KBR Inc (KBR) 2009 Q3 法說會逐字稿

Good day and welcome to the KBR 2009 third quarter earnings call hosted by KBR. Today's call is being recorded. As a reminder your lines will be in an listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time. For opening remarks and introduction, I would like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Thanks, Laura. Good morning, and welcome to KBR's third 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 third quarter results is also available on KBR's website.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; Kevin DeNicola, Senior Vice President and Chief Financial Officer; and Sue Carter, KBR's new 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, 2008, 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 Mr. Bill Utt. Bill?

Thanks, Rob and good morning, everyone. Overall, I am pleased with KBR's third quarter 2009 results. I will discuss the business year highlights in more detail shortly. The EBIC ammonia project passed its performance test and received notification of plan acceptance earlier this summer. We are currently producing LNG from both trains at the Tangguh project and cargos continue to be shipped. We expect to be ready to begin performance test on both terrains during 2009.

On the Yemen project, we are producing LNG on Train 1 which has already been turned over to the customer and we expect Train 2 to be deemed ready for startup in early 2010. However, this quarter, we did experience several items related to equipment failures, subcontractor claims and schedule delays. Our project teams have done an outstanding job working in conjunction with our customers' project teams to minimize these impacts. However, the impacts of these events has adversely impacted KBR's financial performance on these projects over the recent quarters.

As everyone is keenly aware, the last several years have seen the Engineering and Construction space become increasingly stressed as the volume of projects seemingly outstrip the capacity of the industry to engineer, construct and supply equipment to the multitude of energy infrastructure projects being undertaken worldwide.

The strain of this global demand for energy infrastructure have been felt across the entire space. In KBR's case, during 2009, we have experienced problems during plant startup and commissioning activities with the quality of gas compressors, gas compressor seals, pumps, fabricated pieces of equipment and valves. The extent of these problems has been outside historical norms and we believe this is attributable, all or in part, to the fact that our suppliers have struggled to maintain their delivery commitments in an overheated market over the past couple of years.

Further, we have seen labor shortages on several of our projects in and around the Middle East. While we are disappointed with the P&L impacts we have seen over the past quarters, related to these issues, we do not anticipate further material impacts from these issues, and it is possible that we could see some recoveries of prior provisions as we work with our customers, suppliers, subcontractors and insurance carriers to settle claims for extended costs, warranties, failures and time extensions over the coming quarters.

Despite the charges taken this quarter, all of KBR's current LNG projects remain profitable. With respect to our upstream business unit, certainly the most notable recurrence in the quarter was the engineering, procurement and construction management award for the Gorgon LNG project. The KBR led joint venture with partners JGC, Clough and Hatch will provide EPCM services on the three $5 million ton per annum trains, gas processing and treatment facilities, product storage and offloading, complete offsite utilities and accommodations.

The construction effort is a fully modular strategy to minimize impact on the Barrow Island nature reserve and will utilize several fabrication yards across South East Asia and Australia to construct a planned 250,000 tons of LNG modules.

Another important aspect of this project is the unique and one of a kind foreign team plan which was rated world class by the Western Australia EPA. During the quarter, we booked $2.3 billion in backlog related to the Gorgon project of which KBR expects to execute approximately 50% of this work. Work on the Gorgan project went up significantly this quarter as work has shifted from post-FEED activities to full release of engineering and procurement activities. The project was a nice contributor to the third quarter 2009 results.

The Skikda LNG project continues to proceed very well and at the end of the third quarter it was 55% complete. Engineering of procurement services are approaching completion and physical construction activities continue to ramp-up in the field.

In our Oil & Gas business, our work on the Jack/St. Malo semisubmersible haul and mooring pre-FEED and the Chevron Big Foot top size FEED are progressing well. The projects with BP, the Chirag drilling platform FEED and the West of Shetland's FPSO are also proceeding and making nice contributions to our results.

In Australia, our Eos joint venture with WorleyParsons was awarded a distinguished engineering award for its work on Woodside's LNG project and offshore gas production facility.

For our government and infrastructure business, the low cap revenues declined 15% from the prior quarter driven by reduced activity levels in the region, and overall declines in headcount. Currently, our best estimates for volume for the fourth quarter of 2009, is approximately a 5% decline from the third quarter volumes.

With respect to 2010, according to recent reports from the US Government several scenarios exist in the planning for crude productions in Iraq. Currently, the expectations for a withdrawal of troops down to approximately 50,000 by the end of the summer next year. The reduction enforces entails more than physically moving the personnel out of the area.

There will be remediation work that must be done in conjunction with the potential withdrawal including a removal and relocation of service personnel, retrograding of massive quantities of equipment, camp closures, tearing down living and dining facilities, moving thousands of tons of ammunition and many more activities. With the remediation work there will be a lag in the revenue declines from the physical withdrawal of the troops.

At this time, we have not seeing any plans for the remediation activities nor have we been directed through task orders to engage in any troop reduction activities. In regards to the transition from LogCAP III to LogCAP IV in Iraq, we have received one request per proposal for a portion of the work in Iraq that covers logistics, services support.

