KBR, Inc. Q4 2009 Earnings Call Transcript

| About: KBR, Inc. (KBR)

KBR, Inc. (NYSE:KBR)

Q4 2009 Earnings Call Transcript

February 25, 2010 11:00 am ET

Executives

Rob Kukla – Director, IR

Bill Utt – Chairman, President & CEO

Sue Carter – SVP & CFO

Analysts

Andrew Kaplowitz – Barclays Capital

John Rogers – D.A. Davidson

Barry Bannister – Stifel Nicolaus

Jamie Cook – Credit Suisse

Steve Fisher – UBS

Dan Pickering – Tudor Pickering

Jeff Spittel – Pritchard Capital

Operator

Good day everyone and welcome to today’s KBR 2009 fourth quarter earnings conference. Just as a reminder today’s call is being recorded. Another brief reminder, your lines will be in a listen-only mode for the duration of the presentation. There will be question-and-answer session immediately following the prepared remarks and you will receive instructions at that time. For opening remarks and introductions, I would like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Rob Kukla

Thank you, Sara. Good morning and welcome to the KBR’s fourth quarter 2009 earnings conference call. Today's call is also being webcast and a replay will be available on KBR's website for seven days. The press release announcing the fourth quarter results is also available on KBR's website.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer, and Sue Carter, Senior Vice President and Chief Financial Officer. In today's call, Bill will provide opening remarks and business outlook. Sue will address KBR's operating performance, financial position, backlog, and other financial items. We will welcome questions after we complete our prepared remarks.

Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year ended December 31st, 2009, which was filed this morning, KBR's quarterly reports on Forms 10-Q, and KBR's current reports on Form 8-K.

Now, I'll turn the call over to Bill Utt. Bill?

Bill Utt

Thanks, Rob, and good morning everyone. 2009 was a solid year for KBR in what was considered very difficult market environment.

Revenue for full year 2009 was $12.1 billion, up 5% from 2008. Operating income for 2009 was $536 million, down slightly from $541 million for the full year 2008. Sue will discuss several of the one-time items this quarter during her section of the prepared remarks.

We also continued to manage our corporate overhead expenses well during 2009, which were down slightly compared to the previous year and in line with our guidance. We were very pleased with KBR’s backlog at December 31st, 2009. Our backlog was $14.1 billion, up $614 million, or 5%, compared to the September 30th, 2009 backlog.

The Services business unit led the increase in backlog with an almost $600 million, or 31% increase in backlog during the fourth quarter. KBR announced several new awards for Services, including the large DuPont contract for 19 KBR managed industrial sites of which 16 were new sites. We were also awarded a turnaround project for Suncor in Canada, a design-build contract for Boeing-787 Dreamliner assembly plant, and several new hospital construction projects.

The $14.1 billion in backlog at the end of 2009 was flat compared to the end of 2008 despite a $527 million decrease in our Middle-East operations or LogCAP backlog. For 2009 Technology backlog was up 19%, Upstream backlog was up 10%, and Downstream backlog was up 6%.

We feel oftentimes KBR is too frequently associated with a few large global mega projects. While these projects are a hallmark of KBR’s value proposition for our customers, we are not a company of simply a few large mega projects. As we reviewed our portfolio at the end of 2009 we noted that KBR execute work on over $1000 project during the year. We are also participating in over 30 projects having installed cost in excess of $1 billion. So from the aggregate number of total projects, as well as the large number of projects in excess of $1 billion, I hope you see that KBR works across a wide ranging series of global projects and is not beholden to a limited series of large mega projects.

So as we focus on what will grow KBR’s backlog over the next several years, obviously new project awards are important. However, existing project scope adjustments on our current project portfolio is an area which should also be discussed. During 2009, over 50% of added backlog was generated from Project scope growth. The obvious project, which reflects this scope of growth is the LogCAP project, but other projects in our portfolio are on work authorization release or general scope additions.

For example, backlog for our work on Ras Tanura and Yanbu are released in smaller amounts, which is worked off during the quarter and are commonly followed by additional work releases. Another example is our offshore project called Kashagan in the Caspian region.

One final aspect of our backlog performance in 2009 worth highlighting is the underlying profitability of our backlog. We have talked over the past year about the importance and focus we place on the profitability of new project awards and working off lower margin projects such as the Escravos GTL, LogCAP, and the reimbursable component of the Skikda LNG project.

At the end of 2009, our job income backlog was up 21% compared to a flat revenue backlog. So we made very good headway to increasing the profitability of our backlog in a difficult market environment. The strong 2009 backlog performance in otherwise very challenging market environment reinforces our belief that KBR should be able to continue to grow its overall business as we have since 2007 even in the face of a declining LogCAP backlog.

We would now like to make some particular comments on several of KBR’s discrete business units, all of which will be reported separately starting in the first quarter of 2010. At the Tangu project, both LNG trains have produced LNG and cargoes continue to be shipped. However, we are in the process of replacing several troublesome O-rings on one of the trains, which will delay the expected hand-off of both trains to the customer until the end of the first quarter 2010.

On the Yemen project, Train 1 has already been turned over to the client and gas has been admitted into the second LNG train. We expect Train 2 will be deemed ready for startup and turned over to client in about a month. During the quarter, we had increased subcontractor claims and mobilization cost, which led to the additional charges recorded in the fourth quarter. Despite the charges taken over the past several quarters, all of our current LNG projects remain profitable.

