FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 1-3492
HALLIBURTON COMPANY
(a Delaware Corporation)
75-2677995
3600 Lincoln Plaza
500 N. Akard
Dallas, Texas 75201
Telephone Number - Area Code (214) 978-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $2.50 per share:
Outstanding at April 24, 2002 - 435,636,154
HALLIBURTON COMPANY
Index
Page No.
-----------
PART I. FINANCIAL INFORMATION 2-31
Item 1. Financial Statements 2-4
- Condensed Consolidated Statements of Income 2
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Cash Flows 4
- Notes to Quarterly Financial Statements 5-21
1. Management Representations 5
2. Business Segment Information 5-6
3. Acquisitions and Dispositions 6-7
4. Discontinued Operations 7
5. Restricted Cash 7
6. Receivables 8
7. Inventories 8
8. Commitments and Contingencies 8-14
9. Income Per Share 15
10. Comprehensive Income 15
11. Goodwill and Other Intangible Assets 16
12. Dresser Financial Information 16-20
13. Subsequent Event 21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 22-30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II. OTHER INFORMATION 32-34
Item 6. Listing of Exhibits and Reports on Form 8-K 32-33
Signatures 34
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
HALLIBURTON COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
(Millions of dollars and shares except per share data)
Three Months
Ended March 31
-----------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------
Revenues:
Services $ 2,529 $ 2,643
Product sales 460 483
Equity in earnings of unconsolidated affiliates 18 18
- ----------------------------------------------------------------------------------------------------
Total revenues 3,007 3,144
- ----------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 2,530 $ 2,433
Cost of sales 409 422
General and administrative 53 91
Gain on sale of joint venture (108) -
- ----------------------------------------------------------------------------------------------------
Total operating costs and expenses 2,884 2,946
- ----------------------------------------------------------------------------------------------------
Operating income 123 198
Interest expense (32) (47)
Interest income 4 4
Foreign currency losses, net (8) (3)
Other, net 4 -
- ----------------------------------------------------------------------------------------------------
Income from continuing operations before taxes, minority
interest, and change in accounting method, net 91 152
Provision for income taxes (36) (61)
Minority interest in net income of subsidiaries (5) (5)
- ----------------------------------------------------------------------------------------------------
Income from continuing operations before change
in accounting method, net 50 86
Income (loss) from discontinued operations, net of tax (provision)
benefit of $15 and $(15) (28) 22
Cumulative effect of change in accounting method, net - 1
- ----------------------------------------------------------------------------------------------------
Net income $ 22 $ 109
====================================================================================================
Basic income per share:
Income from continuing operations before change in
accounting method, net $ 0.12 $ 0.20
Income (loss) from discontinued operations (0.07) 0.05
- ----------------------------------------------------------------------------------------------------
Net income $ 0.05 $ 0.25
====================================================================================================
Diluted income per share:
Income from continuing operations before change in
accounting method, net $ 0.12 $ 0.20
Income (loss) from discontinued operations (0.07) 0.05
- ----------------------------------------------------------------------------------------------------
Net income $ 0.05 $ 0.25
====================================================================================================
Cash dividends per share $ 0.125 $ 0.125
Basic average common shares outstanding 432 426
Diluted average common shares outstanding 433 430
See notes to quarterly financial statements.
2
HALLIBURTON COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
(Millions of dollars and shares except per share data)
March 31 December 31
--------------- ---------------
2002 2001
- ---------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 266 $ 290
Receivables:
Notes and accounts receivable, net 2,856 3,015
Unbilled work on uncompleted contracts 1,091 1,080
- ---------------------------------------------------------------------------------------------------
Total receivables 3,947 4,095
Inventories 814 787
Current deferred income taxes 153 154
Other current assets 258 247
- ---------------------------------------------------------------------------------------------------
Total current assets 5,438 5,573
Property, plant and equipment after accumulated
depreciation of $3,313 and $3,281 2,757 2,669
Equity in and advances to related companies 524 551
Goodwill, net 720 720
Noncurrent deferred income taxes 405 410
Insurance for asbestos litigation claims 585 612
Other assets 451 431
- ---------------------------------------------------------------------------------------------------
Total assets $ 10,880 $ 10,966
===================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 6 $ 44
Current maturities of long-term debt 81 81
Accounts payable 1,026 917
Accrued employee compensation and benefits 306 357
Advanced billings on uncompleted contracts 538 611
Deferred revenues 91 99
Income taxes payable 149 194
Other current liabilities 513 605
- ---------------------------------------------------------------------------------------------------
Total current liabilities 2,710 2,908
Long-term debt 1,402 1,403
Employee compensation and benefits 562 570
Asbestos litigation claims 753 737
Other liabilities 640 555
Minority interest in consolidated subsidiaries 46 41
- ---------------------------------------------------------------------------------------------------
Total liabilities 6,113 6,214
===================================================================================================
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 456 and 455 shares 1,141 1,138
Paid-in capital in excess of par value 313 298
Deferred compensation (86) (87)
Accumulated other comprehensive income (233) (236)
Retained earnings 4,294 4,327
- ---------------------------------------------------------------------------------------------------
5,429 5,440
Less 21 shares of treasury stock, at cost for both periods 662 688
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 4,767 4,752
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,880 $ 10,966
===================================================================================================
See notes to quarterly financial statements.
3
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Three Months
Ended March 31
------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 22 $ 109
Adjustments to reconcile net income to net cash from operations:
Loss (income) from discontinued operations 28 (22)
Depreciation, depletion and amortization 132 134
Provision for deferred income taxes 7 13
Distributions from (advances to) related companies, net of
equity in (earnings) losses 27 (17)
Change in accounting method, net - (1)
Gain on sale of joint venture (108) -
Gain on option component of joint venture sale (3) -
Other non-cash items 18 19
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts 120 2
Inventories (28) (99)
Accounts payable 109 (31)
Other working capital, net (247) 38
Other operating activities 78 21
- ---------------------------------------------------------------------------------------------------
Total cash flows from operating activities 155 166
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (235) (145)
Sales of property, plant and equipment 28 21
Dispositions (acquisitions) of businesses, net 134 (174)
Other investing activities (4) (2)
- ---------------------------------------------------------------------------------------------------
Total cash flows from investing activities (77) (300)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term borrowings (1) (9)
Borrowings (repayments) of short-term debt, net (38) 269
Payments of dividends to shareholders (54) (54)
Proceeds from exercises of stock options - 19
Payments to reacquire common stock (1) (4)
Other financing activities 1 (2)
- ---------------------------------------------------------------------------------------------------
Total cash flows from financing activities (93) 219
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (9) (14)
Net cash flows from discontinued operations - (24)
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (24) 47
Cash and cash equivalents at beginning of period 290 231
- ---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 266 $ 278
===================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 41 $ 61
Income taxes $ 46 $ 58
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ - $ 14
Liabilities disposed of in dispositions of businesses $ - $ -
See notes to quarterly financial statements.
4
HALLIBURTON COMPANY
Notes to Quarterly Financial Statements
(Unaudited)
Note 1. Management Representations
We employ accounting policies that are in accordance with generally
accepted accounting principles in the United States of America. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and
assumptions that affect:
- the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements; and
- the reported amounts of revenues and expenses during the reporting
period.
Ultimate results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and applicable rules of
Regulation S-X. Accordingly, these financial statements do not include all
information or footnotes required by generally accepted accounting principles
for complete financial statements and should be read together with our 2001
Annual Report on Form 10-K. Prior year amounts have been reclassified to conform
to the current year presentation.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of March 31, 2002, the results of our
operations for the three months ended March 31, 2002 and 2001 and our cash flows
for the three months then ended. The results of operations for the three months
ended March 31, 2002 and 2001 may not be indicative of results for the full
year.
Note 2. Business Segment Information
We have two business segments which are organized around the products
and services provided to our customers - Energy Services Group and Engineering
and Construction Group. Dresser Equipment Group is presented as discontinued
operations through March 31, 2001 as a result of the sale in April 2001 of the
remaining businesses within the Dresser Equipment Group. See Note 4.
The table below presents revenues and operating income by business
segment on a comparable basis.