Theatre Transportation Mission, Postal Service, ice plant operations and some air terminal operations. The bids on this RFP have been submitted, and we expect the results of the bidding to be out within the next month. To put this RFP in perspective, this covers approximately 25% of the current work KBR provides in Iraq today.

For the second portion of work in Iraq, the base life support services, we have received a competitive concept letter from the customer and expect a formal RFP in mid-to-late November. Preliminary indications are that the base life support services will be divided into North and South. The present planning schedule anticipates that a full transition to LogCAP IV in Iraq should occur some time around the third quarter of 2010.

In Afghanistan, the transition from LogCAP III to LogCAP IV is ongoing and KBR's work under current task orders ends March 2010. However, the transition is proceeding more slowly than the customer had originally planned. Our current estimate is that a complete transition from LogCAP III to LogCAP IV in Afghanistan will occur after the March 2010 target date and go into the summer of 2010.

Also, in Afghanistan, KBR supports the UK's Ministry of Defense campaign through contractor logistics support, infrastructure support and temporary deployable accommodations programs.

As KBR complete its 2010 budgeting exercises and finalizes its 2010 financial plan, we will comment further on our 2010 LogCAP III and LogCAP IV expectations in December. Within the infrastructure area the Qatar-Bahrain Causeway project continues to contribute nicely to our results as well as our program management for the Das Island project in Abu Dhabi. The first Formula One race at Das Island is this Sunday with final completion of the racetrack and surrounding infrastructure including the marina and hotels winding down. I would like to congratulate the team for their hard work and successful execution of this project.

In Australia, we are seeing signs of improvement in the mineral sectors as some customers have began reviving potential projects. The government stimulus packages are underpinning infrastructure projects which continue to provide us with a good list of opportunities, although we are experiencing a tougher competitive environment. Also, KBR and its joint venture partner, Arup, recently received approval to complete the final planning work for the Victoria Rail Project. The joint venture's role is as the customer's consultant to undertake conceptual studies and consulting for the architectural master planning, rail and transport planning, tunnel engineering and station design, railway engineering, as well as environmental community and stakeholder risk management.

KBR Services business unit also continues to perform well. With the third quarter 2009 behind us, this marks a full year with BE&K's impact in the year-over-year financial comparisons.

As we have talked over the past several quarters, the integration has been completed and went extremely well. Over the past year we have made numerous announcements regarding project awards at BE&K, including new markets to KBR such as power.

Over the past year, the BE&K acquisition has re-established KBR as a significant contractor in direct tower construction and maintenance. The Shell Scotford Upgrader project ramped up in the third quarter as we anticipated. If you recall from last quarter's call, our work in the first half of the year was slowed by the customer to enable engineering material supplied by others to catch up with the construction demand.

At the end of the summer, staff levels were increased considerably and we were still experiencing growth in our scope of the project. The project is currently 65% complete and we expect completion of the project in mid-2010.

In the Canadian oil sands area, we have not seen many changes over the last three months since last quarter's update. Customers are moving forward with smaller capital and maintenance projects, but the large project environment seeks to continue to reduce its cost structure under the current economic environment.

Earlier this month, KBR was awarded a contract to provide turnaround services for Suncor's turnaround 2010 project at its oil sands plant in Fort McMurray, Alberta. KBR Canada will provide turnaround planning, management and execution for the shutdown and maintenance of the plant including direct tunnel labor resources, management of subcontractors and coordination of activities with the client workforce.

Their Turnaround group, a KBR subsidiary that was acquired in 2008 will contribute export project control systems and high level technical capabilities for planning, scheduling, cost estimating, forecasting and integration of KBR and Suncor's activities.

For our downstream business unit, the Ras Tanura project for the Aramco-Dow joint venture as well as the FEED and site development work for the Lobito refinery project for Sonangol in Angola, notably contributed to third quarter results. Also contributing to the quarter's performance were numerous refining projects including the Yanbu export refinery project.

In regards to the Yanbu project, in early August we announced KBR was awarded a contract to provide detailed engineering and procurement services for the utilities package, interconnecting systems and pipe racks for the entire complex.

During the quarter, KBR was also awarded a contract to provide front-end engineering, design and project management services for Saudi Aramco Shaybah Natural Gas Liquids project. KBR will develop the process design, layout equipments and material specifications, prepare bid packages and develop an estimate for the construction of several projects related to the Shaybah NGL facility.

Also, KBR was awarded a framework contract by Sasol Technology to provide engineering services across various sectors at Sasol's group's businesses. I was also pleased with the technology business unit's performance this quarter. Revenue was up 42% over the third quarter of last year, as well as business unit income up 75% over this period.

During the third quarter, technology had several announcements including an award by Beijing Guoneng Clean Energy Engineering Company to provide licensing, engineering services and proprietary equipment for the implementation of the KBR and Southern Company TRIG coal-gasification technology. Also, KBR was awarded licensing and engineering services for grassroots FCC and hydroprocessing technologies for Sonangol's Sonaref Refinery in Angola and a ROSE Technology award by Hindustan Petroleum Corporation, providing licensing, engineering services and proprietary equipment for augmenting the capacity of an existing de-asphalting unit at its Mumbai refinery in India.