The Gorgon LNG, Pearl GTL, and Skikda LNG projects continue to progress well during the quarter and were positive contributors to our gas monetization operating results. The impact excess LNG FEED continues as planned and is expected to be completed in the fourth quarter of this year.

Also during the fourth quarter KBR commenced activities on the FEED contract for the Pluto 2 and 3 LNG projects for Woodside. Also, we announced earlier this month that Woodside had awarded KBR a contract to execute a Basis of Design Study for their Browse LNG development. This nine months study will focus on a 12 million ton per annum liquefaction facility as well as associated infrastructure and marine facilities. We are pleased to be working again with Woodside on another one of their key LNG projects.

In our oil and gas business, KBR was awarded a contract by Chevron for the Big Foot topsides FEED. The projects with BP is as rag drilling platform FEED and the West of Shetland’s FPSO are also proceeding and making nice contributions to our results.

For our Downstream business unit, the Ras Tanura project, the FEED and site development work on the Lobito refinery project, and several refining projects, including the Yanbu project contributed to the fourth quarter’s results. For the Yanbu export refinery project, the customers received a lump sum EPC bids. The bids are currently undergoing technical and commercial evaluation by the customer with the expectation of moving into the execution phase of the project within the next several months.

The Ras Tanura project continues to proceed with FEED activities, which we expect to complete during the summer of this year. The two refinery projects in Africa also continue to move forward. We believe we will see the first phases of the Lobito refinery project in Angola move forward from FEED into EPCM during the first half of 2010. For the South Africa refinery project, we have received word that PetroSA has elected to move forward from the pre-FEED phase into FEED activities.

The Technology business unit grew 15% and posted job income margins in excess of 50% during 2009. We expect our Technology business unit to again show strong growth during 2010. For the fourth quarter of 2009 revenue was up 17% and business unit income was up 133% compared to the year earlier period. During the fourth quarter Technology was awarded a contract by Al-Jubail Fertilizer Company to provide engineering procurement and to supply proprietary equipment for an existing ammonia plant in Saudi Arabia, and was also awarded a contract by Saudi Aramco and Sumitomo Chemical Company to provide basic engineering and related services for a phenol technology package for the development of the Rabigh II project.

For our North America Government and Defense business, we originally communicated and expected 5% revenue decline in the fourth quarter. However, we saw a small revenue decline than envisioned in the fourth quarter as a result of a small reduction in base footprint despite a 10% reduction in troop levels. KBR currently plans for multiple base closures starting next month, with the majority of the Iraq bases closing during the summer period. We continue to believe the recent reports from the U.S. government showing an expected troop withdrawal down to approximately 35,000 to 50,000 by the end of the summer of this year.

In regards to the transition for LogCAP III to LogCAP IV in Iraq, we have not been advised of any decision related to the request for proposals for logistic support services, either transportation mission, postal services, ice plant operations, and some air terminal operations. For the second portion of work in Iraq for the base life support services, we are in the process of drafting our response to the formal RFP for this scope of work.

In Afghanistan, the transition is proceeding and transition activity has increased. Our current estimate is that a complete transition from LogCAP III to LogCAP IV in Afghanistan will occur in the early summer of 2010.

Also in Afghanistan, our London-based International Government and Defense business unit continues to provide logistic support, infrastructure support and temporary deployable accommodation for the U.K. Ministry of Defense. We also had success in broadening our services offering with a new customer, NATO, in Afghanistan. We continue to actively seek to broaden our supply of services within the U.K., Australia, and Middle East, through our London operations.

In our Brisbane-based Infrastructure and Minerals business unit, we are continuing to see a strong business recovery for our consulting engineering business, Australia’s fifth largest. In the Minerals’ sector we continue to see positive indications that some of our minerals projects will receive approval to move from FEED into delivery phases in 2010. Internationally, Qatar-Bahrain Causeway project continued to perform well and we expect this project to move into its next phases of execution during the first half of 2010.

KBR’s services business unit also continues to perform well and had a significant fourth quarter in terms of new awards, including the DuPont, Suncor, and Boeing awards that I mentioned earlier. The three-year construction and maintenance and services contract with DuPont add 16 new sites to KBR’s industrial maintenance business. The addition of these three sites adds over 1200 new employee, a 33% increase. In addition to the Dreamliner project, KBR’s building group was also awarded two new hospital projects in the fourth quarter of 2009.

In Canada, in addition to the Suncor award we are now seeing customers move forward with smaller capital and maintenance projects. The Shell Scotford Upgrader project is currently 82% complete and we expect completion of the project in mid 2010.

After Sue’s comments, I will comment in more detail on the market outlook for our business before turning the call over for questions. Sue?

Sue Carter

Thanks, Bill. I will review KBR’s consolidated fourth quarter 2009 results, which primarily focus on year-over-year comparisons. Consolidated KBR revenue totaled $3 billion compared to $3.4 billion for the fourth quarter of 2008. Over this time period, the decrease was primarily related to lower activity on our Iraq-related services in the Government and Infrastructure business unit, partially offset by a 29% for Upstream.

