10-K 1 form10k.htm KBR 10-K 12-31-2009 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, 2009

OR

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to

Commission File Number 1-33146

KBR, Inc.
(Exact name of registrant as specified in its charter)

Delaware
20-4536774
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

601 Jefferson Street
Suite 3400
Houston, Texas 77002
(Address of principal executive offices)
Telephone Number - Area code (713) 753-3011

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each Exchange on which registered
Common Stock par value $0.001 per share
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    x     No    o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    x     No    o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes  o    No  x

The aggregate market value of the voting stock held by non-affiliates on June 30, 2009, was approximately $2,947,702,000, determined using the closing price of shares of common stock on the New York Stock Exchange on that date of $18.44.

As of February 19, 2010, there were 160,466,526 shares of KBR, Inc. Common Stock, $0.001 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the KBR, Inc. Company Proxy Statement for our 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
 


 

 

TABLE OF CONTENTS

 
Page
PART I
 
  4
  15
  26
  26
  26
  27
   
PART II
 
  27
30
  31
60
  60
114
  114
  116
   
FINANCIAL STATEMENTS
 
  61
  62
  63
Consolidated Statements of Comprehensive Income 64
  65
  66
  67
   
PART III
 
  116
  116
  116
  116
  116
   
PART IV
 
  116
   
  122


Forward-Looking and Cautionary Statements

This report contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward looking information. Some of the statements contained in this annual report are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” “expect” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations.

We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially include the risks and uncertainties described under “Risk Factors” contained in Part I of this Annual Report on Form 10-K.

Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.



Item 1. Business

General

KBR, Inc. and its subsidiaries (collectively, “KBR”) is a global engineering, construction and services company supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power and industrial sectors. We offer a wide range of services through six business units; Government and Infrastructure (“G&I”), Upstream, Services, Downstream, Technology and Ventures.  See Note 7 to our consolidated financial statements for financial information about our reportable business segments.

KBR, Inc. was incorporated in Delaware on March 21, 2006 as an indirect wholly-owned subsidiary of Halliburton Company (“Halliburton”). KBR was formed to own and operate KBR Holdings, LLC (“KBR Holdings”), which was contributed to KBR by Halliburton in November 2006.  In November 2006, KBR, Inc. completed an initial public offering of 32,016,000 shares, or approximately 19%, of its common stock.  On April 5, 2007, Halliburton completed the separation of KBR through a tax-free exchange with Halliburton’s stockholders of the remaining 135,627,000 shares of KBR owned by Halliburton for publicly held shares of Halliburton common stock pursuant to the terms of an exchange offer commenced by Halliburton on March 2, 2007.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Transactions with Former Parent” for further discussion regarding our relationship with Halliburton.

Recent acquisitions and dispositions

In June 2007, we completed the disposition of our 51% interest in Devonport Management Limited (“DML”) to Babcock International Group plc. DML owns and operates Devonport Royal Dockyard, one of Western Europe’s largest naval dockyard complexes. Our DML operations, which were part of our G&I business unit, primarily involved refueling nuclear submarines and performing maintenance on surface vessels for the U.K. Ministry of Defence as well as limited commercial projects.

In April 2008, we acquired 100% of the outstanding common stock of Turnaround Group of Texas, Inc. (“TGI”) and Catalyst Interactive. TGI is a Houston-based turnaround management and consulting company that specializes in the planning and execution of turnarounds and outages in the petrochemical, power, and pulp & paper industries. Catalyst Interactive is an Australian e-learning and training solution provider that specializes in the defense, government and industry training sectors. TGI’s results of operations are included in our Services business unit. Catalyst Interactive’s results of operations are included in our Government & Infrastructure business unit.

In July 2008, we acquired 100% of the outstanding common shares of BE&K, Inc., (“BE&K”) a privately held, Birmingham, Alabama-based engineering, construction and maintenance services company. The acquisition of BE&K enhances our ability to provide contractor and maintenance services in North America.  BE&K and its acquired divisions were integrated into our Services, Downstream and Government & Infrastructure business units based upon the nature of the underlying projects acquired.

In October 2008, we acquired 100% of the outstanding common stock of Wabi Development Corporation (“Wabi”). Wabi was a privately held Canada-based general contractor, which provides services for the energy, forestry and mining industries. Wabi provides maintenance, fabrication, construction and construction management services to a variety of clients in Canada and Mexico. Wabi was integrated into our Services business unit and it provides additional growth opportunities for our heavy hydrocarbon, forestry, oil sand, general industrial and maintenance services business.

See Note 4 to our consolidated financial statements for further discussion of our recent acquisitions.

Our Business Units

Downstream.  Our Downstream business unit serves clients in the petrochemical, refining, coal gasification and syngas markets, executing projects throughout the world. We leverage our differentiated process technologies, some of which are the most efficient ones available in the market today, and also execute projects using non-KBR technologies, either alone or with joint venture or alliance partners to a wide variety of customers. Downstream’s work with KBR’s Ventures business unit has resulted in creative equity participation structures such as our Egypt Basic Industries Corporation Ammonia plant which offers our customers unique solutions to meet their project development needs. We are a leading contractor in the markets that we serve delivering projects through a variety of service offerings including front-end engineering design (“FEED”), detailed engineering, engineering, procurement and construction (“EPC”), engineering, procurement and construction management  (“EPCM”) and program management. We are dedicated to providing life cycle value to our customers.


Government and Infrastructure.  Our G&I business unit provides program and project management, contingency logistics, operations and maintenance, construction management, engineering and other services to military and civilian branches of governments and private clients worldwide. We deliver on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. A significant portion of our G&I business unit’s current operations relate to the support of the United States government operations in the Middle East, which we refer to as our Middle East operations, and is one of the largest U.S. military deployments since World War II. In the civil infrastructure market, we operate in diverse sectors, including transportation, waste and water treatment and facilities maintenance. We design, construct, maintain and operate and manage civil infrastructure projects ranging from airport, rail, highway, water and wastewater facilities, and mining and mineral processing to regional development programs and major events. We provide many of these services to foreign governments such as the United Kingdom and Australia.

Services. Our Services business unit delivers full scope engineering, construction, construction management, fabrication, maintenance, and turnaround expertise to customers worldwide.  Our experience is broad and based on 90 years of successful project realization beginning with the founding of legacy company Brown & Root in 1919.  With the acquisition of BE&K, our market reach has expanded and now includes power, alternate energy, pulp and paper, industrial and manufacturing, and pharmaceutical industries in addition to our base markets in the oil, gas, oil sands, petrochemicals and hydrocarbon processing industries.  We provide commercial building construction services to education, food and beverage, healthcare, hospitality and entertainment, life science and technology, and mixed use building clients through our Building Group.  KBR Services and its joint venture partner offer maintenance, small capital construction, and drilling support services for offshore oil and gas producing facilities in the Bay of Campeche through the use of semisubmersible vessels.

Technology.  Our Technology business unit offers differentiated process technologies, some of which are the most efficient ones available in the market today, including value-added technologies in the coal monetization, petrochemical, refining and syngas markets. We offer technology licenses, and, in conjunction with our Downstream business unit, offer project management and engineering, procurement and construction for integrated solutions worldwide. We are one of a few engineering and construction companies to possess a technology center, with 80 years of experience in technology research and development.

Upstream.  Our Upstream business unit provides a full range of services for large, complex upstream projects, including liquefied natural gas (“LNG”), gas-to-liquids (“GTL”), onshore oil and gas production facilities, offshore oil and gas production facilities, including platforms, floating production and subsea facilities, and onshore and offshore pipelines. In gas-to-liquids, we are leading the construction of two of the world’s three gas-to-liquids projects under construction or start-up, the size of which exceeds that of almost any other in the industry. Our Upstream business unit has designed and constructed some of the world’s most complex onshore facility and pipeline projects and, in the last 30 years, more than half of the world's operating LNG liquefaction capacity. In oil & gas, we provide integrated engineering and program management solutions for offshore production facilities and subsea developments, including the design of the largest floating production facility in the world to date.

Ventures.  Our Ventures business unit’s purpose is to help our customers realize completed projects.  The Ventures business unit invests KBR equity alongside clients’ equity in projects where one or more of KBR’s other business units has a direct role in engineering, construction, construction management or operations and maintenance.  The Ventures business unit also manages KBR’s existing portfolio of project equity and debt investments and represents KBR’s interests on project company boards. Project equity investments under current management include defense equipment and housing, toll roads and petrochemicals.


Our Significant Projects

The following table summarizes several significant contracts under which business units are currently providing or have recently provided services.

G&I-Middle East Operations

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
LogCAP III
 
U.S. Army
 
Worldwide
 
Cost-reimbursable
 
Contingency support services.

G&I-Americas Operations

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
CENTCOM
 
U.S. Army
 
Middle East
 
Fixed-price and cost-reimbursable
 
Construction of military infrastructure and support facilities.
 
 
 
 
 
 
 
 
 
DOCCC-Office of Space Launch
 
NRO Office of Space Launch
 
USA
 
Fixed-price plus award fee
 
Provide on call project management, construction management and related support for mission critical facilities at Cape Canaveral and other locations.
 
 
 
 
 
 
 
 
 
Qatar Bahrain Causeway Phase I and II
 
Qatar Bahrain Causeway Foundation
 
Qatar/Bahrain
 
Cost-reimbursable
 
Program management contracting.
 
 
 
 
 
 
 
 
 
USAREUR
 
U.S. Army
 
Europe (Balkans)
 
Fixed- price and cost-reimbursable
 
Contingency support within the USAREUR AOR; Balkans Support.

G&I-International Operations

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
Aspire Defence-Allenby & Connaught Accommodation Project
 
Aspire Defence U.K. Ministry of Defence
 
U.K.
 
Fixed-price and cost-reimbursable
 
Design, build and finance the upgrade and service of army facilities.
 
 
 
 
 
 
 
 
 
Temporary Deployable Accommodations (“TDA”)
 
U.K. Ministry of Defence
 
Worldwide
 
Fixed-price
 
Battlefield infrastructure support.
 
 
 
 
 
 
 
 
 
CONLOG
 
U.K. Ministry of Defence
 
Worldwide
 
Fixed- price and cost-reimbursable
 
Provide contingency support services to MOD.
 
 
 
 
 
 
 
 
 
Hope Downs Iron Ore Project
 
Rio Tinto IO
 
Western Australia
 
Cost-reimbursable
 
Engineering, Procurement & Construction Management.
 
 
 
 
 
 
 
 
 
Afghanistan ISP UK
 
Ministry of Defence (Defense Estates)
 
Afghanistan
 
Firm-fixed price
 
Construction of military infrastructure and support facilities.
 
 
 
 
 
 
 
 
 
Tier 3 Basra
 
UK Ministry of Defence Basra
 
Iraq
 
Fixed-price and cost-reimbursable
 
Construction of Hardened Accommodation (Field Hospital, DFAC)


Upstream- Gas Monetization

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
Tangguh LNG
 
BP Berau Ltd.
 
Indonesia
 
Fixed-price
 
EPC-CS services for two LNG liquefaction trains; joint venture with JGC.
 
 
 
 
 
 
 
 
 
Yemen LNG
 
Yemen LNG Company Ltd.
 
Yemen
 
Fixed-price
 
EPC-CS services for two LNG liquefaction trains; joint venture with JGC and Technip.
 
 
 
 
 
 
 
 
 
Skikda LNG
 
Sonatrach
 
Algeria
 
Fixed-price and cost-reimbursable
 
EPC-CS services for one LNG liquefaction train.
 
 
 
 
 
 
 
 
 
Escravos GTL
 
Chevron Nigeria Ltd & Nigeria National Petroleum Corp.
 
Nigeria
 
Cost-reimbursable
 
EPC-CS services for a GTL plant producing diesel, naphtha and liquefied petroleum gas; joint venture with Snamprogetti.
 
 
 
 
 
 
 
 
 
Pearl GTL
 
Qatar Shell GTL Ltd.
 
Qatar
 
Cost-reimbursable
 
Front-end engineering design (“FEED”) work and project management for the overall complex and EPCM for the GTL synthesis and utilities portions of the complex; joint venture with JGC.
 
 
 
 
 
 
 
 
 
Gorgon LNG
 
Chevron Australia Pty Ltd
 
Australia
 
Cost-reimbursable
 
Front-end engineering design (“FEED”) work and project management for a Liquefied Natural Gas (LNG) facility (Three Trains) on Barrow Island; joint venture with JGC, Clough and Hatch.
                 
KEP2010
 
Statoil Hydro
 
Norway
 
Cost-reimbursable
 
Engineering and support services for the overall construction of an upgrade to a gas plant.