Finally, I would like to take a few minutes to discuss the recent announcements regarding organizational changes you have seen in the KBR press releases over the past several months. For 2010, KBR will be managing its businesses as eight discrete E&C business operation, each focusing on a specific segment of the market with identifiable customers, business strategies, project management and sales and marketing capabilities. Upon completion of our preparations for this re-organization, the gas monetization oil and gas downstream in the technology business units will comprise a hydrocarbons group, which we announced, will be led by John Rose.

We are continuing to examine the optimal business grouping and management structure for the remaining business units comprised of North American government defense, international government defense, global infrastructure and minerals, and the power and industrial business units. KBR will continue to support these business units through our existing operations group, which oversees the engineering and procurement resources at KBR as well as a remodeled services business unit comprising KBR's construction, operations and maintenance and fabrications resources.

Ventures, the entity which oversees and administers KBR's project investments will also be reported separately. From an external reporting standpoint, we believe this reorganization will increase transparency and hopefully make KBR easier to understand. We expect to finalize our preparations for this reorganization in the first quarter of 2010 and make our first external reporting for this new organization structure at the quarter ended March 31, 2010. After Kevin's comments, I will comment in more detail on the market outlook for our business before turning the call over to questions, Kevin?

Okay, thanks, Bill. I'll review KBR's consolidated third quarter 2009 results, which primarily focuses on year-over-year comparisons. Our consolidated KBR revenue totaled $2.8 billion compared to $3 billion for the third quarter of 2008.

Over this time period the technology of business unit revenue increased 42% followed by a 34% increase for upstream and a 5% increase for services. In government and infrastructure business unit, revenue was down 22% primarily related to lower activity in Iraq related services.

Consolidated operating income was $131 million for the third quarter of 2009, compared to operating income of $144 million for the third quarter of 2008. Net income from continuing operations attributable to KBR for the third quarter of 2009 was $73 million or $0.45 per diluted share compared to $74 million or $0.44 per diluted share for the prior year third quarter.

During the third quarter of 2009, net income from continuing operations included a $10 million tax benefit related to return to accrual adjustment for the 2008 tax year which was partially offset by a $6 million impairment of goodwill at a staffing company acquired as part of the BE&K acquisition.

Upstream revenue was $735 million in the third quarter of 2009, it's up $185 million or 34% from the third quarter of 2008. Business unit income was $48 million in the third quarter of 2009, compared to $53 million reported in the third quarter of 2008.

For the gas monetization operations, job income was up $3 million over this time period, primarily driven by increases in the Skikda LNG, the Gorgon LNG, and Pearl GTL projects as well incentive fees on the Escravos GTL project. These increases were substantially offset by increases in project costs on the other LNG projects due to schedule delays, subcontractor claims and overall lower activity levels on these projects as these projects near completion.

For the oil and gas operations, job income declined by $6 million as a result of the completion of a number of offshore engineering projects. Government and infrastructure revenue in the third quarter of 2009 was $1.4 billion compared to $1.8 billion for the prior year prior third quarter. Business unit income was $89 million in the third quarter of 2009, compared to $104 million in the third quarter of 2008.

Business unit income in the third quarter of 2009 and 2008 included a $17 million and a $13 million recovery respectively of a previous $40 million charge related to an unfavorable jury verdict from litigation with a subcontractor on the LogCAP III contract in the second quarter of 2008.

The decrease in business unit income was primarily related to lower volume and award fee accrual rates with the LogCAP project at lower activity on several projects including the Allenby & Connaught project in UK MoD operations in Basra. Partially offsetting this decrease was work on the CENTCOM project and a Causeway project in Qatar.

Service revenue was $566 million in the third quarter of 2009, up from $539 million in the third quarter of 2008. Business unit income was $36 million compared to $27 million for the prior year third quarter. The increase was primarily due to increased progress on several projects in our BE&K construction operations including power projects, refining projects and activated carbon project in Louisiana. Also contributing to the increase was work in our offshore vessels in the Gulf of Mexico.

Downstream revenue was $123 million in the third quarter of 2009, compared to $138 million from the third quarter of 2008. Business unit income was $10 million in the third quarter of 2009, compared to $15 million in the third quarter of 2008. The business unit income decrease was due to lower activity in the chemicals operations acquired from BE&K and the completion of several projects in the refining business.

Technology revenue for the third quarter of 2009 was $27 million, up $8 million compared to third quarter of 2008. Business unit income in the third quarter of 2009 was $7 million compared to $4 million for the prior year third quarter. The increase primarily relates to the new syngas projects, including several ammonia projects in South America and one project in India and final license payments on new ammonia project in Trinidad.

Now, let's review other financial items. General and administrative expenses for the third quarter of 2009 were $54 million, slightly down by $1 million from the third quarter of 2008 and flat compared to the sequential quarter. The corporate G&A for the first nine months of 2009 was $157 million.