Consolidated operating income was $124 million in the fourth quarter of 2009 compared to operating income of $153 million in the fourth quarter of 2008. Net income from continuing operations attributable to KBR for the fourth quarter of 2009 was $73 million or $0.45 per diluted share compared to $88 million, or $0.54 per diluted share for the prior fourth quarter.

During the fourth quarter of 2009, net income from continuing operations included a $0.70 per share – per diluted share gain related to the EPC-1 arbitration. Partially offsetting this gain was a charge of $0.50 per diluted share for the reversal of previously recognized award fees related to the LogCAP III contract, a charge of $0.09 per dilute share for an unfavorable court ruling related to a subcontractor claim for work in 2003 and 2004 under the LogCAP III contract, $0.07 per diluted share to correct prior period errors related to revenue recognition for legal for ongoing lawsuits, which does not have a material impact on the financial statements for previously reported quarters, and a charge of $0.02 per diluted share related to the abandonment of the Westside Houston Resource Development Center.

Upstream revenue was $1.1 billion in the fourth quarter of 2009, up $235 million, or 29% from the fourth quarter of 2008. Business unit income was $220 million in the fourth quarter of 2009 compared to $65 million reported in the fourth quarter of 2008. Revenue and business unit income include the $183 million gain related to the EPC-1 arbitration settlement.

For the Gas Monetization operations, job income was down $32 million over this time period, primarily driven by increased project cost of $24 million for subcontractor claims and scheduled delays on two LNG projects. These decreases were partially offset by the Gorgon LNG project, the Escravos GTL project, and several FEED projects.

For the Oil and Gas operations, job income increased by $191 million, which includes the $183 million gain of the EPC-1 arbitration in the fourth quarter of 2009 and increased progress on several offshore engineering projects.

Government and Infrastructure revenue in the fourth quarter of 2009 was $1.2 billion compared to $1.8 billion for the prior year fourth quarter. Business unit loss was $109 million in the fourth quarter of 2009 compared to business unit income of $85 million in the fourth quarter of 2008. For the Middle East operations, job income in the fourth quarter of 2009 included a charge of $20 million for an adverse decision on award fees on LogCAP III, a charge of $1132 million for KBR’s assessment and reversal of previously recognized award fees related to the LogCAP III contract, a charge of $19 million on the unfavorable court ruling, and a charge of $17 million related to the legal fees.

For the Americas operations, the $7 million increase in job income over this period primarily related to the $6 million charge on the embassy project in Macedonia in the fourth quarter of 2008 and progress on several infrastructure projects, but was personally offset by the completion of a large facilities management project. The $11 million dollar in decrease in job income for the international operations was primarily related to lower volume on the Allenby & Connaught project, the completion of a road project in the U.K., lower U.K. MoD operations work in Basra, Iraq, and lower volume on projects in Australia.

Services revenue was $543 million in the fourth quarter of 2009, down from $597 million in the fourth quarter in the fourth quarter of 2008. Business unit income was $55 million compared to $53 million for the prior year fourth quarter. The increase was primarily due to increased progress on several projects in our construction operations, including power projects, refining projects, an activated carbon project in Louisiana, and several hospital projects. Partially offsetting this increase was lower activity in our Industrial Services and slightly lower volumes for our offshore vessels in the Gulf of Mexico.

Downstream revenue was $125 million in the fourth quarter of 2009 compared to $145 from the fourth quarter of 2008. Business unit income was $11 million in the fourth quarter of 2009 compared to $14 million in the fourth quarter of 2008. The business unit income decrease was due to lower activity in the Chemical Operations and the completion of the EBIC ammonia project. This decrease was partially offset by the increased work on the Ras Tanura project, and the Lobito refinery FEED.

Technology revenue for the fourth quarter of 2009 was $27 million, flat compared to the fourth quarter of 2008. Business unit income in the fourth quarter of 2009 was $7 million compared to $3 million for the prior year fourth quarter. The increase is primarily related to several refining technology packages for a facility in Angola, a ROSE unit project in Indonesia, and Ethylene project in Korea, two ammonia license and basic engineering projects in South America, and a final license payment for the completion of a ROSE project in the United States.

Now, let’s review other financial items. General and administrative expenses for the fourth quarter of 2009 was $60 million, flat from the fourth quarter of 2008. Sequentially, the corporate G&A was up by $6 million, primarily related to a $4 million write-off of the West Side campus, which we announced in late January of this year, and year-end adjustments for (inaudible) compensation.

The corporate G&A for the full year of 2009 was$217 million compared to $223 million for the full year 2008 despite a 5% increase in revenue over the same time period. As we look at 2010, our current estimates for the first – for the full year 2010 corporate G&A expenses are expected to be in the $230 million range, driven by general wage adjustments, and expenses related to enhancing our IT systems.

Our effective tax rate in the fourth quarter of 2009 was 26%, which was lower than our statutory rate of 35%, primarily due to increased income in lower tax countries, particularly the U.K. and Australia.

For the full year of 2009, our effective tax rate was 32% compared to 37% for the full year of 2008. The decrease was primarily related to the third quarter 2009 impact from the final determination of previously estimated 2008 domestic and foreign taxable income made in connection with the preparation and filing of our 2008 consolidated tax returns that we discussed last quarter and the comments I just made on the fourth quarter of 2009. We expect the full year 2010 effective tax rate to be approximately the U.S. statutory rate of 35%.

