered over 35 years, the project includes a nine-year
construction program to improve soldiers’ single living, technical and
administrative accommodations, along with leisure and recreational
facilities. Aspire Defence will manage the existing properties and will be
responsible for design, refurbishment, construction and integration of new
and modernized facilities. We indirectly own a 45% interest in Aspire
Defence, the project company that is the holder of the 35-year concession
contract. In addition, we own a 50% interest in each of two joint ventures
that provide the construction and the related support services to Aspire
Defence. Our performance through the construction phase is supported by
$142 million in letters of credit and surety bonds totaling approximately
$163 million as of December 31, 2008, both of which have been guaranteed
by Halliburton. Furthermore, our financial and performance guarantees are
joint and several, subject to certain limitations, with our joint venture
partners. The project is funded through equity and subordinated debt
provided by the project sponsors and the issuance of publicly held senior
bonds which are nonrecourse to us. The entities we hold an interest in are
considered variable interest entities; however, we are not the primary
beneficiary of these entities. We account for our interests in each of the
entities using the equity method of accounting. As of December 31, 2008,
the aggregate total assets and total liabilities of the variable interest
entities were $2.8 billion and $2.7 billion, respectively. As of December
31, 2007, the aggregate total assets and total liabilities of the variable
interest entities were $3.5 billion and $3.5 billion, respectively. Our
maximum exposure to project company losses as of December 31, 2008 was $73
million. Our maximum exposure to construction and operating joint venture
losses is limited to the funding of any future losses incurred by those
entities under their respective contracts with the project company. As of
December 31, 2008, our assets and liabilities associated with our
investment in this project, within our consolidated balance sheet, were
$24 million and $15 million, respectively. The $58 million
difference between our recorded liabilities and aggregate maximum exposure
to loss was primarily related to our $64 million remaining commitment to
fund subordinated debt to the project in the
future;
|
|
•
|
during
2005, we formed a joint venture to engineer and construct a gas
monetization facility. We own 50% equity interest and determined that we
are the primary beneficiary of the joint venture which is consolidated for
financial reporting purposes. At December 31, 2008 and December 31, 2007,
the joint venture had $716 million and $428 million in total assets and
$861 million and $575 million in total liabilities, respectively. There
are no consolidated assets that collateralize the joint venture’s
obligations. However, at December 31, 2008 and December 31, 2007, the
joint venture had approximately $81 million and $358 million of cash,
respectively, which mainly relate to advanced billings in connection with
the joint venture’s obligations under the EPC
contract;
|
|
•
|
we
have equity ownership in three joint ventures to execute EPC projects. Our
equity ownership ranges from 33% to 50%, and these joint ventures are
considered variable interest entities. We are not the primary beneficiary
and thus account for these joint ventures using the equity method of
accounting. At December 31, 2008 and December 31, 2007, these joint
ventures had aggregate assets of $798 million and $1 billion and aggregate
liabilities of $904 million and $1.1 billion, respectively. Our aggregate,
maximum exposure to loss related to these entities was $55 million at
December 31, 2008, and is comprised of our equity investments in and
advances to the joint ventures;
|
|
•
|
we
have an investment in a development corporation that has an indirect
interest in the Egypt Basic Industries Corporation (“EBIC”) ammonia plant
project located in Egypt. We are performing the engineering, procurement
and construction (“EPC”) work for the project and operations and
maintenance services for the facility. We own 65% of this development
corporation and consolidate it for financial reporting purposes. The
development corporation owns a 25% ownership interest in a company that
consolidates the ammonia plant which is considered a variable interest
entity. The development corporation accounts for its investment in the
company using the equity method of accounting. The variable interest
entity is funded through debt and equity. Indebtedness of EBIC under its
debt agreement is non-recourse to us. We are not the primary beneficiary
of the variable interest entity. As of December 31, 2008, the variable
interest entity had total assets of $507 million and total liabilities of
$409 million. As of December 31, 2007, the variable interest entity had
total assets of $407 million and total liabilities of $278 million. Our
maximum exposure to loss on our equity investments at December 31, 2008
was $62 million. As of December 31, 2008, our assets and liabilities
associated with our investment in this project, within our consolidated
balance sheet, were $62 million and zero, respectively. The $62 million
difference between our recorded liabilities and aggregate maximum exposure
to loss was primarily related to our investment balance and certain
unbilled construction service revenues in the project as of December 31,
2008;
|
|
•
|
In
July 2006, we were awarded, through a 50%-owned joint venture, a contract
with Qatar Shell GTL Limited to provide project management and
cost-reimbursable engineering, procurement and construction management
services for the Pearl GTL project in Ras Laffan, Qatar. The project,
which is expected to be completed by 2011, consists of gas production
facilities and a GTL plant. The joint venture is considered a variable
interest entity. We consolidate the joint venture for financial reporting
purposes because we are the primary beneficiary. As of December 31, 2008,
the Pearl joint venture had total assets of $146 million and total
liabilities of $109 million. As of December 31, 2007, the Pearl joint
venture had total assets of $163 million and total liabilities of $158
million.
|
Note
17. Transactions with Former Parent
In
connection with the Offering in November 2006 and the separation of our business
from Halliburton, in April 2007, we entered into various agreements with
Halliburton including, among others, a master separation agreement, tax sharing
agreement, transition services agreements and an employee matters
agreement.
Pursuant
to our master separation agreement, we agreed to indemnify Halliburton for,
among other matters, all past, present and future liabilities related to our
business and operations, 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 11 for a 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 provides various interim corporate
support services to us and we 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 are substantially the
same as the costs incurred and recorded in our historical financial statements.
During 2007, most of the corporate service activities were discontinued and
primarily related to human resources and risk management. As of December 31,
2008, the
only significant corporate service activities incurred related to fees for
ongoing guarantees provided by Halliburton on existing credit support
instruments which have not yet expired.
Costs for
all services provided by Halliburton were $6 million, $13 million and $40
million for the years ended December 31, 2008, 2007 and 2006,
respectively. All of the charges described above have been included
as costs of our operations in our consolidated statements of income. It is
possible that the terms of these transactions may differ from those that would
result from transactions among third parties. Halliburton incurred approximately
$14 million for the year ended December 31, 2006 for expenses relating to the
FCPA and bidding practices investigations. Halliburton incurred $1 million as
such costs for the quarter ended March 31, 2007. We do not know the
amount of costs incurred by Halliburton following our separation from
Halliburton as none of these costs were charged to us. These expenses were
incurred for the benefit of both Halliburton and us, and we and Halliburton have
no reasonable basis for allocating these costs between us. Subsequent
to our separation from Halliburton and in accordance with the Master Separation
Agreement, Halliburton continues to bear the direct costs associated with
overseeing and directing the FCPA and bidding practices
investigations.
At
December 31, 2008 and 2007, KBR had a $54 million and a $16 million balance
payable to Halliburton, respectively, which consists of amounts KBR owes
Halliburton for estimated outstanding income taxes under the tax sharing
agreement and amounts owed pursuant to our transition services agreement for
credit support arrangements and information technology. See Note 12
for further discussion of amounts outstanding under the tax sharing
agreement.
On April
1, 2006, Halliburton contributed to us its interest in three joint ventures,
which are accounted for using the equity method of accounting. These joint
ventures own and operate offshore vessels equipped to provide various services,
including accommodations, catering and other services to sea-based oil and gas
platforms and rigs off the coast of Mexico. At March 31, 2006, the contributed
interest in the three joint ventures had a book value of approximately $26
million.
Note
18. Retirement Plans
We have
various plans that cover a significant number of our employees. These plans
include defined contribution plans, defined benefit plans, and other
postretirement plans:
|
•
|
Our
defined contribution plans provide retirement benefits in return for
services rendered. These plans provide an individual account for each
participant and have terms that specify how contributions to the
participant’s account are to be determined rather than the amount of
pension benefits the participant is to receive. Contributions to these
plans are based on pretax income and/or discretionary amounts determined
on an annual basis. Our expense for the defined contribution plans totaled
$47 million in 2008, $44 million in 2007 and $46 million in 2006.
Additionally, we participate in a Canadian multi-employer plan to which we
contributed $9 million in 2008 and $7 million in 2007 and
2006;
|
|
•
|
Our
defined benefit plans are funded pension plans, which define an amount of
pension benefit to be provided, usually as a function of age, years of
service, or compensation; and
|
|
•
|
Our
postretirement medical plan is offered to specific eligible employees.
This plan is contributory. Our liability is limited to a fixed
contribution amount for each participant or dependent. The plan
participants share the total cost for all benefits provided above our
fixed contributions. Participants’ contributions are adjusted as required
to cover benefit payments. We have made no commitment to adjust the amount
of our contributions; therefore, the computed accumulated postretirement
benefit obligation amount is not affected by the expected future health
care cost inflation rate.
|
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to:
|
•
|
recognize
on its balance sheet the funded status (measured as the difference between
the fair value of plan assets and the benefit obligation) of pension and
other postretirement benefit plans;
|
|
•
|
recognize,
through comprehensive income, certain changes in the funded status of a
defined benefit and postretirement plan in the year in which the changes
occur;
|
|
•
|
measure
plan assets and benefit obligations as of the end of the employer’s fiscal
year; and
|
|
•
|
disclose
additional information.
|
The
requirement to recognize the funded status of a benefit plan and the additional
disclosure requirements were effective for fiscal years ending after December
15, 2006. Accordingly, we adopted the recognition and disclosure provisions of
SFAS No. 158, prospectively, on December 31, 2006. The requirement to measure
plan assets and benefit obligations as of the date of the employer’s fiscal
year-end is effective for fiscal years ending after December 15, 2008. We
adopted the measurement date change requirements for our fiscal year ending
December 31, 2008. The charge to retained earnings due to the
elimination of the early measurement date is detailed in the following
table.
|
|
|
|
|
Other Postretirement
Benefits
|
|
Millions
of dollars
|
|
|
|
|
|
|
|
|
Change in retained earnings due to elimination of
early measurement dates
|
|
|
|
|
|
|
Service
cost
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
Interest
cost
|
|
|
1 |
|
|
|
25 |
|
|
|
— |
|
Expected
return on plan assets
|
|
|
(1 |
) |
|
|
(28 |
) |
|
|
— |
|
Currency
fluctuations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
(Gain)/
loss amortization
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
Transfers
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Benefits
paid
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
pension cost
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
Benefit
obligation and plan assets
We used a
December 31 measurement date for all plans in 2008, a September 30 measurement
date for our international plans in 2007 and an October 31 measurement date for
our domestic plans in 2007. Plan asset, expenses, and obligation for retirement
plans are presented in the following tables.
|
|
|
|
|
Other Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of period
|
|
$ |
45 |
|
|
$ |
1,689 |
|
|
$ |
48 |
|
|
$ |
1,657 |
|
|
$ |
— |
|
|
$ |
1 |
|
Service
cost
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
— |
|
Interest
cost
|
|
|
4 |
|
|
|
90 |
|
|
|
2 |
|
|
|
85 |
|
|
|
— |
|
|
|
— |
|
Plan
participants’ contributions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
Currency
fluctuations
|
|
|
— |
|
|
|
(439 |
) |
|
|
— |
|
|
|
73 |
|
|
|
— |
|
|
|
— |
|
Actuarial
(gain) loss
|
|
|
1 |
|
|
|
(52 |
) |
|
|
(3 |
) |
|
|
(82 |
) |
|
|
— |
|
|
|
— |
|
Acquisitions
|
|
|
27 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Transfers
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
Benefits
paid
|
|
|
(4 |
) |
|
|
(60 |
) |
|
|
(2 |
) |
|
|
(46 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Effects
of eliminating early measurement date
|
|
|
— |
|
|
|
27 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Benefit
obligation at end of period
|
|
$ |
73 |
|
|
$ |
1,256 |
|
|
$ |
45 |
|
|
$ |
1,689 |
|
|
$ |
1 |
|
|
$ |
— |
|
Accumulated
benefit obligation at end of period
|
|
$ |
73 |
|
|
$ |
1,234 |
|
|
$ |
45 |
|
|
$ |
1,617 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
Plan assets
|
|
United
States
|
|
|
Int’l
|
|
|
United
States
|
|
|
Int’l
|
|
|
|
Millions of
dollars
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of period
|
|
$ |
45 |
|
|
$ |
1,658 |
|
|
$ |
41 |
|
|
$ |
1,490 |
|
|
$ |
— |
|
|
$ |
— |
|
Actual
return on plan assets
|
|
|
(18 |
) |
|
|
(257 |
) |
|
|
6 |
|
|
|
126 |
|
|
|
— |
|
|
|
— |
|
Employer
contributions
|
|
|
3 |
|
|
|
71 |
|
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
1 |
|
Settlements
and transfers
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
Plan
participants’ contributions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
Currency
fluctuations
|
|
|
— |
|
|
|
(448 |
) |
|
|
— |
|
|
|
68 |
|
|
|
— |
|
|
|
— |
|
Benefits
paid
|
|
(4
|
) |
|
|
(60 |
) |
|
|
(2 |
) |
|
|
(46 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Acquisitions
|
|
|
20 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Transfers
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Effects
of eliminating early measurement date
|
|
|
— |
|
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Fair
value of plan assets at end of period
|
|
$ |
46 |
|
|
$ |
985 |
|
|
$ |
45 |
|
|
$ |
1,658 |
|
|
$ |
— |
|
|
$ |
— |
|
Funded
status
|
|
$ |
(27 |
) |
|
$ |
(271 |
) |
|
$ |
— |
|
|
$ |
(31 |
) |
|
|
(1 |
) |
|
$ |
— |
|
Employer
contribution
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
Net
amount recognized
|
|
$ |
(27 |
) |
|
$ |
(271 |
) |
|
$ |
— |
|
|
$ |
(25 |
) |
|
$ |
(1 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized on the consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Current
liabilities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Noncurrent
liabilities
|
|
|
(27 |
) |
|
|
(271 |
) |
|
|
— |
|
|
|
(25 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine benefit obligations at measurement
date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.15 |
% |
|
|
5.98 |
% |
|
|
6.30 |
% |
|
|
5.70 |
% |
|
|
5.39 |
% |
|
|
5.75 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
4.30 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
health care cost trend rates at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
care cost trend rate assumed for next year
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
10.0 |
% |
Rate
to which the cost trend rate is assumed to decline (the ultimate trend
rate)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
5.0 |
% |
Year
that the rate reached the ultimate trend rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
allocation at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
(40%
– 60 |
%) |
|
|
51 |
% |
|
|
43 |
% |
|
|
63 |
% |
|
|
67 |
% |
Debt
securities
|
|
|
(40%
– 60 |
%) |
|
|
41 |
% |
|
|
56 |
% |
|
|
35 |
% |
|
|
32 |
% |
Other
|
|
|
(0%
– 5 |
%) |
|
|
8 |
% |
|
|
1 |
% |
|
|
2 |
% |
|
|
1 |
% |
Total
|
|
|
(100 |
%) |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Assumed
long-term rates of return on plan assets, discount rates for estimating benefit
obligations, and rates of compensation increases vary for the different plans
according to the local economic conditions. The discount rate was determined
based by reviewing yields of high-quality fixed income investments as of the
measurement date and the expected duration of pension obligations specific to
the characteristics of our plan.
The
overall expected long-term rate of return on assets was determined based upon an
evaluation of our plan assets, historical trends, and experience, taking into
account current and expected market conditions.
Our
investment strategy varies by country depending on the circumstances of the
underlying plan. Typically, less mature plan benefit obligations are funded by
using more equity securities, as they are expected to achieve long-term growth
while exceeding inflation. More mature plan benefit obligations are funded using
more fixed income securities, as they are expected to produce current income
with limited volatility. Risk management practices include the use of multiple
asset classes and investment managers within each asset class for
diversification purposes. Specific guidelines for each asset class and
investment manager are implemented and monitored.
Amounts
recognized in accumulated other comprehensive income were as
follows:
|
|
|
|
|
Other Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss (gain)
|
|
$ |
20 |
|
|
$ |
350 |
|
|
$ |
— |
|
Prior
service cost (benefit)
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
Total
recognized in accumulated other comprehensive income
|
|
$ |
20 |
|
|
$ |
348 |
|
|
$ |
— |
|
Expected
cash flows
Contributions. Funding
requirements for each plan are determined based on the local laws of the country
where such plan resides. In certain countries the funding requirements are
mandatory while in other countries they are discretionary. We currently expect
to contribute $11 million to our international pension plans and $6 million to
our domestic plan in 2009.
