10-K 1 kbr1231201210k.htm 10-K KBR 12.31.2012 10K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from             to
Commission File Number 1-33146
 
 
 
KBR, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
20-4536774
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
601 Jefferson Street Suite 3400
 
77002
Houston, Texas
 
Zip Code
(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  ý    No  ¨

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

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  ý    No  ¨

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  ý    No  ¨

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

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

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

The aggregate market value of the voting stock held by non-affiliates on June 29, 2012, was approximately $3.6 billion, determined using the closing price of shares of common stock on the New York Stock Exchange on that date of $24.71.

As of January 31, 2013, there were 147,615,219 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 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
 




TABLE OF CONTENTS
 
 
 
 
Page
 
 
FINANCIAL STATEMENTS
 
 
 



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Forward-Looking and Cautionary Statements

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

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

Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or on 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.


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PART I
Item 1. Business

General

KBR, Inc. and its subsidiaries (collectively, “KBR”) is a global engineering, construction and services company supporting the energy, hydrocarbons, government services, minerals, civil infrastructure, power, industrial and commercial markets. We offer a wide range of services through our Hydrocarbons, Infrastructure, Government and Power (“IGP”), Services and Other groups. Information regarding segment disclosures are incorporated by reference in Note 5 to our consolidated financial statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

KBR, Inc. was incorporated in Delaware on March 21, 2006 prior to an exchange offer transaction that separated us from our former parent, Halliburton Company, which was completed on April 5, 2007. We trace our history and culture to two businesses, The M.W. Kellogg Company (Kellogg) and Brown & Root, Inc. (Brown & Root). Kellogg dates back to a pipe fabrication business which was founded in New York in 1901 and has been creating technology for petroleum refining and petrochemicals processing since 1919. Brown & Root was founded in Houston, Texas in 1919 and built the world’s first offshore platform in 1947. Brown & Root was acquired by Halliburton in 1962 and Kellogg was acquired by Halliburton in 1998 through its merger with Dresser Industries.

Our Business Groups and Business Units

We operate in four business groups which are consistent with our segment reporting under Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 280 - Segment Reporting: Hydrocarbons; IGP; Services; and Other as described below.

Hydrocarbons. Our Hydrocarbons business group provides services ranging from prefeasibility studies to front-end engineering design (“FEED”) through construction and commissioning of process facilities in remote locations and developed areas around the world. We are involved in hydrocarbon processing which includes constructing liquefied natural gas (“LNG”) plants in several countries. Our global teams of engineers also provide process technology and project delivery for projects in the oil and gas, olefins, refining, petrochemical, biofuels and carbon capture markets. The Hydrocarbons business group is comprised of the Gas Monetization, Oil & Gas, Downstream and Technology business units.

Gas Monetization business unit – Our Gas Monetization business unit designs and constructs facilities that enable our customers to monetize their natural gas resources. We design and build LNG and gas-to-liquids (“GTL”) facilities that allow for the economical development and transportation of resources across the globe. Additionally, we make significant contributions in advancing gas processing development, equipment design and innovative construction methods.

Oil & Gas business unit – Our Oil & Gas business unit delivers onshore and offshore oil and natural gas production facilities which include platforms, floating production and subsea facilities and pipelines. We also provide specialty consulting services which include field development studies and planning, structural integrity management and proprietary designs for ship and semi-submersible hulls.

Downstream business unit – Our Downstream business unit serves clients in the petrochemical, refining, chemicals, biofuels and syngas markets throughout the world. We utilize our differentiated process technologies, but also execute projects and complexes using technologies supplied by others. Our success is based on delivering value over the lifecycle of projects in the hydrocarbon market.

Technology business unit – Our Technology business unit offers highly efficient, differentiated proprietary process technologies for the coal monetization, petrochemical, refining and syngas markets. Our Downstream business unit is often contracted to provide project management and engineering, procurement and construction (“EPC”) delivery of our process technology as part of fully integrated solutions worldwide.

Infrastructure, Government & Power. Our IGP business group delivers effective solutions to industrial commercial, defense and governmental agencies worldwide, providing base operations, facilities management, border security, EPC services and logistics support. We also provide project management, construction management, design and support services for an array of complex infrastructure initiatives including aviation, road, rail, maritime, water, wastewater, building and pipeline projects. For the industrial manufacturing and process markets, we provide a full range of pre-FEED, FEED and EPC services to a variety of heavy industrial and advanced manufacturing clients, frequently employing our clients’ proprietary knowledge and technologies in strategically critical projects. For the power market, we use our full-scope EPC expertise to execute projects which play a

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distinctive role in increasing the world’s power generation capacity from multiple fuel sources and in enhancing the efficiency and environmental compliance of existing power facilities. The IGP business group includes the North American Government and Logistics (“NAGL”), International Government, Defence and Support Services (“IGDSS”), Infrastructure, Minerals and the Power and Industrial (“P&I”) business units.

North American Government and Logistics business unit – Our NAGL business unit offers operations, maintenance and logistics support in both contingency and sustainment environments as well as construction and design/build services to the United States Department of Defense (“DoD”), Department of State (“DoS”) and other federal government agencies.

International Government, Defence and Support Services business unit – Our IGDSS business unit supports armed forces and government departments around the world by providing logistics and field support, operations and maintenance of equipment, camps and bases, program and project management, construction management, training, visualization software and engineering and support services. We provide services to government departments in the United Kingdom (“U.K.”), Europe, Middle East and Australia.

Infrastructure business unit – Our Infrastructure business unit provides engineering, construction and project management services across the world on complex infrastructure projects. The Infrastructure business unit provides global focus and leadership in three key markets – transport (aviation, ports, rail and roads); water (water and wastewater); and facilities (includes buildings and pipelines).

Minerals business unit – Our Minerals business unit provides EPC and EPC management ("EPCm") services across the world on complex mining and minerals projects. The Minerals unit operates in three key markets – bulk materials handling (pit-to-port-to-plant); minerals processing; and support infrastructure (camps, power, water, transport, port, marine, rail and road).

Power & Industrial business unit – Our P&I business unit provides full-scope EPC services for the industrial and power markets globally. Within the Power product line, we deliver fossil fuel and renewable power generation projects, plant re-powering projects and emissions control projects to customers that include regulated utilities, power cooperatives, municipalities, independent power producers and industrial cogeneration providers. Within the Industrial product line, we serve clients in the forest products, manufacturing, technology, life sciences, consumer products, metals and materials sectors.

Services. Our Services business group delivers full-scope construction, construction management, fabrication, operations/maintenance, commissioning/startup and turnaround expertise worldwide to a broad variety of markets including oil and gas, petrochemicals processing, mining, power, alternate energy, pulp and paper, industrial and manufacturing and consumer product industries.  Specifically, Services is organized around four major product lines; U.S. Construction, Industrial Services, Building Group and Canada Operations.

Our U.S. Construction product line delivers direct hire construction and construction management for stand-alone construction projects to a variety of markets and works closely with the Hydrocarbons group, Minerals and Power and Industrial business units to provide construction execution support on all domestic EPC projects.

Our Industrial Services product line is a diversified global maintenance organization providing maintenance, on-call construction, turnaround and specialty services to a variety of markets at over 90 locations where we have embedded KBR personnel. This product line works with our other business units to identify potential for pull through opportunities and to identify upcoming EPC projects.

Our Building Group product line provides commercial general contractor services to education, food and beverage, manufacturing, health care, hospitality and entertainment, life science and technology and mixed-use building clients.

Our Canada Operations product line is a diversified construction and fabrication operation providing direct hire construction, construction management, module assembly, fabrication and maintenance services to our Canadian customers. This product line serves a number of markets including oil and gas customers operating in the oil sands, pulp and paper, mining and industrial markets.

Other. Included in Other is the Ventures business unit and other operations. 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 technology supply, engineering, construction, construction management or operations and maintenance. Project equity investments under current management include defense equipment and housing, toll roads and petrochemicals.


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In addition to the Ventures business unit, other business operations are reported in our Other group including the Allstates staffing business, our engineering resource operations and other operations that do not individually meet the criteria for group presentation under ASC 280.

Our Business Strategy

Our business strategy is to create shareholder value by providing our customers differentiated capital project delivery and services offerings across the entire engineering, construction and operations project lifecycle as a vertically integrated global contractor. We execute our business strategy on a global scale delivering consistent results anywhere in the world. An essential feature of our global strategy is to establish local operations in market geographies where demand for our services is expected to grow. Our core skills are conceptual design, FEED, engineering, project management, procurement, construction, construction management, logistics, commissioning, operations and maintenance. We will complement organic growth by pursuing targeted acquisitions that focus on expanding our capabilities and market coverage or accelerating business growth strategies. Key features of our business unit strategies include:

The Hydrocarbons business group will build on our world-class strength and experience with hydrocarbon processing projects and seek to expand our footprint in both offshore and onshore oil and gas services. Our business will grow by utilizing our leading technology and execution excellence to provide high value process facilities to customers. Our Technology business unit will expand its portfolio of differentiated process technologies and associated service, proprietary equipment and catalyst offerings and deliver through an expanded global platform.
The Infrastructure, Government & Power business group will broaden our commercial, government operations, EPC logistics, construction and maintenance services internationally. We will apply our design, project management and construction skills to infrastructure, industrial, mining, minerals and power markets utilizing the same global delivery platform already in place for Hydrocarbons.
The Services business group will capitalize on our brand reputation and core competencies to expand our direct hire construction, general contracting and industrial services operations both domestically and internationally with focus on safe operations and high value outcomes.
The Ventures business unit will invest alongside our clients in selected projects to both earn a return on our capital and secure capital projects for our business units to design, build and maintain.

Competition and Scope of Global Operations

We operate in highly competitive markets throughout the world. The types of competition with respect to sales of our capital project and service offerings include:

customer relationships;
successful prior execution of large projects in difficult locations;
technical excellence and differentiation;
high value in delivered projects and services measured by performance, quality, operability and cost;
service delivery, including the ability to deliver personnel, processes, systems and technology on an “as needed, where needed and when needed” basis with the required local content and presence;
consistent superior service quality;
market leading health, safety and environmental standards and sustainable practices;
financial strength through liquidity and capital capacity and the ability to support warranties;
breadth of proprietary technology and technical sophistication; and
robust risk awareness and management processes.

We conduct business in over 70 countries. Based on the location of services provided, our operations in countries other than the United States accounted for 73% of our consolidated revenue during 2012, 78% of our consolidated revenue during 2011, and 79% of our consolidated revenue during 2010. Our international revenues in the Asia Pacific geographic region accounted for 24%, 16% and 10% of our consolidated revenue during 2012, 2011 and 2010, respectively. Our international revenues in the Africa geographic region accounted for 21%, 23% and 21% of our consolidated revenue during 2012, 2011 and 2010, respectively. Revenue from our operations in Iraq, primarily related to our work for the U.S. government, was 6%, 21% and 29% of our consolidated revenue in 2012, 2011 and 2010, respectively. See Note 5 to our consolidated financial statements for selected geographic information.


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We market substantially all of our capital project and service offerings through our business units. We have many substantial competitors in the markets that we serve. The competitors include but are not limited to AMEC, Bechtel Corporation, CH2M Hill Companies Ltd., Chicago Bridge and Iron Co., N.V., Chiyoda, Fluor Corporation, Foster Wheeler Ltd., Jacobs Engineering Group, Inc., JGC Corp, John Wood Group PLC, McDermott International, Petrofac PLC, Saipem S.p.A., Technip, URS Corporation, AECOM Technology Corporation and Worley Parsons Ltd. Since the markets for our services are vast and extend across multiple geographic regions, 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, foreign currency exchange controls and fluctuations. We strive to manage or mitigate these risks through a variety of means including contract provisions, contingency planning, insurance schemes, hedging and other risk management activities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Instruments Market Risk,” “Risk Factors - International and political events may adversely affect our operations,” and Note 14 to our consolidated financial statements for information regarding our exposures to foreign currency fluctuations, risk concentration and financial instruments used to manage our risks.