Bill spent quite a bit of time discussing KBR’s backlog, but let me take a moment to provide a few additional comments. We had no material project cancellation in the backlog portfolio during the fourth quarter. Overall, the backlog portfolio mix at the end of the fourth quarter was 82% cost reimbursable and 18% fixed price, the same mix we reported from the sequential quarter.

Next, I will discuss our liquidity and balance sheet. Cash flow from operations for the full year of 2009 used $36 million, which includes an increase in working capital of approximately $220 million related to the Skikda LNG project and $35 million in tax payments made prior to the recognition of foreign tax credit arising from the EPC-1 arbitration decision. The EPC-1 arbitration is included in net income, receivable, and taxes payable, which nets to zero in operating cash flow. Operating cash flow is increased upon collection of the award.

At the end of December 2009, our balance sheet remained strong with no debt and with cash and cash equivalents of $941 million, which net off $236 million of cash associated with our consolidated joint venture, was approximately $705 million.

One of the key areas of focus for me and the KBR team is working capital management. We are vigorously working to manage and reduce working capital requirements. With the reversal of the award fees related to the LogCAP III contract, the working capital was significantly reduced. However, we are still focused on the collection of those award fees. From my cash flow comments earlier, we did see an increase in working capital related to the Skikda project, which we have reduced working to reduce the receivables for this project.

From the uses of cash perspective, we remain committed to optimally deploying the capital to the benefit of the shareholders in a thoughtful, careful and strategic manner. We currently pay a quarterly dividend, which is reviewed by the Board of Directors at each meeting. Also discussed at the Board meeting is the option for another share repurchase program. So including M&A and organic growth, everything is essentially on the table in terms of options for putting that capital to work.

From an M&A perspective, we are not as concentrated on prospective transformational deals but more bolt-on opportunities that can enhance our service offerings or broaden our geographic reach. A few areas that would be of interest to us are building up our oil and gas capabilities, growing our power capabilities, particularly with Engineering and within our Infrastructure business, perhaps domestically in the U.S.

During the fourth quarter, we repurchased about 200,000 shares for approximately $3.9 million. For the full year of 2009, we have repurchased about 1.9 million shares for approximately $28 million. We will continue to purchase shares periodically in the market to maintain KBR’s outstanding share count at approximately 160 million shares.

Capital expenditures totaled $19 million and depreciation and amortization was $14 million during the fourth quarter of 2009. For the full year 2009, capital expenditures were $41 million.

Let me talk about the award fees reversal a bit more from the financial side. We have historically recognized award fees under the LogCAP III contract using an estimate on the amount to be awarded based on in-theater performance ratings. Over the seven year period that we’ve worked under the LogCAP III contract, KBR has received 83 excellent ratings out of the total of 106 ratings. Our accruals utilized an 80% rate through April 30th, 2008, and a 72% rate thereafter.

No award fee boards had been held for our Iraq based work under LogCAP III since the June 2008 meetings, which evaluated our performance for the period of January 2008, through April 2008. The letter, formalizing the results of this meeting and the Award Fee Determining Official, or AFDO, decision was received last Friday. The letter references failure to provide notice of poor conditions for electrical systems under task orders 139 and 151. More enquiry and analysis are required to fully understand and interpret this decision and whether there are additional actions that we may take.

The award fee from the June 2008 award fee board meetings was computed using the results of the meeting and then reduced to zero by the AFDO based on other inputs and his discretion. Our $20 million accrual for this award fee was reversed in the fourth quarter of 2009. In addition, we’ve reevaluated our assumptions used in the award fee estimation process related to the remainder of the open performance periods from May 1, 2008 through December 31st, 2009. Those estimates were also based on our historical experience and assumes that award fees would continue to be determined in large part and scores from non-binding monthly evaluations made by our customers in the field of operations. These score were largely very good to excellent during the open performance period.

However, in light of the discretionary actions and the AFDO in February 2010 with respect to the January through April 2008 period of performance, we concluded that we can no longer reliably estimate the fees to be awarded. Accordingly we’ve reversed the remaining balance of accrued award fees of approximately $112 million that had previously been estimated as earned and recognized as revenue during the period of May 1, 2008, through December 31, 2009.

Our award fees recognized prior to December 31, 2009, were based on our estimated accrual rates. The customer has informed us that the next award fee evaluation board will be held in the first half of 2010. Although there can be no assurance, we are hopeful that the reasons used by the AFDO in determining a zero award for the January through April of 2008 period will not also result in zero award fees for the open performance period. If our next award fee letter has performance scores and award rates that results in an award, our revenue and earnings will be adjusted accordingly.

Now, I would like to make an additional comment on the PEMEX arbitration award. The initial award of approximately $286 million plus legal fees, administrative recovery fees, and interest totaled $350 million. After adjusting this amount for the counter claims of $6 million awarded to PEMEX and the amount we had on our books, this gets you to the $183 million operating income gain or the $117 million net of tax gain to net income.

As you have now seen, the detailed P&L impact from the arbitration decision, I know the key question on your mind is the actual collection of cash in the this award. From the previous two favorable arbitrations on EPC-28 and EPC-22 we did receive the cash payments. However, at this time, the timing on the collection on EPC-1 remains uncertain. We will update you as we receive more clarity around this portion of the award.

