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Note 1. Description of Company and Significant Accounting Policies
KBR, Inc., a Delaware corporation, was formed on March 21, 2006. 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. Headquartered in Houston, Texas, we offer a wide range of services through our Hydrocarbons, Infrastructure, Government and Power ("IGP"), Services and Other business segments. See Note 5 for additional financial information about our business segments.
Principles of consolidation
Our consolidated financial statements include the financial position, results of operations and cash flows of KBR and our majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary (see Note 15). The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates' operating and financial policies. The cost method is used when we do not have the ability to exert significant influence. All intercompany accounts and transactions are eliminated in consolidation.
Use of estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States, requiring us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the balance sheet dates, and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to current year presentation on the consolidated balance sheets and the consolidated statements of cash flows.
Engineering and construction contracts
Revenue from contracts to provide construction, engineering, design or similar services is reported on the percentage-of-completion method of accounting. Progress is generally measured based upon physical progress, man-hours, or costs incurred, depending on the type of job. Physical progress is determined as a combination of input and output measures as deemed appropriate by the circumstances. All known or anticipated losses on contracts are provided for in the period they become evident. Claims and change orders that are in the process of being negotiated with customers for extra work or changes in the scope of work are included in contract value when collection is deemed probable. Our contracts often require us to pay liquidated damages should we not meet certain performance requirements, including completion of the project in accordance with a scheduled time. We include an estimate of liquidated damages in contract costs when it is deemed probable that they will be paid.
Our revenue includes both equity in the earnings of unconsolidated affiliates and revenue from sales of services to joint ventures. We often participate on larger projects as a joint venture partner and also provide services to the joint venture as a subcontractor. The amount included in our revenue represents equity in the earnings from joint ventures, impairments of equity investments in joint ventures, if any, and revenue from services provided to joint ventures.
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 revenues include base fees, actual direct project costs incurred and an allocation of indirect costs. Indirect costs are applied using rates approved by our government customers. The general, administrative, and overhead cost reimbursement rates are estimated periodically in accordance with government contract accounting regulations and may change based on actual costs incurred or based upon the volume of work performed. Revenue is reduced for our estimate of costs that either are in dispute with our customer or have been identified as potentially unallowable per the terms of the contract or the federal acquisition regulations.
We generally recognize award fees on the LogCAP III contract using an estimated accrual of the amounts to be awarded. Once task orders underlying the work are definitized and award fees are granted, we adjust our estimate of award fees to the actual amounts earned. However, as further discussed in Note 9, we are currently unable to reliably estimate award fees as a result of our customer's unilateral decision to grant no award fees for certain performance periods. In accordance with the provisions of the LogCAP III contract, we earn profits on our services rendered based on a combination of a fixed fee plus award fees granted by our customer. Both fees are measured as a percentage rate applied to estimated and negotiated costs. The LogCAP III customer is contractually obligated to periodically convene Award-Fee Boards, which are comprised of individuals who have been designated to assist the Award Fee Determining Official ("AFDO") in making award fee determinations. Award fees are based on evaluations of our performance using criteria set forth in the contract, which include non-binding monthly evaluations made by our customers in the field of operations. Although these criteria have historically been used by the Award-Fee Boards in reaching their recommendations, the amounts of award fees are determined at the sole discretion of the AFDO.
For contracts containing multiple deliverables entered into subsequent to June 30, 2003, we analyze each activity within the contract to ensure that we adhere to the separation guidelines for revenue arrangements with multiple deliverables in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605—Revenue Recognition. For service-only contracts and service elements of multiple deliverable arrangements, award fees are recognized only when definitized and awarded by the customer. Award fees on government construction contracts are recognized during the term of the contract based on our estimate of the amount of fees to be awarded.
Accounting for pre-contract costs
Pre-contract costs incurred in anticipation of a specific contract award are deferred only if the costs can be directly associated with a specific anticipated contract and their recoverability from that contract is probable. Pre-contract costs related to unsuccessful bids are written off no later than the period we are informed that we are not awarded the specific contract. Costs related to one-time activities such as introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, or commencing new operations are expensed when incurred.
Legal expenses
We expense legal costs in the period in which such costs are incurred.
Cash and equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and equivalents include cash related to contracts in progress as well as cash held by our joint ventures that we consolidate for accounting purposes. Joint venture cash balances are limited to joint venture activities and are not available for other projects, general cash needs, or distribution to us without approval of the board of directors of the respective joint ventures. Cash held by our joint ventures that we consolidate for accounting purposes totaled approximately $244 million at December 31, 2011 and $145 million at December 31, 2010. We expect to use the cash on these projects to pay project costs.
Restricted cash primarily consists of amounts held in deposit with certain banks to collateralize standby letters of credit as well as amounts held in deposit with certain banks to establish foreign operations. Our current restricted cash is included in "Other current assets" and our non-current restricted cash is included in "Other assets" on our consolidated financial statements. Our restricted cash balances are presented in the table below:
December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Current restricted cash |
$ | 3 | $ | 11 | ||||
Non-current restricted cash |
2 | 10 | ||||||
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Total restricted cash |
$ | 5 | $ | 21 | ||||
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Allowance for bad debts
We establish an allowance for bad debts through a review of several factors including historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retentions.
Goodwill and other intangibles
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations and, in accordance with FASB 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. Our operations are grouped into four segments: Hydrocarbons; Infrastructure, Government & Power; Services; and Other. Within those segments we operate 10 business units which are also our operating segments as defined by FASB ASC 280 – Segment Reporting and our reporting units as defined by FASB ASC 350. In accordance with FASB ASC 350, we conduct our goodwill impairment testing at the reporting unit level which consists of our 10 business units. 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, and Ventures business units, as well as the Allstates staffing business.
Our annual impairment test for goodwill at October 1, 2011 was a quantitative analysis using a two-step process that involves comparing the estimated fair value of each business unit to its carrying value, including goodwill. If the fair value of a business unit exceeds its carrying amount, the goodwill of the business unit is not considered impaired; therefore, the second step of the impairment test is unnecessary. If the carrying amount of a business 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.
Consistent with prior years, the fair values of business units in 2011 were determined using a combination of two methods, one based on market earnings multiples of peer companies identified for each business unit (the market approach), and the other based on discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses over a four year period plus a terminal value period (the income approach).
The market approach estimates fair value by applying earnings and revenue market multiples to a business unit's operating performance for the trailing twelve-month period. The market multiples are derived from comparable publicly traded companies with operating and investment characteristics similar to those of each of our reporting units. The income approach estimates fair value by discounting each business unit's estimated future cash flows using a weighted-average cost of capital that reflects current market conditions and the risk profile of each business unit. The fair value derived from the weighting of these two methods provided appropriate valuations that, in aggregate, reasonably reconciled to our market capitalization, taking into account observable control premiums.
In addition to the earnings multiples and the discount rates disclosed above, certain other judgments and estimates are used to prepare the 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.
We believe these two approaches are appropriate valuation techniques and we generally weight the two resulting values equally as an estimate of business unit fair value for the purposes of our impairment testing. However, we may weigh one value more heavily than the other when conditions merit doing so.
At October 1, 2011, our market capitalization exceeded the carrying value of our consolidated net assets by $1.6 billion and the fair value of all our individual reporting units significantly exceeded their respective carrying amounts as of that date. However, the fair value for the P&I, I&M, Services and Allstates reporting units exceeded their carrying values based on projected growth rates and other market inputs to our impairment test models that are more sensitive to the risk of future variances due to competitive market conditions as well as business unit execution risks.
We review our projected growth rates, other market inputs used in our impairment test models, changes in our business and other factors that could represent indicators of impairment. In 2012, we intend to report the Infrastructure and Minerals business units separately and have concluded that each will be considered a separate reporting unit for goodwill impairment testing purposes. Subsequent to our October 1, 2011 annual impairment test, we reviewed the new Infrastructure and Minerals reporting units and no indication of impairment was identified.
Impairment of long-lived assets
When events or changes in circumstances indicate that long-lived assets other than goodwill may be impaired, an evaluation is performed. For an asset classified as held for use, the estimated future undiscounted cash flow associated with the asset are compared to the asset's carrying amount to determine if a write-down to fair value is required. When an asset is classified as held for sale, the asset's book value is evaluated and adjusted to the lower of its carrying amount or fair value less cost to sell. Depreciation or amortization is ceased when an asset is classified as held for sale.
We evaluate equity method investments for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such investment may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. Management assesses the fair value of its equity method investment using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales, internally developed discounted cash flow analysis and analysis from outside advisors. If the estimated fair value is less than the carrying value and management considers the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment.
Pensions
Our pension benefit obligations and expenses are calculated using actuarial models and methods, in accordance with FASB ASC 715 – Compensation—Retirement Benefits. Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of 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 also evaluated periodically and updated accordingly to reflect our actual experience.
Unrecognized actuarial gains and losses are generally being recognized over a period of 10 to 15 years, which represents the expected remaining service life of the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumptions changes in the obligations and the difference between expected returns and actual returns on plan assets. The difference between actual and expected returns is deferred as an unrecognized actuarial gain or loss and is recognized as future pension expense.
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 further in Note 17 in the accompanying financial statements.
Income taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. A current tax asset or liability is recognized for the estimated taxes refundable or payable on tax returns for the current year. A deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Additionally, we use forecasts of certain tax elements such as taxable income and foreign tax credit utilization and the evaluation of tax planning strategies in making this assessment of realization. Given the inherent uncertainty involved with the use of such assumptions, there can be significant variation between anticipated and actual results.
We have operations in numerous countries other than the United States. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned, and revenue-based tax withholding. The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.
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 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.
Derivative instruments
At times, we enter into derivative financial transactions to hedge existing or projected exposures to changing foreign currency exchange rates. We do not enter into derivative transactions for speculative or trading purposes. We recognize all derivatives on the balance sheet at fair value. Derivatives that are not accounted for as hedges under FASB ASC 815 – Derivatives and Hedging, are adjusted to fair value and such changes are reflected through the results of operations. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value is recognized in earnings. Recognized gains or losses on derivatives entered into to manage foreign exchange risk are included in foreign currency gains and losses in the consolidated statements of income.
Concentration of credit risk
We have revenues and receivables from transactions with individual external customers that amount to 10% or more of our revenues. A significant portion of our revenue from services is generated from transactions with the United States government, which was derived almost entirely from our IGP segment. Additionally, a considerable percentage of revenue from services is generated from transactions with the Chevron Corporation ("Chevron"), which was derived almost entirely from our Hydrocarbons segment. No other customers represented 10% or more of consolidated revenues in any of the periods presented. In addition, our receivables are generally not collateralized. The information in the following tables has summarized data related to our transactions with the U.S. government and Chevron.
Revenues from major customers:
Years ended December 31, | ||||||||||||
Millions of dollars, except percentage amounts | 2011 | 2010 | 2009 | |||||||||
U.S. government revenue |
$ | 2,219 | $ | 3,277 | $ | 5,195 | ||||||
Chevron revenue |
$ | 2,047 | $ | 1,783 | $ | 1,375 | ||||||
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Percentages of revenues and accounts receivable from major customers:
Years ended December 31, | ||||||||||||
Millions of dollars, except percentage amounts | 2011 | 2010 | 2009 | |||||||||
U.S. government revenue percentage |
24 | % | 32 | % | 43 | % | ||||||
Chevron revenues percentage |
22 | % | 18 | % | 11 | % | ||||||
U.S. government receivables percentage |
26 | % | 33 | % | 44 | % | ||||||
Chevron receivables percentage |
8 | % | 11 | % | 7 | % | ||||||
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Noncontrolling interest
Noncontrolling interest in consolidated subsidiaries in our consolidated balance sheets principally represents noncontrolling shareholders' proportionate share of the equity in our consolidated subsidiaries. Noncontrolling interest in consolidated subsidiaries is adjusted each period to reflect the noncontrolling shareholders' allocation of income or the absorption of losses by noncontrolling shareholders on certain majority-owned, controlled investments.
Foreign currency translation
We determine the functional currency of our foreign entities based upon the currency of the primary environment in which they operate. Where the functional currency is not the U.S. dollar, translation of assets and liabilities to U.S. dollars is based on exchange rates at the balance sheet date. Translation of revenue and expenses to U.S. dollars is based on the average rate during the period. Translation gains or losses, net of income tax effects, are reported as a component of other comprehensive income (loss). Gains or losses from foreign currency transactions are included in results of operations, with the exception of intercompany foreign transactions that are of a long-term investment nature, which are recorded in "Other comprehensive income" on our consolidated balance sheets.
Variable Interest Entities
The majority of our joint ventures are variable interest entities. We account for variable interest entities ("VIEs") in accordance with FASB 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. We have applied the requirements of FASB ASC 810 on a prospective basis from the date of adoption on January 1, 2010. The adoption of FASB ASC 810 resulted in the consolidation of the Fasttrax Limited VIE which is discussed below under the caption "Fasttrax Limited Project."
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 group 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 810-10, 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, and financial and performance guarantees, and significant, 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.
Stock-based compensation
We apply the fair value recognition provisions of FASB ASC 718-10 for share-based payments to account for and report equity-based compensation. FASB ASC 718-10 requires equity-based compensation expense to be measured based on the grant-date fair value of the award. For performance-based awards, compensation expense is measured based on the grant-date fair value of the award and the fair value of that award is remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period or the vesting period are recognized as compensation cost on a straight line basis over that period. See Note 13 for detailed information on stock-based compensation and incentive plans.
Additional Balance Sheet Information
Included in "Other current assets" on our consolidated balance sheets are "Advances to subcontractors" and included in "Other current liabilities" on our consolidated balance sheets are "Retainage payables to subcontractors." Our "Advances to subcontractors" and "Retainage payables to subcontractors" for the years ended December 31, 2011 and 2010 is presented below:
December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Advances to subcontractors |
$ | 167 | $ | 181 | ||||
Retainage payables to subcontractors |
$ | 202 | $ | 226 | ||||
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Note 3. Business Combinations and Other Transactions
Business Combinations
ENI Holdings, Inc.(the "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 processing 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, 2011, the remaining escrowed holdback was $27 million and primarily related to security for indemnification obligations. R&S and its acquired divisions have been integrated into the IGP segment.
The acquisition generated goodwill of approximately $250 million none of which is expected to be deductible for income tax purposes. Goodwill was recognized primarily as a result of acquiring an assembled workforce, expertise and capabilities in the material handling and processing systems market, cost saving opportunities and other synergies. During 2011, we recorded an increase to goodwill of approximately $4 million primarily associated with additional purchase consideration payable to the seller based upon our estimates of post-closing working capital adjustments and final valuation of acquired intangible assets.
Of the total purchase price, $56 million has been allocated to customer relationships, trade names and other intangibles. Customer relationships represent existing contracts and the underlying customer relationships and backlog and will be amortized on a straight-line basis over the period in which the economic benefits are expected to be realized. Tradename intangibles include the Roberts & Schaefer's and Soros brands and will be amortized on a straight-lined basis over an estimated useful life of 8-10 years.
Energo. On April 5, 2010, we acquired 100% of the outstanding common stock of Houston-based Energo Engineering ("Energo") for approximately $16 million in cash, subject to an escrowed holdback amount of $6 million to secure working capital adjustments, indemnification obligations of the sellers, and other contingent obligations related to the operation of the business. As a result of the acquisition, we recognized goodwill of $6 million and other intangible assets of $3 million. Energo provides Integrity Management (IM) and advanced structural engineering services to the offshore oil and gas industry. Energo's results of operations were integrated into our Hydrocarbons segment.
Other Transactions
M.W. Kellogg Limited ("MWKL"). On December 31, 2010, we obtained control of the remaining 44.94% interest in our MWKL subsidiary located in the U.K for approximately £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 approximately $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, 2011, we have liability of approximately $8 million classified on our balance sheet as "Noncurrent Obligation to former noncontrolling interest" and $1 million classified on our balance sheet as "Obligation to former noncontrolling interest" reflecting our estimate of 44.94% of future proceeds from certain receivables owed to MWKL.
LNG Joint Venture. On January 5, 2011, we sold our 50% interest in a joint venture to our joint venture partner for approximately $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 approximately $8 million which is included in "Equity in earnings of unconsolidated affiliates, net" in our consolidated income statement for year ended December 31, 2011.
Technology License Agreement. Effective December 24, 2009, we entered into a collaboration agreement with BP p.l.c. to market and license certain technology. In conjunction with this arrangement, we acquired a license granting us the exclusive right to the technology. In January 2010, as partial consideration for the license, we paid an initial fee of $20 million, which will be amortized on a straight-line basis over the shorter of its estimated useful life or the 25-year life of the arrangement. We currently estimate the useful life to be 25 years.
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Note 4. Percentage-of-Completion Contracts
Revenue from contracts to provide construction, engineering, design, or similar services is reported on the percentage-of-completion method of accounting using measurements of progress toward completion appropriate for the work performed. Commonly used measurements are physical progress, man-hours, and costs incurred.
Billing practices for these projects are governed by the contract terms of each project based upon costs incurred, achievement of milestones, or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method of accounting. Billings in excess of recognized revenue are recorded in "Advance billings on uncompleted contracts." When billings are less than recognized revenue, the difference is recorded in "Unbilled receivables on uncompleted contracts." With the exception of claims and change orders that are in the process of being negotiated with customers, unbilled receivables are usually billed during normal billing processes following achievement of the contractual requirements.
Recording of profits and losses on percentage-of-completion contracts requires an estimate of the total profit or loss over the life of each contract. This estimate requires consideration of contract value, change orders and claims reduced by costs incurred and estimated costs to complete. Anticipated losses on contracts are recorded in full in the period they become evident. Except in a limited number of projects that have significant uncertainties in the estimation of costs, we do not delay income recognition until projects have reached a specified percentage of completion. Generally, profits are recorded from the commencement date of the contract based upon the total estimated contract profit multiplied by the current percentage complete for the contract.
When calculating the amount of total profit or loss on a percentage-of-completion contract, we include unapproved claims in total estimated contract value when the collection is deemed probable based upon the four criteria for recognizing unapproved claims in accordance with FASB ASC 605-35 related to accounting for performance of construction-type and certain production-type contracts. Including unapproved claims in this calculation increases the operating income (or reduces the operating loss) that would otherwise be recorded without consideration of the probable unapproved claims. Probable unapproved claims are recorded to the extent of costs incurred and include no profit element. In all cases, the probable unapproved claims included in determining contract profit or loss are less than the actual claim that will be or has been presented to the customer.
When recording the revenue and the associated unbilled receivable for unapproved claims, we only accrue an amount equal to the costs incurred related to probable unapproved claims. The amounts of unapproved claims and change orders included in determining the profit or loss on contracts and recorded in current and non-current unbilled receivables on uncompleted contracts are as follows:
Years ended December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Probable unapproved claims |
$ | 31 | $ | 19 | ||||
Probable unapproved change orders |
6 | 10 | ||||||
Probable unapproved change orders related to unconsolidated subsidiaries |
— | 3 | ||||||
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As of December 31, 2011, the probable unapproved claims related to several projects. See Note 9 for a discussion of U.S. government contract claims, which are not included in the table above.
Included in the table above are contracts with probable unapproved claims that will likely not be settled within one year totaling $19 million for both years ending December 31, 2011 and 2010, which are reflected as a non-current asset in "Noncurrent unbilled receivables on uncompleted contracts" on the consolidated balance sheets. Other probable unapproved claims and change orders that we believe will be settled within one year, have been recorded as a current asset in "Unbilled receivables on uncompleted contracts" on the consolidated balance sheets.
Liquidated damages
Many of our engineering and construction contracts have milestone due dates that must be met or we may be subject to penalties for liquidated damages if claims are asserted and we were responsible for the delays. These generally relate to specified activities that must be met within a project by a set contractual date or achievement of a specified level of output or throughput of a plant we construct. Each contract defines the conditions under which a customer may make a claim for liquidated damages. However, in some instances, liquidated damages are not asserted by the customer, but the potential to do so is used in negotiating claims and closing out the contract.
Based upon our evaluation of our performance and other legal analysis, we have not accrued for possible liquidated damages related to several projects totaling $11 million at December 31, 2011 and $20 million at December 31, 2010 (including amounts related to our share of unconsolidated subsidiaries), that we could incur based upon completing the projects as currently forecasted.
PEMEX Arbitration. In 1997 and 1998 we entered into three contracts with PEMEX, the project owner, to build offshore platforms, pipelines and related structures in the Bay of Campeche offshore Mexico. The three contracts were known as Engineering, Procurement and Construction ("EPC") 1, EPC 22 and EPC 28. All three projects encountered significant schedule delays and increased costs due to problems with design work, late delivery and defects in equipment, increases in scope and other changes. PEMEX took possession of the offshore facilities of EPC 1 in March 2004 after having achieved oil production but prior to our completion of our scope of work pursuant to the contract.
We filed for arbitration with the International Chamber of Commerce ("ICC") in 2004 claiming recovery of damages of $323 million for the EPC 1 project. PEMEX subsequently filed counterclaims totaling $157 million. In December 2009, the ICC ruled in our favor, and we were awarded a total of approximately $351 million including legal and administrative recovery fees as well as interest. PEMEX was awarded approximately $6 million on counterclaims, plus interest on a portion of that sum. In connection with this award, we recognized a gain of $117 million net of tax in 2009. The arbitration award is legally binding and on November 2, 2010, we received a judgment in our favor in the U.S. District Court for the Southern District of New York to recognize the award in the U.S. of approximately $356 million plus Mexican value added tax and interest thereon until paid. PEMEX initiated an appeal to the U.S. Court of Appeals for the Second Circuit and asked for a stay of the enforcement of the judgment while on appeal. The stay was granted, but PEMEX was required to post collateral of $395 million with the court registry. Appellate briefs have been filed by both parties and oral arguments were heard by the Second Circuit Court on February 2, 2012. On February 16, 2012, the Second Circuit issued an order remanding the case to the District Court to consider if the decision of the Collegiate Court in Mexico, described below, would have affected the trial court's ruling. We believe the possibility of the trial court reversing its own ruling to be remote as U.S. courts have a strong record of recognizing and enforcing international arbitration awards. However, an unfavorable ruling by the trial court could have a material adverse impact to our results of operations.
PEMEX attempted to nullify the award in Mexico which was rejected by the Mexican trial court in June 2010. PEMEX then filed an "amparo" action on the basis that its constitutional rights had been violated which was denied by the Mexican court in October 2010. PEMEX subsequently appealed the adverse decision with the Collegiate Court in Mexico on the grounds that the arbitration tribunal did not have jurisdiction and that the award violated the public order of Mexico. Although these arguments were presented in the initial nullification and amparo actions and were rejected in both cases, in September 2011, the Collegiate Court in Mexico ruled in favor of PEMEX on the amparo action. The Collegiate Court ruled that PEMEX, by administratively rescinding the contract in 2004, deprived the arbitration panel of jurisdiction thereby nullifying the arbitration award. The Collegiate Court decision is contrary to the ruling received from the ICC as well as all other Mexican courts which have denied PEMEX's repeated attempts to nullify the arbitration award. We also believe the Collegiate Court decision is contrary to Mexican law governing contract arbitration. However, we do not expect the Collegiate Court decision to affect the outcome of the U.S. appeal discussed above or our ability to ultimately collect the ICC arbitration award in the U.S. due to the significant assets of PEMEX in the U.S. as well as the collateral posted by PEMEX with the court registry The circumstances of this matter are unique and in the unlikely event we are not able to collect the arbitration award in the U.S., we will pursue other remedies including filing a North American Free Trade Agreement ("NAFTA") arbitration to recover the award as an unlawful expropriation of assets by the government of Mexico.