Upstream-Oil & Gas

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
Azeri-Chirag- Gunashli
 
AIOC
 
Azerbaijan
 
Cost-reimbursable
 
Engineering and procurement services for six offshore platforms, subsea facilities, 600 kilometers of offshore pipeline and onshore terminal upgrades.
 
 
 
 
 
 
 
 
 
Kashagan
 
AGIP
 
Kazakhstan
 
Cost-reimbursable
 
Project management services for the development of multiple facilities in the Caspian Sea.
 
 
 
 
 
 
 
 
 
EOS JV North Rankin 2 (NR2)
 
Woodside Energy Limited
 
Australia
 
Fixed-price
 
Detailed engineering and procurement management services to maintain gas supply to its onshore LNG facility, principally by providing compression facilities for the low pressure Perseus reservoir.


Services

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
Georgia Power
 
Georgia Power
 
Georgia
 
Cost-reimbursable and fixed price
 
Provision of engineering project management, procurement, and direct hire construction services for environmental related scope for coal-fired power generation plant and environmental remediation.
 
 
 
 
 
 
 
 
 
Shell Scotford
 
Shell Canada
 
Canada
 
Cost-reimbursable
 
Provision of direct hire construction services for oil sands upgrader project.
 
 
 
 
 
 
 
 
 
LCRA
 
Lower Colorado River Authority
 
Texas
 
Cost- reimbursable
 
Provision of project management, procurement, and direct hire construction services for environmental related scope for coal-fired power generation plant.
                 
Crowfoot Project
 
ADA, Red River Environmental
 
Louisiana
 
Cost-reimbursable and fixed price
 
Provision of full scope EPC services for an activated carbon facility.
 
 
 
 
 
 
 
 
 
Hunt Refining
 
Hunt Refining
 
Alabama
 
Cost-reimbursable with fixed fee
 
Provision of engineering procurement, direct hire construction and program management services for refinery expansion.
 
 
 
 
 
 
 
 
 
Borger Refinery
 
ConocoPhillips
 
Texas
 
Cost- reimbursable
 
Provision of direct hire construction services for a Benzene Recovery unit
                 
North County Waste to Energy
 
Solid Waste Authority of Palm Beach
 
Florida
 
Cost-reimbursable and fixed price
 
Provision of full scope EPC services for repowering of waste to energy recovery facility
                 
EFACEC Transformer
 
EFACEC
 
Georgia
 
Guaranteed Max-Price
 
Provision of construction services for industrial building to manufacture transformers
                 
Gold Rush
 
Proctor and Gamble
 
Utah
 
Cost-reimbursable
 
Provision of engineering, procurement, construction management and direct hire construction services for consumer products facility
                 
Richmond County Plant
 
Progress Energy
 
North Carolina
 
Fixed-Price
 
Provision of direct hire construction services for natural gas fired combined cycle power plant
                 
Mt Pleasant Hospital
 
Roper St. Francis Healthcare
 
South Carolina
 
Guaranteed Max-Price
 
Provision of construction services for a new build hospital and admin building


Downstream

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
Ethylene/Olefins Facility
 
Saudi Kayan Petrochemical Company
 
Saudi Arabia
 
Cost-reimbursable
 
Basic process design and EPCM services for a new ethylene facility using SCORE™ technology
 
 
 
 
 
 
 
 
 
Ras Tanura Integrated Project
 
Dow and Saudi Aramco
 
Saudi Arabia
 
Cost-reimbursable
 
FEED and PM/CM of an integrated refinery and Petrochemical complex.
 
 
 
 
 
 
 
 
 
Yanbu Export Refinery Project
 
Aramco Services Co. and ConocoPhillips Yanbu Ltd.
 
Saudi Arabia
 
Cost-reimbursable
 
Program management services including FEED for a new 400,000 barrels per day green field export refinery.
 
 
 
 
 
 
 
 
 
Ammonia Plant
 
Egypt Basic Industries Corporation
 
Egypt
 
Fixed-price
 
EPC-CS services for an ammonia plant based on KBR Advanced Ammonia Process technology.
                 
Sonaref Refinery
 
Sonangol
 
Angola
 
Cost-reimbursable
 
FEED and EPCM site development of a new 200,000 barrels per day green field refinery.

Technology

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
Moron Ammonia Plant
 
Ferrostaal/Pequiven
 
Venezuela
 
Fixed-price
 
Technology license and engineering services.
 
 
 
 
 
 
 
 
 
Jose Ammonia Facility
 
Pequiven
 
Venezuela
 
Fixed-price
 
Technology license and basic engineering services.
 
 
 
 
 
 
 
 
 
Hazira Ammonia Plant Revamp
 
KRIBHCO
 
India
 
Fixed-price
 
Technology license and basic engineering services.
                 
Lobito Refinery Hydrocracker
 
Sonangol
 
Angola
 
Fixed-price
 
Technology license and basic engineering services.
                 
Dumai Revamp
 
Pertamina
 
Indonesia
 
Fixed-price
 
Technology license and basic engineering services.

Ventures

Project Name
 
Customer Name
 
Location
 
Contract Type
 
Description
Egypt Basic Industries (EBIC)-Ammonia Project
 
Transammonia
 
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 shareholder value by providing our customers differentiated capital project and services offerings across the entire engineering, construction and services project lifecycle.  We will execute our business strategy on a global scale through best in class risk awareness, delivering consistent, predictable financial results in all markets where we operate. Our core skills are conceptual design, FEED (front-end engineering design), engineering, project management, procurement, construction, construction management, operations and maintenance.  Our primary activities are scalable, which will enable us to grow the company organically. We will complement organic growth by pursuing targeted merger and acquisition opportunities with a focus on expanding our product and services capabilities and market coverage to accelerate implementation of individual Business Unit strategies. Key features of our business unit strategies include:

 
·
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 construction and industrial services 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;

 
·
price;

 
·
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;

 
·
service quality;

 
·
health, safety, and environmental standards and practices;

 
·
financial strength;

 
·
breadth of technology and technical sophistication;

 
·
risk management awareness and processes; and

 
·
warranty.

We conduct business in over 45 countries.  Based on the location of services provided, our operations in countries other than the United States accounted for 79% of our consolidated revenue during 2009, 85% of our consolidated revenue during 2008 and 89% of our consolidated revenue during 2007.  Revenue from our operations in Iraq, primarily related to our work for the U.S. government, was 35% of our consolidated revenue in 2009, 43% of our consolidated revenue in 2008 and 50% of our consolidated revenue in 2007. See Note 7 to our consolidated financial statements for selected geographic information.


We market substantially all of our capital project and service offerings through our servicing and sales organizations. We serve highly competitive industries and we have many substantial competitors in the markets that we serve.  Some of our competitors have greater financial and other resources and better access to capital than we do, which may enable them to compete more effectively for large-scale project awards.  The companies competing in the markets that we serve include but are not limited to AMEC, Bechtel Corporation, CH2M Hill Companies Ltd., Chicago Bridge and Iron Co., N.V., Chiyoda, DynCorp, Fluor Corporation, Foster Wheeler Ltd., Jacobs Engineering Group, Inc., JGC Corp, John Wood Group PLC, McDermott International, Petrofac PLC, Saipem S.PA., Shaw Group, Inc., Technip, URS Corporation, and Worley Parsons Ltd.   Since the markets for our services are vast and cross numerous geographic lines, we cannot make a meaningful estimate of the total number of our competitors.

Our operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, expropriation or other governmental actions, inflation, exchange controls and currency fluctuations. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Instruments Market Risk” and Note 15 to our consolidated financial statements for information regarding our exposures to foreign currency fluctuations, risk concentration, and financial instruments used to manage our risks.

Joint Ventures and Alliances

We enter into joint ventures and alliances with other industry participants in order to reduce and diversify risk, increase the number of opportunities that can be pursued, capitalize on the strengths of each party, expand or create the relationships of each party with different potential customers, and allow for greater flexibility in choosing the preferred location for our services based on the greatest cost and geographical efficiency. Several of our significant joint ventures and alliances are described below.  All joint venture ownership percentages presented are as of December 31, 2009.

In 2002, we entered into a cooperative agreement with ExxonMobil Research and Engineering Company for licensing fluid catalytic cracking technology that was an extension of a previous agreement with Mobil Oil Corporation.  Under this alliance, we offer to the industry certain fluid catalytic cracking technology that is available from both parties.  We lead the marketing effort under this collaboration, and we co-develop certain new fluid catalytic cracking technology.

 M.W. Kellogg Limited (“MWKL”) is a London-based joint venture that provides full EPC-CS contractor services for LNG, GTL and onshore oil and gas projects. MWKL is owned 55% by us and 45% by JGC. MWKL supports both of its parent companies, on a stand-alone basis or through our gas alliance with JGC, and also provides services to other third party customers. We consolidate MWKL for financial accounting purposes.

Kellogg Joint Venture (“KJV”) is a joint venture consisting of JGC, Hatch Associates, Clough Projects and KBR for the purpose of design, procurement, fabrication, construction, commissioning and testing of the Gorgon Downstream LNG Project located on Barrow Island off the northwest coast of Western Australia.  We hold a 30% interest in the joint venture which is consolidated for financial accounting purposes because we are the primary beneficiary.

Aspire Defence—Allenby & Connaught is a joint venture between us, Carillion Plc. and two financial investors formed to contract with the U.K. Ministry of Defence to upgrade and provide a range of services to the British Army’s garrisons at Aldershot and around the Salisbury Plain in the United Kingdom. We own a 45% interest in Aspire Defence. In addition, we own a 50% interest in each of the two joint ventures that provide the construction and related support services to Aspire Defence. We account for our investments in these entities using the equity method of accounting.

MMM is a joint venture formed under a Partners Agreement with Grupo R affiliated entities. The principal Grupo R entity is Corporative Grupo R, S.A. de C.V. and Discoverer ASA, Ltd a Cayman Islands company. The partners agreement covers five joint venture entities related to the Mexico contract with PEMEX. The MMM joint venture was set up under Mexican maritime law in order to hold navigation permits to operate in Mexican waters. The scope of the business is to render services of maintenance, repair and restoration of offshore oil and gas platforms and provisions of quartering in the territorial waters of Mexico. We own a 50% interest in MMM and in each of the four other joint ventures. We account for our investment in these entities using the equity method of accounting.


Backlog

Backlog represents the dollar amount of revenue we expect to realize in the future as a result of performing work on contracts awarded and in progress.  Our backlog was $14.1 billion at both December 31, 2009 and 2008, respectively.  We estimate that as of December 31, 2009, 55% of our backlog will be complete within one year.  Our G&I business unit’s total backlog attributable to firm orders was $2.7 billion at December 31, 2009 and $3.3 billion as of December 31, 2008.  For additional information regarding backlog see our discussion within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Contracts

Our contracts can be broadly categorized as either cost-reimbursable or fixed-price, the latter sometimes being referred to as lump-sum. Some contracts can involve both fixed-price and cost-reimbursable elements.

Fixed-price contracts are for a fixed sum to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail more risk to us because they require us to predetermine both the quantities of work to be performed and the costs associated with executing the work. Although fixed-price contracts involve greater risk than cost-reimbursable contracts, they also are potentially more profitable since the owner/customer pays a premium to transfer more project risk to us.

Cost-reimbursable contracts include contracts where the price is variable based upon our actual costs incurred for time and materials, or for variable quantities of work priced at defined unit rates, including reimbursable labor hour contracts. Profit on cost-reimbursable contracts may be a fixed amount, a mark-up applied to costs incurred, or a combination of the two. Cost reimbursable contracts are generally less risky than fixed-price contracts because the owner/customer retains many of the project risks.

Our G&I business unit provides substantial work under cost-reimbursable contracts with the Department of Defense (“DoD”),  the Ministry of Defence (“MoD”) and other governmental agencies which are generally subject to applicable statutes and regulations.  If our customer or a government auditor finds that we improperly charged any costs to a contract, these costs are not reimbursable or, if already reimbursed, the costs must be refunded to the customer. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include threatened termination or termination under any affected contract. Furthermore, the government has the contractual right to terminate or reduce the amount of work under our contracts at any time.  See “Risk Factors – Our U.S. government contracts work is regularly reviewed and audited by our customer, government auditors and others, and these reviews can lead to withholding or delay of payments to us, non-receipt of award fees, legal actions, fines, penalties and liabilities and other remedies against us.”