Our current estimates for the full year 2009 G&A expenses should be in line to slightly lower to full year 2008. As we've discussed over the past several quarters, we have worked extremely hard to control and maintain our general and administrative expenses. To put this in perspective G&A as a percentage of revenue for first nine months of 2009 was 1.7% compared to 2% for the first nine months of 2008.

Our effective tax rate in the third quarter of 2009 was 25%. The third quarter of 2009 effective tax rate was lower than our statuary rate of 35% primarily due to the final determination of previously estimated 2008 domestic and foreign taxable income made in connection with the preparation filing of the 2008 consolidated tax return, as well as the benefit associated with income on unincorporated joint ventures. We continue to expect that full year 2009 effective tax rate to be approximately 36% to 37%.

Let me take a moment to discuss backlog. Total backlog was $13.4 billion at the end of the September 2009 quarter. That's up 9% sequentially from the June 2009 quarter, and down 12% from the third quarter of 2008.

We had no material project cancellations in the backlog portfolio during the third quarter. The sequential increase was primarily related to the addition of the Gorgon LNG EPCM award in September, increased Middle East backlog, and additional work authorizations on Ras Tanura.

Overall, the backlog portfolio mix at the end of the third quarter was 82% cost reimbursable, 18% fixed price, compared to the 79, 21 mix we reported from the sequential quarter that is primarily related to the cost reimbursable Gorgon LNG project.

Next, I'll discuss our liquidity and balance sheet. At the end of September 2009, our balance sheet remained strong with no debt and with cash and cash equivalents of approximately $1 billion, which net of $205 million of cash associated with our consolidated joint ventures and advance payments related to a contract in progress, was approximately $815 million.

In the third quarter of 2009, cash flow from ops used $19 million, which includes a net $116 million decrease in advance payments associated with our consolidated joint ventures and a contract in progress.

Cash flow from ops for the first nine months of 2009 used $27 million, which includes a net $149 million decrease in advance payments associated with our consolidated joint ventures and the contract in progress.

And during the third quarter we repurchased about 202,000 shares for approximately $4.4 million. For the first nine months of 2009, we repurchased about 1.6 million shares for approximately $24 million. We'll continue to purchase shares periodically in the market to maintain KBR's outstanding share count at approximately $160 million.

Capital expenditures totaled $6 million and depreciation and amortization was $13 million during the third quarter of 2009. For the first nine months of 2009, capital expenditures were $22 million with the fourth quarter 2009 expected to be in line with the quarterly run rate of 2009.

Lastly, I would like to update you on the progress for replacing KBR's current credit facility. As you may be aware, the current revolving credit facility expires late next year, so our treasury team has been working extremely hard to acquire a new facility ahead of the expiration. We expect to enter into a new bank syndicated unsecured revolving credit facility in the fourth quarter of 2009. The new facility may be used for working capital, Letters of Credit, general corporate purposes and will replace the existing facility. And with that I'll turn the call back to Bill for his final remarks.

Thank you, Kevin. In the hydrocarbon markets, we believe we see indications that most geographic regions outside North America are recovering with the strengthening price for oil. For North America, many customers are expected to maintain decreased capital budgets in the short-term until economic conditions become more favorable.

For the North America engineering and construction markets, power and power related environmental opportunities remain stable due to lower natural gas prices and environmental regulatory requirements. We have seen a recent increase in prequalification request and expect a number of our markets to strengthen in 2010.

However, the bidding opportunities are expected to continue to be smaller in size, while the market strengthens with an increasing number of competitors. Our customers are using the current market conditions to identify cost savings within their future project planning.

For the government markets, a significant portion of our business is in the Middle East region, supporting US operations, which I described earlier in the call. We are still identifying and pursuing opportunities to utilize our expertise gained in the region for both US and international governmental agencies. Within the civil infrastructure sector, the global economic conditions have caused a slowdown in some projects, stimulus spending and a general economic recovery in some regions should result in increased opportunities for KBR.

Before turning the call over to questions, I would like to take a moment to introduce and welcome Sue Carter to KBR. As you saw from the announcement earlier this week, Sue will become the Senior Vice President and Chief Financial Officer for KBR. Sue brings 28 years of extensive accounting and finance experience to KBR, having been the CFO at Lennox Internationals for the last five years as well as the Vice President of Finance and Chief Accounting Officer at Cummins, Inc.

I look forward to working with Sue, and I am confident that her leadership will continue to improve KBR's operating and financial efficiency, help to reduce and control cost and create tangible shareholder value. For those of you who do not know Sue personally, we would be happy to coordinate a introductory call for you with Sue, and this call can be coordinated through Rob Kukla.

I would also like to take this opportunity to thank Kevin for his work at KBR. I am very appreciative to Kevin for his contributions at KBR to improving the transparency of KBR's financial reporting, strengthening cash flow management and reducing our overall cost structure. I wish Kevin all the best in his retirement from KBR, and with his future endeavors. Now, we will take your questions. So we ask that you please limit your comments to one question and one follow-up.

