KBR, INC., 10-Q filed on 7/27/2011
Quarterly Report
Document And Entity Information
6 Months Ended
Jun. 30, 2011
Jul. 15, 2011
Document And Entity Information
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
Jun. 30, 2011 
 
Entity Registrant Name
KBR, INC. 
 
Entity Central Index Key
0001357615 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
150,789,209 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
KBR 
 
Condensed Consolidated Statements Of Income (USD $)
In Millions, except Per Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Revenue:
 
 
 
 
Services
$ 2,416 
$ 2,610 
$ 4,693 
$ 5,226 
Equity in earnings of unconsolidated affiliates, net
41 
61 
85 
76 
Total revenue
2,457 
2,671 
4,778 
5,302 
Operating costs and expenses:
 
 
 
 
Cost of services
2,231 
2,415 
4,365 
4,898 
General and administrative
58 
55 
102 
104 
Loss (gain) on disposition of assets, net
(1)
(2)
Total operating costs and expenses
2,288 
2,472 
4,465 
5,004 
Operating income
169 
199 
313 
298 
Interest expense, net
(5)
(5)
(10)
(9)
Foreign currency gains (losses), net
(3)
(5)
Other non-operating expense
 
 
(1)
 
Income before income taxes and noncontrolling interests
166 
191 
305 
284 
Less: Provision for income taxes
39 
69 
61 
103 
Net Income
127 
122 
244 
181 
Less: Net income attributable to noncontrolling interests
27 
16 
39 
29 
Net income attributable to KBR
$ 100 
$ 106 
$ 205 
$ 152 
Net income attributable to KBR per share:
 
 
 
 
Basic
$ 0.65 
$ 0.66 
$ 1.35 
$ 0.94 
Diluted
$ 0.65 
$ 0.66 
$ 1.34 
$ 0.94 
Basic weighted average common shares outstanding
151 
160 
151 
160 
Diluted weighted average common shares outstanding
152 
161 
152 
161 
Cash dividends declared per share
$ 0.05 
$ 0.05 
$ 0.10 
$ 0.05 
Condensed Consolidated Balance Sheets (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and equivalents
$ 712 
$ 786 
Receivables:
 
 
Accounts receivable, net of allowance for bad debts of $26 and $27
1,516 
1,455 
Unbilled receivables on uncompleted contracts
447 
428 
Total receivables
1,963 
1,883 
Deferred income taxes
194 
199 
Other current assets
380 
394 
Total current assets
3,249 
3,262 
Property, plant, and equipment, net of accumulated depreciation of $353 and $334 (including $79 and $80, net, owned by a variable interest entity - see Note 12)
381 
355 
Goodwill
952 
947 
Intangible assets, net
121 
127 
Equity in and advances to related companies
229 
219 
Noncurrent deferred income taxes
100 
103 
Noncurrent unbilled receivables on uncompleted contracts
316 
320 
Other assets
129 
84 
Total assets
5,477 
5,417 
Current liabilities:
 
 
Accounts payable
856 
921 
Due to former parent, net
53 
43 
Obligation to former noncontrolling interest (Note 3)
20 
180 
Advance billings on uncompleted contracts
608 
498 
Reserve for estimated losses on uncompleted contracts
22 
26 
Employee compensation and benefits
236 
200 
Current non-recourse project-finance debt of a variable interest entity (Note 12)
10 
Other current liabilities
483 
470 
Total current liabilities
2,288 
2,347 
Noncurrent employee compensation and benefits
358 
397 
Noncurrent non-recourse project-finance debt of a variable interest entity (Note 12)
92 
92 
Other noncurrent liabilities
151 
132 
Noncurrent income tax payable
114 
128 
Noncurrent deferred tax liability
103 
117 
Total liabilities
3,106 
3,213 
KBR Shareholders' equity:
 
 
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding
 
 
Common stock, $0.001 par value, 300,000,000 shares authorized, 172,048,337 and 171,448,067 shares issued, and 150,759,156 and 151,132,049 shares outstanding
 
 
Paid-in capital in excess of par
1,998 
1,981 
Accumulated other comprehensive loss
(436)
(438)
Retained earnings
1,347 
1,157 
Treasury stock, 21,289,181 shares and 20,316,018 shares, at cost
(489)
(454)
Total KBR shareholders' equity
2,420 
2,246 
Noncontrolling interests
(49)
(42)
Total shareholders' equity
2,371 
2,204 
Total liabilities and shareholders' equity
$ 5,477 
$ 5,417 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data
Jun. 30, 2011
Dec. 31, 2010
Receivables:
 
 
Allowance for bad debts
$ 26 
$ 27 
Property, Plant, and Equipment:
 
 
Accumulated depreciation
353 
334 
PP&E owned by a VIE, net
$ 79 
$ 80 
KBR Shareholders' equity:
 
 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
50,000,000 
50,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
300,000,000 
300,000,000 
Common stock, shares issued
172,048,337 
171,448,067 
Common stock, shares outstanding
150,759,156 
151,132,049 
Treasury stock, shares
21,289,181 
20,316,018 
Condensed Consolidated Statements Of Comprehensive Income (USD $)
In Millions
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Condensed Consolidated Statements Of Comprehensive Income
 
 
 
 
Net income
$ 127 
$ 122 
$ 244 
$ 181 
Other comprehensive income (loss), net of tax benefit (provision):
 
 
 
 
Net cumulative translation adjustments
(8)
(8)
(4)
(6)
Pension liability adjustments
Net unrealized gain (loss) on derivatives
(2)
Total other comprehensive income (loss), net of tax
(4)
(4)
Comprehensive income
123 
118 
246 
185 
Less: Comprehensive income attributable to noncontrolling interests
(27)
(15)
(39)
(28)
Comprehensive income attributable to KBR
$ 96 
$ 103 
$ 207 
$ 157 
Condensed Consolidated Statements Of Cash Flows (USD $)
In Millions
6 Months Ended
Jun. 30,
2011
2010
Cash flows from operating activities:
 
 
Net income
$ 244 
$ 181 
Adjustments to reconcile net income to net cash provided by operations:
 
 
Depreciation and amortization
35 
29 
Equity in earnings of unconsolidated affiliates
(85)
(76)
Deferred income taxes
(13)
(20)
Other
20 
Changes in operating assets and liabilities:
 
 
Receivables
(25)
(183)
Unbilled receivables on uncompleted contracts
(8)
95 
Accounts payable
(27)
(65)
Advanced billings on uncompleted contracts
(2)
261 
Accrued employee compensation and benefits
37 
50 
Reserve for loss on uncompleted contracts
(4)
(9)
Collection (repayment) of advances from (to) unconsolidated affiliates, net
22 
(4)
Distribution of earnings from unconsolidated affiliates
61 
29 
Other assets
44 
32 
Other liabilities
(61)
92 
Total cash flows provided by operating activities
223 
432 
Cash flows from investing activities:
 
 
Capital expenditures
(47)
(19)
Investment in equity method joint ventures
(11)
(7)
Acquisition of business, net of cash acquired
 
(10)
Investment in licensing arrangement
 
(20)
Total cash flows used in investing activities
(58)
(56)
Cash flows from financing activities:
 
 
Acquisition of noncontrolling interest
(164)
 
Payments to reacquire common stock
(37)
(58)
Distributions to noncontrolling interests, net
(46)
(30)
Payments of dividends to shareholders
(15)
(16)
Net proceeds from issuance of stock
Payments on long-term borrowings
(10)
(4)
Excess tax benefits from stock-based compensation
 
Return of cash collateral on letters of credit, net
16 
24 
Total cash flows used in financing activities
(248)
(83)
Effect of exchange rate changes on cash
(21)
Increase (decrease) in cash and equivalents
(74)
272 
Cash increase due to consolidation of a variable interest entity
 
22 
Cash and equivalents at beginning of period
786 
941 
Cash and equivalents at end of period
712 
1,235 
Noncash operating activities
 
 
Other assets (Note 7)
 
83 
Other liabilities (Note 7)
 
(83)
Noncash financing activities
 
 
Dividends declared
$ 8 
$ 8 
Description Of Business And Basis Of Presentation
Description Of Business And Basis Of Presentation

Note 1. Description of Business and Basis of Presentation

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, petrochemicals, government services, industrial and civil infrastructure sectors. 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 reportable business segments.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules of the United States Securities and Exchange Commission ("SEC") for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States ("U.S. GAAP"). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC. We believe that the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all normal adjustments that management considers necessary for a fair presentation of our consolidated results of operations, financial position and cash flows. Operating results for interim periods are not necessarily indicative of results to be expected for the full fiscal year 2011 or any other future periods.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and costs during the reporting periods. Actual results could differ materially from those estimates. On an ongoing basis, we review our estimates based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.

 

Our condensed consolidated financial statements include the accounts of majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary. The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates' operating and financial policies. The cost method is used when we do not have the ability to exert significant influence. Intercompany accounts and transactions are eliminated.

