KBR Inc (KBR) 2009 Q4 法說會逐字稿

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

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

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

Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year ended December 31, 2009 which was filed this morning, KBR's quarterly reports on Form 10-K 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. 2009 was a solid year for KBR in what was considered a very difficult market environment. Revenue for full year 2009 was $12.1 billion, up 5% from 2008. Operating income for 2009 was $536 million, down slightly from $541 million for the full year 2008.

Sue will discuss several of the one-time items this quarter during her section of the prepared remarks. We also continued to manage our corporate overhead expenses well during 2009 which were down slightly compared to the previous year and in line with our guidance.

We were very pleased with KBR's backlog at December 31, 2009. Our backlog was $14.1 billion, up $614 million or 5% compared to the September 30, 2009 backlog. The services business unit led the increase in backlog with an almost $600 million or 31% increase in backlog during the fourth quarter.

KBR announced several new awards for services including the large DuPont contract for 19 KBR managed industrial sites, of which 16 were new sites. We were also awarded a turnaround project for Suncor in Canada, a design build contract for Boeing 787 Dreamliner assembly plant and several new hospital construction projects.

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

We feel oftentimes KBR's too frequently associated with a few large global megaprojects. While these projects are a hallmark of KBR's value proposition for our customers, we are not a company of simply a few large megaprojects.

As we reviewed our portfolio at the end of 2009, we noted that KBR executed work on over 1000 projects during the year. We are also participating in over 30 projects, having installed cost in excess of $1 billion. So from the aggregate number of total projects as well as the large number of projects in excess $1 billion, I hope you see that KBR works across a wide ranging series of global projects and is not beholden to a limited series of large megaprojects.

So as we focus on what will grow KBR's backlog over the next several years, obviously new project awards are important. However, existing project scope adjustments on our current project portfolio is an area which should also be discussed.

During 2009, over 50% of added backlog was generated from project scope growth. The obvious project which reflects this scope growth is the LogCAP project but other projects in our portfolio are on work authorization releases or general scope editions. For example, backlog for our work on Ras Tanura or on Yanbu are released in smaller amounts which is worked off during the quarter and are commonly followed by additional work releases. Another example is our offshore project called Kashagan in the Caspian region. One final aspect of

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

At the end of 2009, our job income backlog was up 21% compared to a flat revenue backlog. So we made very good headway to increasing the profitability of our backlog in a difficult market environment.

The strong 2009 backlog performance in an otherwise very challenging market environment reinforces our belief that KBR should be able to continue to grow its overall business as we have since 2007 even in the face of a declining LogCAP backlog. We would now like to make some particular comments on several of KBR's discrete business units, all of which will be reported separately starting in the first quarter of 2010.

At the Tangguh project, both LNG trains have produced LNG and cargoes continue to be shipped. However we are in the process of replacing several troublesome O-rings on one of the trains which will delay the expected hand-off of both trains to the customer until the end of the first quarter 2010.

On the Yemen project, Train 1 has already been turned over to the client and gas has been admitted into the second LNG train. We expect Train 2 will be deemed ready for startup and turned over to the client in about a month.

During the quarter, we had increased subcontractor claims and mobilization costs which led to the additional charges recorded in the fourth quarter. Despite the charges taken over the past several quarters, all of our current LNG projects remain profitable.

The Gorgon LNG, Pearl GTL and Skikda LNG projects continued to progress well during the quarter and were positive contributors to our gas monetization operating results. The Inpex Ichthys LNG feed continues as planned and is expected to be completed in the fourth quarter of this year. Also during the fourth quarter, KBR commenced activities on the feed contract for the Pluto 2 and 3 LNG projects for Woodside.

Also we announced earlier this month that Woodside had awarded KBR a contract to execute a basis of design study for their Browse LNG development. This nine-month study will focus on a 12 million ton per annum liquefaction facility as well as associated infrastructure and marine facilities. We are pleased to be working again with Woodside on another one of their key LNG projects.