We were successful in litigating and collecting on valid international arbitration awards against PEMEX on the EPC 22 and EPC 28 projects during 2008. Additionally, PEMEX has sufficient assets in the U.S. which we believe we will be able to attach as a result of the recognition of the ICC arbitration award in the U.S. Although it is possible we could resolve and collect the amounts due from PEMEX in the next 12 months, we believe the timing of the collection of the award is uncertain and therefore, we have continued to classify the amount due from PEMEX as a long term receivable included in "Noncurrent unbilled receivable on uncompleted contracts" as of December 31, 2011. No adjustments have been made to our receivable balance since recognition of the initial award in 2009. Depending on the timing and amount ultimately settled with PEMEX, including interest, we could recognize an additional gain upon collection of the award.
In connection with the EPC 1 project, we have approximately $80 million in outstanding performance bonds furnished to PEMEX when the project was awarded. The bonds were written by a Mexican bond company and backed by a U.S. insurance company which is indemnified by KBR. As a result of the ICC arbitration award in December 2009, the panel determined that KBR had performed on the project and recovery on the bonds by PEMEX was precluded. PEMEX filed an action in Mexico in June 2010 against the Mexican bond company to collect the bonds even though the arbitration award ruled that the bonds were to be returned to KBR. In May 2011, the Mexican trial court ruled PEMEX could collect the bonds even though PEMEX at the time was unsuccessful in its attempts to nullify the arbitration award. The decision was immediately appealed by the bonding company and PEMEX was not able to call the bonds while on appeal. In October 2011, we were officially notified that the appellate court ruled in favor of PEMEX, therefore allowing PEMEX to call the bonds. In December 2011, we and the Mexican bond company stayed payment of the bonds by filing direct amparos in the Mexican courts, and we filed a bond to cover interest accruing during the pendency of our amparo action. In the event our amparo is unsuccessful and the U.S. insurance company makes payment to the Mexican bonding company, we may be required to indemnify the U.S. insurance company. In this event, we will pursue other remedies including seeking relief in the U.S. District Court for the Southern District of New York or the filing of a NAFTA arbitration to recover the bonds as an unlawful expropriation of assets by the government of Mexico.
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Note 5. Business Segment Information
We provide a wide range of services, but the management of our business is heavily focused on major projects within each of our reportable segments. At any given time, a relatively few number of projects and joint ventures represent a substantial part of our operations. Our equity in earnings and losses of unconsolidated affiliates that are accounted for using the equity method of accounting is included in revenue of the applicable segment.
The following is a description of our reportable segments:
Hydrocarbons. Our Hydrocarbons business segment serves the Hydrocarbon industry by providing services ranging from prefeasibility studies to designing, and construction to commissioning of process facilities in remote locations 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 execute and provide solutions for projects in the biofuel, carbon capture, oil and gas, olefins and petrochemical markets. The Hydrocarbons business segment includes the Gas Monetization, Oil & Gas, Downstream, and Technology business units.
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 from locations across the globe. Additionally, we make significant contributions in gas processing development, equipment design and innovative construction methods. 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. Our Downstream business unit provides a complete range of engineering, procurement, construction and construction services ("EPC-CS") services, as well as program and project management, consulting, front-end engineering and design ("FEED") for refineries, petrochemical and other plants. Our Technology business unit provides expertise related to differentiated process technologies for the coal monetization, petrochemical, refining and syngas markets.
Infrastructure, Government & Power. Our IGP business segment serves the Infrastructure, Government & Power industries delivering effective solutions to defense and governmental agencies worldwide, providing base operations, facilities management, border security, engineering, procurement and construction ("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, waste water, building, and pipeline projects. For the industrial manufacturing sector, we provide a full range of EPC services to a variety of heavy industrial and advanced manufacturing markets, 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 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 segment includes the North American Government and Logistics ("NAGL", formerly North American Government and Defense), International Government, Defence and Support Services ("IGDSS", formerly International Government and Defence), Infrastructure and Minerals ("I&M"), and the Power and Industrial ("P&I") business units. In 2012, we intend to report the Infrastructure and Minerals business units separately. Our R&S acquired business will be included in the new Minerals business unit.
Services. Our Services segment delivers full-scope construction, construction management, fabrication, operations/ maintenance, commissioning/startup and turnaround expertise to customers worldwide to a broad variety of markets including oil and gas, petrochemicals and hydrocarbon processing, 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. Our U.S. Construction product line delivers direct hire construction, construction management for construction only projects to a variety of markets and works closely with the Hydrocarbons group and Power and Industrial business unit to provide construction execution support on all domestic EPC projects. Our Industrial Services product line is a diversified maintenance organization operating on a global basis providing maintenance, on-call construction, turnaround and specialty services to a variety of markets. This group works with all of our other operating units to identify potential for pull through opportunities and to identify upcoming EPC projects at one of the 80 plus locations where we have embedded KBR personnel. Our Building Group product line provides general commercial contractor services to education, food and beverage, manufacturing, health care, hospitality and entertainment, life science and technology, and mixed-use building clients. Our Canada product line is a diversified construction and fabrication operation providing direct hire construction, 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.
Certain of our business units meet the definition of operating segments contained in FASB ASC 280 – Segment Reporting, but individually do not meet the quantitative thresholds as a reportable segment, nor do they share a majority of the aggregation criteria with another operating segment. These operating segments are reported on a combined basis as "Other" and include our Ventures and Allstates business units as well as corporate expenses not included in the operating segments' results. Our segment information has been prepared in accordance with FASB ASC 280 – Segment Reporting.
Our reportable segments follow the same accounting policies as those described in Note 1 (Significant Accounting Policies). Our equity in pretax earnings and losses of unconsolidated affiliates that are accounted for using the equity method of accounting is included in revenue and operating income of the applicable segment.
Reportable segment performance is evaluated by our chief operating decision maker using operating segment income which is defined as operating segment revenue less the cost of services and segment overhead directly attributable to the operating segment. Reportable segment income excludes certain cost of services and general and administrative expenses directly attributable to the operating segment that is managed and reported at the corporate level, and corporate general and administrative expenses. We believe this is the most accurate measure of the ongoing profitability of our operating segments.
Labor cost absorption in the following table represents income or expense generated by our central service labor and resource groups for amounts charged to the operating segments. Additionally, in the following table depreciation and amortization associated with corporate assets is allocated to our operating segments for determining operating income or loss.
The tables below present information on our reportable segments.
Operations by Reportable Segment
Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Revenue: |
||||||||||||
Hydrocarbons |
$ | 4,258 | $ | 3,969 | $ | 3,906 | ||||||
Infrastructure, Government and Power |
3,328 | 4,299 | 6,288 | |||||||||
Services |
1,590 | 1,755 | 1,863 | |||||||||
Other |
85 | 76 | 48 | |||||||||
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|||||||
Total revenue |
$ | 9,261 | $ | 10,099 | $ | 12,105 | ||||||
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Segment operating income: |
||||||||||||
Hydrocarbons |
$ | 408 | $ | 400 | $ | 464 | ||||||
Infrastructure, Government and Power |
266 | 272 | 188 | |||||||||
Services |
58 | 102 | 96 | |||||||||
Other |
51 | 35 | 16 | |||||||||
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|
|
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Segment operating income |
783 | 809 | 764 | |||||||||
Unallocated amounts: |
||||||||||||
Labor cost absorption income (expense) |
18 | 12 | (11 | ) | ||||||||
Corporate general and administrative expense |
(214 | ) | (212 | ) | (217 | ) | ||||||
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|
|
|
|
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Total operating income |
$ | 587 | $ | 609 | $ | 536 | ||||||
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|
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|
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Capital Expenditures: |
||||||||||||
Hydrocarbons |
$ | — | $ | 1 | $ | 2 | ||||||
Infrastructure, Government and Power |
3 | 8 | 9 | |||||||||
Services |
3 | 2 | 4 | |||||||||
Other |
77 | 55 | 26 | |||||||||
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|
|
|
|
|
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Total |
$ | 83 | $ | 66 | $ | 41 | ||||||
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Equity in earnings (losses) of unconsolidated affiliates, net: |
||||||||||||
Hydrocarbons |
$ | 32 | $ | 40 | $ | (30 | ) | |||||
Infrastructure, Government and Power |
67 | 40 | 27 | |||||||||
Services |
26 | 33 | 28 | |||||||||
Other |
33 | 24 | 20 | |||||||||
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|
|
|
|
|
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Total |
$ | 158 | $ | 137 | $ | 45 | ||||||
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Depreciation and amortization: |
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Hydrocarbons |
$ | 2 | $ | 3 | $ | 3 | ||||||
Infrastructure, Government and Power |
14 | 6 | 5 | |||||||||
Services |
9 | 12 | 19 | |||||||||
Other |
46 | 41 | 28 | |||||||||
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|
|
|
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Total |
$ | 71 | $ | 62 | $ | 55 | ||||||
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Within KBR, not all assets are associated with specific segments. Those assets specific to segments include receivables, inventories, certain identified property, plant and equipment and equity in and advances to related companies, and goodwill. The remaining assets, such as cash and the remaining property, plant and equipment, are considered to be shared among the segments and are therefore reported as General corporate assets.
Balance Sheet Information by Reportable Segment
December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Total assets: |
||||||||
Hydrocarbons |
$ | 2,836 | $ | 2,136 | ||||
Infrastructure, Government and Power |
2,827 | 2,836 | ||||||
Services |
604 | 590 | ||||||
Other |
(594 | ) | (145 | ) | ||||
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|
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Total assets |
$ | 5,673 | $ | 5,417 | ||||
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|
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Goodwill: |
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Hydrocarbons |
$ | 249 | $ | 249 | ||||
Infrastructure, Government and Power |
403 | 399 | ||||||
Services |
287 | 287 | ||||||
Other |
12 | 12 | ||||||
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Total |
$ | 951 | $ | 947 | ||||
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Equity in/advances to related companies: |
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Hydrocarbons |
$ | 9 | $ | 49 | ||||
Infrastructure, Government and Power |
(51 | ) | (15 | ) | ||||
Services |
36 | 33 | ||||||
Other |
196 | 152 | ||||||
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|
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Total |
$ | 190 | $ | 219 | ||||
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Revenue by country is determined based on the location of services provided. Long-lived assets by country are determined based on the location of tangible assets.
Selected Geographic Information
Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Revenue: |
||||||||||||
United States |
$ | 1,994 | $ | 2,082 | $ | 2,550 | ||||||
Iraq |
1,969 | 2,891 | 4,239 | |||||||||
Africa |
2,113 | 2,094 | 2,260 | |||||||||
Other Middle East |
707 | 995 | 1,224 | |||||||||
Asia Pacific (includes Australia) |
1,439 | 1,030 | 624 | |||||||||
Europe |
587 | 585 | 607 | |||||||||
Other Countries |
452 | 422 | 601 | |||||||||
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|
|
|
|
|
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Total |
$ | 9,261 | $ | 10,099 | $ | 12,105 | ||||||
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|
|
December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Long-Lived Assets (PP&E): |
||||||||
United States |
$ | 225 | $ | 178 | ||||
United Kingdom |
97 | 111 | ||||||
Other Countries |
62 | 66 | ||||||
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Total |
$ | 384 | $ | 355 | ||||
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Note 6. Goodwill and Intangible Assets
Goodwill
The table below summarizes our goodwill by segment.
Millions of dollars |
Hydrocarbons | IGP | Services | Other | Total | |||||||||||||||
Balance at December 31, 2009 |
$ | 243 | $ | 149 | $ | 287 | $ | 12 | $ | 691 | ||||||||||
Acquisition of R&S |
— | 250 | — | — | 250 | |||||||||||||||
Acquisition of Energo |
6 | — | — | — | 6 | |||||||||||||||
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|
|
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Balance at December 31, 2010 |
249 | 399 | 287 | 12 | 947 | |||||||||||||||
Purchase price adjustment |
— | 4 | — | — | 4 | |||||||||||||||
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|
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|
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Balance at December 31, 2011 |
$ | 249 | $ | 403 | $ | 287 | $ | 12 | $ | 951 | ||||||||||
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The increase in goodwill in 2011 of $4 million was related to a purchase price adjustment for R&S. The increase in goodwill in 2010 was a result of the acquisition of R&S in December 2010 and Energo in April 2010. See Note 3 for further discussion of these acquired entities.
In the third quarter of 2009, we recognized a goodwill impairment charge of approximately $6 million related to the AllStates staffing business unit in connection with our annual goodwill impairment test on September 30, 2009. The charge was primarily the result of a decline in the staffing market, the effect of the recession on the market, and our reduced forecasts of the sales, operating income and cash flows for this business unit that were identified through the course of our 2009 annual planning process.
Intangible Assets
Intangible assets are comprised of customer relationships, contracts, backlog, trade name licensing agreements and other. The cost and accumulated amortization of our intangible assets were as follows:
December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
|
|
|
|
|||||
Intangibles not subject to amortization |
$ | 11 | $ | 11 | ||||
Intangibles subject to amortization |
191 | 190 | ||||||
|
|
|
|
|||||
Total intangibles |
202 | 201 | ||||||
Accumulated amortization of intangibles |
(89 | ) | (74 | ) | ||||
|
|
|
|
|||||
Net intangibles |
$ | 113 | $ | 127 | ||||
|
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|
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Intangibles subject to amortization are amortized over their estimated useful lives of up to 25 years. Our intangibles amortization expense for the years ended December 31, 2011, 2010 and 2009 is presented below:
Millions of dollars |
Intangibles amortization expense |
|||
2009 |
$ | 15 | ||
2010 |
$ | 12 | ||
2011 |
$ | 16 | ||
|
|
Our expected intangibles amortization expense in future periods is presented below:
Millions of dollars |
Expected future intangibles amortization expense |
|||
2012 |
$ | 15 | ||
2013 |
$ | 14 | ||
2014 |
$ | 12 | ||
2015 |
$ | 11 | ||
2016 |
$ | 10 | ||
|
|
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Note 7. Property, Plant and Equipment
Other than those assets that have been written down to their fair values due to impairment, property, plant, and equipment are reported at cost less accumulated depreciation, which is generally provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are also used for tax purposes, wherever permitted. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized.
Property, plant and equipment are composed of the following:
Estimated Useful |
December 31, | |||||||||||
Millions of dollars | Lives in Years | 2011 | 2010 | |||||||||
Land |
N/A | $ | 31 | $ | 31 | |||||||
Buildings and property improvements |
5-44 | 244 | 212 | |||||||||
Equipment and other |
3-20 | 473 | 446 | |||||||||
|
|
|
|
|
|
|||||||
Total |
748 | 689 | ||||||||||
Less accumulated depreciation |
(364 | ) | (334 | ) | ||||||||
|
|
|
|
|||||||||
Net property, plant and equipment |
$ | 384 | $ | 355 | ||||||||
|
|
|
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In the fourth quarter of 2010, we recognized a $5 million impairment charge on long-lived assets associated with a technology center in our Hydrocarbons segment primarily related to equipment, land and buildings. Our Hydrocarbons segment intends to replace the function of the technology operating center through alliances and joint-ventures with third parties rather than direct ownership. As a result of our decision to sell the assets, we adjusted the carrying values to fair value as of December 31, 2010 and such fair value was based on third-party market prices for similar assets.
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Note 8. Debt and Other Credit Facilities
Credit Agreement
On December 2, 2011, we entered into a $1 billion, five-year unsecured revolving credit agreement (the "Credit Agreement) with a syndicate of international banks, replacing the three-year unsecured revolving credit agreement, dated November 3, 2009 (the "Prior Credit Agreement") which terminated upon closing of the Credit Agreement. The Credit Agreement expires in December 2016 and can be used for working capital and the issuance of letters of credit for general corporate purposes. Amounts drawn under the Credit Agreement will bear interest at variable rates, per annum, based either on (i) the London interbank offered rate ("LIBOR") plus an applicable margin of 1.50% to 1.75%, or (ii) a base rate plus an applicable margin of 0.50% to 0.75%, with the base rate being equal to the highest of (a) reference bank's publicly announced base rate, (b) the Federal Funds Rate plus 0.5%, or (c) LIBOR plus 1%. The amount of the applicable margin to be applied will be determined by the Company's ratio of consolidated debt to consolidated EBITDA for the prior four fiscal quarters, as defined in the Credit Agreement. The Credit Agreement provides for fees on letters of credit issued under the Credit Agreement at a rate equal to the applicable margin for LIBOR-based loans, except for performance letters of credit, which are priced at 50% of such applicable margin. KBR pays an issuance fee of 0.15% of the face amount of a letter of credit upon issuance. KBR also pays a commitment fee of 0.25%, per annum, on any unused portion of the commitment under the Credit Agreement. As of December 31, 2011, there were $245 million in letters of credit and no advances outstanding.
The Credit Agreement contains customary covenants similar to the Prior Credit Agreement which include financial covenants requiring maintenance of a ratio of consolidated debt to consolidated EBITDA not greater than 3.5 to 1 and a minimum consolidated net worth of $2 billion plus 50% of consolidated net income for each quarter beginning December 31, 2011, and 100% of any increase in shareholders' equity attributable to the sale of equity interests.
The Credit Agreement contains a number of other covenants restricting, among other things, our ability to incur additional liens and indebtedness, enter into asset sales, repurchase our equity shares and make certain types of investments. Our subsidiaries are restricted in incurring indebtedness, however, they are permitted to incur indebtedness as it relates to purchase money obligations, capitalized leases, refinancing or renewals secured by liens upon or in property acquired, constructed or improved in an aggregate principal amount not to exceed $200 million at any time outstanding. Additionally, our subsidiaries may incur unsecured indebtedness not to exceed $200 million in aggregate outstanding principal amount at any time. We are also permitted to repurchase our equity shares, provided that no such repurchases shall be made from proceeds borrowed under the Credit Agreement, and that the aggregate purchase price and dividends paid after December 2, 2011, does not to exceed the Distribution Cap (equal to the sum of $750 million plus the lesser of (1) $400 million and (2) the amount received by us in connection with the arbitration and subsequent litigation of the PEMEX contracts as further discussed in Note 4 to our consolidated financial statements). At December 31, 2011, the remaining availability under the Distribution Cap was approximately $732 million.
Letters of credit, surety bonds and guarantees
In connection with certain projects, we are required to provide letters of credit, surety bonds or guarantees to our customers. Letters of credit are provided to certain customers and counter-parties in the ordinary course of business as credit support for contractual performance guarantees, advanced payments received from customers and future funding commitments. We have approximately $1.8 billion in committed and uncommitted lines of credit to support the issuance of letters of credit and as of December 31, 2011, and we had utilized $635 million of our credit capacity. Surety bonds are also posted under the terms of certain contracts primarily related to state and local government projects to guarantee our performance. The letters of credit outstanding included $245 million issued under our Credit Agreement and $390 million issued under uncommitted bank lines at December 31, 2011. Of the total letters of credit outstanding, $185 million relate to our joint venture operations and $14 million of the letters of credit have terms that could entitle a bank to require additional cash collateralization on demand. As the need arises, future projects will be supported by letters of credit issued under our Credit Agreement or other lines of credit arranged on a bilateral, syndicated or other basis. We believe we have adequate letter of credit capacity under our Credit Agreement and bilateral lines of credit to support our operations for the next twelve months.
Nonrecourse Project Finance Debt
Fasttrax Limited, a joint venture in which we indirectly own a 50% equity interest with an unrelated partner, was awarded a contract in 2001 with the U.K. Ministry of Defence ("MoD") to provide a fleet of 92 heavy equipment transporters ("HETs") to the British Army. Under the terms of the arrangement, Fasttrax Limited operates and maintains the HET fleet for a term of 22 years. The purchase of the HETs by the joint venture was financed through a series of bonds secured by the assets of Fasttrax Limited totaling approximately £84.9 million and are non-recourse to KBR and its partner including £12.2 million which was replaced when the shareholders funded combined equity and subordinated debt of approximately £12.2 million. The bonds are guaranteed by Ambac Assurance UK Ltd under a policy that guarantees the schedule of the principle and interest payments to the bond trustee in the event of non-payment by Fasttrax Limited. See Note 15 for additional details on Fasttrax Limited non-recourse project finance debt of a VIE that is consolidated by KBR. The secured bonds are an obligation of Fasttrax Limited and will never be a debt obligation of KBR because they are non-recourse to the joint venture partners. Accordingly, in the event of a default on the term loan, the lenders may only look to the resources of Fasttrax Limited for repayment.
|
Note 9. United States Government Contract Work
We provide substantial work under our government contracts to the United States Department of Defense ("DoD") and other governmental agencies. These contracts include our worldwide United States Army logistics contracts, known as LogCAP III and IV.
Given the demands of working in Iraq and elsewhere for the U.S. government, as discussed further below, we have disagreements and have experienced performance issues with the various government customers for which we work. When 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 receive payment for amounts owed for our allowable costs under cost-reimbursable contracts. Other remedies that could be sought by our government customers for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines, and suspensions or debarment from doing business with the government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts, and may also have a material adverse effect on our business, financial condition, results of operations, and cash flow.
We have experienced and expect to be a party to various claims against us by employees, third parties, soldiers, subcontractors and others that have arisen out of our work in Iraq such as claims for wrongful termination, assaults against employees, personal injury claims by third parties and army personnel, and subcontractor claims. While we believe we conduct our operations safely, the environments in which we operate often lead to these types of claims. We believe the vast majority of these types of claims are governed by the Defense Base Act or precluded by other defenses. We have a dispute resolution program under which most employment claims are subject to binding arbitration. However, as a result of amendments to the Department of Defense Appropriations Act of 2010, certain types of employee claims cannot be compelled to binding arbitration. An unfavorable resolution or disposition of these matters could have a material adverse effect on our business, results of operations, financial condition and cash flow.
Award Fees
In accordance with the provisions of the LogCAP III contract, we recognize revenue on our services rendered on a task order basis based on either a cost-plus-fixed-fee or cost-plus-base-fee and award fee arrangement. The fees are determined as a percentage rate applied to a negotiated estimate of the total costs for each task order. Prior to the fourth quarter of 2009, we recognized award fees on the LogCAP III contract using an estimated accrual of the amounts to be awarded. Once task orders underlying the work were definitized and award fees were granted, we adjusted our estimate of award fees to the actual amounts earned. We used 72% as our accrual rate through the third quarter of 2009.
On February 19, 2010, KBR was notified by the AFDO that a determination had been made regarding the Company's performance for the period January 2008 to April 2008 in Iraq. The notice stated that based on information received from various DoD individuals and organizations after the date of the evaluation board held in June 2008, the AFDO made a unilateral decision to grant no award fees for the period of performance from January 2008 to April 2008. As a result of the AFDO's adverse determination we reversed award fees that had previously been estimated as earned and recognized as revenue resulting in a net decrease of $65 million in 2009. Commencing in the fourth quarter of 2009, we stopped accruing award fees and began recognizing them only upon receipt of the award fee letter due to the inability to reliably estimate the amount of fees to be awarded. We have filed an appeal to the ACO related to the decision to grant no award fees for the period of performance from January 2008 to April 2008.