Benefit payments. The
following table presents the expected benefit payments over the next 10
years.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
6 |
|
|
$ |
45 |
|
2010
|
|
|
6 |
|
|
|
47 |
|
2011
|
|
|
6 |
|
|
|
48 |
|
2012
|
|
|
6 |
|
|
|
51 |
|
2013
|
|
|
6 |
|
|
|
52 |
|
Years
2014 – 2018
|
|
|
29 |
|
|
|
287 |
|
Expected
benefit payments for other postretirement benefits are immaterial.
Net
periodic cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
— |
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
8 |
|
Interest
cost
|
|
|
4 |
|
|
|
90 |
|
|
|
3 |
|
|
|
85 |
|
|
|
2 |
|
|
|
70 |
|
Expected
return on plan assets
|
|
|
(4 |
) |
|
|
(102 |
) |
|
|
(3 |
) |
|
|
(97 |
) |
|
|
(3 |
) |
|
|
(79 |
) |
Amortization
of prior service cost
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Recognized
actuarial loss
|
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
22 |
|
|
|
1 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
— |
|
|
$ |
7 |
|
|
$ |
— |
|
|
$ |
18 |
|
|
$ |
— |
|
|
$ |
15 |
|
For other
postretirement plans, net periodic cost was immaterial for the years ended
December 31, 2008, 2007, and 2006.
Weighted-average assumptions used to determine net periodic benefit
cost for years ended December 31
|
|
|
|
|
Other Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.13 |
% |
|
|
5.70 |
% |
|
|
5.75 |
% |
|
|
5.00 |
% |
|
|
5.75 |
% |
|
|
5.00 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
Expected
return on plan assets
|
|
|
7.81 |
% |
|
|
7.00 |
% |
|
|
8.25 |
% |
|
|
7.00 |
% |
|
|
8.25 |
% |
|
|
7.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Rate
of compensation increase
|
|
|
N/A |
|
|
|
4.30 |
% |
|
|
N/A |
|
|
|
3.75 |
% |
|
|
N/A |
|
|
|
3.5 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Estimated
amounts that will be amortized from accumulated other comprehensive income, net
of tax, into net periodic benefit cost in 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Actuarial
(gain) loss
|
|
$ |
1 |
|
|
$ |
9 |
|
Prior
service (benefit) cost
|
|
|
— |
|
|
|
(1 |
) |
Total
|
|
$ |
1 |
|
|
$ |
8 |
|
The
majority of our postretirement benefit plans are not subjected to risk
associated with fluctuations in the medical trend rates because the company
subsidy is capped. We expect the amortization from other comprehensive income to
be immaterial. Assumed health care cost trend rates are not expected to have a
significant impact on the amounts reported for the total of the health care
plans. A one-percentage-point change in assumed health care cost trend rates
would not have a material impact on total of service and interest cost
components or the postretirement benefit obligation.
Note
19. Reorganization of Business Operations
In the
fourth quarter of 2007, we initiated a restructuring whereby we committed to a
minor headcount reduction and ceased using certain leased office
space. In connection with this restructuring we recorded charges
totaling approximately $5 million of which the majority related to a vacated
lease, previously utilized by our G&I division in Arlington. This amount is
included in “Cost of services” in our statements of income for the year ended
December 31, 2007. Less than $1 million consists of standard termination
benefits payable to a limited number of corporate and division employees. These
termination costs are included in “General and Administrative” in our statements
of income for the year ended December 31, 2007. The amounts recorded represent
the total amounts expected to be incurred in connection with these activities.
During 2008, we paid approximately $4 million of the lease and the termination
benefits, which included a lease cancellation penalty. The remaining balance in
connection with this restructuring reserve was approximately $1 million at
December 31, 2008.
Note 20. Quarterly Data
(Unaudited)
Summarized quarterly financial data
for the years ended December 31, 2008 and 2007 are as follows
|
|
|
|
(in millions, except per share
amounts)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,519 |
|
|
$ |
2,
658 |
|
|
$ |
3,018 |
|
|
$ |
3,386 |
|
|
$ |
11,581 |
|
Operating
income
|
|
|
154 |
|
|
|
90 |
|
|
|
144 |
|
|
|
153 |
|
|
|
541 |
|
Income
from continuing operations
|
|
|
98 |
|
|
|
48 |
|
|
|
74 |
|
|
|
88 |
|
|
|
308 |
|
Income
from discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
Net
income
|
|
|
98 |
|
|
|
48 |
|
|
|
85 |
|
|
|
88 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share (2) (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.58 |
|
|
$ |
0.28 |
|
|
$ |
0.45 |
|
|
$ |
0.55 |
|
|
$ |
1.86 |
|
Discontinued
operations, net
|
|
|
— |
|
|
|
— |
|
|
|
0.07 |
|
|
|
— |
|
|
|
0.07 |
|
Net
income per share
|
|
$ |
0.58 |
|
|
$ |
0.28 |
|
|
$ |
0.51 |
|
|
$ |
0.55 |
|
|
$ |
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share (2) (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.58 |
|
|
$ |
0.28 |
|
|
$ |
0.44 |
|
|
$ |
0.54 |
|
|
$ |
1.84 |
|
Discontinued
operations, net
|
|
|
— |
|
|
|
— |
|
|
|
0.07 |
|
|
|
— |
|
|
|
0.07 |
|
Net
income per share
|
|
$ |
0.58 |
|
|
$ |
0.28 |
|
|
$ |
0.51 |
|
|
$ |
0.54 |
|
|
$ |
1.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,027 |
|
|
$ |
2,152 |
|
|
$ |
2,177 |
|
|
$ |
2,389 |
|
|
$ |
8,745 |
|
Operating
income
|
|
|
45 |
|
|
|
65 |
|
|
|
102 |
|
|
|
82 |
|
|
|
294 |
|
Income
from continuing operations
|
|
|
24 |
|
|
|
50 |
|
|
|
60 |
|
|
|
48 |
|
|
|
182 |
|
Income
from discontinued operations
|
|
|
4 |
|
|
|
90 |
|
|
|
3 |
|
|
|
23 |
|
|
|
120 |
|
Net
income
|
|
|
28 |
|
|
|
140 |
|
|
|
63 |
|
|
|
71 |
|
|
|
302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share (2) (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.14 |
|
|
$ |
0.30 |
|
|
$ |
0.36 |
|
|
$ |
0.29 |
|
|
$ |
1.08 |
|
Discontinued
operations, net
|
|
|
0.02 |
|
|
|
0.54 |
|
|
|
0.02 |
|
|
|
0.14 |
|
|
|
0.71 |
|
Net
income per share
|
|
$ |
0.17 |
|
|
$ |
0.83 |
|
|
$ |
0.38 |
|
|
$ |
0.42 |
|
|
$ |
1.80 |
|
Diluted
income per share (2) (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.14 |
|
|
$ |
0.30 |
|
|
$ |
0.35 |
|
|
$ |
0.28 |
|
|
$ |
1.08 |
|
Discontinued
operations, net
|
|
|
0.02 |
|
|
|
0.53 |
|
|
|
0.02 |
|
|
|
0.14 |
|
|
|
0.71 |
|
Net
income per share
|
|
$ |
0.17 |
|
|
$ |
0.83 |
|
|
$ |
0.37 |
|
|
$ |
0.42 |
|
|
$ |
1.79 |
|
_______________________
(1)
|
In
June 2007 we completed the disposition of our 51% interest in DML. The
results of operations of DML for all periods presented have been reported
as discontinued operations. See Note 22 to the consolidated financial
statements for information about discontinued
operations.
|
(2)
|
The
sum of income (loss) per share for the four quarters may differ from the
annual amounts due to the required method of computing weighted average
number of shares in the respective
periods.
|
(3)
|
Due
to the effect of rounding, the sum of the individual per share amounts may
not equal the total shown.
|
Note
21. Recent Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
141(R)”), which replaces FASB Statement No. 141. SFAS 141(R), establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. This
Statement also established disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008, early
adoption is prohibited. Currently this statement is not expected to have a
significant impact to our financial position, results of operations or cash
flows. A significant impact may however be realized on any future acquisitions
by the company. The amounts of such impact cannot be currently determined and
will depend on the nature and terms of such future acquisitions, if
any.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statement-amendments of ARB No. 51,” (“SFAS 160”). SFAS
160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. The Statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective for fiscal years beginning after December 15, 2008, early adoption
is prohibited. We do not believe adoption of SFAS 160 will have a significant
impact on our financial position, results of operations or cash
flows.
In March
2008, the FASB issued SFAS 132R-a, “Employer’s Disclosure about Pensions and
Other Postretirement Benefits” which replaces SFAS 132. This
Statement was developed in response to concerns expressed by users of financial
statements about their need for more information about pension plan assets,
obligations, benefit payments, contributions, and net benefit
cost. The FSP is intended to provide users of employers’ financial
statements with more informative disclosures about the nature and valuation of
postretirement benefit plan assets. The disclosures about plan assets
would be effective for fiscal years beginning after December 15,
2008. Early adoption is prohibited. We are currently
evaluating the potential impact of adopting FSP SFAS 132R-a.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets.” This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB Statement No. 141 (Revised 2007), “Business
Combinations,” and other U.S. generally accepted accounting principles (GAAP).
This FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. Currently, this statement is not expected to have a
significant impact on our financial position, results of operations or cash
flows.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating
Securities.” This FSP provides that unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. The FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior period
earnings per share data presented shall be adjusted retrospectively. Early
application of this FSP is prohibited. We are currently evaluating the potential
impact of adopting FSP EITF 03-6-1.
In
December 2008, the FASB issued FIN 46R-8, “Interests in Variable Interest
Entities.” The FSP was issued by the FASB to expeditiously meet the
need for enhanced information about transferred financial assets and an
enterprise’s involvement with a variable interest entity (VIE). The
FSP requires extensive additional disclosures by public entities with continuing
involvement in transfers of financial assets to special-purpose entities and
with VIEs, including sponsors that have a variable interest in a
VIE. The FSP is effective for fiscal periods ending after December
15, 2008. The adoption FSP FIN 46R-8 did not have a
significant impact to our financial position, results of operations or cash
flows.
Note
22. Discontinued Operations
In May
2006, we completed the sale of our Production Services group, which was part of
our Services business unit. The Production Services group delivers 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 2007, we settled certain claims and provided an allowance against certain
receivables from the Production Services group resulting in a charge of
approximately $15 million. In the fourth quarter of 2007, we recognized a tax
benefit of $23 million in discontinued operations primarily related to a
previously uncertain tax position associated with the sale of Production
Services group.
On June
28, 2007, we completed the disposition of our 51% interest in DML to Babcock
International Group plc. 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 business unit, primarily involved refueling nuclear
submarines and performing maintenance on surface vessels for the U.K. Ministry
of Defence as well as limited commercial projects. In connection with the sale,
we received $345 million in cash proceeds, net of direct transaction costs for
our 51% interest in DML.
The sale
of DML resulted in a gain of approximately $101 million, net of tax of $115
million, in the year ended December 31, 2007. During the
preparation of our 2007 tax return in the third quarter of 2008, we identified
additional foreign tax credits upon completion of a tax pool study resulting
from the sale of our interest in DML in the U.K. Approximately $11 million of
the foreign tax credits were recorded as a tax benefit in discontinued
operations in the third quarter of 2008.
In
accordance with the provisions of SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets,” the results of operations of the Production
Services group and DML for the current and prior periods have been reported as
discontinued operations. Total assets and liabilities of discontinued operations
were $7 million and $1 million in the consolidated balance sheet at December 31,
2008 and 2007, respectively.
The
consolidated operating results of our Production Services group and DML, which
are classified as discontinued operations in our consolidated statements of
income, are summarized in the following table:
|
|
Years
ended December 31,
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
449 |
|
|
$ |
1,128 |
|
Operating
profit
|
|
$ |
22 |
|
|
$ |
109 |
|
Pretax
income
|
|
$ |
11 |
|
|
$ |
77 |
|
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures
None
Managements
Evaluation of Disclosure Controls and Procedures
In
accordance with Rules 13a-15 and 15d-15 under the Securities and Exchange Act of
1934 as amended (the “Exchange Act”), we carried out an evaluation, under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of December 31, 2008 to provide reasonable assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
Our disclosure controls and procedures include controls and procedures designed
to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting
There has
been no change in our internal control over financial reporting that occurred
during the three months ended December 31, 2008 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Managements
Annual Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in the Securities Exchange Act Rule 13a-15(f).
Internal control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions, the
effectiveness of internal control over financial reporting may vary over
time.
Under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation to
assess the effectiveness of our internal control over financial reporting as of
December 31, 2008, based upon criteria set forth in the Internal
Control–Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our assessment, we have concluded that, as
of December 31, 2008, our internal control over financial reporting is
effective. Our independent registered public accounting firm, KPMG LLP, has
issued its report on the effectiveness of our internal control over financial
reporting as of December 31, 2008, which follows.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
KBR,
Inc.
We have
audited KBR, Inc.’s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
KBR, Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, KBR, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of KBR, Inc. as
of December 31, 2008 and 2007, and the related consolidated statements of
income, shareholders’ equity and comprehensive income, and cash flows for each
of the years in the three-year period ended December 31, 2008, and our report
dated February 25, 2009 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Houston,
TX
February
25, 2009
None.
Item 10. Directors, Executive Officers and Corporate
Governance
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2009 Annual Meeting of
Stockholders.
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2009 Annual Meeting of
Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2009 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions, and
Director Independence
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2009 Annual Meeting of
Stockholders.
Item 14. Principal Accounting Fees and Services
The
information required by this Item is incorporated herein by reference to the
KBR, Inc. Company Proxy Statement for our 2009 Annual Meeting of
Stockholders.
Item 15. Exhibits and Financial Statement
Schedules.
|
1.
|
Financial
Statements:
|
|
|
|
(a)
|
The
report of the Independent Registered Public Accounting Firm and the
financial statements of the Company as required by Part II, Item 8, are
included on page 63 and pages 64 through 117 of this annual report. See
index on page 62.
|
|
|
|
|
|
|
|
2.
|
Financial
Statement Schedules:
|
Page No.
|
|
|
|
|
|
|
|
(a)
|
KPMG
LLP Report on supplemental schedule
|
122
|
|
|
|
|
|
|
|
(b)
|
Schedule
II—Valuation and qualifying accounts for the three years ended December
31, 2008
|
123
|
|
|
|
|
|
|
|
(c)
|
Financial
Statements of 50-Percent-Or-Less-Owned Investees
|
124
|
|
|
|
|
|
|
|
Note:
All schedules not filed with this report required by Regulations S-X have
been omitted as not applicable or not required, or the information
required has been included in the notes to financial
statements.
|
|
|
|
|
|
|
|
|
Note:
“Financial Statements of 50-Percent-Or-Less-Owned Investees” are included
for Asia Pacific Transport Joint Venture Consortium for the year ended
December 31, 2007. The financial statements of the joint
venture for the year ended December 31, 2008 have not been completed by
management of the venture and therefore are not available.
|
|
3.
Exhibits:
Exhibit
Number
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated as of May 6, 2008, by and among KBR, Inc.,
BE&K, Inc., and Whitehawk Sub, Inc., (incorporated by reference to
Exhibit 2.1 to KBR’s Current Report on Form 8-K; File No.
001-33416)
|
|
|
|
3.1
|
|
KBR
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to KBR’s registration statement on Form S-1;
Registration No. 333-133302)
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of KBR, Inc. (incorporated by reference to Exhibit 3.1
to KBR’s Form 10-Q for the period ended June 30, 2007; File No.
1-33146)
|
|
|
|
4.1
|
|
Form
of specimen KBR common stock certificate (incorporated by reference to
Exhibit 4.1 to KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
10.1
|
|
Master
Separation Agreement between Halliburton Company and KBR, Inc. dated as of
November 20, 2006 (incorporated by reference to Exhibit 10.1 to KBR’s
current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
10.2
|
|
Tax
Sharing Agreement, dated as of January 1, 2006, by and between Halliburton
Company, KBR Holdings, LLC and KBR, Inc., as amended effective February
26, 2007 (incorporated by reference to Exhibit 10.2 to KBR’s Annual Report
on Form 10-K for the year ended December 31, 2006; File No.