Income Per Share
Income Per Share

Note 2. Income per Share

Basic income per share is based upon the weighted average number of common shares outstanding during the period. Dilutive income per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued, using the treasury stock method. A reconciliation of the number of shares used for the basic and diluted income per share calculations is as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Millions of shares

   2011      2010      2011      2010  

Basic weighted average common shares outstanding

     151         160         151         160   

Dilutive effect of stock options and restricted shares

     1         1         1         1   
                                   

Diluted weighted average common shares outstanding

     152         161         152         161   
                                   

For purposes of applying the two-class method in computing earnings per share, net earnings allocable to participating securities was approximately $0.5 million for the three months ended June 30, 2011 and 2010, and approximately $1 million for the six months ended June 30, 2011 and 2010. The diluted earnings per share calculation did not include 0.7 million and 0.4 million anti-dilutive weighted average shares for the three and six months ended June 30, 2011, respectively. The diluted earnings per share calculation did not include 1.0 million and 1.4 million anti-dilutive weighted average shares for the three and six months ended June 30, 2010, respectively.

Business Combinations And Other Transactions
Business Combinations And Other Transactions

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. R&S' operating results are reported in our IGP segment.

The purchase price was $280 million plus preliminary net 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 post-closing adjustments. The purchase price was subject to an initial escrowed holdback amount of $43 million to secure post-closing working capital adjustments, indemnification obligations of the sellers and other contingent obligations related to the operations of the business. During the first six months of 2011, we recorded an increase to goodwill of approximately $3 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. As of June 30, 2011, approximately $27 million of holdbacks remained in escrow and subject to finalization of post-closing working capital adjustments, indemnification obligations and other contingent obligations.

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 that we expect to finalize in the third quarter of 2011. The initial purchase price of $164 million was paid on January 5, 2011. In addition, we agreed to pay the former noncontrolling interest 44.94% of future proceeds collected on certain receivables owed to MWKL. Furthermore, 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 June 30, 2011, we had a net liability of approximately $20 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 which is nearing completion. 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 condensed consolidated income statement for the six months ended June 30, 2011.

Percentage-Of-Completion Contracts
Percentage-Of-Completion Contracts

Note 4. Percentage-of-Completion Contracts

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:

 

Millions of dollars

   June 30,
2011
     December 31,
2010
 

Probable unapproved claims

   $ 25       $ 19   

Probable unapproved change orders

     4         10   

Probable unapproved change orders related to unconsolidated subsidiaries

     —           3   
                 

As of June 30, 2011, the probable unapproved claims related to several completed projects. Contracts with probable unapproved claims that will likely not be settled within one year totaled $20 million at June 30, 2011, and $19 million at December 31, 2010, and are reflected as a non-current asset in "Noncurrent unbilled receivables on uncompleted contracts" in our condensed 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" in our condensed consolidated balance sheets. See Note 7 for a discussion of U.S. government contract claims, which are not included in the table above.

 

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 U.S. District Court for the Southern District of New York to recognize the award in the U.S. of approximately $356 million plus interest thereon until paid. PEMEX initiated an appeal and a stay to the U.S. Court of Appeals for the Second Circuit related to the enforcement of the judgment which was granted by the U.S. District Court and PEMEX was required to post collateral of $395 million with the court registry. We believe the likelihood of PEMEX receiving a favorable ruling on appeal is remote as U.S. courts have a strong record of recognizing and enforcing international arbitration awards.

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. These arguments were presented in the initial nullification and amparo actions and were rejected in both cases. We will respond to further efforts by PEMEX to nullify our award as may be required. Mexican courts have a solid record of enforcing arbitration awards and we believe it is likely that the amparo action will be denied. Additionally, we believe the facts and circumstances in our case suggest it is unlikely that a favorable decision to PEMEX in Mexico would affect the outcome of the U.S. appeal.

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 June 30, 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.

Business Segment Information
Business Segment Information

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.

Operating segment performance is evaluated by our chief operating decision maker using operating segment income which is defined as operating segment revenue less the cost of services and segment overhead directly attributable to the operating segment. Intersegment revenues are eliminated from operating segment revenues. Operating segment income excludes certain cost of services directly attributable to the operating segment that is managed and reported at the corporate level, and corporate general and administrative expenses. Labor cost absorption represents costs incurred by our central service labor and resource groups (above)/under the amounts charged to the operating segments.

 

The table below presents information on our reportable business segments.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Millions of dollars

   2011     2010     2011     2010  

Revenue:

        

Hydrocarbons

   $ 1,100      $ 1,004      $ 2,147      $ 1,926   

Infrastructure, Government and Power

     890        1,197        1,745        2,471   

Services

     445        452        842        867   

Other

     22        18        44        38   
                                

Total revenue

   $ 2,457      $ 2,671      $ 4,778      $ 5,302   
                                

Operating segment income:

        

Hydrocarbons

   $ 121      $ 116      $ 220      $ 192   

Infrastructure, Government and Power

     72        105        133        151   

Services

     15        25        28        46   

Other

     13        4        25        13   
                                

Operating segment income

     221        250        406        402   

Unallocated amounts:

        

Labor cost absorption

     6        4        9        —     

Corporate general and administrative

     (58     (55     (102     (104
                                

Total operating income

   $ 169      $ 199      $ 313      $ 298   
                                
Committed And Restricted Cash
Committed And Restricted Cash

Note 6. Committed and Restricted Cash

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 $212 million at June 30, 2011 and $136 million at December 31, 2010. We expect to use the cash on these projects to pay project costs.

Restricted cash consists of amounts held in deposit with certain banks to collateralize standby letters of credit. Our current restricted cash is included in "Other current assets" and our non-current restricted cash is included in "Other assets" on our condensed consolidated financial statements. Our restricted cash balances are presented in the table below:

 

Millions of dollars

   June 30,
2011
     December 31,
2010
 

Current restricted cash

   $ 1       $ 11   

Non-current restricted cash

     1         10   
                 

Total restricted cash

   $ 2       $ 21   
                 
United States Government Contract Work
United States Government Contract Work

Note 7. United States Government Contract Work

We provide substantial work under our government contracts to the United States Department of Defense and other governmental agencies. These contracts include our worldwide United States Army logistics contracts, known as LogCAP 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. Both fees are determined as a percentage rate applied to a negotiated estimate of the total costs for each task order. For task orders under an award fee arrangement, our 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. The amounts of award fees are determined at the sole discretion of the AFDO.

During the fourth quarter of 2009, we determined that we could no longer reliably estimate fees to be awarded by the AFDO and, accordingly, adjusted our accrual rate to 0%. Until such time as we are able to resume making reliable fee estimates on the LogCAP III contract, we will recognize award fees only when awarded. During the second quarter of 2010, we received an award fee of $60 million representing approximately 47% of the available award fee pool for the period of performance from May 2008 through August 2009 which we recorded as an increase to revenue in the second quarter of 2010. During the first quarter of 2011, we were awarded and recognized revenue of $16 million for award fees representing approximately 53% of the available award fee pool for the periods of performance from March 2010 through August 2010 on task orders in Iraq. We were awarded ratings of "very good" on these task orders. We expect to receive award fees in the third quarter of 2011 for the period of performance from September 2010 through February 2011 on task orders in Iraq. The anticipated available award fee pool associated with this period of performance is subject to final determination by our customer.

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 Department of Defense 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 June 30, 2011, open Form 1's from the DCAA recommending suspension of payments totaling approximately $360 million associated with our contract costs incurred in prior years, of which approximately $162 million has been withheld from our current billings. As a consequence, for certain of these matters, we have withheld approximately $78 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 $83 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 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. The Army previously indicated that not all task orders and subcontracts had been reviewed and that they may make additional adjustments. 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 June 30, 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 acquired security. We believe that, while the LogCAP III contract anticipates that the Army will provide force protection to KBR employees, it does not prohibit 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. Discovery is currently pending various motions from both parties and no hearing date has been scheduled. 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 Department of Justice ("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. We have not received a final determination by the DCMA and, as requested, we continue to provide information to the DCMA. 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 June 30, 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 to the ASBCA to recover the $51 million of 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 June 30, 2011, we have outstanding Form 1's from the DCAA disapproving $143 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. In 2009, 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 to recover $54 million of the $82 million withheld from us by the customer. The claims proceedings are in the discovery process and a trial date has been set for October 2011. With respect to questions raised regarding billing in accordance with contract terms, as of June 30, 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. However, we are unable to estimate an amount of possible loss or range of possible loss in excess of the amount accrued related to any costs billed to the customer that were not in accordance with the contract terms. We believe the prices obtained for these services were reasonable, we intend to vigorously defend ourselves in this matter and 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 June 30, 2011, we had withheld $38 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 in the U.S. Federal Court in the Southern District of Texas to recover approximately $35 million for payments we have 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. As noted above, we have claims pending in the U.S. COFC to recover these amounts from the U.S. government and we believe it is probable that we will recover such amounts. Additionally, in March 2011, the U.S. government filed a counterclaim alleging KBR employees accepted bribes from Tamimi in exchange for awarding a master agreement for DFAC services to Tamimi. The government 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 government's counterclaim and believe it to be without merit. Trial for the claims in the U.S. COFC is scheduled to begin in October 2011.

 

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 June 30, 2011 and December 31, 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 form 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 June 30, 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 further discussions with the customer regarding the applicable provisions of the FAR and interpretations thereof, as well as providing additional supporting documentation to the customer. As of June 30, 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 June 30, 2011, we have accrued our estimate of probable loss related to this matter; however, it is reasonably possible we could incur additional losses.

