KBR Inc (KBR) 2008 Q3 法說會逐字稿

Good day and welcome to the KBR 2008 third quarter earnings call hosted by KBR. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following 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.

Thanks Teresa. Good morning and welcome to KBR third quarter 2008 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 third quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Kevin DeNicola, Senior Vice President and Chief Financial Officer.

In today's call, Bill will provide opening remarks and business outlook. Kevin 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 31, 2007, KBR's quarterly reports on Forms 10-Q and KBR's current reports on Form 8-K. Now I will turn the call over to Bill Utt. Bill?

Thanks Rob and good morning everyone. I'm very pleased with KBR's third quarter results. Consolidated KBR revenue for the third quarter of 2008 totaled $3 billion, up almost 39% from the $2.2 billion for the third quarter of 2007.

Year-over-year improved quarterly revenue was obviously led by a 600% increase for services which accounts for the addition of BE&K into the KBR financials. Next was a 35% increase for upstream, a 34% increase for downstream and a 12% increase at G&I.

Income from continuing operations for the third quarter of 2008 was $74 million or $0.44 per diluted share compared to $60 million or $0.35 per diluted share for the prior year third quarter representing a 23% increase. Last quarter I spoke in great detail about the adverse and unexpected jury award of $40 million related to a 2003 LogCAP III subcontract which resulted in a second-quarter charge of $0.15 per share.

I was very pleased that a judgment has been entered in the case on August 26 which reduced the total judgement to just over $27 million. The $13 million reduction positively impacted income from continuing operations for the third quarter of 2008 by $0.05 per share.

KBR still believes there are additional errors in the award and we are evaluating our options which may include a settlement or an appeal. Based on the ultimate outcome, we believe that a majority of these costs are ultimately billable to our customers.

Also during the third quarter of 2008 the Gulf Coast region, particularly Galveston and Houston, bore the brunt of Hurricane Ike on Friday September 12. After the hurricane, much of the downtown area was inaccessible and millions of residents were without power, some for several weeks.

KBR's Houston offices were back up and running on the Wednesday after the hurricane. Although damage to KBR's facilities was minimal, a few floors in the KBR tower did sustain broken windows which caused water damage. Events surrounding Hurricane Ike did have a negative impact on KBR's third quarter earnings of approximately $0.04 to $0.05 per share primarily related to a few days of unbillable work hours while KBR's offices were closed as well as for facility repair expenses net of insurance.

I'm very pleased with the backlog growth both with and without the BE&K acquisition. As a result of the close of BE&K on July 1, 2008 backlog increased approximately $2 billion. Total backlog increased to $15.3 billion at the end of September 2008, a 21% increase from the sequential quarter and a 27.1% increase from the September 2007 quarter.

Without the impact of BE&K, KBR's backlog increased 5% over the sequential quarter and a little over 10% over the prior year third quarter. Now let me discuss some operational highlights for our KBR business units.

With respect to our upstream business unit, each of KBR's LNG projects and our other lump sum turnkey projects remain profitable. The Skikda LNG project continues to proceed very well and at the end of the third quarter was 30% complete.

At the end of September 2008, the Tanggu LNG project was 97% complete and we expect the first train to complete in early 2009. The Yemen LNG project remains on track for the completion of the first train in the first half of 2009. At the end of the third quarter of 2008, the Yemen LNG project was 89% complete.

During the third quarter, KBR announced that Kellogg Joint Venture Group was awarded a work authorization by Chevron Australia to finalize the front-end engineering and design work for the Chevron operated Gorgon project. This is positive news in regards to the importance of this project to our customer and essentially funds the project through the final investment decision.

The continued work on the fee for the project is going very well and was a nice contributor to third quarter results. We're helping our customer in reevaluating the scope and the scale of the facility which is now comprised of three 5 million metric ton per annum trains as they work towards a final investment decision. We remain pleased with the current pipeline of projects across upstream's end markets and are well positioned to convert these prospects into future work for KBR.

For Government and Infrastructure, the first couple of requests for proposals or RFPs under the LogCAP IV contract have been issued and two bids have been formally submitted. These RFPs have been relatively small in terms of dollar amounts in comparison to the overall LogCAP III spend.

With regards to our customer's primary objective of diversifying the contractors on the LogCAP IV project, we would not be surprised if KBR does not with these initial transition task orders as we expect the customer to use these early task orders to engage and establish other contractors in the LogCAP operations.