001-33146)
|
|
|
|
10.3
|
|
Amended
and Restated Registration Rights Agreement, dated as of February 26, 2007,
between Halliburton Company and KBR, Inc. (incorporated by reference to
Exhibit 10.3 to KBR’s Annual Report on Form 10-K for the year ended
December 31, 2006; File No. 001-33146)
|
|
|
|
10.4
|
|
Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (KBR as service provider)
(incorporated by reference to Exhibit 10.4 to KBR’s current report on Form
8-K dated November 20, 2006; File No. 001-33146)
|
|
|
|
10.5
|
|
Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (Halliburton as service
provider) (incorporated by reference to Exhibit 10.5 to KBR’s current
report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
10.6
|
|
Employee
Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.6 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
10.7
|
|
Intellectual
Property Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.7 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
|
|
|
|
10.8
|
|
Five
Year Revolving Credit Agreement, dated as of December 16, 2005, among KBR
Holdings, LLC, a Delaware limited liability company, as Borrower, the
Banks and the Issuing Banks party thereto, Citibank, N.A. (“Citibank”), as
Paying Agent, and Citibank and HSBC Bank USA, National Association, as
Co-Administrative Agents (Incorporated by reference to Exhibit 10.30 to
Halliburton Company’s Annual Report on Form 10-K for the year ended
December 31, 2005; File No. 001-03492)
|
|
|
|
10.9
|
|
Amendment
No. 1 to the Five Year Revolving Credit Agreement, dated as of April 13,
2006, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent
(incorporated by reference to Exhibit 10.9 to KBR’s registration statement
on Form S-1; Registration No. 333-133302)
|
|
|
|
10.10
|
|
Amendment
No. 2 to the Five Year Revolving Credit Agreement, dated as of October 31,
2006, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent
(incorporated by reference to Exhibit 10.24 to KBR’s registration
statement on Form S-1; Registration No. 333-133302)
|
|
|
|
10.11
|
|
Amendment
No. 3 to the Five Year Revolving Credit Agreement, dated as of January 11,
2008, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent
(incorporated by reference to Exhibit 10.1 to KBR’s current report on Form
8-K dated January 17, 2008; File No. 1-33146
)
|
Exhibit
Number
|
|
Description
|
|
|
|
10.12+
|
|
Employment
Agreement, dated as of April 3, 2006, between William P. Utt and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.15 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
10.13+
|
|
Employment
Agreement, dated as of November 7, 2005, between Cedric W. Burgher and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.16 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
10.14+
|
|
Employment
Agreement, dated as of August 1, 2004, between Bruce A. Stanski and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.17 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
|
|
|
|
10.15
|
|
Form
of Indemnification Agreement between KBR, Inc. and its directors
(incorporated by reference to Exhibit 10.18 to KBR’s registration
statement on Form S-1; Registration No. 333-133302)
|
|
|
|
10.16+
|
|
KBR,
Inc. 2006 Stock and Incentive Plan (as amended June 27, 2007)
(incorporated by reference to Exhibit 10.1 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
10.17+
|
|
KBR,
Inc. Senior Executive Performance Pay Plan (incorporated by reference to
Exhibit 10.21 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
|
|
10.18+
|
|
KBR,
Inc. Management Performance Pay Plan (incorporated by reference
to Exhibit 10.22 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
|
|
10.19+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan (incorporated by reference to
Exhibit 10.23 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
|
|
10.20+
|
|
KBR
Dresser Deferred Compensation Plan (incorporated by reference to Exhibit
4.5 to KBR’s Registration Statement on Form S-8 filed on April 13,
2007)
|
|
|
|
10.21+
|
|
KBR
Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10.3 to KBR’s current report on Form 8-K dated April 9, 2007; File
No. 1-33146).
|
|
|
|
10.22+
|
|
KBR
Benefit Restoration Plan (incorporated by reference to Exhibit 10.4 to
KBR’s current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
|
|
|
10.23+
|
|
KBR
Elective Deferral Plan (incorporated by reference to Exhibit 10.5 to KBR’s
current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
|
|
|
10.24+
|
|
Restricted
Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.2 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
10.25+
|
|
Stock
Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.3 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
10.26+
|
|
KBR
Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan (incorporated by reference to Exhibit 10.4 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
10.27+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Stock Option Award (incorporated
by reference to Exhibit 10.5 to KBR’s Form 10-Q for the quarter ended June
30, 2007; File No. 1-33146)
|
|
|
|
10.28+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Restricted Stock Award
(incorporated by reference to Exhibit 10.6 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
|
|
10.29+
|
|
Form
of Restricted Stock Agreement between KBR, Inc. and William P. Utt
pursuant to KBR, Inc. 2006 Stock and Incentive Plan (incorporated by
reference to Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended
September 30, 2007; File No. 1-33146)
|
|
|
|
10.30+
|
|
Form
of KBR Performance Award Agreement pursuant to KBR, Inc. 2006 Stock and
Incentive Plan (incorporated by reference to Exhibit 10.5 to KBR’s Form
10-Q for the quarter ended September 30, 2007; File No.
1-33146)
|
Exhibit
Number
|
|
Description
|
|
|
|
10.31+
|
|
KBR,
Inc., 2009 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended June 30, 2008; File
No. 1-33146)
|
|
|
|
10.32
|
|
Amendment
No. 4 to the Five Year Revolving Credit Agreement, dated as of May 7,
2008, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent.
(incorporated by reference to Exhibit 10.2 to KBR’s Form 10-Q for the
quarter ended June 30, 2008; File No. 1-33146)
|
|
|
|
10.33
|
|
Form
of Severance and Change in Control Agreement (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended September 30, 2008;
File No. 1-33146)
|
|
|
|
10.34+
|
|
Severance
and change in control agreement with William P. Utt, President and Chief
Executive Officer of KBR. (incorporated by reference to Exhibit 10.7 to
KBR’s current report on Form 8-K dated January 7, 2009; File No.
1-33146)
|
|
|
|
21.1
|
|
List
of subsidiaries
|
|
|
|
23.1
|
|
Consent
of KPMG LLP - Houston, Texas
|
|
|
|
23.2
|
|
Consent
of KPMG - Adelaide, South Australia
|
|
|
|
31.1
|
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
31.2
|
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
32.1
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
_________________________
+
|
Management
contracts or compensatory plans or
arrangements
|
Report of
Independent Registered Public Accounting Firm on Supplementary
Information
The Board
of Directors and Shareholders
KBR,
Inc.:
Under the
date of February 25, 2009, we reported on the consolidated balance sheets of
KBR, Inc. and subsidiaries as of December 31, 2008 and 2007 and the related
consolidated statements of income, shareholders’ equity and comprehensive
income, and cash flows, for each of the years in the three-year period ended
December 31, 2008, which reports appear in the December 31, 2008, Annual Report
on Form 10-K of KBR, Inc. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule (Schedule II) included in the Company’s Annual
Report on Form 10-K. The financial statement schedule is the responsibility of
the Company’s management. Our responsibility is to express an opinion on the
consolidated financial statement schedule based on our audits.
In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As
discussed in Notes 2, 18, and 12, respectively, to the consolidated financial
statements, the Company changed its method of accounting for stock-based
compensation plans as of January 1, 2006, its method of accounting for defined
benefit and other post retirement plans as of December 31, 2006, and its method
of accounting for uncertainty in income taxes as of January 1,
2007.
/s/ KPMG
LLP
Houston,
Texas
February
25, 2009
KBR,
Inc.
Schedule
II - Valuation and Qualifying Accounts (Millions of Dollars)
The table
below presents valuation and qualifying accounts for continuing
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
Period
|
|
|
Charged to Costs and
Expenses
|
|
|
Charged to Other
Accounts
|
|
|
|
|
|
|
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from accounts and notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for bad debts
|
|
$ |
51 |
|
|
$ |
36 |
|
|
$ |
2 |
|
|
$ |
(32 |
)(a) |
|
$ |
57 |
|
Reserve
for losses on uncompleted contracts
|
|
$ |
38 |
|
|
$ |
176 |
|
|
$ |
— |
|
|
$ |
(34 |
) |
|
$ |
180 |
|
Reserve
for potentially disallowable costs incurred under government
contracts
|
|
$ |
133 |
|
|
$ |
— |
|
|
$ |
51 |
(b) |
|
$ |
(107 |
) |
|
$ |
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from accounts and notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for bad debts
|
|
$ |
57 |
|
|
$ |
19 |
|
|
$ |
2 |
|
|
$ |
(55 |
)(a) |
|
$ |
23 |
|
Reserve
for losses on uncompleted contracts
|
|
$ |
180 |
|
|
$ |
26 |
|
|
$ |
— |
|
|
$ |
(89 |
) |
|
$ |
117 |
|
Reserve
for potentially disallowable costs incurred under government
contracts
|
|
$ |
77 |
|
|
$ |
— |
|
|
$ |
34 |
(b) |
|
$ |
(12 |
) |
|
$ |
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from accounts and notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for bad debts
|
|
$ |
23 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
(6 |
)(a) |
|
$ |
19 |
|
Reserve
for losses on uncompleted contracts
|
|
$ |
117 |
|
|
$ |
27 |
|
|
$ |
— |
|
|
$ |
(68 |
) |
|
$ |
76 |
|
Reserve
for potentially disallowable costs incurred under government
contracts
|
|
$ |
99 |
|
|
$ |
— |
|
|
$ |
18 |
(b) |
|
$ |
(5 |
) |
|
$ |
112 |
|
_________________________
(a)
|
Receivable
write-offs, net of recoveries, and
reclassifications.
|
(b)
|
Reserves
have been recorded as reductions of revenue, net of reserves no longer
required.
|
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
30
June 2007
Draft
dated 1 February 2008
Report of Independent
Auditors
The Board
of Directors
KBR,
Inc.
We have
audited the accompanying combined balance sheet of Asia Pacific Transport Joint
Venture Consortium as of 30 June 2006, and the related combined income statement
and statements of changes in equity and cash flows for the year then ended.
These combined financial statements are the responsibility of Asia Pacific Joint
Venture Consortium’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the combined financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In
our opinion, the combined financial statements referred to above present fairly,
in all material respects, the financial position of Asia Pacific Transport Joint
Venture Consortium as of 30 June 2006, and the results of their operations and
their cash flows for the year then ended in conformity with Australian
equivalents to International Financial Reporting Standards.
As
discussed in Note 22 to the combined financial statements, as a result of
adopting AASB 132 “Financial Instruments: Disclosure and
Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement”
on 1 July 2005, Asia Pacific Transport Joint Venture Consortium changed its
method of accounting for financial instruments. In accordance with an election
taken under the relevant transitional provisions, the prior period comparatives
have not been restated.
The
accompanying combined financial statements have been prepared assuming that Asia
Pacific Transport Joint Venture Consortium will continue as a going concern. As
discussed in Notes 1 and 16 to the combined financial statements, Asia Pacific
Transport Joint Venture Consortium has suffered recurring losses from operations
and has a net accumulated deficit that raise substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these matters
are also described in Notes 1 and 16. The combined financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Australian
equivalents to International Financial Reporting Standards vary in certain
significant respects from U.S. generally accepted accounting principles.
Information relating to the nature of such differences is presented in Note 24
to the combined financial statements.