Investigations 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 of our customer on the LogCAP III contract. This case was originally filed pending the government's decision whether or not to participate in the suit. In June 2006, the government formally declined to participate. The principal allegations are that our compensation for the provision of Morale, Welfare and Recreation ("MWR") facilities under LogCAP III is based on the volume of usage of those facilities and that we deliberately overstated that usage. In accordance with the contract, we charged our customer based on actual cost, not based on the number of users. It was also alleged that, during the period from November 2004 into mid-December 2004, we continued to bill the customer for lunches, although the dining facility was closed and not serving lunches. There are also allegations regarding housing containers and our provision of services to our employees and contractors. On July 5, 2007, the court granted our motion to dismiss the qui tam claims and to compel arbitration of employment claims including a claim that the plaintiff was unlawfully discharged. The majority of the plaintiff's claims were dismissed but the plaintiff was allowed to pursue limited claims pending discovery and future motions. Substantially all employment claims were sent to arbitration under the Company's dispute resolution program 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 is expected in 2011. We believe the relator's claim is without merit and that the likelihood that a loss has been incurred is remote. As of June 30, 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." Three arbitration hearings took place in 2010 in Washington, D.C. primarily related to claims involving unpaid rents and damages on lost or unreturned vehicles totaling approximately $77 million. The arbitration panel awarded $7 million to FKTC plus an unquantified amount for repair costs on certain vehicles, damages suffered as a result of late vehicle returns, and interest thereon, to be determined at a later date. No payments are expected to occur until all claims are arbitrated and awards finalized. 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. As of June 30, 2011 and December 31, 2010, we have recorded un-reimbursable expenses and a liability of $20 million for the full amount of the awarded damages. In February 2010, we filed a notice of appeal with the Federal Fourth Circuit Court of Appeals in Richmond, Virginia which is set for argument in September 2011.

Electrocution litigation. During 2008, a lawsuit was filed against KBR 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. We intend to vigorously defend this matter. 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 Appeal dismissed our appeal concluding it did not have jurisdiction. The case is currently proceeding with the discovery process. We are unable 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 June 30, 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 who purport to represent a large class of unnamed persons. 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. 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. We intend to vigorously defend these matters. 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 June 30, 2011, no amounts have been accrued.

 

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 Federal Court in Houston, Texas where KBR filed various motions to dismiss. In September 2006, the case was dismissed based upon the court's ruling that it lacked jurisdiction because the case presented a non-justiciable political question. The plaintiffs appealed the dismissals to the Fifth Circuit Court of Appeals in New Orleans, Louisiana and in May 2008, the court reversed and remanded the remaining cases to trial court in Houston, Texas for discovery proceedings. Thereafter, the Trial Court in Houston, Texas directed the parties to conduct full substantive discovery.

In July and August 2009, KBR re-filed motions to dismiss in the trial court including the re-submittal of dispositive motions on the Defense Base Act and Political Question Doctrine, and the Combatant Activities Exception to the Federal Tort Claims Act. In January and February 2010, the trial court denied our motions to dismiss based on the Political Question Doctrine and other defenses but granted portions of our motion to dismiss under the Defense Base Act. In March 2010, we filed appeals on all dispositive motions that were previously denied with the Fifth Circuit Court of Appeals and moved to stay all proceedings in the trial court pending the resolution of these appeals. The cases were removed from the trial docket and a stay was entered. In September 2010, the DOJ filed a brief in support of KBR's position that the cases should be dismissed in their entirety based upon the exclusivity provisions in the Defense Base Act. The Fifth Circuit Court of Appeals heard oral arguments on all issues in New Orleans, Louisiana on July 7, 2011. The DOJ argued in favor of KBR's position on the proposition that the Defense Base Act exclusivity provisions should require dismissal of all claims. Currently, the trial court proceedings continue to be stayed pending a ruling on the appeal which is expected in the second half of 2011.We are unable to determine the likely outcome of these cases at this time nor can we reliable estimate a range of possible loss, if any. Accordingly, as of June 30, 2011, no amounts have been accrued.

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 LogCAP III. We have filed motions to dismiss the complaint which are currently pending. We have not adjusted our revenues or accrued any amounts related to this matter.

Other Matters

Claims. Included in receivables in our condensed consolidated balance sheets are unapproved claims for costs incurred under various government contracts totaling $149 million at June 30, 2011 of which $121 million is included in "Accounts receivable" and $28 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 $121 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 $28 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 June 30, 2011 are considered to be probable of collection and have been previously recognized as revenue.

Other Commitments And Contingencies
Other Commitments And Contingencies

Note 8. 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. We also agreed to a period of organizational probation of three years, during which we retain a monitor who assesses our compliance with the plea agreement and evaluates our FCPA compliance program over the three year period, with periodic reports to the DOJ. 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.

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. As of 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 at December 31, 2010 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. 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.

Under the terms of the MSA, Halliburton has agreed to indemnify us, and any of our greater than 50%-owned subsidiaries, for our share of fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of claims made or assessed by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a settlement thereof relating to FCPA and related corruption allegations, which could involve Halliburton and us through The M. W. Kellogg Company, MWKL, or their or our joint ventures in projects both in and outside of Nigeria, including the Bonny Island, Nigeria project. Halliburton's indemnity will not apply to any other losses, claims, liabilities or damages assessed against us as a result of or relating to FCPA matters and related corruption allegations or to any fines or other monetary penalties or direct monetary damages, including disgorgement, assessed by governmental authorities in jurisdictions other than the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement thereof, or assessed against entities such as TSKJ, in which we do not have an interest greater than 50%.

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 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 violated the terms of their contracts with us. In the first quarter of 2011, we reduced project cost estimates for the remaining unpaid agent fees on the Bonny Island project which resulted in an increase of $4 million to operating income in our condensed consolidated statements of income.

Barracuda-Caratinga Project Arbitration

In June 2000, we entered into a contract with Barracuda & Caratinga Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields, which are located off the coast of Brazil. 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 is being conducted in New York under the guidelines of the United Nations Commission on International Trade Law ("UNCITRAL"). Petrobras contends that all of the bolts installed on the project are defective and must be replaced.

In 2009, we received an unfavorable ruling from the arbitration panel on the legal and factual issues as the panel decided the original design specification for the bolts originated with KBR and its subcontractors. The ruling concluded that KBR's express warranties in the contract regarding the fitness for use of the design specifications for the bolts took precedence over any implied warranties provided by the project owner. Our potential exposure includes the costs of the bolts replaced to date by Petrobras, any incremental monitoring costs incurred by Petrobras and damages for any other bolts that are subsequently found to be defective. We believe that it is probable that we have incurred some liability in connection with the replacement of bolts that have failed during the contract warranty period which expired June 30, 2006. In May 2010, the arbitration tribunal heard arguments from both parties regarding various damage scenarios and estimates of the amount of KBR's overall liability in this matter. The final arbitration arguments were made in August of 2010. Based on the damage estimates presented at this hearing, we estimate our minimum exposure, excluding interest, to be approximately $12 million representing our estimate for replacement of bolts that failed during the warranty period and were not replaced. As of June 30, 2011 and December 31, 2010, we have recorded a liability of $12 million to Petrobras for the failed bolts included in "Other current liabilities." We also have recorded an indemnification receivable from Halliburton of $12 million pursuant to the indemnification under the MSA included in "Other current assets." The amount of any remaining liability will be dependent upon the legal and factual issues to be determined by the arbitration tribunal in the final arbitration hearings. For the remaining bolts at dispute, we cannot determine that we have liability nor determine the amount of any such liability and no additional amounts have been accrued.

Any liability incurred by us in connection with the replacement of bolts that have failed to date or related to the remaining bolts at dispute in the bolt arbitration is covered by an indemnity from our former parent Halliburton. Under the MSA, Halliburton has agreed to indemnify us and any of our greater than 50%-owned subsidiaries as of November 2006, for all out-of-pocket cash costs and expenses (except for ongoing legal costs), or cash settlements or cash arbitration awards in lieu thereof, we may incur after the effective date of the MSA as a result of the replacement of the subsea flowline bolts installed in connection with the Barracuda-Caratinga project. As of June 30, 2011, we are not aware of any uncertainties related to the indemnity from Halliburton or any material limitations on our ability to recover amounts due to us for matters covered by the indemnity from Halliburton. We do not believe any outcome of this matter will have a material adverse impact to our operating results or financial position.

 

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 site conditions and until further information is available, we are only able to estimate a possible range of remediation costs. These locations were primarily utilized for manufacturing or fabrication work and are no longer in operation. The use of these facilities created various environmental issues including deposits of metals, volatile and semi-volatile compounds, and hydrocarbons impacting surface and subsurface soils and groundwater. The range of remediation costs could change depending on our ongoing site analysis and the timing and techniques used to implement remediation activities. We do not expect costs related to environmental matters will have a material adverse effect on our condensed 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 possible costs that could be as much as $13 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 and accordingly, no amounts have been accrued for potential liabilities.

Letters of credit

In connection with certain projects, we are required to provide letters of credit or surety bonds to our customers. Letters of credit are provided to customers in the ordinary course of business to guarantee advance payments from certain customers, support future joint venture funding commitments and to provide performance and completion guarantees on engineering and construction contracts. We have $1.8 billion in committed and uncommitted lines of credit to support letters of credit and as of June 30, 2011, we had utilized $586 million of our credit capacity for letters of credit. The letters of credit outstanding included $261 million issued under our Revolving Credit Facility and $325 million issued under uncommitted bank lines as of June 30, 2011. Surety bonds are also posted under the terms of certain contracts primarily related to state and local government projects to guarantee our performance.

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 $19 million at June 30, 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.