Significant Acquisitions and Other Transactions

In November 2012, the joint venture in which we hold a 50% interest sold the office building in which we lease office space for our corporate headquarters and business unit offices in Houston, Texas, for $175 million. Since we will continue to lease the office building from the new owner under essentially the same lease terms, the $44 million pre-tax gain on the sale will be deferred and amortized using the straight-line method over the remaining term of the lease, which expires in 2030.

In November 2012, we closed on the sale of our former headquarters campus located at 4100 Clinton Drive in Houston, Texas for approximately $42 million in cash. The sale resulted in a $27 million pre-tax gain on disposal of assets in "Operating income" in our consolidated statements of income.

On December 31, 2010, we obtained control of the remaining 44.94% interest in our M.W. Kellogg Limited (“MWKL”) consolidated joint venture previously held by JGC Corporation. MWKL is located in the U.K. and provides EPC services primarily for LNG, GTL and onshore oil and gas projects. MWKL will continue to support our LNG and other Hydrocarbons projects.

On December 21, 2010, we completed the acquisition of 100% of the outstanding common shares of ENI Holdings, Inc. (“ENI”). ENI is the parent to the Roberts & Schaefer Company (“R&S”), a privately held EPC services company for material handling systems. Headquartered in Chicago, Illinois, R&S provides services and associated processing infrastructure to customers in the mining and minerals, power, industrial, refining, aggregates, precious and base metals industries. ENI and its acquired businesses have been integrated into our IGP business group. On December 6, 2012, ENI Holdings, LLC filed a lawsuit in Delaware Chancery Court alleging KBR is wrongfully withholding the escrowed holdback. On January 25, 2013, we filed an answer denying the wrongful withholding allegation. In addition we filed a counterclaim for indemnity and fraud under the terms of the Stock Purchase Agreement. As of December 31, 2012, the escrowed holdback amount was $25 million.

See Note 3 to our consolidated financial statements for further discussion of our recent acquisitions.

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, facilitate relationships between us, our venture partners and different potential customers and allow for greater flexibility in delivering our services based on cost and geographical efficiency. Our significant joint ventures and alliances are described below. All joint venture ownership percentages presented are as of December 31, 2012.

JKC is a joint venture consisting of JGC Corporation, KBR and Chiyoda for the purpose of design, procurement, fabrication, construction, commissioning and testing of the Ichthys Onshore LNG Export Facility in Darwin, Australia ("Inpex LNG project"). The project will be executed using two joint ventures in which we own a 30% equity interest. The investments are accounted for using the equity method of accounting and reported in our Hydrocarbons business group.

Kellogg Joint Venture (“KJV”) is a joint venture consisting of JGC Corporation, Hatch Associates PTY LTD (“Hatch”), Clough Projects Australia PTY LTD (“Clough”) 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 and reported in our Hydrocarbons business group.

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Aspire Defence Holdings Limited (“Aspire Defence”) is a joint venture between us, Carillion Private Finance Limited and two financial investors formed to contract with the U.K. Ministry of Defence (“MoD”) 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 which is reported in our Ventures business unit that is included in our Other group. In addition, we own a 50% interest in each of the two joint ventures within our IGP group 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.

Mantenimiento Marino de Mexico (“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 executing Mexican contracts 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 maintenance, repair and restoration services 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 within our Services business group.

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. For our projects related to unconsolidated joint ventures, we have included our percentage ownership of the joint venture’s estimated revenue in backlog. Our backlog was $14.9 billion and $10.9 billion at December 31, 2012 and 2011, respectively. We estimate that as of December 31, 2012, 48% of our backlog will be recognized as revenue within one year. All backlog is attributable to firm orders at December 31, 2012 and 2011. 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 are broadly categorized as either cost-reimbursable or fixed-price, although a portion of our contracts are “hybrid” contracts containing both cost-reimbursable and fixed-price scopes.

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 project risks to us.

Cost-reimbursable contracts include contracts where the price is variable based upon our actual costs incurred for time and materials, or for variable quantities of work priced at defined unit rates and 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 IGP business group provides substantial work under cost-reimbursable contracts with the DoD and other governmental agencies which are generally subject to applicable statutes and regulations. If the government finds that we improperly charged any costs to a contract under the terms of the contract or applicable Federal Procurement Regulations, these costs are potentially not reimbursable or, if already reimbursed, we may be required to refund the costs to the customer. Such conditions may also include financial penalties. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include 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, 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.”

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. A considerable percentage of revenue is generated from transactions with the Chevron Corporation (“Chevron”) primarily from our Hydrocarbons business group and the U.S. government from our IGP business group. No other customers represented 10% or more of consolidated revenues in any of the periods presented. The information in the following tables has summarized data related to our revenue from Chevron and the U.S. government.

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Revenues and percent of revenues from major customers by year:
 
 
 
 
 
 
 
 
 
Years ended December 31,
 
2012
 
2011
 
2010
Millions of dollars, except percentage amounts
$
%
 
$
%
 
$
%
Chevron revenue
$
2,302

29
%
 
$
2,047

22
%
 
$
1,783

18
%
U.S. government revenue
$
690

9
%
 
$
2,219

24
%
 
$
3,277

32
%

Raw Materials

Equipment and materials essential to our business are obtained from a variety of sources throughout the world. The principal equipment and materials we use in our business are subject to availability and price fluctuations due to customer demand, producer capacity and market conditions. We monitor the availability and price 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 significant 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. See, “Risk Factors - The nature of our contracts, particularly those that are fixed-price, subject us to risks associated with cost over-runs, operating cost inflation and potential claims for liquidated damages.” andRisk Factors - Current or future economic conditions in the credit markets may negatively affect ability to operate our or our customers’ businesses, finance working capital, implement our acquisition strategy and access our cash and short-term investments.”

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, coal gasification 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 a licensor of ammonia process technologies used in the conversion of synthetic gas to ammonia. We believe our technology portfolio and experience in the commercial application of these technologies and related know-how differentiates us, 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, know-how and trade secrets through patents and confidentiality agreements. 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.

Employees

As of December 31, 2012, we had approximately 27,000 employees, of which approximately 16% 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.

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 Occupational 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

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the various regulations enacted by the Health and Safety Act of 1974.

These laws and 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 and security 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 Clean Water 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. These requirements apply to our business groups where we perform construction and industrial maintenance services or operate and maintain facilities.

We continue to monitor conditions at sites owned or previously owned and until further information is available, we are only able to estimate a possible range of remediation costs. These locations were primarily utilized for manufacturing or fabrication work and are no longer in operation. The use of these facilities created various environmental issues including deposits of metals, volatile and semi-volatile compounds and hydrocarbons impacting surface and subsurface soils and groundwater. The range of remediation costs could change depending on our ongoing site analysis and the timing and techniques used to implement remediation activities. We do not expect that costs related to environmental matters will have a material adverse effect on our consolidated financial position or results of operations. Based on the information presently available to us, as of December 31, 2012, we have accrued approximately $6 million for the assessment and remediation costs associated with all environmental matters, which represents the low end of the range of estimated possible costs that could be as much as $11 million. See Note 10 to our consolidated financial statements for more information on environmental matters.

We have been named as a potentially responsible party (“PRP”) in various clean-up actions taken by federal and state agencies in the U.S. Based on the early stages of these actions, we are unable to determine whether we will ultimately be deemed responsible for any costs associated with these actions.

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 mineral and 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 minerals, oil and natural gas.  We will continue to monitor developments in this area.

Compliance

We are subject to numerous compliance-related laws and regulations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act, other applicable anti-bribery legislation and laws and regulations regarding trade and exports. We are also governed by our own Code of Business Conduct and other compliance-related corporate policies and procedures that mandate compliance with these laws. Conducting our business with ethics and integrity is a key priority for KBR. Our Code of Business Conduct is a guide for every employee in applying legal and ethical practices to our everyday work. The Code of Business Conduct describes not only our standards of integrity but also some of the specific principles and areas of the law that are most likely to affect our business. We regularly train our employees regarding anti-bribery issues and our Code of Business Conduct.

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 Securities 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

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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

Risks Related to Operations of our Business

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 and environmental approvals. Because a significant portion of our revenue is generated from such projects, our results of operations and cash flows 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.

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 necessary 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.

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

We conduct our business under various types of contracts where costs are estimated in advance of our performance. Approximately 43% of the value of our backlog is attributable to fixed-price contracts where we bear a significant portion of the risk of cost over-runs. These types of contracts are priced based in part on cost and scheduling estimates which are based on assumptions including prices and availability of labor, equipment and materials as well as productivity, performance and future economic conditions. If these estimates prove inaccurate, there are errors or ambiguities as to contract specifications or if circumstances change due to, among other things, unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of equipment and materials or our suppliers’ or subcontractors’ inability to perform, then cost over-runs may occur. We may not be able to obtain compensation for additional work performed or expenses incurred. Additionally, we may be required to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts. Our failure to accurately estimate the resources and time required for fixed-price contracts or our failure to complete our contractual obligations within the time frame and costs committed could result in reduced profits or, in certain cases, a loss for that contract. If the contract is significant, or we encounter issues that impact multiple contracts, cost over-runs could have a material adverse effect on our business, financial condition and results of operations.

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 the 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, the costs of executing our existing and future projects may increase, and our financial performance may decline.

We conduct a portion of our engineering and construction operations through joint ventures and partnerships exposing us to risks and uncertainties, many of which are outside of our control.

We conduct a portion of our engineering, procurement and construction operations through large project-specific joint ventures, where control may be shared with unaffiliated third parties. As with any joint venture arrangement, differences in views

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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 share liabilities on a joint and several basis with our joint venture partners under these joint venture arrangements. If our partners do not meet their contractual obligations, the joint venture may be unable to adequately perform and deliver its contracted services requiring us to make additional investments or perform additional services to ensure the adequate performance and delivery of services to our customer. We could be liable for both our obligations and those of our partners which may result in reduced profits or, in some cases, significant losses on the project. Additionally, these factors could have a material adverse affect on the business operations of the joint venture and, in turn, our business operations and reputation.

Operating through joint ventures in which we have a minority interest could result 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. Additionally, 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 may have received if the risks and resources we contributed were always proportionate to our returns.

The nature of our engineering and construction business exposes us to potential liability claims and contract disputes which may exceed or are excluded from existing insurance coverage.

We engage in engineering and construction activities for large facilities where design, construction or systems failures can result in substantial injury or damage to employees or other third parties exposing us to legal proceedings, investigations and disputes. 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. 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, which result in us 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 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 may 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.

International and political events may adversely affect our operations.

A significant portion of our revenue is derived from foreign operations, which exposes us to risks inherent in doing business in each of the countries where we transact business. The occurrence of any of the risks described below could have a material adverse effect on our business operations and financial performance. With respect to any particular country, these risks may include, but not limited to:

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;
currency fluctuations, devaluations and conversion restrictions;
confiscatory taxation or other adverse tax policies;
governmental activities or judicial actions that limit or disrupt markets, restrict payments, limit the movement of funds, result in the deprivation of contract rights or result in the inability for us to obtain or retain licenses required for operation.

Due to the unsettled political conditions in many oil-producing countries and other countries where we provide governmental logistical support, our financial performance is subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls and governmental actions. Our operations are conducted in areas that have significant amounts of political risk. In addition, military action or continued unrest in the Middle East could impact the supply and price of oil and gas,

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disrupt our operations in the region and elsewhere and increase our costs related to security worldwide.

We may have additional tax liabilities associated with our domestic and 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. We are audited by various U.S. and foreign tax authorities and in the ordinary course of our business there are many transactions and calculations where the ultimate tax determination may be uncertain. 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, Algeria, Egypt and Saudi Arabia where the country or location and surrounding area is suffering from political, social, economic issues, war or civil unrest. In those locations where we have employees or operations, we have and may continue to incur substantial costs to maintain the safety of our personnel. Despite these precautions, we have suffered the loss of employees and contractors which could expose us to claims and litigation. In the future, the safety of our personnel in these and other locations may continue to be at risk, exposing us to the potential loss of additional employees and contractors.

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 in our commodity-based markets depends on capital spending by oil and natural gas companies, including national and international oil companies, and by industrial, mining 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 demand for crude oil or natural gas. 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, social unrest, military and economic conditions;
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 in which we operate.

