KBR Inc (KBR) 2011 Q3 法說會逐字稿

Good day, Ladies and Gentlemen, and welcome to the KBR's Third-Quarter 2011 Earnings Conference hosted by KBR. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time. Now, 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.

Thanks, Erin, and good morning. And welcome to KBR's Third-Quarter 2011 Earnings Conference call. Today's call is also being webcast and a replay will be available on KBR's website for 7 days. The press release announcing the third-quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Sue Carter, Executive Vice President and Chief Financial Officer. In today's call, Bill will provide opening remarks and business outlook. Sue will address KBR's operating performance, financial position, backlog and other financial items. We will welcome questions after we complete our prepared remarks.

Before turning you 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, 2010, KBR's quarterly reports on Form 10-Q and KBR's current reports on Forms 8-K. Now, I will turn the call over to Mr. Bill Utt. Bill?

Thanks, Rob, and good morning, everyone. Overall, I am pleased with KBR's execution and progress across our businesses. KBR's third-quarter net revenue was in line with our expectations and, excluding the LogCAP project, is up 5% year over year.

Now, I would like to talk about some of the unusual accounting and tax impacts arising in the third quarter. During the third quarter, as a result of a scheduled re-forecast of the remaining work on the Gorgon project, we increased our forecast man-hour backlog for the work we expect to perform over the remainder of the project. This backlog increase reduced the project's percentage of completion and, as a result, reduced our job income on the project. This reduction in job income was offset, in part, in net income attributable to non-controlling interest. These amounts will be recovered over the remaining life of the project.

Also, during the third quarter, KBR received notice of an arbitration award of approximately $193 million from the Barracuda-Caratinga arbitration. This award, for which KBR is indemnified by our prior parent, created a book tax benefit for KBR in the amount of $68 million. The award will be tax deductible by KBR when the award is paid. The indemnity payments to KBR are treated as a non-taxable contribution to capital for tax purposes.

Finally, during the third quarter, KBR received information from the Australian receiver controlling our former investment in an Australian railroad venture, which allowed us to release a $24 million deferred tax liability, related to our share of the Australian railroad investment. As a result of these impacts, as well as the continuing strength of our business, our 2011 guidance is $3.15 to $3.30 per share.

Now, let's talk about KBR businesses. KBR's backlog at September 30 was $11.7 billion. Compared to the prior-year third quarter, KBR's job income backlog has increased 11%, while revenue backlog is down 5%. Compared to the last quarter, job income backlog increased 1%, despite a 2% revenue backlog decline. Approximately 75% of the revenue backlog decline this quarter was related to a re-forecast of the Escravos estimate to complete, and FX impacts.

Quarter over quarter, Hydrocarbons' backlog declined $674 million, primarily due to project work off. IGP's backlog was up $313 million, led by work additions on the LogCAP III and IV projects, including $300 million of definitized work for a base life support task order, for the Department of State's mission in Iraq, as well as the award of a construction services contract for the Plant Ratcliffe coal gasification project in Mississippi. Services' backlog increased $21 million from the second quarter, as a result of the Plant Scherer and other US construction project awards. We also continue to see increased activity at our North American-focused businesses.

Now, I would like to comment on a few of our projects. In Australia, KBR and our partners remain actively engaged in post-FEED and Pre-FID activities on the INPEX Ichthys LNG Project, and the open book tender discussions continue to proceed towards a fourth-quarter 2011 FID. At the Pluto LNG project, KBR continues to provide support to Woodside on the Pluto Foundation project on an as-needed basis, and is currently performing various additional studies on the proposed expansion project. At the Browse LNG project, the FEED is wrapping up and we expect to move to a big quality FEED extension during the fourth quarter. Permitting and industrial relations activities are on-going and the project continues to anticipate a 2012 FID.

For the fourth trade on the Gorgon project, pre-FEED activities continue with an expected move into FEED in the summer of 2012. KBR's Perth operating center has been instrumental in supporting the multiple opportunities we see in the Australian LNG market. In North America, LNG project, pre-FID site construction activities commenced during the third quarter and FEED activities are expected to be completed during the first quarter of 2012. We continue to be advised that the project's FID is expected during the first half of 2012.