In our oil and gas business, KBR was awarded a contract by Chevron for the Bigfoot topsides FEED. The projects with BP, the Chirag drilling platform FEED and the West of Shetlands FPSO are also proceeding and making nice contributions to our results.

For our downstream business unit, the Ras Tanura project, the FEED and site development work on the Lobito Refinery project and several refining projects, including the Yanbu project, contributed to the fourth quarter's results. For the Yanbu export refinery project, the customers received the lump EPC bids. The bids are currently undergoing technical and commercial evaluation by the customer with the expectation of moving into the execution phase of the project within the next several months. The Ras Tanura project continues to proceed with FEED activities which we expect to complete during the summer of this year.

The two refinery projects in Africa also continue to move forward. We believe we will see the first phases of the Lobito Refinery project in Angola move forward from FEED into EPCM during the first half of 2010.

For the South Africa Refinery project, we have received word that Petro SA has elected to move forward from the pre-FEED phase into FEED activities. The technology business unit revenue grew 15% and posted job income margins in excess of 50% during 2009.

We expect our technology business unit to again show strong growth during 2010. For the fourth quarter of 2009, revenue was up 17% and business unit income was up 133% compared to the year-earlier period.

During the fourth quarter, [technology] was awarded a contract by Al Jubail Fertilizer Company to provide engineering procurement and to supply proprietary equipment for an existing ammonia plant in Saudi Arabia and was also awarded a contract by Saudi Aramco and Sumitomo Chemical Co. to provide basic engineering and related services for a phenol technology package for the development of the Rabigh II project.

For our North American government and defense business, we originally communicated an expected 5% revenue decline in the fourth quarter. However, we saw a smaller revenue decline than envisioned in the fourth quarter as a result of a smaller reduction in base footprint, despite a 10% reduction in troop levels.

KBR currently plans for multiple base closures starting next month with the majority of the Iraq basis closing during the summer period. We continue to believe the recent reports from the US government showing an expected troop withdrawal down to approximately 35,000 to 50,000 troops by the end of the summer of this year.

In regards to the transition from LogCAP III to LogCAP IV in Iraq, we have not been advised of any decision related to the request for proposals for logistics support services, theater transportation mission, postal services, Ice Plant operations and some air terminal operations.

For the second portion of work in Iraq for the base life support services, we are in the process of drafting our response to the formal RFP for this scope of work. In Afghanistan, the transition is proceeding and transition activity has increased. Our current estimate is that a complete transition from LogCAP III to LogCAP IV in Afghanistan will occur in the early summer of 2010.

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

In our Brisbane-based infrastructure and minerals business unit, we are continuing to see a strong business recovery for our consulting engineering business, [Australia Smith largest]. In the mineral sector, we continue to see positive indications that some of our minerals projects will receive approval to move from FEED into delivery phases in 2010.

Internationally, the Qatar-Bahrain Causeway project continued to perform well and we expect this project to move into its next phases of execution during the first half of 2010. KBR services business unit also continues to perform well and had a significant fourth quarter in terms of new awards including the DuPont, Suncor and Boeing awards that I mentioned earlier.

The three-year construction, maintenance and services contract with DuPont adds 16 new sites to KBR's industrial maintenance business. The addition of these three sites adds over 1200 new employees, a 33% increase.

In addition to the Dreamliner project, KBR's building group was also awarded two new hospital projects in the fourth quarter of 2009. In Canada, in addition to the Suncor award, we are now seeing customers move forward with smaller capital and maintenance projects.

The Shell Scotford Upgrader project is currently 82% complete and we expect completion of the project in mid-2010. After Sue's comments, I will comment in more detail on the market outlook for our business before turning the call over for questions. Sue?

Thanks, Bill. I will review KBR's consolidated fourth quarter 2009 results which primarily focus on year-over-year comparisons. Consolidated KBR revenue totaled $3 billion compared to $3.4 billion for the fourth quarter of 2008.