Significant Customers

We provide services to a diverse customer base, including international and national oil and gas companies, independent refiners, petrochemical producers, fertilizer producers and domestic and foreign governments.  Revenue from the United States government, which was derived almost entirely from our G&I business unit, totaled $5.2 billion, or 43% of consolidated revenue, in 2009, $6.2 billion, or 53% of consolidated revenue, in 2008 and $5.4 billion, or 62% of consolidated revenue in 2007.  Revenue from the Chevron Corporation, which was derived almost entirely from our Upstream business unit, totaled $1.4 billion, or 11% of consolidated revenue, in 2009 and was less than 10% of our consolidated revenues in 2008 and 2007.   No other customers represented 10% or more of consolidated revenues in any of the periods presented.

Raw Materials

Equipment and materials essential to our business are available from worldwide sources. The principal equipment and materials we use in our business are subject to availability and pricing fluctuations due to customer demand, producer capacity, market conditions and material shortage.  We monitor the availability and pricing of equipment and materials on a regular basis.  Our procurement department actively leverages our size and buying power to ensure that we have access to key equipment and materials at the best possible prices and delivery schedule.   While we do not currently foresee any lack of availability of equipment and materials in the near term, the availability of these items may vary significantly from year to year and any prolonged unavailability or significant price increases for equipment and materials necessary to our projects and services could have a material adverse effect on our business. Please read, “Risk Factors—Difficulties in engaging third party subcontractors, equipment manufacturers or materials suppliers or failures by third party subcontractors, equipment manufacturers or materials suppliers to perform could result in project delays and cause us to incur additional costs.”


Intellectual Property

We have developed or otherwise have the right to license leading technologies, including technologies held under license from third parties, used for the production of a variety of petrochemicals and chemicals and in the areas of olefins, refining, fertilizers and semi-submersible technology. We also license a variety of technologies for the transformation of raw materials into commodity chemicals such as phenol and aniline used in the production of consumer end-products. We are also a licensor of ammonia process technologies used in the conversion of Syngas to ammonia. We believe our technology portfolio and experience in the commercial application of these technologies and related know-how differentiates us from other contractors, enhances our margins and encourages customers to utilize our broad range of engineering, procurement, construction and construction services (“EPC-CS”) services.

Our rights to make use of technologies licensed to us are governed by written agreements of varying durations, including some with fixed terms that are subject to renewal based on mutual agreement.  Generally, each agreement may be further extended and we have historically been able to renew existing agreements before they expire. We expect these and other similar agreements to be extended so long as it is mutually advantageous to both parties at the time of renewal. For technologies we own, we protect our rights through patents and confidentiality agreements to protect our know-how and trade secrets.

We own and operate a technology center in Houston, Texas, where we collaborate with our customers to develop new technologies and improve existing ones. We license these technologies to our customers for the design, engineering and construction of oil and gas and petrochemical facilities. We are also working to identify new technologically driven opportunities in emerging markets. Our expenditures for research and development activities were immaterial in each of the past three fiscal years.

Seasonality

On an overall basis, our operations are not generally affected by seasonality. Weather and natural phenomena can temporarily affect the performance of our services, but the widespread geographic scope of our operations mitigates those effects.

Employees

As of December 31, 2009, we had over 51,000 employees in our continuing operations, of which approximately 7.2% were subject to collective bargaining agreements. Based upon the geographic diversification of our employees, we believe any risk of loss from employee strikes or other collective actions would not be material to the conduct of our operations taken as a whole. We believe that our employee relations are good.

Health and Safety

We are subject to numerous health and safety laws and regulations. In the United States, these laws and regulations include: the Federal Occupation Safety and Health Act and comparable state legislation, the Mine Safety and Health Administration laws, and safety requirements of the Departments of State, Defense, Energy and Transportation. We are also subject to similar requirements in other countries in which we have extensive operations, including the United Kingdom where we are subject to the various regulations enacted by the Health and Safety Act of 1974.

These regulations are frequently changing, and it is impossible to predict the effect of such laws and regulations on us in the future. We actively seek to maintain a safe, healthy and environmentally friendly work place for all of our employees and those who work with us.  However, we provide some of our services in high-risk locations and, as a result, we may incur substantial costs to maintain the safety of our personnel.


Environmental Regulation

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others:

 
·
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. Based on the information presently available to us, we believe our accruals are adequate and any future assessment and remediation costs associated with all environmental matters will not have a material adverse effect on our consolidated financial position or our results of operations.   See Note 11 to our consolidated financial statements for more information on environmental matters.

Existing or pending climate change legislation, regulations, international treaties or accords are not expected to have a material direct effect on our business or the markets that we serve, nor on our results of operations or financial position. However, climate change legislation could have a direct effect on our customers or suppliers which could have an indirect effect on our business.  For example, our commodity-based markets depend on the level of activity of oil and gas companies, and existing or future laws, regulations, treaties or international agreements related to climate change, including incentives to conserve energy or use alternative energy sources, could have an indirect impact on our business if such laws, regulations, treaties, or international agreements reduce the worldwide demand for oil and natural gas.  We will continue to monitor emerging developments in this area.

Website Access

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 are made available free of charge on our internet website at www.kbr.com as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of that site is www.sec.gov. We have posted on our website our Code of Business Conduct, which applies to all of our employees and Directors and serves as a code of ethics for our principal executive officer, principal financial officer, principal accounting officer, and other persons performing similar functions. Any amendments to our Code of Business Conduct or any waivers from provisions of our Code of Business Conduct granted to the specified officers above are disclosed on our website within four business days after the date of any amendment or waiver pertaining to these officers.


Item 1A. Risk Factors

Demand for our services provided under government contracts are directly affected by spending and capital expenditures by our customers and our ability to contract with our customers.

We derive a significant portion of our revenue from contracts with agencies and departments of the U.S. government which is directly affected by changes in government spending and availability of adequate funding.  For example, we are currently the sole service provider under our LogCAP III contract in the Middle East and elsewhere and have been awarded a portion of the LogCAP IV contract.  However, the current level of government services being provided in the Middle East will not likely continue for an extended period of time and we expect our overall volume of work to decline as our customer scales back its requirements for the types and the amounts of service we provide.  Factors that could impact current and future U.S. government spending include:

 
policy and/or spending changes implemented by the current administration, DoD or other government agencies;

 
changes, delays or cancellations of U.S. government programs or requirements;

 
adoption of new laws or regulations that affect companies providing services to the U.S. government;

 
U.S. government shutdowns or other delays in the government appropriations process;

 
curtailment of the U.S. governments’ outsourcing of services to private contractors;

 
general economic conditions, including a slowdown in the economy or unstable economic conditions in the U.S. or in the countries in which we operate.

The loss of or a significant decrease in the magnitude of work we perform for the U.S. government in the Middle East or other decreases in governmental spending and outsourcing of the type that we provide could have a material adverse effect on our business, results of operations and cash flow.

The U.S. government awards its contracts through a rigorous competitive process and our efforts to obtain future contract awards from the U.S. government may be unsuccessful.

The U.S. government conducts a rigorous competitive process for awarding most contracts. In the services arena, the U.S. government uses multiple contracting approaches.  It uses omnibus contract vehicles, such as LogCAP, for work that is done on a contingency or as-needed basis.  In more predictable “sustainment” environments, contracts may include both fixed-price and cost-reimbursable elements.  The U.S. government has also recently favored multiple award task order contracts, in which several contractors are selected as eligible bidders for future work. Such processes require successful contractors to continually anticipate customer requirements and develop rapid-response bid and proposal teams as well as have supplier relationships and delivery systems in place to react to emerging needs. We will face rigorous competition and pricing pressures for any additional contract awards from the U.S. government, and we may be required to qualify or continue to qualify under the various multiple award task order contract criteria. The DoD has awarded us a portion of the new LogCAP IV contract, which will replace the current LogCAP III contract under which we are the sole provider, which is a multiple award task order contract.  We may not be awarded any task orders under the LogCAP IV contract, which may have a material adverse effect on future results of operations. It may be more difficult for us to win future awards from the U.S. government and we may have other contractors sharing in any U.S. government awards that we win. In addition, negative publicity regarding findings stemming from DCAA audits and Congressional investigations may adversely affect our ability to obtain future awards.  See “Management’s Discussion and Analysis of Financial Condition and Results of Analysis – U.S. Government Matters.”

Our U.S. government contract work is regularly reviewed and audited by our customer, U.S. government auditors and others, and these reviews can lead to withholding or delay of payments to us, non-receipt of award fees, legal actions, fines, penalties and liabilities and other remedies against us.

U.S. government contracts are subject to specific regulations such as the Federal Acquisition Regulation (“FAR”), the Truth in Negotiations Act, the Cost Accounting Standards (“CAS”), the Service Contract Act and Department of Defense security regulations.  Failure to comply with any of these regulations, requirements or statutes may result in contract termination, and we could be temporarily suspended or even debarred from U.S. government contracting or subcontracting.  Our U.S. government contracts are subject to audits, cost reviews and investigations by U.S. government contracting oversight agencies such as the Defense Contract Audit Agency (“DCAA”).    The DCAA reviews the adequacy of, and our compliance with, our internal control systems and policies, including our labor, billing, accounting, purchasing, property, estimating, compensation and management information systems.  The DCAA has the authority to review how we have accounted for cost under the FAR and CAS, and if they determine that we have not complied with the terms of our contract and applicable statutes and regulations, payments to us may be disallowed which could result in adjustments to previously reported revenues and refunding of previously collected cash proceeds.


Given the demands of working in the Middle East and elsewhere for the U.S. government, we expect that from time to time we will have disagreements or experience performance issues with the various government customers for which we work. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include threatened termination or termination under any affected contract. If any contract were so terminated, we may not receive award fees under the affected contract, and our ability to secure future contracts could be adversely affected, although we would receive payment for amounts owed for our allowable costs under cost-reimbursable contracts. Other remedies that our government customers may seek for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts, and may also have a material adverse effect on our business, financial condition, results of operations and cash flow.

Demand for our services depends on demand and capital spending by customers in their target markets, many of which are cyclical in nature.

Demand for many of our services, especially in our commodity-based markets, depends on capital spending by oil and natural gas companies, including national and international oil companies, and industrial and power companies, which is directly affected by trends in oil, natural gas and commodities prices. Capital expenditures for refining and distribution facilities by large oil and gas companies have a significant impact on the activity levels of our businesses. Demand for LNG facilities for which we provide construction services could decrease in the event of a sustained reduction in crude oil or natural gas prices. Perceptions of longer-term lower oil and natural gas prices by oil and gas companies or longer-term higher material and contractor prices impacting facility costs can similarly reduce or defer major expenditures given the long-term nature of many large-scale projects. Prices for oil, natural gas and commodities are subject to large fluctuations in response to relatively minor changes in supply and demand, market uncertainty, and a variety of other factors that are beyond our control. Factors affecting the prices of oil, natural gas and other commodities include:

 
worldwide political, military, and economic conditions;

 
the cost of producing and delivering oil and natural gas;

 
the level of demand for oil, natural gas, industrial services and power generation;

 
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;

 
a reduction in energy demand as a result of energy taxation or a change in consumer spending patterns;

 
global economic growth or decline;

 
the level of oil production by non-OPEC countries and the available excess production capacity within OPEC;

 
global weather conditions and natural disasters;

 
oil refining capacity;

 
shifts in end-customer preferences toward fuel efficiency and the use of natural gas;

 
potential acceleration of the development and expanded use of alternative fuels;

 
environmental regulation, including limitations on fossil fuel consumption based on concerns about its relationship to climate change; and

 
reduction in demand for the commodity-based markets we serve.


Historically, the markets for oil and natural gas have been volatile and are likely to continue to be volatile in the future.

Additionally, demand for our services may also be materially and adversely affected by the consolidation of our customers, which:

 
could cause customers to reduce their capital spending, which in turn reduces the demand for our services; and

 
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.

The nature of our contracts, particularly our fixed-price contracts, subject us to risks associated with cost over-runs, operating cost inflation and potential claims for liquidated damages.

Our long-term contracts to provide services are either on a cost-reimbursable basis or on a fixed-price basis. At December 31, 2009, 18% of our backlog for continuing operations was attributable to fixed-price contracts and 82% was attributable to cost-reimbursable contracts.  In connection with projects covered by fixed-price contracts, we bear a significant portion of the risk of cost over-runs, operating cost inflation, labor availability and productivity, and supplier and subcontractor pricing and performance.  Our failure to accurately estimate the resources and time required for a fixed-price project or our failure to complete our contractual obligations within the time frame and costs committed could have a material adverse effect on our business, results of operations and financial condition. Risks under our contracts include:

 
Our engineering, procurement and construction projects may encounter difficulties in the design or engineering phases related to the procurement of supplies, schedule changes, equipment performance failures, and other factors that may result in additional costs to us, reductions in revenue, claims or disputes.