In Africa, for the Anadarko LNG project in Mozambique, pre-FEED is underway and we expect the FEED tender to take place in the coming months. In Oil and Gas, KBR is seeing a higher level of activity than at any point in 2011. In August, KBR announced an award from Hyundai Heavy Industries Company, to perform engineering design and procurement services for the BP Quad 204 Floating Production Storage and Offloading project to be located west of the Shetland Isles. KBR is also providing pre-FEED services for the Hod Re-Development project, operating on behalf of BP and Hess Norge AS. In the Caspian, KBR is performing pre-FEED work on Shah Deniz 2 development, with an expectation of moving into FEED in 2012. We are excited at the opportunity to potentially provide, from our London and Kazak offices, both onshore and offshore services, including construction management services on this project.

KBR is also proposing to provide offshore services on the INPEX LNG project as a subcontractor to a Korean fabricator. Finally, KBR is only now beginning to see a return of new activity in the US Gulf of Mexico. At Downstream, we expect our level of activity on the Lobito refinery project to ramp down in November, and continue at a lower level through February, as Sonangol continues to study a range of financing structures and alternatives KBR is also continuing to perform early-stage EPCM work and physical site development. We anticipate FID for the Lobito refinery to occur shortly after the conclusion of Sonangol's analysis of financing alternatives. KBR intends to execute this project from our offices in Houston and Luanda, Angola. On the Sidara project, our FEED work should be completed this year, and we continue to provide coordinating PMC and pre-EPC support activities.

In North America, we are seeing an increase in EPC opportunities driven by competitively priced natural gas for new ethylene and ammonia facilities, and recently renewed a 3-year Master Services Agreement with DuPont for engineering, procurement, and construction services. KBR's Technology business unit continues to grow rapidly and had another solid quarter. Revenue increased 27% and job income was up 21% compared to the prior-year third quarter. At our North American Government and Logistics business unit, KBR received $22 million in LogCAP III award fees, with performance ratings of Very Good to Excellent, for the completion of major projects and base closures on schedule and under budget. KBR was also cited for exceeding operational readiness requirements with the customer satisfaction ratings of Very High.

We expect our final LogCAP III award fee, in the fourth quarter, from a pool of $5 million. During the third quarter, KBR received $423 million of additional funding for LogCAP III task orders for work through the end of the year, as well as task orders under the LogCAP IV contract for base life support services, for the US Department of State in Iraq. The LogCAP IV task order is valued at over $540 million for a 1-year base, plus 1 option year.

For the International Government, Defense and Support Services business unit, KBR was selected by the UK's Foreign Commonwealth Office to provide life support, vehicle maintenance and healthcare services across Iraq and Afghanistan. The 3-year contract also provides the Foreign Commonwealth Office with options for vehicle maintenance in Sudan and Pakistan. In Afghanistan, our NATO work ramped up to full activity this quarter, and our work supporting the UK Ministry of Defence also increased. At KBR's Infrastructure and Minerals business unit, Rio Tinto awarded KBR a $46 million EPCM contract for power and fuel supply projects, to enable Rio Tinto to increase iron ore production capacity in western Australia. We are also seeing an increase in infrastructure spending in the Middle East.

At Power, I am pleased with our 2011 new awards totalling almost $800 million, including the Solid Waste Authority of Palm Beach County, Plant Scherer, and Plant Ratcliffe coal gasification project. KBR has been performing detailed design for major portions of Plant Ratcliffe and, this quarter, was awarded the project's construction contract. Plant Ratcliffe represents the first large-scale installation of our TRIG technology for power generation in the US. Over the past year, we have systematically reinforced our power engineering capabilities, leading to a series of successful project awards. KBR is now recognized in the utility community as an EPC player, compared to being perceived as a construction-only provider at the time KBR acquired BE&K.

Currently, KBR is tracking approximately $3 billion in power-related project opportunities in the United States, which we expect to move forward over the next 2 years. Approximately $1 billion of these projects should be awarded by mid-2012. KBR is also seeing several opportunities to participate in the engineering and construction of new power-generating facilities in Iraq, as well as in the United Kingdom through our PMC contract with Scottish and Southern Energy.

Building on my earlier comments related to a recovering North American market, Services new award and adjustments bookings this quarter are the highest since the first half of 2010. At the end of the third quarter, new awards at Services represent 170% of the total new awards in all of 2010. These new awards will enable KBR to increase our direct-hire US construction staff by over 1,700, for an excess of 300% during 2011. I am particularly pleased with how KBR has successfully combined our engineering and construction capabilities into an expanded and integrated EPC offering in the North American marketplace. This success is most evidenced in our power (technical difficulty) markets in North America and features construction awards for DuPont, Southern Company, CARBO Ceramics, MolyCorp, or, Praxair and the Solid Waste Authority of Palm Beach County.