Until a complete transactions from LogCAP III to LogCAP IV occurs, which could possibly be in the back half of 2009, we expect our work under LogCAP III to essentially continue at present levels. We have previously guided that under LogCAP IV, KBR's experience of work in the region should enable it to win its fair share of work which we estimate to be approximately 40% plus of the work. We also believe that LogCAP IV should yield an increased margin over the current LogCAP III work.

We're continuing to experience a strong showing throughout our other G&I businesses. In the Middle East area, we see continued demand for commercial and and core civil infrastructure projects.

Even at the current oil prices, the Gulf Cooperation Council countries remain committed to major development of infrastructure which includes housing and retail commercial projects as well as civil projects such as roads and bridges. KBR is currently the program manager for the Palm Island project in the United Arab Emirates and we have strong relationships with our customers in the region. We're also seeing a willingness to outsource defense support services from countries in the region that are friendly with the Western countries.

These defensive support services would be in areas where KBR would leverage on its past LogCAP experience including logistics, support services, defense infrastructure and training. In the Asia-Pacific area we're seeing strong demand particularly in the minerals markets.

There are several projects located in the region including Australia, Indonesia and India that are in need of design, construction and mining facility management services. KBR is currently working on several iron ore and coal mining projects in Australia for Rio Tinto and BHP Billiton.

We have also been pursuing opportunities for the Department of Defense and Ministry of Defense in the UK outside of the LogCAP III contract in other geographical areas such as Europe, Africa and other parts of the Middle East. These services would include supporting deployed troops, infrastructure construction, logistics and support services; the exact same expertise and experience that KBR is providing under the LogCAP contract and the Allenby & Connaught project.

I am also pleased that no additional charges were taken during the quarter on the Skopje Embassy project and that progress is being made to close out construction activities in a reasonable manner. At the end of September 2008, the project was essentially 82% complete. We maintain our position that the project will be substantially complete and will achieve early occupancy in January of 2009.

Last week, the G&I business unit announced two project awards. The first was related to multiple project task orders by the US Army Corps of Engineers under its current CENTCOM multiple award task order contract valued at $197 million. Under this competitively bid contract, KBR will provide design, engineering, construction management and project management services on improving and repairing runways, taxiways, hangers, maintenance facilities and communication towers at several airfields in Iraq.

The second award was also from the US Army Corps of Engineers that will allow KBR to compete for future task orders under their Omaha District's Security, Disaster, Infrastructure and Construction contract which has a total contract value of $490 million to be dispersed among three contractors. Under the contract and upon award of future task orders, KBR will provide a full range of construction services to support the fast-track construction projects for various federal agencies.

KBR's Services business unit revenue and backlog grew substantially in the third quarter of 2008 because of the BE&K acquisition. With this acquisition, Services grew from about 5% of total KBR revenue in the second quarter of 2008 to almost 18% of total KBR revenue in the third quarter of 2008.

The integration of BE&K into KBR is going very well and we are ahead of our cost syngery targets which we will continue to expect to be in the range of $13 million a year. These savings began on the closing date and will be fully implemented by January 1, 2009 by which time the majority of the transition work will be complete.

During the third quarter of 2008, BE&K contributed a few cents to KBR's earnings per share. Since the close of the BE&K acquisition, we have been very pleased with the awards BE&K has received.

One of the strategic aspects of the BE&K acquisition was to enable BE&K to leverage KBR's larger balance sheet and available capital resources to pursue and capture larger projects than they were able to do historically. Two such awards over the past several months reflect this success.

First, BE&K was awarded a $232 million contract for the construction of an activated carbon plant in Red River Parish Louisiana for ADA-ES, Inc. Under this contract, BE&K will provide full engineering procurement and construction services on this plant.

Second, although the contract value was not publicly disclosed, BE&K was awarded a contract for full engineering, procurement and construction services for a new baghouse unit by Georgia Power for their plant (inaudible) near Macon, Georgia. The EPC services will include the installation of new baghouse, major new duct work and ancillary facilities for Georgia Power's 3200 MW coal-fired power facility.

Other awards for BE&K include a $64 million contract by EFACEC Power Transformers for the construction of a power transformer manufacturing facility in Rincon, Georgia (technical difficulty) contract by Weyerhaeuser to rebuild a large recovery boiler at its cellulose fiber mill located in Columbus, Mississippi.

Earlier this month KBR acquired Wabi Development Corporation, an Ontario based general contractor for approximately $19.5 million. This acquisition expands KBR's capabilities which currently revolve around upgrading and utilities work to more mining extraction and primary separation work in northern Alberta.