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


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Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future revenue or earnings.

As of December 31, 2012, our backlog was approximately $14.9 billion. We cannot guarantee that the revenue projected in our backlog will be realized or profitable. Many of our contracts are subject to cancellation, termination or suspension at the discretion of the customer. From time to time, changes in project scope may occur with respect to contracts reflected in our backlog and could reduce the dollar amount of our backlog and the timing of the revenue and profits that we actually earn. Projects may remain in our backlog for an extended period of time because of the nature of the project and the timing of the particular services or equipment required by the project. Additionally, poor project performance could also impact our backlog and profits if it results in termination of the contract. We cannot predict the impact that future economic conditions 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.

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. 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 technical 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 as well as our ability to maintain or increase market share.

A portion of our revenues is generated by large, recurring business from certain significant customers. A loss, cancellation or delay in projects by our customers in the future could negatively affect our revenues.

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. A considerable percentage of revenue is generated from transactions with Chevron primarily from our Hydrocarbons business group and the U.S. government from our IGP business group. Revenue from Chevron and the U.S. government in 2012 represented 29% and 9%, respectively, of our total consolidated revenue.

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 the provisioning of services to our customers. 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, challenged or infringed upon. 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, expire or 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 diminish. 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 financial performance could be materially and adversely affected.

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

We seek business acquisition activities as a means of broadening our offerings and capturing additional market opportunities by our business units and we may be exposed to certain additional risks resulting from these activities. These risks include the following:

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 acquisition activities;

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Key personnel within an acquired organization may resign from their related positions resulting in a significant loss to our strategic and operational efficiency associated with the acquired company;
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 of the acquisition, that pose future risks to our working capital needs, cash flows and the profitability of related operations;
We may assume unprofitable projects that pose future risks to our working capital needs, cash flows and the profitability of related operations;
Business acquisitions may include substantial transactional costs to complete the acquisition that exceed the estimated financial and operational benefits;
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.

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, 2012, we had $779 million of goodwill and $99 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 perform an annual and an interim analysis, if appropriate, of our goodwill to determine if it has become impaired. The analysis requires us to make assumptions in estimates of fair value of our reporting units. If actual results are significantly different from the estimates, we might be required to impair a portion of our goodwill, as occurred during 2012 with respect to our Minerals reporting unit, which is part of our IGP segment, resulting in a $178 million impairment of goodwill. An impairment of all or a part of our goodwill and/or intangible assets could have a material adverse impact to our net earnings and net worth.

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

We execute different projects in remote locations around the world. 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.

We rely on information technology systems to conduct our business, and disruption, failure or security breaches of these systems could adversely affect our business and results of operations.

We rely heavily on information technology (IT) systems in order to achieve our business objectives.  We also rely upon industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our IT systems.  However, our portfolio of hardware and software products, solutions and services and our enterprise IT systems may be vulnerable to damage or disruption caused by circumstances beyond our control such as catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses, cyber attacks or other malicious software programs.  The failure or disruption of our IT systems to perform as anticipated for any reason could disrupt our business and result in decreased performance, significant remediation costs, transaction errors, loss of data, processing inefficiencies, downtime, litigation and the loss of suppliers or customers.  A significant disruption or failure could have a material adverse effect on our business operations, financial performance and financial condition. We have experienced limited and infrequent security threats, none of which we considered to be significant to our business or results of operations.

We are implementing a new enterprise resource planning software system ("ERP") and failure to implement the ERP successfully could adversely affect our business and results of operations.

We are incurring costs associated with designing and implementing a new company-wide enterprise ERP with the objective of gradually migrating to the new system. We had capital expenditures of $53 million in 2012 for design and implementation. In addition we incurred expenses related to the ERP initiative of $20 million during 2012. Capital expenditures and expenses for ERP for 2013 and beyond will depend upon the pace of conversion. If implementation is not executed successfully, this could result in business interruptions. If we do not complete the implementation of ERP timely and successfully, we may incur additional

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costs associated with completing this project and a delay in our ability to improve existing operations, support future growth and enable us to take advantage of new applications and technologies.

Risks Related to U.S. Government Operations of our Business

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. Historically, omnibus contract vehicles, such as LogCAP, have been used 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 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. 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 Defense Contract Audit Agency (“DCAA”) audits and Congressional investigations may adversely affect our ability to obtain future awards. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Analysis - U.S. Government Matters.”

Demand for our services provided under U.S. government contracts are directly affected by spending and capital expenditures by our customers.

We derive a 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. Additionally, U.S. government regulations generally include the right for government agencies to modify, delay, curtail, renegotiate or terminate contracts at their convenience any time prior to their completion. As a defense contractor, our financial performance is impacted by the allocation and prioritization of U.S. defense spending and sequestration is one of those impacts. 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;
curtailment of the U.S. governments’ outsourcing of services to private contractors; and
level of political instability due to war, conflict or natural disasters.

We face uncertainty with respect to our U.S. government contracts due to the fiscal and economic challenges facing the U.S. government, including the potential for sequestration and issues surrounding the U.S. national debt ceiling. Potential contract cancellations, modifications or terminations may arise from resolution of these issues and could cause our revenues, profits and cash flows to be lower than our current projections. The loss of work we perform for the U.S. government or other decreases in governmental spending and outsourcing could have a material adverse effect on our business, results of operations and cash flow.

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 DoD security regulations. Failure to comply with any of these regulations, requirements or statutes may result in contract price adjustments, financial penalties and contract termination. Our U.S. government contracts are subject to audits, cost reviews and investigations by U.S. government contracting oversight agencies such as the 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 conduct audits and reviews to determine if KBR is complying with the requirements under the FAR and CAS, pertaining to the allocation, period assignment, allowability and allocation of costs assigned to U.S. government contracts. The DCAA presents its report findings to the Defense Contract Management Agency (“DCMA”). Should the DCMA 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

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of previously collected cash proceeds. 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.

Given the demands of working for the U.S. government, we expect that from time to time we will have disagreements or experience performance issues with our government customers. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include 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 expect to receive payment for amounts owed for our allowable costs under cost-reimbursable contracts. Other remedies that our government customers may seek for 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.

Risks Related to Governmental Regulations and Law

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.

We are subject to anti-bribery laws in the U.S. and other jurisdictions, violations of which could include suspension or debarment of our ability to contract with the United States, state or local governments, U.S. government agencies or the U.K. MoD, third party claims, loss of customers, adverse financial impact, damage to reputation and adverse consequences on financing for current or future projects.

The Foreign Corrupt Practices Act (“FCPA”) in the U.S., the U.K. Anti-Bribery Act 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 provide complete assurance that our internal controls and procedures will always 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.

Risks Related to Financial Conditions and Markets

Current or future economic conditions in the credit markets may negatively affect the ability to operate our or our customers’ businesses, finance working capital, implement our acquisition strategy, and access our cash and short-term investments.

We finance most of our operations using cash provided by operations, but also depend on the availability of credit to grow our businesses. Unfavorable economic conditions have brought uncertainty to the capital and credit markets in the U.S. and abroad, 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 financing 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 opportunities or respond to competitive pressures. If additional funds are not available, or are not available

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on terms satisfactory to us, there could be a material adverse impact on our business and financial performance.

Disruptions of the credit markets could also adversely affect our clients’ borrowing capacity, which supports the continuation and expansion of projects worldwide, and could result in contract cancellations or suspensions, project delays and payment delays or defaults by our clients. In addition, clients may choose to make fewer capital expenditures or 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 financial performance.

In addition, we are subject to the risk that the counterparties to our Credit Agreement may be unable to meet their obligations if they suffer catastrophic demand on their liquidity that will prevent them from fulfilling their contractual obligation to us. We also routinely enter into contracts with counterparties, including vendors, suppliers and subcontractors that may be negatively impacted by events in the credit markets. If those counterparties are unable to perform their obligations to us or our clients, we may be required to provide additional services or make alternate arrangements on less favorable terms with other parties to ensure adequate performance and delivery of service to our clients. These circumstances could also lead to disputes and litigation with our partners or clients, which could have a material adverse impact on our reputation, business, financial condition and results of operations.

Furthermore, our cash balances and short-term investments are maintained in accounts held at major banks and financial institutions located primarily in North America and the United Kingdom. Deposits are in amounts that exceed available insurance. Although none of the financial institutions in which we hold our cash and investments have gone into bankruptcy, been forced into receivership or have been seized by their governments, there is a risk that this may occur in the future. If this were to occur, we would be at risk of not being able to access our cash which may result in a temporary liquidity crisis that could impede our ability to fund operations.

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 beyond the capacity of our Credit Agreement is generally at the provider’s sole discretion. Due to events that affect the banking and insurance 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 market 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 may not be financially strong. 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 Agreement. Any inability to bid for or win new contracts due to the failure of obtaining adequate bonding, letters of credit and/or other customary credit enhancements could have a material adverse effect on our business prospects and future revenue.

Our Credit Agreement imposes restrictions that limit our operating flexibility and may result in additional expenses, and this credit agreement may not be available if financial covenants are violated or if an event of default occurs.

Our Credit Agreement provides a credit line of up to $1.0 billion, and expires in December 2016. It contains a number of covenants restricting, among other things, our ability to incur liens and indebtedness, sell assets, repurchase our equity shares and make certain types of investments. We are also subject to certain financial covenants, including maintenance of a maximum ratio of consolidated debt to consolidated EBITDA and a minimum consolidated net worth. If we fail to meet the covenants, or an event of default occurs, the credit line would not be available unless the necessary waivers or amendments of lenders participating in the bank syndicate could be obtained.

A breach of any covenant or our inability to comply with the required financial ratios could result in a default under our Credit Agreement, 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 are not obligated to provide funding or issue letters of credit and could elect to require us to apply available cash to collateralize any outstanding letters of credit and declare any outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, thus requiring us to apply available cash to repay any borrowings then outstanding. If we are unable to cash collateralize our letters of credit or repay borrowings with respect to our Credit Agreement when due, our lenders could proceed against the guarantees of our major

18



domestic subsidiaries. If any future indebtedness under our Credit Agreement is accelerated, we can provide no assurance that our assets would be sufficient to repay such indebtedness in full.

Provisions in our charter documents, Delaware law and our Credit Agreement 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, 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. 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. Additionally, our Credit Agreement contains a default provision that is triggered upon a change in control of at least 25%.

We are subject to significant foreign exchange and currency risks that could adversely affect our operations, and our ability to reinvest earnings from operations, as well as mitigate 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. However, we do enter into contracts that subject us to currency risk exposure, primarily when our contract revenue is denominated in a currency different from the contract costs. A significant portion of our consolidated revenue and consolidated operating expenses are in foreign currencies. As a result, we are subject to significant foreign currency risks, including risks resulting from changes in foreign exchange rates and limitations on our ability to reinvest earnings from operations in one country to fund the financing requirements of our operations in other countries.

The governments of certain countries have or may in the future impose restrictive exchange controls on local currencies and it may not be possible for us to engage in effective hedging transactions to mitigate the risks associated with fluctuations of a particular currency. We are often required to pay all or a portion of our costs associated with a project in the local currency. As a result, we generally attempt to negotiate contract terms with our customer, who is often affiliated with the local government, or has a significant local presence, to provide that we are only paid in the local currency for amounts that match our local expenses. If we are unable to match our local currency costs with revenue in the local currency, we would be exposed to the risk of adverse changes in currency exchange rates.

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 acquiring and merging of complementary businesses. To successfully fund and complete such potential acquisitions, we may issue additional equity securities that may result in dilution of our existing shareholder ownership earnings per share.

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

We participate in privately financed projects that enable governments and other customers to finance large-scale projects, such as 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 upon 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 receiving project financing. If a project is unable to obtain financing, we could incur losses on our equity investments and any related contractual receivables. After completion of these projects, the return on our equity investments can be dependent on the operational success 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.

Item 1B. Unresolved Staff Comments

None.