Finally, and in addition to the growth in KBR's field construction teams, KBR also continues to grow our resource center headcount, which at the end of the third quarter was up 9% compared to the prior-year third quarter, and up 3% from the June 2011 quarter. Now I will turn the call over to Sue. After Sue's comments, I will comment on KBR's outlook before turning the call over to questions. Sue?

Thank you, Bill. Consolidated KBR revenue totaled $2.4 billion, a decline of $68 million, or 3%, from the prior-year third quarter. As expected, LogCAP revenue decreased $150 million, compared to prior-year third quarter. Positive revenue contributions included a 15% revenue increase from the Hydrocarbons Group; led by Technology, up 27%; followed by Gas Monetization, up 19%; Oil and Gas revenue, up 9%. Infrastructure and Minerals revenue was up 122%, compared to the prior-year third quarter, primarily related to the addition of project revenue related to the R&S acquisition and recently awarded projects. International Government, Defence and Support Services revenue was up 7% over the same period.

Consolidated operating income was $138 million in the third quarter of 2011, compared to $163 million in the third quarter of 2010. The major drivers are gas monetization job income is down $7 million from the third quarter of 2010, with Skikda, Escravos, and Gorgon progressing nicely. Favorable resolution of a contract dispute for taxes and higher subcontractor activity, improved Skikda results by $8 million, and the addition of man hours on Gorgon caused a percent-complete dilution on the project, which was part of an overall $13 million reduction in job income. The dilution is a function of the accounting, not operating performance, as our progress on the project remains solid.

Downstream job income is down $5 million, compared to the prior-year third quarter, primarily related to the completion of the Sonangol FEED at the end of 2010, and the subsequent transition to a lower-value bridging contract, the Shaybah project completion in the third quarter of 2011and Saudi Kayan project completion in late 2010. North American Government and Logistics had award fees of $34 million in the third quarter of 2010, and $22 million in the third quarter of 2011. The $12 million difference is related to the volume of the award fee pools. Performance was consistent with good scores in both periods. On the LogCAP project, job income related to improved margins for the March 2011 version was offset by lower work volumes.

Roberts & Schaefer booked $4 million of cost increases on a legacy Indonesian project in the third quarter of 2011. The year-to-date cost increase on this project is approximately $10 million. Services job income was down $14 million, driven by volume reductions, primarily in US construction and lower activity in our MMM Joint Venture.

Net income attributable to KBR, for the third quarter of 2011, was $1.22 per diluted share, compared to $0.62 per diluted share, for the prior-year third quarter. Favorable discrete tax items added to solid operating performance for the third quarter of 2011.

Let me share a few other financial highlights. General and administrative expenses for the third quarter of 2011 were $61 million, or 2.6% of revenue. KBR continues to focus on and improve performance in G&A expenses. Our full-year 2011 corporate G&A expenses are expected to be approximately $220 million. Labor cost absorption income was $6 million in the third quarter -- flat, compared to the second quarter of 2011, and up $2 million for the third quarter of 2010. Labor cost absorption income improved from the prior-year third quarter, primarily related to higher headcount in the labor resource pool, as well as higher chargeability and utilization in several of our engineering offices. As Bill stated previously, our headcount in the labor resource pools at the end of the third quarter 2011, was up 9%, compared to the prior-year third quarter, and up 3% from the June 2011 quarter.

In the third quarter of 2011, our overall effective tax rate was a negative 40% and our effective tax rate, excluding discrete items, was approximately 27%. We previously guided this effective tax rate, without discrete, in the 30% plus or minus 2% range, so we were near the lower end of the range for the third quarter. We previously discussed the positive discrete tax item for our Freight Link joint venture in Australia. We guided a 22% to 24% tax rate for 2011, based on the results of the first quarter of 2011, plus the resolution on this item, in the last half of 2011. We released $24 million in deferred tax liabilities, which was in line with our expectations.

An additional, favorable discrete tax item, related to the [arbitration] in favor of Barracuda-Caratinga, received in September of 2011, was $193 million. For book purposes, the Halliburton indemnification nets out the cash and P&L items. The arbitration award, payable to Petrobras, will be deductible for tax purposes, when paid. The indemnification from Halliburton will be treated for tax, as a contribution to capital and, accordingly, is not taxable. The net tax benefit from the Barracuda-Caratinga transaction is included in the third quarter tax provision.