This acquisition will allow KBR to utilize and expand its resource base to include both ABTU and CLAC labor resources. For Wabi's fiscal year ended July 31, 2007 Wabi generated approximately CAD124 million in revenue and we acquired Wabi for about three times EBITDA multiple.

The Canadian heavy oil market still remains strong and we expect some good work to come from this market especially building off the Wabi acquisition. Additionally, KBR's joint venture in Mexico to provide offshore maintenance and repair services to platforms in the Gulf of Mexico recently signed two long-term contracts that will utilize both of our vessels.

For our Downstream business unit, the Ras Tanura and Yanbu export refinery projects in Saudi Arabia contributed significantly to the third-quarter results. The EBIC project continues to progress very well and is approximately 99% complete.

Construction and commissioning is targeted to be complete in the first quarter of 2009. Opportunities in the downstream pipeline continue to remain solid. Now I will turn the call over to Kevin. Kevin?

Thanks Bill. I will begin by reviewing KBR's consolidated third quarter 2008 results which primarily focus on year-over-year comparisons.

Our consolidated KBR revenue for the third quarter of 2008 totaled $3 billion compared to $2.2 billion in the third quarter of 2007. Consolidated operating income was $144 million in the third quarter of 2008 compared to income of $102 million in the third quarter of 2007.

Operating income in the third quarter of 2008 included a $13 million partial reversal of the $40 million second quarter charge related to the ASCO litigation. Operating income in the third quarter 2007 included $18 million pre-tax gain on the sale of KBR's interest in the Brown & Root-Condor joint venture in Algeria and a $6 million gain related to a favorable settlement on a road project.

Now before discussing each business unit, I would like to explain the new reported business unit called Other which you saw in this morning's press release and Form 10-Q. This new Other business unit represents BE&K's engineering and technical labor brokerage business which is called Allstates which provides staffing for external projects. We have not yet decided how it will be appropriately allocated to KBR's core business units.

Upstream revenue was $550 million in the third quarter of 2008 up $143 million or 35% from the third quarter of 2007. Business unit income was $53 million in the third quarter compared to $57 million reported in the third quarter of '07.

Business unit income in the third quarter of '07 included an $18 million pre-tax gain on the sale of BRC. Partially offsetting the year-over-year decline were increases in the Skikda LNG project, increased work scope on the Gorgon LNG project, North Rankin 2 offshore project in Australia, the Kashagan project in the Caspian area and FPSO project.

Government and Infrastructure revenue in the third quarter of '08 was $1.8 billion compared to $1.6 billion for the prior year third quarter. Business unit income was $104 million in the third quarter including the $13 million partial reversal of the $40 million second quarter charge related to the ASCO litigation.

Now that compares to $98 million in third quarter of '07 which includes a $6 million gain related to a favorable settlement on a road project. The increase in business unit income was related to LogCAP III work, a UK facilities project in Iraqi for the Ministry of Defense, higher levels of construction activity on the Allenby & Connaught project and multiple water projects in Australia and Scotland.

Services revenue was $539 million in the third quarter, up from $77 million in the third quarter of '07 and business unit income was $27 million compared to $6 million for the prior third quarter due primarily to the addition of BE&K projects. Third quarter of '08 results also benefited from work on the Scotford Upgrader project in Canada, service and maintenance vessels in the Gulf of Mexico, and several industrial services projects.

Downstream revenue was $138 million in the third quarter of '08 compared to $103 million in third quarter of '07. Business unit income was $15 million in the third quarter compared to $4 million in the prior third quarter. The increase in business unit income was primarily driven by the increase addition of BE&K projects and progress on the Ras Tanura integrated project in Saudi Arabia.

Technology revenue for the third quarter of '08 was $19 million compared to $26 million in the third quarter of '07. Business unit income in the third quarter of '08 was $4 million compared to $5 million for the prior year third quarter. Decrease primarily relates to several projects with lower activity during the third quarter compared to the previous year's third quarter which was partially offset by a fluid (inaudible) cracking revamp project in Colombia.

Now with respect to the Ventures unit, business unit income for the third quarter was 0 or breakeven compared to a loss of $3 million for the third quarter of '07 and the improvement was primarily related to no further losses recorded on the Alice Springs Darwin Railroad project. Our investment in this railroad was reduced to below 0 in the second quarter to the extent of our future funding obligations.

