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The People of KBR I 2008 Annual Report

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The People of KBR I 2008 Annual Report The People of KBR I 2008 Annual Report Annual 2008 601 Jefferson Street I Houston, Texas 77002 I 713-753-2000 I www.kbr.com The People of KBR I 2008 Annual Report Board of Directors (from left to right) A large measure of the credit for KBR’s outstanding Jeffrey E. Curtiss – Audit Committee (Chair); Health, Safety and Environment performance during 2008 goes to our dedicated and Committee Loren K. Carroll – Audit Committee; talented employees who never waver in their Compensation Committee (Chair) Lester L. Lyles – Audit Committee; Health, commitment to deliver on our promises and serve Safety and Environment Committee Richard J. Slater – Health, Safety our customers. In recognition of their contributions, and Environment Committee (Chair); Nominating and Corporate Governance we celebrated 2008 as “The Year of the Employee,” Committee John R. Huff – Compensation Committee; and this annual report features just a few of the Nominating and Corporate Governance Committee 57,000 people who drive our success. W. Frank Blount – Nominating and Corporate Governance Committee (Chair); Compensation Committee William P. Utt – Chairman Contents Letter to Shareholders 1 Business 12 Shareholder Information Corporate Officers Risk Factors 23 Unresolved Staff Comments 35 Shares Listed New York Stock Exchange Properties 35 Symbol: KBR Legal Proceedings 36 Transfer Agent and Registrar Submission of Matters to a Vote of Security Holders 36 Mellon Investor Services LLC Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36 480 Washington Boulevard Jersey City, New Jersey 07310-1900 Selected Financial Data 38 1-888-328-5390 Management’s Discussion and Analysis of Financial Condition and Results of Operations 39 www.melloninvestor.com William P. Utt Klaudia J. Brace Quantitative and Qualitative Discussion About Market Risk 68 To Contact Investor Relations Chairman of the Senior Vice President, Financial Statements and Supplementary Data 68 Shareholders may call the Company at Board, President, and Administration 1-886-380-7721 or 713-753-5082 or Chief Executive Officer Report of Independent Registered Public Accounting Firm 69 contact us via email at [email protected]. Consolidated Statements of Income 70 The CEO and CFO certifications required Consolidated Balance Sheets 71 by Section 302 of the Sarbanes-Oxley Act Consolidated Statements of Shareholders’ Equity 72 of 2002 have been filed as exhibits to KBR’s Form 10-K. Our Annual CEO Certification Consolidated Statements of Cash Flows 73 for fiscal year 2008 was submitted to the Notes to Consolidated Financial Statements 74 NYSE timely and without qualification. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 124 Controls and Procedures 124 Other Information 127 Kevin DeNicola Andrew D. Farley Senior Vice President Senior Vice President Directors, Executive Officers and Corporate Governance 127 and Chief Financial and General Counsel Executive Compensation 127 Officer Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 127 Certain Relationships and Related Transactions, and Director Independence 127 Andrew D. Farley Tom Mumford Charles E. Schneider Principal Accounting Fees and Services 127 Senior Vice President Senior Vice President, Vice President, Interim Exhibits and Financial Statement Schedules 127 and General Counsel Business Development Chief Financial Officer Oversight and Treasurer Signatures 163 To My Fellow Shareholders: In our first full year of operation as an independent company, KBR delivered record financial results driven, in large measure, by the strong performance in each of KBR’s business units. Our income from continuing operations rose 69 percent from the previous year, reaching $308 million. Our backlog remained strong at $14.1 billion as of December 31, 2008. Our success is a tribute to the talent, dedication and hard work of our over 57,000 employees who seized the opportunity to grow William P. Utt in new directions after KBR’s separation from our prior parent in 2007. We greatly appreciate the past contributions and ongoing Chairman, President and efforts of our employees. Chief Executive Officer Weathering the Economic Storm Acquisitions Ignite Growth As financial markets deteriorated in 2008, we saw an increasing We made three acquisitions in the Services arena, as well as two disconnect between our performance and our stock price that acquisitions in our Government & Infrastructure business, igniting tempered enthusiasm for the year’s achievements. The reality that progress toward regaining a leadership position in some of KBR’s we cannot control market forces or that the performance of KBR legacy businesses. The July