For the full year of 2011, we anticipate that our overall effective tax rate will be in the 6% to 9% range including discrete items. Our effective tax rate, excluding discrete items, for the full-year 2011, is expected to be 28% to 30%. Net income attributable to non-controlling interest in the third quarter of 2011, was $6 million, compared to $20 million in the prior-year third quarter. We discussed the labor hour adjustments for Gorgon, which impacts job income as a consolidated joint venture. The portion of labor hours attributable to our partner, reduces NCI by $17 million for the quarter, and is the primary driver in the quarter-over-quarter variance. We expect the fourth quarter of 2011 to return to normalized rates.

I would like to discuss KBR's backlog in a bit more detail, building on Bill's earlier comments. The revenue backlog, as of September 30, 2011, was approximately $11.7 billion, down 5% from a year ago, and down 2% compared to the sequential quarter. Overall, the backlog portfolio mix, at the end of the first quarter, was 77% cost reimbursable and 23% fixed price -- that was the third quarter was 77% cost reimbursable and 23% fixed price, comparable to the 76/24 split in the second quarter of 2011.

Next, I will discuss liquidity and our balance sheet. Total cash provided by operating activities for the first 9 months of 2011 was $312 million, compared to $541 million provided by operations for the first 9 months of 2010. Total cash provided by operating activities in the third quarter of 2011 was approximately $89 million. Our focus on cash flow is producing results.

At the end of September 2011, our balance sheet remains strong with cash of approximately $690 million, which included $205 million associated with our consolidated joint ventures. The $690 million in cash, down $22 million compared to the sequential quarter, also reflects a return to shareholders and capital investments of $86 million, through share repurchases of approximately $59 million, capital expenditures of approximately $19 million and, approximately, $8 million in dividends paid. We repurchased 903,000 shares under the sweeping program and 1.3 million shares under our August authorization. The average price per share paid was $27.62 for the third quarter. For the first 9 months of 2011, we repurchased 3 million shares, at an average price of $30.12 per share, for $90 million in cash.

Finally, I would like to reiterate that KBR's full-year 2011 earnings per diluted share guidance, went from $3.15 to $3.30 range, which reflects a full-year, 2011 effective tax rate of 6% to 9%. Also, we anticipate the full-year 2011 corporate G&A expense to be approximately $220 million, and for 2011 KBR expects LogCAP revenues to be at the high end of our revenue guidance of $1.6 billion to $1.8 billion. Now, I will turn the call back to Bill for his final remarks.

Thank you, Sue. I would like to provide KBR's outlook for our markets and businesses. From a market perspective, we see continued, stable work in the hydrocarbon space, with ample opportunities in LNG, offshore oil and gas, and in the downstream markets. We are seeing opportunities evolve to allow KBR to take a bigger share of the project spend, through both increased local presence on our projects, as well as increased EPC opportunities, either alone or with other contractors and fabricators. We see more of a mixed bag in our non-governmental market, with increased spending in power, Middle East infrastructure, and in minerals. We are bit less certain about the evolutions at our government services businesses, where our UK operations in Afghanistan appear stable in the near term, while we anticipate a decline in our Iraq business, as the mission in Iraq shifts from a military focus to a diplomatic focus.

In our predominantly North American-focused Services businesses, we are in the midst of a solid ramp up in US construction, and EPC opportunities. We see good opportunities in Canada, and in the turn-around maintenance markets, but see a slow recovery in our building group markets as a result of a fall off in healthcare and education facility construction opportunities. From a regional perspective, we see strong opportunity in Australia, solid opportunities in the Middle East, and a continuing recovery in the North American markets. We also believe we are seeing the early stages of new investment in infrastructure in Africa.

For KBR, we have booked, and are continuing to look at additional opportunities to book additional work, for our front end engineering offices, principally in Houston and London, as we complete, over the next several months, the work related to Gorgon, the early work on the Lobito project, and the Sidara FEED. We see our high-value centers continuing to execute work coming out of these front-end engineering offices. We are also pleased with both current, as well as expected future growth, of our field teams in Australia, the Middle East, and in North America, and we expect to see this growth amplified by the additional field work we expect to realize on the INPEX project. We will be providing our 2012 earnings guidance in January, when we complete our outlook for the next calendar year. Now, we will take your questions. We ask that you please limit your comments to one question and one follow-up. Thank you.

(Operator instructions) Steven Fisher, UBS.

On the Gorgon man hours. Was the increase essentially a customer-driven scope increase? Was this a good thing on the long term or is this something different that is not as positive?