Three Months
Ended March 31
-----------------------------
Millions of dollars 2002 2001
- -------------------------------------------------------------------------
Revenues:
Energy Services Group $ 1,980 $ 2,031
Engineering and Construction Group 1,027 1,113
- -------------------------------------------------------------------------
Total $ 3,007 $ 3,144
=========================================================================
Operating income:
Energy Services Group $ 162 $ 200
Engineering and Construction Group 31 18
General corporate (70) (20)
- -------------------------------------------------------------------------
Total $ 123 $ 198
=========================================================================
Energy Services Group. The Energy Services Group provides a wide range
of discrete services and products and integrated solutions to customers for the
exploration, development, and production of oil and gas. The customers for this
segment are major, national and independent oil and gas companies. This segment
consists of:
- Halliburton Energy Services provides oilfield services and
products including discrete products and services and integrated
solutions for oil and gas exploration, development and production
throughout the world. Products and services include pressure
pumping equipment and services, logging and perforating, drilling
systems and services, drilling fluids systems, drill bits,
specialized completion and production equipment and services, well
control, integrated solutions, and reservoir description;
5
- Landmark Graphics provides integrated exploration and production
software information systems, data management services and
professional services to the petroleum industry; and
- Other product service lines provide construction, installation and
servicing of subsea facilities; flexible pipe for offshore
applications; pipecoating services; feasibility, conceptual and
front-end engineering and design, detailed engineering,
procurement, construction site management, commissioning, start-up
and debottlenecking of both onshore and offshore facilities; and
large integrated engineering, procurement, and construction
projects containing both surface and sub-surface components. We
also offered pipeline services for offshore customers through
European Marine Contractors Ltd., a 50% owned joint-venture, which
we sold our interest in during January 2002. See Note 3.
Engineering and Construction Group. The Engineering and Construction
Group provides engineering, procurement, construction, project management, and
facilities operation and maintenance for oil and gas petrochemical refining and
other industrial and governmental customers. The Engineering and Construction
Group, operating as Halliburton KBR, includes the following five product lines:
- Onshore operations comprises engineering and construction
activities, including liquefied natural gas, ammonia, crude oil
refineries, and natural gas plants;
- Offshore operations includes specialty offshore deepwater
engineering and marine technology and worldwide fabrication
capabilities;
- Government operations provides operations, maintenance and
logistics activities for government facilities and installations;
- Operations and maintenance provides services for private sector
customers, primarily industrial, hydrocarbon and commercial
applications; and
- Infrastructure provides civil engineering, consulting and project
management services.
Intersegment revenues included in the revenues of the business segments
are immaterial. Our equity in pretax earnings and losses of unconsolidated
affiliates that are accounted for on the equity method is included in revenues
and operating income of the applicable segment.
Note 3. Acquisitions and Dispositions
Magic Earth acquisition. In November 2001, we acquired Magic Earth,
Inc., a leading 3-D visualization and interpretation technology company with
broad applications in the area of data mining. Under the agreement, Halliburton
issued 4.2 million shares of common stock from treasury stock valued at $100
million. Magic Earth became a wholly owned subsidiary and is reported within our
Energy Services Group. We recorded intangible assets of $19 million and goodwill
of $71 million, all of which is nondeductible for tax purposes, subject to the
final valuation of intangible assets and other costs. The intangible assets will
be amortized based on a five year life.
PGS Data Management acquisition. In March 2001, we acquired the PGS
Data Management division of Petroleum Geo-Services ASA (PGS) for $164 million.
The agreement also calls for Landmark to provide, for a fee, strategic data
management and distribution services to PGS for three years. We recorded
intangible assets of $14 million and goodwill of $149 million, $9 million of
which is nondeductible for tax purposes.
PES acquisition. In February 2000, we acquired the remaining 74% of the
shares of PES (International) Limited that we did not already own. PES is based
in Aberdeen, Scotland, and has developed technology that complements Halliburton
Energy Services' real-time reservoir solutions. To acquire the remaining 74% of
PES, we issued 1.2 million shares of Halliburton common stock and rights that
resulted in the issuance of 2.1 million additional shares of Halliburton common
stock. We recorded $115 million of goodwill in connection with acquiring the
remaining 74%.
During the second quarter of 2001, we contributed the majority of PES'
assets and technologies, including $130 million of goodwill associated with the
purchase of PES, to a newly formed joint venture, WellDynamics. We received $39
million in cash as an equity equalization adjustment. The remaining assets and
goodwill of PES relating to completions and well intervention products have been
combined with our existing completions product service line. We own 50% of
WellDynamics and account for this investment using the equity method.
6
Subsea joint venture. In October 2001, we signed a letter of intent to
form a new company by combining our Halliburton Subsea operations with DSND
Subsea ASA, a Norwegian-based company. The transaction is expected to close and
the newly formed company will begin operating on a combined basis by the end of
the second quarter of 2002. We will own 50% of the new company and will account
for it on the equity method.
European Marine Contractors Ltd. disposition. In January 2002, we sold
our 50% interest in European Marine Contractors Ltd., an unconsolidated joint
venture in the Energy Services Group, to our joint venture partner, Saipem. At
the date of sale, we received $115 million in cash and a contingent payment
option valued at $16 million resulting in a pretax operating income gain of $108
million. The contingent payment option was based on a formula linked to the Oil
Service Index performance. In February 2002, we exercised our option receiving
an additional $19 million and recorded a pretax gain of $3 million in other, net
in the income statement as a result of the increase in value of this option. The
total transaction resulted in an after-tax gain of $68 million, or $0.16 per
diluted share.
Dresser Equipment Group divestiture. In April 2001, we disposed of the
remaining businesses in the Dresser Equipment Group. See Note 4.
Note 4. Discontinued Operations
In late 1999 and early 2000 we sold our interest in two joint ventures
which were a significant portion of our Dresser Equipment Group. These sales
prompted a strategic review of the remaining businesses within the Dresser
Equipment Group. As a result of this review, we determined that these remaining
businesses did not closely fit with our core businesses, long-term goals and
strategic objectives. In April 2000, our Board of Directors approved plans to
sell all the remaining businesses within the Dresser Equipment Group. We sold
these businesses on April 10, 2001 and as part of the terms of the transaction,
we retained a 5.1% equity interest in the Dresser Equipment Group, which has
been renamed Dresser, Inc. The financial results of the Dresser Equipment Group
through March 31, 2001 are presented as discontinued operations in our financial
statements.
During the first quarter of 2002, we recorded as expense to
discontinued operations $3 million for asbestos claims and defense costs related
to previously disposed businesses, net of anticipated insurance recoveries for
asbestos claims. We also recorded expense for a $40 million payment associated
with the Harbison-Walker bankruptcy filing. See Note 8.
Three Months
Income (loss) from Operations Ended March 31
of Discontinued Businesses -----------------------
Millions of dollars 2002 2001
- ----------------------------------------------------------------------
Revenues $ - $ 359
Operating income $ - $ 37
Asbestos litigation claims, net of
insurance recoveries (43) -
Tax benefit (expense) 15 (15)
- ----------------------------------------------------------------------
Net income (loss) $ (28) $ 22
======================================================================
Note 5. Restricted Cash
At March 31, 2002, we had restricted cash of $26 million included in
other current assets. This cash is restricted in relation to cash collateral
agreements for certain letters of credit we currently have outstanding.
7
Note 6. Receivables
Our receivables generally are not collateralized. See Note 13. With the
exception of claims and change orders that are in the process of being
negotiated with customers, unbilled work on uncompleted contracts generally
represents work currently billable, and this work is usually billed during
normal billing processes within the next several months or when certain
milestones are achieved. The claims and change orders, included in unbilled work
on uncompleted contracts and relating to approximately 7 projects, amounted to
$169 million at March 31, 2002 and $137 million at December 31, 2001.
Note 7. Inventories
Inventories at March 31, 2002 and December 31, 2001 are composed of the
following:
March 31 December 31
---------------- ---------------
Millions of dollars 2002 2001
- --------------------------------------------------------------------
Finished products and parts $ 549 $ 520
Raw materials and supplies 193 192
Work in process 72 75
- --------------------------------------------------------------------
Total $ 814 $ 787
====================================================================
Included in the above are inventories on the last-in, first-out method
of $55 million at March 31, 2002 and $54 million at December 31, 2001. If the
average cost method had been used, total inventories would have been about $20
million higher than reported at March 31, 2002 and December 31, 2001.
Note 8. Commitments and Contingencies
Asbestos litigation. Several of our subsidiaries, particularly Dresser
Industries, Inc. and Kellogg Brown & Root, Inc., are defendants in a large
number of asbestos-related lawsuits. The plaintiffs allege injury as a result
of exposure to asbestos in products manufactured or sold by former divisions of
Dresser Industries, Inc. or in materials used in construction or maintenance
projects of Kellogg Brown & Root, Inc. These claims are in three general
categories:
- refractory claims;
- other Dresser Industries, Inc. claims; and
- construction claims.