Over this time period, the decrease was primarily related to lower activity on our Iraq-related services in the government and infrastructure business unit, partially offset by a 29% increase for upstream. Consolidated operating income was $124 million in the fourth quarter of 2009 compared to operating income of $153 million in the fourth quarter of 2008.

Net income from continuing operations attributable to KBR for the fourth quarter of 2009 was $73 million or $0.45 per diluted share compared to $88 million or $0.54 per diluted share for the prior fourth quarter. During the fourth quarter of 2009, net income from continuing operations included a $0.70 per diluted share gain related to the EPC 1 arbitration.

Partially offsetting this gain was a charge of $0.50 per diluted share for the reversal of previously recognized award fees related to the LogCAP III contract, a charge of $0.09 per diluted share for an unfavorable court ruling related to a subcontractor claim for work in 2003 and 2004 under the LogCAP III contract, $0.07 per diluted share to correct prior period errors related to revenue recognition for legal fees for ongoing lawsuits which does not have a material impact on the financial statements for previously reported quarters, and a charge of $0.02 per diluted share related to the abandonment of the Westside Houston Resource Development center.

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

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

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

Government and infrastructure revenue in the fourth quarter of 2009 was $1.2 billion compared to $1.8 billion for the prior year fourth quarter. Business unit loss was $109 million in the fourth quarter of 2009 compared to business unit income of $85 million in the fourth quarter of 2008.

For the Middle East operations, job income in the fourth quarter of 2009 included a charge of $20 million for an adverse decision on award fees on LogCAP III, a charge of $112 million for KBR's assessment and reversal of previously recognized award fees related to the LogCAP III contract, a charge of $19 million on the unfavorable court ruling and a charge of $17 million related to the legal fees.

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

Services revenue was $543 million in the fourth quarter of 2009, down from $597 million in the fourth quarter of 2008. Business unit income was $55 million compared to $53 million for the fourth for the prior year fourth quarter.

The increase was primarily due to increased progress on several projects in our construction operations including power projects, refining projects, an activated carbon project in Louisiana and several hospital projects. Partially offsetting this increase was lower activity in our industrial services and slightly lower volumes for our offshore vessels in the Gulf of Mexico.

Downstream revenue was $125 million in the fourth quarter of 2009 compared to $145 million for the fourth quarter of 2008. Business unit income was $11 million in the fourth quarter of 2009 compared to $14 million in the fourth quarter of 2008.

The business unit income decrease was due to lower activity in the chemical operations and the completion of the EBIC ammonia project. This decrease was partially offset by the increased work on the Ras Tanura project and the Lobito Refinery FEED.

Technology revenue for the fourth quarter of 2009 was $27 million, flat compared to the fourth quarter of 2008. Business unit income in the fourth quarter of 2009 was $7 million compared to $3 million for the prior year fourth quarter.

The increase is primarily related to several refining technology packages for a facility in Angola, a ROSE unit project in Indonesia, an ethylene project in Korea, two ammonia license and basic engineering projects in South America and a final license payment for the completion of a ROSE project in the United States.

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

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

Our effective tax rate in the fourth quarter of 2009 was 26% which was lower than our statutory rate of 35% primarily due to increased income in lower tax countries particularly the UK and Australia. For the full year 2009, our effective tax rate was 32% compared to 37% for the full year 2008.

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

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

Next I'll discuss our liquidity and balance sheet. Cash flow from operations for the full year of 2009 used $36 million which includes an increase in working capital of approximately $220 million related to the Skikda LNG project and $35 million in tax payments made prior to the recognition of foreign tax credits arising from the EPC 1 arbitration decision.

The EPC 1 arbitration is included in net income, receivable and taxes payable which nets to zero in operating cash flow. Operating cash flow is increased upon collection of the award.