Now let's review other financial items. General administrative expenses in third quarter were $55 million. That is up $3 million from the second quarter of '08 and that is primarily related to BE&K.

For the full year we expect corporate costs to be approximately $225 million which includes the impact from the BE&K acquisition. Our effective tax rate for the third quarter was 36%. That was flat compared to the second quarter of 2008 and with three full quarters of implementation of our tax strategy to diligently utilize foreign tax credits, we now expect the full year 2008 effective rate to be in the 36 to 37% range.

Total backlog at September 30 '08 was $15.3 billion compared to $12.6 billion at June 30. The sequential backlog increase was primarily due to the addition of the backlog from BE&K which added approximately $2 billion to the backlog as of the July 1, 2008 close; also additional work added to our Middle East operations.

Overall the backlog portfolio mix at the end of the third quarter was 80% cost reimbursable, 20% fixed-price which compares to 76% and 24% respectively to the sequential quarter. Now let me turn to liquidity and the balance sheet.

At the end of September 2008 our balance sheet remains strong with no debt and cash and cash equivalents of $1.1 billion of which $302 million is cash associated with our consolidated joint ventures and another $236 million from advanced payments related to a contract in progress. In total, cash balance decreased by $446 million during the third quarter 2008 primarily driven by approximately $[550] million related to the BE&K acquisition, approximately $196 million related to KBR's share repurchase program.

Partially offsetting this decline was an increase of $91 million related to our consolidated joint ventures and a $20 million increase in advance payments on a contract in progress. Total cash flows provided by operating activities for the first nine months ended September 30 was $1 million which included payments of $158 million related to net committed cash from advanced payments from consolidated joint ventures and other consolidated subsidiaries and a contract in progress and this compares to total cash flows used in operating activities of $284 million for the first six months ended June 30, 2008.

And while we're on the topic of cash, let me take a few moments to discuss our outlook for further uses of cash. The financial and banking issues currently dominating media political discussions, we believe that firms with strong balance sheets, particularly from a cash and debt perspective, will be in a better position to function and capture opportunities to grow their businesses.

KBR continues to have a strong cash position and we're certainly cognizant of the fact that in these financial times, a company must be diligent in their cash management. We continue to have plenty of credit revolver capacity available but we still need to maintain our strong balance sheet to help weather the tough times that the overall economy is experiencing.

As you are aware, KBR initiated and completed its share repurchase program during the third quarter of 2008 which resulted in 8.4 million shares being repurchased at an average purchase price of $23.35. This repurchase program was certainly the right thing at that point in time. And we're certainly aware of where the stock price is today, but given the current state of the US capital markets, we're taking a more conservative approach to evaluating our options for another program.

KBR also remains committed to actively pursuing opportunistic acquisitions similar to the Wabi acquisition that Bill spoke about earlier. Working capital in Iraq was $123 million at the end of the third quarter of '08 and that's down approximately $88 million from the sequential quarter due to timing of collections on receivables.

Capital expenditures totaled $11 million, depreciation was $16 million during the third quarter of 2008. Capital expenditures were up approximately $3 million compared to the sequential quarter primarily due to increased real estate and IT spending. We've revised our expectation for capital expenditures for full year 2008 to be just over $50 million -- that's including BE&K -- as from the previously discussed expectations of less than $60 million.

As you may have noticed in the income statement, the minority interest in net losses and subsidiaries line for the third quarter of 2008 was $22 million. That's a $6 million increase from the sequential quarter and a $9 million increase from the prior year quarter.

The factors driving these increases are increased work on consolidated projects where we owe our joint venture partners their share of the project's profits particularly from Pearl GTL and the Gorgon LNG projects. Now I'll turn it back to Bill for his final remarks.

Thanks Kevin. Although we are aware weary of the financial and credit market concerns, we maintain our strong outlook on our end markets and opportunities. We've not yet seen any indication that major projects in the international energy sectors are being canceled or delayed and have not experienced any material impacts to our business.

We understand the environment that we potentially face over the next few months and years so we're working to conservatively manage our business for any unforeseen impacts to the project opportunities associated with the financial and credit markets. Our cash position is strong.

We have a solid balance sheet and have access to lines of credit through our revolver that will enable KBR to continue to pursue work and capture opportunities when they arise. KBR's backlog is strong at $15.3 billion.

KBR currently has not experienced any project cancellations from work currently in our backlog. With the economic outlook remaining uncertain, it is possible that customers may cancel or delay projects that are currently underway. However, we feel the likelihood of any significant impact to our current backlog from cancellations is limited.