 
We may not be able to obtain compensation for additional work or expenses, particularly on our fixed-price contracts, incurred as a result of customer change orders or our customers providing deficient design or engineering information, equipment or materials.

 
We may be required to pay liquidated damages upon our failure to meet schedule or performance requirements of our 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.

 
Our projects expose us to potential professional liability, product liability, warranty, performance and other claims that may exceed our available insurance coverage.  Although we have historically been able to cover our insurance needs, there can be no assurances that we can secure all necessary or appropriate insurance in the future.

The nature of our engineering and construction business exposes us to potential liability claims and contract disputes which may reduce our profits.

We engage in engineering and construction activities for large facilities where design, construction or systems failures can result in substantial injury or damage to third parties. In addition, the nature of our business results in clients, subcontractors and vendors occasionally presenting claims against us for recovery of cost they incurred in excess of what they expected to incur, or for which they believe they are not contractually liable. We have been and may in the future be named as a defendant in legal proceedings where parties may make a claim for damages or other remedies with respect to our projects or other matters. These claims generally arise in the normal course of our business. When it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits. Our professional liability coverage is on a "claims-made" basis covering only claims actually made during the policy period currently in effect. In addition, even where insurance is maintained for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any such claims. Any liability not covered by our insurance, in excess of our insurance limits or, if covered by insurance but subject to a high deductible, could result in a significant loss for us, which claims may reduce our profits and cash available for operations.


We occasionally bring claims against project owners for additional cost exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as owner-caused delays or changes from the initial project scope, which result in additional cost, both direct and indirect. Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is often difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we may invest significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to promptly recover on these types of claims could have a material adverse impact on our liquidity and financial results.

Our results of operations depend on the award of new contracts and the timing of the performance of these contracts.

A substantial portion of our revenue is directly or indirectly derived from new contract awards. Delays in the timing of the awards or potential cancellations of such prospects as a result of economic conditions, material and equipment pricing and availability, or other factors could impact our long term projected results. It is particularly difficult to predict whether or when we will receive large-scale international and domestic projects as these contracts frequently involve a lengthy and complex bidding and selection process which is affected by a number of factors, such as market conditions, governmental approvals and environmental matters. Because a significant portion of our revenue is generated from such projects, our results of operations and cash flow can fluctuate significantly from quarter to quarter depending on the timing of our contract awards and the commencement or progress of work under awarded contracts. In addition, many of these contracts are subject to financing contingencies and, as a result, we are subject to the risk that the customer will not be able to secure the necessary financing for the project.

We may be unable to obtain new contract awards if we are unable to provide our customers with bonds, letters of credit or other credit enhancements.

Customers may require us to provide credit enhancements, including surety bonds, letters of credit or bank guarantees.  We are often required to provide performance guarantees to customers to indemnify the customer should we fail to perform our obligations under the contract.  Failure to provide a bond on terms required by a customer may result in an inability to bid on or win a contract award.  Historically, we have had adequate bonding capacity but such bonding is generally at the provider’s sole discretion.  Due to events that affect the insurance and bonding markets generally, bonding may be difficult to obtain or may only be available at significant cost.  Moreover, many projects are often very large and complex, which often necessitates the use of a joint venture, often with a competitor, to bid on and perform the contract.  However, entering into joint ventures or partnerships exposes us to the credit and performance risk of third parties, many of whom are not as financially strong as us.  If our joint ventures or partners fail to perform, we could suffer negative results.  In addition, future projects may require us to obtain letters of credit that extend beyond the term of our current credit facility.  Any inability to obtain adequate bonding and/or provide letters of credit or other customary credit enhancements and, as a result, to bid on or win new contracts could have a material adverse effect on our business prospects and future revenue.

Prior to our initial public offering, Halliburton provided guarantees of most of our surety bonds and letters of credit as well as most other payment and performance guarantees under our contracts.  The credit support arrangements in existence at the completion of our initial public offering will remain in effect and primarily relate our Aspire, Escravos and other projects.   Halliburton will not enter into any new credit support arrangements on our behalf, except to the limited extent Halliburton is obligated to do so under the master separation agreement. We have agreed to indemnify Halliburton for all losses under our outstanding credit support instruments and any additional credit support instruments for which Halliburton may become obligated since our initial public offering, and under the master separation agreement, we have agreed to use our reasonable best efforts to attempt to release or replace Halliburton’s liability thereunder for which such release or replacement is reasonably available.

The uncertainty of the timing of future contract awards may inhibit our ability to recover our labor costs.

The uncertainty of our contract award timing can also present difficulties in matching workforce size with contract needs. In some cases, we maintain and bear the cost of a ready workforce that is larger than called for under existing contracts in anticipation of future workforce needs for expected contract awards. If an expected contract award is delayed or not received, we may incur additional costs resulting from reductions in staff or redundancy of facilities, which could have a material adverse effect on us.


Our backlog is subject to unexpected adjustments and cancellations.

As of December 31, 2009, our backlog was approximately $14.1 billion.  We cannot guarantee that the revenue projected in our backlog will be realized or profitable. Project terminations or suspensions and changes in project scope may occur, from time to time, with respect to contracts reflected in our backlog and could reduce the dollar amount of our backlog and the revenue and profits that we actually earn.  Many of our contracts have termination for convenience provisions in them. In addition, projects may remain in our backlog for an extended period of time. Finally, poor project or contract performance could also impact our backlog and profits.  We cannot predict the impact the current worldwide economic recession may have on our backlog which could include a diminished ability to replace backlog once projects are completed and/or could result in the termination, modification or suspension of projects currently in our backlog.  Such developments could have a material adverse affect on our financial condition, results of operations and cash flows.

We conduct a large portion of our engineering and construction operations through project-specific joint ventures.  The failure of our joint venture partners to perform their joint venture obligations could impose on us additional financial and performance obligations that could result in reduced profits or, in some cases, significant losses.

We conduct a large portion of our engineering, procurement and construction operations through project-specific joint ventures, where control may be shared with unaffiliated third parties. As with any joint venture arrangement, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major issues. We also cannot control the actions of our joint venture partners, including any nonperformance, default, or bankruptcy of our joint venture partners, and we typically have joint and several liability with our joint venture partners under these joint venture arrangements.  If our partners do not meet their obligations, the joint venture may be unable to adequately perform and deliver its contracted services requiring us to make additional investments or provide additional services.  These factors could have a material adverse affect the business operations of the joint venture and, in turn, our business operations as well as our reputation within our industry and our client base.

Operating through joint ventures in which we are minority holders results in us having limited control over many decisions made with respect to projects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls and internal control reporting that we follow. As a result, internal control issues may arise, which could have a material adverse effect on our financial condition and results of operation. When entering into joint ventures, in order to establish or preserve relationships with our joint venture partners, we may agree to risks and contributions of resources that are proportionately greater than the returns we could receive, which could reduce our income and returns on these investments compared to what we would have received if the risks and resources we contributed were always proportionate to our returns.

We make equity investments in privately financed projects in which we could sustain significant losses.

We participate in privately financed projects that enable our government and other customers to finance large-scale projects, such as railroads, major military equipment, capital project and service purchases. These projects typically include the facilitation of non-recourse financing, the design and construction of facilities, and the provision of operation and maintenance services for an agreed to period after the facilities have been completed.

We may incur contractually reimbursable costs and typically make an equity investment prior to an entity achieving operational status or completing its full project financing. If a project is unable to obtain financing, we could incur losses including our contractual receivables and our equity investment. After completion of these projects, our equity investments can be at risk, depending on the operation of the project and market factors, which may not be under our control. As a result, we could sustain a loss on our equity investment in these projects. Current equity investments in projects of this type include the Allenby & Connaught project in the U.K. and the Egypt Basic Industries Corporation ammonia plant in Egypt.  Please read Note 16 to our consolidated financial statements for further discussion of these projects.

Intense competition in the engineering and construction industry could reduce our market share and profits.

We serve markets that are highly competitive and in which a large number of multinational companies compete. These highly competitive markets require substantial resources and capital investment in equipment, technology and skilled personnel whether the projects are awarded in a sole source or competitive bidding process. Our projects are frequently awarded through a competitive bidding process, which is standard in our industry. We are constantly competing for project awards based on pricing and the breadth and technological sophistication of our services. Any increase in competition or reduction in our competitive capabilities could have a significant adverse impact on the margins we generate from our projects or our ability to retain market share.


If we are unable to attract and retain a sufficient number of affordable trained engineers and other skilled workers, our ability to pursue projects may be adversely affected and our costs may increase.

Our rate of growth and success of our business depends upon our ability to attract, develop and retain a sufficient number of affordable trained engineers and other skilled workers either through direct hire or acquisition of other firms employing such professionals.  The market for these professionals is competitive.  If we are unable to attract and retain a sufficient number of skilled personnel, our ability to pursue projects may be adversely affected and the costs of performing our existing and future projects may increase, which may adversely impact our margins.

We ship a significant amount of cargo using seagoing vessels which expose us to certain maritime risks.

We execute different projects around the world that include remote locations.  Depending on the type of contract, location and the nature of the work, we may charter vessels under time and bareboat charter parties that assume certain risks typical of those agreements.  Such risks may include damage to the ship and liability for cargo and liability which charterers and vessel operators have to third parties “at law”.  In addition, we ship a significant amount of cargo and are subject to hazards of the shipping and transportation industry.

If we are unable to enforce our intellectual property rights or if our intellectual property rights become obsolete, our competitive position could be adversely impacted.

We utilize a variety of intellectual property rights in our services. We view our portfolio of process and design technologies as one of our competitive strengths and we use it as part of our efforts to differentiate our service offerings. We may not be able to successfully preserve these intellectual property rights in the future and these rights could be invalidated, circumvented, or challenged. In addition, the laws of some foreign countries in which our services may be sold do not protect intellectual property rights to the same extent as the laws of the United States. Because we license technologies from third parties, there is a risk that our relationships with licensors may terminate or expire or may be interrupted or harmed. In some, but not all cases, we may be able to obtain the necessary intellectual property rights from alternative sources. If we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges or infringement proceedings against us, our ability to differentiate our service offerings could be reduced. In addition, if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings, and some of our competitors may be able to offer more attractive services to our customers. As a result, our business and revenue could be materially and adversely affected.

The current worldwide economic recession will likely affect a portion of our client base, subcontractors and suppliers and could materially affect our backlog and profits.

The current worldwide economic recession has reduced the availability of liquidity and credit to fund or support the continuation and expansion of industrial business operations worldwide. Recent financial market conditions have resulted in significant write-downs of asset values by financial institutions, and have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers. Continued disruption of the credit markets could adversely affect our clients' borrowing capacity, which support the continuation and expansion of projects worldwide, and could result in contract cancellations or suspensions, project delays, payment delays or defaults by our clients. In addition, in response to current market conditions, clients may choose to make fewer capital expenditures, to otherwise slow their spending on our services or to seek contract terms more favorable to them. Our government clients may face budget deficits that prohibit them from funding proposed and existing projects or that cause them to exercise their right to terminate our contracts with little or no prior notice. Furthermore, any financial difficulties suffered by our subcontractors or suppliers could increase our cost or adversely impact project schedules.  These disruptions could materially impact our backlog and profits.

We may not be able to raise additional capital or obtain additional financing in the future for working capital, capital expenditures and/or acquisitions.

The financial market condition and overall worldwide economic recession have significantly impacted and continue to impact the capital and credit markets which could make it more difficult for us to raise additional capital or obtain additional financing.  Our ability to obtain such additional capital or financing will depend in part upon prevailing market conditions, as well as conditions in our business and our operating results; and those factors may affect our efforts to arrange additional financings on terms that are satisfactory to us.  We cannot be certain that additional funds will be available if needed to make future investments in certain projects, take advantage of acquisitions or other future opportunities, or respond to competitive pressures.  If additional funds are not available, or are not available on terms satisfactory to us, there could be a material adverse impact on our business and operations.


Our revolving credit facility imposes restrictions that limit our operating flexibility and may result in additional expenses, and this credit facility will not be available if financial covenants are not met or if an event of default occurs.

Our Revolving Credit Facility provides up to $1.1 billion of borrowing, including $830 million in letters of credit fronting commitments at December 31, 2009, and expires in November 2012. The Revolving Credit Facility contains a number of covenants restricting, among other things, incurrence of additional indebtedness and liens, sales of our assets, the amount of investments we can make, and the amount of dividends we can declare to pay or equity shares that can be repurchased. We are also subject to certain financial covenants, including maintenance of ratios with respect to consolidated debt to consolidated EBITDA and a minimum consolidated net worth. If we fail to meet the covenants or an event of default occurs, we would not have available the liquidity that the facility provides.