In 2010, we received award fees of $94 million for the period of performance from May 2008 through May 2010 for task orders in Iraq and Afghanistan which we recorded as an increase to revenue.
In 2011, we were awarded and recognized revenue of $41 million for award fees for the periods of performance from March 2010 through February 2011 on task orders in Iraq. No award fee pools are available for periods of performance subsequent to February 2011.
In August of 2010, we executed a contract modification to the LogCAP III contract on the base life support task order in Iraq that resulted in an increase to our base fee on costs incurred and an increase in the maximum award fee on negotiated costs for the period of performance from September 2010 through February 2011. During the first quarter of 2011, we finalized negotiations with our customer and converted the task order from cost-plus-base-fee and award fee to cost-plus-fixed-fee for the period of performance beginning in March 2011. We recognize revenues for the fixed-fee component on the basis of proportionate performance as services are performed.
Government Compliance Matters
The negotiation, administration, and settlement of our contracts with the U.S. Government, consisting primarily of DoD contracts, are subject to audit by the Defense Contract Audit Agency ("DCAA"), which serves in an advisory role to the Defense Contract Management Agency ("DCMA") which is responsible for the administration of our contracts. The scope of these audits include, among other things, the allowability, allocability, and reasonableness of incurred costs, approval of annual overhead rates, compliance with the Federal Acquisition Regulation ("FAR") and Cost Accounting Standards ("CAS"), compliance with certain unique contract clauses, and audits of certain aspects of our internal control systems. Issues identified during these audits are typically discussed and reviewed with us, and certain matters are included in audit reports issued by the DCAA, with its recommendations to our customer's administrative contracting officer ("ACO"). We attempt to resolve all issues identified in audit reports by working directly with the DCAA and the ACO. When agreement cannot be reached, DCAA may issue a Form 1, "Notice of Contract Costs Suspended and/or Disapproved," which recommends withholding the previously paid amounts or it may issue an advisory report to the ACO. KBR is permitted to respond to these documents and provide additional support. At December 31, 2011, open Form 1's from the DCAA recommending suspension of payments totaling approximately $361 million associated with our contract costs incurred in prior years, of which approximately $150 million has been withheld from our current billings. As a consequence, for certain of these matters, we have withheld approximately $70 million from our subcontractors under the payment terms of those contracts. In addition, we have outstanding demand letters received from our customer requesting that we remit a total of $87 million of disapproved costs for which we do not believe we have a legal obligation to pay. We continue to work with our ACO's, the DCAA and our subcontractors to resolve these issues. However, for certain of these matters, we have filed claims with the Armed Services Board of Contract Appeals ("ASBCA") or the United States Court of Federal Claims ("U.S. COFC").
KBR excludes from billings to the U.S. Government costs that are potentially unallowable, expressly unallowable, or mutually agreed to be unallowable, or not allocable to government contracts per applicable regulations. Revenue recorded for government contract work is reduced at the time we identify and estimate potentially refundable 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 and CAS, quality of supporting documentation for costs incurred, and subcontract terms as applicable. From time to time, we engage outside counsel to advise us on certain matters in determining whether certain costs are allowable. We also review our analysis and findings with the 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 ASBCA or the U.S. 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 the collection of 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.
Certain issues raised as a result of contract audits and other investigations are discussed below.
Private Security. In 2007, we received a Form 1 from the Department of the Army informing us of their intent to adjust payments under the LogCAP III contract associated with the cost incurred for the years 2003 through 2006 by certain of our subcontractors to provide security to their employees. Based on that notice, the Army withheld its initial assessment of $20 million. The Army based its initial assessment on one subcontract wherein, based on communications with the subcontractor, the Army estimated 6% of the total subcontract costs related to the private security. We subsequently received Form 1's from the DCAA disapproving an additional $83 million of costs incurred by us and our subcontractors to provide security during the same periods. Since that time, the Army withheld an additional $25 million in payments from us bringing the total payments withheld to approximately $45 million as of December 31, 2011 out of the Form 1's issued to date of $103 million.
The Army indicated that they believe our LogCAP III contract prohibits us and our subcontractors from billing costs of privately armed security. We believe that, while the LogCAP III contract anticipates that the Army will provide force protection to KBR employees, it does not prohibit us or any of our subcontractors from using private security services to provide force protection to KBR or subcontractor personnel. In addition, a significant portion of our subcontracts are competitively bid fixed price subcontracts. As a result, we do not receive details of the subcontractors' cost estimate nor are we legally entitled to it. Further, we have not paid our subcontractors any additional compensation for security services. Accordingly, we believe that we are entitled to reimbursement by the Army for the cost of services provided by us or our subcontractors, even if they incurred costs for private force protection services. Therefore, we do not agree with the Army's position that such costs are unallowable and that they are entitled to withhold amounts incurred for such costs.
We have provided at the Army's request information that addresses the use of armed security either directly or indirectly charged to LogCAP III. In 2007, we filed a complaint in the ASBCA to recover $44 million of the amounts withheld from us. In 2009, KBR and the Army agreed to stay the case pending further discussions with the DOJ as discussed further below. The ASBCA has denied the Army's latest request to stay the proceedings which are pending a ruling on KBR's motion for summary judgment. We believe these sums were properly billed under our contract with the Army. At this time, we believe the likelihood that a loss related to this matter has been incurred is remote. We have not adjusted our revenues or accrued any amounts related to this matter. This matter is also the subject of a separate claim filed by the DOJ for alleged violation of the False Claims Act as discussed further below under the heading "Investigations, Qui Tams and Litigation."
Containers. In June 2005, the DCAA recommended withholding certain costs associated with providing containerized housing for soldiers and supporting civilian personnel in Iraq. The DCMA agreed that the costs be withheld pending receipt of additional explanation or documentation to support the subcontract costs. During the first quarter of 2011, we received a Form 1 from the DCAA disapproving approximately $25 million in costs related to containerized housing that had previously been deemed allowable. As of December 31, 2011, approximately $51 million of costs have been suspended under Form 1's of which $26 million have been withheld from us by our customer. We have withheld $30 million from our subcontractor related to this matter. In April 2008, we filed a counterclaim in arbitration against our LogCAP III subcontractor, First Kuwaiti Trading Company, to recover the $51 million we paid to the subcontractor for containerized housing as further described under the caption First Kuwaiti Trading Company arbitration below. During the first quarter of 2011, we filed a complaint before the ASBCA to contest the Form 1's and recover the amounts withheld from us by our customer. We believe that the costs incurred associated with providing containerized housing are reasonable, and we intend to vigorously defend ourselves in this matter. We do not believe that we face a risk of significant loss from any disallowance of these costs in excess of the amounts we have withheld from subcontractors and the loss accruals we have recorded. At this time, we believe the likelihood that a loss in excess of the amount accrued for this matter is remote.
Dining facilities. In 2006, the DCAA raised questions regarding our billings and price reasonableness of costs related to dining facilities in Iraq. We responded to the DCMA that our costs are reasonable. As of December 31, 2011, we have outstanding Form 1's from the DCAA disapproving $130 million in costs related to these dining facilities until such time we provide documentation to support the price reasonableness of the rates negotiated with our subcontractor and demonstrate that the amounts billed were in accordance with the contract terms. We believe the prices obtained for these services were reasonable and intend to vigorously defend ourselves on this matter. We filed claims in the U.S. COFC or ASBCA to recover $55 million of the $69 million withheld from us by the customer. The U.S. COFC proceedings were held in the fourth quarter of 2011 and we expect a decision in the second quarter of 2012. With respect to questions raised regarding billing in accordance with contract terms, as of December 31, 2011, we believe it is reasonably possible that we could incur losses in excess of the amount accrued for possible subcontractor costs billed to the customer that were possibly not in accordance with contract terms. We are unable to estimate an amount of possible loss or range of possible loss in excess of the amount accrued related to any costs billed to the customer that were not in accordance with the contract terms. However, we do not believe we face a risk of significant loss from any disallowance of these costs in excess of amounts withheld from subcontractors. As of December 31, 2011, we had withheld $31 million in payments from our subcontractors pending the resolution of these matters with our customer.
In 2009, one of our subcontractors, Tamimi, filed for arbitration to recover approximately $35 million for payments we withheld from them pending the resolution of the Form 1's with our customer. The arbitration was held under the rules of the London Court of International Arbitration in London, England. In December 2010, the arbitration panel ruled that the subcontract terms were not sufficient to hold retention from Tamimi for price reasonableness matters and awarded the subcontractor $38 million including interest thereon and certain legal costs. We paid the award to Tamimi during the third quarter of 2011. As noted above, we have claims pending in the U.S. COFC or ASBCA to recover withholds by our customer related to these amounts from the U.S. government and we believe it is probable that we will recover such amounts.
In March 2011, the DOJ filed a counterclaim in the U.S. COFC alleging KBR employees accepted bribes from Tamimi in exchange for awarding a master agreement for DFAC services to Tamimi. The DOJ seeks disgorgement of all funds paid to KBR under the master agreement as well as all award fees paid to KBR under the related task orders. We have evaluated the DOJ's counterclaim and believe it to be without merit. Trial in the U.S. COFC took place during the fourth quarter of 2011 and post-trial briefs by KBR and the DoJ were filed. We expect a ruling from the court in the second quarter of 2012.
Transportation costs. In 2007, the DCAA, raised a question about our compliance with the provisions of the Fly America Act. During the first quarter of 2011, we received a Form 1 from the DCAA totaling $6 million for alleged violations of the Fly America Act in 2004. Subject to certain exceptions, the Fly America Act requires Federal employees and others performing U.S. Government-financed foreign air travel to travel by U.S. flag air carriers. There are times when we transported personnel in connection with our services for the U.S. military where we may not have been in compliance with the Fly America Act and its interpretations through the Federal Acquisition Regulations and the Comptroller General. Included in our December 31, 2011 and 2010 accompanying balance sheets, is an accrued estimate of the cost incurred for these potentially non-compliant flights. The DCAA may consider additional flights to be noncompliant resulting in potential larger amounts of disallowed costs than the amount we have accrued. At this time, we cannot estimate a range of reasonably possible losses that may have been incurred, if any, in excess of the amount accrued. We will continue to work with our customer to resolve this matter.
In the first quarter of 2011, we received a Form 1 from the DCAA disapproving certain personnel replacement costs totaling approximately $27 million associated with replacing employees who were deployed in Iraq and Afghanistan for less than 179 days. The DCAA claims these replacement costs violate the terms of the LogCAP III contract which expressly disallow certain costs associated with the contractor rotation of employees who have deployed less than 179 days including costs for transportation, lodging, meals, orientation and various forms of per diem allowances. We disagree with the DCAA's interpretation and application of the contract terms as it was applied to circumstances outside of our control including sickness, death, termination for cause or resignation and that such costs should be allowable. We believe the risk of loss associated with the disallowance of these costs is remote. As of December 31, 2011, we had not accrued any amounts related to this matter.
Construction services. From February 2009 through September 2010, we received eight Form 1's from the DCAA disapproving approximately $25 million in costs related to work performed under our CONCAP III contract with the U.S. Navy to provide emergency construction services primarily to Government facilities damaged by Hurricanes Katrina and Wilma. The DCAA claims the costs billed to the U.S. Navy primarily related to subcontract costs that were either inappropriately bid, included unallowable profit markup or were unreasonable. In April 2010, we met with the U.S. Navy in an attempt to settle the potentially unallowable costs. As a result of the meeting, approximately $7 million of the potentially unallowable costs was agreed to be allowable and approximately $1 million unallowable. Settlement of the remaining disputed amounts is pending a final determination from the contracting officer. KBR intends to file a claim with either the U.S. COFC or ASBCA if the remaining amounts are not approved by the contracting officer. As of December 31, 2011, the U.S. Navy has withheld approximately $9 million from us. We believe we undertook adequate and reasonable steps to ensure that proper bidding procedures were followed and the amounts billed to the customer were reasonable and not in violation of the FAR. As of December 31, 2011, we have accrued our estimate of probable loss related to this matter; however, it is reasonably possible we could incur additional losses.
Investigations, Qui Tams and Litigation
The following matters relate to ongoing litigation or investigations involving U.S. government contracts.
McBride Qui Tam suit. In September 2006, we became aware of a qui tam action filed against us in the U.S. District Court in the District of Columbia by a former employee alleging various wrongdoings in the form of overbillings to our customer on the LogCAP III contract. This case was originally filed pending the government's decision whether or not to participate in the suit. In June 2006, the government formally declined to participate. The principal allegations are that our compensation for the provision of Morale, Welfare and Recreation ("MWR") facilities under LogCAP III is based on the volume of usage of those facilities and that we deliberately overstated that usage. In accordance with the contract, we charged our customer based on actual cost, not based on the number of users. It was also alleged that, during the period from November 2004 into mid-December 2004, we continued to bill the customer for lunches, although the dining facility was closed and not serving lunches. There are also allegations regarding housing containers and our provision of services to our employees and contractors. On July 5, 2007, the court granted our motion to dismiss the qui tam claims and to compel arbitration of employment claims including a claim that the plaintiff was unlawfully discharged. The majority of the plaintiff's claims were dismissed but the plaintiff was allowed to pursue limited claims pending discovery and future motions. Substantially all employment claims were sent to arbitration under the Company's dispute resolution program and were subsequently resolved in our favor. In January 2009, the relator filed an amended complaint which is nearing completion of the discovery process. Trial for this matter has not been scheduled. We believe the relator's claim is without merit and that the likelihood that a loss has been incurred is remote. As of December 31, 2011, no amounts have been accrued.
First Kuwaiti Trading Company arbitration. In April 2008, First Kuwaiti Trading Company, one of our LogCAP III subcontractors, filed for arbitration of a subcontract under which KBR had leased vehicles related to work performed on our LogCAP III contract. The FKTC arbitration is being conducted under the rules of the London Court on International Arbitration and the venue is in the District of Columbia. First Kuwaiti alleged that we did not return or pay rent for many of the vehicles and seeks damages in the amount of $134 million. We filed a counterclaim to recover amounts which may ultimately be determined due to the Government for the $51 million in suspended costs as discussed in the preceding section of this footnote titled "Containers." To date arbitration hearings for four subcontracts have taken place in Washington, D.C. primarily related to claims involving unpaid rents and damages on lost or unreturned vehicles. The arbitration panel has awarded approximately $16 million to FKTC for claims involving unpaid rents and damages on lost or unreturned vehicles, repair costs on certain vehicles, damages suffered as a result of late vehicle returns, and interest thereon, net of maintenance, storage and security costs awarded to KBR. No payments are expected to occur until all claims are arbitrated and awards finalized. Arbitration hearings for the remaining subcontracts are expected to resume in September 2012. We believe any damages ultimately awarded to First Kuwaiti will be billable under the LogCAP III contract. Accordingly, we have accrued amounts payable and a related unbilled receivable for the amounts awarded to First Kuwaiti pursuant to the terms of the contract.
Paul Morell, Inc. d/b/a The Event Source vs. KBR, Inc. TES is a former LogCAP III subcontractor who provided DFAC services at six sites in Iraq from mid-2003 to early 2004. In February 2008, TES sued KBR in Federal Court in Virginia for breach of contract and tortious interference with TES's subcontractors by awarding subsequent DFAC contracts to the subcontractors. In addition, the Government withheld funds from KBR that KBR had submitted for reimbursement of TES invoices, and at that time, TES agreed that it was not entitled to payment until KBR was paid by the Government. Eventually KBR and the Government settled the dispute, and in turn KBR and TES agreed that TES would accept, as payment in full with a release of all other claims, the amount the Government paid to KBR for TES's services. In February 2008, TES filed a suit in the Federal Court in Virginia to overturn that settlement and release, claiming that KBR misrepresented the facts. The trial was completed in June 2009 and in January 2010 the Federal Court issued an order against us in favor of TES in the amount of $15 million in actual damages and interest and $4 million in punitive damages relating to the settlement and release entered into by the parties in May 2005. In February 2010, we filed a notice of appeal with the Federal Fourth Circuit Court of Appeals in Richmond, Virginia and oral arguments took place in September 2011. In November 2011, the Court of Appeals upheld the lower court's decision. As of December 31, 2011, we have recorded un-reimbursable expenses and a liability of $19 million for the full amount of the awarded damages, which was paid to TES in January 2012.
Electrocution litigation. During 2008, a lawsuit was filed against KBR in Pittsburgh, Pennsylvania in the Allegheny County Common Pleas Court alleging that the Company was responsible for an electrical incident which resulted in the death of a soldier. This incident occurred at the Radwaniyah Palace Complex. It is alleged in the suit that the electrocution incident was caused by improper electrical maintenance or other electrical work. KBR denies that its conduct was the cause of the event and denies legal responsibility. The case was removed to Federal Court where motion to dismiss was filed. The court issued a stay in the discovery of the case, pending an appeal of certain pre-trial motions to dismiss that were previously denied. In August 2010, the Court of Appeals dismissed our appeal concluding it did not have jurisdiction. Discovery has been completed and we have re-filed our motions to dismiss which are scheduled to be heard on March 30, 2012. We are not able to determine the likely outcome nor can we estimate a range of potential loss, if any, related to this matter at this time. As of December 31, 2011, no amounts have been accrued.
Burn Pit litigation. From November 2008 through February 2011, KBR was served with over 50 lawsuits in various states alleging exposure to toxic materials resulting from the operation of burn pits in Iraq or Afghanistan in connection with services provided by KBR under the LogCAP III contract. Each lawsuit has multiple named plaintiffs collectively representing approximately 250 individual plaintiffs. The lawsuits primarily allege negligence, willful and wanton conduct, battery, intentional infliction of emotional harm, personal injury and failure to warn of dangerous and toxic exposures which has resulted in alleged illnesses for contractors and soldiers living and working in the bases where the pits are operated. All of the pending cases have been removed to Federal Court, the majority of which have been consolidated for multi-district litigation treatment before the U.S. Federal District Court in Baltimore, Maryland. In March 2010, we filed a motion to strike an amended consolidated petition filed by the plaintiffs which was granted by the Court in September 2010. The Court directed the parties to propose a plan for limited jurisdictional discovery. In December 2010, the Court stayed virtually all proceedings pending a decision from the Fourth Circuit Court of Appeals on three other cases involving the Political Question Doctrine and other jurisdictional issues. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, we cannot at this time accurately predict the ultimate outcome nor can we reliably estimate a range of possible loss, if any, related to this matter at this time. Accordingly, as of December 31, 2011, no amounts have been accrued.
Sodium Dichromate litigation. From December 2008 through September 2009, five cases were filed in various federal district courts against KBR by national guardsman and other military personnel alleging exposure to potentially hazardous chemicals at the Qarmat Ali Water Treatment Plant in Iraq in 2003. The majority of the cases have been re-filed and consolidated into two cases with one pending in Houston, Texas and one pending in the District of Oregon. Collectively, the suit represents approximately 170 individual plaintiffs all of which are current and former national guardsmen who claim they were exposed to sodium dichromate while escorting KBR employees who were working at the water treatment plant and that the defendants knew or should have known that the potentially toxic substance existed and negligently failed to protect the guardsmen from exposure. The U.S. Corps of Engineers ("USACE") was contractually obligated to provide a benign site free of war and environmental hazards before KBR's commencement of work on the site. KBR notified the USACE within two days after discovering the sodium dichromate and took effective measures to remediate the site. KBR services provided to the USACE were under the direction and control of the military and therefore, KBR believes it has adequate defenses to these claims. KBR will also assert Political Question Doctrine and Government Contractor defenses. Additionally, U.S. Government and other studies on the effects of exposure to the sodium dichromate contamination at the water treatment plant have found no long term harm to the soldiers. However, due to the inherent uncertainties of litigation and because the litigation is in the preliminary stages, we cannot accurately predict the ultimate outcome nor can we reliably estimate a range of possible loss, if any, related to this matter. Trials have been scheduled for September 2012 in Houston, Texas and October 2012 for the case in Oregon. As of December 31, 2011, no amounts have been accrued. During the period of time since the first litigation was filed against us, we have incurred legal defense costs that we believe are reimbursable under the related customer contract. We intend to bill for these costs, and if necessary, file claims with either the U.S. COFC or ASBCA to recover the associated revenues recognized to date.
Convoy Ambush Litigation. In April 2004, a fuel convoy in route from Camp Anaconda to Baghdad International Airport for the U.S. Army under our LogCAP III contract was ambushed resulting in deaths and severe injuries to truck drivers hired by KBR. In 2005, survivors of the drivers killed and those that were injured in the convoy, filed suit in state court in Houston, Texas against KBR and several of its affiliates, claiming KBR deliberately intended that the drivers in the convoy would be attacked and wounded or killed. The suit also alleges KBR committed fraud in its hiring practices by failing to disclose the dangers associated with working in the Iraq combat zone. The case was removed to U.S. Federal District Court in Houston, Texas. After numerous motions and rulings in the trial court and appeals to U.S. Fifth Circuit Court of Appeals, in January 2012, the appellate Court granted KBR's appeal on dispositive motions and dismissed the claims of all remaining plaintiffs on the grounds that their claims are banned by the exclusive remedy provisions of the Defense Base Act. Prior to the dismissal of the claims against KBR by the appellate Court, KBR settled the claims of one of the plaintiffs. The remaining plaintiffs have sought a rehearing of the dismissal by the Fifth Circuit. We believe the cost of settling with one of the plaintiffs is reimbursable under the related customer contract. We intend to bill for these costs, and if necessary, file claims with either the U.S. COFC or ASBCA to recover the associated revenues recognized to date.
DOJ False Claims Act complaint. In April 2010, the DOJ filed a complaint in the U.S. District Court in the District of Columbia alleging certain violations of the False Claims Act related to the use of private security firms. The complaint alleges, among other things, that we made false or fraudulent claims for payment under the LogCAP III contract because we allegedly knew that they contained costs of services for or that included improper use of private security. We believe these sums were properly billed under our contract with the Army and that the use of private security was not prohibited under the LogCAP III contract. In June 2010, we filed motions to dismiss the complaint and in October 2010, the DOJ filed a motion for partial summary judgment to which we responded before discovery occurred. In August 2011, the motions of both parties were dismissed and the judge ordered the case to proceed with discovery with trial scheduled for late 2012. We continue to believe this complaint is without merit. We have not adjusted our revenues or accrued any amounts related to this matter.
Other Matters
Claims. Included in receivables in our consolidated balance sheets are unapproved claims for costs incurred under various government contracts totaling $161 million at December 31, 2011 of which $110 million is included in "Accounts receivable" and $51 million is included in "Unbilled receivables on uncompleted contracts." Unapproved claims relate to contracts where our costs have exceeded the customer's funded value of the task order. The $110 million of unapproved claims included in Accounts receivable results primarily from de-obligated funding on certain task orders that were also subject to Form 1's relating to certain DCAA audit issues discussed above. We believe such disputed costs will be resolved in our favor at which time the customer will be required to obligate funds from appropriations for the year in which resolution occurs. The remaining unapproved claims balance of approximately $51 million primarily represents costs for which incremental funding is pending in the normal course of business. The majority of costs in this category are normally funded within several months after the costs are incurred. The unapproved claims outstanding at December 31, 2011 are considered to be probable of collection and have been previously recognized as revenue.