We are now 2 years into the project. We have started getting out into the field. We have been able to understand what the logistics issues and capabilities are surrounding the projects. What it takes to construct a project on a fairly environmentally sensitive area of Barrow Island, and get our arms around better, the enormity of this Gorgon project.

When you look at just the onshore scope, is probably initially in the $24 billion range, from what the owners announced at the commissioning of the project in late 2009. I think it is more evolutionary for us just based on a better definition of the project and the work to be completed to bring this project to fruition.

So you will, ultimately generate more profit dollars as a result of the higher man hours incurred?

That is correct, yes. It is really good news, despite the very difficult accounting. I have made comments in our past calls, that there is a fee pool out there that we recognize on a percentage-of-complete basis, and because of the expanded amount of man hours, our percent complete went down during the quarter. That gave rise to the adverse result at the job income line which was made up at the minority interest line.

It is really good news, with a very counterintuitive accounting outcome. But, that is why we spent so much time in both the release and in our comments today, trying to give the proper characteristic of what this is. While it was a little bit confusing this quarter, it overall is good news for KBR, because we will be doing more work on this project and we should be making more income because of the increased man hours.

I heard the $17 million impact on the minority interest. Did I miss what the number was, the impact on the margin in gas monetization job income?

It was $13 million.

There were other impacts that are going on that were not percentage of complete that dealt with IGP. And so there's a lot of moving pieces we looked at this quarter, including some of the FX issues that I talked about in my comments on the backlog, when we talked about some of the drivers for the declining backlog during the quarter.

In terms of the Iraq transition, I wonder if you can walk through how that is going to work? How much staff do you have that needs to come out? How much equipment? Will you have to incur material costs related to this that will have a notable impact on the margin as we get into early 2012?

I think we are still working through that. Our head count in Iraq was down to 10,000, give or take, toward the end of the third quarter. Whatever cost we incur in closing down the bases that will be closed down and remediating the sites will be cost-reimbursable to the US Government pursuant to the LogCAP contract.

We do have some of the awards. We indicated we booked $300 million on the LogCAP IV award related to the State Department mission, but we are still going through trying to dimensionalize what that means. As we get to January, we will be able to comment as to what our revenue guidance is related to LogCAP. While it is still shrinking, there are still a lot of moving pieces for KBR.

John Rogers, of D.A. Davidson & Co.

In the last couple of months when you have been out, you have been giving us an update on the timing of the job awards, some of the big, major projects. Any changes there that we should be thinking about in the fourth quarter and the pace as we go into 2012?

I think there are some, John. I think the INPEX appears to be on schedule, as we've talked about. That is good news for KBR and its partners. Kitimat continues to show good progress. We started some of the site-development activities in the third quarter, which was a good sign.

The Pluto expansion projects. We are continuing to support Woodside, and in the third quarter increase some of our resources to support them on the foundation project. We are looking today at moving forward on Pluto 2 and 3 at the conclusion of Pluto 1. They are still working on issues that is they talked about, but we are ready, able, and willing to support them any way we can.

Gorgon 4 is progressing on an expected basis. Browse, based on what we hear, is still on track. You look at the owner group there, with 5 or 6 owners on a project of that size, I am sure there will be a lot of owner issues that will have to be talked about before they commit to an FID. Based on what we are told today, it is middle of 2012.

We talked a little about the -- it is a very early stage in Mozambique with Anadarko, but that is a pretty big find and, I think, we are very excited to have the opportunity to get back in Africa and look at more LNG projects.

Sonangol, is probably one that -- Sonangol Lobito Refinery, they are doing a pretty thorough job of exploring what their opportunities are to bring in partners on this refinery, or to tie some investment into the refinery to some of the offshore leases that they are in the midst of issuing. We are watching and waiting to see where they go on that. At one point, they looked at build-own-operate transfer options which are coming to a close.

We have visibility in doing work for them through the end of February by our estimation. I am sure we will learn more over the coming weeks and months from them. It is a wait-and-see to see where Sonangol lands on that. All the fundamental drivers and the benefits, that we thought existed with respect to the refinery, still exist for Angola. That is the one, probably, one we had the least visibility given what is going on today. I am sure we will have more visibility over the coming months, but today that is a little bit of a question mark for us compared to prior updates.

Brian Konigsberg, Vertical Research.

Looking out in your pipeline today, and seeing the potential orders it sounds like there are certainly a lot of opportunities. Do you anticipate that Q3 will mark the trough in regards to backlog with this cycle here?