Thank you. (Operator Instructions) And our first question comes from Steven Fisher with UBS.

It sounds like bidding is picking back up in the services segment, but Bill I am just wondering if you think the backlog there is close to bottoming or you expect it to kind of trail down a little bit more before it picks back up?

Steve, we do see the volume of bidding activity picking up. My expectation is that we'll see the backlog start ramping up here perhaps in the first or second quarter of next year. We may see a little more trending down. But we do see what the opportunity is in front of us, particularly some opportunities we're seeing in our building group, as well as the general construction in the US and Canada that we should see that turnaround and start to move up, as we start reporting in the first and second quarters of next year.

Okay, and then the revenues in that segment have actually held up pretty well. I am just wondering, if you'd expect to see that the revenues there deteriorate a little bit consistent with the backlog trend over last few quarters before you get that kind of pick back up again the in the first half of '10?

One other things we'd benefit from a -- in a lot of our businesses is scope growth, we see that in, certainly the hydrocarbon side it's also present to a may be a little bit lesser degree in the services side.

I do think you may see some fall offs, certainly the awards that we haven't seen this year are reflective of the capital budgeting environment that took place a year-ago, and as we all know a year ago things were dramatically unsettled all over the world.

Certainly the bidding environment has become much or the capital budgeting environment for our customers has become much more optimistic, particularly as we moved in to the second quarter of this year.

So, we may see a little glide down in revenues, but again, I think you'll see revenues pick up as -- certainly in the second quarter next year, but we may see some glide down until that time.

Okay. And then, just lastly, wondering how many different RFPs you expect the Iraq work you're doing today to be broken down into? I mean it sounds like you mentioned there is at least three of them?

We just think we're going to see the three. We have the broader theater logistics mission, and then they are going to do as they did in Afghanistan to break it up, break up the basis, the base maintenance for life support into Iraq, northern Iraq, south. So that would be the three contracts in Iraq and that should be it -- that would conclude LogCAP III.

Okay, great. Thanks a lot.

Okay.

Our next question comes from Vance Edelson with Morgan Stanley.

Hi, thanks. Bill, if more troops are ultimately sent to Afghanistan than were contemplated when LogCAP IV was first awarded there in July, could you walk us through if that could have any positive bearing on KBR over the coming year or so?

I think the positive aspect for KBR from that would be just the delay in getting fully transitioned from LogCAP III to LogCAP IV which would give us greater revenues in the 2010 than we might otherwise have expected as of today. And certainly a very complex process of transitioning just with the status quo and if there is a material change in troop levels in Afghanistan, I think that would serve to continue to delay the full transition, so that's the impact we would see at KBR related some more troops into Afghanistan -- simply a delay in the completion of the transition.

Okay, got it, and then for Kevin. With $815 million in available cash, any outgoing thoughts you have around ultimately expanding the share buy back beyond just keeping the share count steady?

Well, I think right now we're comfortable what we are doing as far as that's concerned. That's a possibility as well as many other possibilities. I think as we've said before, we want to be sure we have sufficient cash demand as the current level of business the future levels of business that come along here potential acquisitions both on acquisitions that have been benefiting us that we did in previous years. So, I think we have to look at all the possible uses and see where the best -- what the best uses for shareholder value.

Vance, if I could add something, as we have broken up the organizations in smaller pieces, it's much easier for us to see where we have certain limitations and skill sets and so it's easier for us to envision where bolt on acquisitions fit in and how they would be integrated.

So, I think we still have some aspiration that -- we still have some opportunities out there to increase either a market presence or a skill set diversity within some of these business units. And so I think that's just built on Kevin's comment that the bolt-ons may even be easier for us to look at a smaller scale because of the increasing transparency of our organization.

Okay. That's helpful color. Thanks, guys.

Our next question comes from Barry Bannister with Stifel Nicolaus.

Hi, guys. Given the -- in the quarter, could you tell us the zero margin revenues that were within the gas mon segment, and also what's the inherent go-forward operating margin in that segment after overhead allocation, given the Company's propensity to book cost reimbursable jobs?

Well, I don't think we have the zero margin revenues at our fingertips. But I do think as we have commented previously, we think in the hydrocarbon space when we -- and this is non-technology but this is -- would be our professional services side that when we look at doing EP work which is home-office work, we have a basis to see mid-to-upper teens work on the professional services as we get into EPC work.

We are obviously adding a segment of the revenues that go more towards lower margin work, which is what we typically see for our construction resources, and so, at the EPC side, while they are bigger and on a risk adjusted basis they probably have a lower composite return than we are seeing with adjusted professional services offering, but they are attracted to us because of the amount of volume and contributions they make to our overheads.

So, as we look at professional services we think mid, mid-to-upper teens, and as we get into EPC work, it's probably a little bit lower there because of the composition of services we provide.

Right, and I was really referring more to these Escravos project because it's a very large zero margin project and it helps us model. That's the number that I was looking for.