A breach of any covenant or our inability to comply with the required financial ratios could result in a default under our Revolving Credit Facility, and we can provide no assurance that we will be able to obtain the necessary waivers or amendments from our lenders to remedy a default. In the event of any default not cured or waived, the lenders under our Revolving Credit Facility are not required to lend any additional amounts or issue letters of credit and could elect to require us to apply all of our available cash to collateralize any outstanding letters of credit, declare any outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable or require us to apply all of our available cash to repay any borrowings then outstanding at the time of default. If we are unable to collateralize our letters of credit or repay borrowings with respect to our Revolving Credit Facility when due, our lenders could proceed against the guarantees of our major domestic subsidiaries. If any future indebtedness under our Revolving Credit Facility is accelerated, we can provide no assurance that our assets would be sufficient to repay such indebtedness in full.

An impairment of all or part of our goodwill and/or our intangible assets could have a material adverse impact to our net earnings and net worth.

 
As of December 31, 2009, we had $691 million of goodwill and $58 million of intangible assets recorded on our consolidated balance sheet.  Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. If our market capitalization drops significantly below the amount of net equity recorded on our balance sheet, it might indicate a decline in our fair value and would require us to further evaluate whether our goodwill has been impaired. We also perform an annual review of our goodwill and intangible assets to determine if it has become impaired which would require us to write down the impaired portion of these assets.  An impairment of all or a significant part of our goodwill and/or intangible assets would have a material adverse impact to our net earnings and net worth.

We are subject to certain U.S. laws and regulations, which are the subject of rigorous enforcement by the U.S. government.

To the extent that we export products, technical data and services outside of the United States we are subject to laws and regulations governing trade and exports, including but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Asset Control within the Department of the Treasury.  A failure to comply with these laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts.  Additionally, we may be subject to qui tam litigation brought by private individuals on behalf of the U.S. government under the Federal False Claims Act, which could include claims for treble damages.  U.S. government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible U.S. government contractor and cause us to suffer serious harm to our reputation.  Any suspension or termination of our U.S. government contractor status could have a negative adverse impact to our business, financial condition or results of operations.


Potential consequences arising out of our guilty plea to violations of the FCPA could include suspension or debarment of our ability to contract with the United States, state or local governments, U.S. government agencies or the MoD, third party claims, loss of business, adverse financial impact, damage to reputation and adverse consequences on financing for current or future projects.

The FCPA in the U.S. and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We train our staff concerning FCPA issues, and we also inform our partners, subcontractors, agents and other third parties who work for us or on our behalf that they must comply with the requirements of the FCPA and other anti-corruption laws. We also have procedures and controls in place to monitor internal and external compliance. We cannot assure you that our internal controls and procedures always will protect us from the reckless or criminal acts committed by our employees or third parties working on our behalf. If we are found to be liable for violations of these laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions which could have a material adverse effect on our business.

On February 11, 2009, Kellogg Brown and Root LLC, one of our subsidiaries, plead guilty to one count of conspiring to violate the FCPA and four counts of violating the FCPA, all arising from the intent to bribe various Nigerian officials through commissions paid to agents working on behalf of TSKJ, a joint venture in which one of our subsidiaries (a successor to The M.W. Kellogg Company) had an approximate 25% interest, of a multibillion dollar contract to construct a natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. On the same date, the SEC filed a complaint, and we consented to the filing of a final judgment against us in the Court.  Potential consequences of the guilty plea arising out of the investigations into FCPA violations or related corruption allegations could include suspension of our ability to contract with the United States, state or local governments, U.S. government agencies or the MoD in the United Kingdom. We and our affiliates could be debarred from future contracts or new orders under current contracts to provide services to any such parties.  In 2009, we had revenue of $5.2 billion from our government contracts work with agencies of the United States or state or local governments and revenue of $185 million from our government contracts work with the MoD. Suspension or debarment from the government contracts business would have a material adverse effect on our business, results of operations and cash flow. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Legal Proceedings – FCPA Investigations” for more information.

Our current business strategy includes acquisitions which present certain risks and uncertainties.

We seek business merger and acquisition activities as a means of broadening our offerings and capturing additional market opportunities by our business units. As a result, we may incur certain additional risks accompanying these activities. These risks include the following:

 
·
We may not identify or complete future acquisitions conducive to our current business strategy;

 
·
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;

 
·
Valuation methodologies may not accurately capture the value proposition;

 
·
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;

 
·
We may have difficulty managing the growth from merger and acquisition activities;

 
·
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;

 
·
The effectiveness of our daily operations may be reduced by the redirection of employees and other resources to acquisition activities;

 
·
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;

 
·
Business acquisitions often may include unforeseen substantial transactional costs to complete the acquisition that exceed the estimated financial and operational benefits;


·
We may experience significant difficulties in integrating our current system of internal controls into the acquired operations; and

 
·
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.
 
If we need to sell or issue additional common shares to finance future acquisitions, our existing shareholder ownership could be diluted.

Part of our business strategy is to expand into new markets and enhance our position in existing markets both domestically and internationally through the merging and acquiring of complementary businesses. To successfully fund and complete such identified, potential acquisitions, we may issue additional equity securities that have the potential to dilute our earnings per share and our existing shareholder ownership.

Provisions in our charter documents and Delaware law may inhibit a takeover or impact operational control which could adversely affect the value of our common stock.

Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others, a staggered board of directors, prohibiting stockholder action by written consent, advance notice for raising business or making nominations at meetings of stockholders and the issuance of preferred stock with rights that may be senior to those of our common stock without stockholder approval. Many of these provisions became effective following the exchange offer. These provisions would apply even if a takeover offer may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

International and political events may adversely affect our operations.

A significant portion of our revenue is derived from our foreign operations, which exposes us to risks inherent in doing business in each of the countries in which we transact business. The occurrence of any of the risks described below could have a material adverse effect on our results of operations and financial condition.  With respect to any particular country, these risks may include:

 
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;

 
inflation;

 
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 may have additional tax liabilities associated with our international operations.

We are subject to income taxes in the United States and numerous foreign jurisdictions, many of which are developing countries.  Significant judgment is required in determining our worldwide provision for income taxes due to lack of clear and concise tax laws and regulations in certain developing jurisdictions.  It is not unlikely that laws may be changed or clarified and such changes may adversely affect our tax provisions.  Also, in the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination may be uncertain. We are regularly under audit by various tax authorities. Although we believe that our tax estimates are reasonable, the final outcome of tax audits and related litigation could be materially different from that which is reflected in our financial statements.

We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs.

Some of our services are performed in high-risk locations, such as Iraq, Afghanistan, Nigeria and Algeria where the country or location is suffering from political, social or economic issues, or war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel. Despite these precautions, the safety of our personnel in these locations may continue to be at risk, and we have in the past and may in the future suffer the loss of employees and contractors.

We are subject to significant foreign exchange and currency risks that could adversely affect our operations and our ability to reinvest earnings from operations, and our ability to limit our foreign exchange risk through hedging transactions may be limited.

We generally attempt to denominate our contracts in U.S. Dollars or in the currencies of our costs.  A sizable portion of our consolidated revenue and consolidated operating expenses are in foreign currencies. As a result, we are subject to significant risks, including:

 
foreign exchange risks resulting from changes in foreign exchange rates and the implementation of exchange controls; and

 
limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries.

In particular, we may conduct business in countries that have non-traded or “soft” currencies which, because of their restricted or limited trading markets, may be difficult to exchange for “hard” currencies. The national governments in some of these countries are often not able to establish the exchange rates for the local currency. As a result, it may not be possible for us to engage in hedging transactions to mitigate the risks associated with fluctuations of the particular currency. We are often required to pay all or a portion of our costs associated with a project in the local soft currency. As a result, we generally attempt to negotiate contract terms with our customer, who is often affiliated with the local government, to provide that we are paid in the local currency in amounts that match our local expenses. If we are unable to match our costs with matching revenue in the local currency, we would be exposed to the risk of an adverse change in currency exchange rates.

Where possible, we selectively use hedging transactions to limit our exposure to risks from doing business in foreign currencies. Our ability to hedge may be limited because pricing of hedging instruments, where they exist, is often volatile and not necessarily efficient.

In addition, the value of the derivative instruments could be impacted by:

 
adverse movements in foreign exchange rates;

 
interest rates;

 
commodity prices; or

 
the value and time period of the derivative being different than the exposures or cash flow being hedged.


Halliburton’s indemnity for FCPA Matters and related corruption allegations does not apply to all potential losses, Halliburton’s actions may not be in our stockholders’ best interests and we may take or fail to take actions that could result in our indemnification from Halliburton with respect to corruption allegations no longer being available.

Under the terms of the master separation agreement with Halliburton, Halliburton has indemnified us for our share of fines or other monetary penalties or direct money damages, including disgorgement, as a result of claims made or assessed by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement thereof, relating to certain FCPA matters or related foreign corruption allegations.  Halliburton’s indemnity does not apply to any other losses, claims, liabilities or damages assessed against us or other affiliates assessed by governmental authorities in other jurisdictions. For purposes of the indemnity, “FCPA Matters” include claims relating to alleged or actual violations occurring prior to the date of the master separation agreement of the FCPA or particular, analogous applicable statutes, laws, regulations and rules of U.S. and foreign governments and governmental bodies identified in the master separation agreement in connection with the Bonny Island project in Nigeria and in connection with any other project, whether located inside or outside of Nigeria, including without limitation the use of agents in connection with such projects, identified by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria in connection with the current investigations in those jurisdictions. Please read “—Potential consequences arising out of our guilty plea to violations of the FCPA could include suspension or debarment of our ability to contract with the United States, state or local governments, U.S. government agencies or the MoD, third party claims, loss of business, adverse financial impact, damage to reputation and adverse consequences on financing for current or future projects.” and “—Our indemnification from Halliburton for FCPA Matters may not be enforceable as a result of being against governmental policy.”

Either before or after a settlement or disposition of any remaining corruption allegations, we could incur losses as a result of or relating to such corruption allegations for which Halliburton’s indemnity will not apply, and we may not have the liquidity or funds to address those losses, in which case such losses could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow.

Subject to the exercise of our right to assume control of the investigation, defense and/or settlement of any remaining corruption allegations, Halliburton will have broad discretion over investigation and defense of these matters. We expect that Halliburton will take actions that are in the best interests of its stockholders, which may not be in our or our stockholders’ best interests, particularly in light of the potential differing interests that Halliburton and we may have with respect to the matters currently under investigation and their defense and/or settlement. In addition, the manner in which Halliburton controls the investigation, defense and/or settlement of any remaining corruption allegations and our ongoing obligation to cooperate with Halliburton in its investigation, defense and/or settlement thereof could adversely affect us and our ability to defend or settle other claims against us, or result in other adverse consequences to us or our business that would not be subject to Halliburton’s indemnification. We may take control over the investigation, defense and/or settlement of any remaining corruption allegations or we may refuse to agree to a settlement of such allegations negotiated by Halliburton.  Notwithstanding our decision, if any, to assume control or refuse to agree to a settlement of any remaining corruption allegations, we will have a continuing obligation to assist in Halliburton’s full cooperation with any government or governmental agency, which may reduce any benefit of our taking control over the investigation of such corruption allegations or refusing to agree to a settlement.  If we take control over the investigation, defense and/or settlement of any remaining corruption allegations, refuse a settlement negotiated by Halliburton, enter into a settlement without Halliburton’s consent, materially breach our obligation to cooperate with respect to Halliburton’s investigation, defense and/or settlement or materially breach our obligation to consistently implement and maintain, for five years following our separation from Halliburton, currently adopted business practices and standards relating to the use of foreign agents, Halliburton may terminate the indemnity, which could have a material adverse effect on our financial condition, results of operations and cash flow.

Our indemnification from Halliburton for FCPA matters or related corruption allegations may not be enforceable as a result of being against governmental policy.

Our indemnification from Halliburton of any corruption allegations may not be enforceable as a result of being against governmental policy. Under the indemnity with Halliburton, our share of any liabilities for fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of U.S. or certain foreign governmental claims or assessments relating to corruption allegations would be funded by Halliburton and would not be borne by us and our public stockholders.  If we are assessed by or agree with U.S. or certain foreign governments or governmental agencies to pay any such fines, monetary penalties or direct monetary damages, including disgorgement, and Halliburton’s indemnity cannot be enforced or is unavailable because of governmental requirements of a settlement, we may not have the liquidity or funds to pay those penalties or damages, which would have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow.


Halliburton’s indemnity for matters relating to the Barracuda-Caratinga project only applies to the replacement of certain subsea bolts, and Halliburton’s actions may not be in our stockholders’ best interests.