19



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 Segment
Houston, Texas
  
Leased(1)
  
Office facilities
  
All and Corporate
 
 
 
 
 
 
 
Newark, Delaware
 
Leased
 
Office facilities
 
All
 
 
 
 
 
 
 
Arlington, Virginia
  
Leased
  
Office facilities
  
IGP
 
 
 
 
 
 
 
South Brisbane, Perth, Australia
 
Leased
 
Office and project facilities
 
All
 
 
 
 
 
 
 
Birmingham, Alabama
  
Owned
  
Campus facility
  
All
 
 
 
 
 
 
 
Leatherhead, United Kingdom
  
Owned
  
Campus facility
  
All
 
 
 
 
 
 
 
Greenford, Middlesex
United Kingdom
  
Owned
  
Office facilities
  
Hydrocarbons
 
(1)
In November 2012, our 50% owned joint venture sold the office building in which we lease office space for our corporate headquarters and business unit offices in Houston, Texas. We will continue to lease space from the new owner under essentially the same terms through the expiration of the lease in 2030.

We also own or lease numerous small facilities that include sales offices and project offices throughout the world and lease office space in other buildings owned by unrelated parties. All of our owned properties are unencumbered and we believe all properties that we currently occupy are suitable for their intended use. In the fourth quarter of 2012, we sold a former campus facility located on Clinton Drive in Houston, Texas.

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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Notes 9 and 10 to our consolidated financial statements and the information discussed therein is incorporated by reference into this Item 3.

Item 4.Mine Safety Disclosures

None.

20



PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “KBR.” The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices per share for our common stock as reported by the New York Stock Exchange and dividends declared. In the fourth quarter of 2012, we declared dividends of $0.05 per share on October 22, 2012, and $0.08 per share on December 18, 2012.
 
 
Common Stock Price Range
 
Dividends
Declared
Per Share
 
 
High
 
Low
 
Fiscal Year 2012
 
 
 
 
 
 
First quarter ended March 31, 2012
 
$
38.00

 
$
27.68

 
$
0.05

Second quarter ended June 30, 2012
 
$
35.97

 
$
22.73

 
$
0.05

Third quarter ended September 30, 2012
 
$
32.10

 
$
22.09

 
$
0.05

Fourth quarter ended December 31, 2012
 
$
31.84

 
$
25.95

 
$
0.13

Fiscal Year 2011
 
 
 
 
 
 
First quarter ended March 31, 2011
 
$
38.28

 
$
28.43

 
$
0.05

Second quarter ended June 30, 2011
 
$
38.79

 
$
33.79

 
$
0.05

Third quarter ended September 30, 2011
 
$
39.34

 
$
23.29

 
$
0.05

Fourth quarter ended December 31, 2011
 
$
30.17

 
$
20.86

 
$
0.05

At January 31, 2013, there were 126 shareholders of record. In calculating the number of shareholders, we consider clearing agencies and security position listings as one shareholder for each agency or listing.
On August 26, 2011, KBR announced that its Board of Directors authorized a share repurchase program to repurchase up to 10 million of our outstanding common shares. The authorization does not specify an expiration date. The following is a summary of share repurchases of our common stock settled during the three months ended December 31, 2012. We also have a share maintenance program to repurchase shares based on vesting and other activity under our equity compensation plans. Shares purchased under "Employee transactions" in the table below reflects shares acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock units.
Purchase Period
Total Number
of Shares
Purchased (b)
 
Average
Price Paid
per Share
 
Total Number of
Shares  Purchased
as Part of Publicly
Announced Plans
or Programs (b)
 
Maximum Number of
Shares  that May Yet Be
Purchased Under the
Plans or Programs (a)
October 1 – 30, 2012
 
 
 
 
 
 
 
Repurchase program

 
$

 

 
7,588,665

Employee transactions
1,174

 
$
30.45

 

 

November 2 – 30, 2012
 
 
 
 
 
 
 
Repurchase program

 
$

 

 
7,588,665

Employee transactions
66

 
$
26.97

 

 

December 7 – 31, 2012
 
 
 
 
 
 
 
Repurchase program
111,500

 
$
29.34

 
3,901

 
7,584,764

Employee transactions
3,631

 
$
29.67

 

 

Total
 
 
 
 
 
 
 
Repurchase program
111,500

 
$
29.34

 
3,901

 
7,584,764

Employee transactions
4,871

 
$
29.82

 

 

 
(a)
Represents remaining common shares that may be repurchased pursuant to the August 26, 2011 announced share repurchase program.
(b)
The difference between total number of shares purchased and total number of shares purchased as part of publicly announced plans or programs pertains to repurchases under our share maintenance program.


21



Under our Credit Agreement, we are permitted to repurchase our common stock, provided that no such repurchases shall be made from the proceeds borrowed under the Credit Agreement, and that the aggregate purchase price and dividends paid after December 2, 2012, does not exceed the Distribution Cap. At December 31, 2012, the remaining availability under the Distribution Cap was approximately $659 million. The declaration, payment or increase 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 for the five-year period ended December 31, 2012, 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 December 31, 2007, and reinvestment of all dividends. The shareholder return is not necessarily indicative of future performance.
 
12/31/2007
 
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/30/2011
 
12/31/2012
KBR
$
100.00

 
$
39.53

 
$
49.99

 
$
80.93

 
$
74.43

 
$
80.45

Dow Jones Heavy Construction
100.00

 
44.74

 
50.92

 
65.12

 
53.49

 
64.62

Russell 1000
100.00

 
60.98

 
76.52

 
87.13

 
86.69

 
98.76


22



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 “Item 7. 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,
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
(In millions, except for per share amounts)
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
7,921

 
$
9,261

 
$
10,099

 
$
12,105

 
$
11,581

Operating income
 
299

 
587

 
609

 
536

 
541

Impairment of goodwill and long-lived assets (a)
 
180

 

 
5

 
6

 

Income from continuing operations, net of tax
 
202

 
540

 
395

 
364

 
356

Income from discontinued operations, net of tax (b)
 

 

 

 

 
11

Net income attributable to noncontrolling interests
 
(58
)
 
(60
)
 
(68
)
 
(74
)
 
(48
)
Net income attributable to KBR
 
144

 
480

 
327

 
290

 
319

Basic net income attributable to KBR per share:
 
 
 
 
 
 
 
 
 
 
—Continuing operations
 
$
0.97

 
$
3.18

 
$
2.08

 
$
1.80

 
$
1.84

—Discontinued operations (b)
 

 

 

 

 
0.07

Basic net income attributable to KBR per share
 
$
0.97

 
$
3.18

 
$
2.08

 
$
1.80

 
$
1.91

Diluted net income attributable to KBR per share:
 
 
 
 
 
 
 
 
 
 
—Continuing operations
 
$
0.97

 
$
3.16

 
$
2.07

 
$
1.79

 
$
1.84

—Discontinued operations (b)
 

 

 

 

 
0.07

Diluted net income attributable to KBR per share
 
$
0.97

 
$
3.16

 
$
2.07

 
$
1.79

 
$
1.90

Basic weighted average shares outstanding
 
148

 
150

 
156

 
160

 
166

Diluted weighted average shares outstanding
 
149

 
151

 
157

 
161

 
167

Cash dividends declared per share (d)
 
$
0.28

 
$
0.20

 
$
0.15

 
$
0.20

 
$
0.25

Balance Sheet Data (as of the end of period):
 
 
 
 
 
 
 
 
 
 
Cash and equivalents
 
$
1,053

 
$
966

 
$
786

 
$
941

 
$
1,145

Net working capital
 
1,391

 
1,158

 
923

 
1,350

 
1,099

Total assets
 
5,767

 
5,673

 
5,417

 
5,327

 
5,884

Non-recourse project-finance debt
 
94

 
98

 
101

 

 

Total shareholders’ equity
 
$
2,511

 
$
2,442

 
$
2,204

 
$
2,296

 
$
2,034

Other Financial Data:
 
 
 
 
 
 
 
 
 
 
Backlog at year end
 
$
14,931

 
$
10,931

 
$
12,041

 
$
14,098

 
$
14,097

Gross operating margin percentage
 
3.8
%
 
6.3
%
 
6.0
%
 
4.4
%
 
4.7
%
Capital expenditures (c)
 
$
75

 
$
83

 
$
66

 
$
41

 
$
37

Depreciation and amortization expense
 
$
65

 
$
71

 
$
62

 
$
55

 
$
49

 
(a)
In accordance with ASC 350-20, the goodwill of our Minerals reporting unit, which is part of our IGP segment, was written down to its implied fair value of $85 million from its carrying value of $263 million at December 31, 2011, resulting in an impairment charge of $178 million in the third quarter of 2012. Included in 2009 is a goodwill impairment charge of $6 million related to the Allstates staffing business. Included in 2012 and 2010 are impairment of long-lived asset charges of $2 million and $5 million, respectively, primarily related to equipment, land and buildings.
(b)
We completed the sale of the Production Services group in May 2006 and the disposition of our 51% interest in Devonport Management Limited (“DML”) in June 2007. The results of operations of the Production Services group and DML for all periods presented have been reported as discontinued operations.
(c)
Capital expenditures do not include expenditures related to the noncash investing activities for the purchase of computer software of $19 million for the year ended December 31, 2010.
(d)
In 2012, we declared five dividends totaling $0.28 per share. In each quarter during 2012, we declared a dividend $0.05 per share. In the fourth quarter of 2012, we declared an additional dividend of $0.08 per share on December 18, 2012.

23



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

Introduction

Management’s discussion and analysis (“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, refining, petrochemicals, biofuels and other projects 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 market sectors.

Capital expenditures in our petroleum and petrochemical markets are driven by global and regional economic growth expectations reflected in a long global spending cycle. The spending cycle is moderated by fluctuations in crude oil prices and chemical feedstock costs including natural gas prices, and is also partially subject to volatility of financial markets. The hydrocarbons market in most international regions is improving from the downturn that occurred as a result of the worldwide economic recession. We now see long term growth in energy projects including demand for related licensed process technologies, offshore oil and gas production, LNG, biofuels, motor fuels, chemicals and fertilizers. Upstream and downstream investment plans are advancing in such resource rich areas as the Middle East, Brazil, North Sea and East and West Africa. LNG prospects continue to develop in the Asia-Pacific region, as well as in East Africa and North America as a result of the recent gas discoveries. Each of these trends lends to our particular capability to deliver large projects in remote locations and harsh environments.

Abundant shale gas supplies and resulting low prices in North America are driving renewed interest in petrochemical project investments. Feasibility studies and front-end engineering and design projects continue to grow, reflecting clients’ intentions to invest in capital intensive energy projects that utilize our process technologies and EPC project delivery skills.

Infrastructure, Government and Power Markets (“IGP”). A significant portion of our IGP business group’s current activities supports the United States’ and the United Kingdom’s government operations in Iraq, Afghanistan and in other parts of the Middle East region. As a defense contractor, our financial performance is impacted by the allocation and prioritization of U.S. defense spending, including the effects of sequestration. The logistics support services we provide to the U.S. government are delivered under the LogCAP IV contract and other competitively bid contracts. As a result of withdrawal of U.S. combat troops in Iraq, we demobilized our operations under the LogCAP III contract, which effectively ended in December 2011, while continuing to support the U.S. Department of State's presence in Iraq under LogCAP IV. Although we expect the volume of services we provide to the U.S. and U.K. governments in the Middle East to continue to decline as troop counts are drawn down, we anticipate increased spending for logistics and infrastructure for these clients as troops and equipment return to home base. We also view increased infrastructure spending by Middle Eastern governments as a core opportunity.

We operate in diverse civil infrastructure markets, including transportation, water and waste treatment and facilities. 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. There has been a general trend of under-investment in public infrastructure, particularly related to the quality of water, wastewater, roads and transit, rail, airports and educational facilities, where demand for expanded and improved infrastructure has historically outpaced funding. We have seen increased activity related to these types of projects particularly in the Middle East; however, the global economic recession has caused markets to remain flat in the U.S. and the U.K., which has resulted in delays or slow start-ups to major projects.