acquisition of BE&K, a privately held stock was in line with our peer companies does little to blunt our company with a top-tier reputation and an impressive client list, disappointment over the sharp decline. brought $2 billion of annualized revenue and a $2 billion backlog to KBR. In addition to tripling the size of our Services business With a balance sheet that includes in excess of $1 billion in cash, unit, BE&K strengthened our capabilities and provided access no debt, and ample credit capacity to move forward in growing to attractive industries, including power, pulp and paper, and our business, we have the financial strength and flexibility to pharmaceuticals, where we did not previously have a presence. weather the economic downturn and capture any opportunities it may create. We are confident that, when markets recover, KBR’s The BE&K transaction, valued at $559 million, followed our stock price will return to a level that reflects our performance April acquisition of the Turnaround Group, a Houston-based and underlying strength. management and consulting group that gave us specialized expertise in the planning and execution of plant turnarounds and outages. In the interim, we have taken actions to provide value to our Our October acquisition of Wabi Development Corporation, a shareholders, returning approximately $221 million of cash during general contractor based in Ontario, Canada, enhanced our access 2008 through dividend payments totaling $25 million and to the Canadian industrial services market and provided new labor $196 million for stock repurchases. Last year, we repurchased resources for oil sands projects in Northern Canada. 8.4 million of our common shares at an average price of $23.35 per share. We continue to consider our options, including A fourth acquisition, Catalyst Interactive, complements and additional share repurchases as authorized by the Board of expands KBR’s global training capabilities. An Australian provider of Directors in December 2008, to benefit our shareholders during e-learning and training solutions for defense, government and industry, these incredibly difficult times. Catalyst improves our technology-based training capabilities in the Asia Pacific region and has numerous applications in our other We have also implemented substantial stock ownership end-markets. Finally, in December 2008, KBR bought out the interest requirements for all members of our executive team, ensuring of our partner in the Jordan-BE&K joint venture, which provides that management’s interests align with those of our shareholders. design and construction services to primarily naval customers. And we are forging ahead in implementing our strategy to create sustainable long-term value for our shareholders. Business Units Gain Ground New Strategic Course Yields Benefits Upstream: KBR’s Upstream business unit is building on its stature We saw tangible benefits during 2008 from the new strategic course as a clear market leader in the gas monetization market while that we embarked upon after our separation from Halliburton in enhancing its legacy position in offshore oil and gas services. 2007. Following a candid assessment of our market opportunities, We continued moving our world-scale gas monetization projects customer relationships and unique strengths, we identified the toward a successful conclusion during 2008. At the same time, businesses we would be in, and we restructured the company to we continued to make great headway in the offshore arena. In implement this strategy, creating six business units able to focus addition to receiving contracts relating to offshore facilities in the very closely on their market opportunities. North Sea and Australia, we see tremendous future opportunities from a multi-year agreement reached during 2008 under which In addition to building our capacity for organic growth during we will provide engineering and project management services 2008, we made a number of acquisitions that advanced certain for BP’s offshore developments worldwide. While the economic of our strategies much faster than we could have done with our environment has caused delays in some upstream projects, we existing operations. expect most to move forward, albeit at a more moderate pace. 1 Our success is a tribute to the talent, dedication and hard work of our over 57,000 employees who seized the opportunity to grow in new directions after KBR’s separation from our prior parent in 2007. We greatly appreciate the past contributions and ongoing efforts of our employees. Government & Infrastructure: As the world’s largest defense services A Foundation for the Future provider, our Government & Infrastructure (G&I) business unit Driven by excellence in execution, KBR delivered exceptional has
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