Under the terms of the master separation agreement, Halliburton agreed to indemnify us for out-of-pocket cash costs and expenses, or cash settlements or cash arbitration awards in lieu thereof, we incur as a result of the replacement of certain subsea flow-line bolts installed in connection with the Barracuda-Caratinga project, which we refer to as “B-C Matters.”   At our cost, we will control the defense, counterclaim and/or settlement with respect to B-C Matters, but Halliburton will have discretion to determine whether to agree to any settlement or other resolution of B-C Matters. We expect Halliburton will take actions that are in the best interests of its stockholders, which may or may not be in our or our stockholders’ best interests. Halliburton has the right to assume control over the defense, counterclaim and/or settlement of B-C Matters at any time. If Halliburton assumes control over the defense, counterclaim and/or settlement of B-C Matters, or refuses a settlement proposed by us, it could result in material and adverse consequences to us or our business that would not be subject to Halliburton’s indemnification. In addition, if Halliburton assumes control over the defense, counterclaim and/or settlement of B-C Matters, and we refuse a settlement proposed by Halliburton, Halliburton may terminate the indemnity. Also, if we materially breach our obligation to cooperate with Halliburton or we enter into a settlement of B-C Matters without Halliburton’s consent, Halliburton may terminate the indemnity.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own or lease properties in domestic and foreign locations. The following locations represent our major facilities.

Location
 
Owned/Leased
 
Description
 
Business Unit
Houston, Texas
 
Leased(1)
 
High-rise office facility
 
All and Corporate
 
 
 
 
 
 
 
Arlington, Virginia
 
Leased
 
High-rise office facility
 
G&I
 
 
 
 
 
 
 
Houston, Texas
 
Owned
 
Campus facility
 
All and Corporate
 
 
 
 
 
 
 
Birmingham, Alabama
 
Owned
 
Campus facility
 
Services, Downstream and Corporate
 
 
 
 
 
 
 
Leatherhead, United Kingdom
 
Owned
 
Campus facility
 
All
 
 
 
 
 
 
 
Greenford, Middlesex
United Kingdom
 
Owned(2)
 
High-rise office facility
 
Upstream, Downstream and Technology
_________________________
(1)
At December 31, 2009, we had a 50% interest in a joint venture which owns this office facility.
(2)
At December 31, 2009, we had a 55% interest in a joint venture which owns this office facility.

We also own or lease numerous small facilities that include our technology center, sales offices and project offices throughout the world. We own or lease marine fabrication facilities, which are currently for sale, covering approximately 300 acres in Scotland. All of our owned properties are unencumbered and we believe all properties that we currently occupy are suitable for their intended use.

Item 3. Legal Proceedings

Information relating to various commitments and contingencies is described in “Risk Factors” contained in Part I of this Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Notes 10 and 11 to our consolidated financial statements and the information discussed therein is incorporated by reference into this Item 3.


Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of 2009.


Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange under the symbol “KBR.”  The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices per share for our common stock as reported by the New York Stock Exchange and dividends declared:

 
 
Common Stock Price Range
 
 
Dividends Declared
 
 
 
High
 
 
Low
 
 
Per Share (a)
 
Fiscal Year 2009
 
 
 
 
 
 
 
 
 
First quarter ended March 31, 2009
 
$
17.67
   
$
11.41
   
$
0.05
 
Second quarter ended June 30, 2009
   
19.74
     
13.31
   
 
0.05
 
Third quarter ended September 30, 2009
   
24.73
     
16.29
   
 
0.05
 
Fourth quarter ended December 31, 2009
   
24.68
     
17.28
   
 
0.05
 
Fiscal Year 2008
                 
First quarter ended March 31, 2008
 
$
41.95
 
 
$
24.00
 
 
$
0.05
 
Second quarter ended June 30, 2008
 
 
38.41
 
 
 
27.79
 
 
 
0.05
 
Third quarter ended September 30, 2008
 
 
35.30
 
 
 
13.50
 
 
 
0.05
 
Fourth quarter ended December 31, 2008
 
 
18.59
 
 
 
9.78
 
 
 
0.05
 

 
(a)
Dividends declared per share represents dividends declared and payable to shareholders of record in our fiscal year ended December 31, 2009 and 2008. Excluded from the table are dividends declared of $0.05 per share, which were declared on December 21, 2009 for shareholders of record as of March 15, 2010.

At February 19, 2010, there were 145 shareholders of record. In calculating the number of shareholders, we consider clearing agencies and security position listings as one shareholder for each agency or listing.


In December 2008, our Board of Directors authorized a share repurchase program pursuant to which we intend to repurchase shares in the open market to reduce and maintain, over time, our outstanding shares at approximately 160 million shares.  We entered into an agreement with an agent to conduct a designated portion of the repurchase program in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934. This share repurchase program expired December 31, 2009.  The following is a summary of share repurchases of our common stock during the three months ended December 31, 2009.
 
 
Purchase Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b)
 
October 1 – 22, 2009
                       
Repurchase Program
    40,496     $ 22.54       40,496       358,865  
Employee Transactions (a)
    5,016     $ 22.56              
November 2 –30, 2009
                               
Repurchase Program
    21,033     $ 19.79       21,033       464,286  
Employee Transactions (a)
    40,780     $ 19.03              
December 1 – 18, 2009
                               
Repurchase Program
    137,893     $ 18.97       137,893        
Employee Transactions (a)
    1,542     $ 18.47              
Total
                               
Repurchase Program
    199,422     $ 19.78       199,422        
Employee Transactions (a)
    47,338     $ 19.39              

(a)
Reflects shares acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting in restricted stock units.
(b)
Calculated based on shares outstanding at the end of each month less our targeted number of approximately 160 million outstanding shares. At December 31, 2009, this share repurchase program expired and there were zero shares available to be purchased.

In November 2009, we replaced our $930 million revolving credit facility with a $1.1 billion three-year revolving credit facility (“Revolving Credit Facility”), which expires in November 2012.  Our Revolving Credit Facility restricts, among other things, the total dollar amount we may pay for dividends and equity repurchases of our common stock to a maximum of $400 million in the aggregate during the term of the facility.  At December 31, 2009, we have the capacity to pay additional dividends or repurchase shares in the amount of $397 million after the declaration of dividends and shares repurchased.  See Note 9 to our consolidated financial statements. The declaration and payment of any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, general financial condition and liquidity, success in business activities, capital requirements, and general business conditions.


Performance Graph

The chart below compares the cumulative total shareholder return on our common shares from November 16, 2006 (the date of our initial public offering) to the end of the year with the cumulative total return on the Dow Jones Heavy Construction Industry Index and the Russell 1000 Index for the same period. The comparison assumes the investment of $100 on November 16, 2006, and reinvestment of all dividends. The shareholder return is not necessarily indicative of future performance.
 

 
 
11/16/2006
   
12/29/2006
   
12/31/2007
   
12/31/2008
   
12/31/2009
 
KBR
  $ 100.00     $ 126.04     $ 186.95     $ 73.91     $ 93.18  
Dow Jones Heavy Construction
    100.00       103.62       196.48       87.91       100.05  
Russell 1000
    100.00       101.31       105.22       64.17       80.51  


Item 6. Selected Financial Data

The following table presents selected financial data for the last five years. You should read the following information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes to the consolidated financial statements.

 
 
Years Ended December 31,
 
 
 
2009
   
2008
   
2007
   
2006
   
2005
 
 
 
(In millions, except for per share and employee headcount amounts)
 
Statements of Operations Data:
 
 
   
 
   
 
   
 
   
 
 
Total revenue
  $ 12,105     $ 11,581     $ 8,745     $ 8,805     $ 9,291  
Operating income
    536       541       294       152       385  
Income from continuing operations, net of tax
    364       356       204       34       204  
Income from discontinued operations, net of tax
          11       132       114       55  
Net income attributable to KBR
    290       319       302       168       240  
Basic net income attributable to KBR per share:
                                       
—Continuing operations
  $ 1.80     $ 1.84     $ 1.08     $ 0.39     $ 1.36  
—Discontinued operations (a)
          0.07       0.71       0.81       0.40  
Basic net income attributable to KBR  per share
  $ 1.80     $ 1.91     $ 1.79     $ 1.20     $ 1.76  
Diluted net income attributable to KBR per share:
                                       
—Continuing operations
  $ 1.79     $ 1.84     $ 1.08     $ 0.39     $ 1.36  
—Discontinued operations (a)
          0.07       0.71       0.81       0.40  
Diluted net income attributable to KBR per share
  $ 1.79     $ 1.90     $ 1.78     $ 1.20     $ 1.76  
Basic weighted average shares outstanding
    160       166       168       140       136  
Diluted weighted average shares outstanding
    161       167       169       140       136  
                                         
Cash dividends declared per share (b)
  $ 0.20     $ 0.20     $     $     $  
 
                                       
Balance Sheet Data (as of the end of period):
                                       
Cash and equivalents
  $ 941     $ 1,145     $ 1,861     $ 1,410     $ 362  
Net working capital
    1,350       1,099       1,433       915       944  
Total assets
    5,327       5,884       5,203       5,414       5,182  
Total debt (including notes payable to former parent)
                            774  
Total shareholders’ equity
    2,296       2,034       2,235       1,829       1,399  
                                         
Other Financial Data:
                                       
Backlog at year end
  $ 14,098     $ 14,097     $ 13,051     $ 12,437     $ 10,589  
Gross operating margin percentage
    4.4 %     4.7 %     3.4 %     1.7 %     4.1 %
Capital expenditures (c)
  $ 41     $ 37     $ 36     $ 47     $ 51  
Depreciation and amortization expense (d)
  $ 55     $ 49     $ 31     $ 29     $ 29  

(a)
We completed the sale of our Production Services group in May 2006 and the disposition of our 51% interest in DML in June 2007. The results of operations of Production Services group and DML for all periods presented have been reported as discontinued operations. See Note 20 to the consolidated financial statements for further information.
(b)
Dividends declared for 2009 include dividends for shareholders of record as of March 13, 2009, which were declared in December 17, 2008. Excluded from the table are dividends declared of $0.05 per share, which were declared in December 21, 2009 for shareholders of record as of March 15, 2010.
(c)
Capital expenditures do not include expenditures related to the discontinued operations for DML of $7 million, $10 million and $25 million for the years ended December 31, 2007, 2006 and 2005, respectively.
(d)
Depreciation and amortization expense does not include expenses related to the discontinued operations for DML of $10 million, $18 million and $27 million for the years ended December 31, 2007, 2006 and 2005, respectively.


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Introduction

The purpose of management’s discussion and analysis (“MD&A”) is to increase the understanding of the reasons for material changes in our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The MD&A should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Annual Report.

Executive Overview

Business Environment

Hydrocarbon Markets. We provide a full range of engineering, procurement and construction services for large and complex upstream and downstream projects, including LNG and GTL facilities, onshore and offshore oil and gas production facilities, industrial, power generation and other projects.  We serve customers in the gas monetization, oil and gas, petrochemical, refining, power and chemical markets throughout the world.  Our projects are generally long term in nature and are impacted by factors including market conditions, financing arrangements, governmental approvals and environmental matters. Demand for our services depends primarily on our customers’ capital expenditures in our construction services.

We have benefited in recent years from increased capital expenditures from our petroleum and petrochemical customers driven by historically high crude oil and natural gas prices and general global economic expansion that occurred prior to mid-2008.  We have indications that the hydrocarbons market in most geographical regions outside of North America has recovered from the worldwide economic recession and financial market condition.  However, for the North American Hydrocarbon region, many of our customers have decreased their capital expenditure budgets in the short term until the economic conditions become more favorable.  Although it is presently not possible to determine the impact these conditions may have on us in the future, to date we have experienced only a minor impact to our business, primarily in North America.

North American Engineering and Construction Markets. We provide a wide range of services to a variety of industries in the U.S. and Canada, including oil sands, environmental, power, general industrial, forest products, refining, chemical and commercial buildings.  The economic conditions, volatility in oil and gas prices and financial market conditions that began in 2008 disrupted the normal flow of bid/award opportunities in most of the market sectors during the first half of the year.     However, we have seen a recent increase in prequalification requests from our clients and expect a number of our markets to strengthen in 2010.  With few exceptions, individual bid opportunities in 2010 are generally expected to be smaller with increasing number of competitors.  A number of our customers are using the current market conditions to identify cost savings by consolidating service providers to reduce the number of contractors providing services at their facilities, which we see as a potential opportunity for KBR.