Now we will take your questions. We ask that you please limit your comments to one question and one follow-up. Thank you.

(Operator Instructions) Andy Kaplowitz.

Last quarter you had mentioned a timing issue around an LNG $0.09 charge and that the Board was trying to review or the customers board was trying to review whether to accept that charge and give the money back to you guys. Can you tell us where that stands now?

Yes, we continue to work with our customer on the change order. We continue to remain very optimistic about our ultimate positive resolution of the change order, however, we have not been able to -- or the customer has not been able to get their partnership board scheduled -- or schedule an ad hoc board to consider this change order. And we're revised that the next meeting for this partnership board will be in December. So we're optimistic that from that meeting we will be able to conclude that change order.

Great, thanks. For my follow-up BE&K, so you gave the numbers in the Q and the only question I have for you there is that the margins look a little lower than I would've thought around 3% including the division overhead. And so just curious, is that sort of amortization of intangibles? Is that -- can that margin improve over time? Am I missing something?

Within the BE&K business we are obviously writing off intangibles and there is a certain balance that is being written off over a very short period of time which tends to depress margins. We're optimistic that we can over time through the amortization of these intangibles as well as bringing it more into a KBR framework bring margins closer to what we are seeing.

Gotcha and so your main Service margin (inaudible) around 10%, is that the ultimate goal for BE&K?

I think that's hard to say because the Services business includes pipe fabrication and includes the returns on assets for the service vessels we have in Mexico which typically return margins greater than 10%. So the Services margins are kind of buoyed by the asset-based businesses.

But where we can look at the hydrocarbon business just on the services like (inaudible) basis we should see a convergence. But I would not expect that we would be able to get it to 10% because that brings in asset -- intense asset business that tend to pull that overall margin up.

Gotcha and given the contract awards we have seen in BE&K, it seems like -- it doesn't seem like there has been much of a slowdown in that business. Can you give us just a view on how that business has been fairing over the last few months?

It's mix because BE&K's in a lot of different businesses. We think the general construction market remains strong but we keep an eye on what is happening in the US markets because of the credit crisis that we have.

We are obviously more comfortable today with the work we're doing for utilities that tend to have rate-based recovery and do balance sheet financings. In the building group there is a segment of that business where they have done the construction management for developer finance facilities which is a part of that business, not the major part.

And we have seen that market reduce or contract significantly because of the absence of financing. Now in that business we're still optimistic about their health-care practice and their educational practice which appear to be a little bit less directly impacted by what's going on in the economy.

Vance Edelson, Morgan Stanley & Co. Inc.

Could you let us know on the billable hours for Ike that got pushed back, is that work that is just lost or does it possibly now show up in the fourth quarter results?

Well, it's not lost work. It is work that will eventually manifest itself into our P&L. We have a fixed capacity of people so if we miss out on for example 100,000 hours of work or one million hours of work, that work will be earned out at the end of the job and when we probably -- we do not expect to see that returned in the fourth quarter because the people are otherwise busy doing the work that we have got in the backlog for the fourth quarter.

But it will occur over time. It's just the disruption that we had of people not able to get into work, the offices being closed, we elected to pay people salaries during the time that they couldn't work around Ike. So that was the nature of the earnings impact we saw from Ike and it is not lost work. It's just will be recognized over the next series of quarters as we get caught up on those projects.

Got it. As a follow-up and this is a more general question, if for argument's sake the US pulls out of Iraq sooner rather than later, could you just give us a feel for what your responsibilities would be and kind of the scope and the duration of the work to get that done?

We recognize that any decision of amount of people and the timing is really the government and as a contractor, we simply respond to it. Our sense is that there would be a short-term increase in work as we do a lot of movements of people, equipment, provisions out of theater to other areas and get those to their respective storage locations.

There is also the expectation that we would have to recondition the equipment so it could be stored as well as return the existing campsites to the conditions that we found them. So our work would likely follow the troop strength but we would see an initial blip and we would kind of trail the reduction in troops in terms of where we expect our billings would be.

Jamie Cook, Credit Suisse.

My first question builds sort of a longer-term strategic question. Given what we're seeing in the energy markets, as you think about KBR longer-term, how important do you think it is to diversify out of the energy market? BE&K obviously was a nice little acquisition that now looks much better than I guess I originally thought it did. So kudos to you.