Before turning the call over to Bill, I would like to recap a few 2010 guidance items we’ve provided during today’s call. First, based on our new assessment of the accrual practices for the LogCAP III award fees, we have reduced the low end of our 2010 EPS guidance by $0.10 per diluted share, making the current 2010 guidance $1.50 to $1.80 per diluted share, which we expect about $0.05 per diluted share of this impact in the first quarter of 2010.

Second, we expect corporate G&A for the full year of 2010 to be approximately $230 million, driven by general wage adjustments and expenses related to our enhancing our IT systems. Lastly, we expect the effective tax rate for the full year of 2010 to be approximately 35%.

And now I will turn it back over to Bill for his final remarks. Bill?

Bill Utt

Thanks, Sue. After our discussion there I am glad to finally close the book on the fourth quarter of 2009. KBR continues to see excellent growth opportunities in each of the – other 12 of our reporting units. We have grown KBR’s non LogCAP business consistently since 2007, and we are confident we can continue to grow the size of the overall KBR business despite the continued decline in our LogCAP businesses.

We are also pleased with the continued increase from 2009 levels and the bidding activity we see across our businesses and look forward to a continued series of new awards and scope expansions for KBR in 2010.

Now, we’ll take your questions. We ask that you please limit your comments to one question and one followup. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) First from Barclays Capital, we’ll go to Andrew Kaplowitz.

Andrew Kaplowitz – Barclays Capital

Good morning guys.

Bill Utt

Good morning, Andy.

Sue Carter

Good morning.

Andrew Kaplowitz – Barclays Capital

So on e of your peers is also out today and if you look at sort of what they’ve put [ph] out, it seems like they might be a little more cautious given their tone about the markets. So, I am just curious what you think, Bill, you just mentioned that bidding activity continues to increase. What is customer confidence level right – like right now? And what about pricing as we go forward?

Sue Carter

Andy, as we look at the markets, we are looking at things, we’ll be reporting things a little more granularly in 2010 than we have in the past. I know an area that we’ve seen a real strong pickup in our business that looks like it will sustain itself here for the – yes, certainly for the first part of 2010 is our Building group. And we talked about the Dreamliner project. We also announced the College of Dentistry in Georgia and the North Carolina Health and Human Services project recently. A lot of those projects that are educational or health and medical related were kind of put on hold. Starting in 2008 we’ve been working on preconstruction activities with the customers and now they are seeing that their bond markets and their funding is coming back and so a lot of their projects are moving forward, which does account for a lot of the impact in our Services backlog. We also see projects in the hydrocarbon side continuing to move forward. We’ve talked several quarters ago about – when we are looking at Gorgon, we are – it was our view that the customers are looking at 2015 and what’s – what noise or choppiness we have in the price of commodity or in the capital markets in the near term isn’t really affecting their decisions and as we talked about the – our work in the Caspian, Offshore continues to grow the – we talked about the shrag [ph] structure, the FPSO with BP in the North Sea, the awards with Chevron. So, we are seeing a lot of activity continue offshore and we think that will continue as the international oil companies continue to look for more resources offshore.

So from – so maybe you can look at where we are making our comments and in what markets we are in and you have to contrast that with the other party and their markets and where they are strong relative strength and weakness to KBR.

Regarding the pricing, it’s still a tough market out there. I think we are getting fair returns for the work that we are signing. It’s not the levels that we were seeing in 2007 and 2008. But we are happy with the level of activity and certainly one could look into some of the initial awards coming out of the large scale refineries in the Middle East like Jubail and possibly Yanbu, where the bidding has been very aggressive some of the Asian firms as they are looking – particularly the fabricators, as they look to build up their backlogs. I think I’ve commented also in prior calls that when we went out and looked at the procurement of the modules on the Gorgon project, we were very pleased as was the owner group with the savings or cost reductions we were able to drive relative to our expectations. So we think that as the fabricators get their backlogs up to a more respectable level that they are comfortable with that pricing margins will tend to move upwards as we get to a more equilibrium of supply and demand of services and capital projects.

Andrew Kaplowitz – Barclays Capital

That’s helpful, Bill. If I just – one specific question on the gas monetization business. If I look at the margins excluding the LNG charges you’ve taken over the last couple of quarters, it still looks like the margins have may be gone down a little bit. Is there anything going on there like your Skikda is ramping up in passthrough right now or anything else that we can point out?

Bill Utt

Well, I think we – I think as we are looking at it, in the quarter we did have the charge, which depressed our margins in the fourth quarter. We also did see a pretty good chunk of Escravos go through. The revenue in the fourth quarter was up about $100 million for us, which adds a diluting effect on the unit margins for Gas Monetization from the prior quarter. Year-over-year, you had a $24 million pickup in the fourth quarter of ’08, you had a $24 million fall off in the fourth quarter of ’09, but we don’t see anything, Andy, that’s material or worth calling out regarding the margins that we have on our LNG projects other than what I have just described.

Andrew Kaplowitz – Barclays Capital

That’s helpful. Thank you.

Operator

From D.A. Davidson, we’ll go to John Rogers. Please go ahead.

John Rogers – D.A. Davidson

Hi, yes, good morning.

Bill Utt

Hi, John.

John Rogers – D.A. Davidson

Just, sorry, to follow-up on the PEMEX award, you are waiting to receive the cash. The total receivable is $350 million?

Sue Carter

Yes, it’s correct.