Yes, we are getting some incentive fees on Escravos. Yes, I think we've got - the project in the quarter was probably $200 million of revenues. From a job income standpoint, the third quarter, because of the incentives and recoveries, we booked about $10 million of impact. Part of that was a change order that we took on a wax unit that because of the accounting we have to book presently as opposed to the accrual basis that we otherwise have. We typically run about $6 million of job income off of the Escravos project quarterly.

And then, Kevin, lastly, did you say what the currency impact on backlog was, if it was up 9.2 in nominal terms?

Actually we didn't talk about currency impact. There wasn't anything significant this quarter. We only had that one-time that we sort of had to give you that adjustment. It really wasn't an impact this quarter.

Okay, thanks a lot.

Sure.

Our next question comes from Jamie Cook with Credit Suisse.

Hi, good morning. First question, Bill, when you are talking about LogCAP, I think the first contract you said would be 25% at the current, and then -- but did you quantify Iraq, the north or south portion or can you just -- when we think about those three different task orders, how they rank relative in size to one another?

Well, let's -- we can do some math. We said last quarter that 88% of our volumes, when we said that second quarter were related to Iraq, that's obviously changing as Iraq is winding down, and which we saw a 15% decrease in third quarter and are expecting another 5% decrease in the fourth quarter. Within the logistic support of Iraq, it's 25% of the business is logistics. We really don't know how they are going to break up the bases, but, our best guess at this time was one significant figure precision, is 50-50. They'll probably do something that will try to keep the business fairly balanced, although, that could change based on a greater clarity from the government on that bidding.

Okay. And then, I just guess, my second question or point, I mean, even with some of the charges that you had, in the third quarter the margin profile for the Company was still pretty good and still up over the past two quarters. I guess, my question is the stuff that you are booking into backlog today, how does that margin mix compare to what we've seen over the past couple of quarters? And when you are thinking of this stuff you are putting on today within the hydrocarbon business, what's the percent between fixed price and cost plus. I am just trying to get a sense of how that impacts your business over the next year or so?

Yes, the G&I margins are going to go up simply because LogCAP is our lowest margin project by far and so that reduces -- you are going to see the rest of the portfolio take a bigger piece of the overall reporting which will cause margins to increase.

I think when we look at the additional work that we are booking into the backlog, it is accretive to our margins. We certainly with Gorgon, where we believe we are in the low mid-teens on the base and with the award fees, expect to get up into the mid high-teens on the overall awards, but that will be lumpy based on the incentive awards we get.

I think services, we are seeing a little bit of margin pressure there, but that's in the maybe 1% to 1.5% off of what we have been doing. Some of the aspects we will see especially in the fourth quarter on services is that we have seen the work accelerate. And we have been working with the customer to get a change order negotiated that should reset the fees at a level that we believe is above -- certainly above were we've been accruing to. But that has to get signed and will return us on that project to more normal margins that we expect to see in the Canadian oil sands market.

But overall, things are moving up, we're getting better volumes on the Oil & Gas business, expect that to continue with the FEEDs that we've signed. And certainly, as we look at the net KBR margins, we are seeing an increasing volume relative to the overheads of those business units which should allow us to generally push margins higher in each of our business units.

Thank you very much. That was very helpful.

Our next question comes from Dan Pickering with Tudor, Pickering, Holt.

Good morning, guys. Bill, could you help quantify for us, now that Gorgon has been awarded, your bookings and revenues now $2.3 billion total order there. How roughly will that play out, and I know you're booking all the revenue and effectively, economically involved in half. Is that lumpy? Is it going to be pretty even just kind of walk us through the timing around Gorgon, please.

Yes, I think when you look at the bookings, Dan, and we look at the role of the players. (inaudible) are doing about 20% each of the services, and they'll be doing little bit of the front end, they'll be doing the some of the port facilities and doing a lot of the quarantine operations in Australia. And that should -- have an S curve but it may be a little more levelized over the, the three or four year duration we see for the Gorgon project.

From the KBR standpoint, we're going to do 50% of the work at EPCM. I think it follows a traditional S curve. Now, when you say a traditional S curve we've hit the ground running and we completed the FEED probably in the first half of the year and have been really ramping up post FEED activities which as it was described as post FEED activities it was one and the same to an early notice to proceed or a limited notice to proceed, but we didn't want to get ahead on any announcements with respect to the environmental efforts that were -- the owners were undertaking with the Western Australia government.

So, when we hit the ground running on the Gorgon project, we placed a bunch of purchase orders and we're about 12% complete on purchase orders one month into the project. And so, we're really hitting this thing on a very accelerated basis. That we'll ramp up over the next -- from an engineering and procurement side over the next 24 months it will fall off. But then there is a significant component of overseeing the activities in the fabrication yards and then coordinating the activities in the field.

Field activities might be a little more diluted because of the module design. We are only building about 4,000 beds onsite to allow the -- to minimize the environmental footprint on Barrow island. So, I think you'll see a normal distribution of revenues like we see on other projects but with a lower peak relative to the tails. We'll probably start at a much higher level at the beginning and then as we ramp up it may not be as pronounced given the nature of the work may appear a flatter distribution.