How do think about that? And then my second question is can you just walk us through if we think about your business model, which parts of the business do you view as sort of being more recurring versus -- have a recurring earnings stream versus the more cyclical components? Is there any way we can think of a base earnings case for KBR?

Okay, that's a very broad series of questions. Let me just try to address them byte by byte. I think the first element -- you talked about diversifying out of energy. I would like to make some comments about our perspectives of the international hydrocarbon environment, if we could.

That would be great.

First of all, while the prices declined significantly from as high as around $150 a barrel to around $70 a barrel today, based on our discussions with our customers, their price decks have recently been in the 65 to $70 a barrel price range.

So just based on a change in oil price only, we're still at a point where our customers are making affirmative investment decisions for projects. The second point is that with the falling oil prices, we believe that this is going to drive a reduction in the cost to construct facilities. And we're seeing lower cost of materials, lower cost in our commodities that we use. We're seeing lower cost for equipment.

And if you remember back in '04, '05 people were justifying major capital projects to $30 a barrel and in part because of the cost side was supportive of justifying projects at $35, $30 a barrel. So today at $65, $70 -- and that was a customer price deck based on the three months ago price supply chain for us and we expect that our price of delivering the construction projects is going to follow as well. So we're still keeping in our minds a positive incentive for projects to go forward.

The next aspect is really as we looked at the last year, we haven't seen a lot of big awards. And one of the theories that we talk about around here has been that it has been an inverted yield curve where the short-term price of oil has been above the long-term expected price that we estimate to be between $70 and $90 a barrel.

So when the price was at $150, we could see why customers could be taking decisions not to lock in the capital cost of a project based on a cost deck of $150 a barrel and why it wouldn't be attractive to earn that out at $70 to $90 a barrel over the life of the investment.

So as we look at today's environment, we have what we call a more normal yield curve where you have $60 to $70 oil, a cost structure based on $60 to $70 and a long-term price expectation that's not materially different from the $70 to $90 a barrel. So we think you're going to see some broader -- you may see more projects move forward because of a more sustainable investment climate with a normal cost yield curve.

The fourth element we look at is if you go back and you look at IEA and what they think, given the present depletion rates and assuming zero demand growth globally that by 2025 we need to develop an additional 40 million barrels a day of production. And so you see the depletion curve driving a continued investment in that space and I don't believe that's going to go away because I don't think we are going to see that demand much demand disruption in the market.

And then the last point is that the big customers we have in the hydrocarbon side are typically balance sheet financing. They're the international oil companies or the national oil companies. So as we look at the hydrocarbon market, we think it's a great place for us. But as we look at a transaction like BE&K, it is not the reason of diversifying away from hydrocarbons. For us it's more of trying to establish positions in our value chain that allow us to be a viable competitor from the conceptual consulting of a project all the way through the maintenance of the asset over the life of the project.

So BE&K was great for us because it helped accelerate our presence back into the construction area of the business as well as double our maintenance business and these were two areas that we talked about building as KBR and they really fit right in the mainstream strategically where we wanted to take the Company. The added benefit was they came with a bunch of engineers that we think we can utilize to grow our engineering business. And as we saw over the last 12 to 18 months, we have seen a constriction in the supply of engineers to do the work and we like the engineers that we have acquired and we think it makes KBR a stronger, bigger and more vibrant provider of services not only to the existing BE&K customers, but also to our normal KBR business.

So as we kind of wind to what has recurrent earnings versus cyclical, we're trying to develop the business model that allows us to have relevant positions in consulting, in front-end engineering, in the engineering procurement construction and the maintenance services business. We believe that as we have brought in a greater degree of risk awareness to the Company that the cyclicality that KBR was known for in terms of inconsistent project results is going to dampen a little bit.

I think we're seeing a little bit of that within the results we talked about this quarter. And I think we're making some positive strides to bringing a much less volatile business and a more predictable and systematic level of performance to the Company. So I've probably taken maybe a little longer then maybe the answer you were hoping for, but it is a very integrated question and one that gets into what are we trying to do with KBR as a business.

Barry Bannister, Stifel Nicolaus.

Question I have is about LogCAP. Given this is a fairly politically charged season, on the hill you usually get very, very strong positive feedback. But in the press and in public, it's sometimes not.

So is there a chance that the recent legal issues regarding electrical work which were done to DOD standards might cause some reduction in your fitness report that would affect the operating margins in subsequent quarters as it happened when you stepped down briefly I believe two quarters ago in terms of the LogCAP operating margin?