In the industrial sector, we operate in a number of markets, including utility and non-utility power, forest products, advanced manufacturing, mining, minerals and metals and consumer products, both domestically and internationally. Forest products, advanced manufacturing and consumer products are experiencing modest market improvements. However, the mining, minerals and metals markets are experiencing a decline driven by U.S. demand for commodities. We see modest market improvements internationally related to mining, minerals and metals markets driven by international commodity demand growth. In the power sector, we serve regulated utilities, power cooperatives, municipalities and various non-regulated providers, primarily in the U.S. and U.K. markets. The power sector continues to be driven by long-term economic and demographic trends and changes in environmental regulations. Projects in the power sector are currently concentrated in emissions control, repowering, renewable power and new gas-fired power generation.

24




We provide a wide range of construction and maintenance services to a variety of industries in the U.S. and Canada, including forest products, power, commercial and institutional buildings, general industrial and manufacturing.  Demand for industrial construction services is increasing markedly in Canada, while the commercial building market shows signs of improvement.  

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

Summary of Consolidated Results

2012 compared to 2011

Consolidated revenue in 2012 decreased $1.3 billion, or 14%, to $7.9 billion compared to $9.3 billion in 2011 primarily due to declines in the IGP business group, mainly as a result of the December 2011 completion of operations in Iraq under the LogCAP III contract and lower progress on Minerals projects. The decrease was also due to lower project activity and project completions on the Escravos, Skikda and Pearl GTL projects. Partially offsetting these declines in revenue were aggregate increases of $612 million on increased activity on the Gorgon project and the EPC phase of the Ichthys LNG project in 2012, as well as milestone incentive awards for the Gorgon LNG project. Also, P&I revenue increased by $130 million in 2012 compared to 2011 primarily due to new project awards, including an air emissions controls system project, and increased volume and progress on existing projects awarded in late 2011 and early 2012, such as coal gasification and waste-to-energy expansion projects.

Consolidated operating income in 2012 decreased $288 million, or 49%, to $299 million compared to $587 million in 2011 mainly due to a $178 million goodwill impairment charge of our Minerals reporting unit and the decline in operations in NAGL of $145 million which was primarily due to the completion of operations in Iraq under the LogCAP III contract. In addition, operating income from Services and Minerals declined $82 million and $54 million, respectively, in 2012. Operating income from Services declined due to increased estimated costs to complete several U.S. construction fixed-price projects and the decline in our U.S. Construction business. The decline in Minerals is a result of additional project costs and liquidated damages related to two projects in Indonesia associated with issues encountered during the commissioning and pre-commissioning phase of these projects. Partially offsetting this decline was increased income in 2012 from our Gas Monetization reporting unit of $188 million as a result of increased activity from the Gorgon, Skikda and Ichthys LNG projects, that included change orders which revised estimated cost to complete the Skikda LNG project, as well as milestone awards for the Gorgon LNG project.

2011 compared to 2010

Consolidated revenue in 2011 decreased $838 million, or 8%, to $9.3 billion compared to $10.1 billion in 2010 primarily due to declines in the IGP and Services business groups. The decrease in IGP business group revenue included a $1.1 billion decline resulting from an overall reduction in volume for U.S. military support activities, primarily in Iraq, under our LogCAP III contract. In 2011, the total number of staff working on the LogCAP III contract decreased by 76% including direct hires, subcontractors and local hires as a result of demobilization. The Services business group experienced a $165 million decline in revenue for 2011 primarily driven by the completion of several large projects in the U.S. and Canada. Revenue increased in our Hydrocarbons business group by $289 million primarily driven by further progress on our LNG and GTL projects in Gas Monetization as well as additional phase awards and new technical service projects in Oil & Gas.

Consolidated operating income in 2011 decreased $22 million, or 4%, to $587 million compared to $609 million in 2010. Operating income in 2011 from the IGP business group was down $6 million. The decline was primarily due to lower activity on our LogCAP III contract but offset by income from the Aspire project as well as increased activity on NATO contracts in Afghanistan. Services operating income declined $44 million primarily due to the completion or winding-down of several large projects in the U.S. and Canada. Operating income from Hydrocarbons increased by $8 million largely due to new projects in Oil & Gas and Downstream. Operating income from Ventures increased by $9 million primarily due to improved performance from the EBIC ammonia plant in Egypt.


25



Acquisition of Roberts & Schaefer Company

On December 21, 2010, we completed the acquisition of 100% of the outstanding common shares of ENI Holdings, Inc. (“ENI”). ENI is the parent to the Roberts & Schaefer Company (“R&S”), a privately held, EPC services company for material handling and processing systems. Headquartered in Chicago, Illinois, R&S provides services and associated material handling infrastructure to customers in the mining and minerals, power, industrial, refining, aggregates, precious and base metals industries. The purchase price was $280 million plus estimated working capital of $17 million which included cash acquired of $8 million. The total net cash paid at closing of $289 million is subject to an escrowed holdback. As of December 31, 2012, the remaining escrowed holdback was $25 million and primarily related to security for indemnification obligations. R&S and its acquired divisions have been integrated into the Minerals reporting unit. As a result of our interim goodwill impairment test, we recorded a noncash goodwill impairment charge in our Minerals reporting unit, which is part of our IGP segment, of $178 million in the third quarter of 2012.  See Note 3 and Note 6 to our consolidated financial statements for further discussion of the R&S acquisition and the goodwill impairment charge. On December 6, 2012, ENI Holdings, LLC filed a lawsuit in Delaware Chancery Court alleging KBR is wrongfully withholding the escrowed holdback. On January 25, 2013, we filed an answer denying the wrongful withholding allegation. In addition we filed a counterclaim for indemnity and fraud under the terms of the Stock Purchase Agreement.

Acquisition of remaining interest in M.W. Kellogg Limited.

On December 31, 2010, we obtained control of the remaining 44.94% interest of our MWKL subsidiary located in the U.K. for £107 million subject to certain post-closing adjustments. The acquisition was recorded as an equity transaction that reduced noncontrolling interests, accumulated other comprehensive income (“AOCI”) and additional paid-in capital by $180 million. We recognized direct transaction costs associated with the acquisition of $1 million as a direct charge to additional paid in capital. The initial purchase price of $164 million was paid on January 5, 2011. During the third quarter of 2011, we settled various post-closing adjustments that resulted in a decrease to “Paid-in capital in excess of par” of approximately $5 million. We also agreed to pay the former noncontrolling interest 44.94% of future proceeds collected on certain receivables owed to MWKL. Additionally, the former noncontrolling interest agreed to indemnify us for 44.94% of certain MWKL liabilities to be settled and paid in the future. As of December 31, 2012, we have liabilities of $14 million classified on our balance sheet as “Other current liabilities” reflecting our accrual of 44.94% of proceeds from certain receivables owed to the former noncontrolling interest partner in MWKL. See Note 3 and Note 10 for additional details of obligations due to the former noncontrolling interest partner in MWKL.

Sale of Interest in LNG Joint Venture

On January 5, 2011, we sold our 50% interest in a joint venture to our joint venture partner for $22 million. The joint venture was formed to execute an EPC contract for construction of an LNG plant in Indonesia. We recognized a gain on the sale of our interest of $8 million which is included in “Equity in earnings of unconsolidated affiliates, net” in our consolidated income statement.

Critical Accounting Policies

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 judgments 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 estimates and how they can impact our financial statements. A significant 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.

Engineering and Construction Contracts. Revenue from long-term contracts to provide construction, engineering, design or similar services is recognized as contract performance progresses using the percentage-of-completion method. We estimate the progress towards completion to determine the amount of revenue and profit to be recognized in each reporting period, based upon 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 claims and change orders included in revenue. Progress is

26



generally based upon a cost-to-cost approach but we also use alternative methods including physical progress, labor hours or others depending on the type of job.

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 timeline. We generally include an estimate of liquidated damages in contract costs when it is deemed probable that they will be paid. 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 claims in contract value only when it is probable that the claim will result in additional revenue and the amount can be reliably estimated. Including claims in this calculation increases the operating income (or reduces the operating loss) that would otherwise be recorded without consideration of the claims. Claims are recorded to the extent of costs incurred and include no profit element. 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.

For contracts containing multiple deliverables we analyze each activity within the contract to ensure that we adhere to the separation guidelines of ASC 605 - Revenue Recognition and ASC 605-25 - Multiple-Element Arrangements.

Our revenue includes revenue from services provided to our unconsolidated affiliates or joint ventures, the equity in the earnings of unconsolidated affiliates or joint ventures and gains and losses on disposal of our interest in joint ventures.

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 U.S. government contracts and contract closeout settlements.

Accounting for government contracts. Most of the services provided to the United States government are governed by cost-reimbursable contracts. Generally, these contracts may contain base fees (a fixed profit percentage applied to our actual costs to complete the work), fixed fees and award fees (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 revenue includes 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 pursuant to the terms of the contract or the federal acquisition regulations.

For contracts containing multiple deliverables we analyze each activity within the contract to ensure that we adhere to the separation guidelines of ASC 605 - Revenue Recognition and ASC 605-25 - Multiple-Element Arrangements.

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

27



on how much historical data we have with a particular contract. KBR excludes from billings to the U.S. government costs that are expressly unallowable, or mutually agreed to be unallowable, or not allocable to government contracts based on the applicable regulations. Revenue recorded for government contract work is reduced for our estimate of potentially unallowable costs related to issues that may be categorized as disputed or unallowable as a result of cost overruns or the audit process. Our estimates of potentially unallowable costs are based upon, among other things, our internal analysis of the facts and circumstances, terms of the contracts and the applicable provisions of the FAR, quality of supporting documentation for costs incurred and subcontract terms, as applicable. From time to time, we engage outside counsel to advise us in determining whether certain costs are allowable. We also review our analysis and findings with the administrative contracting officer (“ACO”) as appropriate. In some cases, we may not reach agreement with the DCAA or the ACO regarding potentially unallowable costs which may result in our filing of claims in various courts such as the Armed Services Board of Contract Appeals (“ASBCA”) or the United States Court of Federal Claims (“COFC”). We only include amounts in revenue related to disputed and potentially unallowable costs when we determine it is probable that such costs will result in revenue. We generally do not recognize additional revenue for disputed or potentially unallowable costs for which revenue has been previously reduced until we reach agreement with the DCAA and/or the ACO that such costs are allowable.

Goodwill Impairment Testing. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations and, in accordance with ASC 350 Intangibles - Goodwill and Other, we are required to test goodwill for impairment on an annual basis, and more frequently when negative conditions or other triggering events arise. We test goodwill for impairment annually as of October 1. As of December 31, 2012, we had goodwill totaling $779 million on our consolidated balance sheet. Our operations are grouped into four segments: Hydrocarbons, IGP, Services and Other. Within those segments we operate 11 business units which are also our operating segments as defined by ASC 280 - Segment Reporting and reporting units as defined by ASC 350. In accordance with ASC 350, we conduct our goodwill impairment testing at the reporting unit level which consists of the 11 business units and our Allstates reporting unit. The reporting units include Gas Monetization, Oil & Gas, Downstream, Technology, North American Government & Logistics, International Government, Defense and Support Services, Power & Industrial, Infrastructure, Minerals, Services, Ventures and the Allstates staffing reporting units.

In the third quarter of 2012, during the course of our annual strategic planning process, we determined that both the actual and expected income and cash flows for our Minerals reporting unit were substantially lower than previous forecasts due to lower than expected project bookings and losses from ongoing projects acquired as part of the acquisition of R&S. We also identified a deterioration in economic conditions in the minerals markets and less than expected actual and projected income and cash flows for the Minerals reporting unit, which reduced forecasts of the sales, operating income and cash flows expected in 2013 and beyond. As a result of these triggering events, we performed an interim goodwill impairment test on our Minerals reporting unit and recorded a noncash goodwill impairment charge of $178 million in the third quarter of 2012.

Our October 1, 2012, annual impairment test for goodwill was a quantitative analysis using a two-step process that involves comparing the estimated fair value of each reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the reporting unit is not considered impaired; therefore, the second step of the impairment test is unnecessary. If the carrying value of a reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure the amount of goodwill impairment loss to be recorded, as necessary. The second step compares the implied fair value of the reporting unit's goodwill to the carrying value of that goodwill. We determine the implied fair value of the goodwill in the same manner as determining the amount of goodwill to be recognized in a business combination.