At the end of December 2009, our balance sheet remains strong with no debt and with cash and cash equivalents of $941 million which net of $236 million of cash associated with our consolidated joint venture was approximately $705 million. One of the key areas of focus for me and the KBR team is working capital management.

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

From a uses of cash perspective, we remain committed to optimally deploying the capital to the benefit of the shareholders in a thoughtful, careful and strategic manner. We currently pay a quarterly dividend which is reviewed by the Board of Directors at each meeting.

Also discussed at the Board meetings is the option for another share repurchase program. So including M&A and organic growth, everything is essentially on the table in terms of options for putting that capital to work.

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

During the fourth quarter, we repurchased about 200,000 shares for approximately $3.9 million. For the full year of 2009, we have repurchased about 1.9 million shares for approximately $28 million.

We will continue to purchase shares periodically in the market to maintain KBR's outstanding share count at approximately 160 million shares. Capital expenditures totaled $19 million and depreciation and amortization was $14 million during the fourth quarter of 2009. For the full year 2009, capital expenditures were $41 million.

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

No award fee boards been held for Iraq-based work under LogCAP III since the June 2008 meetings which evaluated our performance for the period of January 2008 through April 2008. The letter formalizing the results of this meeting and the awards fee determining official, or AFDO, decision was received last Friday.

The better references failure to provide notice of poor conditions for electrical systems under task orders 139 and 151. More inquiry and analysis are required to fully understand and interpret this decision and whether there are additional actions that we may take.

The award fee from the June 2008 award fee board meetings was computed using the results of the meeting and then reduced to zero by the AFDO based on other inputs and his discretion. Our $20 million accrual for this award fee was reversed in the fourth quarter of 2009.

In addition, we reevaluated our assumptions used in the award fee estimation process related to the remainder of the open performance periods from May 1, 2008 through December 31, 2009. Those estimates were also based on our historical experience and assumed that award fees would continue to be determined in large part on scores from non-binding monthly evaluations made by our customers in the field of operations.

These scores were largely very good to excellent during the open performance period. However in light of the discretionary actions of the AFDO in February 2010 with respect to the January through April 2008 period of performance, we concluded that we can no longer reliably estimate the fees to be awarded.

Accordingly, we reversed the remaining balance of accrued award fees of approximately $112 million that had previously been estimated as earned and recognized as revenue during the period of May 1, 2008 through December 31, 2009. Our award fees recognized prior to December 31, 2009 were based on our estimated accrual rates.

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

Now I'd like to make additional comments on the Pemex arbitration award. The initial award of approximately $286 million plus legal fees, administrative recovery fees and interest totaled $350 million.

After adjusting this amount for the counterclaims of $6 million awarded to Pemex and the amount we had on our books, this gets you to the $183 million operating income gain or the $117 million net of tax gain to net income. As you've now seen the detailed P&L impact from the arbitration decision, I know the key question on your minds is the actual collection of cash in this award.

From the previous two favorable arbitrations on EPC 28 and EPC 22, we did receive the cash payments. However at this time the timing on the collection on EPC 1 remains uncertain. We will update you as we receive more clarity around this portion of the award.

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

Second, we expect corporate G&A for the full year 2010 to be approximately $230 million, driven by general wage adjustments and expenses related to enhancing our IT systems. Lastly, we expect the effective tax rate for the full year 2010 to be approximately 35%. And now I will turn it back over to Bill for his final remarks. Bill?

Thanks, Sue. After our discussion today, I'm glad to finally close the book on the fourth quarter of 2009. KBR continues to see excellent growth opportunities in each of the other 12 of our reporting units.

We have grown KBR's non-LogCAP business consistently since 2007 and we are confident we can continue to grow the size of the overall KBR business despite the continued decline in our LogCAP businesses. We are also pleased with the continued increase from 2009 levels and the bidding activity we see across our businesses and look forward to a continued series of new awards and scope expansions for KBR in 2010.