Refractory claims
Asbestos was used in a small number of products manufactured or sold by
Harbison-Walker Refractories Company, which Dresser Industries, Inc. acquired in
1967. Harbison-Walker was spun-off by Dresser Industries, Inc. in July, 1992.
At that time, Harbison-Walker assumed liability for asbestos claims filed after
the spin-off and it agreed to defend and indemnify Dresser Industries, Inc. from
liability for those claims. Dresser Industries, Inc. retained responsibility
for all asbestos claims pending as of the date of the spin-off. After the
spin-off, Dresser Industries, Inc. and Harbison-Walker jointly negotiated and
entered into coverage-in-place agreements with a number of insurance companies.
Those agreements provide Dresser Industries, Inc. and Harbison-Walker access to
the same insurance coverage to reimburse them for defense costs, settlements and
court judgments they pay to resolve refractory asbestos claims.
As of March 31, 2002, there were approximately 7,000 open and
unresolved pre-spin-off refractory claims against Dresser Industries, Inc. In
addition, there were approximately 133,000 post spin-off claims that name
Dresser Industries, Inc. as a defendant. Dresser Industries, Inc. has taken up
the defense of unsettled post spin-off refractory claims that name it as a
defendant in order to prevent Harbison-Walker from unnecessarily eroding the
insurance coverage both companies access for these claims. These claims are now
stayed in the Harbison-Walker bankruptcy proceeding.
Other Dresser Industries, Inc. claims
As of March 31, 2002, there were approximately 118,000 open and
unresolved claims alleging injuries from asbestos used in other products
formerly manufactured by Dresser Industries, Inc. Most of these claims involve
gaskets and packing materials used in pumps and other industrial products.
8
Construction claims
Our Engineering and Construction Group includes engineering and
construction businesses formerly operated by The M.W. Kellogg Company and Brown
& Root, Inc., now combined as Kellogg Brown & Root, Inc. As of March 31, 2002,
there were approximately 34,000 open and unresolved claims alleging injuries
from asbestos in materials used in construction and maintenance projects, most
of which were conducted by Brown & Root, Inc. Less than 1,000 of these claims
are asserted against The M.W. Kellogg Company. Kellogg Brown & Root has a good
defense to these claims and a prior owner of The M.W. Kellogg Company provides
Kellogg Brown & Root a contractual indemnification for claims against The M.W.
Kellogg Company.
Harbison-Walker Chapter 11 bankruptcy
On February 14, 2002, Harbison-Walker filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
Bankruptcy Court in Pittsburgh, Pennsylvania. In its bankruptcy-related filings,
Harbison-Walker said that it would seek to utilize Sections 524(g) and 105 of
the Bankruptcy Code to propose and have confirmed a plan of reorganization that
would provide for distributions for all legitimate, pending and future asbestos
claims asserted directly against it or asserted against Dresser Industries, Inc.
for which Harbison-Walker is required to indemnify and defend Dresser
Industries, Inc. If a plan of reorganization is confirmed, all pending and
future refractory asbestos claims against Harbison-Walker or Dresser Industries,
Inc. would be channeled to a Section 524(g)/105 trust for resolution and
payment. In order for a trust to be confirmed at least a majority of the equity
ownership of Harbison-Walker would have to be contributed to the trust. Creation
of a trust would also require the approval of 75% of the asbestos claimant
creditors of Harbison-Walker.
In connection with the Chapter 11 filing by Harbison-Walker, the
Bankruptcy Court issued a temporary restraining order staying all further
litigation of more than 200,000 asbestos claims currently pending against
Dresser Industries, Inc. in numerous courts throughout the United States. A
number of claimants oppose that stay, and filed motions seeking to have the stay
terminated. On April 4, 2002, the Bankruptcy Court heard argument on these
motions and kept the stay in effect until at least 11 days after the Bankruptcy
Court rules on the claimants' motions. When the Bankruptcy Court rules, it may
issue a preliminary injunction continuing the stay or it may modify or dissolve
the stay as it applies to Dresser Industries, Inc. It is also possible that the
Bankruptcy Court will schedule future hearings while continuing or modifying the
stay. At present, there is no assurance that a stay will remain in effect, that
a plan of reorganization will be proposed or confirmed, or that any plan that is
confirmed will provide relief to Dresser Industries, Inc. Dresser Industries,
Inc. may make a contribution to a trust in order to achieve a confirmed plan. If
a plan is not confirmed that provides relief to Dresser Industries, Inc., it
will be required to defend all open claims in the courts in which they have been
filed, possibly with reduced access to the insurance shared with
Harbison-Walker.
The stayed asbestos claims are those covered by insurance that Dresser
Industries, Inc. and Harbison-Walker each access to pay defense costs,
settlements and judgments attributable to both refractory and non-refractory
asbestos claims. The stayed claims include approximately 133,000 post-1992
spin-off refractory claims, 7,000 pre-spin-off refractory claims and
approximately 99,000 other types of asbestos claims pending against Dresser
Industries, Inc. Approximately 48,000 of the claims in the third category are
claims made against Dresser Industries, Inc. based on more than one ground for
recovery and the stay affects only the portion of the claim covered by the
shared insurance. The stay prevents litigation from proceeding while the stay is
in effect and also prohibits the filing of new claims. One of the purposes of
the stay is to allow Harbison-Walker and Dresser Industries, Inc. time to
develop and propose a plan of reorganization.
Dresser Industries, Inc. agreed to provide up to $35 million of
debtor-in-possession financing to Harbison-Walker during the pendency of the
Chapter 11 proceeding of which $5 million had been advanced during the first
quarter. On February 14, 2002, Dresser Industries, Inc. also paid $40 million to
Harbison-Walker's United States parent holding company, RHI Refractories Holding
Company. This payment was made when Harbison-Walker filed its bankruptcy
petition and was charged to discontinued operations in the first quarter of
2002. Harbison-Walker's failure to fulfill its indemnity obligations, and its
excessive erosion of the insurance coverage, required Dresser Industries, Inc.
to assist Harbison-Walker in its bankruptcy proceeding in order to protect the
shared insurance from dissipation. This insurance will be needed if a trust is
to be worked out with the asbestos claimants. The payment to RHI Refractories
led RHI Refractories to forgive intercompany debt owed to it by Harbison-Walker,
thus increasing the assets of Harbison-Walker. Dresser Industries, Inc. will pay
another $35 million to RHI Refractories if a plan of reorganization acceptable
9
to Dresser Industries, Inc. is proposed in the bankruptcy proceedings. A further
$85 million will be paid to RHI Refractories if a plan acceptable to Dresser
Industries, Inc. is approved by 75% of the Harbison-Walker asbestos claimant
creditors and confirmed by the Bankruptcy Court.
On March 21, 2002, Harbison-Walker filed a lawsuit in the United States
Bankruptcy Court for the Western District of Pennsylvania in its Chapter 11
bankruptcy proceeding. This is substantially similar to Dresser Industries,
Inc.'s lawsuit filed in Texas State Court in 2001 and seeks, among other relief,
a determination as to the rights of Dresser Industries, Inc. and Harbison-Walker
to the shared general liability insurance. The lawsuit also seeks damages
against certain insurers for breach of contract and bad faith, and a declaratory
judgment concerning the insurers' obligations under the shared insurance.
Although Dresser Industries, Inc. is a defendant in this lawsuit, it asserts its
own claim to coverage under the shared insurance and is cooperating with
Harbison-Walker to secure both companies' rights to the shared insurance.
Asbestos insurance coverage
We have substantial insurance that reimburses us for portions of the
costs we incur defending asbestos claims, as well as amounts we pay to settle
claims and court judgments. This coverage is provided by a large number of
insurance policies written by dozens of insurance companies. The insurance
companies wrote the coverage over a period of more than 30 years for our
subsidiaries and their predecessors. Large amounts of this coverage are now
subject to coverage-in-place agreements that resolve issues concerning amounts
and terms of coverage. The amount of insurance available to us depends on the
nature and time of the alleged exposure to asbestos, the specific subsidiary
against which an asbestos claim is asserted and other factors.