Well we are continuing to work with our customer to contemplate how one transitions from a contingency type activity to a sustained one. So we're working with them to look at the realities of an extended presence and so we get back to a lot of the electrical issues.

There is a lot of issues that are talked about that really don't involve KBR. And so we have taken a very thorough look at really where our exposures are on those issues and we have made our comments in the Q regarding the fact that we feel our liability is not present on some of these cases.

Regarding the award issues, we continue to establish objectives with our customer every quarter. We continue to get feedback on our achievement of those objectives relative to expectations. And I think we're still on track along historical lines towards the performance of KBR against these objectives.

Now we do get a lot of press being KBR. I guess the good news is that with everything going on in the capital markets, there hasn't a lot of time people could spend looking at contractors in Iraq so it's been a fairly quiet time for us which we appreciate the break.

But in terms of our business vis a vis the expectations of our customer, we believe that we continue to deliver a high level of performance that should at the end of the day manifest itself in terms of how we are scored on our award for fee boards.

And then with respect respect to Afghanistan, has that increased materially as a percentage of your task orders under LogCAP IV that you're working on? And then lastly on LogCAP IV, could you give us some idea of this lumpiness that will be inherent in that whereby the payments are I believe every six months, not three months or something of that sort where your payments are stretched out and it might affect the timing of LogCAP IV earnings in '09?

I'll answer the easy question first. LogCAP IV will have lumpiness because the accounting rules of which grandfathered LogCAP III will state that under LogCAP IV, we cannot recognize award fee scores until they're actually awarded. We will not be able to accrue the award fee scores as we have historically on LogCAP III.

And obviously that factors into how we price our base fees and award fees on our task orders under LogCAP IV. Regarding Afghanistan our work is remaining pretty constant and we're following the efforts of the troops as they change their performance in theater and their location of performance.

And just housekeeping, it's not a question so much. But your share count was less than the buyback. Is that because it's an average and the end of quarter shares was closer to 159?

It's a weighted average share calculation for the quarter so it's not the quarter-end number that you saw there.

So will you use 159 in '09? (multiple speakers) 161, 160 because it was 8.4 off of that (multiple speakers) 170 (multiple speakers) just got to take 8.4 off of it.

Dan Pickering, Tudor Pickering Holt.

Bill, could you talk a little bit about -- I'm just trying to gauge overall demand for [ENT] services in general and I guess the only way I know how to ask that question is sort of the value of your bids outstanding and how that has been trending over the last few months and how you expect that to trend as we step through the next quarter or two given the economic conditions.

I think you asked us that question about a year ago, Dan. And we went back and took a look at it thinking that given the uncertain times you'd come back to that. As we've looked at the business proposals outstanding from January to the end of the second quarter to the end of the third quarter, our proposals outstanding volume has increased and we have seen -- really we haven't seen any material fall-offs in any of our business units.

We have had a pretty good ramp-up in our proposals at G&I. The proposal growth in Upstream is good. Downstream is essentially flat second quarter to third quarter. Services is down a little bit probably with some of the postponements we talked about.

The proposals outstanding are still pretty solid. They have grown during the year. How they go into the future, I think that Upstream we see a solid business for the five reasons that I enumerated at Jamie's question. G&I, we're starting to see some of the benefits of our efforts to diversify our offerings, get traction.

Our Services business is pretty nimble and we will continue to look at other opportunities where some of these other markets may be down. We still have a very small share of market. It's a very fragmented market. And so I think we will just reposition some sales efforts there and maintain a pretty good volume.

We are swimming in a sea of negativity. There is no doubt about it but as we look at just the actual numbers of our business, it looks pretty solid right now. From second quarter to third quarter, the proposals outstanding grew. So I was pleased with that figure.

That's encouraging. And as you looked at the geographic mix of that, was there anything that stood out to you in terms of where things geographically were stronger than others?

I would say if you looked across the proposals outstanding, the G&I and Upstream and even our Downstream business will be international. And those customers that we see -- our balance sheet financiers are integrated oil companies, international oil companies, national oil companies, governments. And so the biggest parts of our business where we have the greatest volume of proposals outstanding appear to be in the markets that have customers who are best able to weather the situation that we're in.

That's helpful. And then I guess I'm thinking here about also about pricing in general. We have got raw materials coming down. That ought to make things more inexpensive I guess for the customer or projects are theoretically becoming cheaper.