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

(Operator Instructions) Andy Kaplowitz, Barclays Capital.

So one of your peers is also out today and if you look at sort of what they put out, it seems like they might be a little more cautious in their tone about the markets. So I'm just curious what you think, Bill. You just mentioned that bidding activity continues to increase. What is customer confidence level like right now and what about pricing as we go forward?

Andy, as we look at the markets, we're looking at things and will be reporting things a little more granularly in 2010 than we have in the past. I know an area that we've seen a real strong pickup in our business that looks like it will sustain itself certainly for the first part of 2010 is our building group.

And we talked about the Dreamliner project. We also announced the College of Dentistry in Georgia and the North Carolina Health and Human Services project recently. A lot of those projects that are educational or health and medical related were kind of put on hold starting in 2008.

We have been working on pre-construction activities with the customers and now they are seeing that their bond markets and their funding is coming back. So a lot of their projects are moving forward which does account for a lot of the impact in our services backlog.

We also see projects in the hydrocarbon side continuing to move forward. We talked several quarters ago about when we were looking at Gorgon where it was our view that the customers were looking at 2015 and what noise or choppiness we have in the price of commodity or in the capital markets in the near term isn't really affecting their decisions.

As we talked about, our work on the Caspian offshore continues to grow. We talked about the Chirag structure, the FPSO with BP in the North Sea, the awards was Chevron. So we're seeing a lot of activity continue offshore and we think that will continue as the international oil companies continue to look for more resources offshore.

So maybe you could look at where we're making our comments and what markets we're in and you'd have to contrast that with the other party and their markets and where they are strong, relative strengths and weaknesses to KBR. Regarding the pricing, it's still a tough market out there.

I think we are getting fair returns for the work that we are signing up. It's not the levels that we were seeing in 2007 and 2008, but we are happy with the level of activity and certainly one could look into some of the initial awards coming out of the large-scale refineries in the Middle East like Jubail and possibly Yanbu where the bidding has been very aggressive by some of the Asian firms as they are looking, particularly the fabricators, as they look to build up their backlogs.

I think I have commented also in prior calls that when we went out and looked at the procurement of the modules on the Gorgon project, we were very pleased as was the owner group with the savings or cost reductions we were able to drive relative to our expectations. So we think that as the fabricators get their backlogs up to a more respectable level that they're comfortable with that pricing margins will tend to move upwards as we get to a more equilibrium of supply and demand of services and capital projects.

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

I think as we are looking at it, in the quarter we did have the charge which depressed our margins in the fourth quarter. We also did see a pretty good chunk of Escravos go through, the revenue in the fourth quarter was up about $100 million for us which adds a diluting effect on the unit margins for gas monetization from the prior quarter.

Year-over-year you had a $24 million pickup in the fourth quarter of 2008. You had a $24 million falloff in the fourth quarter of '09. But we don't see anything that's material or worth calling out regarding the margins that we have on our LNG projects other than what I've just described.

John Rogers, D.A. Davidson.

Just to -- sorry, to follow up on the Pemex award, you're waiting to receive the cash, the total receivable is $350 million?

Yes, that is correct.

And what is the timeline there?

John, it's kind of hard to give it a hard timeline. We do state that on the EPC 22 and 28 that we did have awards and that some period -- and I think that was between six and 12 months, we were able to get the cash on those awards. We have filed in federal court in the states to affirm the arbitration award.

And so we're continuing to work on it and certainly this is larger than the other two awards. But it's not 10 times what the previous awards are. So we're going to work on it. We are optimistic that given our history with Pemex that we should be able to get that cash in the door this year. But again, it takes them to hit the send button before we get the cash.

Okay, that's helpful. And then secondly, Bill, relative to your comments on the buildings market; most of that sounds like it's domestic work. Are there opportunities for that kind of work outside the US?

Of course there (multiple speakers) right now our building group is part of the group we acquired from BE&K in 2008. It has been domestically focused, principally in the US Southeast. We are taking some steps right now to move that group to additional geographies within the states.