Refractory claims insurance
Dresser Industries, Inc. has approximately $2.1 billion in aggregate
limits of insurance coverage for refractory asbestos claims, of which over
one-half is with Equitas or other London-based insurance companies. Most of this
insurance is shared with Harbison-Walker. Many of the issues relating to the
majority of this coverage have been resolved by coverage-in-place agreements
with dozens of companies, including Equitas and other London-based insurance
companies. Recently, however, Equitas and other London-based companies have
imposed new restrictive documentation requirements on Dresser Industries, Inc.
and other insureds. Equitas and the other London-based companies have stated
that the new requirements are part of an effort to limit payment of settlements
to claimants who are truly impaired by exposure to asbestos and can identify the
product or premises that caused their exposure.
Prior to the Harbison-Walker bankruptcy, on August 7, 2001, Dresser
Industries, Inc. filed a lawsuit in Dallas County, Texas, against a number of
these insurance companies asserting Dresser Industries, Inc. rights under an
existing coverage-in-place agreement and under insurance policies not yet
subject to coverage-in-place agreements. The coverage-in-place agreements allow
Dresser Industries, Inc. to enter into settlements for small amounts without
requiring claimants to produce detailed documentation to support their claims,
when we believe such settlements are an effective claims management strategy. We
believe that the new documentation requirements are inconsistent with the
current coverage-in-place agreements and are unenforceable. The insurance
companies Dresser Industries, Inc. has sued have not refused to pay larger claim
settlements where documentation is obtained or where court judgments are
entered. Also, they continue to pay previously agreed to amounts of defense
costs Dresser Industries, Inc. incurs defending refractory asbestos claims. All
of the asbestos claims to which this insurance responds are currently stayed by
the Harbison-Walker bankruptcy, and consequently the breach of the
coverage-in-place agreements is currently having no impact upon Dresser
Industries, Inc. Because of the lawsuit filed by Harbison-Walker in its
bankruptcy proceeding, it is unlikely that this case will proceed independently
of the bankruptcy.
Other Dresser Industries, Inc. claims insurance
Dresser Industries, Inc. has substantial insurance to cover other
non-refractory asbestos claims. One coverage-in-place agreement covers Dresser
Industries, Inc. entities acquired prior to 1986 asbestos exclusions commonly
found in general liability insurance policies. Several former Dresser
Industries, Inc. product manufacturing subsidiaries and divisions are covered
under the policies subject to this coverage-in-place agreement. Asbestos claims
that would be covered by this agreement are currently stayed by the
Harbison-Walker bankruptcy because this coverage also applies to refractory
claims and is shared with Harbison-Walker. Other insurance coverage is provided
by a number of different policies that Dresser Industries, Inc. acquired rights
to access when it acquired businesses from other companies. Three
coverage-in-place agreements provide reimbursement for asbestos claims made
10
against Dresser Industries, Inc. former Worthington pump division. There is also
other substantial insurance coverage that has not yet been reduced to
coverage-in-place agreements.
On August 28, 2001, Dresser Industries, Inc. filed a lawsuit in the
192nd Judicial District of the District Court for Dallas County, Texas against
certain London-based insuring entities that issued insurance policies that
provide coverage to Dresser Industries, Inc. for asbestos-related liabilities
arising out of the historical operations of Worthington Corporation or its
successors. This lawsuit raises essentially the same issue as to the
documentation requirements as the August 7, 2001 Harbison-Walker lawsuit filed
in the same court.
A significant portion of the insurance coverage applicable to
Worthington claims is alleged by Federal-Mogul Products, Inc. to be shared with
Federal-Mogul, which in 2001 filed a voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court in Wilmington,
Delaware.
In response to Federal-Mogul's allegations, on December 7, 2001,
Dresser Industries, Inc. filed a lawsuit in the Delaware Bankruptcy Court
asserting its rights to insurance coverage under historic general liability
policies issued to Worthington Corporation and its successors for
asbestos-related liabilities arising from Worthington's and its successors'
historic operations. This lawsuit also seeks a judicial declaration concerning
the competing rights of Dresser Industries, Inc. and Federal-Mogul, if any, to
this insurance coverage.
At the same time, Dresser Industries, Inc. filed a motion for
preliminary injunction seeking a stay of all Worthington asbestos-related
lawsuits against Dresser Industries, Inc. that are scheduled for trial within
the six months following the filing of the motion. The stay that Dresser
Industries, Inc. seeks, if granted, would remain in place until the competing
rights of Dresser Industries, Inc. and Federal-Mogul are resolved. The Court
has yet to schedule a hearing on Dresser Industries, Inc. motion for preliminary
injunction.
A number of insurers who have agreed to coverage-in-place agreements
with Dresser Industries, Inc. have suspended payment under the shared
Worthington policies until the Federal-Mogul Bankruptcy Court resolves the
insurance issues. Consequently, the effect of the Federal-Mogul bankruptcy on
Dresser Industries, Inc.'s rights to access this shared insurance is uncertain.
Construction claims insurance
Nearly all of our construction asbestos claims relate to Brown & Root,
Inc. operations before the 1980s. Our primary insurance coverage for these
claims was written by Highlands Insurance Company during the time it was one of
our subsidiaries. Highlands was spun-off to our shareholders in 1996. On April
5, 2000, Highlands filed a lawsuit against us in the Delaware Chancery Court.
Highlands asserted that the insurance it wrote for Brown & Root, Inc. that
covered construction asbestos claims was terminated by agreements between
Halliburton and Highlands at the time of the 1996 spin-off. In March 2001, the
Chancery Court ruled that a termination did occur and that Highlands was not
obligated to provide coverage for Brown & Root, Inc.'s asbestos claims. This
decision was affirmed by the Delaware Supreme Court on March 13, 2002. As a
result of this ruling, we have written off approximately $35 million in accounts
receivable for amounts paid for claims and defense costs and $45 million of
accrued receivables in relation to estimated insurance recoveries claims
settlements. In addition, we dismissed the April 24, 2000 lawsuit we filed
against Highlands in Harris County, Texas.
As a consequence of the Delaware Supreme Court's decision, Kellogg
Brown & Root no longer has primary insurance coverage from Highlands for
asbestos claims. However, Kellogg Brown & Root has significant excess insurance
coverage. The amount of this excess coverage that will reimburse us for an
asbestos claim depends on a variety of factors. On March 20, 2002, Kellogg Brown
& Root filed a lawsuit in the 172nd Judicial District of the District Court of
Jefferson County, Texas, against Kellogg Brown & Root's historic insurers that
issued these excess insurance policies. In the lawsuit, Kellogg Brown & Root
seeks to establish the specific terms under which it can seek reimbursement for
costs it incurs defending asbestos claims from its historic construction
operations. Until this lawsuit is resolved, the scope of the excess insurance
will remain uncertain. We do not expect the excess insurers will reimburse us
for asbestos claims until this lawsuit is resolved.
Significant asbestos judgments on appeal
During 2001, there were several adverse judgments in trial court
proceedings that are in various stages of the appeal process. All of these
judgments concern asbestos claims involving Harbison-Walker refractory products.
Each of these appeals, however, has been stayed by the Bankruptcy Court in the
Harbison-Walker Chapter 11 bankruptcy.
11
On November 29, 2001, the Texas District Court in Orange, Texas,
entered judgments against Dresser Industries, Inc. on a $65 million jury verdict
rendered in September 2001 in favor of five plaintiffs. The $65 million amount
includes $15 million of a $30 million judgment against Dresser Industries, Inc.
and another defendant. Dresser Industries, Inc. is jointly and severally liable
for $15 million in addition to $65 million if the other defendant does not pay
its share of this judgment. We believe that during the trial the court committed
numerous errors, including prohibiting Dresser Industries, Inc. from presenting
evidence that the alleged illness of the plaintiffs was caused by products of
other companies that had previously settled with the plaintiffs. We intend to
appeal this judgment and believe that the Texas appellate courts will ultimately
reverse this judgment.
On November 29, 2001, the same District Court in Orange, Texas, entered
three additional judgments against Dresser Industries, Inc. in the aggregate
amount of $35.7 million in favor of 100 other asbestos plaintiffs. These
judgments relate to an alleged breach of purported settlement agreements signed
early in 2001 by a New Orleans lawyer hired by Harbison-Walker, which had been
defending Dresser Industries, Inc. pursuant to the agreement by which
Harbison-Walker was spun-off by Dresser Industries, Inc. in July 1992. These
settlement agreements expressly bind Harbison-Walker Refractories Company as the
obligated party, not Dresser Industries, Inc. Dresser Industries, Inc. intends
to appeal these three judgments on the grounds that it was not a party to the
settlement agreements and it did not authorize anyone to settle on its behalf.