Consistent with prior years, the fair values of reporting units in 2012 were determined using a combination of two methods, one utilizing market earnings multiples (the market approach) and the other derived from discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses over a ten year period plus a terminal value (the income approach).

Under the market approach, we estimate fair value by applying earnings and revenue market multiples to a reporting unit’s operating performance for the trailing twelve-month period. The earnings multiples for the market approach ranged from 5.9 times to 8.1 times the earnings for each of our reporting units. The income approach estimates fair value by discounting each reporting unit’s estimated future cash flows using a weighted-average cost of capital that reflects current market conditions and the risk profile of the reporting unit. To arrive at our future cash flows, we use estimates of economic and market assumptions, including growth rates in revenues, costs, estimates of future expected changes in operating margins, tax rates and cash expenditures. The risk-adjusted discount rates applied to our future cash flows under the income approach ranged from 14.1% to 20.5%. We believe these two approaches are appropriate valuation techniques and we generally weight the two resulting values equally as an estimate of a reporting unit's 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. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. The fair value derived from the weighting of these two methods provides appropriate valuations that, in the aggregate, reasonably reconcile to our market capitalization,

28



taking into account observable control premiums.

In addition to the earnings multiples and the discount rates disclosed above, certain other judgments and estimates are used in our goodwill impairment test. Given our use of judgments and estimates in the performance of our goodwill impairment test, if market conditions change compared to those used in our market approach, or if actual future results of operations fall below the projections used in the income approach, our goodwill could become impaired in the future.

At the annual testing date of October 1, 2012, our market capitalization exceeded the carrying value of our consolidated net assets by $2.6 billion and, except for the Minerals, Services and Downstream reporting units, the fair value of all our reporting units substantially exceeded their respective carrying amounts as of that date. If future variances for projected growth rates and other market inputs are significant, the fair values of some business units may not substantially exceed their carrying values in future periods.

The fair value of the Services reporting unit exceeded its carrying value by approximately 16% and total goodwill allocated to the reporting unit was $287 million at October 1, 2012. The valuation model for the Services reporting unit assumes continuing growth in the Canadian module fabrication, turnaround and construction markets as well as additional maintenance opportunities in the Middle East. The fair value of the Downstream reporting unit exceeded its carrying value by approximately 29% and total goodwill allocated to the reporting unit was $78 million at October 1, 2012. The valuation model for the Downstream reporting unit assumes an emerging market growth opportunity in the Middle East and North America in EPC projects involving ammonia, syngas and chemicals. The carrying value of the Minerals reporting unit exceeded its fair value by approximately 30%, thus failing Step 1. We then performed Step 2 of the goodwill impairment test which compares the implied fair value of Mineral's goodwill to the carrying value of that goodwill. The implied fair value of Mineral's goodwill exceed its carrying value by approximately 14%.

Deferred taxes and tax contingencies. 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 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. A current tax asset or liability is recognized for the estimated taxes refundable or payable on tax returns for the current year. 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.

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 available 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 an assessment of realization. Given the inherent uncertainty involved with the use of such assumptions, there can be significant variation between anticipated and actual results. As of December 31, 2012, we had net deferred tax assets of $333 million, which are net of deferred tax liabilities of $264 million and a valuation allowance of $36 million primarily related to certain foreign branch net operating losses.

We have operations in the United States and in numerous other countries. 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 worldwide 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.

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense.

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

29



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 9 and 10 of our consolidated financial statements, as of December 31, 2012 and 2011, 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 and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. We attempt to resolve these matters through settlements, mediation and arbitration proceedings when possible. If the actual settlement costs, final judgments or fines, differ from our estimates after appeals, 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 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 benefit obligations and the expected rate of return on plan assets. Other assumptions and estimates used in determining benefit obligations and plan expenses, including demographic factors such as retirement age, mortality and turnover, are evaluated periodically and updated accordingly to reflect our actual experience.

The discount rate used to determine the benefit obligations was determined using a cash flow matching approach, which uses projected cash flows matched to spot rates along a high quality corporate yield curve to determine the present value of cash flows to calculate a single equivalent discount rate. The expected long-term rate of return on assets was determined by a stochastic projection that takes into account asset allocation strategies, historical long-term performance of individual asset classes, an analysis of additional return (net of fees) generated by active management, risks using standard deviations and correlations of returns among the asset classes that comprise the plans' asset mix. Plan assets are comprised primarily of equity securities, fixed income funds and securities, hedge funds, real estate and other funds. As we have both domestic and international plans, these assumptions differ based on varying factors specific to each particular country or economic environment. During 2012, plan fiduciaries of our international plan implemented a revised investment strategy that reduces risk associated with fulfilling our pension obligations by further diversifying assets from equities to other asset classes along with the consideration of other risk reduction strategies that include liability hedging. This revised investment strategy is expected to be completed in the first quarter of 2013.

The discount rate utilized to calculate the projected benefit obligation at the measurement date for our U.S. pension plan decreased to 3.09% at December 31, 2012 from 3.74% at December 31, 2011. 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 to 4.50% at December 31, 2012 from 4.90% at December 31, 2011. 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 $89 million and $2 million for the U.K. and U.S. plans, respectively, while a similar increase in the discount rate would reduce our projected benefit obligation by an estimated $83 million and $2 million for the U.K. and U.S. plans, respectively. Our expected long-term rates of return on plan assets utilized at the measurement date remained unchanged at 7.00% for our U.S. pension plans and decreased to 6.15% from 6.60% for our U.K. pension plans.

Unrecognized actuarial gains and losses are generally recognized over a period of 10 to 15 years, which represents a reasonable systematic method for amortizing gains and losses for the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumption 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 pretax unrecognized actuarial loss in accumulated other comprehensive income at December 31, 2012 was $723 million, of which $36 million is expected to be recognized as a component of our expected 2013 pension expense compared to $27 million in 2012. During 2012, we made contributions to fund our defined benefit plans of $30 million. We currently expect to make contributions in 2013 of approximately $25 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 17 in the accompanying financial statements.


30



Variable Interest Entities. We account for variable interest entities (“VIEs”) in accordance with ASC 810 - Consolidation which requires the consolidation of VIEs in which a company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive the benefits from the VIE that could potentially be significant to the VIE. If a reporting enterprise meets these conditions then it has a controlling financial interest and is the primary beneficiary of the VIE. An unconsolidated VIE is accounted for under the equity method of accounting.

We assess all newly created entities and those with which we become involved to determine whether such entities are VIEs and, if so, whether or not we are their primary beneficiary. Most of the entities we assess are incorporated or unincorporated joint ventures formed by us and our partner(s) for the purpose of executing a project or program for a customer, such as a governmental agency or a commercial enterprise, and are generally dissolved upon completion of the project or program. Many of our long-term energy-related construction projects in our Hydrocarbons business segment are executed through such joint ventures. Typically, these joint ventures are funded by advances from the project owner, and accordingly, require little or no equity investment by the joint venture partners but may require subordinated financial support from the joint venture partners such as letters of credit, performance and financial guarantees or obligations to fund losses incurred by the joint venture. Other joint ventures, such as privately financed initiatives in our Ventures business unit, generally require the partners to invest equity and take an ownership position in an entity that manages and operates an asset post construction.

As required by ASC 810, we perform a qualitative assessment to determine whether we are the primary beneficiary once an entity is identified as a VIE. Thereafter, we continue to re-evaluate whether we are the primary beneficiary of the VIE in accordance with ASC 810-10. A qualitative assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed and the parties involved in the design of the entity. We then identify all of the variable interests held by parties involved with the VIE including, among other things, equity investments, subordinated debt financing, letters of credit, financial and performance guarantees and contracted service providers. Once we identify the variable interests, we determine those activities which are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities. Though infrequent, some of our assessments reveal no primary beneficiary because the power to direct the most significant activities that impact the economic performance is held equally by two or more variable interest holders who are required to provide their consent prior to the execution of their decisions. Most of the VIEs with which we are involved have relatively few variable interests and are primarily related to our equity investment, significant service contracts and other subordinated financial support.


31



Results of Operations

We analyze the financial results for each of our four business groups including the related business units within Hydrocarbons and IGP. The business groups presented are consistent with our reportable segments discussed in Note 5 to our consolidated financial statements. While certain business units and product service lines presented below do not meet the criteria for reportable segments in accordance with ASC 280 - Segment Reporting, we believe this supplemental information is relevant and meaningful to our investors. In the first quarter of 2012, we began reporting Infrastructure and Minerals as separate business units. Prior periods have been conformed to the current presentation.

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

Revenue by Business Group
Years Ended December 31,
 
 
 
 
 
2012 vs. 2011
 
 
 
2011 vs. 2010
Millions of dollars
2012
 
2011
 
$
 
%
 
2010
 
$
 
%
Revenue: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Hydrocarbons:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas Monetization
$
3,040

 
$
3,044

 
$
(4
)
 
 %
 
$
2,829

 
$
215

 
8
 %
Oil & Gas
483

 
488

 
(5
)
 
(1
)%
 
426

 
62

 
15
 %
Downstream
575

 
557

 
18

 
3
 %
 
584

 
(27
)
 
(5
)%
Technology
202

 
169

 
33

 
20
 %
 
130

 
39

 
30
 %
Total Hydrocarbons
4,300

 
4,258

 
42

 
1
 %
 
3,969

 
289

 
7
 %
Infrastructure, Government and Power (“IGP”):
 
 
 
 
 
 
 
 
 
 
 
 
 
North American Government and Logistics
725

 
2,198

 
(1,473
)
 
(67
)%
 
3,307

 
(1,109
)
 
(34
)%
International Government, Defence and Support Services
360

 
378

 
(18
)
 
(5
)%
 
369

 
9

 
2
 %
Infrastructure
255

 
246

 
9

 
4
 %
 
236

 
10

 
4
 %
Minerals
192

 
264

 
(72
)
 
(27
)%
 
35

 
229

 
654
 %
Power and Industrial
372

 
242

 
130

 
54
 %
 
352

 
(110
)
 
(31
)%
Total IGP
1,904

 
3,328

 
(1,424
)
 
(43
)%
 
4,299

 
(971
)
 
(23
)%
Services
1,633

 
1,590

 
43

 
3
 %
 
1,755

 
(165
)
 
(9
)%
Ventures
61

 
65

 
(4
)
 
(6
)%
 
55

 
10

 
18
 %
Other
23

 
20

 
3

 
15
 %
 
21

 
(1
)
 
(5
)%
Total revenue
$
7,921

 
$
9,261

 
$
(1,340
)
 
(14
)%
 
$
10,099

 
$
(838
)
 
(8
)%
 
 
(1)
We often participate in larger projects as a joint venture partner and provide services to the joint venture as a subcontractor. The amount included in our revenue represents our share of the earnings (loss) from joint ventures and revenue from services provided to joint ventures.