It's a little bit more challenging to consider taking that internationally compared to some of our other projects because they work very closely with owners, they work very closely with subcontractors on an open book basis in the pre-con design phase. So when they are able to offer their lump-sum prices, they have done so typically with 18 months of work with the owner in developing that price and we are also doing dealing with subcontractors with whom we have a great deal of experience that makes us confident that gives us great certainty that the contractor base can execute the work that we have been working with the client in developing.

Taking that model internationally will be a little bit tougher and so we are really spending our time in the near future looking at how do we expand that geographically or maybe even take that into a different market. And some of the areas we've looked at have been some of the GSA buildings, some courthouses and other federal government facilities that would be more replicatable to the existing business model that that group has.

Barry Bannister, Stifel Nicolaus.

If I look at the LogCAP issues related to electrical, from what I've done in my research, it looks like you have built it to DOD specs. So it sounds a little bit like a case of passing the hot potato.

Given that you're no longer accruing award fees, you're going to recognize them as received. One of the things that I have been concerned about is that during the drawdown, there was an October 26 DOD audit warning about KBR having the correct amount of overhead during the drawdown.

And I know how difficult it can be to go into a drawdown. You are trying to get them out and your own people out at the same time. Are there any issues that we should be concerned about or have you logistically planned for a smooth orderly drawdown that will be fully billable to the client?

We have discussions weekly with our customer in theater regarding the staffing that we have, the amount of management that is there, the services we are providing. So we believe we are fairly lockstep and as we have talked before, you can start taking troops out but you're not going to be able to take contractors out in direct proportion because someone has to take the structures down, someone has got to take the dining facilities apart and return the sites to their original condition.

And certainly in Iraq, we have over 90,000 different facilities that we are overseeing for the US Army. I think there's a constructive tension that's going on. Obviously as troops go down, the obvious question is well is the contractor going down too?

So those questions get asked. We are not aware of any issues ahead of us regarding the amount of management oversight we have. We believe that our -- we are lockstep with our customer in theater regarding the amount of management and the overall staffing that we have. So I don't see anything today that causes me concern.

Okay, great. Could you update us on whether the RFP for theater transport, postal, Ice Plant in Iraq [air] was awarded and if you received it?

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

Jamie Cook, Credit Suisse.

Bill, just a follow-up question on profitability. But more specific to you, I mean we have heard a lot in the industry about more competitive pressures. But I guess the opportunity I look for with KBR is as I look out over the next 12 to 24 months, you have a lot of these legacy projects that are zero margin going away in LogCAP.

While it's been an overhang on your stock, it's probably good it's going away to some degree because it's lower margin. So can you sort of talk about margin targets for the Company or which divisions within KBR you think have the best potential for margin improvement and whether that can offset the competitive pressures?

Then the follow-up question is just on -- relates to LogCAP. While it's a [big dot] revenue number, you have to offset -- or I guess the revenue number is big to offset but I guess given that's a lower margin business, while you have to offset I guess $5 billion -- the revenue dollar I guess (multiple speakers) you know what I'm trying to say.

You don't need as much revenue to offset it as you think just because the new business you would win would be higher margin. You know what I mean? Just sort of where we are on replacing that business?

Okay. To answer your first question, I'm going to take the easy way out. As you look for margin growth in our North American government and defense business as well as our gas monetization businesses as these low-margin projects work their way through, I don't see where we wouldn't be able to look at competing in the market with everybody else at what our market margin is at the time.

So you can look at our numbers and if you have a view of what margins should be, we should be moving to a higher level because of the reduced dilution of our margins on these legacy projects. In terms of our LogCAP job income, we got it. We were going to do about $2.5 billion this year.

If we look at our accounting at a 1% base fee, that's $25 million. I've got to sell about -- I (inaudible) than $5 million of new gas monetization work at a 10% margin to -- excuse me, $250 million at a 10% margin to replace that, services I've got to sell, $400 million at a 6% margin.