 

Transactions with Former Parent

As of June 30, 2011, "Due to former parent, net" was approximately $53 million and was comprised primarily of amounts owed to Halliburton under the tax sharing agreement for estimated income taxes, net of receivables due from Halliburton under the MSA. Our estimate of amounts due to Halliburton under the tax sharing agreement was approximately $45 million at June 30, 2011 and relates to income taxes primarily for the years from 2001 through 2006. Although we believe we have appropriately accrued for these amounts owed to Halliburton, there may be differences of interpretation between us and Halliburton regarding the terms of the tax sharing agreement which may result in changes to the amounts ultimately paid to or received from Halliburton for income taxes at the time of settlement. Under the MSA, Halliburton agreed to indemnify us for certain penalties and fines, including reimbursement of certain legal fees, associated with matters existing at the date of our separation from Halliburton. The remaining balance as of June 30, 2011 is associated with various other amounts payable to or receivable from Halliburton resulting from our separation in 2007 which we will continue to evaluate prior to final settlement with Halliburton.

Included in "Other assets" is an income tax receivable of approximately $18 million related to a foreign tax credit generated prior to our split-off from Halliburton in 2007. The receivable will be collected from Halliburton after Halliburton receives the refund from an amended tax return that was filed in the second quarter of 2011.

As discussed above under "Barracuda-Caratinga Project Arbitration," we have recorded a indemnification receivable due from Halliburton of approximately $12 million associated with our estimated liability in the bolts matter which is included in "Other current assets."

Other

We had commitments to provide funds to our privately financed projects of $30 million as of June 30, 2011 and $33 million as of December 31, 2010. Commitments to fund these projects are supported by letters of credit as described above. At June 30, 2011, approximately $17 million of the $30 million in commitments will become due within one year.

Income Taxes
Income Taxes

Note 9. Income Taxes

Our effective tax rate was approximately 24% for the three months ended June 30, 2011 and 20% for the six months ended June 30, 2011. Our effective tax rate for the three and six months ended June 30, 2011 was lower than the U.S. statutory rate of 35% due to favorable tax rate differentials on foreign earnings and lower tax expense on foreign income from unincorporated joint ventures. In addition, we recognized discrete tax benefits in the first six months of 2011 from the execution of tax planning strategies, the release of a tax reserve due to expiration of a statute and from the reduction of deferred tax liabilities recorded in prior periods as a result of changes in estimates of the tax liability that will be owed upon the planned liquidation of an Australian unconsolidated joint venture that is in receivership. The tax liability that will result from ultimate liquidation of the Australian joint venture is dependent upon the amount and timing of the debts to be discharged during the liquidation process. Although we do not control the process, we anticipate the joint venture will be liquidated in the second half of 2011. As a result, the deferred tax liabilities may be further adjusted based on actions taken by the administrator and timing of the wind-up and liquidation process. Our effective tax rate excluding discrete items was approximately 30% for the first six months of 2011.

Our 36% effective tax rate for the three and six months ended June 30, 2010 was higher than the U.S. statutory tax rate of 35% primarily due to discrete items charged to income tax expense related to increased tax accruals due to several items including Subpart F income and true-up of prior year foreign taxes.

Shareholders' Equity
Shareholders' Equity

Note 10. Shareholders' Equity

The following table summarizes our shareholders' equity activities during the six months ended June 30, 2011:

 

           KBR Shareholders        

Millions of dollars

   Total     Paid-in
Capital in
Excess of
par
     Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
 

Balance at December 31, 2010

   $ 2,204      $ 1,981       $ 1,157        (454   $ (438   $ (42
                                                 

Stock-based compensation

     9        9         —          —          —          —     

Common stock issued upon exercise of stock options

     5        5         —          —          —          —     

Tax benefit increase related to stock-based plans

     3        3         —          —          —          —     

Dividends declared to shareholders

     (15     —           (15     —          —          —     

Repurchases of common stock

     (37     —           —          (37     —          —     

Issuance of ESPP shares

     2             2       

Distributions to noncontrolling interests

     (46     —           —          —          —          (46

Comprehensive income components:

             

Net income

     244        —           205        —          —          39   

Other comprehensive income, net of tax (provision):

             

Net cumulative translation adjustment

     (4     —           —          —          (4     —     

Pension liability adjustment, net of tax

     8        —           —          —          8        —     

Net unrealized gains (losses) on derivatives

     (2     —           —          —          (2     —     
                   

Comprehensive income

     246              
                                                 

Balance at June 30, 2011

   $ 2,371      $ 1,998       $ 1,347      $ (489   $ (436   $ (49
                                                 

The following table summarizes our shareholders' equity activities during the six months ended June 30, 2010:

 

            KBR Shareholders        

Millions of dollars

   Total     Paid-in
Capital in
Excess of
par
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
 

Balance at December 31, 2009

   $ 2,296      $ 2,103      $ 854        (225   $ (444   $ 8   
                                                

Stock-based compensation

     8        8        —          —          —          —     

Common stock issued upon exercise of stock options

     1        1        —          —          —          —     

Dividends declared to shareholders

     (8     —          (8     —          —          —     

Adjustments pursuant to tax sharing agreement with former parent

     (8     (8     —          —          —          —     

Repurchases of common stock

     (58     —          —          (58     —          —     

Issuance of ESPP shares

     2            2       

Distributions to noncontrolling interests

     (30     —          —          —          —          (30

Consolidation of Fasttrax Limited

     (4     —          —          —          —          (4

Comprehensive income components:

            

Net income

     181        —          152        —          —          29   

Other comprehensive income, net of tax (provision):

            

Net cumulative translation adjustment

     (6     —          —          —          (4     (2

Pension liability adjustment, net of tax

     6        —          —          —          5        1   

Net unrealized gains (losses) on derivatives

     4        —          —          —          4        —     
                  

Comprehensive income

     185             
                                                

Balance at June 30, 2010

   $ 2,384      $ 2,104      $ 998      $ (281   $ (439   $ 2   
                                                

Accumulated other comprehensive loss consisted of the following balances:

 

Millions of dollars

   June 30,
2011
    December 31,
2010
 

Cumulative translation adjustments

   $ (56   $ (52

Pension liability adjustments

     (374     (382

Unrealized losses on derivatives

     (6     (4
                

Total accumulated other comprehensive loss

   $ (436   $ (438
                
Fair Value Measurements
Fair Value Measurements

Note 11. Fair Value Measurements

The financial assets and liabilities measured at fair value on a recurring basis at June 30, 2011 are included below:

 

     Fair Value Measurements at Reporting Date Using  

Millions of dollars

   Total Fair
Value at
Reporting
Date
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Marketable securities

   $ 16       $ 13       $ 3       $ —     

Derivative assets

   $ 2       $ —         $ 2       $ —     

Derivative liabilities

   $ 4       $ —         $ 4       $ —     

Derivative instruments. Currency derivative instruments are carried on the condensed consolidated balance sheet at fair value and are primarily based upon market observable inputs and significant other observable inputs. We manage our currency exposures through the use of foreign currency derivative instruments denominated in our major currencies, which are generally the currencies of the countries for which we do the majority of our international business. We utilize derivative instruments to manage the foreign currency exposures related to specific assets and liabilities that are denominated in foreign currencies, and to manage forecasted cash flows denominated in foreign currencies generally related to long-term engineering and construction projects. The purpose of our foreign currency risk management activities is to protect us from the risk that the eventual dollar cash flow resulting from the sale and purchase of products and services in foreign currencies will be adversely affected by changes in exchange rates.

Marketable securities. We use quoted market prices and other observable inputs to determine the fair value of our marketable securities. These financial instruments primarily consist of mutual funds, exchange-traded fixed income securities and money market accounts.

Equity Method Investments And Variable Interest Entities
Equity Method Investments And Variable Interest Entities

Note 12. Equity Method Investments and Variable Interest Entities

Equity Method Investments

The following is a description of our significant investments accounted for on the equity method of accounting that are not 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.

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 condensed consolidated statements of income. As of June 30, 2011, we have not collected the remaining $18 million due from Sonatrach for the sale of our interest in BRC, which is included in "Accounts receivable" on the condensed consolidated balance sheets. 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. We believe the amount owed to us is probable of recovery.

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. FASB ASC 810 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 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.

 

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:

 

     As of June 30, 2011  

Unconsolidated VIEs

   Total
assets
     Total
liabilities
     Maximum
exposure to  loss
 

(in millions)

        

U.K. Road projects

   $ 1,523       $ 1,557       $ 31   

Fermoy Road project

   $ 253       $ 273       $ 2   

Allenby & Connaught project

   $ 3,023       $ 2,985       $ 57   

EBIC Ammonia project

   $ 701       $ 463       $ 50   

 

         As of December 31, 2010      

Unconsolidated VIEs

   Total
assets
     Total
liabilities
 

(in millions)

     

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   

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 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 June 30, 2011, our performance through the construction phase is supported by $67 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 June 30, 2011, our assets and liabilities associated with our investment in this project, within our condensed consolidated balance sheet, were $28 million and $2 million, respectively. The $55 million difference between our recorded liabilities and aggregate maximum exposure to loss was primarily related to our equity investments and $30 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 June 30, 2011, our assets and liabilities associated with our investment in this project, within our condensed consolidated balance sheet, were $76 million and $17 million, respectively. The $33 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 June 30, 2011.