John Rogers – D.A. Davidson

Okay. And what is the time line there?

Bill Utt

You know, John, it’s kind of hard to – to give it a hard time line. We do state that on EPC-22 and 28 that we did have awards and at some period and I think that was between six and 12 months we were able to get the cash on those awards. We have filed in federal court in the states to affirm the arbitration award. And so we are continuing to work on it. Certainly this is larger than the other two awards, but it’s not 10 times what the previous awards. And so we are going to work on it. We are optimistic that given our history with PEMEX that we should be able to get that cash in the door this year. But again it takes them to hit the send button before we get the cash.

John Rogers – D.A. Davidson

Sure, okay. That’s helpful. And then secondly, Bill, relative to your comment from the buildings market, most of that sounds like it’s domestic work. Are there opportunities for that kind of work outside the U.S.?

Bill Utt

Of course there – I would believe they are, John. Right now our Building group is part the group we acquired from BE&K in 2008. It’s been domestically focused principally in the U.S. southeast. We are taking some steps right now to move that group to additional geographies within the States. It’s a little bit more challenging to consider taking that internationally compared to some of our other projects because they work very closely with owners, they work very closely with subcontractors on an open book basis in the precon design phase. And so when they are able to offer their lump sum prices, they’ve done so typically with 12 or 18 months of work with the owner in developing that price. And we are also dealing with subcontractors with whom we have a great deal of experience that makes us confident that – it gives us great certainty that the contractor base can execute the work that we’ve been working with the client and developing. You know, taking that model internationally will be a little bit tougher and so we are really spending our time in the near future looking at how do we expand that geographically or may be even take that into a different market. Some of the areas we’ve looked at have been some of the GSA buildings, some courthouses and other federal government facilities that would be more replicatable to the existing business model that that group has.

John Rogers – D.A. Davidson

Okay, great. That’s helpful. Thank you.

Operator

Barry Bannister of Stifel Nicolaus has the next question. Mr. Bannister, your line is open. Please go ahead. We are unable to hear you.

Barry Bannister – Stifel Nicolaus

Yes, thank you, hi.

Bill Utt

Hi, Barry.

Sue Carter

Barry.

Barry Bannister – Stifel Nicolaus

If I look at the LogCAP issues related to electrical, from what I have done in my research it looks like you're billed to DoD specs, so it sounds a little bit like a case of passing the hot potato. Given that you no longer are accruing award fees, you are recognize them as received, one of the things that I’ve been concerned about is that during the drawdown, there was a October 26 DoD audit warning about KBR having the correct amount of overhead during the drawdown, and I know how difficult it can be to go into a drawdown. You are trying to get them out and your own people out at the same time. Are there any issues that we should be concerned about or have you logistically planned for a smooth orderly drawdown that will be fully billable to the client?

Bill Utt

We have discussion weekly with our customer in theater regarding the staffing that we have, the amount of management that’s there, the services we are providing. So, we believe we are fairly lock stepping and as we’ve talked before, you can start taking troops out, but you are not going to be able to take contractors out in direct proportion because someone has to take the structures down, someone’s got to take the dining facilities apart and return the sites to their original condition. And certainly in Iraq, we have over 90,000 different facilities that we are overseeing for the U.S. Army. I think there is a creative – there is a constructive tension that’s going on. Obviously as troops go down, the obvious question is was the contractor going down too and those questions get asked. We are not aware of any issues ahead of us regarding the amount of management oversight we have. We believe that our – we are lock step with our customer in theater regarding the amount of management, the overall staffing that we have. And so I don’t see anything today that causes me concern.

Barry Bannister – Stifel Nicolaus

Okay, great. And could you update us on whether the RFP for theater, transport, postal, ice plant in Iraq (inaudible) was awarded and if you’ve received it?

Bill Utt

No, it has not been awarded. It has been taken a remark – much longer time than we envisioned. Yes, I think the comments that we make are one, we are the incumbent. It would be hard to replace someone who already knows all the very complicated logistics at this stage, particularly as we are starting to take facilities and troops out of theater. And the other observation that we make is perhaps the behavior is not surprising given the underlying call option that the Army has under LogCAP III for the rates they pay us under LogCAP III compared to the rates that would be charged in LogCAP IV.

Barry Bannister – Stifel Nicolaus

Okay, great, that answers it. Thanks a lot.

Operator

Jamie Cook of Credit Suisse has the next question.

Jamie Cook – Credit Suisse

Hi, good morning. Bill, just a follow-up question on profitability, but more specific to you. I mean we’ve heard a lot in the industry about more competitive pressures but I guess the opportunity I look for with KBR is – as I look at over the next 12 to 24 months you have a lot of these legacy projects that are zero margin going away and LogCAP well to – its’ been a overhang on your stock. It’s probably it’s going away to some degree because it’s lower margin. So can you sort of talk about margin targets for the company or which divisions within KBR you think have the best potential for margin improvement and whether that can offset the competitive pressures?

And then the followup question is just on – relates to LogCAP, well it’s a big dark [ph] revenue number you have to offset or I guess the revenue number to big to offset but I guess given that’s a lower margin business, you know and I mean why you have to offset I guess $5 billion the revenue dollar I guess–

Bill Utt

I what you are asking – yes, absolutely.