So for us to make up the job income is not that big a stretch and I will tell you that we are not as worried about revenues here as we are the job income. That's why we wanted to talk about the change of job income in our backlog year over year of a 20% increase because we are focused on growing the job income and you could see an unusual phenomenon of a revenue fall-off of KBR. You had an increase in profitability of our business.

Okay, all righty. Thanks for answering my question despite my difficulty asking it.

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

Stephen Fisher, UBS.

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

I would think that as we look ahead, certainly it's going to be better than 2009. One, we're focused on the management of working capital. To your point, we are specifically working on Skikda and the working capital that that produces.

Should we receive award fees, we will likely get cash from that. And with any luck, we'll also get some of the Pemex cash. So while I don't want to stretch and look for a dollar amount, I think it is going to be much better than 2009.

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

That's not my expectation, no.

And then, Bill, you mentioned some timing assumptions on projects like Yanbu, Ras Tanura and, in Angola. How have you factored into your guidance the risk that some of these awards slip to the right a bit?

Well I think we have gone back and we continue to look at the schedules that we have. I know we have had some weather issues with our global warming impacts on our construction in Canada and other places in the first quarter.

We think that we are generally tracking to the level of precision in our budget with respect to the timing of these awards. There's just -- with the number of projects that we have, the 30 plus of over $1 billion and 1000 total, there's still a lot of movements under the surface here.

But we are still fairly comfortable that for the year, we're going to be able to hit the number we have for Yanbu. They've got the EPC bids. We understand the EPC bids were below where their expectations were which is good news. I think we've to got to evaluate them technically and commercially, but we still feel that project has good momentum to pick up this summer and get moving.

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

I don't think so. I think we've got a pretty wide goal post there.

Dan Pickering, Tudor Pickering, Holt.

Can we talk a little bit about the LNG charges in the quarter? I know that the Company goes back and does a comprehensive review each time and we continue to see changes in the expectations and I realize that you talked about subcontractors, etc.

I'm just trying to assess as we look at the backlog going forward, job income margin look better but are we doing anything differently in the way we assess those job income margins versus the look-back? Because the look-back seems like we continue to see kind of end of project life charges. So just walk me through what is going on, what's different, so I can get some confidence in the kind of higher job income.

We share the disappointment in the end of the job charges that we are seeing. In part, we have ongoing discussions with our customers and agreements to cover us for some of these additional charges that we hope we'll reverse over time or we certainly believe they will reverse in part if not completely over time.

But we can't book them until we have the signed agreements and the full approvals. And we had that discussion last year on one of the projects where we took a provision in early quarter in 2008 and finally got all the documentation in place in '09 to reverse it. We are -- and these projects go back to a contracting environment of 2004, 2005.

I would believe we've brought a heightened level of discipline and review on what we're doing. We have looked -- and as we look at the Skikda project for example, we believe we are in a different position with respect to end of job issues than we have on Yanbu and Tangguh in Yemen.

And we're working hard to have more money at the back end of a job to deal with this stuff. I think maybe we didn't have as good an estimate of the startups. We also ran into the red-hot nature of the market when we were buying our equipment.

We have had problems with compressors on several of our jobs. We have had valve issues, O-ring issues and we are working through those. We're taking the costs currently and we will reverse them when we have the remedies or offsets from third parties on those costs.

As it relates to LogCAP, given sort of the AFDO, I of think that was what you called the guy who kind of shut you down a little bit in terms of the '08 award number, do you resist change kind of the way you bid LogCAP for work? I know there's some discrepancy between cost reimbursable and you any kind of bonus type scenarios that you get in on your bids? Are you changing the way you bid given kind the way the AFDO has reacted here?

I don't think we change our bids related to the particular action of the award fee determining official. We are looking at LogCAP in total and we are looking at -- and we do this on every project, Dan. So this is just part of how KBR looks at work.