Consolidated VIEs

The following is a summary of the significant VIEs where we are the primary beneficiary:

 

         As of June 30, 2011      

Consolidated VIEs

   Total
assets
     Total
liabilities
 

(in millions)

     

Fasttrax Limited project

   $ 107       $ 112   

Escravos Gas-to-Liquids project

   $ 394       $ 455   

Pearl GTL project

   $ 177       $ 171   

Gorgon LNG project

   $ 564       $ 621   
         As of December 31, 2010      

Consolidated VIEs

   Total
assets
     Total
liabilities
 

(in millions)

     

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. In December 2001, the Fasttrax Joint Venture (the "JV") was created to provide to the United Kingdom Ministry of Defense ("MOD") a fleet of new heavy equipment transporters ("HETs") capable of carrying a Challenger II tank. The JV owns, operates and maintains the HET fleet and provides heavy equipment transportation services to the British Army. The JV's entity structure includes a parent entity and its 100%-owned subsidiary, Fasttrax Ltd (the "SPV"). KBR and its partner each own 50% of the parent entity.

The JV's purchase of the assets was funded through the issuance of several series guaranteed secured bonds. 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 at June 30, 2011, is summarized in the following table and are also reflected on the face of our condensed consolidated balance sheet. Assets collateralizing the JV's senior bonds include cash and equivalents of $23 million and property, plant, and equipment of approximately $79 million, net of accumulated depreciation of $43 million as of June 30, 2011.

 

Consolidated amount of non-recourse project-finance debt of a VIE

Millions of Dollars

   June 30, 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

   $ 92   
        

Total non-recourse project-finance debt of a VIE consolidated by KBR

   $ 102   
        

Escravos Gas-to-Liquids ("GTL") project. During 2005, we formed a joint venture to engineer and construct a gas monetization facility in Nigeria. We own 50% equity interest and determined that we are the primary beneficiary of the joint venture which is consolidated for financial reporting purposes. There are no consolidated assets that collateralize the joint venture's obligations. However, at June 30, 2011 and December 31, 2010, the joint venture had approximately $124 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 is expected to be completed in 2011, consists of gas production facilities and a GTL plant. The joint venture is considered a VIE and we determined that we are the primary beneficiary of the joint venture which is consolidated for financial reporting purposes.

Gorgon LNG project. In 2005, we were awarded, through an Australian joint venture in which we hold a 30% ownership interest, a contract from Chevron for cost-reimbursable FEED and EPCM services to construct a LNG plant in Australia. The joint venture is considered a VIE and we determined that we are the primary beneficiary of the joint venture which is consolidated for financial reporting purposes.

Retirement Plans
Retirement Plans

Note 13. Retirement Plans

The components of net periodic benefit cost related to pension benefits for the three and six months ended June 30, 2011 and 2010 were as follows:

 

     Three Months Ended June 30,  
     2011     2010  

Millions of dollars

   United
States
    International     United
States
    International  

Components of net periodic benefit cost:

        

Service cost

   $ —        $ 1      $ —        $ 1   

Interest cost

     1        20        1        22   

Expected return on plan assets

     (1     (23     (1     (23

Recognized actuarial loss

     1        5        1        4   
                                

Net periodic benefit cost

   $ 1      $ 3      $ 1      $ 4   
                                

 

     Six Months Ended June 30,  
     2011     2010  

Millions of dollars

   United
States
    International     United
States
    International  

Components of net periodic benefit cost:

        

Service cost

   $ —        $ 1      $ —        $ 1   

Interest cost

     2        41        2        44   

Expected return on plan assets

     (2     (47     (2     (46

Recognized actuarial loss

     1        10        1        9   
                                

Net periodic benefit cost

   $ 1      $ 5      $ 1      $ 8   
                                

For the six months ended June 30, 2011, we contributed approximately $52 million of the $64 million we currently expect to contribute in 2011 to our international plans, and approximately $1 million of the $5 million we currently expect to contribute to our domestic plans in 2011.

Recent Adopted Accounting Pronouncements
Recent Adopted Accounting Pronouncements

Note 14. Recent Adopted Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification™ (Codification) to allow 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 accounting standard update 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. We are evaluating the impact that the adoption of ASU 2011-04 will have 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 are 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 will apply to future business combinations and is not expected to have a material impact on our financial position, results of operations, cash flows and disclosures.

Description Of Business And Basis Of Presentation (Policy)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules of the United States Securities and Exchange Commission ("SEC") for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States ("U.S. GAAP"). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC. We believe that the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all normal adjustments that management considers necessary for a fair presentation of our consolidated results of operations, financial position and cash flows. Operating results for interim periods are not necessarily indicative of results to be expected for the full fiscal year 2011 or any other future periods.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and costs during the reporting periods. Actual results could differ materially from those estimates. On an ongoing basis, we review our estimates based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.

Our condensed consolidated financial statements include the accounts of majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary. The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates' operating and financial policies. The cost method is used when we do not have the ability to exert significant influence. Intercompany accounts and transactions are eliminated.

Equity Method Investments And Variable Interest Entities (Policy)
Consolidation, Variable Interest Entity, Policy

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. FASB ASC 810 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 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.

Income Per Share (Tables)
Schedule Of Basic And Diluted Weighted Average Common Shares Outstanding
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Millions of shares

   2011      2010      2011      2010  

Basic weighted average common shares outstanding

     151         160         151         160   

Dilutive effect of stock options and restricted shares

     1         1         1         1   
                                   

Diluted weighted average common shares outstanding

     152         161         152         161   
                                   
Percentage-Of-Completion Contracts (Tables)
Schedule Of Unapproved Claims And Change Orders

Millions of dollars

   June 30,
2011
     December 31,
2010
 

Probable unapproved claims

   $ 25       $ 19   

Probable unapproved change orders

     4         10   

Probable unapproved change orders related to unconsolidated subsidiaries

     —           3   
                 
Business Segment Information (Tables)
Reconciliation Of Operating Segment Income To Consolidated
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Millions of dollars

   2011     2010     2011     2010  

Revenue:

        

Hydrocarbons

   $ 1,100      $ 1,004      $ 2,147      $ 1,926   

Infrastructure, Government and Power

     890        1,197        1,745        2,471   

Services

     445        452        842        867   

Other

     22        18        44        38   
                                

Total revenue

   $ 2,457      $ 2,671      $ 4,778      $ 5,302   
                                

Operating segment income:

        

Hydrocarbons

   $ 121      $ 116      $ 220      $ 192   

Infrastructure, Government and Power

     72        105        133        151   

Services

     15        25        28        46   

Other

     13        4        25        13   
                                

Operating segment income

     221        250        406        402   

Unallocated amounts:

        

Labor cost absorption

     6        4        9        —     

Corporate general and administrative

     (58     (55     (102     (104
                                

Total operating income

   $ 169      $ 199      $ 313      $ 298   
                                
Committed And Restricted Cash (Tables)
Schedule Of Current And Long-Term Restricted Cash

Millions of dollars

   June 30,
2011
     December 31,
2010
 

Current restricted cash

   $ 1       $ 11   

Non-current restricted cash

     1         10   
                 

Total restricted cash

   $ 2       $ 21   
                 
Shareholders' Equity (Tables)
6 Months Ended
Jun. 30,
2011
2010
Shareholders' Equity
 
 
Shareholders' Equity Activities
Accumulated Other Comprehensive Loss
 
           KBR Shareholders        

Millions of dollars

   Total     Paid-in
Capital in
Excess of
par
     Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
 

Balance at December 31, 2010

   $ 2,204      $ 1,981       $ 1,157        (454   $ (438   $ (42
                                                 

Stock-based compensation

     9        9         —          —          —          —     

Common stock issued upon exercise of stock options

     5        5         —          —          —          —     

Tax benefit increase related to stock-based plans

     3        3         —          —          —          —     

Dividends declared to shareholders

     (15     —           (15     —          —          —     

Repurchases of common stock

     (37     —           —          (37     —          —     

Issuance of ESPP shares

     2             2       

Distributions to noncontrolling interests

     (46     —           —          —          —          (46

Comprehensive income components:

             

Net income

     244        —           205        —          —          39   

Other comprehensive income, net of tax (provision):

             

Net cumulative translation adjustment

     (4     —           —          —          (4     —     

Pension liability adjustment, net of tax

     8        —           —          —          8        —     

Net unrealized gains (losses) on derivatives

     (2     —           —          —          (2     —     
                   

Comprehensive income

     246              
                                                 

Balance at June 30, 2011

   $ 2,371      $ 1,998       $ 1,347      $ (489   $ (436   $ (49
                                                 
            KBR Shareholders        

Millions of dollars

   Total     Paid-in
Capital in
Excess of
par
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
 

Balance at December 31, 2009

   $ 2,296      $ 2,103      $ 854        (225   $ (444   $ 8   
                                                

Stock-based compensation

     8        8        —          —          —          —     

Common stock issued upon exercise of stock options

     1        1        —          —          —          —     

Dividends declared to shareholders

     (8     —          (8     —          —          —     

Adjustments pursuant to tax sharing agreement with former parent

     (8     (8     —          —          —          —     

Repurchases of common stock

     (58     —          —          (58     —          —     

Issuance of ESPP shares

     2            2       

Distributions to noncontrolling interests

     (30     —          —          —          —          (30

Consolidation of Fasttrax Limited

     (4     —          —          —          —          (4

Comprehensive income components:

            