/s/
KPMG
Adelaide,
Australia
26
February 2007
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
|
|
Contents
|
|
|
|
|
|
Page
|
|
|
|
Income
Statement
|
127
|
|
|
|
Statement
of Changes in Equity
|
128
|
|
|
|
Balance
Sheet
|
129
|
|
|
|
Statement
of cash flows
|
130
|
|
|
|
Note
1:
|
Statement
of significant accounting policies
|
131
|
|
|
|
Note
2:
|
Revenue
|
138
|
|
|
|
Note
3:
|
Other
Disclosable Expenses
|
138
|
|
|
|
Note
4:
|
Income
tax expense
|
139
|
|
|
|
Note
5:
|
Key
management personnel disclosures
|
139
|
|
|
|
Note
6:
|
Cash
|
140
|
|
|
|
Note
7:
|
Receivables
|
140
|
|
|
|
Note
8:
|
Other
assets
|
140
|
|
|
|
Note
9:
|
Property,
plant and equipment
|
141
|
|
|
|
Note
10:
|
Payables
and other liabilities
|
143
|
|
|
|
Note
11:
|
Deferred
Income
|
143
|
|
|
|
Note
12:
|
Borrowings
|
144
|
|
|
|
Note
13:
|
Reserves
and Equity
|
145
|
|
|
|
Note
14:
|
Commitments
|
146
|
|
|
|
Note
15:
|
Contingent
liabilities
|
147
|
|
|
|
Note
16:
|
Events
subsequent to balance date
|
147
|
|
|
|
Note
17:
|
Related
party transactions
|
148
|
|
|
|
Note
18:
|
Segment
reporting
|
150
|
|
|
|
Note
19:
|
Cash
flow information
|
150
|
|
|
|
Note
20:
|
Financial
instruments
|
150
|
|
|
|
Note
21:
|
Entity
details
|
153
|
|
|
|
Note
22:
|
Prior
Year Changes in Accounting Policies
|
153
|
|
|
|
Note
23:
|
Significant
Accounting Policy Differences Between AIFRS and U.S. GAAP
|
154
|
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Income
Statement
|
|
Note
|
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
|
Unaudited June 2005
$
|
|
Revenue
|
|
|
2 |
|
|
|
80,196,304 |
|
|
|
61,724,038 |
|
|
|
51,391,580 |
|
Linehaul
costs
|
|
|
|
|
|
|
(42,081,628 |
) |
|
|
(34,739,070 |
) |
|
|
(28,360,661 |
) |
Operating
Costs
|
|
|
|
|
|
|
(9,176,254 |
) |
|
|
(5,991,936 |
) |
|
|
(5,819,415 |
) |
Depreciation
and amortisation expenses
|
|
|
|
|
|
|
(18,454,203 |
) |
|
|
(18,071,565 |
) |
|
|
(17,202,137 |
) |
Impairment
of property, plant and equipment
|
|
|
3 |
|
|
|
- |
|
|
|
(87,570,180 |
) |
|
|
- |
|
Marketing
and administration
|
|
|
|
|
|
|
(1,165,789 |
) |
|
|
(1,035,217 |
) |
|
|
(1,224,506 |
) |
Contracts
and consultants
|
|
|
|
|
|
|
(10,257,994 |
) |
|
|
(6,946,025 |
) |
|
|
(8,730,195 |
) |
Employee
benefits expense |
|
|
|
|
|
|
(4,644,511 |
) |
|
|
(4,197,511 |
) |
|
|
(3,973,532 |
) |
Other
expenses
|
|
|
|
|
|
|
(363,209 |
) |
|
|
(419,731 |
) |
|
|
(479,670 |
) |
Operating
loss before finance costs
|
|
|
|
|
|
|
(5,947,284 |
) |
|
|
(97,247,197 |
) |
|
|
(14,398,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income
|
|
|
3 |
|
|
|
1,411,480 |
|
|
|
1,275,453 |
|
|
|
1,118,183 |
|
Financial
expenses
|
|
|
3 |
|
|
|
(70,409,864 |
) |
|
|
(60,167,274 |
) |
|
|
(40,655,408 |
) |
Net
financing costs
|
|
|
|
|
|
|
(68,998,384 |
) |
|
|
(58,891,821 |
) |
|
|
(39,537,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax expense
|
|
|
|
|
|
|
(74,945,668 |
) |
|
|
(156,139,018 |
) |
|
|
(53,935,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense /(benefit)
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
loss after income tax expense/(benefit)
|
|
|
|
|
|
|
(74,945,668 |
) |
|
|
(156,139,018 |
) |
|
|
(53,935,761 |
) |
Attributable
to members
|
|
|
|
|
|
|
(74,945,668 |
) |
|
|
(156,139,018 |
) |
|
|
(53,935,761 |
) |
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Statement
of Changes in Equity
For
the year ended 30 June 2005 (unaudited)
|
|
Combined Participating Interest and Issued
Capital
|
|
|
Retained Earnings / (Accumulated
Deficit)
|
|
|
Total
|
|
Opening
balance as at 1 July 2004
|
|
|
300,012,158 |
|
|
|
(37,248,930 |
) |
|
|
262,763,228 |
|
Net
loss for the period
|
|
|
- |
|
|
|
(53,935,761 |
) |
|
|
(53,935,761 |
) |
Closing
balance at 30 June 2005
|
|
|
300,012,158 |
|
|
|
(91,184,691 |
) |
|
|
208,827,467 |
|
For
the year ended 30 June 2006
|
|
Combined Participating Interest and Issued
Capital
|
|
|
Other contributed equity
(i)
|
|
|
Retained Earnings / (Accumulated
Deficit)
|
|
|
Reserves
|
|
|
Total
|
|
Opening
balance as at 1 July 2005
|
|
|
300,012,158 |
|
|
|
- |
|
|
|
(91,184,691 |
) |
|
|
- |
|
|
|
208,827,467 |
|
Effect
of change in accounting policy
|
|
|
- |
|
|
|
21,761,379 |
|
|
|
(21,761,379 |
) |
|
|
(6,430,385 |
) |
|
|
(6,430,385 |
) |
Net
loss for the period
|
|
|
- |
|
|
|
- |
|
|
|
(156,139,018 |
) |
|
|
- |
|
|
|
(156,139,018 |
) |
Deemed
equity contribution – Note 22
|
|
|
- |
|
|
|
14,230,355 |
|
|
|
- |
|
|
|
- |
|
|
|
14,230,355 |
|
Movement
in fair value of hedging instruments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
86,068 |
|
|
|
86,068 |
|
Closing
balance at 30 June 2006
|
|
|
300,012,158 |
|
|
|
35,991,734 |
|
|
|
(269,085,088 |
) |
|
|
(6,344,317 |
) |
|
|
60,574,487 |
|
For
the year ended 30 June 2007 (unaudited)
|
|
Combined Participating Interest and Issued
Capital
|
|
|
Other contributed equity
(i)
|
|
|
Retained Earnings / (Accumulated
Deficit)
|
|
|
Reserves
|
|
|
Total
|
|
Opening
balance as at 1 July 2006
|
|
|
300,012,158 |
|
|
|
35,991,734 |
|
|
|
(269,085,088 |
) |
|
|
(6,344,317 |
) |
|
|
60,574,487 |
|
Net
loss for the period
|
|
|
- |
|
|
|
- |
|
|
|
(74,945,668 |
) |
|
|
- |
|
|
|
(74,945,668 |
) |
Deemed
equity contribution – Note 22
|
|
|
- |
|
|
|
14,230,355 |
|
|
|
- |
|
|
|
- |
|
|
|
14,230,355 |
|
Movement
in fair value of hedging instruments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,911,230 |
|
|
|
6,911,230 |
|
Closing
balance at 30 June 2007
|
|
|
300,012,158 |
|
|
|
50,222,089 |
|
|
|
(344,030,756 |
) |
|
|
566,913 |
|
|
|
(6,770,404 |
) |
Amounts
are stated net of tax
(i) Refer
to Note 22 for further detail.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Balance
Sheet
|
|
Note
|
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
6 |
|
|
|
20,787,021 |
|
|
|
28,589,938 |
|
Receivables
|
|
|
7 |
|
|
|
9,688,413 |
|
|
|
8,197,268 |
|
Materials
and supplies
|
|
|
|
|
|
|
2,896,796 |
|
|
|
3,013,539 |
|
Other
assets
|
|
|
8 |
|
|
|
4,383,153 |
|
|
|
1,470,663 |
|
TOTAL
CURRENT ASSETS
|
|
|
|
|
|
|
37,755,383 |
|
|
|
41,271,408 |
|
NON-CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
3
& 9
|
|
|
|
683,617,314 |
|
|
|
695,584,818 |
|
TOTAL
NON-CURRENT ASSETS
|
|
|
|
|
|
|
683,617,314 |
|
|
|
695,584,818 |
|
TOTAL
ASSETS
|
|
|
|
|
|
|
721,372,697 |
|
|
|
736,856,226 |
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables
and other liabilities
|
|
|
10 |
|
|
|
19,648,526 |
|
|
|
15,072,497 |
|
Deferred
income
|
|
|
11 |
|
|
|
90,877 |
|
|
|
83,680 |
|
Borrowings
|
|
|
12 |
|
|
|
2,403,000 |
|
|
|
15,856,085 |
|
Employee
entitlements
|
|
|
1 |
j |
|
|
291,855 |
|
|
|
230,104 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
|
|
|
|
22,434,258 |
|
|
|
31,242,366 |
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables
and other liabilities
|
|
|
10 |
|
|
|
10,268,291 |
|
|
|
16,904,221 |
|
Deferred
income
|
|
|
11 |
|
|
|
48,852,394 |
|
|
|
48,943,271 |
|
Borrowings
|
|
|
12
|
|
|
|
633,012,033 |
|
|
|
579,163,557 |
|
Employee
entitlements |
|
|
1 |
j |
|
|
35,317 |
|
|
|
28,324 |
|
TOTAL
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
692,168,035 |
|
|
|
645,039,373 |
|
TOTAL
LIABILITIES
|
|
|
|
|
|
|
714,602,293 |
|
|
|
676,281,739 |
|
NET
ASSETS
|
|
|
|
|
|
|
6,770,404 |
|
|
|
60,574,487 |
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Participating
Interest and Issued Capital
|
|
13
|
|
|
|
300,012,158
|
|
|
|
300,012,158
|
|
Other
contributed equity |
|
13
& 22 |
|
|
|
50,222,089
|
|
|
|
35,991,734 |
|
Reserves |
|
13 |
|
|
|
566,913 |
|
|
|
(6,344,317) |
|
Retained
earnings (accumulated deficit)
|
|
|
|
|
|
|
(344,030,756 |
) |
|
|
(269,085,088 |
) |
TOTAL
EQUITY
|
|
|
|
|
|
|
6,770,404 |
|
|
|
60,574,487 |
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Statement
of cash flows
|
|
Note
|
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
|
Unaudited June 2005
$
|
|
CASH
FLOW FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipts
from customers
|
|
|
|
|
|
78,869,327 |
|
|
|
66,277,415 |
|
|
|
49,624,438 |
|
Payments
to suppliers and employees
|
|
|
|
|
|
(65,896,969 |
) |
|
|
(64,153,474 |
) |
|
|
(42,068,855 |
) |
Borrowing
costs
|
|
|
|
|
|
(26,851,775 |
) |
|
|
(24,129,707 |
) |
|
|
(28,695,956 |
) |
Net
cash provided by (used in) operating activities
|
|
|
19 |
b |
|
|
(13,879,417 |
) |
|
|
(22,005,766 |
) |
|
|
(21,140,373 |
) |
CASH
FLOW FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
|
|
|
|
129,918 |
|
|
|
500 |
|
|
|
151,643 |
|
Payment
for property, plant and equipment
|
|
|
|
|
|
|
(7,433,727 |
) |
|
|
(9,041,962 |
) |
|
|
(15,335,424 |
) |
Net
cash provided by (used in) investing activities
|
|
|
|
|
|
|
(7,303,809 |
) |
|
|
(9,041,462 |
) |
|
|
(15,183,781 |
) |
CASH
FLOW FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings - external
|
|
|
|
|
|
|
5,158,000 |
|
|
|
8,171,001 |
|
|
|
14,244,594 |
|
Proceeds
from borrowings – consortium participants
|
|
|
|
|
|
|
11,467,210 |
|
|
|
32,731,316 |
|
|
|
27,922,586 |
|
Repayment
of borrowings
|
|
|
|
|
|
|
(3,244,901 |
) |
|
|
(3,177,896 |
) |
|
|
(13,186,335 |
) |
Net
cash provided by (used in) financing activities
|
|
|
|
|
|
|
13,380,309 |
|
|
|
37,724,421 |
|
|
|
28,990,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash held
|
|
|
|
|
|
|
(7,802,917 |
) |
|
|
6,677,193 |
|
|
|
(7,333,309 |
) |
Cash
at beginning of year
|
|
|
|
|
|
|
28,589,938 |
|
|
|
21,912,745 |
|
|
|
29,246,054 |
|
Cash
at end of year
|
|
|
19 |
a |
|
|
20,787,021 |
|
|
|
28,589,938 |
|
|
|
21,912,745 |
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Notes
to the financial statements
Note 1
|
Statement of significant
accounting
policies
|
The Asia
Pacific Transport Consortium (‘Consortium’ or 'entity’) was established for the
purpose of constructing 1,420 kilometres of rail line between Alice Springs and
Darwin, the lease and maintenance of the existing 830 kilometre line between
Tarcoola and Alice Springs, integration of the railway line with Darwin’s
East-Arm Port, and operation of the Adelaide to Darwin line for 50 years from
January 2004.
The South
Australian and Northern Territory governments, through a statutory body,
AustralAsia Railway Corporation ("AARC"), established a legislative framework to
co-ordinate and oversee the establishment of the railway. The Concession Deed
sets out the fundamental terms between AARC and the Consortium to finance,
construct, operate, repair and maintain the railway for a 50 year concession
term from the date of completion of construction (2004). Under terms of the
Concession Deed, AARC provided the Consortium with leases and subleases
providing title to the Corridor for at least the term of the Concession Deed,
including leases from the government and various Aboriginal land trusts over
lands within the Corridor. The Concession Deed provides certain assurances to
the Consortium regarding entitlement to exclusive possession, quiet possession
and limited responsibility for certain interests. The Concession Deed also
provides that AARC was responsible for procuring and paying for the construction
of certain government works as part of the construction of the railway. The
government works, which included the construction of certain earthworks,
culverts and bridges, were completed during construction of the railway. Refer
to note 17 for further discussion of the service concession
arrangement.
The
Consortium comprises the following entities domiciled in Australia:
Asia
Pacific Transport Joint Venture (an unincorporated joint venture);
Freight
Link Pty Ltd;
Asia
Pacific Transport Pty Ltd (and its controlled entity, Asia Pacific Transport
Finance Pty Ltd); and
Asia
Pacific Contracting Pty Ltd.
The
Consortium performs all rail safety, marketing, operation and asset management
functions associated with the business. The Consortium has outsourced a number
of activities, including train control, train crewing, terminal loading, port
operations and maintenance associated with track and rolling stock, to rail
service providers.
The joint
venture agreement requires that the joint venture partners of Asia Pacific
Transport Joint Venture (‘APTJV’) have identical equity interests in the other
group entities. The joint venture partners must at all times act in the best
interest of the Consortium.
This
Financial Report of the Consortium has been prepared based upon a business
combination of APTJV (the deemed parent), its group entities (Freight Link Pty
Ltd, Asia Pacific Transport Pty Ltd, Asia Pacific Transport Finance Pty Ltd and
Asia Pacific Contracting Pty Ltd) in accordance with UIG 1013 “Consolidated
Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangements”.
This financial report is a general purpose report which has been prepared in
accordance with the requirements of Australian Accounting standards adopted by
the Australian Accounting Standards Board (‘AASB’).
The
financial report for the year ended 30 June 2007 is unaudited but has been
compiled from the Consortium’s audited consolidated financial report for the
same period (the year ended 30 June 2007). The 2006 comparatives in this report
are audited.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Statement
of Compliance
International
Financial Reporting Standards (“IFRSs”) form the basis of Australian Accounting
Standards adopted by the AASB, being Australian equivalents to IFRS (“AIFRS”).
The financial report also complies with IFRSs and interpretations adopted by the
International Accounting Standards Board.
Basis
of preparation
The
financial report is presented in Australian dollars. It has been prepared on an
accruals basis and is based on historical costs and does not take into account
changing money values or, except where stated, current valuations of non-current
assets. The entity has not early adopted any of the accounting standards and
amendments available for early adoption as none are expected to have a material
impact on the financial position of the entity.
Basis
of consolidation
This
Financial Report of the AsiaPacific Transport Consortium has been prepared based
upon a business combination of APTJV (the deemed parent) and its group entities
in accordance with UIG 1013 “Consolidated Financial Reports in relation to
Pre-Date-of-Transition Stapling Arrangements”.
Controlled
entities are entities controlled by APTJV or its group entities. Control exists
when the entity has the power, directly or indirectly, to govern the financial
and operating policies of an entity to obtain benefits from its activities. The
financial statements of controlled entities are included in the consolidated
financial report from the date that control commences until the date that
control ceases.
Unrealised
gains and losses and inter-entity balances resulting from transactions with or
between entities are eliminated in full within the Consortium.
Going
concern
The
entity has been contracted to the AustralAsia Railway Corporation to undertake,
build, own and operate the Adelaide to Darwin Rail Project (the “Project”). The
entity and parties to the Project are confident of the success of the Project
(supported by detailed financial modelling) and have undertaken to support each
other through the initial stages of the Project. At 30 June 2007, the entity had
net assets of $7m, reflected by participating interests and contributed equity
of $351m, offset by accumulated deficit/reserves of $344m.
In
December 2006 the entity agreed a “Standstill Term” up to March 2009 with the
Senior Banks for a waiver of principal during the Standstill period and
Shareholders committed support of $14.4 million; the shareholders providing the
support being KBR, Carillion and GWA. The Consortium believes it will be able to
meet its ongoing obligations from operating cash flows under the Standstill Term
through 31 March 2009. Accordingly, the financial report has been prepared on a
going concern basis which contemplates the continuity of normal business
activities and the realisation of assets and settlement of liabilities in the
ordinary course of business.
The
preparation of a financial report in conformity with AIFRS requires management
to make judgements, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the judgements
about carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates. The
estimates and judgements that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year relate to going concern (refer Note 1 previous comments) and
impairment (refer Note 1(l).
The
estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in the period in which the estimate is
revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future
periods.
The
accounting policies set out below have been applied consistently to all periods
presented in the financial report. None of the standards, amendments to
standards and interpretations available for early adoption have been early
adopted as none, with the possible exception of Interpretation 12, are expected
to have a significant impact on the financial statements of the Consortium.
Interpretation 12 Service Concession Arrangements, which is effective in the
financial year ended 30 June 2009, addresses the accounting for service
concession operators in public to private service concession arrangements. The
potential effect of the Interpretation on the Consortium's financial statements
has not yet been determined.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Freight
service revenue is recognized when the freight departs from the terminal. This
policy results in recognition of revenue in a manner that does not differ
materially from proportional revenue recognition as a shipment moves from origin
to destination and related expenses are recognised as incurred.
Government
grants are recognised in the balance sheet initially as deferred income and then
released to income on a systematic basis in the same periods in which the
expenses for which the grant was received are incurred. The entity has
recognised as a government grant the difference between the present value of the
Corporation/government loan and its $50m face value as outlined in Note 22.
Deferred income is being recognised over the loan redemption period to
2054.
Interest
revenue is recognised on an accrual basis taking in to account the interest
rates applicable to the financial assets.
All
revenue is stated net of the amount of goods and services tax
(GST).
For the
purposes of the statement of cash flows, cash includes cash on hand and at call
deposits with banks or financial institutions.
Receivables
are stated at their cost less impairment losses. Debtors to be settled within 30
days are carried at amounts due. The collectability of debts is assessed at
balance date and an impairment charge made for any doubtful
accounts.
d.
|
Property,
Plant and Equipment
|
Plant
and equipment
Items of
property, plant and equipment are stated at cost less accumulated depreciation
(see below) and impairment losses (see accounting policy l). The cost of
self-constructed assets includes the cost of materials, direct labour, the
initial estimate, where relevant, of the costs of dismantling and removing the
items and restoring the site on which they are located, and an appropriate
proportion of production overheads. Where parts of an item of property, plant
and equipment have different useful lives, they are accounted for as separate
items of property, plant and equipment.
Preliminary
costs associated with the formation of the Project have been capitalised into
cost of construction related assets and are amortised over periods (between 5
and 50 years) that reflect the duration of benefit arising from the
asset.