Jamie Cook – Credit Suisse

You know what I am trying to tell you because you need as much revenue to offset it as you think just because this biz – the new business you would win be higher margin. You know what I mean, so just sort of where we are on replacing that biz?

Bill Utt

Okay. To answer your first question, I am going to take the easy way out, you should look for margin growth in our North America Government and Defense business as well as our Gas Monetization businesses as these low margin projects work their way through. Yes, I don’t see where we wouldn’t be able to look at competing in the market with everybody else what our market margins at the time. So, you can look at our numbers and if you have a view of what margins should be, we should be moving to a higher level because of the reduced dilution of our margins on these legacy projects.

In terms of our LogCAP job income, yes, we got it; we were going to do about $2.5 billion this year. If we look at our accounting at a 1% base fee, that’s $25 million. I’ve got to sell about, I’ve got to sell less than $500 million of new Gas Mon work at a 10% margin to – excuse me, $250 million at a 10% margin to replace that. Services, I’ve got to sell $500 million at a – or $400 million at a 6% margin. So, for us to make up the job income is not that big a stretch. And I will tell you that we are not as worried about revenues here as we are the job income. And that’s why we wanted to talk about the change of job income in our backlog year-over-year of 20 – of a 20% increase because we are focused on growing the job income and you could see an unusual phenomenon of a revenue fall-off at KBR, yet an increase in profitability of our business.

Jamie Cook – Credit Suisse

Okay. All righty. Thanks for answering my question despite my difficulty in asking it–

Bill Utt

We think about that question all the time, Jamie, thank you.

Jamie Cook – Credit Suisse

Thanks.

Operator

UBS’ Steve Fisher has the next question.

Steve Fisher – UBS

Hi, good morning.

Bill Utt

Hi, Steve.

Steve Fisher – UBS

Related to cash flow, if we ignore the PEMEX payment for a second, given the steep [ph] headwind that you had in 2009, should we be assuming that 2010 could be very significant cash flow year particularly in terms of maybe multiples of net income?

Sue Carter

Well, I would think that as we look ahead, certainly it’s going to be better than 2009. I mean, one, we are focused on the management of working capital. To your point we are specifically working on Skikda and the working capital that that produces. Should we receive award fees, we will likely get cash from that and with any luck we’ll also get some of the PEMEX cash. So, well I don’t want to stretch and add – look for a dollar amount. I think it’s going to be much better than 2009.

Steve Fisher – UBS

Are there any other notable projects like Gorgon or something that may eat up working capital like Skikda did?

Sue Carter

That’s not my expectation, no.

Steve Fisher – UBS

Okay. And then, Bill, you mentioned some pioneering [ph] assumptions on projects like Yanbu, Ras Tanura, Angola, how have you factored into you guidance the risk that some of these awards look to the right a bit?

Bill Utt

Well, I think, Steve, we’ve gone back and we would continue to look at the schedules that we have. I know we have had some weather issues with our global warming impacts on our construction in Canada and other places in the first quarter. We think that we are generally tracking to the level of precision in our budget with respect to the timing of these awards. There is just – with the number of projects that we have – the 30 plus of over a billion and the thousand total, there is a still a lot of movements under the surface here, but we are still fairly comfortable that for the year, we are going to be able to hit the number we have for Yanbu, and they’ve got the EPC bids. We understand the EPC bids were below where their expectations were, which is good news. You’ve got to evaluate them technically and commercially. But we still feel that that project has good momentum to pick up this summer and get moving.

Steve Fisher – UBS

But if these projects that I mentioned look to right a few months will that take you out of the range of your guidance necessarily, I would assume not?

Bill Utt

I don’t think so. I think we’ve got a pretty wide goalpost there.

Steve Fisher – UBS

Okay, that’s helpful.

Operator

From Tudor, Pickering, Holt, we go to Dan Pickering.

Dan Pickering – Tudor Pickering

Good morning, guys.

Bill Utt

Hi, Dan.

Sue Carter

Good morning.

Dan Pickering – Tudor Pickering

Can we talk a little bit about the LNG charges in the quarter? I know that the company goes back and does a comprehensive review each time and we’ve continued to see changes in the expectations and I realize you talked about subcontracting – subcontractors, et cetera. I am just trying to assess as we look at the backlog going forward job income margins look better but are we doing anything differently in the way that we assess those job income margins versus to look back, and to look back seems like we continuously kind of in this project life charges. So just walk me through what’s going on, what’s different, I am trying to get confidence in the kind of higher job income.

Bill Utt

We share the disappointment in the end of the job charges that we are seeing in part we have ongoing discussion with our customers and agreements to cover us for some of these additional charges that we hope will reverse over time, but we certainly believe they will reverse in part if not completely over time. But we can't book them until we have the signed agreements and the full approvals. And we have that discussion. Last year on one of projects where we took the provision in an early quarter in 2008 and finally got all the documentation in place in ’09 to reverse it, we are – these projects, Dan, go back to a contracting environment of 2004, 2005. I would believe we brought a heightened level of discipline and review on what we’re doing. We have looked and as we look at the Skikda project, for example, we believe we are in a different position with respect to end of job issues than we have on Yanbu and Tangu and Yemen. And we are working harder to have more money at the back end of the job to deal with this stuff. I think we – maybe we didn’t have as good an estimate of the startups.