Okay. And so, I sort of thought about this as 2011 being your biggest year and that's maybe half the revenues, it sounds like it probably still is the biggest year but not quite that much of the project.

Yes, I don't think its going be half, because I think 2010 is going to be a strong year and we will be in the inflection point of the staffing curve early next year but I think you will see a good bit of revenues next year. I think you will see a stronger level '11 and we might start trending down in '12.

Okay. Thank you. And then I am trying to understand the mix here with Afghanistan, clearly a slower transition away. It's helpful but you told us in the last conference call that Afghanistan I think in a way it was around $600 million in revenues. Can you help us with the roughly where you think it will be in '09, so we can then sort of think about how to scale that in '10?

Well, our volumes, we looked at the volumes in the third quarter and we expect -- we saw the volumes decline in Iraq and so by inference we didn't see a material decline in Afghanistan as we are going through the transition. We may see for the fourth quarter a little bit of decline but as we said this transition is very complex and could be made even more complex by the change in troop strength that the Administration is presently considering.

So, the overall revenues, I don't think will be materially different in '09 from prior years. But we'll comment to more extensively in December when we finalize our budgets and the Board has a chance to review then on our overall LogCAP work because that's such a big mover within the KBR frame of earnings for 2010.

Thank you. And then, final question from me, I guess if we backed out Gorgon from the order this quarter and think about that number. Your anticipation for kind of Q4, Q1 would be at that order level, you talked to a kind of a services business maybe ticking down a bit. I am just trying to gauge if at Gorgon we're sort of -- or are we on the bottom here, we're going to kind of waffle along here for a while kind of at this level?

You mean at the 13 billion minus the minority interest on Gorgon?

Yes, I am just trying to assess if it's really thinking about how this uptick in bidding activity eventually make its way into orders, and is that really a second half of '10 event or first half of '10 event?

I probably would take the easy way out and say a middle of 2010 event. We've got, obviously some lumpy stuff we are looking at in the gas monetization side. We are pursuing Pluto, we are involved in impacts and those will have some -- some evolutions between now and the middle of next year. The oil & gas side, we've got a four FEEDs that we have commented on that we are very excited about bigfoot [jack], St. Malo, Chirag and West of Shetlands.

So, we think those will move on and we will continue to get awards that will be more of the scope growth as opposed to larger one-time awards. G&I is going to -- the wild card is how do we do a LogCAP IV? And we still are very optimistic about our prospects in Iraq, but we have not had award under LogCAP IV yet as the government has sought to diversify some of the supply base.

And, so, if you look at -- I think as you look at the business, net of what's going to happen in G&I, I think we'll probably be in the second quarter about where we are now. What happens -- but at the end of the year and maybe in the first quarter, it could be down a little bit. It could be the same. It's -- I feel by second quarter we will remain at this level, just how do you bridge it from here.

Okay. Thank you very much. Kevin, good luck to you, and welcome.

Thank you.

Our next question comes from Andy Kaplowitz with Barclays Capital.

Good morning, guys.

Good morning.

Bill, you talked about margins a little bit, I am just wondering how you generally feel about the pricing environment? If you go back a few months and look at to what we have now, it seems like margins have hung in better than people have thought or pricing has. Is that a fair statement or is it just very variable?

I think it's generally a fair statement. I think when we were thinking about life in the first couple of months of 2009, it was a very negative and muddled situation. We are pleased with where we are, what we are seeing in terms of the margins. Now they are down from the peak that we saw in the '07 and first part of '08 timeframe. But, it has come back to, I think, a very sustainable margin environment, a fair margin environment as between supplier and customer. And, we believe that we will continue to see this stability maintained.

Clearly the -- we have seen a couple of awards in the Middle East that were very highly contested around Jubail, the refinery, and we think there is certainly a flight to increase backlog by a number of our foreign competitors. But, as you move into the implementation of Yanbu, the implementation of Ras Tanura, some of the other projects we are in. We are thinking that some of that initial capture may lead itself back to the traditional margin that we would expect to see in the average cycle of the space.

Great. And you mentioned the Yanbu Bill, obviously it looks like you are progressing on the project. I know it's a joint venture structure for the customers, and so, I don't know it's a hard question to ask, but what do you think the conviction level is around the customers to do the project going forward?

When you look at the projects in Saudi, Jubail, Yanbu, Ras Tanura they all involve Aramco, and I have spent a lot of time over in Saudi with Aramco and their conviction levels is very high. They have partners that are -- they think add value in terms of technology or market access, and, but I think when you look at the real impetus on the project, I think, clearly Aramco's bringing the product.

Aramco is funding the investment. Aramco wants to create jobs for its population, 50% of which are under the age of 21. So, we think the conviction is pretty high because it's -- Aramco is, I think, while there are joint ventures, I think Aramco is bringing more of the externalities surrounding just the project itself to the table.

Great. And one more quick one, if I could, I think you mentioned in the Q that offshore engineering work was sort of ending or you had a few projects that were ending, and so, your job income was a little bit lower in that piece of the business, but clearly it seems like over the last few months, the offshore work has ramped up again, where at least there has been some more high-profile engineering wins, and it seems like the Gulf of Mexico is open for business now. So, can we see that business for you guys actually ramp up over time and when can we expect that?