It is hard to say. We expect INPEX to go forward in the fourth quarter, which will obviously have a very positive impact for us. I think some of the other projects in the pipeline will go forward. A lot of what we are seeing evolve here, we are talking mid-12, so, you could be in the third quarter, depending on where some of those go. We are seeing the opportunities continuing to march towards us, with INPEX being the first, and other opportunities on the horizon.

We are optimistic about our ability to grow backlog in a number of our businesses. The Infrastructure, Minerals business, Power, the Hydrocarbon sector. With the work-off in LogCAP, we will have to see how that plays out that. There is probably a little bit of uncertainty about calling this a low point in the backlog because we did have a pretty good bump this year But those several hundred million dollars of backlog add, could work their way down to a little bit lower numbers. I wouldn't call it a trough, but I feel pretty optimistic about what we are headed.

On the power margins, you said you expected about a billion dollars in awards coming over the next 9 months or so. Is that more environmental retro-fit related? Is it dependant on the rules and (indiscernible) going forward, as it is written.

I think it is a combination of things. I don't have precise breakdown, but it does involve new combined-cycle construction to replace either environmentally, economically or physically obsolete coal plants. A lot of utilities have announced some retirements there. But there is also environmental spending we are anticipating, so, it is a mixed bag.

Andy Kaplowitz, Barclays Capital.

On the Gorgon POC, in the quarter, it actually had a positive affect on the overall earnings in the quarter when you net out minority expense and the above the line stuff?

I am trying to read into your question. Would I call the short fall-off a consensus on the Gorgon? No, I probably wouldn't. We had some FX issues on there. We had some changing IGP's, and the result -- We had a net positive result and Gorgon probably wasn't as much as we would have liked for the work we were doing. But, given the changes, it created a lot of confusion on the P&L.

The issues in the quarter were not really Gorgon POC. That makes it complicated, but it was more around FX. You had the Roberts and Schaefer charge in there. That was small but it was in there. Maybe a couple of other things, is that fair?

That is a very appropriate way of looking at our quarter. We think we will return to our normal pace next quarter, but it was one that we had a lot of things -- We had a lot of things going on, but net-net, we would have liked to have done better for those items we talked about.

I am going to try this question. And you will see what kind of answer you can give me. As I look at 2011 versus 2012, we have a lot of big projects out there. We have Lobito ramping down, Sidora ramping down. Is it possible we will see some sort of earnings pause with a re-acceleration later next year and in '13 KBR?

I think we have to look at our mix of work. One of the questions we have talked about, Andy, is how we are going to do all these LNG projects. In the past, I have talked about how the different projects we are pursuing do not create labor shortages for us.

The INPEX project is going to be a big project for us. That is going to be, primarily, the fabrication oversight and the construction management, which we are going to spend a lot of hours on, and that doesn't, cannibalize some of our front end.

I made comments about wanting to refill London and Houston. We have done a good job with the Gorgon project moving through and during 2012 to move largely out of those offices. We have some work to do. We have proposals on the table, and we will see where that takes us, but I would like to stay away from addressing your question specifically, because we haven't been through our budgets.

I really can't comment on how all this stuff knits together. Particularly with the amount of work we are expecting to see in LogCAP, in the first part of the year, as we take apart the operations for the military in Iraq and build up the diplomatic missions.

I figured you would shy away from that, but okay.

Good try.

Lobito itself, it has obviously slipped quite far. What is the conviction level that they do figure out financing and go forward?

So, if I didn't answer your question you get a bonus question? (laughter) I think, Andy, the project, in my mind, is going to go forward. This is Sonangol's first project without an IOC. We have commented about when you get in they sort of look at things differently than the discipline or the rigor that gets brought in an IOC-ventured project.

While it is a little bit disappointing to see them make their left turns and right turns along the path, to get this project implemented, they really are asking the right questions at what is the best way for us to look at investing our capital as the Angolan government in this refinery. Compared to the other needs that they have with their population and other investments that they are making outside of Angola.

It has slipped. We wish it hadn't slipped but we still, in our dialogue with executives from Sonangol, most recently at the end of the third quarter or a little after, they continue to demonstrate their commitment and they want to get it done, but they have to address some questions that their finance ministry has asked to make sure they are making the right decision. We are going to support them as best we can, and I believe we will get some additional views from them during the fourth quarter.

Jamie Cook, of Credit Suisse.

Sorry to ask the Gorgon question again, but we got surprised by McDermottt this morning. Did you quantify this scope increase or man hours increase in the actual currency headwind that you had in the quarter? Sue, is there any way you can help us with how much the legacy problem projects on a revenue basis were in 2011, and then what we think that will be in 2012? I am assuming less revenues, that going to boost your -- that's going to help your margins to some degree, so I am just trying to think through that, as well?