We also ran into the red hot nature of the market, we were buying our equipment; we’ve had problems with compressors on several of our jobs. We’ve had valve issues, O ring issues, and we are working through those. We are taking the cost currently and we’ll reverse them when we have the remedies or offsets from third parties on those costs.

Dan Pickering – Tudor Pickering

Okay, thanks. And then, as it relates to LogCAP, given sort of the AFDO I think that was what you called the guy who kind of shut you down a little bit in terms of the’08 award number. Do you – does this change kind of the way you bid LogCAP IV work? I know there is some discrepancy between cost reimbursable and any kind of bonus type scenarios that you are getting on your bids. Are you changing the way you bid given kind of the way the AFDO has reacted here?

Bill Utt

I don’t think we change our bids related to the particular action of the Award Fee Determining Official. We are looking at LogCAP in total, and we are looking at – and we do this in every project, Dan, so this is just part of how KBR looks at work. We are looking at it on a risk-adjusted basis. Now I’ll be very honest with you. I think the risks in LogCAP have gone up in the last year, and our bids – to get an acceptable risk-adjusted return, we’ll have to increase as well. So, we are taking into consideration all the issues surrounding us in LogCAP as we proceed forward. And as I mentioned in one of the earlier comments that it may not matter what we bid in this upcoming base life support in Iraq because there is still a call option on the table for us vis-à-vis LogCAP III that 1% plus 2% award fee.

Dan Pickering – Tudor Pickering

Okay. Thank you very much.

Operator

Jeff Spittel with Pritchard Capital has the next question. Please go ahead.

Jeff Spittel – Pritchard Capital

Thanks. Good morning guys.

Bill Utt

Good morning.

Sue Carter

Good morning.

Jeff Spittel – Pritchard Capital

I guess centering on LogCAP, understanding that there is a lag factor in terms of troop withdrawals, et cetera, could you walk us through I guess the variability there? I think the Congressional Budgeting Office has talked about getting down to about 50,000 troops on the ground by the end of the summer this year. Can you talk about how that factors into the guidance and again understanding there is a lag, what kind of swing factor that could provide?

Bill Utt

I think we tried to address that in our guidance for 2010. We finished up the year at $5 billion of LogCAP revenue. We are expecting to – from a monthly basis see really a linear decline in our activity over the first six months to a level of 30,000 to 50,000 troops, and then having that go out as an acentote [ph] for the second half of 2010. Our guidance was really based on LogCAP IV being the basis of that second six months of ’10, but the bulk of the $2.5 billion was going to be recognized in the first six months. And you could probably do your math from the troop count of 12/31; you are drawing a declining line through the end of June to 50,000, and then going out horizontally for the next six months.

Jeff Spittel – Pritchard Capital

Okay. That’s what I thought. And switching over to the Upstream Oil and Gas business, you’ve talked a little bit, trying to expand your footprint there, are there specific geographic areas where you are starting to see the climate improve versus say six months ago where you are targeting some opportunities there?

Bill Utt

Well, I know that we made a concerted effort to be in Australia when the Australia LNG market took off and I very much like our position there with impacts Pluto 2, 3, the Browse LNG project, and then even a little further out possibly Gorgon 4 and 5. Africa is still slow. From a LNG standpoint, I think we’ve got some issues that has to get sorted out politically in Algeria. We’ve got some leadership issues in Nigeria that are slowly moving forward, but a lot of issues have to be addressed in Nigeria. Angola seems to be moving forward on their refinery project, which is good for us. Those are the primary areas we look at. On a secondary basis, there is still some rumblings in Egypt and Libya about projects. But those are much further out for us. They are still working systematically through in South Africa on the refinery.

So, Africa, is hot and cold in certain markets in certain countries, but mostly it’s a quite market now. The – we are looking at how does KBR participate in Latin America and are thoughtfully thinking through how do we get down to that market and certainly deal with a lot of the local content issues that Brazil, for example, is looking for as they develop their offshore resources.

In the Oil and Gas business, we are in all of the major areas. We are in the Gulf, North Sea, West Africa, Caspian, Australia, A-Pac region. So we like our footprint there. We are looking at some penetration of the offshore Brazilian market with our GVA business – as I’ve spent the last seven or eight months down there prospecting.

Downstream, we’ve got good presence in African and the Middle East. And we are also seeing some movement on some smaller projects in the State. So I kind of like where we are there.

And in the Technology business, we spent last year rebuilding our sales distribution channel. We’ve got that implemented. And now we are trying to drive all of our intellectual property content through that distribution channel and we are actually pleased to have grown what we are offering through a collaborative effort with BP that we announced in our K that was signed up Christmas eve that really gives us a great footprint to provide an alternative technology to your normal crackers that is based on a wide spread between oil and gas price. So, we have both the cracker technology now there is other technology that we think gets us really broadly positioned for all the upgrading stuff of those heavy asphalts.

Jeff Spittel – Pritchard Capital

Thanks for the overview. Appreciate it.

Bill Utt

Okay.

Rob Kukla

Hi, Sara, I think we have time for one more question please.

Operator

And actually it appears we have no further questions at this time. So I will turn the conference back over to our speakers.

Rob Kukla

Great. Thank you very much for joining. We look forward to the first quarter 2010 conference call in a few months. If you have any followup question, don’t hesitate to give me a call. Thanks.

Operator

And again, that does conclude today’s conference. We thank you all for joining.

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