Depreciation
The
depreciable amount of all fixed assets including buildings and capitalised
leased assets, but excluding freehold land, are depreciated on a straight line
basis over their useful lives to the joint venture commencing from the time the
asset is held ready for use. Leasehold improvements are depreciated over the
shorter of either the unexpired period of the lease or the estimated useful
lives of the improvements.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
The
depreciation rates used in the current and comparative periods are:
Class
of Fixed Asset
|
Depreciation
Rate
|
|
|
Buildings
(Terminals)
|
3%-15%
|
Infrastructure
(Track)
|
2%-10%
|
Plant
& Equipment / Office & Administration
|
2%-40%
|
Rolling
Stock
|
5%
|
Leases of
fixed assets, where substantially all the risks and benefits incidental to the
ownership of the asset, but not legal ownership, are transferred to the entity
are classified as finance leases. Finance leases are capitalised recording an
asset and a liability equal to the present value of the minimum lease payments,
including any guaranteed residual value. Leased assets are depreciated on a
straight line basis over their estimated useful lives where it is likely that
the economic entity will obtain ownership of the asset or over the term of the
lease. Lease payments are allocated between the reduction of the lease liability
and the lease interest expense for the period.
Lease
payments under operating leases, where substantially all the risks and benefits
remain with the lessor, are recognised in the income statement on a
straight-line basis over the term of the lease.
The
entity was assigned leases at nil cost to enable it to undertake the Project on
the rail corridor. No value was assigned to these leases at the time of
receipt.
f.
|
Materials
and supplies
|
Materials
and supplies, consisting mainly of items for maintenance of property and
equipment are stated at the lower of cost or market. The cost of materials and
supplies is based on the first-in first-out principle and includes expenditure
incurred in acquiring the materials and supplies and bringing them to their
existing location and condition.
g.
|
Payables
and other liabilities
|
Liabilities
are recognised for amounts to be paid in the future for goods or services
received and are stated at cost. Trade accounts payable are normally settled
within 30 days.
Loans
received at below-market rates are initially measured at their fair value. Any
difference between the fair value of the loan on initial recognition and the
amount received is accounted for according to its nature (see accounting policy
n).
A
provision is recognised in the balance sheet when the entity has a present legal
or constructive obligation as a result of a past event, and it is probable that
an outflow of economic benefits will be required to settle the obligation. If
the effect is material, provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market assessments of
the time value of money and, where appropriate, the risks specific to the
liability.
As stated
in Note 1 previously, the entity for the purposes of this report comprises one
joint venture as deemed parent entity and four companies.
The joint
venture is not a taxable entity and lodges a tax return as a Partnership.
Accordingly, any tax liabilities are the responsibility of the individual
partners and the report does not contain any income tax expense or provision
with respect to the joint venture.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Income
tax on the profit or loss for the year of the other four companies comprises
current and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly in
equity.
Current
tax is the expected tax payable on the taxable income for the year, using tax
rates enacted or substantially enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
Deferred
tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes. The
following temporary differences are not provided for: goodwill, the initial
recognition of assets or liabilities that affect neither accounting nor taxable
profit, and differences relating to investments in subsidiaries to the extent
that they will probably not reverse in the foreseeable future. The amount of
deferred tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets or liabilities, using tax rates
enacted or substantially enacted at the balance sheet date.
A
deferred tax asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer
probable that the related tax benefit will be realised.
The
entity’s net obligation in respect of long-term service benefits, other than
pension plans, is the amount of future benefit that employees have earned in
return for their service in the current and prior periods. The obligation is
calculated using expected future increases in wage and salary rates including
related on-costs and expected settlement dates and is discounted using the rates
attached to the Commonwealth Government bonds at the balance sheet date which
have maturity dates approximating to the terms of the entity’s
obligations.
Liabilities
for employee benefits for wages, salaries, annual leave and sick leave that are
expected to be settled within 12 months of the reporting date represent present
obligations resulting from employees’ services provided to reporting date, are
calculated at undiscounted amounts based on remuneration wages and salary rates
that the entity expects to pay as at reporting date including related on-costs,
such as workers compensation insurance and payroll tax.
Non-accumulating
non-monetary benefits, such as medical care, housing, cars and free or
subsidised goods and services, are expensed based on the net marginal cost to
the entity as the benefits are taken by employees.
k.
|
Foreign
currency transactions and balances
|
Foreign
currency transactions during the period are converted to Australian currency at
the rates of exchange applicable at the dates of the transactions. Amounts
receivable and payable in foreign currencies at balance date are converted to
the rates of exchange ruling at that date.
The gains
and losses from conversion of short-term assets and liabilities, whether
realised or unrealised, are included in profit from ordinary activities as they
arise.
The
carrying amounts of non-current assets valued on the cost basis are reviewed to
determine whether there is any indication of impairment at balance date. If any
such indication exists, the asset’s recoverable amount is estimated. An
impairment loss is recognised whenever the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. Impairment losses are
recognised in the income statement, unless an asset has previously been
revalued, in which case the impairment loss is recognised as a reversal to the
extent of that previous revaluation with any excess recognised through profit or
loss.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Impairment
losses recognised in respect of cash-generating units are allocated first to
reduce the carrying amount of any goodwill allocated to cash-generating units
(group of units) and then, to reduce the carrying amount of the other assets in
the unit (group of units) on a pro rata basis.
The
recoverable amount of assets is the greater of their net selling price and value
in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset. For an asset that does not generate largely independent cash inflows,
the recoverable amount is determined for the cash-generating unit to which the
asset belongs.
An
impairment loss is reversed if there is an indication that the impairment loss
may no longer exist and there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset’s carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortisation, if no
impairment loss had been recognised.
m.
|
Goods
and services tax
|
Revenues,
expenses and assets are recognised net of the amount of goods and services tax
(GST), except where the amount of GST incurred is not recoverable from the
Australian Taxation Office (ATO). In these circumstances the GST is recognised
as part of the cost of acquisition of the asset or as part if an item of the
expense. Receivables and payables are stated with the amount of GST included.
The net amount of GST recoverable from, or payable to, the ATO is included as a
current asset or liability in the balance sheet. Cash flows are included in the
statement of cash flows on a gross basis. The GST components of cash flows
arising from the investing or financing activities which are recoverable from,
or payable to, the ATO are classified as operating cash flows.
n.
|
Interest-bearing
borrowings
|
Interest-bearing
borrowings are recognised initially at fair value less attributable transaction
costs. Subsequent to initial recognition, interest-bearing borrowings are stated
at amortised cost with any difference between cost and redemption value being
recognised in the income statement over the period of the borrowings on an
effective interest basis.
Net
financing costs comprise interest payable on borrowings calculated using the
effective interest rate method, interest receivable on funds invested, dividend
income, and gains and losses on hedging instruments that are recognised in the
income statement (see accounting policy p).
Interest
income is recognised in the income statement as it accrues, using the effective
interest method. Dividend income is recognised in the income statement on the
date the entity’s right to receive payments is established. The interest expense
component of finance lease payments is recognised in the income statement using
the effective interest rate method.
The
entity uses derivative financial instruments to hedge its exposure to interest
rate risks arising from operational and financing activities. In accordance with
its treasury policy, the entity does not hold or issue derivative financial
instruments for trading purposes.
Derivative
financial instruments are recognised initially at cost. Subsequent to initial
recognition, derivative financial instruments are stated at fair value. The gain
or loss on re-measurement to fair value is recognised immediately in profit or
loss. However, where derivatives qualify for hedge accounting, recognition of
any resultant gain or loss depends on the nature of the item being hedged (see
accounting policy p).
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
The fair
value of interest rate swaps is the estimated amount that the entity would
receive or pay to terminate the swap at the balance sheet date, taking into
account current interest rates and the current creditworthiness of the swap
counterparties. The fair value of forward exchange contracts is their quoted
market price at the balance sheet date, being the present value of the quoted
forward price.
Where a
derivative financial instrument is designated as a hedge of the variability in
cash flows of a recognised asset or liability, or a highly probable forecasted
transaction, the effective part of any gain or loss on the derivative financial
instrument is recognised directly in equity. The ineffective part of any gain or
loss is recognised immediately in the income statement. When the forecasted
transaction subsequently results in the recognition of a non-financial asset or
non-financial liability, the associated cumulative gain or loss is removed from
equity and included in the initial cost or other carrying amount of the
non-financial asset or liability. If a hedge of a forecasted transaction
subsequently results in the recognition of a financial asset or a financial
liability, the associated gains and losses that were recognised directly in
equity are reclassified into profit or loss in the same period or periods during
which the asset acquired or liability assumed affects profit or loss (i.e., when
interest income or expense is recognised).
When a
hedging instrument expires or is sold, terminated or exercised, or the entity
revokes designation of the hedge relationship, but the hedged forecast
transaction is still expected to occur, the cumulative gain or loss at that
point remains in equity and is recognised in accordance with the above policy
when the transaction occurs. If the hedged transaction is no longer expected to
take place, the cumulative unrealised gain or loss recognised in equity is
recognised immediately in the income statement.
Borrowing
costs incurred in relation to qualifying assets are capitalised into the cost of
the asset and amortised over the asset's useful life following completion of the
asset's construction. Borrowing costs incurred which are not related to
qualifying assets are expensed as incurred.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
2 Revenue
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
|
Unaudited June 2005
$
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
–
Freight service revenue
|
|
|
80,196,304 |
|
|
|
61,724,038 |
|
|
|
51,391,580 |
|
Total
Revenue
|
|
|
80,196,304 |
|
|
|
61,724,038 |
|
|
|
51,391,580 |
|
Note
3
|
Other
Disclosable Expenses
|
Finance
costs:
|
|
|
|
|
|
|
|
|
|
–
interest income
|
|
|
(1,327,800 |
) |
|
|
(1,198,399 |
) |
|
|
(1,118,183 |
) |
–
Corporation Loan Grant income
|
|
|
(83,680 |
) |
|
|
(77,054 |
) |
|
|
- |
|
–
interest expense, OpCo Notes (ii)
|
|
|
14,230,355 |
|
|
|
14,230,355 |
|
|
|
- |
|
–
other interest expense
|
|
|
56,121,391 |
|
|
|
45,799,096 |
|
|
|
40,482,770 |
|
–
borrowing fees
|
|
|
58,118 |
|
|
|
137,823 |
|
|
|
172,638 |
|
|
|
|
68,998,384 |
|
|
|
58,891,821 |
|
|
|
39,537,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortisation of property, plant and equipment
|
|
|
18,454,203 |
|
|
|
18,071,565 |
|
|
|
17,202,137 |
|
Sale
of property, plant and equipment
|
|
|
817,110 |
|
|
|
1,882 |
|
|
|
7,791 |
|
Impairment
of property, plant and equipment (i)
|
|
|
- |
|
|
|
87,570,180 |
|
|
|
- |
|
Remuneration
of auditor:
|
|
|
|
|
|
|
|
|
|
|
|
|
–
audit or review – KPMG
|
|
|
40,000 |
|
|
|
38,000 |
|
|
|
35,000 |
|
–
other services – KPMG
|
|
|
41,275 |
|
|
|
39,150 |
|
|
|
56,365 |
|
–
other services – other auditors
|
|
|
- |
|
|
|
- |
|
|
|
5,560 |
|
(i)
|
At
June 2007, the present book value of future operating cash flows
representing the recoverable amount of PP&E under the value in use
assumption was equivalent to the 30 June 2007 $684m PP&E carrying
value, and hence an impairment charge is not required. The discount rate
utilised in the financial model was
10.45%.
|
At June
2006, the present value of future operating cash flows representing the
recoverable amount of PP&E under the value in use assumption was below the
30 June 2006 $783m PP&E carrying value, and hence an impairment charge of
$87,570,180 was recorded. The discount rate utilised in the financial model was
10.44%.
(ii)
|
Refer
to Note 22 for further detail.
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
4 Income tax
expense
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
|
Unaudited June 2005
$
|
|
|
|
|
|
|
|
|
|
|
|
Recognised
in the income statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
tax expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Deferred
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
–
Temporary differences
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
–
Benefit of tax losses recognised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
income tax expense / (benefit) in income statement
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
All
attributable to continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
The
prima facie tax payable on profit is reconciled to the income tax expense
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prima
facie tax payable on loss before income tax at 30%
|
|
|
(22,483,700 |
) |
|
|
(42,572,598 |
) |
|
|
(16,180,728 |
) |
Add
tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
–
Other non-allowable items
|
|
|
(2,444,864 |
) |
|
|
8,506 |
|
|
|
6,477 |
|
–
Unrecognised deferred tax asset
|
|
|
24,928,564 |
|
|
|
42,564,092 |
|
|
|
16,174,251 |
|
Income
Tax Expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets have not been recognised in respect of the following
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
losses (in Freight Link Pty Ltd)
|
|
|
60,941,469 |
|
|
|
43,524,285 |
|
|
|
27,269,345 |
|
The
deductible tax losses do not expire under current tax legislation. No deferred
tax assets have been recognised because it is not probable that future taxable
profit will be available against which the entity can utilise the benefits there
from.
Note
5:
|
Key
management personnel disclosures
|
The key
management personnel comprise the directors and CEO of Freight Link Pty Ltd,
with remuneration as follows:
Short-term
employee benefits
|
|
|
986,789 |
|
|
|
820,780 |
|
|
|
1,000,616 |
|
Other
long-term benefits
|
|
|
88,811 |
|
|
|
73,870 |
|
|
|
62,718 |
|
Total
|
|
|
1,075,600 |
|
|
|
894,650 |
|
|
|
1,063,334 |
|
Refer to
Note 17 for other related party transactions.
The
following were key management personnel of the entity at any time during the
year:
Mr
Nick Bowen
|
Dr
Dan Norton
|
Mr
Tim Fischer
|
Mr
Doug Ridley
|
Mr
Malcolm Kinnaird, AO
|
Mr
Mark Snape
|
Mr
Brett Lazarides
|
Mr
Ron Thomas
|
Mr
Brian McGlynn
|
Mr
Bill Woodhead
|
Mr
Bruce McGowan
|
Mr
John
Fullerton
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
6: Cash
|
|
Note
|
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
Cash
at bank
|
|
|
6 |
a |
|
|
20,786,621 |
|
|
|
28,589,538 |
|
Cash
on hand
|
|
|
|
|
|
|
400 |
|
|
|
400 |
|
|
|
|
|
|
|
|
20,787,021 |
|
|
|
28,589,938 |
|
|
a.