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Note 10. Other Commitments and Contingencies
Foreign Corrupt Practices Act ("FCPA") investigations
In February 2009, KBR LLC, entered a guilty plea to violations of the FCPA in the United States District Court, Southern District of Texas, Houston Division (the "Court"), related to the Bonny Island investigation. KBR LLC pled guilty to one count of conspiring to violate the FCPA and four counts of violating the FCPA, all arising from the intent to bribe various Nigerian government officials through commissions paid to agents working on behalf of TSKJ on the Bonny Island project. The plea agreement reached with the DOJ resolved all criminal charges in the DOJ's investigation and called for the payment of a criminal penalty of $402 million, of which Halliburton was obligated to pay $382 million under the terms of the Master Separation Agreement ("MSA"), while we were obligated to pay $20 million. In addition, we settled a civil enforcement action by the SEC which called for Halliburton and KBR, jointly and severally, to make payments totaling $177 million, all of which was payable by Halliburton pursuant to the indemnification under the MSA. As of December 31, 2010, all criminal and civil penalties to the DOJ and SEC were paid. We also agreed to a period of organizational probation, during which we retained a monitor who assessed our compliance with the plea agreement and evaluated our FCPA compliance program over a three year period that ended on February 17, 2012, with periodic reports to the DOJ and SEC during the three-year period. Pursuant to the plea agreement with the DOJ and the consent judgment with the SEC, the monitor has certified that KBR's current anti-corruption compliance program is appropriately designed and implemented to ensure compliance with the FCPA and other applicable anti-corruption laws.
In addition to the DOJ and SEC investigations, the U.K. Serious Fraud Office ("SFO") conducted an investigation of activities by current and former employees of M.W. Kellogg Limited ("MWKL") regarding the Bonny Island project. During the investigation, MWKL self-reported to the SFO its corporate liability for corruption-related offenses arising out of the Bonny Island project and entered into a plea negotiation process under the "Attorney General's Guidelines on Plea Discussions in Cases of Serious and Complex Fraud" issued by the Attorney General for England and Wales. In February 2011, MWKL reached a settlement with the SFO in which the SFO accepted that MWKL was not party to any unlawful conduct and assessed a civil penalty of approximately $11 million including interest and reimbursement of certain costs of the investigation. The settlement terms included a full release of all claims against MWKL, its current and former parent companies, subsidiaries and other related parties including their respective current or former officers, directors and employees with respect to the Bonny Island project. At December 31, 2010, we recorded a liability to the SFO of $11 million included in "Other current liabilities" in our consolidated balance sheet which was paid during the first quarter of 2011. Due to the indemnity from Halliburton under the MSA, we recognized a receivable from Halliburton of approximately $6 million in "Due to former parent, net" in our consolidated balance sheet which was paid by Halliburton in the second quarter of 2011.
In addition, Halliburton settled corruption allegation claims asserted by the Federal Government of Nigeria in late 2010 against Halliburton, KBR, and TSKJ Nigeria Limited. The settlement provided a complete release to KBR and all of its affiliates and related companies in connection with any liability for matters related to the Bonny Island project in Nigeria.
With the settlement of the DOJ, SEC, SFO and Nigerian investigations, all known investigations in the Bonny Island project have been concluded. We are not aware of any other corruption allegations against us by governmental authorities in foreign jurisdictions.
Commercial Agent Fees
We have both before and after the separation from our former parent used commercial agents on some of our large-scale international projects to assist in understanding customer needs, local content requirements, vendor selection criteria and processes and in communicating information from us regarding our services and pricing. Prior to separation, it was identified by our former parent in performing its investigation of anti-corruption activities that certain of these agents may have engaged in activities that were in violation of anti-corruption laws at that time and the terms of their agent agreements with us. Accordingly, we have ceased the receipt of services from and payment of fees to these agents. Fees for these agents are included in the total estimated cost for these projects at their completion. In connection with actions taken by U.S. Government authorities, we have removed certain unpaid agent fees from the total estimated costs in the period that we obtained sufficient evidence to conclude such agents clearly violated the terms of their contracts with us. In 2009, we reduced project cost estimates by $21 million as a result of making such determinations. In September 2010, we executed a final settlement agreement with one of our agents in question after the agent was reviewed and approved under our policies on business conduct. Under the terms of the settlement agreement, the agent had, among other things, confirmed their understanding of and compliance with KBR's policies on business conduct and represented that they have complied with anti-corruption laws as they relate to prior services provided to KBR. We negotiated final payment for fees to this agent on several projects in our Hydrocarbons segment resulting in an overall reduction of estimated project costs of approximately $60 million in 2010. We released the remaining agent fee accruals in 2011 on the Bonny Island project which resulted in an increase of $4 million to operating income.
Barracuda-Caratinga Project Arbitration
In June 2000, we entered into a contract with Barracuda & Caratinga Leasing Company B.V., the project owner and claimant, to develop the Barracuda and Caratinga crude oilfields, which are located off the coast of Brazil. Petrobras is a contractual representative that controls the project owner. In November 2007, we executed a settlement agreement with the project owner to settle all outstanding project issues except for the bolts arbitration discussed below.
At Petrobras' direction, we replaced certain bolts located on the subsea flowlines that failed through mid-November 2005, and we understand that additional bolts failed thereafter, which were replaced by Petrobras. These failed bolts were identified by Petrobras when it conducted inspections of the bolts. In March 2006, Petrobras notified us they submitted this matter to arbitration claiming $220 million plus interest for the cost of monitoring and replacing the defective stud bolts and, in addition, all of the costs and expenses of the arbitration including the cost of attorneys' fees. The arbitration was conducted in New York under the guidelines of the United Nations Commission on International Trade Law ("UNCITRAL").
In September 2011, the arbitration panel awarded the claimant approximately $193 million. The damages awarded were based on the panel's estimate to replace all subsea bolts, including those that did not manifest breaks, as well as legal and other costs incurred by the claimant in the arbitration and interest thereon since the date of the award. The panel rejected our argument, and the case law relied upon by us, that we were only liable for bolts that were discovered to be broken prior to the expiration of the warranty period that ended on June 30, 2006. As of December 31, 2011, we have recorded a liability of $197 million, including interest, to Petrobras for the failed bolts which is included in "Other current liabilities." The liability incurred by us in connection with the arbitration is covered by an indemnity from our former parent, Halliburton. Accordingly, we have recorded an indemnification receivable from Halliburton of $197 million pursuant to the indemnification under the MSA which is included in "Other current assets" as of December 31, 2011. The arbitration award payable to Petrobras will be deductible for tax purposes when paid. The indemnification payment will be treated by KBR for tax purposes as a contribution to capital and accordingly is not taxable. Consequently, the arbitration ruling resulted in a tax benefit during 2011 of $69 million. Halliburton has directed us to challenge the arbitration award as being defective or outside the jurisdiction of the arbitration panel. This challenge was filed in the United States District Court for the Southern District of New York on December 16, 2011. We will continue to be responsible for all ongoing legal costs associated with this matter. If the challenge to the arbitration award is successful and the award payable to Petrobras is either reduced or reversed in a future period, we would reverse the related tax benefit previously recognized as a charge to income as tax expense in that period. As of December 31, 2011, we do not believe there are any legal limitations on our ability to recover the full amount of the cash arbitration award and we intend to assert our rights under the indemnity agreement with Halliburton.
FAO Litigation
In April 2001, our subsidiary, MWKL, entered into lump-sum contracts with Fina Antwerp Olefins (FAO), a joint venture between ExxonMobil and Total, to perform EPC services for FAO's revamp and expansion of an existing olefins plant in Belgium. The contracts had an initial value of approximately 113 million. Upon execution of the contracts, MWKL was confronted with a multitude of changes and issues on the project resulting in significant cost overruns and schedule delays. The project was completed in October 2003. In 2005, after unsuccessful attempts to engage FAO in negotiations to settle MWKL's outstanding claims, MWKL filed suit against FAO in the Commercial Court of Antwerp, Belgium, seeking to recover amounts for rejected change requests, disruption, schedule delays and other items. MWKL sought the appointment of a court expert to determine the technical aspects of the disputes between the parties upon which the judge could rely for allocating liability and determining the final amount of MWKL's claim against FAO. FAO filed a counterclaim in 2006 claiming recovery of additional costs for various matters including, among others, project management, temporary offices, security, financing costs, deficient work items and disruption of activities some of which we believe is either barred by the language in the contract or has not been adequately supported. Although the court expert has issued several preliminary reports which support our claim receivable, a final report has yet to be issued that addresses the full value of KBR's claims. We currently expect the court expert to release a final report in June 2012. We do not believe we face a risk of significant loss associated with the value of the claim receivable recorded on our balance sheets or FAO's counterclaims. As of December 31, 2011, no amounts have been accrued related to the counterclaim.
Environmental
We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation, and Liability Act; the Resources Conservation and Recovery Act; the Clean Air Act; the Federal Water Pollution Control Act; and the Toxic Substances Control Act. In addition to 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 segments 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 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, we have accrued approximately $7 million for the assessment and remediation costs associated with all environmental matters, which represents the low end of the range of estimated possible costs that could be as much as $11 million.
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.
Leases
We are obligated under operating leases, principally for the use of land, offices, equipment, field facilities, and warehouses. We recognize minimum rental expenses over the term of the lease. When a lease contains a fixed escalation of the minimum rent or rent holidays, we recognize the related rent expense on a straight-line basis over the lease term and record the difference between the recognized rental expense and the amounts payable under the lease as deferred lease credits. We have certain leases for office space where we receive allowances for leasehold improvements. We capitalize these leasehold improvements as property, plant, and equipment and deferred lease credits. Leasehold improvements are amortized over the shorter of their economic useful lives or the lease term. Total rent expense was $145 million, $165 million, and $233 million in 2011, 2010, and 2009, respectively. Future total rental payments on noncancelable operating leases are as follows:
Millions of dollars |
Future rental payments |
|||
2012 |
$ | 76 | ||
2013 |
$ | 70 | ||
2014 |
$ | 64 | ||
2015 |
$ | 61 | ||
2016 |
$ | 57 | ||
Beyond 2016 |
$ | 470 | ||
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Eldridge Park I Building Lease. On September 30, 2010, we executed a lease agreement for office space located in Houston, Texas for the purpose of expanding our leased office space. The non-cancelable lease term expires on December 31, 2018. The lease term includes a rent holiday from the beginning of the lease through December 31, 2011; and a total combined leasehold improvement allowance of $4 million. Annual base rent, excluding termination fees, based on currently planned occupancy ranges from $1.6 million to $1.8 million.
In February 2010, we executed two lease amendments for office space located in two separate office buildings in Houston, Texas for the purpose of significantly expanding our current leased office space and to extend the original term of the leases to June 30, 2030. These amendments did not change our historical accounting for these agreements as operating leases. The essential provisions of the lease amendments are as follows:
601 Jefferson Building Lease. The lease amendment extends the original term of the lease to June 30, 2030 and includes renewal options for three consecutive additional periods from 5 to 10 years each at prevailing market rates. Annual base rent for the leased office space escalates ratably over the lease term from $9 million to $14 million. The lease amendment includes a leasehold improvement allowance of $29 million primarily for the construction of leasehold improvements. The lease may be terminated by KBR under a one-time option in March 2022 for all, or a portion, of the leased premises subject to a termination fee. The 601 Jefferson building is owned by a joint venture in which KBR owns 50% interest with an unrelated party owning the remaining 50% interest. The joint venture is funding the leasehold improvement allowance through joint venture partner capital contributions from each partner on a pro-rata basis.
500 Jefferson Building Lease. The lease amendment extends the original term of the lease to June 30, 2030 and includes renewal options for three consecutive additional periods from 5 to 10 years each at prevailing market rates. The lease terms include a rent holiday for the first six months of the lease beginning July 1, 2010. Annual base rent for the leased office space escalates ratably over the lease term from $2 million to $3 million. The lease amendment includes a leasehold improvement allowance of $6 million primarily for the construction of leasehold improvements. The lease may be terminated under a one-time option in March 2022 for all, or a portion, of the leased premises subject to a termination fee.
Other
We had commitments to provide funds to our privately financed projects of $17 million as of December 31, 2011 and $33 million as of December 31, 2010. Commitments to fund these projects are supported by letters of credit as discussed in Note 8. At December 31, 2011, all $17 million in commitments will become due within one year.
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Note 11. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Current income taxes: |
||||||||||||
Federal |
$ | 19 | $ | 56 | $ | (3 | ) | |||||
Foreign |
183 | 118 | 99 | |||||||||
State |
3 | 3 | 7 | |||||||||
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|
|
|
|||||||
Total current |
205 | 177 | 103 | |||||||||
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|
|
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Deferred income taxes: |
||||||||||||
Federal |
(110 | ) | 15 | (39 | ) | |||||||
Foreign |
(62 | ) | (1 | ) | 105 | |||||||
State |
(1 | ) | — | (1 | ) | |||||||
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|||||||
Total deferred |
(173 | ) | 14 | 65 | ||||||||
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|
|
|||||||
Provision for income taxes |
$ | 32 | $ | 191 | $ | 168 | ||||||
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|
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The United States and foreign components of income from continuing operations before income taxes and noncontrolling interests were as follows:
Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
United States |
$ | 12 | $ | 105 | $ | (128 | ) | |||||
Foreign |
560 | 481 | 660 | |||||||||
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|
|
|
|
|
|||||||
Total |
$ | 572 | $ | 586 | $ | 532 | ||||||
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The reconciliations between the actual provision for income taxes on continuing operations and that computed by applying the United States statutory rate to income from continuing operations before income taxes and noncontrolling interests are as follows:
Years ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
U.S. statutory federal rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Rate differentials on foreign earnings |
(3.8 | ) | (2.9 | ) | (2.3 | ) | ||||||
Non-deductible expenses |
— | — | 0.4 | |||||||||
State and local income taxes |
0.4 | 0.2 | 0.9 | |||||||||
Prior year foreign, federal and state taxes |
(6.0 | ) | 2.1 | (1.0 | ) | |||||||
Barracuda arbitration award indemnification |
(12.1 | ) | — | — | ||||||||
Australian joint venture |
(5.6 | ) | — | — | ||||||||
Valuation allowance |
(1.4 | ) | 0.2 | 1.7 | ||||||||
Taxes on unincorporated joint ventures |
(1.8 | ) | (2.6 | ) | (2.0 | ) | ||||||
Other permanent items, net |
0.9 | 0.6 | (1.2 | ) | ||||||||
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|
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Total effective tax rate on pretax earnings |
5.6 | % | 32.6 | % | 31.5 | % | ||||||
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We generally do not provide U.S. federal and state income taxes on the accumulated but undistributed earnings of non-United States subsidiaries except for certain entities in Mexico and certain other joint ventures. Taxes are provided as necessary with respect to earnings that are considered not permanently reinvested. For all other non-U.S. subsidiaries, no U.S. taxes are provided because such earnings are intended to be reinvested indefinitely to finance foreign activities. These accumulated but undistributed foreign earnings could be subject to additional tax if remitted, or deemed remitted, as a dividend. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, the potential foreign tax credit associated with the deferred income would be available to reduce the resulting U.S. tax liabilities.
KBR is subject to a tax sharing agreement primarily covering periods prior to the April 2007 separation from Halliburton. The tax sharing agreement provides, in part, that KBR will be responsible for any audit settlements directly attributable to its business activity for periods prior to its separation from Halliburton. As of December 31, 2011, we have recorded a $45 million payable to Halliburton for tax related items under the tax sharing agreement. See Note 16 for further discussion related to our transactions with Halliburton.
The primary components of our deferred tax assets and liabilities and the related valuation allowances are as follows:
Years ended December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Gross deferred tax assets: |
||||||||
Depreciation and amortization |
$ | 7 | $ | 11 | ||||
Employee compensation and benefits |
183 | 159 | ||||||
Construction contract accounting |
131 | 109 | ||||||
Loss carryforwards |
49 | 63 | ||||||
Insurance accruals |
29 | 30 | ||||||
Allowance for bad debt |
11 | 11 | ||||||
Accrued liabilities |
48 | 23 | ||||||
Barracuda arbitration award indemnification |
71 | — | ||||||
Other |
29 | 4 | ||||||
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|
|
|
|||||
Total |
$ | 558 | $ | 410 | ||||
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|
|
|
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Gross deferred tax liabilities: |
||||||||
Construction contract accounting |
$ | (92 | ) | $ | (104 | ) | ||
Intangibles |
(40 | ) | (39 | ) | ||||
Depreciation and amortization |
(27 | ) | (16 | ) | ||||
Deferred foreign tax credit carryforward |
(11 | ) | (8 | ) | ||||
Other |
(37 | ) | (95 | ) | ||||
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|
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Total |
$ | (207 | ) | $ | (262 | ) | ||
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|
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Valuation Allowances: |
||||||||
Loss carryforwards |
(25 | ) | (32 | ) | ||||
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|
|
|
|||||
Net deferred income tax asset |
$ | 326 | $ | 116 | ||||
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At December 31, 2011, we had foreign net operating loss carryforwards of approximately $150 million of which $79 million will expire by 2021and $71 million can be carried forward indefinitely.
For the year ended December 31, 2011, our valuation allowance decreased from $32 million to $25 million primarily as a result of changes in our estimate of the amount of our net operating losses in certain foreign locations that expired during the year or that we do not believe we will be able to utilize.
KBR is the parent of a group of domestic companies that are members of a U.S. consolidated federal income tax return. We also file income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to examination by tax authorities for U.S. federal or state and local income tax for years before 2006, or for non-U.S. income tax for years before 1998.
We account for uncertain tax positions in accordance with guidance in FASB ASC 740 which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. A reconciliation of the beginning and ending amount of uncertain tax positions is as follows:
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Balance at January 1 |
$ | 95 | $ | 41 | $ | 22 | ||||||
Increases in tax positions for current year |
37 | 64 | — | |||||||||
Increases in tax positions for prior years |
11 | — | 24 | |||||||||
Decreases in tax positions for prior year |
(5 | ) | (9 | ) | (3 | ) | ||||||
Reductions in tax positions for audit settlements |
(7 | ) | — | (2 | ) | |||||||
Reductions in tax positions for statute expirations |
(11 | ) | — | — | ||||||||
Other |
— | (1 | ) | — | ||||||||
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|
|
|
|
|
|||||||
Balance at December 31 |
$ | 120 | $ | 95 | $ | 41 | ||||||
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The total amount of uncertain tax positions that, if recognized, would affect our effective tax rate was approximately $105 million as of December 31, 2011. The difference between this amount and the amounts reflected in the tabular reconciliation above relates primarily to deferred U.S. federal and non-U.S. income tax benefits on uncertain tax positions related to U.S. federal and non-U.S. income taxes. In the next twelve months, it is reasonably possible that our uncertain tax positions could change by approximately $33 million due to the expirations of the statute of limitations.
We recognize interest and penalties related to uncertain tax positions within the provision for income taxes in our consolidated statement of income. As of December 31, 2011 and 2010, we had accrued approximately $20 million and $23 million, respectively, in interest and penalties. During the year ended December 31, 2011, 2010 and 2009, we recognized approximately $4 million, $10 million and $1 million, respectively in net interest and penalties charges related to uncertain tax positions.
As of December 31, 2011, the uncertain tax positions and accrued interest and penalties were not expected to be settled within one year and therefore are classified in noncurrent income tax payable. Increases in tax positions for 2011 includes approximately $31 million related to balance sheet reclassifications from tax-related liability accounts and therefore did not have an impact on the effective tax rate in 2011. The remaining $6 million of increase in 2011 relates primarily to uncertain tax positions that were not previously accrued and, consequently, had an unfavorable impact on our effective tax rate in 2011.
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Note 13. Stock-based Compensation and Incentive Plans
Stock Plans
In 2011, 2010, and 2009 stock-based compensation awards were granted to employees under KBR stock-based compensation plans.
KBR 2006 Stock and Incentive Plan
In November 2006, KBR established the KBR 2006 Stock and Incentive Plan (KBR 2006 Plan) which provides for the grant of any or all of the following types of stock-based awards:
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stock options, including incentive stock options and nonqualified stock options; |
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stock appreciation rights, in tandem with stock options or freestanding; |
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restricted stock; |
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restricted stock units; |
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cash performance awards; and |
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stock value equivalent awards. |
Under the terms of the KBR 2006 Plan, 10 million shares of common stock have been reserved for issuance to employees and non-employee directors. The plan specifies that no more than 3.5 million shares can be awarded as restricted stock or restricted stock units or pursuant to cash performance awards. At December 31, 2011, approximately 4.2 million shares were available for future grants under the KBR 2006 Plan, of which approximately 0.8 million shares remained available for restricted stock awards or restricted stock unit awards.
KBR Stock Options
Under KBR's 2006 Plan, effective as of the closing date of the KBR initial public offering, stock options are granted with an exercise price not less than the fair market value of the common stock on the date of the grant and a term no greater than 10 years. The term and vesting periods are established at the discretion of the Compensation Committee at the time of each grant. We amortize the fair value of the stock options over the vesting period on a straight-line basis. Options are granted from shares authorized by our board of directors. Total number of stock options granted and the assumptions used to determine the fair value of granted options were as follows:
Years ended December 31, | ||||||||
KBR stock options assumptions summary |
2011 | 2010 | ||||||
Granted stock options (millions of shares) |
0.6 | 0.8 | ||||||
Weighted average expected term (in years) |
6.2 | 6.5 | ||||||
Weighted average grant-date fair value per share |
$ | 16.78 | $ | 9.49 |
Years ended December 31, | ||||||||||||||||
KBR stock options range assumptions summary |
2011 | 2010 | ||||||||||||||
Range | Range | |||||||||||||||
Start | End | Start | End | |||||||||||||
Expected volatility range |
44.01 | % | 53.17 | % | 44.91 | % | 48.03 | % | ||||||||
Expected dividend yield range |
0.52 | % | 0.79 | % | 0.74 | % | 0.95 | % | ||||||||
Risk-free interest rate range |
1.22 | % | 2.76 | % | 1.76 | % | 2.84 | % |
For KBR stock options granted in 2011, 2010 and 2009, the fair value of options at the date of grant was estimated using the Black-Scholes-Merton option pricing model. The expected volatility of KBR options granted in each year is based upon a blended rate that uses the historical and implied volatility of common stock for KBR and selected peers. The expected term of KBR options granted in each year is based upon the average of the life of the option and the vesting period of the option. The simplified estimate of expected term is utilized as we lack sufficient history to estimate an expected term for KBR options. The estimated dividend yield is based upon KBR's annualized dividend rate divided by the market price of KBR's stock on the option grant date. The risk-free interest rate is based upon the yield of US government issued treasury bills or notes on the option grant date.
The following table presents stock options granted, exercised, forfeited and expired under KBR stock-based compensation plans for the year ended December 31, 2011.