32




Income (loss) by Business Group
Years Ending December 31,
 
 
 
 
 
2012 vs. 2011
 
 
 
2011 vs. 2010
Millions of dollars
2012
 
2011
 
$
 
%
 
2010
 
$
 
%
Business group income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Hydrocarbons:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas Monetization
$
445

 
$
257

 
$
188

 
73
 %
 
$
252

 
$
5

 
2
 %
Oil & Gas
115

 
104

 
11

 
11
 %
 
90

 
14

 
16
 %
Downstream
75

 
77

 
(2
)
 
(3
)%
 
117

 
(40
)
 
(34
)%
Technology
94

 
75

 
19

 
25
 %
 
55

 
20

 
36
 %
Total job income
729

 
513

 
216

 
42
 %
 
514

 
(1
)
 
 %
Impairment of long-lived assets

 

 

 
 %
 
(4
)
 
4

 
100
 %
Gain (loss) on sale of assets

 
1

 
(1
)
 
(100
)%
 

 
1

 
 %
Divisional overhead
(128
)
 
(106
)
 
(22
)
 
(21
)%
 
(110
)
 
4

 
4
 %
Total Hydrocarbons
601

 
408

 
193

 
47
 %
 
400

 
8

 
2
 %
Infrastructure, Government and Power (“IGP”):
 
 
 
 
 
 
 
 
 
 
 
 
 
North American Government and Logistics
67

 
212

 
(145
)
 
(68
)%
 
230

 
(18
)
 
(8
)%
International Government, Defence and Support Services
113

 
128

 
(15
)
 
(12
)%
 
88

 
40

 
45
 %
Infrastructure
59

 
62

 
(3
)
 
(5
)%
 
56

 
6

 
11
 %
Minerals
(56
)
 
(2
)
 
(54
)
 
n/m

 
6

 
(8
)
 
(133
)%
Power and Industrial
34

 
29

 
5

 
17
 %
 
37

 
(8
)
 
(22
)%
Total job income
217

 
429

 
(212
)
 
(49
)%
 
417

 
12

 
3
 %
Impairment of goodwill
(178
)
 

 
(178
)
 
 %
 

 

 
 %
Loss on sale of assets
(1
)
 
(1
)
 

 
 %
 

 
(1
)
 
 %
Divisional overhead
(142
)
 
(162
)
 
20

 
12
 %
 
(145
)
 
(17
)
 
(12
)%
Total IGP
(104
)
 
266

 
(370
)
 
(139
)%
 
272

 
(6
)
 
(2
)%
Services:
 
 
 
 
 
 
 
 
 
 
 
 
 
Job income
42

 
124

 
(82
)
 
(66
)%
 
172

 
(48
)
 
(28
)%
Gain (loss) on sale of assets

 
1

 
(1
)
 
(100
)%
 
(1
)
 
2

 
200
 %
Divisional overhead
(58
)
 
(67
)
 
9

 
13
 %
 
(69
)
 
2

 
3
 %
Total Services
(16
)
 
58

 
(74
)
 
(128
)%
 
102

 
(44
)
 
(43
)%
Ventures:
 
 
 
 
 
 
 
 
 
 
 
 
 
Job income (loss)
40

 
45

 
(5
)
 
(11
)%
 
33

 
12

 
36
 %
Gain on sale of assets

 
1

 
(1
)
 
(100
)%
 
3

 
(2
)
 
(67
)%
Divisional overhead
(3
)
 
(4
)
 
1

 
25
 %
 
(3
)
 
(1
)
 
(33
)%
Total Ventures
37

 
42

 
(5
)
 
(12
)%
 
33

 
9

 
27
 %

33



Income (loss) by Business Group
Years Ending December 31,
 
 
 
 
 
2012 vs. 2011
 
 
 
2011 vs. 2010
Millions of dollars
2012
 
2011
 
$
 
%
 
2010
 
$
 
%
Business group income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
Job income
15

 
16

 
(1
)
 
(6
)%
 
12

 
4

 
33
 %
Impairment of long-lived assets
(2
)
 

 
(2
)
 
 %
 
(1
)
 
1

 
100
 %
Gain (loss) on sale of assets
33

 
1

 
32

 
n/m

 
(2
)
 
3

 
150
 %
Divisional overhead
(8
)
 
(8
)
 

 
 %
 
(7
)
 
(1
)
 
(14
)%
Total Other
38

 
9

 
29

 
322
 %
 
2

 
7

 
350
 %
Total business group income
556

 
783

 
(227
)
 
(29
)%
 
809

 
(26
)
 
(3
)%
Unallocated amounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor cost absorption income (expense)
(35
)
 
18

 
(53
)
 
(294
)%
 
12

 
6

 
50
 %
Corporate general and administrative expense
(222
)
 
(214
)
 
(8
)
 
(4
)%
 
(212
)
 
(2
)
 
(1
)%
Total operating income
$
299

 
$
587

 
$
(288
)
 
(49
)%
 
$
609

 
$
(22
)
 
(4
)%
 
n/m - not meaningful

Hydrocarbons

Gas Monetization. Gas Monetization revenue decreased by $4 million in 2012 compared to 2011, primarily driven by lower volume of work associated with project completions or near completions on the Escravos, Skikda and Pearl GTL projects, as well as the FEED phase of the Ichthys LNG project. The decrease in 2012 revenues is offset by increased activity and milestone incentive awards on the Gorgon project and the start of the EPC phase of the Ichthys LNG project.

Gas Monetization job income increased by $188 million in 2012 compared to 2011. Job income increased $230 million as a result of increased activity from the Gorgon, Skikda and Ichthys LNG projects.  Included in the increased activity are change orders which revised estimated cost to complete for Skikda, as well as milestone awards for Gorgon. Partially offsetting these increases in job income were decreases of $47 million primarily due to lower activity and project completions on Escravos, Pearl and other projects.

Gas Monetization revenue increased by $215 million in 2011 compared to 2010, primarily due to higher progress on Gorgon and Escravos which increased revenue by $232 million in the aggregate. Revenue further increased by $121 million as a result of higher activity on a FEED project awarded in late 2010 and activity on other projects. Partially offsetting the increases were declines in revenue of $142 million in the aggregate due to lower activity on Skikda and Pearl as well as the completion of other LNG and GTL projects in 2010.

Gas Monetization job income increased by $5 million in 2011 compared to 2010. Job income increased by $41 million as a result of increased activity on the EPCm portion of Gorgon, the sale of our interest in an unconsolidated joint venture, the reversal of previously accrued commercial agent fees on a completed LNG project and activity on other projects. These increases were partially offset by a decrease of $32 million primarily due to income in 2010 related to change orders associated with the completion of an LNG project that did not recur in 2011 and lower subcontractor activity on Skikda.

Oil & Gas. Oil & Gas revenue decreased by $5 million and job income increased by $11 million in 2012 compared to 2011. The decrease in revenue is primarily due to the completion or near-completion of several long term projects in late 2011 and during 2012. These project completions were offset by other long term technical service projects and increased progress on existing projects primarily located in the North Sea and Azerbaijan, as well as the recognition of $8 million in license fee revenue for several semi-submersible hulls. The increase in job income is primarily due to increased progress for projects in the North Sea and Azerbaijan, as well as the recognition of the license fees, partially offset by the completion or near completion of other projects.


34



Oil & Gas revenue and job income increased by $62 million and $14 million, respectively, in 2011 compared to 2010. New technical service projects and additional phases of existing projects primarily in the North Sea, Caspian Sea and Gulf of Mexico contributed $127 million to the increase in 2011 revenue, partially offset by a decrease of $75 million due to lower volume and progress on projects that were either completed or nearing completion during 2011. Job income increased mainly as a result of new project awards, increased activity on existing projects and close-out activity on completed projects.

Downstream. Downstream revenue increased by $18 million and job income decreased by $2 million in 2012 compared to 2011. The increase in revenue in 2012 is primarily driven by additional revenue of $20 million related to the $39 million FAO claim settlement, of which $19 million was previously recorded. The decrease in job income is driven primarily by the completion of engineering on a refinery project in Africa in early 2012 and lower volumes on projects in the Middle East. These decreases are partially offset by our portion of the FAO settlement of $14 million, as well as activity from newly awarded projects in North America and Saudi Arabia.

Downstream revenue and job income decreased by $27 million and $40 million, respectively, in 2011 compared to 2010. Revenue decreased by $186 million primarily due to several projects that were either completed or nearing completion. This decrease was partially offset by additional revenue of $122 million from newly awarded projects started in late 2010 or during 2011 as well as increased activity on existing projects including the Yanbu and DuPont projects. Job income decreased primarily due to the completion or near completion of projects in Africa and the Middle East, partly offset by additional activity from new projects.

Technology. Technology revenue and job income increased by $33 million and $19 million, respectively, in 2012 compared to 2011. This increase is primarily due to the progress achieved on license and engineering projects in Egypt, the U.S., Uzbekistan, Russia, India, Bolivia and China which collectively contributed $55 million to revenues and $36 million to job income. The increase in revenue and job income also includes $8 million associated with the completion of ammonia license and basic engineering contracts in Venezuela. Partially offsetting these increases were decreases in revenue and job income associated with the completion of engineering services on an ammonia project located in Brazil and on other projects.

Technology revenue and job income increased by $39 million and $20 million, respectively, in 2011 compared to 2010, primarily due to the progress achieved on a new grassroots ammonia, urea and granulation project in Brazil and other petrochemical and ammonia projects located in China, India, Indonesia and Korea. These new projects contributed $73 million to the increases in revenue and $36 million to the increases in job income. Partially offsetting these increases were decreases in revenue and job income associated with the completion of engineering services on several projects located in Turkmenistan, India, China, Korea and Angola.

Infrastructure, Government and Power (“IGP”)

North American Government and Logistics (“NAGL”). NAGL revenue decreased by $1.5 billion in 2012 compared to 2011, due to the December 2011 completion of operations in Iraq under the LogCAP III contract. Our services in the region have shifted to the LogCAP IV contract supporting the U.S. Department of State in Iraq.

NAGL job income decreased by $145 million in 2012 compared to 2011, primarily due to the completion of services under the LogCAP III contract. The decrease includes the unfavorable ruling from the U.S. COFC regarding costs associated with dining facility services. This resulted in a noncash, pre-tax charge of $28 million. Partially offsetting the decrease was higher income related to the LogCAP IV contract.

NAGL revenue decreased by $1.1 billion in 2011 compared to 2010 primarily due to an overall reduction in the volume of U.S. military support activities due to troop drawdown and related base closures in Iraq and completion of work in Afghanistan under our LogCAP III contract. Revenue from the LogCAP III contract declined $1.3 billion in 2011. Revenue decreases were partially offset by an increase of $188 million associated with our LogCAP IV task order that began in mid-2010.

NAGL job income decreased by $18 million in 2011 compared to 2010. Lower volume of activity on our LogCAP III contract resulted in a reduction to income of $46 million. Additionally, recognized LogCAP III award fees declined by $54 million in 2011 compared to 2010. These declines in job income were partially offset by increases of $69 million related to fixed-fees and lower adjustments recognized for potentially unallowable costs on the LogCAP III contract and higher income related to the LogCAP IV contract.


35



International Government, Defence and Support Services (“IGDSS”). IGDSS revenue decreased by $18 million and job income decreased by $15 million in 2012 compared to 2011, driven by lower activity on the Aspire Defence project and reduced margins on a U.K. MoD contract in Afghanistan. These decreases were partially offset by increased activity related to support services in Africa and a NATO contract in Afghanistan.

IGDSS revenue increased by $9 million in 2011 compared to 2010 primarily due to commencement of service under new NATO contracts in Afghanistan, reduced cost estimates for the remaining period of performance for construction activities on Aspire Defence and various other new project awards. These increases in revenue were partially offset by lower activity on the Temporary Deployable Accommodation project as well as absence of new task orders.

IGDSS job income increased by $40 million in 2011 compared to 2010 primarily due to reduced cost estimates on Aspire Defence that produced $33 million of additional job income during 2011, increased activity on NATO contracts in Afghanistan and operations-related efficiencies in other contingency logistics and construction management projects.

Infrastructure. Infrastructure revenue increased by $9 million and job income decreased by $3 million in 2012 compared to 2011. The increase in revenue is due to increased activity in the Middle East associated with the expansion of the Doha Expressway program. The decrease in job income is a result of a decline in market conditions in the APAC market.

Infrastructure revenue and job income increased by $10 million and $6 million in 2011 compared to 2010. The increase in revenue is due a transport project in Qatar which commenced in late 2010. This increase was partially offset by revenue reductions due to the completion of water projects in the U.K. and Australia as well lower activity on various infrastructure projects due to deferred government spending resulting from flooding in Queensland, Australia. The increase in job income is primarily as a result of increased progress on a transport project in Qatar as well as $10 million in project incentives earned on a transport project in Australia. These increases were partially offset by lower overall activity on various other infrastructure projects in the U.K. and Australia.

Minerals. Minerals revenue decreased by $72 million in 2012 compared to 2011, due to a decline in project awards, a general decline in economic conditions, as well as lower volume of work and progress on existing projects. This includes a $56 million reduction in revenue related to two projects in Indonesia.

Minerals job income decreased by $54 million in 2012 compared to 2011. The decrease is primarily due to various projects encountering increased operating costs, funding of liquidated damages and other project items. Job income related to the two Indonesian projects declined $38 million as a result of additional project costs and liquidated damages related to two projects in Indonesia associated with issues encountered during the commissioning, pre-commissioning and earthworks phase of the these projects. Job income is down a further $16 million due to increased costs, liquidated damages and technical delays primarily for legacy R&S projects.