Cash available is governed by finance covenants with
lenders.
|
Trade
debtors
|
|
|
8,905,614 |
|
|
|
7,578,637 |
|
Other
debtors
|
|
|
782,799 |
|
|
|
618,631 |
|
|
|
|
9,688,413 |
|
|
|
8,197,268 |
|
CURRENT
|
|
|
|
|
|
|
Prepayments
Other
|
|
|
4,340,552 42,601 |
|
|
|
1,360,027 110,636 |
|
|
|
|
4,383,153 |
|
|
|
1,470,663 |
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
9:
|
Property,
plant and equipment
|
|
|
Office
& Administration
|
|
|
Plant
|
|
|
Terminals
|
|
|
Track
|
|
|
Rollingstock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At
cost
|
|
|
1,409,446 |
|
|
|
1,211,794 |
|
|
|
828,973 |
|
|
|
771,585,682 |
|
|
|
54,298,694 |
|
|
|
829,334,589 |
|
Accumulated
amortisation/depreciation/impairment
|
|
|
(1,035,493 |
) |
|
|
(267,335 |
) |
|
|
(163,921 |
) |
|
|
(132,062,223 |
) |
|
|
(12,188,303 |
) |
|
|
(145,717,275 |
) |
|
|
|
373,953 |
|
|
|
944,459 |
|
|
|
665,052 |
|
|
|
639,523,459 |
|
|
|
42,110,391 |
|
|
|
683,617,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
cost
|
|
|
1,284,653 |
|
|
|
1,189,409 |
|
|
|
775,330 |
|
|
|
769,318,708 |
|
|
|
50,303,118 |
|
|
|
822,871,218 |
|
Accumulated
amortisation/depreciation
|
|
|
(784,362 |
) |
|
|
(199,138 |
) |
|
|
(131,914 |
) |
|
|
(116,675,919 |
) |
|
|
(9,495,067 |
) |
|
|
(127,286,400 |
) |
|
|
|
500,291 |
|
|
|
990,271 |
|
|
|
643,416 |
|
|
|
642,642,789 |
|
|
|
40,808,051 |
|
|
|
695,584,818 |
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
9:
|
Property,
plant and equipment (continued)
|
Movement
in the carrying amounts for each class of property, plant and equipment between
the beginning and the end of the current financial year.
|
|
|
|
|
|
|
|
2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
& Administration
|
|
|
Plant
|
|
|
Terminals
|
|
|
Track
|
|
|
Rollingstock
|
|
|
Total
|
|
Carrying
amount at beginning of year
|
|
|
500,291 |
|
|
|
990,271 |
|
|
|
643,416 |
|
|
|
652,642,789 |
|
|
|
40,808,051 |
|
|
|
695,584,818 |
|
Additions
|
|
|
124,793 |
|
|
|
22,387 |
|
|
|
53,643 |
|
|
|
2,266,973 |
|
|
|
4,965,931 |
|
|
|
7,433,727 |
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(947,028 |
) |
|
|
(947,028 |
) |
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Depreciation
|
|
|
(251,131 |
) |
|
|
(68,199 |
) |
|
|
(32,007 |
) |
|
|
(15,386,303 |
) |
|
|
(2,716,563 |
) |
|
|
(18,454,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount at end of year
|
|
|
373,953 |
|
|
|
944,459 |
|
|
|
665,052 |
|
|
|
639,523,459 |
|
|
|
42,110,391 |
|
|
|
683,617,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount at beginning of year
|
|
|
668,299 |
|
|
|
606,612 |
|
|
|
591,566 |
|
|
|
748,674,315 |
|
|
|
41,572,535 |
|
|
|
792,113,327 |
|
Additions
|
|
|
210,551 |
|
|
|
551,329 |
|
|
|
160,730 |
|
|
|
1,500,421 |
|
|
|
6,618,931 |
|
|
|
9,041,962 |
|
Disposals
|
|
|
(2,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,382 |
) |
Impairment
|
|
|
(62,984 |
) |
|
|
(124,670 |
) |
|
|
(81,002 |
) |
|
|
(82,164,023 |
) |
|
|
(5,137,501 |
) |
|
|
(87,570,180 |
) |
Depreciation
|
|
|
(313,193 |
) |
|
|
(43,000 |
) |
|
|
(27,878 |
) |
|
|
(15,367,924 |
) |
|
|
(2,245,914 |
) |
|
|
(17,997,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount at end of year
|
|
|
500,291 |
|
|
|
990,271 |
|
|
|
643,416 |
|
|
|
652,642,789 |
|
|
|
40,808,051 |
|
|
|
695,584,818 |
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
10: Payables and other liabilities
|
Note
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
CURRENT
|
|
|
|
|
|
|
|
Trade
creditors
|
|
|
|
13,980,510 |
|
|
|
10,125,976 |
|
Sundry
creditors
|
|
|
|
5,638,341 |
|
|
|
4,902,765 |
|
GST
payable
|
|
|
|
29,675 |
|
|
|
43,756 |
|
|
|
|
|
19,648,526 |
|
|
|
15,072,497 |
|
NON-CURRENT
|
|
|
|
|
|
|
|
|
|
Fair
value swaps (ii)
|
|
|
|
(566,913 |
) |
|
|
6,344,317 |
|
Project
contracts (at discount value) (i)
|
|
|
|
10,835,204 |
|
|
|
10,559,904 |
|
|
|
|
|
10,268,291 |
|
|
|
16,904,221 |
|
(i)
Relates to several amounts payable by the entity if funds are available – refer
Note 17 ‘D&C Contractor’ paragraph for further detail.
(ii)
Refer to note 20(a) for further detail.
Note
11: Deferred income
|
Note
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
CURRENT
|
|
|
|
|
|
|
|
Deferred
grant – Corporation loan (i)
|
|
|
|
90,877 |
|
|
|
83,680 |
|
|
|
|
|
90,877 |
|
|
|
83,680 |
|
NON-CURRENT
|
|
|
|
|
|
|
|
|
|
Deferred
grant – Corporation loan (i)
|
|
|
|
48,852,394 |
|
|
|
48,943,271 |
|
|
|
|
|
48,852,394 |
|
|
|
48,943,271 |
|
(i) At
the outset of the Project, a $50m loan was received from the AustralAsia Railway
Corporation, an entity owned by the South Australian and Northern Territory
governments, with repayment required by 2054. Interest payments may be required
in certain circumstances based on EBITDA performance against the entity’s 2003
“Base Case” financial model. However, due to the remote likelihood of the entity
achieving these results, on adoption of AASB 139 Financial Instruments:
Recognition and Measurement effective 1 July 2005 (refer Note 22), the loan has
been discounted at the entity’s weighted average cost of debt rate and
recognised as a component of borrowings at that present value (refer Note
12(b)). The difference between the present value of the loan and the $50m face
value has been accounted for as a deferred government grant, to be amortised to
income on the same basis as the loan is accreted to its $50m face
value.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
|
|
|
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from participating interest holders (e)
|
|
|
|
|
|
403,000 |
|
|
|
403,000 |
|
Working
Capital loan
|
|
|
|
|
|
2,000,000 |
|
|
|
2,000,000 |
|
Lease
liability (d)
|
|
|
|
|
|
- |
|
|
|
52,814 |
|
Senior
D - Amortising
|
|
|
|
|
|
- |
|
|
|
10,033,571 |
|
Senior
E – Rolling Stock
|
|
|
|
|
|
- |
|
|
|
3,366,700 |
|
|
|
|
12 |
a |
|
|
2,403,000 |
|
|
|
15,586,085 |
|
NON-CURRENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
C - Bullet
|
|
|
|
|
|
|
109,020,000 |
|
|
|
109,020,000 |
|
Senior
D - Amortising
|
|
|
|
|
|
|
167,268,639 |
|
|
|
159,663,016 |
|
Senior
E - Rolling Stock
|
|
|
|
|
|
|
53,321,081 |
|
|
|
45,613,334 |
|
Tier
1 Mezzanine (c )
|
|
|
|
|
|
|
114,408,242 |
|
|
|
100,017,220 |
|
Tier
2 Mezzanine
|
|
|
|
|
|
|
30,008,673 |
|
|
|
26,698,041 |
|
Loan
Notes-OPCO (c )
|
|
|
|
|
|
|
94,869,031 |
|
|
|
94,869,031 |
|
Loan
Notes-SON 1 (c )
|
|
|
|
|
|
|
58,847,446 |
|
|
|
38,782,790 |
|
Loan
Notes-SON 2 (c )
|
|
|
|
|
|
|
4,212,192 |
|
|
|
3,527,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
loan
|
|
|
12 |
b |
|
|
1,056,729 |
|
|
|
973,049 |
|
|
|
|
|
|
|
|
633,012,033 |
|
|
|
579,163,557 |
|
|
a.
|
Refer
Note 20d Finance arrangements for terms and conditions of borrowings
including covenants. Senior debt is secured under the Security Trust Deed
by a charge on all the entity’s assets.-refer Note17 ‘Equity
Investors’.
|
|
b.
|
Fair
value of loan (refer Note 11 (i) for
detail).
|
|
c.
|
Owed
either fully or partly to related parties – refer Note 17 ‘Equity
Investors’.
|
|
d.
|
Relates
to leased software asset, included in ‘Office and Administration’ assets
in Note 9.
|
|
e.
|
Loan
is non-interest bearing and repayable on
demand.
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
13:
|
Reserves
and Equity
|
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
Hedging
Reserve
|
|
|
|
|
|
|
The
hedging reserve comprises the effective portion of the cumulative net
change in the fair value of cash flow hedging instruments related to
hedged transactions that have not yet occurred.
|
|
|
|
|
|
|
—
Valuation at the beginning of the financial year
|
|
|
(6,344,317 |
) |
|
|
- |
|
—
Change in accounting policy at 1 July 2005
|
|
|
- |
|
|
|
(6,430,385 |
) |
—
Movement in fair value of hedging instruments
|
|
|
6,911,230 |
|
|
|
86,068 |
|
—
Valuation at the end of the financial year
|
|
|
566,913 |
|
|
|
(6,344,317 |
) |
Equity
|
|
|
|
|
|
|
|
|
Freight
Link Pty Ltd (95,992,500 shares on issue; 2006:
95,992,500)
|
|
|
959,925 |
|
|
|
959,925 |
|
Asia
Pacific Transport Joint Venture (participating interest)
|
|
|
299,048,929 |
|
|
|
299,048,929 |
|
Asia
Pacific Contracting Pty Ltd (165,200 shares on issue; 2006:
165,200)
|
|
|
1,652 |
|
|
|
1,652 |
|
Asia
Pacific Transport Pty Ltd (165,200 shares on issue; 2006:
165,200)
|
|
|
1,652 |
|
|
|
1,652 |
|
Other
contributed equity (i)
|
|
|
50,222,089 |
|
|
|
35,991,734 |
|
|
|
|
350,234,247 |
|
|
|
336,003,892 |
|
Voting
rights are in proportion to equity interests.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
|
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
a.
|
Operating
lease commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancellable
operating leases contracted for but not capitalised in the financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
–
not later than 1 year
|
|
|
7,873,140 |
|
|
|
2,556,996 |
|
|
–
later than 1 year but not later than 5 years
|
|
|
10,481,009 |
|
|
|
3,236,994 |
|
|
–
later than 5 years
|
|
|
26,837,343 |
|
|
|
- |
|
|
|
|
|
44,991,492 |
|
|
|
5,793,990 |
|
b.
|
Capital
Expenditure Commitments
|
|
|
|
|
|
|
|
|
|
Contracted
for:
|
|
|
|
|
|
|
|
|
|
–
plant and equipment purchases
|
|
|
- |
|
|
|
5,145,947 |
|
|
–
capital expenditure projects
|
|
|
3,302,000 |
|
|
|
- |
|
|
|
|
|
3,302,000 |
|
|
|
5,145,947 |
|
|
Payable:
|
|
|
|
|
|
|
|
|
|
–
not later than 1 year
|
|
|
3,302,000 |
|
|
|
5,145,947 |
|
|
–
later than 1 year and not later than 5 years
|
|
|
- |
|
|
|
- |
|
|
|
|
|
3,302,000 |
|
|
|
5,145,947 |
|
|
|
|
|
|
|
|
|
|
|
c.
|
Finance
Lease Commitments
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
|
|
–
not later than 1 year
|
|
|
- |
|
|
|
55,788 |
|
|
–
later than 1 year but not later than 5 years
|
|
|
- |
|
|
|
- |
|
|
–
later than 5 years
|
|
|
- |
|
|
|
- |
|
|
|
|
|
- |
|
|
|
55,788 |
|
|
Less:
future lease finance charges
|
|
|
- |
|
|
|
2,974 |
|
|
|
|
|
- |
|
|
|
52,814 |
|
|
Lease
liabilities provided for in the financial statements:
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
- |
|
|
|
52,814 |
|
|
Non-current
|
|
|
- |
|
|
|
- |
|
|
Total
lease liability
|
|
|
- |
|
|
|
52,814 |
|
|
|
|
|
|
|
|
|
|
|
d.
|
Other
Commitments
|
|
|
|
|
|
|
|
|
|
Contracted
for:
|
|
|
43,139,494 |
|
|
|
45,385,613 |
|
|
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
|
|
–
not later than 1 year
|
|
|
12,348,387 |
|
|
|
8,026,119 |
|
|
–
later than 1 year and not later than 5 years - later than 5
years
|
|
|
11,620,308 19,170,799 |
|
|
|
15,079,700 22,279,794 |
|
|
|
|
|
43,139,494 |
|
|
|
45,385,613 |
|
These
include commitments to the Sponsors for professional services which are
conditional on funds being available and lapse in 2008.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
15:
|
Contingent
liabilities
|
The
representatives are not aware of any circumstances or information that would
lead them to believe that the entity has a material contingent
liability.
Note
16:
|
Events
subsequent to balance date
|
The
Consortium will present a plan to the Senior Banks in 2008 to restructure,
refinance or sell the business under its obligations in the Standstill
Agreement. The Consortium continues to meet all of its obligations under the
Standstill Agreement.
Other
than noted in this section, there has not arisen in the interval between the end
of the financial year and the date of this report any item, transaction or event
of a material and unusual nature likely, in the opinion of the representatives
of the joint venture and the directors of the companies, to affect significantly
the operations of the Consortium, results of those operations, or the state of
affairs of the Consortium, at 30 June 2007.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
Note
17:
|
Related
party transactions
|
Due to
the size and complexity of the Project, there are a large number of parties
involved. The following diagram summarises the structure and the significant
entities:
Unaudited
Service
Concession Arrangement (Concession Deed)
Asia
Pacific Transport Joint Venture (‘APT’) is the entity contracted by the
AustralAsia Railway Corporation to undertake, build, own and operate the
Adelaide to Darwin Rail Project, a 50-year concession on the corridor from
Tarcoola to Darwin ending in 2054. Other APT companies are involved in the
financing and management of the construction contract. The D&C Contractor,
ADrail, was awarded the fixed sum, fixed duration contract to construct the
railway and associated infrastructure. Freight Link Pty Ltd operates the railway
with many of the activities being sub-contracted to other parties.
The
Consortium is required to maintain the railway and hand it over to the
AustralAsia Railway Corporation in good working condition at the conclusion of
the concession (or surrender the assets earlier if the Project fails), and is
otherwise wholly responsible for operations on the corridor during the
concession period. There are no service obligations imposed by the concession
arrangement apart from track capital expenditure which would be expended if
specific financial criteria are met in future years. There is no renewal
option.
Equity
Investors
·
|
Sponsors,
comprising subsidiary companies of the following
groups:
|
|
–
|
John
Holland Group Pty Ltd *(part of the Leighton
Group)
|
|
–
|
Barclay
Mowlem (Asia) Limited *(part of Carillion
plc)
|
|
–
|
Macmahon
Holdings Limited *
|
|
–
|
GWI
Holdings Pty Ltd (the owner of Australia Southern Railroad Pty
Ltd)
|
|
–
|
Colonial
Investment Services Limited *
|
|
–
|
Northern
Territory Government #
|
·
|
Aboriginal
corporations
|
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
|
–
|
Northern
Aboriginal Investment Corporation Pty
Limited
|
|
–
|
Centrecorp
Aboriginal Investment Corporation Pty
Ltd
|
|
*
|
Also
participate in Tier 1 Mezzanine debt on the same terms as other
Noteholders.
|
#
|
Also
participates in Tier 2 Mezzanine debt on the same terms as other
Noteholders.
|
APT
entities
All APT
entities are controlled by the Equity Investors:
Asia Pacific Transport Joint
Venture: contracted by the AustralAsia Railway Corporation to undertake,
build, own and operate the Adelaide to Darwin Rail Project.
Asia Pacific Transport Pty
Ltd: The nominee agent and trustee of and for the Asia Pacific Transport
Joint Venture.
Asia Pacific Transport Finance Pty
Ltd: Responsible for arranging debt finance to fund construction and
operation of the railway.
Asia Pacific Contracting Pty
Ltd: Responsible for the design and construction of the Government
Improvements in relation to the Project.
Freight Link Pty Ltd:
Responsible for establishing and operating the integrated rail transport
business in South Australia and Northern Territory.
As a
result of its first few years of operations Freight Link incurred losses greater
than its initial capitalisation, but no more than the guaranteed capital
subscription (or the amount as increased due to further subscriptions of capital
resulting from amounts being called under the bank letters of credit) received
by construction completion (“Capitalisation Event”). The Capitalisation Event
occurred on 31 March 2004. The APT JV could not seek to recover any debts due
from Freight Link until after the Capitalisation Event, ensuring that Freight
Link maintained net assets available to satisfy other creditors.
D&C
Contractor
ADrail
Joint Venture comprises Brown & Root Construction Pty Ltd, Barclay Mowlem
Construction Pty Ltd, John Holland Pty Ltd and Macmahon Contractors Pty Ltd
(with varying levels of participation).
An amount
of $10 million ($7.4m discounted, part of ‘Project Contracts’ payable per Note
10) is payable by Asia Pacific Transport JV to ADrail Joint Venture for early
completion of the Railway. ADrail Joint venture is a related party of the
entity. It is conditional on funds being available for distribution as
determined by the project finance documents and D & C contract. It is
expected to be payable in the period 2010 to 2011 and has been
capitalised into the relevant assets at a discounted value.