Net income

     181        —          152        —          —          29   

Other comprehensive income, net of tax (provision):

            

Net cumulative translation adjustment

     (6     —          —          —          (4     (2

Pension liability adjustment, net of tax

     6        —          —          —          5        1   

Net unrealized gains (losses) on derivatives

     4        —          —          —          4        —     
                  

Comprehensive income

     185             
                                                

Balance at June 30, 2010

   $ 2,384      $ 2,104      $ 998      $ (281   $ (439   $ 2   
                                                

Millions of dollars

   June 30,
2011
    December 31,
2010
 

Cumulative translation adjustments

   $ (56   $ (52

Pension liability adjustments

     (374     (382

Unrealized losses on derivatives

     (6     (4
                

Total accumulated other comprehensive loss

   $ (436   $ (438
                
Fair Value Measurements (Tables)
Fair Value Of Assets And Liabilities
     Fair Value Measurements at Reporting Date Using  

Millions of dollars

   Total Fair
Value at
Reporting
Date
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Marketable securities

   $ 16       $ 13       $ 3       $ —     

Derivative assets

   $ 2       $ —         $ 2       $ —     

Derivative liabilities

   $ 4       $ —         $ 4       $ —     
Equity Method Investments And Variable Interest Entities (Tables)
6 Months Ended
Jun. 30, 2011
12 Months Ended
Dec. 31, 2010
Consolidated Amount Of Non-Recourse Project-Finance Debt Of A VIE
 
Variable Interest Entity, Not Primary Beneficiary [Member]
 
 
Schedule Of Variable Interest Entities
Variable Interest Entity, Primary Beneficiary [Member]
 
 
Schedule Of Variable Interest Entities
 

Consolidated amount of non-recourse project-finance debt of a VIE

Millions of Dollars

   June 30, 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

   $ 92   
        

Total non-recourse project-finance debt of a VIE consolidated by KBR

   $ 102   
        
     As of June 30, 2011  

Unconsolidated VIEs

   Total
assets
     Total
liabilities
     Maximum
exposure to  loss
 

(in millions)

        

U.K. Road projects

   $ 1,523       $ 1,557       $ 31   

Fermoy Road project

   $ 253       $ 273       $ 2   

Allenby & Connaught project

   $ 3,023       $ 2,985       $ 57   

EBIC Ammonia project

   $ 701       $ 463       $ 50   
         As of December 31, 2010      

Unconsolidated VIEs

   Total
assets
     Total
liabilities
 

(in millions)

     

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   
         As of June 30, 2011      

Consolidated VIEs

   Total
assets
     Total
liabilities
 

(in millions)

     

Fasttrax Limited project

   $ 107       $ 112   

Escravos Gas-to-Liquids project

   $ 394       $ 455   

Pearl GTL project

   $ 177       $ 171   

Gorgon LNG project

   $ 564       $ 621   
         As of December 31, 2010      

Consolidated VIEs

   Total
assets
     Total
liabilities
 

(in millions)

     

Fasttrax Limited project

   $ 106       $ 112   

Escravos Gas-to-Liquids project

   $ 356       $ 423   

Pearl GTL project

   $ 174       $ 167   

Gorgon LNG project

   $ 347       $ 372   
Retirement Plans (Tables)
3 Months Ended
Jun. 30, 2011
6 Months Ended
Jun. 30, 2011
Schedule Of Defined Benefit Plans Disclosures
     Three Months Ended June 30,  
     2011     2010  

Millions of dollars

   United
States
    International     United
States
    International  

Components of net periodic benefit cost:

        

Service cost

   $ —        $ 1      $ —        $ 1   

Interest cost

     1        20        1        22   

Expected return on plan assets

     (1     (23     (1     (23

Recognized actuarial loss

     1        5        1        4   
                                

Net periodic benefit cost

   $ 1      $ 3      $ 1      $ 4   
                                
Schedule Of Defined Benefit Plans Disclosures
     Six Months Ended June 30,  
     2011     2010  

Millions of dollars

   United
States
    International     United
States
    International  

Components of net periodic benefit cost:

        

Service cost

   $ —        $ 1      $ —        $ 1   

Interest cost

     2        41        2        44   

Expected return on plan assets

     (2     (47     (2     (46

Recognized actuarial loss

     1        10        1        9   
                                

Net periodic benefit cost

   $ 1      $ 5      $ 1      $ 8   
                                
Income Per Share (Details) (USD $)
In Millions
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Income Per Share
 
 
 
 
Basic weighted average common shares outstanding
151 
160 
151 
160 
Dilutive effect of stock options and restricted shares
Diluted weighted average common shares outstanding
152 
161 
152 
161 
Net earnings allocable to participating securities
$ 0.5 
$ 0.5 
$ 1.0 
$ 1.0 
Antidilutive weighted average shares
0.7 
1.0 
0.4 
1.4 
Business Combinations And Other Transactions (Narrative) (Details)
In Millions, unless otherwise specified
0 Months Ended
Dec. 21, 2010
ENI Holdings, Inc [Member]
USD ($)
6 Months Ended
Jun. 30, 2011
ENI Holdings, Inc [Member]
USD ($)
1 Months Ended
Dec. 31, 2010
MWKL [Member]
GBP (£)
6 Months Ended
Jun. 30, 2011
MWKL [Member]
USD ($)
Jan. 5, 2011
MWKL [Member]
USD ($)
0 Months Ended
Jan. 5, 2011
LNG Joint Venture [Member]
USD ($)
6 Months Ended
Jun. 30, 2011
LNG Joint Venture [Member]
USD ($)
Percentage of ownership acquired
100.00% 
 
44.94% 
 
 
 
 
Purchase price paid of the acquisition of an entity
$ 280 
 
 
 
$ 164 
 
 
Preliminary net working capital
17 
 
 
 
 
 
 
Cash acquired
 
 
 
 
 
 
Total purchase price
289 
 
107 
 
 
 
 
Escrowed hold back amount
43 
27 
 
 
 
 
 
Increase in goodwill
 
 
 
 
 
 
Percentage payable to the former noncontrolling interest of future proceeds collected on certain receivables
 
 
44.94% 
44.94% 
 
 
 
Percentage of indemnification by the former noncontrolling interest of certain liabilities to be settled and paid in the future
 
 
44.94% 
 
 
 
 
Business acquisition net liability
 
 
 
20 
 
 
 
Percentage interest in unconsolidated joint venture that was sold
 
 
 
 
 
50.00% 
 
Net sales price of equity method investment
 
 
 
 
 
22 
 
Gain on sale of equity method investment
 
 
 
 
 
 
$ 8 
Percentage-Of-Completion Contracts (Narrative) (Details) (USD $)
In Millions, unless otherwise specified
1 Months Ended
Dec. 31, 2009
Jun. 30, 2011
Dec. 31, 2010
Nov. 2, 2010
Dec. 31, 2004
Dec. 31, 1998
Percentage-Of-Completion Contracts
 
 
 
 
 
 
Probable unapproved claims likely not to be settled within one year
 
$ 20 
$ 19 
 
 
 
Number of contracts for offshore platforms pipelines and related structures
 
 
 
 
 
Amount of arbitration claim filed against project owner
 
 
 
 
323 
 
Amount of counterclaims filed against enterprise
 
 
 
 
157 
 
Amount awarded to enterprise in arbitration
351 
 
 
356 
 
 
Amount of counterclaims awarded to project owner in arbitration
 
 
 
 
 
Amount of gain after income taxes recognized by enterprise as result of arbitration award
117 
 
 
 
 
 
Amount required for collateral from project owner
 
 
 
$ 395 
 
 
Percentage-Of-Completion Contracts (Schedule Of Unapproved Claims And Change Orders) (Details) (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Percentage-Of-Completion Contracts
 
 
Probable unapproved claims
$ 25 
$ 19 
Probable unapproved change orders
10 
Probable unapproved change orders related to unconsolidated subsidiaries
 
$ 3 
Business Segment Information (Reconciliation Of Operating Segment Income To Consolidated) (Details) (USD $)
In Millions
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Revenue:
 
 
 
 
Total Revenue
$ 2,457 
$ 2,671 
$ 4,778 
$ 5,302 
Operating segment income:
 
 
 
 
Total operating income
169 
199 
313 
298 
Corporate general and administrative
(58)
(55)
(102)
(104)
Hydrocarbons [Member]
 
 
 
 
Revenue:
 
 
 
 
Total Revenue
1,100 
1,004 
2,147 
1,926 
Operating segment income:
 
 
 
 
Total operating income
121 
116 
220 
192 
Infrastructure Government And Power [Member]
 
 
 
 
Revenue:
 
 
 
 
Total Revenue
890 
1,197 
1,745 
2,471 
Operating segment income:
 
 
 
 
Total operating income
72 
105 
133 
151 
Services [Member]
 
 
 
 
Revenue:
 
 
 
 
Total Revenue
445 
452 
842 
867 
Operating segment income:
 
 
 
 
Total operating income
15 
25 
28 
46 
Other [Member]
 
 
 
 
Revenue:
 
 
 
 
Total Revenue
22 
18 
44 
38 
Operating segment income:
 
 
 
 
Total operating income
13 
25 
13 
Operating Segment income [Member]
 
 
 
 
Operating segment income:
 
 
 
 
Total operating income
221 
250 
406 
402 
Unallocated amounts [Member]
 
 
 
 
Operating segment income:
 