KBR stock options activity summary |
Number of Shares |
Weighted Average Exercise Price per Share |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (in millions) |
||||||||||||
Outstanding at December 31, 2010 |
2,948,646 | $ | 15.29 | 6.84 | $ | 44.77 | ||||||||||
Granted |
641,914 | 36.26 | ||||||||||||||
Exercised |
(517,974 | ) | 14.12 | |||||||||||||
Forfeited |
(129,488 | ) | 23.91 | |||||||||||||
Expired |
(42,899 | ) | 15.65 | |||||||||||||
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Outstanding at December 31, 2011 |
2,900,199 | $ | 19.75 | 6.75 | $ | 28.58 | ||||||||||
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Exercisable at December 31, 2011 |
1,538,278 | $ | 14.62 | 5.26 | $ | 20.38 | ||||||||||
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The total intrinsic values of options exercised for the years ended December 31, 2011, 2010, and 2009 were $10 million, $4 million, and $1 million, respectively. As of December 31, 2011, there was $10 million of unrecognized compensation cost, net of estimated forfeitures, related to non-vested KBR stock options, expected to be recognized over a weighted average period of approximately 1.92 years. Stock option compensation expense was $7 million in 2011, $5 million in 2010, and $4 million in 2009. Total income tax benefit recognized in net income for stock-based compensation arrangements was $2 million in 2011 and 2010, and $1 million in 2009.
KBR Restricted stock
Restricted shares issued under the KBR's 2006 Plan are restricted as to sale or disposition. These restrictions lapse periodically over an extended period of time not exceeding 10 years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value of the stock on the date of grant is amortized and ratably charged to income over the period during which the restrictions lapse on a straight-line basis. For awards with performance conditions, an evaluation is made each quarter as to the likelihood of the performance criteria being met. Stock-based compensation is then adjusted to reflect the number of shares expected to vest and the cumulative vesting period met to date.
The following table presents the restricted stock awards and restricted stock units granted, vested, and forfeited during 2011 under KBR's 2006 Stock and Incentive Plan.
Restricted stock activity summary |
Number of Shares |
Weighted Average Grant-Date Fair Value per Share |
||||||
Nonvested shares at December 31, 2010 |
1,137,443 | $ | 21.13 | |||||
Granted |
274,948 | 35.16 | ||||||
Vested |
(492,473 | ) | 21.94 | |||||
Forfeited |
(86,420 | ) | 24.23 | |||||
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|
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Nonvested shares at December 31, 2011 |
833,498 | $ | 24.95 | |||||
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The weighted average grant-date fair value per share of restricted KBR shares granted to employees during 2011, 2010, and 2009 were $35.16, $21.28, and $12.34, respectively. Restricted stock compensation expense was $12 million for 2011 and 2010, and $13 million for 2009. Total income tax benefit recognized in net income for stock-based compensation arrangements was $4 million in 2011 and 2010, and $5 million in 2009. As of December 31, 2011, there was $15 million of unrecognized compensation cost, net of estimated forfeitures, related to KBR's nonvested restricted stock and restricted stock units, which is expected to be recognized over a weighted average period of 2.9 years. The total fair value of shares vested was $16 million in 2011, $13 million in 2010, and $12 million in 2009 based on the weighted-average fair value on the vesting date. The total fair value of shares vested was $11 million in 2011, $12 million in 2010, and $15 million in 2009 based on the weighted-average fair value on the date of grant.
KBR Cash Performance Based Award Units ("Cash Performance Awards")
Under KBR's 2006 Plan, for Cash Performance Awards granted in the year 2011 performance is based 100% on average Total Shareholder Return ("TSR"), as compared to the average TSR of KBR's peers. For Cash Performance Awards granted in the year 2010, performance is based 75% on average Total Shareholder Return ("TSR"), as compared to the average TSR of KBR's peers, and 25% on KBR's Return on Capital ("ROC"). For awards granted in the year 2009, performance is based 50% on cumulative TSR, as compared to our peer group and 50% on KBR's ROC. The cash performance award units may only be paid in cash. In accordance with the provisions of FASB ASC 718-10, the TSR portion of the performance award units are classified as liability awards and remeasured at the end of each reporting period at fair value until settlement. The fair value approach uses the Monte Carlo valuation method which analyzes the companies comprising KBR's peer group, considering volatility, interest rate, stock beta and TSR through the grant date. The ROC calculation is based on the company's weighted average net income from continuing operations plus (interest expense x (1-effective tax rate)), divided by average monthly capital from continuing operations. The ROC portion of the Cash Performance Award is also classified as a liability award and remeasured at the end of each reporting period based on our estimate of the amount to be paid at the end of the vesting period.
Under KBR's 2006 Plan, in 2011, we granted 28.0 million performance based award units ("Cash Performance Awards") with a three-year performance period from January 1, 2011 to December 31, 2013. In 2010, we granted 25.2 million Cash Performance Awards with a three-year performance period from January 1, 2010 to December 31, 2012. In 2009 we granted 20.4 million Cash Performance Awards with a performance period from January 1, 2009 to December 31, 2011. Cash Performance Awards forfeited totaled approximately 6 million in 2011 and in 2010, and 4 million in 2009. At December 31, 2011, the outstanding balance for Cash Performance Award units was 61.6 million. No Cash Performance Awards will vest until such earned Cash Performance Awards, if any, are paid, subject to approval of the performance results by the certification committee.
Cost for the Cash Performance Awards is accrued over the requisite service period. For the years ended December 31, 2011, 2010, and 2009, we recognized $34 million, $26 million, and $30 million, respectively, in expense for the Cash Performance Awards. The expense associated with these options is included in cost of services and general and administrative expense in our consolidated statements of income. The liability for awards included in "Employee compensation and benefits" on the consolidated balance sheet were $52 million at December 31, 2011 of which $22 million will become due within one year, and $48 million at December 31, 2010.
KBR Employee Stock Purchase Plan ("ESPP")
Under the KBR ESPP, eligible employees may withhold up to 10% of their earnings, subject to some limitations, to purchase shares of KBR's common stock. Unless KBR's Board of Directors shall determine otherwise, each six-month offering period commences at the beginning of February and August of each year. Employees who participate in the ESPP will receive a 5% discount on the stock price at the end of each six-month purchase period. During 2011 and 2010, our employees purchased approximately 105,000 and 169,000 shares, respectively, through the KBR ESPP. These shares were reissued from our treasury share account.
Stock-based compensation
The grant-date fair value of employee share options is estimated using option-pricing models. If an award is modified after the grant date, incremental compensation cost is recognized immediately before the modification. The benefits of tax deductions in excess of the compensation cost recognized for the options (excess tax benefits) are classified as additional paid-in-capital, and cash retained as a result of these excess tax benefits is presented in the statement of cash flows as financing cash inflows.
Stock-based compensation summary table | Years ended December 31 | |||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Stock-based compensation |
$ | 19 | $ | 17 | $ | 17 | ||||||
Total income tax benefit recognized in net income for stock-based compensation arrangements |
$ | 6 | $ | 6 | $ | 6 | ||||||
Incremental compensation cost |
$ | 1 | $ | 2 | $ | 1 | ||||||
Tax benefit increase (decrease) related to stock-based plans |
$ | 3 | $ | — | $ | (7 | ) |
Incremental compensation cost resulted from modifications of previously granted stock-based awards which allowed certain employees to retain their awards after leaving the company. Excess tax benefits realized from the exercise of stock-based compensation awards has been recognized as paid-in capital in excess of par.
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Note 14. Financial Instruments and Risk Management
Foreign currency risk. Techniques in managing foreign currency risk include, but are not limited to, foreign currency investing and the use of currency derivative instruments. We selectively manage significant exposures to potential foreign exchange losses considering current market conditions, future operating activities and the associated cost in relation to the perceived risk of loss. The purpose of our foreign currency risk management activities is to protect us from the risk that the eventual U.S. dollar cash flow resulting from the sale and purchase of products and services in foreign currencies will be adversely affected by changes in exchange rates.
We manage our foreign currency exposure through the use of currency derivative instruments as it relates to the major currencies, which are generally the currencies of the countries in which we do the majority of our international business. These contracts generally have an expiration date of two years or less. Forward exchange contracts, which are commitments to buy or sell a specified amount of a foreign currency at a specified price and time, are generally used to manage identifiable foreign currency commitments. Forward exchange contracts and foreign exchange option contracts, which convey the right, but not the obligation, to sell or buy a specified amount of foreign currency at a specified price, are generally used to manage exposures related to assets and liabilities denominated in a foreign currency. None of the forward or option contracts are exchange traded. While derivative instruments are subject to fluctuations in value, the fluctuations are generally offset by the value of the underlying exposures being managed. The use of some contracts may limit our ability to benefit from favorable fluctuations in foreign exchange rates.
Foreign currency contracts are not utilized to manage exposures in some currencies due primarily to the lack of available markets or cost considerations (non-traded currencies). We attempt to manage our working capital position to minimize foreign currency commitments in non-traded currencies and recognize that pricing for the services and products offered in these countries should cover the cost of exchange rate devaluations. We have historically incurred transaction losses in non-traded currencies.
Assets, liabilities and forecasted cash flow denominated in foreign currencies. We utilize the derivative instruments described above to manage the foreign currency exposures related to specific assets and liabilities, that are denominated in foreign currencies; however, we have not elected to account for these instruments as hedges for accounting purposes. Additionally, we utilize the derivative instruments described above to manage forecasted cash flow denominated in foreign currencies generally related to long-term engineering and construction projects. Since 2003, we have designated these contracts related to engineering and construction projects as cash flow hedges. The ineffective portion of these hedges is included in operating income in the accompanying consolidated statements of income. During 2011, 2010 and 2009 no hedge ineffectiveness was recognized. Unrealized gains and losses include amounts attributable to cash flow hedges placed by our consolidated and unconsolidated subsidiaries and are included in other comprehensive income in the accompanying consolidated balance sheets. We had $0 in unrealized net gains or losses, $2 million in unrealized net gains, and $1 million in unrealized net losses on these cash flow hedges as of December 31, 2011, 2010 and 2009, respectively. Changes in the timing or amount of the future cash flow being hedged could result in hedges becoming ineffective and, as a result, the amount of unrealized gain or loss associated with that hedge would be reclassified from other comprehensive income into earnings. At December 31, 2011, the maximum length of time over which we are hedging our exposure to the variability in future cash flow associated with foreign currency forecasted transactions is 46 months.
Notional amounts and fair market values. The notional amounts of open forward contracts and options held by our consolidated subsidiaries were $352 million, $403 million, and $406 million at December 31, 2011, 2010, and 2009, respectively. The notional amounts of our foreign exchange contracts do not generally represent amounts exchanged by the parties, and thus, are not a measure of our exposure or of the cash requirements relating to these contracts. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as exchange rates. These contract assets had a fair value of $5 million and $6 million at December 31, 2011 and 2010, respectively.
Credit risk. Financial instruments that potentially subject us to concentrations of credit risk are primarily cash equivalents, investments and trade receivables. It is our practice to place our cash equivalents in time deposits and high-quality securities with various banks, financial institutions and investment managers. We derive the majority of our revenues from engineering and construction services to the energy industry and services provided to the United States government. There are concentrations of receivables in the United States and the United Kingdom. We maintain an allowance for losses based upon the expected collectability of all trade accounts receivable.
There are no significant concentrations of credit risk with any individual counterparty related to our derivative contracts. We select counterparties based on their profitability, balance sheet and a capacity for timely payment of financial commitments which is unlikely to be adversely affected by foreseeable events.
Interest rate risk. Certain of our unconsolidated subsidiaries and joint-ventures are exposed to interest rate risk through their variable rate borrowings. This variable-rate exposure is managed with interest rate swaps. We had unrealized net losses on the interest rate swaps held by our unconsolidated subsidiaries and joint-ventures of approximately $4 million, $5 million, and $4 million as of December 31, 2011, 2010, and 2009, respectively.
Fair market value of financial instruments. The carrying amount of variable rate long-term debt approximates fair market value because these instruments reflect market changes to interest rates. The carrying amount of short-term financial instruments, cash and equivalents, receivables, and accounts payable, as reflected in the consolidated balance sheets, approximates fair market value due to the short maturities of these instruments. The currency derivative instruments are carried on the balance sheet at fair value and are based upon third party quotes.
FASB ASC 820-10 addresses fair value measurements and disclosures, defining fair value, establishing a framework for using fair value to measure assets and liabilities, and expanding disclosures about fair value measurements. This standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. ASC 820-10 establishes a three-tier value hierarchy, categorizing the inputs used to measure fair value. The hierarchy can be described as follows:
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Level 1 – Observable inputs such as unadjusted quoted prices for identical assets or liabilities in active markets. |
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Level 2 – Inputs other than the quoted prices in active markets that are observable either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices that are in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
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Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
The financial assets and liabilities measured at fair value on a recurring basis are included below:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Millions of dollars |
Total at December 31, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Marketable securities |
$ | 17 | $ | 11 | $ | 6 | $ | — | ||||||||
Derivative assets |
$ | 7 | $ | — | $ | 7 | $ | — | ||||||||
Derivative liabilities |
$ | 2 | $ | — | $ | 2 | $ | — |
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Note 15. Equity Method Investments and Variable Interest Entities
We conduct some of our operations through joint ventures which are in partnership, corporate, undivided interest and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are also variable interest entities which are further described under "Variable Interest Entities". The following is a description of our significant investments accounted for on the equity method of accounting that are not variable interest entities.
Equity Method Investments
Brown & Root Condor Spa ("BRC"). BRC is a joint venture in which we owned 49% interest. During the third quarter of 2007, we sold our 49% interest and other rights in BRC to Sonatrach for approximately $24 million resulting in a pre-tax gain of approximately $18 million which was included in "Equity in earnings (losses) of unconsolidated affiliates" on the consolidated statements of income. In the fourth quarter of 2008, we filed for arbitration with the ICC in Paris, France in an attempt to force collection. A final arbitration hearing occurred in January 2011 and in May 2011, we received a favorable arbitration award which approximates our outstanding accounts receivable balance. In 2011, we collected the remaining $18 million due from Sonatrach for the sale of our interest in BRC.
MMM. MMM is a joint venture formed under a Partners Agreement related to the Mexico contract with PEMEX. The MMM joint venture was set up under Mexican maritime law in order to hold navigation permits to operate in Mexican waters. The scope of the business is to render services for maintenance, repair and restoration of offshore oil and gas platforms and provisions of quartering in the territorial waters of Mexico. KBR holds a 50% interest in the MMM joint venture.
Consolidated summarized financial information for all jointly owned operations including variable interest entities that are accounted for using the equity method of accounting is as follows:
Balance Sheets
December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Current assets |
$ | 2,151 | $ | 2,694 | ||||
Noncurrent assets |
3,828 | 3,949 | ||||||
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Total assets |
$ | 5,979 | $ | 6,643 | ||||
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Current liabilities |
$ | 1,111 | $ | 1,658 | ||||
Noncurrent liabilities |
4,468 | 4,541 | ||||||
Member's equity |
400 | 444 | ||||||
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Total liabilities and member's equity |
$ | 5,979 | $ | 6,643 | ||||
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Statements of Operations
Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Revenue |
$ | 2,638 | $ | 2,497 | $ | 2,535 | ||||||
Operating income |
$ | 666 | $ | 617 | $ | 221 | ||||||
Net income |
$ | 314 | $ | 334 | $ | 63 | ||||||
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Unconsolidated VIEs
The following is a summary of the significant variable interest entities in which we have a significant variable interest, but we are not the primary beneficiary:
Year ended December 31, 2011 | ||||||||||||
Unconsolidated VIEs (in millions, except for percentages) |
VIE Total assets | VIE Total liabilities | Maximum exposure to loss |
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U.K. Road projects |
$ | 1,393 | $ | 1,520 | $ | 30 | ||||||
Fermoy Road project |
$ | 228 | $ | 249 | $ | 2 | ||||||
Allenby & Connaught project |
$ | 2,954 | $ | 2,916 | $ | 37 | ||||||
EBIC Ammonia project |
$ | 693 | $ | 389 | $ | 40 | ||||||
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Unconsolidated VIEs (in millions, except for percentages) |
Year ended December 31, 2010 | |||||||
VIE Total assets | VIE Total liabilities | |||||||
U.K. Road projects |
$ | 1,506 | $ | 1,531 | ||||
Fermoy Road project |
$ | 240 | $ | 269 | ||||
Allenby & Connaught project |
$ | 2,913 | $ | 2,885 | ||||
EBIC Ammonia project |
$ | 604 | $ | 388 | ||||
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U.K. Road projects. We are involved in four privately financed projects, executed through joint ventures, to design, build, operate, and maintain roadways for certain government agencies in the United Kingdom. We have a 25% ownership interest in each of these joint ventures and account for them using the equity method of accounting. The joint ventures have obtained financing through third parties that is nonrecourse to the joint venture partners. These joint ventures are variable interest entities; however, we are not the primary beneficiary of these joint ventures. Our maximum exposure to loss represents our equity investments in these ventures.
Fermoy Road project. We participate in a privately financed project executed through certain joint ventures formed to design, build, operate, and maintain a toll road in southern Ireland. The joint ventures were funded through debt and were formed with minimal equity. These joint ventures are variable interest entities; however, we are not the primary beneficiary of the joint ventures. We have up to a 25% ownership interest in the project's joint ventures, and we are accounting for these interests using the equity method of accounting.
Allenby & Connaught project. In April 2006, Aspire Defence, a joint venture between us, Carillion Plc. and two financial investors, was awarded a privately financed project contract, the Allenby & Connaught project, by the U.K. MoD to upgrade and provide a range of services to the British Army's garrisons at Aldershot and around Salisbury Plain in the United Kingdom. In addition to a package of ongoing services to be delivered over 35 years, the project includes a nine-year construction program to improve soldiers' single living, technical and administrative accommodations, along with leisure and recreational facilities. Aspire Defence manages the existing properties and is responsible for design, refurbishment, construction and integration of new and modernized facilities. We indirectly own a 45% interest in Aspire Defence, the project company that is the holder of the 35-year concession contract. In addition, we own a 50% interest in each of two joint ventures that provide the construction and the related support services to Aspire Defence. As of December 31, 2011, our performance through the construction phase is supported by $57 million in letters of credit. Furthermore, our financial and performance guarantees are joint and several, subject to certain limitations, with our joint venture partners. The project is funded through equity and subordinated debt provided by the project sponsors and the issuance of publicly held senior bonds which are nonrecourse to us. The entities we hold an interest in are variable interest entities; however, we are not the primary beneficiary of these entities. We account for our interests in each of the entities using the equity method of accounting. Our maximum exposure to construction and operating joint venture losses is limited to the funding of any future losses incurred by those entities under their respective contracts with the project company. As of December 31, 2011, our assets and
liabilities associated with our investment in this project, within our consolidated balance sheet, were $22 million and $2 million, respectively. The $35 million difference between our recorded liabilities and aggregate maximum exposure to loss was primarily related to our equity investments and $17 million remaining commitment to fund subordinated debt to the project in the future.
EBIC Ammonia project. We have an investment in a development corporation that has an indirect interest in the Egypt Basic Industries Corporation ("EBIC") ammonia plant project located in Egypt. We performed the engineering, procurement and construction ("EPC") work for the project and continue to provide operations and maintenance services for the facility. We own 65% of this development corporation and consolidate it for financial reporting purposes. The development corporation owns a 25% ownership interest in a company that consolidates the ammonia plant which is considered a variable interest entity. The development corporation accounts for its investment in the company using the equity method of accounting. The variable interest entity is funded through debt and equity. Indebtedness of EBIC under its debt agreement is non-recourse to us. We are not the primary beneficiary of the variable interest entity. As of December 31, 2011, our assets and liabilities associated with our investment in this project, within our consolidated balance sheet, were $60 million and $17 million, respectively. The $22 million difference between our recorded liabilities and aggregate maximum exposure to loss was related to our investment balance and other receivables in the project as of December 31, 2011.
Consolidated VIEs
The following is a summary of the significant VIEs where we are the primary beneficiary:
Consolidated VIEs (in millions, except for percentages) |
Year ended December 31, 2011 | |||||||
VIE Total assets | VIE Total liabilities | |||||||
Fasttrax Limited project |
$ | 103 | $ | 108 | ||||
Escravos Gas-to-Liquids project |
$ | 326 | $ | 381 | ||||
Pearl GTL project |
$ | 153 | $ | 146 | ||||
Gorgon LNG project |
$ | 546 | $ | 607 |
Consolidated VIEs (in millions, except for percentages) |
Year ended December 31, 2010 | |||||||
VIE Total assets | VIE Total liabilities | |||||||
Fasttrax Limited project |
$ | 106 | $ | 112 | ||||
Escravos Gas-to-Liquids project |
$ | 356 | $ | 423 | ||||
Pearl GTL project |
$ | 174 | $ | 167 | ||||
Gorgon LNG project |
$ | 347 | $ | 372 |
Fasttrax Limited project. Effective January 1, 2010, upon the adoption of the newly issued guidance in FASB ASC 810 – Consolidation, we determined that we are the primary beneficiary of this project entity because we control the activities that most significantly impact economic performance of the entity. This variable interest entity, in which we have a 50% ownership interest, was previously accounted for using the equity method of accounting because no party absorbed the majority of the expected losses which was the determining factor under the superseded standard. We have applied the requirements of FASB ASC 810 on a prospective basis from the date of adoption. Upon consolidation of this joint venture, consolidated current assets increased by $26 million primarily related to cash and equivalents, consolidated noncurrent assets increased by $89 million related to property, plant and equipment, consolidated current liabilities increased by $10 million primarily related to accounts payable, and noncurrent liabilities increased by $112 million related to the outstanding senior bonds and subordinated debt issued to finance the JV's operations. No gain or loss was recognized by KBR upon consolidation of this VIE. Assets collateralizing the JV's senior bonds included cash and equivalents of $21 million and property, plant, and equipment of approximately $80 million, net of accumulated depreciation of $38 million as of December 31, 2010. The bonds of the SPV, being non-recourse to KBR, are shown on the face of our consolidated balance sheet as "Non-recourse project-finance debt."
In December 2001, the Fasttrax Joint Venture (the "JV") was created to provide to the U.K. MoD a fleet of 92 new heavy equipment transporters ("HETs") capable of carrying a 72-ton Challenger II tank. The JV owns, operates and maintains the HET fleet and provides heavy equipment transportation services to the British Army. The purchase of the assets was completed in 2004, and the operating and service contracts related to the assets extend through 2023. The JV's entity structure includes a parent entity and its 100%-owned subsidiary, Fasttrax Ltd (the "SPV"). KBR and its partner own each 50% of the parent entity.
The JV's purchase of the assets was funded through the issuance of several series guaranteed secured bonds totaling approximately £84.9 million issued by the SPV including £12.2 million which was replaced in 2005 when the shareholders funded combined equity and subordinated debt of approximately £12.2 million. The bonds are guaranteed by Ambac Assurance U.K. Ltd under a policy that guarantees the schedule of principle and interest payments to the bond trustee in the event of non-payment by Fasttrax. The total amount of non-recourse project-finance debt of a VIE consolidated by KBR is summarized in the following table. Assets collateralizing the JV's senior bonds include cash and equivalents of $23 million and property, plant, and equipment of approximately $75 million, net of accumulated depreciation of $45 million as of December 31, 2011.