Other
Contracts
With the
exception of a number of the principal contracts that were negotiated at the
outset of the Project in conjunction with the formation of the bid syndicate or
as subsequently amended, all other contracts have been awarded following
competitive tender.
Contracts
entered into by this entity and related entities with shareholders as executed
in 2001 on commercial terms with review and approval from all shareholders and
the Senior Banks are as follows:
GWA/ASR,
subsidiary of ARG (GWI)
(Rail
Operations & Rolling Stock Services)
2007
expense $19,617,401 2006 expense $16,034,544, 2005 expense
$18,990,468
Accrued
creditor as at 30 June 2007 of $338,533
BJB
(joint venture of KBR, Laing O’Rourke & John Holland)
(Track
Maintenance & Capital Expenditure)
2007
expense $10,212,413, and accrued creditor as at 30 June 2007 of
$1,055,784
2006
expense $9,707,046, and accrued creditor as at 30 June 2006 of
$853,553
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
2005
expense $8,945,380
KBR services 2007 expense
$93,049, and accrued creditor as at 30 June 2007 of $3,480.
Note
18:
|
Segment
reporting
|
The
entity has been contracted by the AustralAsia Railway Corporation to undertake,
build, own and operate the Adelaide to Darwin Rail Project. It therefore
operates in one business and one (Australia) geographical segment.
Note
19: Cash flow information
|
Note
|
|
Unaudited June 2007
$
|
|
|
June 2006
$
|
|
|
Unaudited June 2005
$
|
|
a.
|
Reconciliation
of Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at the end of the financial year as shown in the Statement
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows is reconciled to the related items in the balance sheet as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
on hand
|
|
|
|
400 |
|
|
|
400 |
|
|
|
- |
|
|
At
call deposits with financial institutions
|
|
|
|
20,786,621 |
|
|
|
28,589,538 |
|
|
|
21,912,745 |
|
|
|
|
|
|
20,787,021 |
|
|
|
28,589,938 |
|
|
|
21,912,745 |
|
b.
|
Reconciliation
of Cash Flow from Operations with Loss after income tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
after income tax
|
|
|
|
(74,945,668 |
) |
|
|
(156,139,018 |
) |
|
|
(53,935,761 |
) |
|
Non-cash
flows in profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_
(Profit)/Loss on sale of non-current assets
|
|
|
|
817,110 |
|
|
|
1,882 |
|
|
|
7,791 |
|
|
–
Depreciation and amortization
|
|
|
|
18,454,203 |
|
|
|
18,071,565 |
|
|
|
17,202,137 |
|
|
–
Impairment of fixed assets
|
|
|
|
- |
|
|
|
87,570,180 |
|
|
|
3,052,049 |
|
|
–
Accrued interest
|
|
|
|
41,161,757 |
|
|
|
29,872,657 |
|
|
|
10,841,269 |
|
|
Changes
in assets and liabilities, net of the effects of purchase and disposals of
subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
Decrease/(Increase) in receivables
|
|
|
|
(1,423,110 |
) |
|
|
(1,427,654 |
) |
|
|
(3,687,166 |
) |
|
–
Decrease/(Increase) in materials and supplies
|
|
|
|
116,743 |
|
|
|
338,272 |
|
|
|
(3,687,166 |
) |
|
–
Decrease/(Increase) in prepayments
|
|
|
|
(2,980,525 |
) |
|
|
(727,565 |
) |
|
|
865,560 |
|
|
–
(Decrease)/Increase in payables
|
|
|
|
4,851,329 |
|
|
|
305,924 |
|
|
|
4,601,873 |
|
|
–
(Decrease)/Increase in provisions
|
|
|
|
68,744 |
|
|
|
127,991 |
|
|
|
(88,125 |
) |
|
Cash
flows from operations
|
|
|
|
(13,879,417 |
) |
|
|
(22,005,766 |
) |
|
|
(21,140,373 |
) |
Note
20:
|
Financial
instruments
|
Other
than cash at bank and borrowings associated with the finance facilities
summarised below, none of the financial assets or liabilities on the statement
of financial position are interest bearing.
Exposure
to credit, interest rate and currency risks arises in the normal course of the
consolidated entity’s business. Derivative financial instruments are used to
hedge exposure to fluctuations in interest rates.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
The
entity adopts a policy of ensuring that 100% of its exposure to changes in
interest rates on senior debt borrowings is on a fixed rate basis for the period
up to June 2011 (except Tranche C - June 2009). Interest rate swaps, denominated
in Australian dollars, have been entered into to achieve this fixed rate
exposure within the entity’s policy (refer to table below).
The
entity classifies interest rate swaps as cash flow hedges and states them at
fair value. The fair value of swaps is recognised at $6.3m (refer Notes 10 and
12) and consists of five sets of swaps on three tranches of debt (floating for
fixed), with notional principals at 30 June 2006 as follows:
Senior
Debt Tranche C
|
$109,020,000
(6.939% plus 1.65% margin, termination date 31 March
2009)
|
|
|
Senior
Debt Tranche D
|
$169,560,395
(7.022% plus 1.65% margin, termination date 31 March
2011)
|
|
|
Rolling
Stock Debt Tranche E (Hedge 1)
|
$36,499,449
(6.222% plus 1.65% margin, termination date 30 June
2011)
|
|
|
Rolling
Stock Debt Tranche E (Hedge 2)
|
$7,305,996
(6.160% plus 1.65% margin, termination date 30 June
2011)
|
|
|
Rolling
Stock Debt Tranche E (Hedge 3)
|
$5,279,444
(6.025% plus 1.65% margin, termination date 30 June
2011)
|
Credit
risk
The
maximum exposure to credit risk, excluding the value of any collateral or other
security, at balance date to recognised financial assets is the carrying amount
of those assets, net of any provisions for doubtful debts, as disclosed in the
statement of financial position and notes to the financial report.
The
entity does not have any material credit risk exposure to any single debtor or
group of debtors under financial instruments entered into by the
entity.
For all
financial assets and liabilities, fair value approximates their carrying value.
No financial assets and financial liabilities are readily traded on organised
markets in a standardised form other than listed investments.
Forward
exchange contracts are either marked to market using listed market prices or by
discounting the contractual forward price and deducting the current spot rate.
For interest rate swaps broker quotes are used. Those quotes are back tested
using pricing models or discounted cash flow techniques.
Where
discounted cash flow techniques are used, estimated future cash flows are based
on management’s best estimates and the discount rate is a market related rate
for a similar instrument at the balance sheet date. Where other pricing models
are used, inputs are based on market related data at the balance sheet
date.
The
aggregate fair values and carrying amounts of financial assets and financial
liabilities are disclosed in the balance sheet and in the notes to the financial
statements.
c.
|
Financing
arrangements
|
Facilities
for the Project have been contracted through Asia Pacific Transport Finance Pty
Ltd (APTF). There is a loan agreement between Asia Pacific Transport Joint
Venture (APT JV) and APTF whereby all loans from external parties are on-lent to
APT JV on similar terms. The Project is funded by a combination of shareholder
contributions (including loan notes), senior debt and mezzanine debt. Senior
debt has three tranches for repayment on various terms and is secured by a
charge over all the entity’s assets under the Security Trust Deed. Interest rate
swaps have been transacted by the financiers in order to manage interest rate
exposures, as noted in 20(a) above. Senior debt has been hedged 100% (refer Note
16 ‘Key principles of Phase 2’ for comment on reduction from 100% post balance
date) from April 2001 for a period of ten years (except tranche C; 8 years).
Thereafter hedging will be on a rolling basis. The financing arrangements were
amended on 14 March 2005 with a $46.2 million facility provided by shareholders
in the form of loan notes (Senior OpCo Series 1) Subsequent Events
note.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
|
|
Amount ($ million)
|
|
|
Interest rate %
|
|
|
Profile
|
|
|
|
|
|
|
|
|
|
Facilities
arranged by APT JV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OpCo
Notes (a)
|
|
|
94.9 |
|
|
|
15.0 |
% |
|
Repayable
based on financial performance as per Agreement
|
|
|
|
|
|
|
|
|
|
|
|
Senior
OpCo Series 1 Notes (a)
|
|
|
46.2 |
|
|
|
18.0 |
% |
|
Repayable
based on financial performance as per Agreement
|
|
|
|
|
|
|
|
|
|
|
|
WCN Notes
|
|
|
14.4 |
|
|
|
18.0 |
% |
|
Repayable based on financial performance as per
Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation loan
(subordinated)
|
|
|
50.0 |
|
|
0 to 5% depends on
profitability
|
|
|
Repayable based on financial performance with
reference to benchmarks, as per Note 11(i)
|
|
|
|
|
|
|
|
|
|
|
|
Facilities
arranged by APTF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
C – Bullet
|
|
|
109.0 |
|
|
|
8.589 |
(b) |
|
Interest
only to March 2009, then bullet payment at March 2009.
|
|
|
|
|
|
|
|
|
|
|
|
Senior
D – Amortising
|
|
|
185.3 |
|
|
|
8.672 |
(b) |
|
Originally
interest only to March 2006, then amortised up to March 2016. Principal
payments deferred from December 2006 to December 2008,
inclusive.
|
|
|
|
|
|
|
|
|
|
|
|
Senior
E – Rolling stock
|
|
|
54.9 |
|
|
|
7.830 |
(b) |
|
Originally
interest only to March 2006, then amortised up to March 2016. Principal
payments deferred from December 2006 to December 2008,
inclusive.
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 mezzanine
|
|
|
78.5 |
|
|
|
14.060 |
(
c) |
|
Interest
only to March 2012, then amortises up to March 2017, with $52.1 million
bullet payment. Interest capitalises if not paid.
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2A mezzanine
|
|
|
16.4 |
|
|
|
12.00 |
|
|
Interest free to March 2006, then interest only up
to March 2017, then amortises up to March 2024. Interest capitalises if
not paid. Rate changes post March 2012 to BBR+
6%.
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2B mezzanine
|
|
|
10.1 |
|
|
|
12.060 |
|
|
Interest free to March 2006, then interest only up
to March 2017, then amortises up to March 2024. Interest capitalises if
not paid.
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
|
2.0 |
|
|
|
8.050 |
|
|
Available
up to March 2016
|
|
|
|
|
|
|
|
|
|
|
|
For
amounts drawn down/advanced as at 30 June 2006 and 30 June 2007, refer note
12.
(a) OpCo notes are related
party notes redeemable at the end of the Concession Period (see Note 17).
Interest at a rate of 15% only accrues, and is only payable, if there is
available cash (as defined in the Agreement) after servicing Senior OpCo notes.
Senior OpCo Series 1 notes are interest bearing (18% coupon), also redeemable at
the end of the Concession Period. Interest is payable quarterly. Senior OpCo
Series 2 notes have the same terms as Senior OpCo Series 1 notes and are issued
in lieu of interest on the latter in the event that available cash (as defined
in the Agreement) is not sufficient to meet the quarterly interest payments
due.
(b)
Includes 1.65% swap margin as referred to in note 20(a).
(c)
Includes 5.5% margin as per Mezzanine Agreements. A 2% penalty rate also applies
in Event of Default.
Covenants
Senior
debt is subject to certain covenants. Compliance with certain covenants
(including debt service coverage ratio, debt service reserve and capital
expenditure reserve bank account minimum balances and hedging requirements) have
been waived over the duration of the standstill period as described in Note 16.
Debt service coverage ratios required under the Mezzanine agreements have been
in breach since January 2005, and 2% penalty interest on Tier 1 has been accrued
since then. There is no other impact of the Mezzanine breaches on either of the
Mezzanine debt tiers.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Asia
Pacific Transport Joint Venture Consortium Combined Financial
Report
Financial
statements for the year ended 30 June 2007
The
registered office and principal place of business of the entity is:
1 Station
Place, Hindmarsh, South Australia 5000
Note
22:
|
Prior
Year Changes in Accounting Policies
|
Fair
value loans
In the
2006 financial year the entity adopted AASB 132 Financial Instruments:
Presentation and Disclosure and AASB 139 Financial Instruments: Recognition and
Measurement. This change in accounting policy has been adopted in accordance
with the transition rules contained in AASB 1 which does not require the
restatement of comparative information for financial instruments within the
scope of AASB 132 and AASB 139.
Corporation
Loan
In
accordance with AASB 139, all loans at below-market rates are required to be
measured at their fair value (i.e. the present value of future cash flows
discounted at a market interest rate). Any difference between the fair value of
the loan on initial recognition and the amount received should be accounted for
according to its nature.
The
entity has recorded its $50m nominal (government) loan at its present value of
$973,049 discounted from 2054 at a rate of 8.6%, the weighted average cost of
senior debt. The difference between the $973,049 present value and the $50m face
value has been accounted for as a deferred government grant under AASB 120
Accounting for Government Grants and Disclosure of Government assistance (refer
Notes 11 and 12).
OpCo
Notes
The OpCo
Notes were issued pursuant to the Equity Subscription Deed to equity holders of
the consortium in May 2003, with further issuances in December 2003, April 2004,
July 2004 and 2005. The notes have a stated interest rate of 15%, however
interest only accrues, and is only payable, in the event of 'free cash' (as
defined in the Equity Subscription Deed). In accordance with AASB 132 and AASB
139, the OpCo Notes are a financial liability and interest must be charged to
the income statement (at a rate of 15%). The Consortium has not generated ‘free
cash’ at any period through 30 June 2006.
Accordingly,
as the OpCo Note interest is not payable by the entity, the offsetting entry for
the interest charge is recognised as a contribution to equity. As a result of
this change in accounting policy, the entity recorded a charge to Retained
Earnings/Accumulated Deficit and increase in Other Contributed Equity of $21.7m
at 1 July 2005. For the year ended 30 June 2006, an interest charge of $14.2m
was recorded (as shown in Note 3) with a corresponding increase in Other
Contributed Equity (refer Note 13).
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Note
23:
|
Significant
Accounting Policy Differences between AIFRS and U.S.
GAAP
|
In
Australia, financial statements are required to be prepared in accordance with
Australian Accounting Standards, adopted by the Australian Accounting Standards
Board (“AASB”) (“Australian GAAP)”.
With
effect for periods ending after 1 January 2005 International Financial Reporting
Standards (“IFRS”) form the basis of Australian Accounting Standards (“AASBs”)
adopted by the AASB and for the purpose of this report are called Australian
equivalents to IFRS (“AIFRS”) to distinguish from previous Australian GAAP.
During the transition to AIFRS, the consolidated entity elected not to restate
the 2005 comparatives for AASB 139: Financial instruments: Recognition
and Measurement and AASB 132: Financial Instruments:
Presentation. This is explained in note 22. The financial statements of
the Consortium for the years ended 30 June 2007, 2006, and 2005 comply with
IFRSs and interpretations adopted by the International Accounting Standards
Board.
AIFRS
differs in certain material respects from US GAAP. A description of material
differences between AIFRS and US GAAP applicable to the Consortium as of, and
for the years ended 30 June 2007 and 2006 and 2005 is set out
below:
(A)
Debt Issuance Costs
Under
AIFRS, debt issuance costs are included in the initial recognition of the debt
liability, and are subsequently amortised to interest expense under the
effective interest method. Under US GAAP, debt issuance costs are capitalized as
a deferred cost, with subsequent amortization included in interest expense under
the effective interest method. Accordingly, a difference between AIFRS and US
GAAP arises in the balance sheet presentation. There is no income statement
difference between AIFRS and US GAAP as interest expense amortization is
determined in the same manner.
(B) Impairment of
long-lived assets
Under
AIFRS, the entity determines the recoverable amount of long-lived assets based
upon the higher of its fair value less costs to sell and its value in use, the
latter is generally determined on a discounted cash flow basis when assessing
impairment. The discount rate is a pre-tax risk-adjusted market rate, which is
applied both to assess recoverability and to calculate the amount of any
impairment charge. Under US GAAP, long-lived assets are first tested for
recoverability for impairment using undiscounted cash flows. Only if the
long-lived asset’s carrying amount exceeds the sum of undiscounted future cash
flows is the asset considered impaired and written down to its fair value.