We believe that these judgments are contrary to applicable law and will be
reversed.
On December 5, 2001, a jury in the Circuit Court for Baltimore City,
Maryland, returned verdicts against Dresser Industries, Inc. and other
defendants following a trial involving refractory asbestos claims. Each of the
five plaintiffs alleges exposure to Harbison-Walker products. Dresser
Industries, Inc. portion of the verdicts was approximately $30 million. Dresser
Industries, Inc. believes that the trial court committed numerous errors and
that the trial evidence did not support the verdicts. The trial court has
entered judgment on these verdicts. Dresser Industries, Inc. intends to appeal
the judgment to the Maryland Supreme Court where we expect the judgment will be
significantly reduced, if not totally reversed.
On October 25, 2001, in the Circuit Court of Holmes County,
Mississippi, a jury verdict of $150 million was rendered in favor of six
plaintiffs against Dresser Industries, Inc. and two other companies. Dresser
Industries, Inc. share of the verdict was $21.5 million. The award was for
compensatory damages. The jury did not award any punitive damages. The trial
court has entered judgment on the verdict. We believe there were serious errors
during the trial and we intend to appeal this judgment to the Mississippi
Supreme Court. We believe the judgment will ultimately be reversed because there
was a total lack of evidence that the plaintiffs were exposed to a
Harbison-Walker product or that they suffered compensatory damages. Also, there
were procedural errors in the selection of the jury.
Asbestos claims history. Since 1976, approximately 499,000 asbestos
claims have been filed against us. Almost all of these claims have been made in
separate lawsuits in which we are named as a defendant along with a number of
other defendants, often exceeding 100 unaffiliated defendant companies in total.
During the first quarter of 2002 we received approximately 25,000 new claims and
we closed approximately 7,000 claims. The number of open claims pending against
us at the end of the first quarter of 2002, at the end of each quarter of 2001
and at the end of the two preceding years is as follows:
Total Open
Period Ending Claims
- -----------------------------------------
March 31, 2002 292,000
December 31, 2001 274,000
September 30, 2001 146,000
June 30, 2001 145,000
March 31, 2001 129,000
December 31, 2000 117,000
- -----------------------------------------
The claims include approximately 133,000 at March 31, 2002 and 125,000
at December 31, 2001 of post spin-off Harbison-Walker refractory related claims
that name Dresser Industries, Inc. as a defendant.
12
We manage asbestos claims to achieve settlements of valid claims for
reasonable amounts. When reasonable settlement is not possible, we contest
claims in court. Since 1976, we have closed approximately 207,000 claims through
settlements and court proceedings at a total cost of approximately $162 million.
We have received or expect to receive from our insurers all but approximately
$64 million of this cost, resulting in an average net cost per closed claim of
about $309.
Reserves for asbestos claims. We have accrued reserves for our estimate
of our liability for known open asbestos claims. We have not accrued reserves
for unknown claims that may be filed against us in the future. Our estimate of
the cost of resolving open claims is based on our historical litigation
experience on closed claims, completed settlements and our estimate of amounts
we will recover from insurance companies. Our estimate of recoveries from
insurance companies with which we have coverage-in-place agreements is based on
those agreements. In those instances in which agreements are still in
negotiation or in litigation, our estimate is based on our expectation of our
ultimate recovery from insurance companies. We believe that the insurance
companies with which we have signed agreements will be able to meet their
obligations under these agreements for the amounts due to us. A summary of our
reserves for open claims and corresponding insurance recoveries is as follows:
March 31 December 31
------------------------------
Millions of dollars 2002 2001
- -----------------------------------------------------------------------------
Asbestos litigation claims $ 753 $ 737
- -----------------------------------------------------------------------------
Estimated insurance recoveries:
Highlands Insurance Company - (45)
Other insurance carriers (585) (567)
- -----------------------------------------------------------------------------
Insurance for asbestos litigation claims (585) (612)
- -----------------------------------------------------------------------------
Net liability for known open asbestos claims $ 168 $ 125
=============================================================================
These insurance receivables and reserves are included in noncurrent
assets and liabilities due to the extended time periods involved to settle
claims.
Accounts receivable for billings to insurance companies for payments
made on asbestos claims were $24 million at March 31, 2002, and $18 million at
December 31, 200l, excluding accounts receivable written off at the conclusion
of the Highlands litigation.
We have not accrued reserves for unknown claims that may be asserted
against us in the future. We have not had sufficient information to make a
reasonable estimate of future claims. However, we recently retained a leading
claim evaluation firm to assist us in making an estimate of our potential
liability for asbestos claims that may be asserted against us in the future.
When the evaluation firm's analysis is completed it is likely that we will
accrue a material liability for future claims that may be asserted against us.
We expect the analysis will be completed during the second quarter of 2002 and
that we will accrue the liability at the end of the quarter. At the same time we
will accrue a receivable for related insurance proceeds we expect to collect
when future claims are actually paid.
The uncertainties of asbestos claim litigation and resolution of the
litigation with insurance companies described above make it difficult to
accurately predict the results of the ultimate resolution of asbestos claims.
That uncertainty is increased by the possibility of adverse court rulings or new
legislation affecting asbestos claim litigation or the settlement process.
Subject to these uncertainties and based on our experience defending asbestos
claims and our estimate of amounts we will recover from insurance, we believe
that the open asbestos claims currently pending against us will be resolved
without a material adverse effect on our financial position or the results of
our operations.
Fort Ord litigation. Brown & Root Services, now operating as Kellogg
Brown & Root, has been a defendant in civil litigation pending in federal court
in Sacramento, California. The lawsuit alleges that Brown & Root Services
violated provisions of the False Claims Act while performing work for the United
States Army at Fort Ord in California. This lawsuit was filed by a former
employee in 1997. On February 8, 2002, this lawsuit and a related grand jury
investigation were settled. Kellogg Brown & Root made a $2 million payment to
the United States government and paid the former employee's legal expenses.
Kellogg Brown & Root denied wrongdoing and did not admit liability. The United
States government agreed to suspend further investigation and forgo any further
13
sanctions with regard to the Fort Ord contract. Kellogg Brown & Root's ability
to perform further work for the United States government has not been impaired.
Improper payments reported to the Securities and Exchange Commission.
We have reported to the Securities and Exchange Commission that one of our
foreign subsidiaries operating in Nigeria has made improper payments of
approximately $2.4 million to a Nigerian national who held himself out as a tax
consultant when, in fact he was an employee of a local tax authority. The
payments were made to obtain favorable tax treatment and clearly violated our
Code of Business Conduct and our internal control procedures. They were
discovered during an audit of the foreign subsidiary. We have conducted an
investigation assisted by outside legal counsel. Based on the findings of the
investigation we have terminated several employees. None of our senior officers
were involved. We are cooperating with the Securities and Exchange Commission in
its review of the matter. We plan to take further action to ensure that our
foreign subsidiary pays all taxes owed in Nigeria, which may be as much as an
additional $3 million and was fully accrued as of March 31, 2002. The integrity
of our Code of Business Conduct and our internal control procedures are
essential to the way we conduct business.
BJ Services patent litigation. On April 12, 2002, a federal court jury
in Houston, Texas, returned a verdict against Halliburton Energy Services, Inc.
in the patent infringement lawsuit brought by BJ Services. The lawsuit alleged
that a well fracturing fluid system used by Halliburton Energy Services
infringed a patent issued to BJ in January 2000 for a method of well fracturing
using a specific fracturing fluid. The jury awarded BJ approximately $98 million
in damages, plus pre-judgment interest, less than one-quarter of BJ Services'
claim at the beginning of the trial. The jury also found that there was no
intentional infringement by Halliburton. As a result of the jury's determination
of infringement, the court has enjoined us from further use of our Phoenix
fracturing fluid. We plan to appeal this verdict to the Federal Circuit, which
hears all appeals of patent cases. We believe that BJ's patent is invalid and
unenforceable on a number of different grounds, and intend to pursue vigorously
our rights to appeal. We have alternative products to use in our fracturing
operations, and do not expect the loss to have a material adverse impact on our
overall energy services business.
Environmental. We are subject to numerous environmental legal and
regulatory requirements related to our operations worldwide. We take a proactive
approach to evaluating and addressing the environmental impact of our
operations. Each year we assess and remediate contaminated properties in order
to avoid future liabilities and comply with legal and regulatory requirements.
On occasion we are involved in specific environmental litigation and claims,
including the clean-up of properties we own or have operated as well as efforts
to meet or correct compliance-related matters.