Consolidated amount of non-recourse project-finance debt of a VIE
Millions of Dollars |
December 31, 2011 | |||
Current non-recourse project-finance debt of a VIE consolidated by KBR |
$ | 10 | ||
Noncurrent non-recourse project-finance debt of a VIE consolidated by KBR |
$ | 88 | ||
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Total non-recourse project-finance debt of a VIE consolidated by KBR |
$ | 98 | ||
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The guaranteed secured bonds were issued in two classes consisting of Class A 3.5% Index Linked Bonds in the amount of £56 million and Class B 5.9% Fixed Rate Bonds in the amount of £16.7 million. Principal payments on both classes of bonds commenced in March 2005 and are due in semi-annual installments over the term of the bonds which end in 2021. Subordinated notes payable to the 50% partner initially bear interest at 11.25% increasing to 16% over the term of the note through 2025. Payments on the subordinated debt commenced in March 2006 and are due in semi-annual installments over the term of the note. The following table summarizes the combined principal installments for both classes of bonds and subordinated notes, including inflation adjusted bond indexation over the next five-years and beyond as of December 31, 2011:
Millions of pounds |
Debt Payments | |||
2012 |
£ | 6 | ||
2013 |
£ | 6 | ||
2014 |
£ | 6 | ||
2015 |
£ | 6 | ||
2016 |
£ | 6 | ||
Beyond 2016 |
£ | 33 | ||
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Escravos Gas-to-Liquids ("GTL") project. During 2005, we formed a joint venture to engineer and construct a gas monetization facility. We own 50% equity interest in the joint venture and determined that we are the primary beneficiary which is consolidated for financial reporting purposes. There are no consolidated assets that collateralize the joint venture's obligations. However, at December 31, 2011 and 2010, the joint venture had approximately $119 million and $84 million of cash, respectively, which mainly relate to advanced billings in connection with the joint venture's obligations under the EPC contract.
Pearl GTL project. In July 2006, we were awarded, through a 50%-owned joint venture, a contract with Qatar Shell GTL Limited to provide project management and cost-reimbursable engineering, procurement and construction management services for the Pearl GTL project in Ras Laffan, Qatar. The project, which was substantially complete as of December 31, 2011, consists of gas production facilities and a GTL plant. The joint venture is considered a VIE. We consolidate the joint venture for financial reporting purposes because we are the primary beneficiary.
Gorgon LNG project. We have a 30% ownership in an Australian joint venture which was awarded a contract by Chevron for cost-reimbursable FEED and EPCM services to construct a LNG plant. The joint venture is considered a VIE, and, as a result of our being the primary beneficiary, we consolidate this joint venture for financial reporting purposes.
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Note 16. Transactions with Former Parent
Historically, all transactions between Halliburton and KBR were recorded as an intercompany payable or receivable. In 2005, Halliburton contributed $300 million of the intercompany balance to KBR equity in the form of a capital contribution. The remaining portion of the intercompany balance owed to Halliburton was converted to Subordinated Intercompany Notes in the amount of $774 million. In connection with our initial public offering in November 2006 and the separation of our business from Halliburton, we entered into various agreements, including, among others, a master separation agreement, transition services agreements, a tax sharing agreement, and made payment in full on the $774 million notes payable.
Pursuant to our master separation agreement, we agreed to indemnify Halliburton for, among other matters, all past, present and future liabilities related to our business and operations. We agreed to indemnify Halliburton for liabilities under various outstanding and certain additional credit support instruments relating to our businesses and for liabilities under litigation matters related to our business. Halliburton agreed to indemnify us for, among other things, liabilities unrelated to our business, for certain other agreed matters relating to the investigation of FCPA and related corruption allegations and the Barracuda-Caratinga project and for other litigation matters related to Halliburton's business. See Note 10. Under the transition services agreements, Halliburton provided various interim corporate support services to us and we provided various interim corporate support services to Halliburton. The tax sharing agreement provides for certain allocations of U.S. income tax liabilities and other agreements between us and Halliburton with respect to tax matters.
As of December 31, 2011, "Due to former parent, net" was approximately $53 million and was comprised primarily of estimated amounts owed to Halliburton under the tax sharing agreement for income taxes. Our estimate of amounts due to Halliburton under the tax sharing agreement was approximately $45 million at December 31, 2011 and relates to income tax adjustments paid by Halliburton subsequent to our separation that were directly attributable to us, primarily for the years from 2001 through 2006. The remaining balance of $8 million included in "Due to former parent, net" as of December 31, 2011 is associated with various other amounts payable to Halliburton arising under the other separation agreements.
During the fourth quarter of 2011, Halliburton provided notice and demanded payment for significantly greater amounts that it alleges are owed by us under the tax sharing agreement for various other tax-related transactions pertaining to periods prior to our separation from Halliburton. We believe that the amount in the demand is invalid based on our internal assessment of Halliburton's methodology for computing the claim. Based on advice from internal and external legal counsel, we do not believe that Halliburton has a legal entitlement to payment of the amount in the demand. However, although we believe we have appropriately accrued for amounts owed to Halliburton based on our interpretation of the tax sharing agreement, there may be changes to the amounts ultimately paid to or received from Halliburton under the tax sharing agreement upon final settlement.
Included in "Other assets" is an income tax receivable of approximately $18 million related to a foreign tax credit generated as a result of a final settlement we paid to a foreign taxing authority in 2011 for a disputed tax matter that arose prior to our separation from Halliburton. In order to claim the tax credit, we requested, and Halliburton agreed to and did file an amended U.S. Federal tax return for the period in which the disputed tax liability arose. However, Halliburton notified us during the fourth quarter of 2011 that it does not intend to remit to us the refund received or to be received by Halliburton as a result of the amended return. KBR disputes Halliburton's position on this matter and believes it has legal entitlement to the $18 million refund. We intend to vigorously pursue collection of this amount and certain other unrecorded counterclaims. The timing of ultimate resolution of these matters will depend in part on future discussion with Halliburton, which if not fruitful, could lead to arbitration under the terms of the separation agreements.
As discussed above under "Barracuda-Caratinga Project Arbitration," we have recorded an indemnification receivable due from Halliburton of approximately $197 million associated with our estimated liability in the bolts matter which is included in "Other current assets" as of December 31, 2011.
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Note 17. Retirement Plans
We have various plans that cover our employees. These plans include defined contribution plans and defined benefit plans.
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Our defined contribution plans provide retirement benefits in return for services rendered. These plans provide an individual account for each participant and have terms that specify how contributions to the participant's account are to be determined rather than the amount of pension benefits the participant is to receive. Contributions to these plans are based on pretax income and/or discretionary amounts determined on an annual basis. Our expense for the defined contribution plans totaled $71 million in 2011, $64 million in 2010, and $61 million in 2009. Additionally, we participate in a Canadian multi-employer plan to which we contributed $10 million in 2011, $12 million in 2010, and $17 million in 2009; |
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Our defined benefit plans are funded pension plans, which define an amount of pension benefit to be provided, usually as a function of age, years of service, or compensation. |
We account for our defined benefit pension plan in accordance with FASB ASC 715 – Compensation – Retirement Benefits, which requires an employer to:
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recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the benefit obligation) of pension plan; |
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recognize, through comprehensive income, certain changes in the funded status of a defined benefit plan in the year in which the changes occur; |
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measure plan assets and benefit obligations as of the end of the employer's fiscal year; and |
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disclose additional information. |
Benefit obligation and plan assets
We used a December 31 measurement date for all plans in 2011 and 2010. Plan asset, expenses, and obligation for retirement plans are presented in the following tables.
Pension Benefits | ||||||||||||||||
Benefit obligation |
United States | Int'l | United States | Int'l | ||||||||||||
Millions of dollars |
2011 | 2010 | ||||||||||||||
Change in projected benefit obligation |
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Projected benefit obligation at beginning of period |
$ | 81 | $ | 1,538 | $ | 80 | $ | 1,528 | ||||||||
Service cost |
— | 1 | — | 1 | ||||||||||||
Interest cost |
4 | 86 | 4 | 85 | ||||||||||||
Foreign currency exchange rate changes |
— | 25 | — | (52 | ) | |||||||||||
Actuarial (gain) loss |
8 | 62 | 3 | 27 | ||||||||||||
Other |
— | (2 | ) | — | — | |||||||||||
Benefits paid |
(5 | ) | (50 | ) | (6 | ) | (51 | ) | ||||||||
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Projected benefit obligation at end of period |
$ | 88 | $ | 1,660 | $ | 81 | $ | 1,538 | ||||||||
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Accumulated benefit obligation at end of period |
$ | 88 | $ | 1,660 | $ | 81 | $ | 1,538 | ||||||||
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Pension Benefits | ||||||||||||||||
Plan assets | United States | Int'l | United States | Int'l | ||||||||||||
Millions of dollars |
2011 | 2010 | ||||||||||||||
Change in plan assets |
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Fair value of plan assets at beginning of period |
$ | 65 | $ | 1,286 | $ | 57 | $ | 1,231 | ||||||||
Actual return on plan assets |
(2 | ) | 33 | 8 | 134 | |||||||||||
Employer contributions |
6 | 68 | 6 | 14 | ||||||||||||
Foreign currency exchange rate changes |
— | 19 | — | (42 | ) | |||||||||||
Benefits paid |
(5 | ) | (50 | ) | (6 | ) | (51 | ) | ||||||||
Other |
— | (2 | ) | — | — | |||||||||||
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Fair value of plan assets at end of period |
$ | 64 | $ | 1,354 | $ | 65 | $ | 1,286 | ||||||||
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Funded status |
$ | (24 | ) | $ | (306 | ) | $ | (16 | ) | $ | (252 | ) | ||||
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Amounts recognized on the consolidated balance sheet |
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Noncurrent liabilities |
$ | (24 | ) | $ | (306 | ) | $ | (16 | ) | $ | (252 | ) | ||||
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Weighted-average assumptions used to determine benefit obligations at measurement date |
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Discount rate |
3.74 | % | 4.90 | % | 4.84 | % | 5.45 | % | ||||||||
Rate of compensation increase |
N/A | N/A | N/A | N/A | ||||||||||||
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Assumed long-term rates of return on plan assets, discount rates for estimating benefit obligations, and rates of compensation increases vary for the different plans according to the local economic conditions. The 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. 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.
Plan fiduciaries of the Company's retirement plans set investment policies and strategies and oversee its investment direction, which includes selecting investment managers, commissioning asset-liability studies and setting long-term strategic targets. Long-term strategic investment objectives include preserving the funded status of the plan and balancing risk and return and have a wide diversification of asset types, fund strategies and fund managers. Targeted asset allocation ranges are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below a target range.
The targeted asset allocation ranges for the International plans for 2012 and 2011, by asset class, are as follows:
International Plans – Asset Class | 2012 Targeted | 2011 Targeted | ||||||||||||||
Percentage Range | Percentage Range | |||||||||||||||
Minimum | Maximum | Minimum | Maximum | |||||||||||||
Equity securities |
56 | % | 61 | % | 56 | % | 61 | % | ||||||||
Fixed income securities |
35 | % | 40 | % | 35 | % | 40 | % | ||||||||
Cash equivalents and other assets |
— | 2 | % | — | 4 | % | ||||||||||
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The targeted asset allocation ranges for the Domestic plans for 2012 and 2011, by asset class, are as follows:
Domestic Plans – Asset Class | 2012 Targeted | 2011 Targeted | ||||||||||||||
Percentage Range | Percentage Range | |||||||||||||||
Minimum | Maximum | Minimum | Maximum | |||||||||||||
U.S. equity securities |
19 | % | 28 | % | 34 | % | 51 | % | ||||||||
Non-U.S. equity securities |
31 | % | 47 | % | 15 | % | 22 | % | ||||||||
Fixed income securities |
29 | % | 43 | % | 30 | % | 44 | % | ||||||||
Cash equivalents |
1 | % | 2 | % | — | 2 | % | |||||||||
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The inputs and methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a description of the primary valuation methodologies used for assets measured at fair value:
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Common Stocks and Corporate Bonds: Valued at the closing price reported on the active market on which the individual securities are traded. |
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Corporate Bonds, Government Bonds and Mortgage Backed Securities: Valued at quoted prices in markets that are not active, broker dealer quotations, or other methods by which all significant inputs are observable, either directly or indirectly. |
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Common Collective Trust Funds: Valued at the net asset value per unit held at year end as quoted in an active market or as quoted by the funds. |
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Mutual Funds: Valued at the net asset value of shares held at year end as quoted in the active market. |
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Real Estate: Valued at net asset value per unit held at year end as quoted by the manager. |
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Annuities: Valued by computing the present value of the expected benefits based on the demographic information of the participants. |
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Other: Estimated income to be received on the Plan assets as computed by our trustee |
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement as of the reporting date.
A summary of total investments for KBR's pension plan assets measured at fair value is presented below. See Note 14 for a detailed description of fair value measurements and the hierarchy established for Level 1, 2 and 3 valuation inputs.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Millions of dollars |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset Category at December 31, 2011 |
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United States plan assets |
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U.S. equity securities |
$ | 15 | $ | 13 | $ | 2 | $ | — | ||||||||
Non-U.S. equity securities |
26 | 24 | 2 | — | ||||||||||||
Government bonds |
4 | — | 4 | — | ||||||||||||
Corporate bonds |
17 | 9 | 8 | — | ||||||||||||
Mortgage backed securities |
1 | — | 1 | — | ||||||||||||
Cash and cash equivalents |
1 | — | 1 | — | ||||||||||||
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Total U.S. plan assets |
$ | 64 | $ | 46 | $ | 18 | $ | — | ||||||||
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International plan assets |
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U.S. equity securities |
$ | 67 | $ | 67 | $ | — | $ | — | ||||||||
Non-U.S. equity securities |
689 | 689 | — | — | ||||||||||||
Government bonds |
259 | — | 259 | — | ||||||||||||
Corporate bonds |
264 | — | 264 | — | ||||||||||||
Other bonds |
6 | 1 | 5 | — | ||||||||||||
Annuity contracts |
5 | — | — | 5 | ||||||||||||
Real estate |
8 | — | 8 | — | ||||||||||||
Cash and cash equivalents |
51 | 51 | — | — | ||||||||||||
Other |
5 | — | — | 5 | ||||||||||||
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Total international plan assets |
$ | 1,354 | $ | 808 | $ | 536 | $ | 10 | ||||||||
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Total plan assets at December 31, 2011 |
$ | 1,418 | $ | 854 | $ | 554 | $ | 10 | ||||||||
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Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Millions of dollars |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset Category at December 31, 2010 |
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United States plan assets |
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U.S. equity securities |
$ | 28 | $ | 27 | $ | 1 | $ | — | ||||||||
Non-U.S. equity securities |
15 | 15 | — | — | ||||||||||||
Government bonds |
4 | — | 4 | — | ||||||||||||
Corporate bonds |
15 | 8 | 7 | — | ||||||||||||
Mortgage backed securities |
1 | — | 1 | — | ||||||||||||
Cash and cash equivalents |
2 | 2 | — | — | ||||||||||||
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Total U.S. plan assets |
$ | 65 | $ | 52 | $ | 13 | $ | — | ||||||||
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International plan assets |
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U.S. equity securities |
$ | 57 | $ | 57 | $ | — | $ | — | ||||||||
Non-U.S. equity securities |
591 | 571 | 20 | — | ||||||||||||
Government bonds |
269 | — | 269 | — | ||||||||||||
Corporate bonds |
293 | 19 | 274 | — | ||||||||||||
Other bonds |
2 | 2 | — | — | ||||||||||||
Annuity contracts |
5 | — | — | 5 | ||||||||||||
Real estate |
8 | — | 8 | — | ||||||||||||
Cash and cash equivalents |
52 | 52 | — | — | ||||||||||||
Other |
9 | — | — | 9 | ||||||||||||
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Total international plan assets |
$ | 1,286 | $ | 701 | $ | 571 | $ | 14 | ||||||||
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Total plan assets at December 31, 2010 |
$ | 1,351 | $ | 753 | $ | 584 | $ | 14 | ||||||||
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The fair value measurement of plan assets using significant unobservable inputs (level 3) changed each year due to the following:
Level 3 fair value measurement rollforward for 2011
Millions of dollars |
Total | Annuity Contracts |
Other | |||||||||
International plan assets |
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Balance at December 31, 2010 |
$ | 14 | $ | 5 | $ | 9 | ||||||
Purchases, sales and settlements |
(4 | ) | — | (4 | ) | |||||||
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Balance at December 31, 2011 |
$ | 10 | $ | 5 | $ | 5 | ||||||
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Level 3 fair value measurement rollforward for 2010
Millions of dollars |
Total | Annuity Contracts |
Other | |||||||||
International plan assets |
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Balance at December 31, 2009 |
$ | 13 | $ | 6 | $ | 7 | ||||||
Purchases, sales and settlements |
1 | (1 | ) | 2 | ||||||||
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Balance at December 31, 2010 |
$ | 14 | $ | 5 | $ | 9 | ||||||
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The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2011, net of tax were as follows:
Pension Benefits | ||||||||
Millions of dollars |
United States | Int'l | ||||||
Net actuarial loss, net of tax of $15 and $173, respectively |
$ | 27 | $ | 444 | ||||
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Total in accumulated other comprehensive loss |
$ | 27 | $ | 444 | ||||
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Expected cash flows
Contributions. Funding requirements for each plan are determined based on the local laws of the country where such plan resides. In certain countries the funding requirements are mandatory while in other countries they are discretionary. We expect to contribute $26 million to our international pension plans and $4 million to our domestic plan in 2012.
Benefit payments. The following table presents the expected benefit payments over the next 10 years.
Pension Benefits | ||||||||
Millions of dollars |
United States | Int'l | ||||||
2012 |
$ | 6 | $ | 51 | ||||
2013 |
$ | 6 | $ | 53 | ||||
2014 |
$ | 7 | $ | 54 | ||||
2015 |
$ | 7 | $ | 56 | ||||
2016 |
$ | 7 | $ | 58 | ||||
Years 2017 – 2021 |
$ | 27 | $ | 317 | ||||
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Net periodic cost
Pension Benefits | ||||||||||||||||||||||||
United States | Int'l | United States | Int'l | United States | Int'l | |||||||||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||||||||||||||
Components of net periodic benefit cost |
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Service cost |
$ | — | $ | 1 | $ | — | $ | 1 | $ | — | $ | 2 | ||||||||||||
Interest cost |
4 | 86 | 4 | 85 | 5 | 77 | ||||||||||||||||||
Expected return on plan assets |
(4 | ) | (98 | ) | (3 | ) | (90 | ) | (4 | ) | (84 | ) | ||||||||||||
Settlements/curtailments |
— | — | — | — | 1 | (4 | ) | |||||||||||||||||
Recognized actuarial loss |
1 | 20 | 1 | 18 | 1 | 11 | ||||||||||||||||||
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Net periodic benefit cost |
$ | 1 | $ | 9 | $ | 2 | $ | 14 | $ | 3 | $ | 2 | ||||||||||||
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Weighted-average assumptions used to determine net periodic benefit cost |
Pension Benefits | |||||||||||||||||||||||
United States | Int'l | United States | Int'l | United States | Int'l | |||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||
Discount rate |
4.84 | % | 5.45 | % | 5.35 | % | 5.84 | % | 6.15 | % | 5.98 | % | ||||||||||||
Expected return on plan assets |
7.00 | % | 7.00 | % | 7.00 | % | 7.00 | % | 7.63 | % | 7.00 | % | ||||||||||||
Rate of compensation increase |
N/A | NA | N/A | NA | N/A | 4.00 | % | |||||||||||||||||
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Estimated amounts that will be amortized from accumulated other comprehensive income, net of tax, into net periodic benefit cost in 2012 are as follows:
Pension Benefits | ||||||||
Millions of dollars |
United States | International | ||||||
Actuarial (gain) loss |
$ | 1 | $ | 18 | ||||
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Total |
$ | 1 | $ | 18 | ||||
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Note 18. Recent Accounting Pronouncements
In September 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in a Multiemployer Plan. ASU 2011-09 is intended to provide additional disclosures about an employer's financial obligations to a multiemployer pension plan and, therefore, help financial statements users have a better understanding of the commitments and risks involved with its participation in multiemployer pension plans. For public entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011. Early adoption is permissible. ASU 2011-09 should be applied retrospectively for all prior periods presented. We adopted this ASU effective December 31, 2011, which did not have a material impact on our financial statement disclosures.
In September 2011, The FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting standard did not have a material impact on our financial position, results of operations, cash flows and disclosures.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on our financial position, results of operations, cash flows and disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification™ (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this ASU is not expected to have a material impact on our financial position, results of operations, cash flows and disclosures.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU reflects the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity, as defined by ASC 805 Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments became effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this accounting standard update did not have a material impact on our financial position, results of operations, cash flows and disclosures.
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Note 19. Quarterly Data (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2011 and 2010 are presented in the following table. In the following table, the sum of basic and diluted "Net income attributable to KBR per share" for the four quarters may differ from the annual amounts due to the required method of computing weighted average number of shares in the respective periods. Additionally, due to the effect of rounding, the sum of the individual quarterly earnings per share amounts may not equal the calculated year earnings per share amount.
Quarter | ||||||||||||||||||||
(in millions, except per share amounts) |
First | Second | Third | Fourth | Year | |||||||||||||||
2011 |
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Total revenue |
$ | 2,321 | $ | 2,457 | $ | 2,387 | $ | 2,096 | $ | 9,261 | ||||||||||
Operating income |
144 | 169 | 138 | 136 | 587 | |||||||||||||||
Net income |
117 | 127 | 191 | 105 | 540 | |||||||||||||||
Net income attributable to noncontrolling interests |
(12 | ) | (27 | ) | (6 | ) | (15 | ) | (60 | ) | ||||||||||
Net income attributable to KBR |
105 | 100 | 185 | 90 | 480 | |||||||||||||||
Net income attributable to KBR per share : |
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Net income attributable to KBR per share – Basic |
$ | 0.69 | $ | 0.65 | $ | 1.23 | $ | 0.60 | $ | 3.18 | ||||||||||
Net income attributable to KBR per share – Diluted |
$ | 0.69 | $ | 0.65 | $ | 1.22 | $ | 0.60 | $ | 3.16 | ||||||||||
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2010 |
||||||||||||||||||||
Total revenue |
$ | 2,631 | $ | 2,671 | $ | 2,455 | $ | 2,342 | $ | 10,099 | ||||||||||
Operating income |
99 | 199 | 163 | 148 | 609 | |||||||||||||||
Net income |
59 | 122 | 117 | 97 | 395 | |||||||||||||||
Net income attributable to noncontrolling interests |
(13 | ) | (16 | ) | (20 | ) | (19 | ) | (68 | ) | ||||||||||
Net income attributable to KBR |
46 | 106 | 97 | 78 | 327 | |||||||||||||||
Net income attributable to KBR per share : |
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Net income attributable to KBR per share – Basic |
$ | 0.29 | $ | 0.66 | $ | 0.62 | $ | 0.52 | $ | 2.08 | ||||||||||
Net income attributable to KBR per share – Diluted |
$ | 0.29 | $ | 0.66 | $ | 0.62 | $ | 0.51 | $ | 2.07 | ||||||||||
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KBR, Inc.