 
 
 
Labor cost absorption
 
Corporate general and administrative
$ (58)
$ (55)
$ (102)
$ (104)
Committed And Restricted Cash (Narrative) (Details) (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Committed And Restricted Cash
 
 
Cash Held By Consolidated Joint Ventures
$ 212 
$ 136 
Committed And Restricted Cash (Schedule Of Current And Long-Term Restricted Cash) (Details) (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Committed And Restricted Cash
 
 
Current restricted cash
$ 1 
$ 11 
Non-current restricted cash
10 
Total restricted cash
$ 2 
$ 21 
United States Government Contract Work (Narrative) (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31,
6 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
1 Months Ended
Mar. 31, 2006
3 Months Ended
Mar. 31, 2011
3 Months Ended
Jun. 30, 2010
Dec. 31, 2009
2011
Fly America Act [Member]
Transportation Costs [Member]
2011
LogCAP III Contract [Member]
Transportation Costs [Member]
2011
All DCAA Audit Issues [Member]
2011
Private Security [Member]
Dec. 31, 2007
Private Security [Member]
1 Months Ended
Apr. 30, 2008
Containers [Member]
3 Months Ended
Mar. 31, 2011
Containers [Member]
2011
Containers [Member]
2011
Dining Facilities [Member]
Dec. 31, 2010
Dining Facilities [Member]
Dec. 31, 2009
Dining Facilities [Member]
3 Months Ended
Mar. 31, 2011
Transportation Costs [Member]
1 Months Ended
Apr. 30, 2010
Construction Services [Member]
20 Months Ended
Sep. 30, 2010
Construction Services [Member]
Jun. 30, 2011
Construction Services [Member]
1 Months Ended
Apr. 30, 2008
First Kuwaiti Trading Company Arbitration [Member]
Dec. 31, 2010
First Kuwaiti Trading Company Arbitration [Member]
1 Months Ended
Jan. 31, 2010
The Event Source [Member]
Jun. 30, 2011
The Event Source [Member]
Jun. 30, 2011
Burn Pit litigation [Member]
Jun. 30, 2011
Claims [Member]
LogCAPIII award fee accrual rate
 
 
 
0.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Award fee
 
$ 16 
$ 60 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Award fee percentage
 
53.00% 
47.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total amount of DCAA Form 1's - Notice of contract costs suspended and/or disapproved issued to the enterprise
 
 
 
 
27 
360 
103 
 
 
25 
51 
143 
 
 
 
 
25 
 
 
 
 
 
 
 
Number of Form 1's received from the DCAA.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
eight 
 
 
 
 
 
 
 
DCAA Form 1 total withholds of payments from remittances on contract billings
 
 
 
 
 
 
162 
45 
 
 
 
26 
82 
 
 
 
 
 
 
 
 
 
 
 
Total amount of payments withheld from subcontractors as a result of disapproved costs related to DCAA Form 1's issued to the enterprise
 
 
 
 
 
 
78 
 
 
 
 
30 
38 
 
 
 
 
 
 
 
 
 
 
 
 
Total amount of payment demanded by the DCAA in demand letters issued for disapproved costs related to DCAA Form 1's issued
 
 
 
 
 
 
83 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DCAA Form 1 initial assessment and withhold from remittances on contract billings
 
 
 
 
 
 
 
 
20 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated percentage of the total subcontract costs related to the private security costs
 
 
 
 
 
 
 
 
6.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DCAA Form 1 disapproval of contract costs in addition to the initial assessment
 
 
 
 
 
 
 
83 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DCAA Form 1 withholds from remittances on contract billings in addition to the initially-withheld amount
 
 
 
 
 
 
 
25 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Appeal to recover the DCAA Form 1 withhold from remittances on contract billings
 
 
 
 
 
 
 
 
44 
 
51 
 
54 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of counterclaims filed by the enterprise against a subcontractor
 
 
 
 
 
 
 
 
 
51 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arbitration amount sought by subcontractor for payments withheld
 
 
 
 
 
 
 
 
 
 
 
 
 
 
35 
 
 
 
 
 
 
 
 
 
 
Amount awarded to subcontractor in arbitration
 
 
 
 
 
 
 
 
 
 
 
 
 
38 
 
 
 
 
 
 
 
 
 
 
 
Minimum number of deployment days in the contractor rotation terms under the LogCAP III contract.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
179 
 
 
 
 
 
 
 
 
 
Amount of costs deemed allowable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of costs deemed unallowable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total claim by subcontractor related to leased vehicles
220 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
134 
 
 
 
 
 
Amount of subcontractor claims that have been subject to arbitration hearings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
77 
 
 
 
 
Partial arbitration award to subcontractor for damages
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of actual damages and interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 
 
 
 
Punitive damages relating to the settlement
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Un-reimbursable expenses and liability
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20 
 
 
Number of lawsuits the enterprise has been served
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
over 50 
 
Unapproved claims included in accounts receivables related to various government contracts where costs have exceeded the customer's funded value of task orders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
149 
Amount of unapproved claims related to de-obligation of funding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
121 
Unapproved balance for which incremental funding is pending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 28 
Other Commitments And Contingencies (Foreign Corrupt Practices Act) (Narrative) (Details) (USD $)
In Millions, unless otherwise specified
Jun. 30, 2011
Feb. 28, 2009
1 Months Ended
Feb. 28, 2011
Serious Fraud Office [Member]
Bonny Island [Member]
Dec. 31, 2010
Serious Fraud Office [Member]
Bonny Island [Member]
The U.K. Serious Fraud Office's civil penalty
 
 
$ 11 
 
Department Of Justice FCPA Plea Agreement Obligation
 
402 
 
 
Portion of criminal penalty indemnified by former parent
 
382 
 
 
The enterprise's liability under the DOJ FCPA plea agreement
 
20 
 
 
Organizational probation period (in years)
 
three 
 
 
The SEC's settled civil enforcement action
 
177 
 
 
The U.K. Serious Fraud Office's civil penalty recorded as an other current liability of the enterprise
 
 
 
11 
Portion of SFO penalty indemnified by former parent
 
 
 
$ 6 
Minimum ownership percentage for indemnification
50.00% 
 
 
 
Other Commitments And Contingencies (Other) (Narrative) (Details) (USD $)
In Millions
1 Months Ended
Mar. 31, 2006
3 Months Ended
Mar. 31, 2011
6 Months Ended
Jun. 30, 2011
Dec. 31, 2010
Other Commitments And Contingencies
 
 
 
 
Increase In Operating Income As A Result of Cost Estimate Reduction
 
$ 4 
 
 
Customer's arbitration claim
220 
 
 
 
Estimated damages related to the Barracuda-Caratinga project
 
 
12 
12 
Indemnification receivable recorded on the Barracuda-Caratinga Project
 
 
12 
 
Accrual for environmental loss contingencies
 
 
 
Maximum possible assessment and remediation costs associated with all environmental matters
 
 
13 
 
Committed and uncommitted lines of credit, total
 
 
1,800 
 
Letters of credit and financial guarantees utilized
 
 
586 
 
Letters of credit issued under the enterprise's revolving credit facility
 
 
261 
 
Letters of credit and financial guarantees outstanding, issued under uncommitted bank lines
 
 
325 
 
Liquidated damages
 
 
19 
20 
Amounts due to former parent, net
 
 
53 
 
Estimate of amounts due to former parent under the tax sharing agreement
 
 
45 
 
Committed funds to privately financed projects
 
 
30 
33 
Committed funds for privately financed projects current
 
 
17 
 
Amount of income tax receivable from the former parent, related to a foreign tax credit
 
 
$ 18 
 
Income Taxes (Narrative) (Details)
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Income Taxes
 
 
 
 
Effective income tax rate
24.00% 
36.00% 
20.00% 
36.00% 
Statutory income tax rate
35.00% 
35.00% 
35.00% 
35.00% 
Effective income tax rate, excluding discrete items
 
 
30.00% 
 
Shareholders' Equity (Shareholders' Equity Activities) (Details) (USD $)
In Millions
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Beginning Balance
 
 
$ 2,204 
$ 2,296 
Stock-based compensation
 
 
Common stock issued upon exercise of stock options
 
 
Tax benefit increase related to stock-based plans
 
 
 
Dividends declared to shareholders
 
 
(15)
(8)
Adjustments Pursuant to Tax Sharing Agreement with Former Parent
 
 
 
(8)
Repurchases of common stock
 
 
(37)
(58)
Issuance of ESPP shares
 
 
Distributions to noncontrolling interests
 
 
(46)
(30)
Consolidation of Fasttrax Limited
 
 
 
(4)
Net Income
127 
122 
244 
181 
Net cumulative translation adjustments
(8)
(8)
(4)
(6)
Pension liability adjustment, net of tax
Net unrealized gain (loss) on derivatives
(2)
Comprehensive income
123 
118 
246 
185 
Ending Balance
2,371 
2,384 
2,371 
2,384 
Paid-in Capital in Excess of par
 
 
 
 
Beginning Balance
 
 
1,981 
2,103 
Stock-based compensation
 
 
Common stock issued upon exercise of stock options
 
 
Tax benefit increase related to stock-based plans
 
 
 
Adjustments Pursuant to Tax Sharing Agreement with Former Parent
 
 
 
(8)
Ending Balance
1,998 
2,104 
1,998 
2,104 
Retained Earnings
 
 
 