We also incur costs related to compliance with ever-changing
environmental, legal and regulatory requirements in the jurisdictions where we
operate. It is very difficult to quantify the potential liabilities. We do not
expect these expenditures to have a material adverse effect on our consolidated
financial position or our results of operations. Our accrued liabilities for
environmental matters were $49 million as of March 31, 2002 and December 31,
2001.
Letters of credit. In the normal course of business, we have agreements
with banks under which approximately $1.4 billion of letters of credit or bank
guarantees were issued, including $223 million which relate to our joint
ventures' operations. In addition, $328 million of these financial instruments
include provisions that allow the banks to require cash collateralization if
debt ratings of either rating agency fall below the rating of BBB by Standard &
Poor's or Baa2 by Moody's Investors' Services and $127 million where banks may
require cash collateralization if either debt rating falls below investment
grade. These letters of credit and bank guarantees relate to our guaranteed
performance or retention payments under our long-term contracts and
self-insurance. In the past, no significant claims have been made against these
financial instruments. We do not anticipate material losses to occur as a result
of these financial instruments.
Unasserted liquidated damages. At March 31, 2002 and December 31, 2001,
we have not accrued $97 million of contractual obligations for schedule-related
liquidated damages relating to two projects because we believe we have valid
claims against the customer which would counter these liquidated damages, if
asserted.
Other. We are a party to various other legal proceedings. We expense
the cost of legal fees related to these proceedings. We believe any liabilities
we may have arising from these proceedings will not be material to our
consolidated financial position or results of operations.
14
Note 9. Income Per Share
Three Months
Ended March 31
Millions of dollars and shares -------------------------
except per share data 2002 2001
- -------------------------------------------------------------------------------------
Income from continuing operations before
change in accounting method, net $ 50 $ 86
=====================================================================================
Basic weighted average shares 432 426
Effect of common stock equivalents 1 4
- -------------------------------------------------------------------------------------
Diluted weighted average shares 433 430
=====================================================================================
Income per common share from continuing operations before change in accounting
method, net:
Basic $ 0.12 $ 0.20
=====================================================================================
Diluted $ 0.12 $ 0.20
=====================================================================================
Basic income per share is based on the weighted average number of
common shares outstanding during the period. Diluted income per share includes
additional common shares that would have been outstanding if potential common
shares with a dilutive effect had been issued. Included in the computation of
diluted income per share at March 31, 2001 are rights we issued in connection
with the PES acquisition for 1.1 million shares of Halliburton common stock.
Excluded from the computation of diluted income per share are options to
purchase 17 million shares of common stock in 2002 and 2 million shares in 2001.
These options were outstanding during these years, but were excluded because the
option exercise price was greater than the average market price of the common
shares.
Note 10. Comprehensive Income
The components of other comprehensive income adjustments to net income
include the cumulative translation adjustment of some of our foreign entities,
minimum pension liability adjustments and unrealized gains or (losses) on
investments and derivatives.
Three Months
Ended March 31
-----------------------
Millions of dollars 2002 2001
- -------------------------------------------------------------------------------------
Net income $ 22 $ 109
Cumulative translation adjustment, net of tax 3 (42)
Unrealized gains (losses) on investments and derivatives - (2)
- -------------------------------------------------------------------------------------
Total comprehensive income $ 25 $ 65
=====================================================================================
Accumulated other comprehensive income at March 31, 2002 and December
31, 2001 consisted of the following:
March 31 December 31
--------------- ---------------
Millions of dollars 2002 2001
- ----------------------------------------------------------------------------------------
Cumulative translation adjustment $ (202) $ (205)
Pension liability adjustments (27) (27)
Unrealized losses on investments and derivatives (4) (4)
- ----------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (233) $ (236)
- ----------------------------------------------------------------------------------------
15
Note 11. Goodwill and Other Intangible Assets
Effective January 1, 2002, we adopted the Financial Accounting
Standards Board SFAS No. 142 "Goodwill and Other Intangible Assets" and in
accordance with the statement, amortization of goodwill has been discontinued.
We have reviewed this new statement and determined that our reporting units as
defined under SFAS No. 142 will be the same as our reportable operating
segments: Energy Services Group and Engineering and Construction Group. We have
completed the impairment tests of goodwill as of January 1, 2002 and determined
that our goodwill for each reporting unit is not impaired. We also reevaluated
our intangible assets and determined that their remaining useful life is
appropriate. For the three months ended March 31, 2001, our reported net income
was $109 million with basic and diluted earnings per share of $0.25. Adjusted
for the non-amortization provisions of SFAS No. 142, our reported net income
would have been $118 and our basic and diluted earnings per share would have
been $0.27 resulting in an increase in net income of $9 million or $0.02 basic
and diluted per share.
Note 12. Dresser Financial Information
Since becoming a wholly owned subsidiary, Dresser Industries, Inc. has
ceased filing periodic reports with the United States Securities and Exchange
Commission. Dresser's 8% guaranteed senior notes, which were initially issued by
Baroid Corporation, remain outstanding and are fully and unconditionally
guaranteed by Halliburton. In January 1999, as part of a legal reorganization
associated with the merger, Halliburton Delaware, Inc., our first tier holding
company subsidiary, was merged into Dresser Industries, Inc. The majority of our
operating assets and activities are now included in Dresser Industries, Inc. and
its subsidiaries. In August 2000, the United States Securities and Exchange
Commission released a new rule governing the financial statements of guarantors
and issuers of guaranteed securities registered with the United States
Securities and Exchange Commission. The following condensed consolidating
financial information presents Halliburton and our subsidiaries on a stand-alone
basis using the equity method of accounting for our interest in our
subsidiaries.
16
Condensed Consolidating Statements
of Income Non-issuer/ Dresser Halliburton Consolidated
Quarter ended March 31, 2002 Non-guarantor Industries, Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,007 $ 36 $ 30 $ (66) $ 3,007
Cost of revenues 2,939 - - - 2,939
General and administrative 53 - - - 53
Gain on sale of joint venture (108) - - - (108)
Interest expense (12) (8) (12) - (32)
Interest income 4 - 13 (13) 4
Other, net (4) - - - (4)
Income from continuing operations before
taxes and minority interest 111 28 31 (79) 91
Benefit (provision) for income taxes (42) 2 4 - (36)
Minority interest in net income of
subsidiaries (5) - - - (5)
Income from continuing operations 64 30 35 (79) 50
Loss from discontinued operations (28) - - - (28)
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 36 $ 30 $ 35 $ (79) $ 22
=========================================================================================================================
Condensed Consolidating Statements
of Income Non-issuer/ Dresser Halliburton Consolidated
Quarter ended March 31, 2001 Non-guarantor Industries, Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,144 $ 131 $ 143 $ (274) $ 3,144
Cost of revenues 2,855 - - - 2,855
General and administrative 91 - - - 91
Interest expense (10) (9) (29) 1 (47)
Interest income 4 3 - (3) 4
Other, net (11) 21 13 (26) (3)
Income from continuing operations
before taxes, minority interest and
change in accounting method, net 181 146 127 (302) 152
Benefit (provision) for income taxes (68) (3) 10 - (61)
Minority interest in net income of
subsidiaries (5) - - - (5)
Income from continuing operations
before change in accounting
method, net 108 143 137 (302) 86
Income from discontinued operations 22 - - - 22
Cumulative effect of change in
accounting method, net of tax benefit 1 - - - 1
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 131 $ 143 $ 137 $ (302) $ 109
=======================================================================================================================
17
Condensed Consolidating
Balance Sheets Non-issuer/ Dresser Halliburton Consolidated
March 31, 2002 Non-guarantor Industries, Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 161 $ - $ 105 $ - $ 266
Receivables:
Notes and accounts receivable, net 2,844 10 2 - 2,856
Unbilled work on uncompleted contracts 1,091 - - - 1,091
- -----------------------------------------------------------------------------------------------------------------------
Total receivables 3,935 10 2 - 3,947
Inventories 814 - - - 814
Other current assets 403 - 8 - 411
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 5,313 10 115 - 5,438
Property, plant and equipment, net 2,757 - - - 2,757
Equity in and advances to
unconsolidated affiliates 524 - - - 524
Intercompany receivable from
consolidated affiliates - 1,647 (872) (775) -
Equity in and advances to
consolidated affiliates - 5,505 6,773 (12,278) -
Goodwill, net 636 84 - - 720
Insurance for asbestos litigation claims 585 - - - 585
Other assets 790 28 38 - 856