Schedule II – Valuation and Qualifying Accounts (Millions of Dollars)
The table below presents valuation and qualifying accounts for continuing operations.
Additions | ||||||||||||||||||||
Descriptions |
Balance at Beginning Period |
Charged to Costs and Expenses |
Charged to Other Accounts |
Deductions | Balance at End of Period |
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Year ended December 31, 2011: |
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Deducted from accounts and notes receivable: |
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Allowance for bad debts |
$ | 27 | $ | (2 | ) | $ | — | $ | (1 | )(a) | $ | 24 | ||||||||
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Reserve for losses on uncompleted contracts |
$ | 26 | $ | 13 | $ | — | $ | (17 | ) | $ | 22 | |||||||||
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Reserve for potentially disallowable costs incurred under government contracts |
$ | 141 | $ | — | $ | 22 | (b) | $ | (36 | ) | $ | 127 | ||||||||
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Year ended December 31, 2010: |
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Deducted from accounts and notes receivable: |
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Allowance for bad debts |
$ | 26 | $ | 13 | $ | — | $ | (12 | )(a) | $ | 27 | |||||||||
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Reserve for losses on uncompleted contracts |
$ | 40 | $ | 1 | $ | — | $ | (15 | ) | $ | 26 | |||||||||
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Reserve for potentially disallowable costs incurred under government contracts |
$ | 116 | $ | — | $ | 34 | (b) | $ | (9 | ) | $ | 141 | ||||||||
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Year ended December 31, 2009: |
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Deducted from accounts and notes receivable: |
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Allowance for bad debts |
$ | 19 | $ | 6 | $ | 3 | $ | (2 | )(a) | $ | 26 | |||||||||
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Reserve for losses on uncompleted contracts |
$ | 76 | $ | 3 | $ | — | $ | (39 | ) | $ | 40 | |||||||||
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Reserve for potentially disallowable costs incurred under government contracts |
$ | 112 | $ | — | $ | 9 | (b) | $ | (5 | ) | $ | 116 | ||||||||
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(a) | Receivable write-offs, net of recoveries, and reclassifications. |
(b) | Reserves have been recorded as reductions of revenue, net of reserves no longer required. |
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Principles of consolidation
Our consolidated financial statements include the financial position, results of operations and cash flows of KBR and our majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary (see Note 15). The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates' operating and financial policies. The cost method is used when we do not have the ability to exert significant influence. All intercompany accounts and transactions are eliminated in consolidation.
Use of estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States, requiring us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the balance sheet dates, and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to current year presentation on the consolidated balance sheets and the consolidated statements of cash flows.
Engineering and construction contracts
Revenue from contracts to provide construction, engineering, design or similar services is reported on the percentage-of-completion method of accounting. Progress is generally measured based upon physical progress, man-hours, or costs incurred, depending on the type of job. Physical progress is determined as a combination of input and output measures as deemed appropriate by the circumstances. All known or anticipated losses on contracts are provided for in the period they become evident. Claims and change orders that are in the process of being negotiated with customers for extra work or changes in the scope of work are included in contract value when collection is deemed probable. Our contracts often require us to pay liquidated damages should we not meet certain performance requirements, including completion of the project in accordance with a scheduled time. We include an estimate of liquidated damages in contract costs when it is deemed probable that they will be paid.
Our revenue includes both equity in the earnings of unconsolidated affiliates and revenue from sales of services to joint ventures. We often participate on larger projects as a joint venture partner and also provide services to the joint venture as a subcontractor. The amount included in our revenue represents equity in the earnings from joint ventures, impairments of equity investments in joint ventures, if any, and revenue from services provided to joint ventures.
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 revenues include base fees, actual direct project costs incurred and an allocation of indirect costs. Indirect costs are applied using rates approved by our government customers. The general, administrative, and overhead cost reimbursement rates are estimated periodically in accordance with government contract accounting regulations and may change based on actual costs incurred or based upon the volume of work performed. Revenue is reduced for our estimate of costs that either are in dispute with our customer or have been identified as potentially unallowable per the terms of the contract or the federal acquisition regulations.
We generally recognize award fees on the LogCAP III contract using an estimated accrual of the amounts to be awarded. Once task orders underlying the work are definitized and award fees are granted, we adjust our estimate of award fees to the actual amounts earned. However, as further discussed in Note 9, we are currently unable to reliably estimate award fees as a result of our customer's unilateral decision to grant no award fees for certain performance periods. In accordance with the provisions of the LogCAP III contract, we earn profits on our services rendered based on a combination of a fixed fee plus award fees granted by our customer. Both fees are measured as a percentage rate applied to estimated and negotiated costs. The LogCAP III customer is contractually obligated to periodically convene Award-Fee Boards, which are comprised of individuals who have been designated to assist the Award Fee Determining Official ("AFDO") in making award fee determinations. Award fees are based on evaluations of our performance using criteria set forth in the contract, which include non-binding monthly evaluations made by our customers in the field of operations. Although these criteria have historically been used by the Award-Fee Boards in reaching their recommendations, the amounts of award fees are determined at the sole discretion of the AFDO.
For contracts containing multiple deliverables entered into subsequent to June 30, 2003, we analyze each activity within the contract to ensure that we adhere to the separation guidelines for revenue arrangements with multiple deliverables in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605—Revenue Recognition. For service-only contracts and service elements of multiple deliverable arrangements, award fees are recognized only when definitized and awarded by the customer. Award fees on government construction contracts are recognized during the term of the contract based on our estimate of the amount of fees to be awarded.
Accounting for pre-contract costs
Pre-contract costs incurred in anticipation of a specific contract award are deferred only if the costs can be directly associated with a specific anticipated contract and their recoverability from that contract is probable. Pre-contract costs related to unsuccessful bids are written off no later than the period we are informed that we are not awarded the specific contract. Costs related to one-time activities such as introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, or commencing new operations are expensed when incurred.
Legal expenses
We expense legal costs in the period in which such costs are incurred.
Cash and equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and equivalents include cash related to contracts in progress as well as cash held by our joint ventures that we consolidate for accounting purposes. Joint venture cash balances are limited to joint venture activities and are not available for other projects, general cash needs, or distribution to us without approval of the board of directors of the respective joint ventures. Cash held by our joint ventures that we consolidate for accounting purposes totaled approximately $244 million at December 31, 2011 and $145 million at December 31, 2010. We expect to use the cash on these projects to pay project costs.
Restricted cash primarily consists of amounts held in deposit with certain banks to collateralize standby letters of credit as well as amounts held in deposit with certain banks to establish foreign operations. Our current restricted cash is included in "Other current assets" and our non-current restricted cash is included in "Other assets" on our consolidated financial statements. Our restricted cash balances are presented in the table below:
December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Current restricted cash |
$ | 3 | $ | 11 | ||||
Non-current restricted cash |
2 | 10 | ||||||
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Total restricted cash |
$ | 5 | $ | 21 | ||||
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Allowance for bad debts
We establish an allowance for bad debts through a review of several factors including historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retentions.
Goodwill and other intangibles
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations and, in accordance with FASB 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. Our operations are grouped into four segments: Hydrocarbons; Infrastructure, Government & Power; Services; and Other. Within those segments we operate 10 business units which are also our operating segments as defined by FASB ASC 280 – Segment Reporting and our reporting units as defined by FASB ASC 350. In accordance with FASB ASC 350, we conduct our goodwill impairment testing at the reporting unit level which consists of our 10 business units. 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, and Ventures business units, as well as the Allstates staffing business.
Our annual impairment test for goodwill at October 1, 2011 was a quantitative analysis using a two-step process that involves comparing the estimated fair value of each business unit to its carrying value, including goodwill. If the fair value of a business unit exceeds its carrying amount, the goodwill of the business unit is not considered impaired; therefore, the second step of the impairment test is unnecessary. If the carrying amount of a business 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.
Consistent with prior years, the fair values of business units in 2011 were determined using a combination of two methods, one based on market earnings multiples of peer companies identified for each business unit (the market approach), and the other based on discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses over a four year period plus a terminal value period (the income approach).
The market approach estimates fair value by applying earnings and revenue market multiples to a business unit's operating performance for the trailing twelve-month period. The market multiples are derived from comparable publicly traded companies with operating and investment characteristics similar to those of each of our reporting units. The income approach estimates fair value by discounting each business unit's estimated future cash flows using a weighted-average cost of capital that reflects current market conditions and the risk profile of each business unit. The fair value derived from the weighting of these two methods provided appropriate valuations that, in aggregate, reasonably reconciled to our market capitalization, taking into account observable control premiums.
In addition to the earnings multiples and the discount rates disclosed above, certain other judgments and estimates are used to prepare the 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.
We believe these two approaches are appropriate valuation techniques and we generally weight the two resulting values equally as an estimate of business unit fair value for the purposes of our impairment testing. However, we may weigh one value more heavily than the other when conditions merit doing so.
At October 1, 2011, our market capitalization exceeded the carrying value of our consolidated net assets by $1.6 billion and the fair value of all our individual reporting units significantly exceeded their respective carrying amounts as of that date. However, the fair value for the P&I, I&M, Services and Allstates reporting units exceeded their carrying values based on projected growth rates and other market inputs to our impairment test models that are more sensitive to the risk of future variances due to competitive market conditions as well as business unit execution risks.
We review our projected growth rates, other market inputs used in our impairment test models, changes in our business and other factors that could represent indicators of impairment. In 2012, we intend to report the Infrastructure and Minerals business units separately and have concluded that each will be considered a separate reporting unit for goodwill impairment testing purposes. Subsequent to our October 1, 2011 annual impairment test, we reviewed the new Infrastructure and Minerals reporting units and no indication of impairment was identified.
Impairment of long-lived assets
When events or changes in circumstances indicate that long-lived assets other than goodwill may be impaired, an evaluation is performed. For an asset classified as held for use, the estimated future undiscounted cash flow associated with the asset are compared to the asset's carrying amount to determine if a write-down to fair value is required. When an asset is classified as held for sale, the asset's book value is evaluated and adjusted to the lower of its carrying amount or fair value less cost to sell. Depreciation or amortization is ceased when an asset is classified as held for sale.
We evaluate equity method investments for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such investment may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. Management assesses the fair value of its equity method investment using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales, internally developed discounted cash flow analysis and analysis from outside advisors. If the estimated fair value is less than the carrying value and management considers the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment.
Pensions
Our pension benefit obligations and expenses are calculated using actuarial models and methods, in accordance with FASB ASC 715 – Compensation—Retirement Benefits. Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of 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 also evaluated periodically and updated accordingly to reflect our actual experience.
Unrecognized actuarial gains and losses are generally being recognized over a period of 10 to 15 years, which represents the expected remaining service life of the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumptions changes in the obligations and the difference between expected returns and actual returns on plan assets. The difference between actual and expected returns is deferred as an unrecognized actuarial gain or loss and is recognized as future pension expense.
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 further in Note 17 in the accompanying financial statements.
Income taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. A current tax asset or liability is recognized for the estimated taxes refundable or payable on tax returns for the current year. A deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Additionally, we use forecasts of certain tax elements such as taxable income and foreign tax credit utilization and the evaluation of tax planning strategies in making this assessment of realization. Given the inherent uncertainty involved with the use of such assumptions, there can be significant variation between anticipated and actual results.
We have operations in numerous countries other than the United States. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned, and revenue-based tax withholding. The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.
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 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.
Derivative instruments
At times, we enter into derivative financial transactions to hedge existing or projected exposures to changing foreign currency exchange rates. We do not enter into derivative transactions for speculative or trading purposes. We recognize all derivatives on the balance sheet at fair value. Derivatives that are not accounted for as hedges under FASB ASC 815 – Derivatives and Hedging, are adjusted to fair value and such changes are reflected through the results of operations. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value is recognized in earnings. Recognized gains or losses on derivatives entered into to manage foreign exchange risk are included in foreign currency gains and losses in the consolidated statements of income.
Concentration of credit risk
We have revenues and receivables from transactions with individual external customers that amount to 10% or more of our revenues. A significant portion of our revenue from services is generated from transactions with the United States government, which was derived almost entirely from our IGP segment. Additionally, a considerable percentage of revenue from services is generated from transactions with the Chevron Corporation ("Chevron"), which was derived almost entirely from our Hydrocarbons segment. No other customers represented 10% or more of consolidated revenues in any of the periods presented. In addition, our receivables are generally not collateralized. The information in the following tables has summarized data related to our transactions with the U.S. government and Chevron.
Revenues from major customers:
Years ended December 31, | ||||||||||||
Millions of dollars, except percentage amounts | 2011 | 2010 | 2009 | |||||||||
U.S. government revenue |
$ | 2,219 | $ | 3,277 | $ | 5,195 | ||||||
Chevron revenue |
$ | 2,047 | $ | 1,783 | $ | 1,375 | ||||||
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Percentages of revenues and accounts receivable from major customers:
Years ended December 31, | ||||||||||||
Millions of dollars, except percentage amounts | 2011 | 2010 | 2009 | |||||||||
U.S. government revenue percentage |
24 | % | 32 | % | 43 | % | ||||||
Chevron revenues percentage |
22 | % | 18 | % | 11 | % | ||||||
U.S. government receivables percentage |
26 | % | 33 | % | 44 | % | ||||||
Chevron receivables percentage |
8 | % | 11 | % | 7 | % | ||||||
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Noncontrolling interest
Noncontrolling interest in consolidated subsidiaries in our consolidated balance sheets principally represents noncontrolling shareholders' proportionate share of the equity in our consolidated subsidiaries. Noncontrolling interest in consolidated subsidiaries is adjusted each period to reflect the noncontrolling shareholders' allocation of income or the absorption of losses by noncontrolling shareholders on certain majority-owned, controlled investments.
Foreign currency translation
We determine the functional currency of our foreign entities based upon the currency of the primary environment in which they operate. Where the functional currency is not the U.S. dollar, translation of assets and liabilities to U.S. dollars is based on exchange rates at the balance sheet date. Translation of revenue and expenses to U.S. dollars is based on the average rate during the period. Translation gains or losses, net of income tax effects, are reported as a component of other comprehensive income (loss). Gains or losses from foreign currency transactions are included in results of operations, with the exception of intercompany foreign transactions that are of a long-term investment nature, which are recorded in "Other comprehensive income" on our consolidated balance sheets.
Variable Interest Entities
The majority of our joint ventures are variable interest entities. We account for variable interest entities ("VIEs") in accordance with FASB 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. We have applied the requirements of FASB ASC 810 on a prospective basis from the date of adoption on January 1, 2010. The adoption of FASB ASC 810 resulted in the consolidation of the Fasttrax Limited VIE which is discussed below under the caption "Fasttrax Limited Project."
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 group 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 810-10, 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, and financial and performance guarantees, and significant, 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.
Stock-based compensation
We apply the fair value recognition provisions of FASB ASC 718-10 for share-based payments to account for and report equity-based compensation. FASB ASC 718-10 requires equity-based compensation expense to be measured based on the grant-date fair value of the award. For performance-based awards, compensation expense is measured based on the grant-date fair value of the award and the fair value of that award is remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period or the vesting period are recognized as compensation cost on a straight line basis over that period. See Note 13 for detailed information on stock-based compensation and incentive plans.
Additional Balance Sheet Information
Included in "Other current assets" on our consolidated balance sheets are "Advances to subcontractors" and included in "Other current liabilities" on our consolidated balance sheets are "Retainage payables to subcontractors." Our "Advances to subcontractors" and "Retainage payables to subcontractors" for the years ended December 31, 2011 and 2010 is presented below:
December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Advances to subcontractors |
$ | 167 | $ | 181 | ||||
Retainage payables to subcontractors |
$ | 202 | $ | 226 | ||||
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December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Current restricted cash |
$ | 3 | $ | 11 | ||||
Non-current restricted cash |
2 | 10 | ||||||
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Total restricted cash |
$ | 5 | $ | 21 | ||||
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Revenues from major customers:
Years ended December 31, | ||||||||||||
Millions of dollars, except percentage amounts | 2011 | 2010 | 2009 | |||||||||
U.S. government revenue |
$ | 2,219 | $ | 3,277 | $ | 5,195 | ||||||
Chevron revenue |
$ | 2,047 | $ | 1,783 | $ | 1,375 | ||||||
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Percentages of revenues and accounts receivable from major customers:
Years ended December 31, | ||||||||||||
Millions of dollars, except percentage amounts | 2011 | 2010 | 2009 | |||||||||
U.S. government revenue percentage |
24 | % | 32 | % | 43 | % | ||||||
Chevron revenues percentage |
22 | % | 18 | % | 11 | % | ||||||
U.S. government receivables percentage |
26 | % | 33 | % | 44 | % | ||||||
Chevron receivables percentage |
8 | % | 11 | % | 7 | % | ||||||
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December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Advances to subcontractors |
$ | 167 | $ | 181 | ||||
Retainage payables to subcontractors |
$ | 202 | $ | 226 | ||||
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Years ended December 31, | ||||||||
Millions of dollars | 2011 | 2010 | ||||||
Probable unapproved claims |
$ | 31 | $ | 19 | ||||
Probable unapproved change orders |
6 | 10 | ||||||
Probable unapproved change orders related to unconsolidated subsidiaries |
— | 3 | ||||||
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Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Revenue: |
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Hydrocarbons |
$ | 4,258 | $ | 3,969 | $ | 3,906 | ||||||
Infrastructure, Government and Power |
3,328 | 4,299 | 6,288 | |||||||||
Services |
1,590 | 1,755 | 1,863 | |||||||||
Other |
85 | 76 | 48 | |||||||||
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Total revenue |
$ | 9,261 | $ | 10,099 | $ | 12,105 | ||||||
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Segment operating income: |
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Hydrocarbons |
$ | 408 | $ | 400 | $ | 464 | ||||||
Infrastructure, Government and Power |
266 | 272 | 188 | |||||||||
Services |
58 | 102 | 96 | |||||||||
Other |
51 | 35 | 16 | |||||||||
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Segment operating income |
783 | 809 | 764 | |||||||||
Unallocated amounts: |
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Labor cost absorption income (expense) |
18 | 12 | (11 | ) | ||||||||
Corporate general and administrative expense |
(214 | ) | (212 | ) | (217 | ) | ||||||
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Total operating income |
$ | 587 | $ | 609 | $ | 536 | ||||||