We're looking at it on a risk adjusted basis. Now I'll be very honest with you. I think the risks in LogCAP have gone up in the last year. And our bids to get an acceptable risk adjusted return will have to increase as well.

So, we are taking into consideration all the issues surrounding us in LogCAP as we proceed forward. And as I mentioned in one of the earlier comments, that it may not matter what we bid in this upcoming base life support in Iraq because there's still a call option on the table for us, vis a vis LogCAP III at 1% plus 2% award fee.

Justin Spittel, Pritchard Capital.

I guess centering on LogCAP, understanding that there is a lag factor in terms of troop withdrawals, etc.; can you walk us through I guess the variability there? I think the Congressional budgeting office has talked about getting down to about 50,000 troops on the ground by the end of December this year. Can you talk about how that factors into the guidance and again, understanding there's a [lag], what kind of swing factor that could provide?

I think we tried to address that in our guidance for 2010. We finished up the year at $5 billion of LogCAP revenue. We are expecting to from a monthly basis see really a linear decline in our activity over the first six months to a level of 30,000 to 50,000 troops and then having that go out as an asymptote for the second half of 2010.

Our guidance was really based on LogCAP IV being be basis of that second six months of 2010. But the bulk of the $2.5 billion was going to be recognized in the first six months and you could probably do your math from the troop count at 12-31, drawing a declining line through the end of June to 50,000, then going out horizontally for the next six months.

Okay, that's what I thought. And switching over to the upstream oil and gas business, you talked a little bit about trying to expanding your footprint there. Are there specific geographic areas where you're starting to see the climate improve versus say six months ago where you're targeting some opportunities there?

Well I know that we made a concerted effort to be in Australia when the Australia LNG market took off and I very much like our position there with Inpex; Pluto 2, 3; the Browse LNG project and then even a little further out possibly Gorgon 4 and 5.

Africa is still slow. From an LNG standpoint, I think we've got some issues that have to get sorted out politically in Algeria. We have got some leadership issues in Nigeria that are slowly moving forward but a lot of issues have to be addressed in Nigeria.

Angola seems to be moving forward on their refinery project which is good for us. Those are the primary areas we look at. On a secondary basis, there's still some rumblings in Egypt and Libya about projects but those are much further out for us. They're still working systematically through in South Africa on the refinery.

So you know Africa is hot and cold in certain markets and certain countries. But mostly it's a quiet market now. We are looking at how does KBR participate in Latin America and our (inaudible) thinking through how do we get down to that market and certainly deal with a lot of the local content issues that Brazil for example is looking for as they develop their offshore resources.

In the oil and gas business, we are in all the major areas. We're in the Gulf, North Sea, West Africa, Caspian, the Australia APAC region. So we like our footprint there. We're looking at some penetration of the offshore Brazilian market with our GBA business and have spent the last seven or eight months down their prospecting.

Downstream, we've got good presence in Africa and the Middle East and we're also seeing some movement on some smaller projects here in the states. So I kind of like where we are there and then the technology business, we spent last year rebuilding our sales distribution channel. We've got that implemented and now we're trying to drive all of our intellectual property content through that distribution channel.

We're actually pleased to have grown what we are offering through a collaborative effort with BP that we announced in RK that was signed up Christmas Eve that really gives us a great footprint to provide an alternative technology to your normal crackers that is based on a wide spread between oil and gas price. So we have both the cracker technology, now this other technology that we think gets us really broadly positioned for all the upgrading stuff for those heavy asphalts.

Thanks for the overview, appreciate it.

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

Actually, it appears we have no further questions at this time. So I'll turn the conference back over to our speakers.

Thank you very much for joining us. We look forward to the first-quarter 2010 conference call in a few months. If you have any follow-up questions, don't hesitate to give me a call. Thanks.

Again, that does conclude today's conference. We thank you all for joining us.