On the Gorgon currency, we did have a strengthening of the US dollar relative to the Australian dollar during the period. It was a substantial contributor to the fall-off and backlog that I talked about. I think we said that about three-quarters of the backlog decline was related to FX and a reduced estimate to complete on Escravos, which, for us is not bad news, because there is no margin on that.

No, but was there an FX impact on the P&L and the man hour increase -- or scope increase on Gorgon. Did you quantify that?

There were FX impacts on Gorgon, both in the earnings and in the backlog.

And will you quantify that, or no?

I don't have that off the top of my head. We will have to think about that, and if we do, we will make some comments the next time we are together. We have not in the past.

Did you quantify how much the scope increased or the man hours?

No, we did not.

Can you, or you won't?

We probably won't, because we don't want to get into talking about discreet scope additions on individual projects.

Can you help us, Sue, with how much Escravos is forecasted to be in 2011 and how that runs off in 2012. I guess would be a positive contributor to your profit next year?

I think Skikda, we are expecting that to be completed mid-year next year and Escravos, we will see that wind through the fourth quarter of next year.

As we look at the third quarter, the big projects in gas monetization, in terms of work for the quarter, was Skikda, Escravos, and Gorgon, and the Skikda and Escravos content at this point in time, as Bill said, we are going to start winding some of these down. It was heavier in the third quarter than what it was a year ago.

Chase Jacobson, William Blair & Company.

I want to make sure I understand the tax issues in the guidance. The previous guidance, including the discreet items, had the tax rate at $0.22 to $0.24, which assumed a mid-20's tax rate in the second half of the year. If I back out the Barracuda-Caratinga benefit this quarter, it looks like the tax rate, in the back half of the year is in the high, mid-teens. Is that $0.37 of discreet tax items that you had mentioned last quarter, is that closer to $0.50 now for the year?

What we had built into the 22% to 24% was everything that we knew from the first quarter from the second quarter, and our outlook, and expectations pending resolution of all of our research on the Freight Link issue. So, all of those discreet items were in there. Then, if you look at the Barracuda-Caratinga and the impact on that, the way to look at it and look at it with our filings, is it is 35% of the award, which is under $93 million, so it is $68 million, which translates into $0.45,as you look at that being an add to the discreet items.

I understand the $0.45 there. But, the additional $0.05 rate at the mid-point; how much of that is tax and how much is just better operations, in general? It sounds like a little bit of a combination of both?

It is a combination of both. We took a look at everything that had changed, from when we did the guidance in July operationally and with all of these tax issues. Gave you the guidance for the new tax rate, as well as an overall look, so we narrowed the range and took it to $3.15 to $3.30.

On the INPEX project, can you give us a reminder of how that partnership may be structured, and how that may play out in terms of backlog and revenue, assuming that project does go forward in the fourth quarter? Like it seems to be doing?

Yes the venture is comprised of 40% JGC, 30% Shiota, and 30 % KBR. Our accounting for that project will be equity accounting, where we will be booking our share of the expected profits of the joint venture in the backlog, as well as the expected man hours that we will be charging the project as a service provider.

Joseph Ritchie, Goldman Sachs.

I will follow-up on Andy's question from earlier, and try to tackle this a little differently. I know you will provide guidance for us in early January, but you had significant non-recurring items that impacted your year this year. Obviously, the tax items and LogCAP fees. If I try to back those out, if my numbers are right, I get a number close to $200 million to $215 million in earnings in 2011.

Right now, we are looking at fairly significant consensus expectations for next year. I am just wondering if there are any potential one-time items, that could benefit your company in 2012 from an EPS standpoint?

We do have some one-timers that could be there. We have several litigations and arbitrations, that are pending, that if they get resolved, could be positive contributors. We have the resolution of legacy items out there that we think we have taken some very prudent and in some respects conservative provisions on, and they are possible.

I can't, today, tell you they are going to show up, but we feel that at some point these items could show up. And, as we have seen in some of these matters on LogCAP, you can [show up] favorably for us in future years.

Relating to the high level of oil and gas activity that you mentioned earlier. Thinking about your business today, do you feel like you are appropriately positioned to gain the type of share of wallet you want to gain on the offshore markets? And, if not, are you looking for opportunities to grow inorganically?