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 10,605 $ 7,274 $ 6,054 $(13,053) $10,880
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 995 $ 43 $ 75 $ - $ 1,113
Other current liabilities 1,563 9 25 - 1,597
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,558 52 100 - 2,710
Long-term debt 212 439 751 - 1,402
Intercompany payable from
consolidated affiliates 775 - - (775) -
Asbestos litigation claims 753 - - - 753
Other liabilities 1,075 10 117 - 1,202
Minority interest in consolidated
subsidiaries 46 - - - 46
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 5,419 501 968 (775) 6,113
Shareholders' equity:
Common shares 175 - 1,141 (175) 1,141
Other shareholders' equity 5,011 6,773 3,945 (12,103) 3,626
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,186 6,773 5,086 (12,278) 4,767
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,605 $ 7,274 $ 6,054 $(13,053) $10,880
=======================================================================================================================
18
Condensed Consolidating
Balance Sheets Non-issuer/ Dresser Halliburton Consolidated
December 31, 2001 Non-guarantor Industries, Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 213 $ - $ 77 $ - $ 290
Receivables:
Notes and accounts receivable, net 3,002 13 - - 3,015
Unbilled work on uncompleted contracts 1,080 - - - 1,080
- -----------------------------------------------------------------------------------------------------------------------
Total receivables 4,082 13 - - 4,095
Inventories 787 - - - 787
Other current assets 323 71 7 - 401
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 5,405 84 84 - 5,573
Property, plant and equipment, net 2,669 - - - 2,669
Equity in and advances to
unconsolidated affiliates 551 - - - 551
Intercompany receivable from
consolidated affiliates (1,089) - 2,854 (1,765) -
Equity in and advances to
consolidated affiliates - 5,296 3,122 (8,418) -
Goodwill, net 636 84 - - 720
Insurance for asbestos litigation claims 612 - - - 612
Other assets 793 27 21 - 841
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,577 $ 5,491 $ 6,081 $(10,183) $10,966
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 808 $ 129 $ 105 $ - $ 1,042
Other current liabilities 1,791 20 55 - 1,866
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,599 149 160 - 2,908
Long-term debt 211 439 753 - 1,403
Intercompany payable from
consolidated affiliates - 1,765 - (1,765) -
Asbestos litigation claims 737 - - - 737
Other liabilities 1,016 16 93 - 1,125
Minority interest in consolidated
subsidiaries 41 - - - 41
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 4,604 2,369 1,006 (1,765) 6,214
Shareholders' equity:
Common shares 175 - 1,138 (175) 1,138
Other shareholders' equity 4,798 3,122 3,937 (8,243) 3,614
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,973 3,122 5,075 (8,418) 4,752
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,577 $ 5,491 $ 6,081 $(10,183) $10,966
=======================================================================================================================
19
Condensed Consolidating Statements
of Cash Flows Non-issuer/ Dresser Halliburton Consolidated
Quarter ended March 31,2002 Non-guarantor Industries, Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 162 $ (21) $ 14 $ - $ 155
Capital expenditures (235) - - - (235)
Sales of property, plant and equipment 28 - - - 28
Other investing activities 130 - 105 (105) 130
Payments on long-term borrowings (1) - - - (1)
Borrowings (repayments) of
short-term debt, net (13) - (25) - (38)
Payments of dividends to shareholders - - (54) - (54)
Payments to reacquire common stock - - (1) - (1)
Other financing activities (114) 21 (11) 105 1
Effect of exchange rate on cash (9) - - - (9)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
equivalents $ (52) $ - $ 28 $ - $ (24)
======================================================================================================================
Condensed Consolidating Statements
of Cash Flows Non-issuer/ Dresser Halliburton Consolidated
Quarter ended March 31,2001 Non-guarantor Industries, Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 123 $ 23 $ 20 $ - $ 166
Capital expenditures (145) - - - (145)
Sales of property, plant and equipment 21 - - - 21
Other investing activities (176) - (177) 177 (176)
Payments on long-term borrowings (4) (5) - - (9)
Borrowings (repayments) of
short-term debt, net (15) - 284 - 269
Payments of dividends to shareholders - - (54) - (54)
Proceeds from exercises of stock options - - 19 - 19
Payments to reacquire common stock - - (4) - (4)
Other financing activities 193 (18) - (177) (2)
Effect of exchange rate on cash (14) - - - (14)
Net cash flows from discontinued
operations (24) - - - (24)
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
equivalents $ (41) $ - $ 88 $ - $ 47
=======================================================================================================================
20
Note 13. Subsequent Event
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding subsidiary will sell an undivided ownership interest in this pool
of receivables to entities managed by unaffiliated financial institutions
pursuant to another agreement. Sales to the funding subsidiary have been
structured as "true sales" under applicable bankruptcy laws, and the assets of
the funding subsidiary are not available to pay any creditors of Halliburton or
of its subsidiaries or affiliates, until such time as the agreement with the
unaffiliated companies is terminated following sufficient collections to
liquidate all outstanding undivided ownership interests. The funding subsidiary
retains an interest in the pool of receivables that are not sold to the
unaffiliated companies, and will be fully consolidated and reported in our
financial statements.
The amount of undivided interests, which can be sold under the program,
varies based on the amount of eligible receivables in the pool at any given time
and other factors. As of April 16, 2002, the funding subsidiary has initially
sold a $150 million undivided ownership interest to the unaffiliated companies,
and may from time to time sell additional undivided ownership interests. We will
continue to service, administer and collect the receivables on behalf of the
purchaser. The amount of undivided ownership interest in the pool of receivables
sold to the unaffiliated companies will be reflected as a reduction of accounts
receivable in our consolidated balance sheet and in cash flows from operating
activities in our consolidated statement of cash flows.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
In this section, we discuss the operating results and general financial
condition of Halliburton Company and its subsidiaries. We explain:
- factors and risks that impact our business;
- why our earnings and expenses for the first quarter of 2002 differ
from the first quarter of 2001;
- capital expenditures;
- factors that impacted our cash flows; and
- other items that materially affect our financial condition or
earnings.
BUSINESS ENVIRONMENT
Our business is organized around two business segments:
- Energy Services Group; and
- Engineering and Construction Group.
The results of Dresser Equipment Group are reported as discontinued
operations through March 31, 2001.
We currently operate in almost 100 countries throughout the world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry, and to other industrial and governmental customers. The
majority of our consolidated revenues is derived from the sale of services and
products, including engineering and construction activities, to large oil and
gas companies. These services and products are used throughout the energy
industry, from the earliest phases of exploration and development of oil and gas
reserves through the refining and distribution process.
The industries we serve are highly competitive with many substantial
competitors for each segment. No country other than the United States or the
United Kingdom accounts for more than 10% of our operations. Unsettled political
conditions, acts of terrorism, expropriation or other governmental actions,
exchange controls or currency devaluation may result in increased business risk
in any one country. We believe the geographic diversification of our business
activities reduces the risk that loss of business in any one country would be
material to our consolidated results of operations.
Halliburton Company
Activity levels within our two business segments are significantly
impacted by the spending of large oil and gas companies on exploration and
production programs and capital expenditures for refining and distribution
facilities. High levels of worldwide drilling activity, particularly in the
United States for gas drilling, occurred in the first half of 2001, but began to
decline in the latter part of that year. The decline was partially due to
general business conditions caused by global economic unrest and uncertainty
which was accelerated by the terrorist attacks on September 11, 2001. The energy
industry in the United States was further impacted by consecutive unseasonably
warm winters which caused higher than normal gas storage levels creating an
excess of supply. The increased gas storage levels contributed to the declining
natural gas prices and reduced spending on gas drilling activities.
Comparatively, quarterly average natural gas prices (Henry Hub - expressed in
U.S. dollars per MCF) decreased from $6.55 in the 2001 first quarter, to $2.42
in the 2001 fourth quarter, and slightly increased to $2.47 during the 2002
first quarter. Natural gas prices are expected to steadily increase throughout
the remainder of 2002 as excess inventories are utilized due to a combination of
lower production levels and increasing demand.
During the 2002 first quarter, crude oil prices (West Texas
Intermediate - expressed in U.S. dollars per barrel) remained above $20.00 per
barrel, which was above anticipated levels for the 2002 first quarter despite
weak demand due to actions to control production by OPEC. Comparatively,
quarterly average oil prices decreased from $28.89 in the 2001 first quarter, to
$20.52 in the 2001 fourth quarter, and increased to $21.36 during the 2002 first
quarter. For the remainder of 2002, oil prices are expected to average at or
slightly above year end 2001 levels, but may be volatile due to the political
tension in the Middle East.