 
Beginning Balance
 
 
1,157 
854 
Dividends declared to shareholders
 
 
(15)
(8)
Net Income
 
 
205 
152 
Ending Balance
1,347 
998 
1,347 
998 
Treasury Stock
 
 
 
 
Beginning Balance
 
 
(454)
(225)
Repurchases of common stock
 
 
(37)
(58)
Issuance of ESPP shares
 
 
Ending Balance
(489)
(281)
(489)
(281)
Accumulated Other Comprehensive Loss
 
 
 
 
Beginning Balance
 
 
(438)
(444)
Net cumulative translation adjustments
 
 
(4)
(4)
Pension liability adjustment, net of tax
 
 
Net unrealized gain (loss) on derivatives
 
 
(2)
Ending Balance
(436)
(439)
(436)
(439)
Noncontrolling Interests
 
 
 
 
Beginning Balance
 
 
(42)
Distributions to noncontrolling interests
 
 
(46)
(30)
Consolidation of Fasttrax Limited
 
 
 
(4)
Net Income
 
 
39 
29 
Net cumulative translation adjustments
 
 
 
(2)
Pension liability adjustment, net of tax
 
 
 
Ending Balance
$ (49)
$ 2 
$ (49)
$ 2 
Shareholders' Equity (Accumulated Other Comprehensive Loss) (Details) (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Shareholders' Equity
 
 
Cumulative translation adjustments
$ (56)
$ (52)
Pension liability adjustments
(374)
(382)
Unrealized losses on derivatives
(6)
(4)
Total accumulated other comprehensive loss
$ (436)
$ (438)
Fair Value Measurements (Fair Value Of Assets And Liabilities) (Details) (USD $)
In Millions
Jun. 30, 2011
Marketable securities
$ 16 
Derivative assets
Derivative liabilities
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
 
Marketable securities
13 
Derivative assets
 
Derivative liabilities
 
Significant Other Observable Inputs (Level 2) [Member]
 
Marketable securities
Derivative assets
Derivative liabilities
Significant Unobservable Inputs (Level 3) [Member]
 
Marketable securities
 
Derivative assets
 
Derivative liabilities
 
Equity Method Investments And Variable Interest Entities (Narrative) (Details) (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
Jun. 30, 2011
Dec. 31, 2010
2011
Fermoy Road Project [Member]
2011
U.K. Road Projects [Member]
1 Months Ended
Apr. 30, 2006
Allenby & Connaught Project [Member]
Jun. 30, 2011
Allenby & Connaught Project [Member]
3 Months Ended
Jun. 30, 2011
Construction And Related Support Services Joint Ventures [Member]
Jun. 30, 2011
EBIC Ammonia Project [Member]
Jun. 30, 2011
EBIC Ammonia Project [Member]
KBR [Member]
Jun. 30, 2011
EBIC Ammonia Project [Member]
Development Corporation [Member]
2011
Fasttrax Limited Project [Member]
2011
Escravos Gas-To-Liquids Project [Member]
Dec. 31, 2010
Escravos Gas-To-Liquids Project [Member]
1 Months Ended
Jul. 31, 2006
Pearl GTL Project [Member]
2011
Gorgon LNG Project [Member]
2011
Aspire Defence [Member]
3 Months Ended
Sep. 30, 2007
Brown And Root Condor Spa [Member]
Jun. 30, 2011
Brown And Root Condor Spa [Member]
Percentage interest in unconsolidated joint venture that was sold
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
49.00% 
 
Net sales price of equity method investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 24 
 
Gain on sale of equity method investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18 
 
Accounts receivable on sale of equity method investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18 
Variable interest entity, ownership percentage
 
 
25.00% 
25.00% 
 
 
50.00% 
 
 
 
50.00% 
50.00% 
 
50.00% 
30.00% 
45.00% 
 
 
Term of contracted services portion of project (in years)
 
 
 
 
35 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term of construction portion of project (in years)
 
 
 
 
nine 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of letter of credit supporting construction portion
 
 
 
 
 
67 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of assets associated with our investment in a project on a unconsolidated VIE that is reported within our condensed consolidated balance sheet
 
 
 
 
 
28 
 
76 
 
 
 
 
 
 
 
 
 
 
Amount of liabilities associated with our investment in a project on a unconsolidated VIE that is reported within our condensed consolidated balance sheet
 
 
 
 
 
 
17 
 
 
 
 
 
 
 
 
 
 
Ownership percentage the enterprise has in a development company that has a minority interest in a VIE
 
 
 
 
 
 
 
 
65.00% 
 
 
 
 
 
 
 
 
 
Development company's ownership interest in a company that consolidates a VIE
 
 
 
 
 
 
 
 
 
25.00% 
 
 
 
 
 
 
 
 
Difference between our recorded liabilities and aggregate maximum exposure to loss
 
 
 
 
 
55 
 
33 
 
 
 
 
 
 
 
 
 
 
Remaining commitment to fund subordinated debt to the project in the future
 
 
 
 
 
30 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of subsidiary owned by the parent entity
 
 
 
 
 
 
 
 
 
 
100.00% 
 
 
 
 
 
 
 
Assets collateralizing the Joint Venture's senior bonds, cash and equivalents
 
 
 
 
 
 
 
 
 
 
23 
 
 
 
 
 
 
 
Assets collateralizing the Joint Venture's senior bonds, property, plant and equipment
 
 
 
 
 
 
 
 
 
 
79 
 
 
 
 
 
 
 
Assets collateralizing the Joint Venture's senior bonds, accumulated depreciation of related property, plant and equipment
 
 
 
 
 
 
 
 
 
 
43 
 
 
 
 
 
 
 
Cash Held By Consolidated Joint Ventures
$ 212 
$ 136 
 
 
 
 
 
 
 
 
 
$ 124 
$ 84 
 
 
 
 
 
Equity Method Investments And Variable Interest Entities (Schedule Of Variable Interest Entities) (Details) (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Variable Interest Entity, Not Primary Beneficiary [Member] |
Fermoy Road Project [Member]
 
 
Unconsolidated VIEs, Total assets
$ 253 
$ 240 
Unconsolidated VIEs, Total liabilities
273 
269 
Maximum exposure to loss
 
Variable Interest Entity, Not Primary Beneficiary [Member] |
U.K. Road Projects [Member]
 
 
Unconsolidated VIEs, Total assets
1,523 
1,506 
Unconsolidated VIEs, Total liabilities
1,557 
1,531 
Maximum exposure to loss
31 
 
Variable Interest Entity, Not Primary Beneficiary [Member] |
Allenby & Connaught Project [Member]
 
 
Unconsolidated VIEs, Total assets
3,023 
2,913 
Unconsolidated VIEs, Total liabilities
2,985 
2,885 
Maximum exposure to loss
57 
 
Variable Interest Entity, Not Primary Beneficiary [Member] |
EBIC Ammonia Project [Member]
 
 
Unconsolidated VIEs, Total assets
701 
604 
Unconsolidated VIEs, Total liabilities
463 
388 
Maximum exposure to loss
50 
 
Variable Interest Entity, Primary Beneficiary [Member] |
Fasttrax Limited Project [Member]
 
 
Consolidated VIEs, Total assets
107 
106 
Consolidated VIEs, Total liabilities
112 
112 
Variable Interest Entity, Primary Beneficiary [Member] |
Escravos Gas-To-Liquids Project [Member]
 
 
Consolidated VIEs, Total assets
394 
356 
Consolidated VIEs, Total liabilities
455 
423 
Variable Interest Entity, Primary Beneficiary [Member] |
Pearl GTL Project [Member]
 
 
Consolidated VIEs, Total assets
177 
174 
Consolidated VIEs, Total liabilities
171 
167 
Variable Interest Entity, Primary Beneficiary [Member] |
Gorgon LNG Project [Member]
 
 
Consolidated VIEs, Total assets
564 
347 
Consolidated VIEs, Total liabilities
$ 621 
$ 372 
Equity Method Investments And Variable Interest Entities (Consolidated Amount Of Non-Recourse Project-Finance Debt Of A VIE) (Details) (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Equity Method Investments And Variable Interest Entities
 
 
Current non-recourse project-finance debt of a VIE consolidated by KBR
$ 10 
$ 9 
Noncurrent non-recourse project-finance debt of a VIE consolidated by KBR
92 
92 
Total non-recourse project-finance debt of a VIE consolidated by KBR
$ 102 
 
Retirement Plans (Narrative) (Details) (USD $)
In Millions
6 Months Ended
Jun. 30, 2011
United States [Member]
 
Employer contributions, approximately
$ 1 
Defined Benefit Plan, Total Estimated Employer Contributions in Current Fiscal Year
International [Member]
 
Employer contributions, approximately
52 
Defined Benefit Plan, Total Estimated Employer Contributions in Current Fiscal Year
$ 64 
Retirement Plans (Schedule Of Defined Benefit Plans Disclosures) (Details) (USD $)
In Millions
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
United States [Member]
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
Interest cost
$ 1 
$ 1 
$ 2 
$ 2 
Expected return on plan assets
(1)
(1)
(2)
(2)
Recognized actuarial loss
Net periodic benefit cost
International [Member]
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
Service cost
Interest cost
20 
22 
41 
44 
Expected return on plan assets
(23)
(23)
(47)
(46)
Recognized actuarial loss
10 
Net periodic benefit cost
$ 3 
$ 4 
$ 5 
$ 8