My comments were very specific to the success we have seen on doing more EPC work as KBR. We are very pleased with the progress we have made in North America. We have looked, and are continuing to look, at other opportunities to do more EPC work overseas. We have got some steps we have taken. We probably will talk more about that at our upcoming Investor Day in November.

But, yes, we are looking to find out how we take a bigger share of wallet, particularly given the opportunities we see out there for KBR. Oil and gas is one area where we have recently been doing a lot of topsides engineering work. Which is very good work. It has a good margin, but it is somewhat finite in terms of the volumes you can get.

We have had several opportunities we have been working on, and continue to work on, where we can do a broader scope. The Shah Deniz 2 project that is I commented on, where we are looking to do CM work and others, is a good example of some of these initiatives that is we believe will give us a greater earnings potential, perhaps at a lower job income margin for oil and gas, but a greater earnings potential overall at KBR.

Matt Tucker, KeyBanc Capital Markets

Excluding the EPS accounting issue, this relates to the gas monetization margins in the quarter. Exclude the POC accounting issue and assume that currency is kind of neutral impact in the fourth quarter, would you expect those margin to rebound to the recent run rate of the 8% to 9% level?

Yes, I think we would. I think this is a quarter where you saw the messiness and nothing that we see looking forward changes our progress or performance on the project.

You sounded fairly upbeat, in terms of your outlook for the downstream end market. But, it has been kind of lumpy, in terms of awards over the past few quarters, relatively weak this quarter. If you exclude Lobito, which obviously, could make things extremely lumpy, when do you expect to start to see a sustainable pick up in the downstream award activity?

We are starting to see a little bit more activity in the North American markets. People are spending money. We have had some good awards, the CARBO Ceramics award, the construction of the base lube oil plant, at Pascagoula for Chevron, and others. We are seeing that activity creep up. We think we have got our positioning and pricing of our services at market, so we ought to be good there.

The challenge is where do we find those opportunities, internationally, to sustain the size of the business and ultimately grow this business going forward. And yet, it has been a little lumpier on the international side. We still think the Middle East, in particular, is a good example where maybe we have not seen as many awards coming out since the first part of the year, but do we see a backlog of work out there.

We see opportunities evolving and coming forward in Iraq, Kuwait and Saudi. We think there will be additional downstream projects in Qatar with the completion of the GTL and liquids facility we are involved in. We are pretty optimistic about what we see in the Middle East. It gives us a sense that there will be more activity for us in the coming 6 to 12 months than we have seen in the last 6 to 12 months.

Robert Connors, Stifel Nicolaus.

It seem as lot of resources, particularly in London and Houston are starting to get full on a lot of this LNG FEED work. Are you starting to see that pull up some of the FEED pricing in the industry for some of the other end markets, particularly in some of the downstream, and pet chemical markets?

Not really. The FEED market is a market where you are using very capable people to do very high-level conceptual PNID work. We haven't seen the degree of margin pressure on the FEED that we have seen on the broader assignments where you are putting less differentiated personnel.

The FEED's, as I see them are staying fairly consistent to what we have historically done. The real competition and pricing has been when you have hundreds of people on projects that is are maybe a little less differentiable as a group, compared to the FEED people.

Also, on the market, a couple of new projects, talking about GTL. Is that of interest for you going forward? Are you just more focused on the LNG aspect of it?

No, we are very interested in GTL. We are involved in 2 of the 3 projects. I think there is Oryx, Escravos and Pearl and we are involved in 2. It plays to a strength of KBR, which is process engineering and taking apart molecules and atoms, and reassembling them. We like GTL as much as we like LNG. Our technical guys like it even more because there is more fun stuff to do than LNG.

Matt Tucker, Keybanc Capital Markets.

On the Roberts & Schaefer project, where you took the charge, is the project complete or when is it expected to be complete? Or could it be a similar drag on the earnings going forward?

The Roberts & Schaefer project, I believe, should be completed first quarter of 2012. The issues we found were soils issues where the soils issues weren't as we had expected. Unfortunately, a motor was dropped that was being delivered to the site by the freight company, which caused us to have to incur additional costs related to the repairs and replacement of that equipment.

We think we are drawing to an end, and certainly as we look at matters like soils issues, and some of the delivery logistics. I think KBR can add a lot of strength to how Roberts & Schaefer is doing that, and they will move up to the higher level of performance we have seen to match the rest of KBR.

At this time there are no further questions. I will turn it back to Mr. Kukla for any closing comments.

Thank you for joining us today. I will be available later today for the rest of the follow-up calls. Thank you very much.

(Operator Instructions) That concludes our call. Thank you for your participation.