In the third quarter of 2012, during the course of our annual strategic planning process, we identified deterioration in economic conditions in the minerals markets and less than expected actual and projected income and cash flows due to lower than expected project bookings and losses from ongoing projects acquired as part of the R&S acquisition. As a result of our interim goodwill impairment test, we recorded a noncash goodwill impairment charge of $178 million in the third quarter of 2012. 

Minerals revenue increased by $229 million and job income decreased by $8 million in 2011 compared to 2010. The increase in revenue is primarily due to the inclusion of legacy R&S projects acquired in December 2010 as well as increased activity on a minerals project in Australia, which commenced late in 2010. The decrease in job income is primarily due to project loss provisions totaling $25 million recognized on three projects acquired from R&S due to increased cost estimates at completion. These losses were partially offset by job income due to increased activity in 2011 on a minerals project in Australia.

Power and Industrial (“P&I”). P&I revenue and job income increased by $130 million and $5 million, respectively, in 2012 compared to 2011. These increases are due to new projects awarded in 2012 and increased progress on existing projects awarded during late 2011. New projects include air emissions controls systems in Illinois and Kentucky, with existing project growth from a coal gasification project in Mississippi and a waste-to-energy expansion project in Florida. This increase was partially offset by reduced activity from projects completed or nearing completion during 2012.

P&I revenue and job income decreased by $110 million and $8 million, respectively, in 2011 as compared to 2010 due to the completion of procurement, construction and fieldwork activities on various projects, including a waste-to-energy refurbishment and other projects during 2011. These decreases were partially offset by increased progress on existing engineering projects and the award of several new projects in 2011. New projects include a coal gasification project in Mississippi and a waste-to-energy expansion project in Florida.

36




Services

Services revenue increased by $43 million in 2012 as compared to 2011. This increase is primarily driven by increases of $167 million in our Canada product line and $121 million in our U.S. Construction product line due to several new awards and increased activity on new projects. The increased activity in our Canada product line is primarily related to construction services for gas plants in Northern British Columbia and fabrication modules for oil sands projects. The increase in our U.S. construction product line is primarily associated with the construction of a base oil facility, turnaround upgrades and rebuilds. These increases were partially offset by lower revenue of $194 million from our Building Group product line due to the completion of several large hospital and other projects. Revenue also declined $51 million in our Industrial Services and other product lines due to the completion of a major turnaround project in 2011.

Services job income decreased by $82 million in 2012 as compared to 2011 due to increased estimated costs to complete on several U.S. construction fixed-price projects and the decline in our U.S. Construction business. The increase in costs are primarily related to lower productivity and higher wage rates, which gave rise to higher direct labor costs, indirect costs and other extension-of-time-related cost. This decline in the U.S. Construction business was partially offset by increased income from our Canadian product line related to construction services for gas plants in Northern British Columbia and fabrication modules for oil sands projects in Canada.

Services revenue decreased by $165 million in 2011 compared to 2010. Revenue declined by $303 million in our U.S. Construction Group and $93 million in our Canada operations primarily as a result of completion or near completion of several large projects. These declines were partially offset by increases in revenue of $208 million in our Building Services group due to higher activity on several hospital projects and $35 million in our Industrial Services group from increased construction, maintenance and services under a new multi-site contract throughout the Eastern and Gulf Coast regions of the U.S.

Services job income decreased by $48 million in 2011 compared to 2010 primarily due to the decline in U.S. Construction Group and Canada activity resulting from completion or near completion of several projects which was partially offset by the increased Building Group project activity on the hospital projects.

Ventures

Ventures operations consist of investments in joint ventures accounted for under the equity method of accounting, net of tax. Ventures revenue and job income decreased by $4 million and $5 million, respectively, in 2012 as compared to 2011, due to a decline of $10 million on the EBIC ammonia plant in Egypt related to noncash hedge accounting adjustments, write-off of deferred losses related to the refinancing of EBIC debt, reduced productivity as a result of low gas feedstock pressure and plant closure for turnaround maintenance. This decline was partially offset by higher revenue and job income of $6 million achieved by other Ventures projects, primarily due to lower debt interest costs and lower maintenance costs.

Ventures revenue and job income increased by $10 million and $12 million, respectively, in 2011 as compared to 2010, due to increased sales volume and higher ammonia prices related to the EBIC ammonia plant in Egypt.

Services Revenue by Market Sector

The Services business group provides construction management, direct hire construction and maintenance services to clients in a number of markets. We believe customer focus, attention to highly productive delivery and a diverse market presence are the keys to our success in delivering construction and maintenance services. Accordingly, the Services business group focuses on these key success factors. The analysis below is supplementally provided to present the revenue generated by Services based on the markets served, some of which are the same sectors served by our other business groups.

37



 
Year Ending December 31, 2012
(in millions)
Business
Group
Revenue
 
Services
Revenue
 
Total
Revenue by
Market
Sectors
Hydrocarbons:
 
 
 
 
 
Gas Monetization
$
3,040

 
$

 
$
3,040

Oil & Gas
483

 
331

 
814

Downstream
575

 
413

 
988

Technology
202

 

 
202

Total Hydrocarbons
4,300

 
744

 
5,044

Infrastructure, Government and Power (“IGP”):
 
 
 
 
 
North American Government and Logistics
725

 
60

 
785

International Government, Defence and Support Services
360

 

 
360

Infrastructure
255

 

 
255

Minerals
192

 

 
192

Power and Industrial
372

 
829

 
1,201

Total IGP
1,904

 
889

 
2,793

Services
1,633

 
(1,633
)
 

Other
84

 

 
84

Total KBR Revenue
$
7,921

 
$

 
$
7,921

 
Year Ending December 31, 2011
(in millions)
Business
Group
Revenue
 
Services
Revenue
 
Total
Revenue by
Market
Sectors
Hydrocarbons:
 
 
 
 
 
Gas Monetization
$
3,044

 
$

 
$
3,044

Oil & Gas
488

 
165

 
653

Downstream
557

 
377

 
934

Technology
169

 

 
169

Total Hydrocarbons
4,258

 
542

 
4,800

Infrastructure, Government and Power (“IGP”):
 
 
 
 
 
North American Government and Logistics
2,198

 
80

 
2,278

International Government, Defence and Support Services
378

 

 
378

Infrastructure
246

 

 
246

Minerals
264

 

 
264

Power and Industrial
242

 
968

 
1,210

Total IGP
3,328

 
1,048

 
4,376

Services
1,590

 
(1,590
)
 

Other
85

 

 
85

Total KBR Revenue
$
9,261

 
$

 
$
9,261

 

38



 
Year Ending December 31, 2010
(in millions)
Business
Group
Revenue
 
Services
Revenue
 
Total
Revenue by
Market
Sectors
Hydrocarbons:
 
 
 
 
 
Gas Monetization
$
2,829

 
$

 
$
2,829

Oil & Gas
426

 
297

 
723

Downstream
584

 
534

 
1,118

Technology
130

 

 
130

Total Hydrocarbons
3,969

 
831

 
4,800

Infrastructure, Government and Power (“IGP”):
 
 
 
 
 
North American Government and Logistics
3,307

 
97

 
3,404

International Government, Defence and Support Services
369

 

 
369

Infrastructure
236

 

 
236

Minerals
35

 

 
35

Power and Industrial
352

 
827

 
1,179

Total IGP
4,299

 
924

 
5,223

Services
1,755

 
(1,755
)
 

Other
76

 

 
76

Total KBR Revenue
$
10,099

 
$

 
$
10,099


Corporate, tax and other matters

Labor cost absorption income (expense) represents costs incurred by our central labor and resource groups net of the amounts charged to the operating business units. Labor cost absorption expense was $(35) million in 2012 compared to income of $18 million in 2011 and $12 million in 2010. The 2012 labor cost absorption expense difference of $(53) million compared to 2011 was primarily due to lower chargeable hours and utilization in several of our engineering offices as a result of delays in awards of certain expected projects. Labor cost absorption income difference of $6 million compared to 2010 was primarily due to higher chargeable hours and utilization in several of our engineering offices.

General and administrative expense was $222 million in 2012, $214 million in 2011 and $212 million in 2010. The increase in 2012 was primarily due to enterprise resource planning ("ERP") project expenses, higher pension costs driven by unfavorable changes in assumptions that impacted 2012 expense and other risk and benefit programs. The increases were partially offset by lower information technology support costs, lower legal costs and reductions associated with other cost containment measures. The increase in 2011 was due to higher information technology support costs, ERP project expenses and employee salary and benefits related expenses. The increases were partially offset by lower incentive compensation in 2011 as well as a reduction in expenses associated with legal restructuring of a foreign subsidiary completed in 2010.

Net interest expense was $7 million, $18 million and $17 million in 2012, 2011 and 2010, respectively. The 2012 reduction in expense is primarily associated with favorable terms of our new Credit Agreement. Interest income was substantially the same in all periods.

We had foreign currency losses of $2 million in 2012, gains of $3 million in 2011 and losses of $4 million in 2010. Foreign currency losses in 2012 were primarily due to the fluctuating Euro and currencies with limited hedge market such as the Algerian Dinar. Foreign currency gains in 2011 were primarily due to the weakening U.S. Dollar against most major currencies. Foreign currency losses in 2010 were primarily due to the weakening Euro and from currencies with no hedge market such as the Algerian Dinar. Some of these positions were not fully hedged.

The effective tax rate on pretax earnings was 29.9%, 5.6% and 32.6% for the years ended December 31, 2012, 2011 and 2010, respectively. Our U.S. statutory tax rate for all years was 35%. In the third quarter of 2012, we recorded a noncash goodwill impairment charge of $178 million in our Minerals reporting unit, which is not deductible for U.S. taxes. Excluding the nondeductible goodwill impairment charge and discrete items, our adjusted effective tax rate was 29.1% for year ended December 31, 2012. The adjusted effective tax rate includes increases of 3.9% as a result of incremental income taxes on certain undistributed foreign earnings in Australia that were previously deemed to be permanently reinvested. Our adjusted effective tax rate excluding discrete items for 2012 was lower than our statutory rate of 35% primarily due to favorable tax rate differentials on foreign earnings and lower tax expense on foreign income from unincorporated joint ventures. In 2012, we also recognized

39



discrete net tax benefits of approximately $50 million including benefits primarily related to the recognition of previously unrecognized tax benefits related to tax positions taken in prior years due to progress in resolving transfer pricing matters with certain taxing jurisdictions, statute expirations on certain domestic tax matters and other reductions to foreign tax exposures, tax benefits associated with the interest on the Barracuda-Caratinga award, as well as discrete tax benefits related to deductions arising from an unconsolidated joint venture in Australia. Provision for income taxes was $86 million for the year ended December 31, 2012.

Excluding discrete items, our effective tax rate was approximately 29.3% for the year ended December 31, 2011. The effective tax rate for 2011, excluding discrete items, was lower than the U.S. statutory rate due to favorable tax rate differentials on foreign earnings and lower tax expense on foreign income from unincorporated joint ventures. In 2011, we recognized discrete tax benefits including a $69 million tax benefit related to the arbitration award against KBR associated with the Barracuda-Caratinga project in Brazil as well as $32 million in tax benefits related to the reduction of deferred tax liabilities associated with the pending liquidation of an unconsolidated joint venture in Australia resulting in a net effective tax rate of approximately 5.6%. In September 2011, an arbitration panel in the Barracuda-Caratinga arbitration awarded Petrobras $193 million which will be deductible for tax purposes, and for which we are indemnified by our former parent, Halliburton. The indemnification payment from Halliburton to KBR will be treated by KBR for tax purposes as a contribution to capital and accordingly is not taxable income. Consequently, the arbitration ruling resulted in a tax benefit during 2011. In addition, we recognized other discrete tax benefits in 2011 totaling $34 million primarily from favorable return to accrual adjustments, I.R.S. audit adjustments and the execution of tax planning strategies.

The effective tax rate for the year ended December 31, 2010 was lower than our statut