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Capital Expenditures: |
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Hydrocarbons |
$ | — | $ | 1 | $ | 2 | ||||||
Infrastructure, Government and Power |
3 | 8 | 9 | |||||||||
Services |
3 | 2 | 4 | |||||||||
Other |
77 | 55 | 26 | |||||||||
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Total |
$ | 83 | $ | 66 | $ | 41 | ||||||
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Equity in earnings (losses) of unconsolidated affiliates, net: |
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Hydrocarbons |
$ | 32 | $ | 40 | $ | (30 | ) | |||||
Infrastructure, Government and Power |
67 | 40 | 27 | |||||||||
Services |
26 | 33 | 28 | |||||||||
Other |
33 | 24 | 20 | |||||||||
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Total |
$ | 158 | $ | 137 | $ | 45 | ||||||
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Depreciation and amortization: |
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Hydrocarbons |
$ | 2 | $ | 3 | $ | 3 | ||||||
Infrastructure, Government and Power |
14 | 6 | 5 | |||||||||
Services |
9 | 12 | 19 | |||||||||
Other |
46 | 41 | 28 | |||||||||
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Total |
$ | 71 | $ | 62 | $ | 55 | ||||||
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December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Total assets: |
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Hydrocarbons |
$ | 2,836 | $ | 2,136 | ||||
Infrastructure, Government and Power |
2,827 | 2,836 | ||||||
Services |
604 | 590 | ||||||
Other |
(594 | ) | (145 | ) | ||||
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Total assets |
$ | 5,673 | $ | 5,417 | ||||
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Goodwill: |
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Hydrocarbons |
$ | 249 | $ | 249 | ||||
Infrastructure, Government and Power |
403 | 399 | ||||||
Services |
287 | 287 | ||||||
Other |
12 | 12 | ||||||
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Total |
$ | 951 | $ | 947 | ||||
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Equity in/advances to related companies: |
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Hydrocarbons |
$ | 9 | $ | 49 | ||||
Infrastructure, Government and Power |
(51 | ) | (15 | ) | ||||
Services |
36 | 33 | ||||||
Other |
196 | 152 | ||||||
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Total |
$ | 190 | $ | 219 | ||||
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Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Revenue: |
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United States |
$ | 1,994 | $ | 2,082 | $ | 2,550 | ||||||
Iraq |
1,969 | 2,891 | 4,239 | |||||||||
Africa |
2,113 | 2,094 | 2,260 | |||||||||
Other Middle East |
707 | 995 | 1,224 | |||||||||
Asia Pacific (includes Australia) |
1,439 | 1,030 | 624 | |||||||||
Europe |
587 | 585 | 607 | |||||||||
Other Countries |
452 | 422 | 601 | |||||||||
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Total |
$ | 9,261 | $ | 10,099 | $ | 12,105 | ||||||
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December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Long-Lived Assets (PP&E): |
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United States |
$ | 225 | $ | 178 | ||||
United Kingdom |
97 | 111 | ||||||
Other Countries |
62 | 66 | ||||||
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Total |
$ | 384 | $ | 355 | ||||
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Millions of dollars |
Hydrocarbons | IGP | Services | Other | Total | |||||||||||||||
Balance at December 31, 2009 |
$ | 243 | $ | 149 | $ | 287 | $ | 12 | $ | 691 | ||||||||||
Acquisition of R&S |
— | 250 | — | — | 250 | |||||||||||||||
Acquisition of Energo |
6 | — | — | — | 6 | |||||||||||||||
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Balance at December 31, 2010 |
249 | 399 | 287 | 12 | 947 | |||||||||||||||
Purchase price adjustment |
— | 4 | — | — | 4 | |||||||||||||||
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Balance at December 31, 2011 |
$ | 249 | $ | 403 | $ | 287 | $ | 12 | $ | 951 | ||||||||||
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December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
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Intangibles not subject to amortization |
$ | 11 | $ | 11 | ||||
Intangibles subject to amortization |
191 | 190 | ||||||
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Total intangibles |
202 | 201 | ||||||
Accumulated amortization of intangibles |
(89 | ) | (74 | ) | ||||
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Net intangibles |
$ | 113 | $ | 127 | ||||
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Millions of dollars |
Intangibles amortization expense |
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2009 |
$ | 15 | ||
2010 |
$ | 12 | ||
2011 |
$ | 16 | ||
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Millions of dollars |
Expected future intangibles amortization expense |
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2012 |
$ | 15 | ||
2013 |
$ | 14 | ||
2014 |
$ | 12 | ||
2015 |
$ | 11 | ||
2016 |
$ | 10 | ||
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Estimated Useful |
December 31, | |||||||||||
Millions of dollars | Lives in Years | 2011 | 2010 | |||||||||
Land |
N/A | $ | 31 | $ | 31 | |||||||
Buildings and property improvements |
5-44 | 244 | 212 | |||||||||
Equipment and other |
3-20 | 473 | 446 | |||||||||
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Total |
748 | 689 | ||||||||||
Less accumulated depreciation |
(364 | ) | (334 | ) | ||||||||
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Net property, plant and equipment |
$ | 384 | $ | 355 | ||||||||
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Millions of dollars |
Future rental payments |
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2012 |
$ | 76 | ||
2013 |
$ | 70 | ||
2014 |
$ | 64 | ||
2015 |
$ | 61 | ||
2016 |
$ | 57 | ||
Beyond 2016 |
$ | 470 | ||
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Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Current income taxes: |
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Federal |
$ | 19 | $ | 56 | $ | (3 | ) | |||||
Foreign |
183 | 118 | 99 | |||||||||
State |
3 | 3 | 7 | |||||||||
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Total current |
205 | 177 | 103 | |||||||||
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Deferred income taxes: |
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Federal |
(110 | ) | 15 | (39 | ) | |||||||
Foreign |
(62 | ) | (1 | ) | 105 | |||||||
State |
(1 | ) | — | (1 | ) | |||||||
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|
|
|
|||||||
Total deferred |
(173 | ) | 14 | 65 | ||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 32 | $ | 191 | $ | 168 | ||||||
|
|
|
|
|
|
Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
United States |
$ | 12 | $ | 105 | $ | (128 | ) | |||||
Foreign |
560 | 481 | 660 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 572 | $ | 586 | $ | 532 | ||||||
|
|
|
|
|
|
Years ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
U.S. statutory federal rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Rate differentials on foreign earnings |
(3.8 | ) | (2.9 | ) | (2.3 | ) | ||||||
Non-deductible expenses |
— | — | 0.4 | |||||||||
State and local income taxes |
0.4 | 0.2 | 0.9 | |||||||||
Prior year foreign, federal and state taxes |
(6.0 | ) | 2.1 | (1.0 | ) | |||||||
Barracuda arbitration award indemnification |
(12.1 | ) | — | — | ||||||||
Australian joint venture |
(5.6 | ) | — | — | ||||||||
Valuation allowance |
(1.4 | ) | 0.2 | 1.7 | ||||||||
Taxes on unincorporated joint ventures |
(1.8 | ) | (2.6 | ) | (2.0 | ) | ||||||
Other permanent items, net |
0.9 | 0.6 | (1.2 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total effective tax rate on pretax earnings |
5.6 | % | 32.6 | % | 31.5 | % | ||||||
|
|
|
|
|
|
Years ended December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Gross deferred tax assets: |
||||||||
Depreciation and amortization |
$ | 7 | $ | 11 | ||||
Employee compensation and benefits |
183 | 159 | ||||||
Construction contract accounting |
131 | 109 | ||||||
Loss carryforwards |
49 | 63 | ||||||
Insurance accruals |
29 | 30 | ||||||
Allowance for bad debt |
11 | 11 | ||||||
Accrued liabilities |
48 | 23 | ||||||
Barracuda arbitration award indemnification |
71 | — | ||||||
Other |
29 | 4 | ||||||
|
|
|
|
|||||
Total |
$ | 558 | $ | 410 | ||||
|
|
|
|
|||||
Gross deferred tax liabilities: |
||||||||
Construction contract accounting |
$ | (92 | ) | $ | (104 | ) | ||
Intangibles |
(40 | ) | (39 | ) | ||||
Depreciation and amortization |
(27 | ) | (16 | ) | ||||
Deferred foreign tax credit carryforward |
(11 | ) | (8 | ) | ||||
Other |
(37 | ) | (95 | ) | ||||
|
|
|
|
|||||
Total |
$ | (207 | ) | $ | (262 | ) | ||
|
|
|
|
|||||
Valuation Allowances: |
||||||||
Loss carryforwards |
(25 | ) | (32 | ) | ||||
|
|
|
|
|||||
Net deferred income tax asset |
$ | 326 | $ | 116 | ||||
|
|
|
|
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Balance at January 1 |
$ | 95 | $ | 41 | $ | 22 | ||||||
Increases in tax positions for current year |
37 | 64 | — | |||||||||
Increases in tax positions for prior years |
11 | — | 24 | |||||||||
Decreases in tax positions for prior year |
(5 | ) | (9 | ) | (3 | ) | ||||||
Reductions in tax positions for audit settlements |
(7 | ) | — | (2 | ) | |||||||
Reductions in tax positions for statute expirations |
(11 | ) | — | — | ||||||||
Other |
— | (1 | ) | — | ||||||||
|
|
|
|
|
|
|||||||
Balance at December 31 |
$ | 120 | $ | 95 | $ | 41 | ||||||
|
|
|
|
|
|
|
Years ended December 31, | ||||||||
KBR stock options assumptions summary |
2011 | 2010 | ||||||
Granted stock options (millions of shares) |
0.6 | 0.8 | ||||||
Weighted average expected term (in years) |
6.2 | 6.5 | ||||||
Weighted average grant-date fair value per share |
$ | 16.78 | $ | 9.49 |
Years ended December 31, | ||||||||||||||||
KBR stock options range assumptions summary |
2011 | 2010 | ||||||||||||||
Range | Range | |||||||||||||||
Start | End | Start | End | |||||||||||||
Expected volatility range |
44.01 | % | 53.17 | % | 44.91 | % | 48.03 | % | ||||||||
Expected dividend yield range |
0.52 | % | 0.79 | % | 0.74 | % | 0.95 | % | ||||||||
Risk-free interest rate range |
1.22 | % | 2.76 | % | 1.76 | % | 2.84 | % |
KBR stock options activity summary |
Number of Shares |
Weighted Average Exercise Price per Share |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (in millions) |
||||||||||||
Outstanding at December 31, 2010 |
2,948,646 | $ | 15.29 | 6.84 | $ | 44.77 | ||||||||||
Granted |
641,914 | 36.26 | ||||||||||||||
Exercised |
(517,974 | ) | 14.12 | |||||||||||||
Forfeited |
(129,488 | ) | 23.91 | |||||||||||||
Expired |
(42,899 | ) | 15.65 | |||||||||||||
|
|
|
|
|||||||||||||
Outstanding at December 31, 2011 |
2,900,199 | $ | 19.75 | 6.75 | $ | 28.58 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable at December 31, 2011 |
1,538,278 | $ | 14.62 | 5.26 | $ | 20.38 | ||||||||||
|
|
|
|
|
|
|
|
Restricted stock activity summary |
Number of Shares |
Weighted Average Grant-Date Fair Value per Share |
||||||
Nonvested shares at December 31, 2010 |
1,137,443 | $ | 21.13 | |||||
Granted |
274,948 | 35.16 | ||||||
Vested |
(492,473 | ) | 21.94 | |||||
Forfeited |
(86,420 | ) | 24.23 | |||||
|
|
|
|
|||||
Nonvested shares at December 31, 2011 |
833,498 | $ | 24.95 | |||||
|
|
|
|
Stock-based compensation summary table | Years ended December 31 | |||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Stock-based compensation |
$ | 19 | $ | 17 | $ | 17 | ||||||
Total income tax benefit recognized in net income for stock-based compensation arrangements |
$ | 6 | $ | 6 | $ | 6 | ||||||
Incremental compensation cost |
$ | 1 | $ | 2 | $ | 1 | ||||||
Tax benefit increase (decrease) related to stock-based plans |
$ | 3 | $ | — | $ | (7 | ) |
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Millions of dollars |
Total at December 31, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Marketable securities |
$ | 17 | $ | 11 | $ | 6 | $ | — | ||||||||
Derivative assets |
$ | 7 | $ | — | $ | 7 | $ | — | ||||||||
Derivative liabilities |
$ | 2 | $ | — | $ | 2 | $ | — |
|
Balance Sheets
December 31, | ||||||||
Millions of dollars |
2011 | 2010 | ||||||
Current assets |
$ | 2,151 | $ | 2,694 | ||||
Noncurrent assets |
3,828 | 3,949 | ||||||
|
|
|
|
|||||
Total assets |
$ | 5,979 | $ | 6,643 | ||||
|
|
|
|
|||||
Current liabilities |
$ | 1,111 | $ | 1,658 | ||||
Noncurrent liabilities |
4,468 | 4,541 | ||||||
Member's equity |
400 | 444 | ||||||
|
|
|
|
|||||
Total liabilities and member's equity |
$ | 5,979 | $ | 6,643 | ||||
|
|
|
|
Statements of Operations
Years ended December 31, | ||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||
Revenue |
$ | 2,638 | $ | 2,497 | $ | 2,535 | ||||||
Operating income |
$ | 666 | $ | 617 | $ | 221 | ||||||
Net income |
$ | 314 | $ | 334 | $ | 63 | ||||||
|
|
|
|
|
|
Unconsolidated VIEs
The following is a summary of the significant variable interest entities in which we have a significant variable interest, but we are not the primary beneficiary:
Year ended December 31, 2011 | ||||||||||||
Unconsolidated VIEs (in millions, except for percentages) |
VIE Total assets | VIE Total liabilities | Maximum exposure to loss |
|||||||||
U.K. Road projects |
$ | 1,393 | $ | 1,520 | $ | 30 | ||||||
Fermoy Road project |
$ | 228 | $ | 249 | $ | 2 | ||||||
Allenby & Connaught project |
$ | 2,954 | $ | 2,916 | $ | 37 | ||||||
EBIC Ammonia project |
$ | 693 | $ | 389 | $ | 40 | ||||||
|
|
|
|
|
|
Unconsolidated VIEs (in millions, except for percentages) |
Year ended December 31, 2010 | |||||||
VIE Total assets | VIE Total liabilities | |||||||
U.K. Road projects |
$ | 1,506 | $ | 1,531 | ||||
Fermoy Road project |
$ | 240 | $ | 269 | ||||
Allenby & Connaught project |
$ | 2,913 | $ | 2,885 | ||||
EBIC Ammonia project |
$ | 604 | $ | 388 | ||||
|
|
|
|
Consolidated VIEs (in millions, except for percentages) |
Year ended December 31, 2011 | |||||||
VIE Total assets | VIE Total liabilities | |||||||
Fasttrax Limited project |
$ | 103 | $ | 108 | ||||
Escravos Gas-to-Liquids project |
$ | 326 | $ | 381 | ||||
Pearl GTL project |
$ | 153 | $ | 146 | ||||
Gorgon LNG project |
$ | 546 | $ | 607 |
Consolidated VIEs (in millions, except for percentages) |
Year ended December 31, 2010 | |||||||
VIE Total assets | VIE Total liabilities | |||||||
Fasttrax Limited project |
$ | 106 | $ | 112 | ||||
Escravos Gas-to-Liquids project |
$ | 356 | $ | 423 | ||||
Pearl GTL project |
$ | 174 | $ | 167 | ||||
Gorgon LNG project |
$ | 347 | $ | 372 |
Millions of Dollars |
December 31, 2011 | |||
Current non-recourse project-finance debt of a VIE consolidated by KBR |
$ | 10 | ||
Noncurrent non-recourse project-finance debt of a VIE consolidated by KBR |
$ | 88 | ||
|
|
|||
Total non-recourse project-finance debt of a VIE consolidated by KBR |
$ | 98 | ||
|
|
Millions of pounds |
Debt Payments | |||
2012 |
£ | 6 | ||
2013 |
£ | 6 | ||
2014 |
£ | 6 | ||
2015 |
£ | 6 | ||
2016 |
£ | 6 | ||
Beyond 2016 |
£ | 33 | ||
|
|
|
Pension Benefits | ||||||||||||||||
Benefit obligation |
United States | Int'l | United States | Int'l | ||||||||||||
Millions of dollars |
2011 | 2010 | ||||||||||||||
Change in projected benefit obligation |
||||||||||||||||
Projected benefit obligation at beginning of period |
$ | 81 | $ | 1,538 | $ | 80 | $ | 1,528 | ||||||||
Service cost |
— | 1 | — | 1 | ||||||||||||
Interest cost |
4 | 86 | 4 | 85 | ||||||||||||
Foreign currency exchange rate changes |
— | 25 | — | (52 | ) | |||||||||||
Actuarial (gain) loss |
8 | 62 | 3 | 27 | ||||||||||||
Other |
— | (2 | ) | — | — | |||||||||||
Benefits paid |
(5 | ) | (50 | ) | (6 | ) | (51 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Projected benefit obligation at end of period |
$ | 88 | $ | 1,660 | $ | 81 | $ | 1,538 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated benefit obligation at end of period |
$ | 88 | $ | 1,660 | $ | 81 | $ | 1,538 | ||||||||
|
|
|
|
|
|
|
|
Pension Benefits | ||||||||||||||||
Plan assets |
United States | Int'l | United States | Int'l | ||||||||||||
Millions of dollars |
2011 | 2010 | ||||||||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets at beginning of period |
$ | 65 | $ | 1,286 | $ | 57 | $ | 1,231 | ||||||||
Actual return on plan assets |
(2 | ) | 33 | 8 | 134 | |||||||||||
Employer contributions |
6 | 68 | 6 | 14 | ||||||||||||
Foreign currency exchange rate changes |
— | 19 | — | (42 | ) | |||||||||||
Benefits paid |
(5 | ) | (50 | ) | (6 | ) | (51 | ) | ||||||||
Other |
— | (2 | ) | — | — | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Fair value of plan assets at end of period |
$ | 64 | $ | 1,354 | $ | 65 | $ | 1,286 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Funded status |
$ | (24 | ) | $ | (306 | ) | $ | (16 | ) | $ | (252 | ) | ||||
|
|
|
|
|
|
|
|
Amounts recognized on the consolidated balance sheet |
||||||||||||||||
Noncurrent liabilities |
$ | (24 | ) | $ | (306 | ) | $ | (16 | ) | $ | (252 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average assumptions used to determine benefit obligations at measurement date |
||||||||||||||||
Discount rate |
3.74 | % | 4.90 | % | 4.84 | % | 5.45 | % | ||||||||
Rate of compensation increase |
N/A | N/A | N/A | N/A | ||||||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Millions of dollars |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset Category at December 31, 2011 |
||||||||||||||||
United States plan assets |
||||||||||||||||
U.S. equity securities |
$ | 15 | $ | 13 | $ | 2 | $ | — | ||||||||
Non-U.S. equity securities |
26 | 24 | 2 | — | ||||||||||||
Government bonds |
4 | — | 4 | — | ||||||||||||
Corporate bonds |
17 | 9 | 8 | — | ||||||||||||
Mortgage backed securities |
1 | — | 1 | — | ||||||||||||
Cash and cash equivalents |
1 | — | 1 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. plan assets |
$ | 64 | $ | 46 | $ | 18 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
International plan assets |
||||||||||||||||
U.S. equity securities |
$ | 67 | $ | 67 | $ | — | $ | — | ||||||||
Non-U.S. equity securities |
689 | 689 | — | — | ||||||||||||
Government bonds |
259 | — | 259 | — | ||||||||||||
Corporate bonds |
264 | — | 264 | — | ||||||||||||
Other bonds |
6 | 1 | 5 | — | ||||||||||||
Annuity contracts |
5 | — | — | 5 | ||||||||||||
Real estate |
8 | — | 8 | — | ||||||||||||
Cash and cash equivalents |
51 | 51 | — | — | ||||||||||||
Other |
5 | — | — | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total international plan assets |
$ | 1,354 | $ | 808 | $ | 536 | $ | 10 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total plan assets at December 31, 2011 |
$ | 1,418 | $ | 854 | $ | 554 | $ | 10 | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Millions of dollars |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset Category at December 31, 2010 |
||||||||||||||||
United States plan assets |
||||||||||||||||
U.S. equity securities |
$ | 28 | $ | 27 | $ | 1 | $ | — | ||||||||
Non-U.S. equity securities |
15 | 15 | — | — | ||||||||||||
Government bonds |
4 | — | 4 | — | ||||||||||||
Corporate bonds |
15 | 8 | 7 | — | ||||||||||||
Mortgage backed securities |
1 | — | 1 | — | ||||||||||||
Cash and cash equivalents |
2 | 2 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. plan assets |
$ | 65 | $ | 52 | $ | 13 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
International plan assets |
||||||||||||||||
U.S. equity securities |
$ | 57 | $ | 57 | $ | — | $ | — | ||||||||
Non-U.S. equity securities |
591 | 571 | 20 | — | ||||||||||||
Government bonds |
269 | — | 269 | — | ||||||||||||
Corporate bonds |
293 | 19 | 274 | — | ||||||||||||
Other bonds |
2 | 2 | — | — | ||||||||||||
Annuity contracts |
5 | — | — | 5 | ||||||||||||
Real estate |
8 | — | 8 | — | ||||||||||||
Cash and cash equivalents |
52 | 52 | — | — | ||||||||||||
Other |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total international plan assets |
$ | 1,286 | $ | 701 | $ | 571 | $ | 14 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total plan assets at December 31, 2010 |
$ | 1,351 | $ | 753 | $ | 584 | $ | 14 | ||||||||
|
|
|
|
|
|
|
|
Millions of dollars |
Total | Annuity Contracts |
Other | |||||||||
International plan assets |
||||||||||||
Balance at December 31, 2010 |
$ | 14 | $ | 5 | $ | 9 | ||||||
Purchases, sales and settlements |
(4 | ) | — | (4 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2011 |
$ | 10 | $ | 5 | $ | 5 | ||||||
|
|
|
|
|
|
Level 3 fair value measurement rollforward for 2010
Millions of dollars |
Total | Annuity Contracts |
Other | |||||||||
International plan assets |
||||||||||||
Balance at December 31, 2009 |
$ | 13 | $ | 6 | $ | 7 | ||||||
Purchases, sales and settlements |
1 | (1 | ) | 2 | ||||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2010 |
$ | 14 | $ | 5 | $ | 9 | ||||||
|
|
|
|
|
|
Pension Benefits | ||||||||
Millions of dollars |
United States | Int'l | ||||||
Net actuarial loss, net of tax of $15 and $173, respectively |
$ | 27 | $ | 444 | ||||
|
|
|
|
|||||
Total in accumulated other comprehensive loss |
$ | 27 | $ | 444 | ||||
|
|
|
|
Pension Benefits | ||||||||
Millions of dollars |
United States | Int'l | ||||||
2012 |
$ | 6 | $ | 51 | ||||
2013 |
$ | 6 | $ | 53 | ||||
2014 |
$ | 7 | $ | 54 | ||||
2015 |
$ | 7 | $ | 56 | ||||
2016 |
$ | 7 | $ | 58 | ||||
Years 2017 – 2021 |
$ | 27 | $ | 317 | ||||
|
|
|
|
Pension Benefits | ||||||||||||||||||||||||
United States | Int'l | United States | Int'l | United States | Int'l | |||||||||||||||||||
Millions of dollars |
2011 | 2010 | 2009 | |||||||||||||||||||||
Components of net periodic benefit cost |
||||||||||||||||||||||||
Service cost |
$ | — | $ | 1 | $ | — | $ | 1 | $ | — | $ | 2 | ||||||||||||
Interest cost |
4 | 86 | 4 | 85 | 5 | 77 | ||||||||||||||||||
Expected return on plan assets |
(4 | ) | (98 | ) | (3 | ) | (90 | ) | (4 | ) | (84 | ) | ||||||||||||
Settlements/curtailments |
— | — | — | — | 1 | (4 | ) | |||||||||||||||||
Recognized actuarial loss |
1 | 20 | 1 | 18 | 1 | 11 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net periodic benefit cost |
$ | 1 | $ | 9 | $ | 2 | $ | 14 | $ | 3 | $ | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | ||||||||
Millions of dollars |
United States | International | ||||||
Actuarial (gain) loss |
$ | 1 | $ | 18 | ||||
|
|
|
|
|||||
Total |
$ | 1 | $ | 18 | ||||
|
|
|
|
International Plans – Asset Class | 2012 Targeted | 2011 Targeted | ||||||||||||||
Percentage Range | Percentage Range | |||||||||||||||
Minimum | Maximum | Minimum | Maximum | |||||||||||||
Equity securities |
56 | % | 61 | % | 56 | % | 61 | % | ||||||||
Fixed income securities |
35 | % | 40 | % | 35 | % | 40 | % | ||||||||
Cash equivalents and other assets |
— | 2 | % | — | 4 | % | ||||||||||
|
|
|
|
|
|
|
|
Domestic Plans – Asset Class | 2012 Targeted | 2011 Targeted | ||||||||||||||
Percentage Range | Percentage Range | |||||||||||||||
Minimum | Maximum | Minimum | Maximum | |||||||||||||
U.S. equity securities |
19 | % | 28 | % | 34 | % | 51 | % | ||||||||
Non-U.S. equity securities |
31 | % | 47 | % | 15 | % | 22 | % | ||||||||
Fixed income securities |
29 | % | 43 | % | 30 | % | 44 | % | ||||||||
Cash equivalents |
1 | % | 2 | % | — | 2 | % | |||||||||
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost |
Pension Benefits | |||||||||||||||||||||||
United States | Int'l | United States | Int'l | United States | Int'l | |||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||
Discount rate |
4.84 | % | 5.45 | % | 5.35 | % | 5.84 | % | 6.15 | % | 5.98 | % | ||||||||||||
Expected return on plan assets |
7.00 | % | 7.00 | % | 7.00 | % | 7.00 | % | 7.63 | % | 7.00 | % | ||||||||||||
Rate of compensation increase |
N/A | NA | N/A | NA | N/A | 4.00 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter | ||||||||||||||||||||
(in millions, except per share amounts) |
First | Second | Third | Fourth | Year | |||||||||||||||
2011 |
||||||||||||||||||||
Total revenue |
$ | 2,321 | $ | 2,457 | $ | 2,387 | $ | 2,096 | $ | 9,261 | ||||||||||
Operating income |
144 | 169 | 138 | 136 | 587 | |||||||||||||||
Net income |
117 | 127 | 191 | 105 | 540 | |||||||||||||||
Net income attributable to noncontrolling interests |
(12 | ) | (27 | ) | (6 | ) | (15 | ) | (60 | ) | ||||||||||
Net income attributable to KBR |
105 | 100 | 185 | 90 | 480 | |||||||||||||||
Net income attributable to KBR per share : |
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Net income attributable to KBR per share – Basic |
$ | 0.69 | $ | 0.65 | $ | 1.23 | $ | 0.60 | $ | 3.18 | ||||||||||
Net income attributable to KBR per share – Diluted |
$ | 0.69 | $ | 0.65 | $ | 1.22 | $ | 0.60 | $ | 3.16 | ||||||||||
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2010 |
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Total revenue |
$ | 2,631 | $ | 2,671 | $ | 2,455 | $ | 2,342 | $ | 10,099 | ||||||||||
Operating income |
99 | 199 | 163 | 148 | 609 | |||||||||||||||
Net income |
59 | 122 | 117 | 97 | 395 | |||||||||||||||
Net income attributable to noncontrolling interests |
(13 | ) | (16 | ) | (20 | ) | (19 | ) | (68 | ) | ||||||||||
Net income attributable to KBR |
46 | 106 | 97 | 78 | 327 | |||||||||||||||
Net income attributable to KBR per share : |
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Net income attributable to KBR per share – Basic |
$ | 0.29 | $ | 0.66 | $ | 0.62 | $ | 0.52 | $ | 2.08 | ||||||||||
Net income attributable to KBR per share – Diluted |
$ | 0.29 | $ | 0.66 | $ | 0.62 | $ | 0.51 | $ | 2.07 | ||||||||||
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