Do you view that overall given one, your mix of legacy projects and what you'll be doing going forward, does that give you a margin expansion opportunity? Does it shrink your margins a little bit or do you just see the business as staying pretty stable in terms of how you think about big margin?

Dan, I look at the business -- and we are still digesting through a lot of legacy contracts and one of the -- second quarter we had a large amount of Escravos revenue that went through the books at zero margin. So that has been a drag.

I would say that the work that we're looking at prospectively on the hydrocarbon side are typically at margins that are greater than the recorded margins as we just digest out lower margin work. And so I think there is economic -- margin expansion just by that factor alone, just getting the bad work out and allowing the good work to come in.

And then from our side, we continue to do I think a very good job of identifying the risks and analyzing, pricing them and that should allow us to have less volatility in our reported results in future periods. So I think we still have some room to run just based on better operations of the business and the liquidation of lower margin inventory.

And Bill, I just want to clarify. You said in Q2 you had a lot of Escravos revenue?

Yes, I think Q2 was one of the contributors to the reduction in revenue. We had a big flood of Escravos come through that goes without the margin because of the conversion.

And Q3 that was less significant?

Yes.

Steve Fisher, UBS.

You mentioned the 40% target for share of the LogCAP IV contract. Wondering if you can just give some color as to how you get to that number. Is it just based on the assumption that you had the legacy contract and you should get more than your fair share or there's certain types of project that you feel you're more suited to?

It's largely based on what you described. We're the established contractor. We know the Army best. We have got a very integrated relationship established and we think we will do better than one-third. And that's -- you could look at -- it depends on the packages of work that they put to bid and how they do it. I don't think they'll get it down to small chunks.

It may just be big chunks and I know that there is a -- because of our award fee scores, the customer is very happy with our performance and yet we recognize that from a political sense it makes a lot of good sense to get some diversity in the theater. So we think we do good job and that we will do better than simply one over three.

Got it and then you mentioned the infrastructure opportunities in the Middle East and Asia? In the event that Yanbu or Ras Tanura, the next phase of those extends beyond 2009 in terms of starting up, do you think those infrastructure opportunities could offset what you would have generated from those projects?

I don't think so because you look at a Yanbu and a Ras Tanura, those are big elephants and you would have to build a very significant scale of these other projects to overcome that. I think they could mitigate some of the impact and I will also say that as I talked about our proposals outstanding, part of me says I hope we don't win all the proposals outstanding because we don't have the resources to do all the work.

So we think we have enough diversity of projects in our portfolio on the hydrocarbon side such that if one or two disappear or get delayed that we should be able to efficiently manage our labor pools and keep people working.

Teresa, let's make -- let's go ahead and do one more call, please.

Wonderful. Our final question will be from John Rogers.

Bill, you talked about the activity in the international markets on the G&I side, the non-US government-sponsored work. But bookings in that market have been fairly slow so far this year. Is there a series of projects that are going to be released that you're looking at?

Part of it is the programs and the customer behaviors and particularly in the Middle East as they get to know a relationship, they give you a small project and if you do a good job, they give you another big one. And we have seen some other service providers who are not in the ENC space but providing IT services have gotten in, they got a couple of small contracts and the next thing they knew, they had a series of very large contracts and very significant volume.

We believe we are in the phase of -- we've done the marketing. We're doing our initial work over there and we would expect if form holds true that we should see a growth in the amount of awards we get from these customers as we establish our execution credibility with them on the present projects we're executing.

That is something that we should expect to see in 2009 assuming no major unusual events?

We would expect to see some come in 2009. Again it will depend on how quickly that ramp-up occurs and also on a relative basis how does that volume compare with the other projects that we are also pursuing. They may just get caught in a shadow and we may not talk much about them if we get several of these larger awards that we have been trying to position for for some time.

These are civil and commercial type projects as opposed to your (multiple speakers)

They're more civil engineering projects, yes.

Just one other quick follow-up. In terms of your G&A levels, they have been fairly stable of late. Is that a good run rate now, the $55 million a quarter?

Yes, Kevin, I think that what I expect going forward is something just shy of the $60 million level as we looked at the longer run rate numbers. We were running about 54, 55. Then we added BE&K and I think what we should be looking at is something just shy of 60 (multiple speakers) quarter.

That does conclude our question-and-answer session today. At this time I'll turn the call back to management for closing remarks.

Great. Thanks you all for joining today. We look forward to talking with you all next quarter. Thanks.

That does conclude our conference. Thank you for your participation. You may disconnect at this time.