Well, we made a conscious effort to bring in a new management team last year and we've supplemented our capabilities with some very good officer level hires at KBR particularly focus to the Gulf of Mexico.

And we're very pleased with how we've been able to capture FEED work and it's certainly our intention to move down the value chain from just engineering services only to EP, EPCM or even EPC over time that we'll demonstrate that, one our commitment to the offshore business is back our interest is back and that our participation in the space will be much increased from what its been over the last four or five years.

Okay, thank you very much.

Our next question comes from Will Gabrielski with Broadpoint.

Thank you. Couple of questions, specifically on currency in terms of the competitiveness out there are you guys starting to see a benefit from the dollar having weakened now? I know a stronger dollar was a negative in terms of bidding in certain regions. Is that showing up as a positive now?

Yes, I think clearly as we are bidding international projects out of Houston against competitors in the UK and other areas. The weak dollar does make our labor cost a little bit more attractive. I don't think it's a driver towards selections, but it does help our positioning as the customer evaluates cost.

Okay. For the Gulf of Mexico, obviously you guys have some interesting front end work going on. What's your prediction for when that could turn around, and then also on the Mexico side in terms of PMX and some of the opportunities maybe there offshore. What's your general expectation, I know everyone has a pretty wide range right now.

I think our near-term expectation is we've got the FEED agreements, we expect that they will take their general a year to do and we hope to move into the execution phases of those approximately ten to 13 months after we announced the FEEDs. We are hopeful that we can rebuild our presence down in Mexico work as offshore work becomes available there.

Okay. In Australia, have you guys gotten any visibility or a sense from Woodside on -- what's their -- how likely they are to procure gas for Pluto Q3 and if they didn't have gas in the short run, would they still be as committed to moving that FEED forward?

We understand from Pluto that they intend to at least proceed with the FEED this quarter. And we believe that to make that decision they've got to feel good about their gas, but I prefer that question (inaudible) it's, the FEED will take us a year and certainly that gives Woodside a lot of time to go talk with other parties about third-party gas supply or even to executive its own drilling programs.

Okay. Two questions on the government side. First, you guys obviously in the Q disclosed your expectation for the next award fee evaluations, last quarter we were talking about second half, I saw you changed the commentary this quarter to possibly by year end but also early 2010, any updates there as of right now?

We see progress towards conveying the Boards, but the government has a lot of things to do, and we're ready to go at anytime. So, it could go this year, it could go into next year, but we do see all the signals lining up that they are getting back into working the award fee boards.

Okay. And then lastly, if you will allow, for G&I outside of the Middle East ops and outside of LogCAP, directionally, I know that a big focus is diversifying that segment away from the Middle East outside, and I am curious what's your expectation there would be and what you are hearing from government right now and some of the other big programs -- AFRICAP and things like that?

Well, I think AFRICAP has been announced and we were not successful on that project. They elected to go with three other providers. For the other businesses, we still are looking to grow our business. You can see it's fallen off a little bit from our backlog in the North American market, and one of the things we are working on is with the expected falloff in LogCAP we now have some visibility to start looking at our North American government business in a post-LogCAP environment. So we are going to be trying to strengthen that over the coming quarters.

And we are optimistic that we can continue to grow our international government defense work that does a lot of work for the Ministry of Defense over in Afghanistan now, but also supporting some US troops in Iraq. And continue to build that presence as the Middle East work falls off with additional work in other parts of the Middle East as well as Australia.

And then we want to grow our infrastructure business. I think that's one of the areas that has been somewhat ignored by -- in the LogCAP shadow that has been cast. We think there are some good opportunities to build our presence both here in the US and in Australia, and make that a more compelling part of our story.

Okay. Great. Thanks, guys.

And Laura, I think we've got time for one more brief question?

And our final question comes from Martin Malloy with Johnson & Rice.

Good morning.

Good morning.

Could you talk a little bit about your capacity due additional projects, LNG projects in the Australia, South East Asia region after being awarded Gorgon, and also with, when you expect the FEED to be completed on the impact project?

To answer the second question first, we are expecting the FEED to be completed around the middle of the year next year. On impacts the -- and with respect to our capacity to do more LNG work and post the Gorgon award, we have obviously been working on a proposal to Woodside and put forward a very capable A team out of our Greenford office to perform that work. And that's -- that's an evidence of additional capability that we have, plus we have the engineering and construction capabilities rolling off of Skikda. And that's US based. So we have got capacity to undertake two more projects by ourselves within the KBR resource centers.

Thank you.

Okay. Thank you, Marty.

And that concludes our question-and-answer session.

Okay. Everybody, thank you for participating in the call. I will turn it back over to Rob.

Thank you very much for joining us this quarter. We look forward to being with you next quarter. If you have any follow-up questions, don't hesitate to give me a call today or tomorrow. Thank you.

That concludes today's conference. Thank you for your participation.