Government and Infrastructure Business.  A significant portion of our G&I business unit’s current activities support the United States’ and the United Kingdoms’ operations in Iraq, Afghanistan and in other parts of the Middle East region.  These operations have resulted in one of the largest military deployments since World War II, which has caused a parallel increase in government spending.  The logistics support services that KBR provides the U.S. military are delivered under our LogCAP III contract, which was a competitively bid contract.  Revenues under the LogCAP III project were approximately $4.8 billion, $5.5 billion, and $4.7 billion for the years ended December 31, 2009, 2008 and 2007, respectively.  KBR is the only company providing services under this contract.  Currently, the U.S. government is transitioning work from LogCAP III to LogCAP IV, which is a multiple award contract with three contractors, including KBR, who can each bid and potentially win specific task orders.  As troop deployments shift within the Middle East region, and as additional work is awarded under LogCAP IV, we have seen a decline in work under LogCAP III and we expect this decline will continue. We expect the U.K. military will remain engaged in the region, although their presence has shifted from Iraq to Afghanistan.

In the civil infrastructure sector, we operate in diverse sectors, including transportation, waste and water treatment and facilities maintenance.  In addition to U.S. state, local and federal agencies, we provide these services to governments around the world including the U.K., Australia and the Middle East.  In Australia, we also provide related services to the global mining industry.  There has been a general trend of historic under-investment in infrastructure.  In particular, infrastructure related to the quality of water, wastewater, roads and transit, airports, and educational facilities has historically declined while demand for expanded and improved infrastructure has historically outpaced funding. As a result, demand is at an all time high.  We expect increased opportunities for our engineering and construction services and for privately financed project activities where our ability to assist with arranging financing and our desire to participate in project ownership make us an attractive partner for state and local governments undertaking important infrastructure projects. However, the global economic recession has caused a slow down in some projects.  Stimulus spending and a general economic recovery should result in increased opportunities in the future across all sectors.


Summary of Consolidated Results

Consolidated revenues in 2009 increased approximately $524 million, or 5%, to $12.1 billion compared to $11.6 billion in 2008.  The primary drivers of this increase were from our Upstream and Services business units.  Our Upstream business unit revenues grew $648 million in 2009, or 24%, largely as a result of several cost reimbursable LNG and GTL projects in our Gas Monetization Operations.  Although the recent worldwide economic recession and financial market conditions continue to impact our customers in the hydrocarbons market, most of our ongoing LNG and GTL projects were under development and awarded prior to mid-2008 and continue to have a positive impact on revenue growth and backlog in our Gas Monetization Operations.  Our Services business unit revenues increased $893 million in 2009, or 65%, primarily as a result of our July 1, 2008 acquisition of BE&K, an Alabama-based engineering, construction and maintenance services company that has greatly increased our presence in the North American engineering and construction markets.  Our Georgia Power, Hunt Refinery and Red River plant expansion projects where we provide process construction and program management services and other projects acquired in the BE&K transaction were significant contributors to the increase in Services revenue in 2009.  Revenues from our G&I business unit were down approximately $1.1 billion in 2009, or 15%, compared to the prior year.  The majority of this decrease is due to our Middle East Operations where U.S. military troop level reductions in Iraq have resulted in a significant impact to our staffing levels on the LogCAP III contract.  In 2009, the total number of staff working on the LogCAP III project decreased by approximately 17% including direct hires, subcontractors and local hires.  Additionally, the U.S. Army has transitioned work in Kuwait and Afghanistan from the LogCAP III contract to the LogCAP IV contract.  Although we expect to continue to provide services to the U.S. Army in Iraq under the LogCAP III contract through late 2010, we have not been awarded any new work under the LogCAP IV contract.  Also contributing to the decline in G&I revenues in 2009 were declines in our International Operations where we experienced reduced levels of activities for the U.K. military in Iraq and Afghanistan as well as a number of engineering projects completed during the year.

Consolidated operating income in 2009 decreased approximately $5 million, or 1%, to $536 million compared to $541 million in 2008.  Job income for 2009 from our G&I business unit was down approximately $168 million in 2009 as a result of the $132 million reduction in our award fee accrual and lower volume of activity on our LogCAP III contract.  G&I business unit overheads increased $23 million, or 20%, primarily due to lower recoverability of certain costs  as a result of decreased activity as well as higher bid and proposal expenses.  Additionally, Services business unit overheads increased $40 million, or 95%, due to the additional overhead resulting from the BE&K corporate headquarters in Birmingham, Alabama, acquired in the BE&K acquisition on July 1, 2008. These decreases in job income were partially offset by a favorable arbitration award of $351 million on the EPC 1 project performed for PEMEX in our Oil and Gas Operations which resulted in $183 million of job income for 2009.  Additionally, in 2008, our Oil and Gas Operations recognized a $51 million gain related to a settlement with PEMEX on the EPC 28 project.  Additionally, we experienced higher activity in 2009 on Gas Monetization projects in our Upstream business unit and projects in our Services business unit resulting from the July 1, 2008 acquisition of BE&K.

Consolidated revenues in 2008 were $11.6 billion as compared to $8.7 billion in 2007. Revenue was significantly impacted by our Middle East operations in our G&I business unit.  Revenues from our Middle East Operations were up approximately $736 million in 2008 largely as a result of higher volume on U.S. military support activities in Iraq under our LogCAP III contract due to a U.S. military troop surge in the second half of 2007 that continued to positively impact our 2008 revenue.  In 2008, the total number of employees working in the Middle East increased by approximately 11% to just over 72,000 including direct hires, subcontractors and local hires.  Revenues from our Gas Monetization operations in our Upstream business unit increased approximately $755 million in 2008 due to increased progress on a number of GTL and LNG projects.  Revenues from our Services business unit increased significantly during 2008 by approximately $1.1 billion.  The majority of this increase relates to the business we obtained through the acquisition of BE&K which contributed approximately $825 million of revenue during 2008.  Also contributing to the increase in 2008 in our Services business unit were increases in activity from direct construction and modular fabrication services in our Canadian and North American construction operations.

Consolidated operating income in 2008 was $541 million as compared to $294 million in 2007. All of our business units had improvements in business unit income primarily due to increased revenue from work performed.  Income from our Services business unit increased significantly both as a result of continued growth in our legacy operations and as a result of the business we obtained through the acquisition of BE&K. In addition, our Oil & Gas operations in the Upstream business unit recognized increased income as a result of a $51 million favorable arbitration award on the EPC 28 PEMEX project in the first quarter of 2008. Our Downstream income increased primarily due to increased activity on several large petrochemical projects in Saudi Arabia and newly awarded refining projects as well as a result of the work we obtained in the BE&K acquisition. We also reduced our labor cost absorption and our corporate general and administrative expenses during 2008.


For a more detailed discussion of the results of operations for each of our business units, corporate general and administrative expense, income taxes and other items, see “Results of Operations” below.

Acquisition of BE&K, Inc.

On July 1, 2008, we acquired 100% of the outstanding common shares of BE&K, Inc., (“BE&K”) a privately held, Birmingham, Alabama-based engineering, construction and maintenance services company serving both domestic and international customers. BE&K’s international operations are located in Poland and Russia.  The acquisition of BE&K enhances our ability to provide construction and maintenance services in North America. We paid approximately $559 million in cash including certain stockholders equity adjustments as defined in the stock purchase agreement and direct transaction costs. BE&K and its acquired divisions have been integrated into our Services, Downstream and Government & Infrastructure business units based upon the nature of the underlying projects acquired. As a result of the acquisition, the condensed consolidated statements of income include the results of operations of BE&K since the date of acquisition. See Note 4 to our consolidated financial statements for further discussion of the BE&K acquisition.
 
Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimations and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective, or complex estimates and assessments and is fundamental to our results of operations.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes.

Percentage of completion.  Revenue from long-term contracts to provide construction, engineering, design or similar services are reported on the percentage-of-completion method of accounting. This method of accounting requires us to calculate job profit to be recognized in each reporting period for each job based upon our projections of future outcomes, which include estimates of the total cost to complete the project; estimates of the project schedule and completion date; estimates of the extent of progress toward completion; and amounts of any probable unapproved claims and change orders included in revenue. Progress is generally based upon physical progress, man-hours or costs incurred depending on the type of job. Physical progress is determined as a combination of input and output measures as deemed appropriate by the circumstances.

At the outset of each contract, we prepare a detailed analysis of our estimated cost to complete the project. Risks relating to service delivery, usage, productivity, and other factors are considered in the estimation process. Our project personnel periodically evaluate the estimated costs, claims, change orders, and percentage of completion at the project level. The recording of profits and losses on long-term contracts requires an estimate of the total profit or loss over the life of each contract. This estimate requires consideration of total contract value, change orders, and claims, less costs incurred and estimated costs to complete. We also take into account liquidated damages when determining total contract profit or loss.  Our contracts often require us to pay liquidated damages should we not meet certain performance requirements, including completion of the project in accordance with a scheduled time. We include an estimate of liquidated damages in contract costs when it is deemed probable that they will be paid.  Anticipated losses on contracts are recorded in full in the period in which they become evident. Profits are recorded based upon the product of estimated contract profit at completion times the current percentage-complete for the contract.


When calculating the amount of total profit or loss on a long-term contract, we include unapproved claims in contract value when the collection is deemed probable based upon the four criteria for recognizing unapproved claims under FASB ASC 605-35 regarding accounting for performance of construction-type and certain production-type contracts. Including probable unapproved claims in this calculation increases the operating income (or reduces the operating loss) that would otherwise be recorded without consideration of the probable unapproved claims.  Probable unapproved claims are recorded to the extent of costs incurred and include no profit element. In all cases, the probable unapproved claims included in determining contract profit or loss are less than the actual claim that will be or has been presented to the customer. We are actively engaged in claims negotiations with our customers, and the success of claims negotiations has a direct impact on the profit or loss recorded for any related long-term contract. Unsuccessful claims negotiations could result in decreases in estimated contract profits or additional contract losses, and successful claims negotiations could result in increases in estimated contract profits or recovery of previously recorded contract losses.
 
At least quarterly, significant projects are reviewed in detail by senior management. We have a long history of working with multiple types of projects and in preparing cost estimates. However, there are many factors that impact future costs, including but not limited to weather, inflation, labor and community disruptions, timely availability of materials, productivity, and other factors as outlined in our “Risk Factors” contained in Part I of this Annual Report on Form 10-K. These factors can affect the accuracy of our estimates and materially impact our future reported earnings.

Estimated Losses on Uncompleted Contracts and Changes in Contract Estimates.  We record provisions for estimated losses on uncompleted contracts in the period in which such losses are identified. The cumulative effects of revisions to contract revenue and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties, adjustments for audit findings on US government contracts and contract closeout settlements. Our contracts often require us to pay liquidated damages should we not meet certain performance requirements, including completion of the project in accordance with a scheduled time. We include an estimate of liquidated damages in contract costs when it is deemed probable that they will be paid.

Accounting for government contracts.  Most of the services provided to the United States government are governed by cost-reimbursable contracts. Generally, these contracts contain both a base fee (a fixed profit percentage applied to our actual costs to complete the work) and an award fee (a variable profit percentage applied to definitized costs, which is subject to our customer’s discretion and tied to the specific performance measures defined in the contract, such as adherence to schedule, health and safety, quality of work, responsiveness, cost performance, and business management).

Revenue is recorded at the time services are performed, and such revenues include base fees, actual direct project costs incurred and an allocation of indirect costs. Indirect costs are applied using rates approved by our government customers. The general, administrative, and overhead cost reimbursement rates are estimated periodically in accordance with government contract accounting regulations and may change based on actual costs incurred or based upon the volume of work performed. Revenue is reduced for our estimate of costs that either are in dispute with our customer or have been identified as potentially unallowable per the terms of the contract or the federal acquisition regulations.

Award fees are generally evaluated and granted periodically by our customer. For contracts entered into prior to June 30, 2003, award fees are recognized during the term of the contract based on our estimate of amounts to be awarded. Once award fees are granted and task orders underlying the work are definitized, we adjust our estimate of award fees to actual amounts earned. Our estimates are often based on our past award experience for similar types of work. We periodically receive LogCAP award fee scores and, based on these actual amounts, we adjust our accrual rate for future awards, if necessary. The controversial nature of this contract may cause actual awards to vary significantly from past experience.

For contracts containing multiple deliverables entered into subsequent to June 30, 2003 (such as PCO Oil South), we analyze each activity within the contract to ensure that we adhere to the separation guidelines of FASB ASC 605 – Revenue Recognition and FASB ASC 605-25 – Multiple-Element Arrangements.  For service-only contracts and service elements of multiple deliverable arrangements, award fees are recognized only when definitized and awarded by the customer. The LogCAP IV contract would be an example of a contract in which award fees would be recognized only when definitized and awarded by the customer. Award fees on government construction contracts are recognized during the term of the contract based on our estimate of the amount of fees to be awarded.