Accordingly, a difference between AIFRS and US GAAP may arise where the
recoverability test under US GAAP does not result in an impairment although an
impairment charge is recorded for AIFRS. The difference may result in lower
impairment charges against income and higher asset carrying amounts for US GAAP;
the difference in asset carrying amounts is subsequently reduced through higher
depreciation charges against income.
Under
AIFRS, impairment losses, except for goodwill, may be reversed in subsequent
periods if the recoverable amount increases. Under US GAAP, impairment reversals
are not allowed, as the impairment loss results in a new cost basis for the
asset. Any credit to income resulting from reversal in impairment charges under
AIFRS is derecognized under US GAAP. As stated in Note 3, the Consortium
recognised an impairment charge in 2006. As a result of the US GAAP requirement
for a recoverability test based on undiscounted cash flows, no US GAAP
impairment charge would have been incurred in 2006.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
(C) Capitalized
interest
Under
AIFRS, an entity may choose to capitalize or expense interest costs that are
directly attributable to the acquisition, construction or production of a
qualifying asset under AIFRS. Capitalization of interest costs (including the
amortisation of discounts, premiums and issue costs on debt, if applicable)
related to qualifying assets is required under US GAAP.
Where an
entity chooses to capitalize interest costs under AIFRS, any interest earned on
temporary investment of funds borrowed to finance the asset’s construction is
netted against interest cost in determining the capitalized interest. US GAAP
generally does not allow interest income to be netted in determining the amount
of interest cost to be capitalized.
The
entity has elected to capitalize interest costs (including amortisation of debt
issuance costs) incurred during the construction period and has netted interest
income against interest expense in arriving at the capitalized
value.
(D)
Derivatives
The
Consortium uses derivative financial instruments to hedge its exposure to
movements in interest rates.
As
explained above, the Consortium elected not to early adopt AASB 132 and AASB 139
for the 2005 comparative financial statements. Accordingly, in the 2005
comparative period, under previous Australian GAAP, derivatives outstanding at
the balance sheet date were not recognised. Gains and losses on interest rate
swaps were recognised as part of interest expense when settled
(quarterly).
On 1 July
2005 the Consortium adopted AASB 139. This resulted in the consolidated entity
recognising all derivative financial instruments as assets or liabilities at
fair value. In addition, if the instrument is designated as a hedge of the
variability in cash flows of a highly probable forecasted transaction, the
effective part of any gain or loss on the derivative financial instrument is
recognised directly in equity (hedge reserve) provided certain documentation and
other criteria are met as required by the detailed AIFRS transition rules. Such
rules required hedge documentation to be in place by 1 July 2005 for all
previous hedge relationships and in place at inception of the hedge relationship
for all subsequent hedges.
Under US
GAAP all derivative financial instruments are recognised as assets or
liabilities at fair value. The accounting for changes in the fair value of a
derivative (that is gains and losses) depends on the intended used of the
derivative and the resulting designation. The Consortium did not formally
designate hedging relationships under US GAAP. Accordingly, in the 2005
comparative period, derivative financial instruments would have been measured at
fair value under US GAAP with no derivatives qualifying for hedge
accounting.
Certain
instruments the Consortium designated as hedges under AIFRS would not have
qualified for hedge accounting under US GAAP and, accordingly changes in fair
value would have been recognised in the income statement rather than in equity
(hedge reserve). The impact is to reduce net income. There is no impact on net
equity.
(E)
Start up costs
Under
AIFRS the Consortium capitalizes as part of property, plant and equipment, costs
associated with start-up activities relating to the Project which were incurred
prior to commissioning date. These capitalized costs are depreciated in
subsequent years. Under US GAAP, costs of start-up activities are expensed as
incurred.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
(F) Income
tax
Under
AIFRS the Consortium has not recognised deferred tax assets in relation to
deductible temporary differences or potentially available income tax credits or
capital loss carry forwards.
Under
AIFRS deferred tax is calculated using the balance sheet liability method,
providing for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and their respective tax basis. A
deferred tax asset is recognized only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised.
Under
U.S. GAAP, deferred tax assets and liabilities are recognised for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets are
reduced by a valuation allowance if, in the opinion of management, it is more
likely than not that some portion, or all of the deferred tax asset, will not be
realised.
The
Consortium has reported a cumulative net tax loss in recent years. Based on this
significant negative evidence, under US GAAP the consolidated entity would
recognise a full valuation allowance against its deferred tax assets. This will
however have no impact on net deferred tax assets, income or net equity reported
in the financial statements.
(H) Non-interest bearing
loan
The
AustralAsia Railway Corporation provided the Consortium with a Corporate loan
(subordinated) of $50 million in 2001 (refer note 22). Repayment of this loan is
to occur at the end of the Concession period in 2054. Interest only accrues, and
is only payable, if certain EBITDA targets are met. As described in Note 11, the
likelihood of achieving these targets is remote, and therefore the loan is
considered non-interest bearing.
As at 1
July 2005 the non-interest bearing loan from the AustralAsia Railway Corporation
was recognised initially at fair value and subsequently stated at amortised cost
with any difference between the amortised cost and repayment value being
recognised in the income statement over the period of the borrowings on an
effective interest rate basis.
Under US
GAAP the entity recognises the financial liability at its original face value
($50 million) and does not unwind the discount expense over the period of the
borrowings.
(I)
Recent Changes to US GAAP
In June
2006, FASB Interpretation No. 48 ‘Accounting for Uncertainty in Income Taxes –
an interpretation of FASB Statement No. 109’ (FIN 48) was issued. FIN 48 states
that the evaluation of a tax position in accordance with this Interpretation is
a two-step process. The first step is recognition: The enterprise determines
whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating whether
a tax position has met the more-likely-than-not recognition threshold, the
enterprise should presume that the position will be examined by the appropriate
taxing authority that would have full knowledge of all relevant information. The
second step is measurement: A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. The Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for periods ending
after December 15 2006. The provisions of FIN 48 are to be applied to all tax
positions upon initial adoption, with the cumulative effect adjustment reported
as an adjustment to the opening balance of retained earnings. The adoption of
FIN 48 has not resulted in any material impact on the Consortium as it relates
to its financial position and results of operations.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
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. In February 2008, the FASB issued FASB Staff
Position No. 157-2 that provides for a one-year deferral for the implementation
of SFAS 157 for non-financial assets and liabilities. SFAS 157 does not require
any new fair value measurements, but rather, it provides enhanced guidance to
other pronouncements that require or permit assets or liabilities to be measured
at fair value. Accordingly, the adoption of this Statement is not expected to
have a material impact on the Consortium’s 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. Most of the provisions of SFAS 159 apply only
to entities that elect the fair value option. However, the amendment to FASB
Statement No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”, applies to all entities with available-for-sale and trading
securities. Currently, the adoption of this Statement is not expected to have a
material impact on the Consortium’s financial position, results of operations
and cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
141(R)”), which replaces FASB Statement No. 141. SFAS 141(R), establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. This
Statement also established disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008, early
adoptions is prohibited. Currently this statement is not expected to have a
significant impact on the Consortium’s financial position, results of operations
and cash flows. A significant impact may however be realized on any future
acquisitions by the Consortium. The amounts of such impact cannot be currently
determined and will depend on the nature and terms of such future acquisitions,
if any.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statement-amendments of ARB No. 51,” (“SFAS 160”). SFAS
160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. The Statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective for fiscal years beginning after December 15, 2008, early adoption
is prohibited. We are currently evaluating the impact the adoption of SFAS 160
will have on the Consortium’s financial position, results of operations and cash
flows.
The
accompanying notes form part of these financial statements.
APT JV
Consortium Combined Financial Report
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
Dated:
February 25, 2009
|
KBR,
INC.
|
|
|
|
|
By:
|
/s/ WILLIAM P. UTT
|
|
|
William
P. Utt
|
|
|
|
|
|
President
and Chief Executive
Officer
|
Dated:
February 25, 2009
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature
|
|
Title
|
|
|
|
|
|
President,
Chief Executive Officer and Director
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
Vice
President and Chief Accounting Officer
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
EXHIBIT
INDEX
|
|
|
Exhibit
Number
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated as of May 6, 2008, by and among KBR, Inc.,
BE&K, Inc., and Whitehawk Sub, Inc., (incorporated by reference to
Exhibit 2.1 to KBR’s Current Report on Form 8-K; File No.
001-33416)
|
|
|
|
3.1
|
|
KBR
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to KBR’s registration statement on Form S-1;
Registration No. 333-133302)
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of KBR, Inc. (incorporated by reference to Exhibit 3.1
to KBR’s Form 10-Q for the period ended June 30, 2007; File No.
1-33146)
|
|
|
|
4.1
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Form
of specimen KBR common stock certificate (incorporated by reference to
Exhibit 4.1 to KBR’s registration statement on Form S-1; Registration No.
333-133302)
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10.1
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Master
Separation Agreement between Halliburton Company and KBR, Inc. dated as of
November 20, 2006 (incorporated by reference to Exhibit 10.1 to KBR’s
current report on Form 8-K dated November 20, 2006; File No.
001-33146)
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10.2
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Tax
Sharing Agreement, dated as of January 1, 2006, by and between Halliburton
Company, KBR Holdings, LLC and KBR, Inc., as amended effective February
26, 2007 (incorporated by reference to Exhibit 10.2 to KBR’s Annual Report
on Form 10-K for the year ended December 31, 2006; File No.
001-33146)
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10.3
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Amended
and Restated Registration Rights Agreement, dated as of February 26, 2007,
between Halliburton Company and KBR, Inc. (incorporated by reference to
Exhibit 10.3 to KBR’s Annual Report on Form 10-K for the year ended
December 31, 2006; File No. 001-33146)
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10.4
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Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (KBR as service provider)
(incorporated by reference to Exhibit 10.4 to KBR’s current report on Form
8-K dated November 20, 2006; File No. 001-33146)
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10.5
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Transition
Services Agreement dated as of November 20, 2006, by and between
Halliburton Energy Services, Inc. and KBR, Inc. (Halliburton as service
provider) (incorporated by reference to Exhibit 10.5 to KBR’s current
report on Form 8-K dated November 20, 2006; File No.
001-33146)
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10.6
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Employee
Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.6 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
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10.7
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Intellectual
Property Matters Agreement dated as of November 20, 2006, by and between
Halliburton Company and KBR, Inc. (incorporated by reference to Exhibit
10.7 to KBR’s current report on Form 8-K dated November 20, 2006; File No.
001-33146)
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10.8
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Five
Year Revolving Credit Agreement, dated as of December 16, 2005, among KBR
Holdings, LLC, a Delaware limited liability company, as Borrower, the
Banks and the Issuing Banks party thereto, Citibank, N.A. (“Citibank”), as
Paying Agent, and Citibank and HSBC Bank USA, National Association, as
Co-Administrative Agents (Incorporated by reference to Exhibit 10.30 to
Halliburton Company’s Annual Report on Form 10-K for the year ended
December 31, 2005; File No. 001-03492)
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10.9
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Amendment
No. 1 to the Five Year Revolving Credit Agreement, dated as of April 13,
2006, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent
(incorporated by reference to Exhibit 10.9 to KBR’s registration statement
on Form S-1; Registration No. 333-133302)
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10.10
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Amendment
No. 2 to the Five Year Revolving Credit Agreement, dated as of October 31,
2006, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent
(incorporated by reference to Exhibit 10.24 to KBR’s registration
statement on Form S-1; Registration No.
333-133302)
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10.11
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Amendment
No. 3 to the Five Year Revolving Credit Agreement, dated as of January 11,
2008, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent
(incorporated by reference to Exhibit 10.1 to KBR’s current report on Form
8-K dated January 17, 2008; File No. 1-33146 )
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10.12+
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Employment
Agreement, dated as of April 3, 2006, between William P. Utt and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.15 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
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10.13+
|
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Employment
Agreement, dated as of November 7, 2005, between Cedric W. Burgher and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.16 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
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10.14+
|
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Employment
Agreement, dated as of August 1, 2004, between Bruce A. Stanski and KBR
Technical Services, Inc. (incorporated by reference to Exhibit 10.17 to
KBR’s registration statement on Form S-1; Registration No.
333-133302)
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10.15
|
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Form
of Indemnification Agreement between KBR, Inc. and its directors
(incorporated by reference to Exhibit 10.18 to KBR’s registration
statement on Form S-1; Registration No. 333-133302)
|
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10.16+
|
|
KBR,
Inc. 2006 Stock and Incentive Plan (as amended June 27, 2007)
(incorporated by reference to Exhibit 10.1 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
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10.17+
|
|
KBR,
Inc. Senior Executive Performance Pay Plan (incorporated by reference to
Exhibit 10.21 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
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10.18+
|
|
KBR,
Inc. Management Performance Pay Plan (incorporated by reference to Exhibit
10.22 to KBR’s Form 10-K for the fiscal year ended December 31, 2006; File
No. 1-33146)
|
|
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10.19+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan (incorporated by reference to
Exhibit 10.23 to KBR’s Form 10-K for the fiscal year ended December 31,
2006; File No. 1-33146)
|
|
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10.20+
|
|
KBR
Dresser Deferred Compensation Plan (incorporated by reference to Exhibit
4.5 to KBR’s Registration Statement on Form S-8 filed on April 13,
2007)
|
|
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10.21+
|
|
KBR
Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10.3 to KBR’s current report on Form 8-K dated April 9, 2007; File
No. 1-33146).
|
|
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|
10.22+
|
|
KBR
Benefit Restoration Plan (incorporated by reference to Exhibit 10.4 to
KBR’s current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
|
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10.23+
|
|
KBR
Elective Deferral Plan (incorporated by reference to Exhibit 10.5 to KBR’s
current report on Form 8-K dated April 9, 2007; File No.
1-33146).
|
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10.24+
|
|
Restricted
Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.2 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
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10.25+
|
|
Stock
Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan
(incorporated by reference to Exhibit 10.3 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
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|
10.26+
|
|
KBR
Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and Incentive
Plan (incorporated by reference to Exhibit 10.4 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
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|
10.27+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Stock Option Award (incorporated
by reference to Exhibit 10.5 to KBR’s Form 10-Q for the quarter ended June
30, 2007; File No. 1-33146)
|
|
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|
10.28+
|
|
KBR,
Inc. Transitional Stock Adjustment Plan Restricted Stock Award
(incorporated by reference to Exhibit 10.6 to KBR’s Form 10-Q for the
quarter ended June 30, 2007; File No. 1-33146)
|
|
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|
10.29+
|
|
Form
of Restricted Stock Agreement between KBR, Inc. and William P. Utt
pursuant to KBR, Inc. 2006 Stock and Incentive Plan (incorporated by
reference to Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended
September 30, 2007; File No.
1-33146)
|
10.30+
|
|
Form
of KBR Performance Award Agreement pursuant to KBR, Inc. 2006 Stock and
Incentive Plan (incorporated by reference to Exhibit 10.5 to KBR’s Form
10-Q for the quarter ended September 30, 2007; File No.
1-33146)
|
|
|
|
10.31+
|
|
KBR,
Inc., 2009 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended June 30, 2008; File
No. 1-33146)
|
|
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10.32
|
|
Amendment
No. 4 to the Five Year Revolving Credit Agreement, dated as of May 7,
2008, among KBR Holdings, LLC, a Delaware limited liability company, as
Borrower, the Banks and Institutional Banks parties to the Five Year
Revolving Credit Agreement, and Citibank, N.A., as paying agent.
(incorporated by reference to Exhibit 10.2 to KBR’s Form 10-Q for the
quarter ended June 30, 2008; File No. 1-33146)
|
|
|
|
10.33
|
|
Form
of Severance and Change in Control Agreement (incorporated by reference to
Exhibit 10.1 to KBR’s Form 10-Q for the quarter ended September 30, 2008;
File No. 1-33146)
|
|
|
|
10.34+
|
|
Severance
and change in control agreement with William P. Utt, President and Chief
Executive Officer of KBR. (incorporated by reference to Exhibit 10.7 to
KBR’s current report on Form 8-K dated January 7, 2009; File No.
1-33146)
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List
of subsidiaries
|
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Consent
of KPMG LLP - Houston, Texas
|
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Consent
of KPMG - Adelaide, South Australia
|
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Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
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Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
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Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
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|
|
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Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
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______________________________
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+ Management
contracts or compensatory plans or
arrangements
|