Similar to many cost-reimbursable contracts, these government contracts are typically subject to audit and adjustment by our customer. Each contract is unique; therefore, the level of confidence in our estimates for audit adjustments varies depending on how much historical data we have with a particular contract. Further, the significant size and controversial nature of our contracts may cause actual awards to vary significantly from past experience.


Goodwill Impairment.  We operate our business through six business units which are also our operating segments as defined by FASB ASC 280 – Segment Reporting.  These operating segments form the basis for our reporting units used in our goodwill impairment testing.  These reporting units include the Upstream, Downstream, Services, Government & Infrastructure, Technology, and Ventures business units.  Additionally, in 2008 we identified an additional reporting unit related to a small staffing business acquired in the acquisition of BE&K.  This reporting unit is presented as a component of “Other” within our MD&A segment disclosure.

We test the reporting unit goodwill for impairment on an annual basis, and more frequently when negative conditions or other triggering events arise, such as when significant current or projected operating losses exist or are forecasted.  The annual impairment test for goodwill is a two-step process that involves comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill.  If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired; therefore, the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure the amount of impairment loss to be recorded, as necessary.

Consistent with prior years, the fair values of reporting units in 2009 were determined using two methods, one based on market earnings multiples of peer companies for each reporting unit, and the other based on discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses. We believe these two approaches are appropriate valuation techniques and we generally weight the two resulting values equally as an estimate of reporting unit fair value for the purposes of our impairment testing.  However, we may weigh one value more heavily than the other when conditions merit doing so.  For instance, when historic results are believed to be higher than forecast results, we would generally weigh the discounted cash flow method more heavily than our historic earnings method.  The earnings multiples for the first method ranged between 5.5 times and 5.9 times for each of our reporting units.  The second method used market-based discount rates ranging from 8.8 percent to 13.0 percent.  The fair value derived from the weighting of these two methods provided appropriate valuations that, in aggregate, reasonably reconciled to our market capitalization, taking into account observable control premiums.

In the third quarter of 2009, we recognized a goodwill impairment charge of approximately $6 million as a result of our annual goodwill impairment test on September 30, 2009.  The charge was taken against our reporting unit related to the small staffing business acquired in the acquisition of BE&K.  The charge was primarily the result of a decline in the staffing market, the effect of the recession on the market, and our reduced forecasts of the sales, operating income and cash flows for this reporting unit that were identified through the course of our annual planning process.  As of December 31, 2009, goodwill and intangibles for this reporting unit totaled approximately $18 million, including goodwill of $12 million, after recognition of the impairment charge.  Based upon our analysis that we prepared in accordance with FASB ASC 350 – Intangibles—Goodwill and Other, we believe that the reporting unit’s book value of $21 million, include the related goodwill and customer relationship intangible is recoverable.

Subsequent to our September 30, 2009 annual goodwill impairment testing we monitored the changes in our business and other factors that could represent indicators of impairment.  No such indicators of impairment were noted.  With the exception of the staffing business, the fair value of all of our other reporting units significantly exceeded their respective carrying amounts as of our last impairment test.

Our goodwill totaled $691 million and $694 million at December 31, 2009 and 2008, respectively.  The decline in goodwill was due to the impairment charge of $6 million partially offset by $3 million in opening balance sheet adjustments related to our BE&K  and Wabi acquisitions, translation of  goodwill balances denominated in a foreign currency and purchase price adjustments.

Income tax accounting.   Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.  A current tax asset or liability is recognized for the estimated taxes payable or refundable on tax returns for the current year.  A deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences between the financial reporting basis and the income tax basis of assets and liabilities.  The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered.  The value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.


In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.  Additionally, we use forecasts of certain tax elements such as taxable income and foreign tax credit utilization and the evaluation of tax planning strategies in making this assessment of realization. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results.  As of December 31, 2009, we had net deferred tax assets of $177 million, which are net of deferred tax liabilities of $196 million and a valuation allowance of $30 million primarily related to certain foreign branch net operating losses.  In 2009, we increased our valuation allowance by $11 million which was primarily due to net operating losses generated in tax jurisdictions where future taxable income is not expected to be sufficient for us to recognize a tax benefit.

We have operations in numerous countries other than the United States. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned, and revenue-based tax withholding. The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.

Tax filings of our subsidiaries, unconsolidated affiliates, and related entities are routinely examined in the normal course of business by tax authorities. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties as needed based on this outcome.

Legal and Investigation Matters.  As discussed in Notes 10 and 11 of our consolidated financial statements, as of December 31, 2009 and 2008, we have accrued an estimate of the probable and estimable costs for the resolution of some of our legal and investigation matters. For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts. Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations. Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The precision of these estimates is impacted by the amount of due diligence we have been able to perform. We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, our future financial results may be materially and adversely affected. We record adjustments to our initial estimates of these types of contingencies in the periods when the change in estimate is identified.

Pensions.  Our pension benefit obligations and expenses are calculated using actuarial models and methods, in accordance with FASB ASC 715 – Compensation—Retirement Benefits.  Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of plan benefits and the expected rate of return on plan assets. Other critical assumptions and estimates used in determining benefit obligations and plan expenses, including demographic factors such as retirement age, mortality, and turnover, are also evaluated periodically and updated accordingly to reflect our actual experience.

The discount rate was determined annually by reviewing yields on high-quality bonds that receive one of the two highest ratings given by a recognized rating agency and the expected duration of the obligations specific to the characteristics of the Company’s plans.  The overall expected long-term rate of return on assets was determined by reviewing targeted asset allocations and historical index performance of the applicable asset classes on a long-term basis of at least 15 years.  Plan assets are comprised primarily of equity and debt securities. As we have both domestic and international plans, these assumptions differ based on varying factors specific to each particular country or economic environment.
 
The discount rate utilized to determine the projected benefit obligation at the measurement date for our U.S. pension  plan decreased from 6.15% at December 31, 2008 to 5.35% at December 31, 2009. The discount rate utilized to determine the projected benefit obligation at the measurement date for our U.K. pension plans, which constitutes all of our international plans and 95% of all plans decreased from 5.98% at December 31, 2008 to 5.84% at December 31, 2009.  An additional future decrease in the discount rate of 25 basis points for our pension plans would increase our projected benefit obligation by an estimated $2 million and $46 million for the US and UK plans, respectively, while a similar increase in the discount rate would reduce our projected benefit obligation by an estimated $2 million and $44 million for the US and UK plans, respectively.  Our expected long-term rates of return on plan assets utilized at the measurement date decreased from 7.81% to 7.63% for our U.S. pension plan and remained unchanged at 7.0% for our international plans.


Unrecognized actuarial gains and losses are generally being recognized over a period of 10 to 15 years, which represents the expected remaining service life of the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumptions changes in the obligations and the difference between expected returns and actual returns on plan assets. The difference between actual and expected returns is deferred as an unrecognized actuarial gain or loss and is recognized as future pension expense. Our unrecognized actuarial loss at December 31, 2009 was $576 million, of which $20 million is expected to be recognized as a component of our expected 2010 pension expense. Lower than expected long-term rates of return on our plan assets and the previous curtailment of our existing pension plans could increase our future pension costs and contributions over historical levels.  During 2009, we made contributions to fund our defined benefit plans of $23 million.  We currently expect to make contributions in 2010 of approximately $14 million.

The actuarial assumptions used in determining our pension benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.  Our actuarial estimates of pension benefit expense and expected pension returns of plan assets are discussed in Note 18 in the accompanying financial statements.

Results of Operations

We analyze the financial results for each of our six business units and certain product service lines.  The business units presented are consistent with our reportable operating segments discussed in Note 7 (Business Segment Information) to our consolidated financial statements. We also present the results of operations for product service lines (“PSL”). While certain of the business units and product service lines presented below do not meet the criteria for reportable segments in accordance with FASB ASC 280 – Segment Reporting, we believe this supplemental information is relevant and meaningful to our investors for various reasons including monitoring our progress and growth in certain markets and product lines.


In millions
 
Years Ended December 31,
 
Revenue (1)
 
2009
 
 
2008
 
 
Increase (Decrease)
 
 
Percentage Change
 
 
2007
 
 
Increase (Decrease)
 
 
Percentage Change
 
G&I:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government – Middle East Operations
 
$
4,838
 
 
$
5,518
 
 
$
(680
)
 
 
(12)
%
 
$
4,782
 
 
$
736
 
 
 
15
%
U.S. Government – Americas Operations
 
 
484
 
 
 
618
 
 
 
(134
)
 
 
(22)
%
 
 
721
 
 
 
(103
)
 
 
(14)
%
International Operations
 
 
557
 
 
 
802
 
 
 
(245
)
 
 
(31)
%
 
 
590
 
 
 
212
 
 
 
36
%
Total G&I
 
 
5,879
 
 
 
6,938
 
 
 
(1,059
)
 
 
(15)
%
 
 
6,093
 
 
 
845
 
 
 
14
%
Upstream:
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
Gas Monetization
 
 
2,748
 
 
 
2,157
 
 
 
591
 
 
 
27
%
 
 
1,402
 
 
 
755
 
 
 
54
%
Oil & Gas
 
 
582
 
 
 
525
 
 
 
57
 
 
 
11
%
 
 
485
 
 
 
40
 
 
 
8
%
Total Upstream
 
 
3,330
 
 
 
2,682
 
 
 
648
 
 
 
24
%
 
 
1,887
 
 
 
795
 
 
 
42
%
Services
 
 
2,266
 
 
 
1,373
 
 
 
893
 
 
 
65
%
 
 
322
 
 
 
1,051
 
 
 
326
%
Downstream
 
 
485
 
 
 
484
 
 
 
1
 
 
 
 
 
 
361
 
 
 
123
 
 
 
34
%
Technology
 
 
97
 
 
 
84
 
 
 
13
 
 
 
15
%
 
 
90
 
 
 
(6
)
 
 
(7)
%
Ventures
 
 
21
 
 
 
(2
)
 
 
23
 
 
 
1,150
%
 
 
(8
)
 
 
6
 
 
 
75
%
Other
 
 
27
 
 
 
22
 
 
 
5
 
 
 
23
%
 
 
 
 
 
22
 
 
 
 
Total revenue
 
$
12,105
 
 
$
11,581
 
 
$
524
 
 
 
5
%
 
$
8,745
 
 
$
2,836
 
 
 
32
%
_________________________
(1)
Our revenue includes both equity in the earnings of unconsolidated affiliates and revenue from the sales of services into the joint ventures. We often participate on larger projects as a joint venture partner and also provide services to the venture as a subcontractor. The amount included in our revenue represents our share of total project revenue, including equity in the earnings (loss) from joint ventures and revenue from services provided to joint ventures.


For purposes of reviewing the results of operations, “business unit income” is calculated as revenue less cost of services managed and reported by the business unit and are directly attributable to the business unit. Business unit income excludes corporate general and administrative expenses and other non-operating income and expense items.


In millions
 
Years Ending December 31,
 
 
 
2009
 
 
2008
 
 
Increase (Decrease)
 
 
Percentage Change
 
 
2007
 
 
Increase (Decrease)
 
 
Percentage Change
 
Business unit income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
G&I:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government – Middle East Operations
 
$
70
 
 
$
242
 
 
$
(172
)
 
 
(71
)%
 
$
231
 
 
$
11
 
 
 
5
%
U.S. Government – Americas Operations
 
 
65
 
 
 
36
 
 
 
29
 
 
 
81
%
 
 
68
 
 
 
(32
)
 
 
(47)
%
International Operations
 
 
145
 
 
 
170
 
 
 
(25
)
 
 
(15)
%
 
 
116
 
 
 
54
 
 
 
47
%
Total job income
 
 
280
 
 
 
448
 
 
 
(168
)
 
 
(38
)%
 
 
415
 
 
 
33
 
 
 
8
%
Divisional overhead
 
 
(139
)
 
 
(116
)
 
 
(23
)
 
 
(20)
%
 
 
(136
)
 
 
20
 
 
 
15
%
Total G&I business unit income
 
 
141
 
 
 
332
 
 
 
(191
)
 
 
(58)
%
 
 
279
 
 
 
53
 
 
 
19
%
Upstream:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
Gas Monetization
 
 
178
 
 
 
165
 
 
 
13
 
 
 
8
%
 
 
161
 
 
 
4
 
 
 
2
%
Oil & Gas
 
 
274
 
 
 
141
 
 
 
133
 
 
 
94
%
 
 
81
 
 
 
60
 
 
 
74
%
Total job income
 
 
452
 
 
 
306