22
Rig count is another barometer of our business, particularly in the
Energy Services Group. Comparatively, the quarterly average worldwide rig count
decreased from 2,378 in the 2001 first quarter, to 2,030 in the 2001 fourth
quarter, and further decreased to 1,932 during the 2002 first quarter. These rig
count decreases were attributable to North America, although Canada's rig count
has rebounded to some degree, from the fourth quarter of 2001, due to
seasonality. The international rig count was relatively flat for the comparable
periods. The rig count for the remainder of this year will be predicated on oil
and gas prices and demand which will be driven by the United States and world
economies.
In the United States, our oilfield services are significantly impacted
by gas drilling activity on land and our related pricing, which is more
short-term focused based upon natural gas prices. In the short-term,
opportunities will be provided by international long-term engineering and
construction contracts and by large field development projects which are not as
impacted as the United States land drilling activity. Drilling activity in the
United States is expected to begin to improve in the second quarter and continue
to improve through year-end. In the longer-term, we expect increased global
demand for oil and natural gas, additional customer spending to replace
depleting reserves and our continued technological advances to provide growth
opportunities for us.
Energy Services Group
Low natural gas and crude oil drilling activity since the 2001 third
quarter resulted in decreased demand for the services and products provided by
the Energy Services Group. The United States rotary rig count averaged 818 rigs
for the 2002 first quarter compared to 1,139 for the 2001 first quarter, a
decrease of 28%. The United States rig count has decreased 19% in the 2002 first
quarter from the 2001 fourth quarter; and has decreased by 34% from its peak in
the 2001 second quarter. The international rotary rig count has remained
relatively stable since the 2001 first quarter, with a quarterly average of 731
rigs during the 2002 first quarter compared to an average of 724 in the 2001
first quarter. This average is expected to continue relatively unchanged
throughout the remainder of 2002.
The decreased rig activity in the United States has increased pressure
on the oilfield services product service line to discount prices. The price
increases we implemented last year and our efforts to manage costs should
partially offset the impacts of lower activity levels and additional
discounting. As predicted, our production enhancement products in the pressure
pumping product service line have been significantly impacted by the current
economic slowdown due to its dependence on United States gas drilling. Our
drilling systems product service line which has a large percentage of its
business outside the United States and is heavily involved in deepwater oil and
gas development, has remained strong despite the overall decline in the energy
industry.
Engineering and Construction Group
Our engineering and construction projects are more long-term in nature
and are not as impacted by short-term oil and gas price changes. The global
economic slowdown is expected to reach its lowest level in the first half of
2002 and we may see a turnaround during the second half of 2002. Manufacturing
activity has recently improved and has led to increased demand for ethylene and
for other petrochemicals. However, project awards will continue to be delayed or
their scope reduced due to excess capacity in petrochemical supplies. A number
of large-scale gas and liquefied natural gas, gas-to-liquids, government and
infrastructure projects are being awarded or actively considered. Growth
opportunities also exist to provide additional security and defense support to
government agencies in the United States and other countries. Demands for these
services are expected to grow as governmental agencies seek to control costs and
efficiencies by outsourcing these functions.
Backlog
Our backlog at March 31, 2002, was $9.8 billion, comprised of $7.7
billion for the Engineering and Construction Group and $2.1 billion for the
Energy Services Group. Our total backlog at December 31, 2001, was $9.9 billion.
Reorganization of Business Operations
Based on our review of our businesses, we have concluded that the
Energy Services Group and the Engineering and Construction Group would be better
positioned as separate businesses, operating as two groups of wholly-owned
subsidiaries. A more distinct separation of the two businesses will create two
stronger, leaner, more competitive and cost efficient business organizations
where each businesses risks and rewards will be consistent with its financial
results. The reorganization will also result in reconfiguring our support
functions into the two business groups. Although we have no specific plans
currently, the reorganization would facilitate separation of the ownership of
23
the two businesses in the future if we identify an opportunity that produces
greater value for our shareholders than continuing to own both businesses.
We expect the reorganization to be completed by mid-year. Most of the
reorganization costs, principally severance costs, will be incurred in the 2002
second quarter. Before we announced the reorganization internally in the 2002
first quarter, we incurred and recorded approximately $7 million of after-tax
severance cost relating to executives who were impacted by the reorganization.
We expect that the cost savings generated by the reorganization will commence in
the 2002 third quarter.
RESULTS OF OPERATIONS IN 2002 COMPARED TO 2001
First Quarter of 2002 Compared with the First Quarter of 2001
First Quarter
REVENUES ----------------------- Increase
Millions of dollars 2002 2001 (decrease)
- ----------------------------------------------------------------------------------
Energy Services Group $ 1,980 $ 2,031 $ (51)
Engineering and Construction Group 1,027 1,113 (86)
- ----------------------------------------------------------------------------------
Total revenues $ 3,007 $ 3,144 $ (137)
==================================================================================
Consolidated revenues in the 2002 first quarter of $3.0 billion
decreased $137 million compared to the 2001 first quarter. International
revenues were 67% of total revenues for the 2002 first quarter and 62% in the
2001 first quarter, highlighting the reduction in business levels in the United
States.
Energy Services Group revenues were $2.0 billion for the 2002 first
quarter, a decrease of 2% from the 2001 first quarter. International revenues
were 65% of total revenues in the 2002 first quarter compared to 58% in the 2001
first quarter due to decreased United States drilling activity. Our oilfield
services product service line revenues of $1.5 billion in the 2002 first quarter
declined 5% from the 2001 first quarter, primarily due to reduced rig activity
particularly in the United States and increased discounts. Revenues from
pressure pumping, completion products, drilling fluids and drill bit product
service lines declined between 6% and 8% in the 2002 first quarter from the 2001
first quarter. Logging revenues were down about 11% from the same period.
Drilling services revenues increased 15% in the 2002 first quarter as compared
to the 2001 first quarter due to a 7% increase in the United States, and a 19%
increase internationally. Geographically, oilfield services North America
revenues decreased 21%, reflecting market conditions and weak rig activity.
International revenues were strong in the 2002 first quarter, with a 11%
increase over 2001. Europe/Africa revenues increased 28%. Asia Pacific revenue
increased almost 20%. Middle East oilfield service revenues were up over 12%.
Revenues were slightly lower in Latin America due to an oil workers strike in
Venezuela and the impact of the Argentina economic crisis.
Revenues for the balance of the segment increased $30 million for the
2002 first quarter as compared to the 2001 first quarter, with the largest
increase attributable to a major project in Brazil. Integrated exploration and
production information systems revenues experienced growth of 14%, primarily due
to increased professional services as a result of the PGS Data Management
acquisition. Increased revenues were partially offset by a decrease in
Surface/Subsea revenue, as many of the projects were completed in 2001 and
delays in new project awards.
Engineering and Construction Group revenues of $1 billion in the 2002
first quarter were 8% lower than the 2001 first quarter. The revenue decline is
primarily caused by the weakened economy and completion of several major
projects. Several major contracts were awarded in late 2001 and early 2002, but
no significant revenue is expected from these projects until late 2002. Offshore
operations were further impacted by the reduced activity in the Gulf of Mexico.
Government operations were basically flat for the 2002 first quarter as compared
to the 2001 first quarter, as the logistical support contract in the Balkans
remains in the sustainment phase and activity at the Devonport shipyards was
about the same as the previous year. International revenues were 71% for both
the first quarter of 2002 and 2001. Revenue declined in all geographic regions
other than Europe/Africa, which posted a moderate improvement.
24
First Quarter
OPERATING INCOME -------------------------- Increase
Millions of dollars 2002 2001 (decrease)
- -------------------------------------------------------------------------------------
Energy Services Group $ 162 $ 200 $ (38)
Engineering and Construction Group 31 18 13
General corporate (70) (20) (50)
- -------------------------------------------------------------------------------------
Total operating income $ 123 $ 198 $ (75)
=====================================================================================
Consolidated operating income of $123 million was 38% lower in the 2002
first quarter compared to the 2001 first quarter. In the 2002 first quarter, we
incurred some nonrecurring items, which included:
- $108 million pretax gain in the Energy Services Group on the sale
of our 50% interest in European Marine Contractors;
- $98 million pretax expense in the Energy Services Group related to
the judgment in the BJ Services patent infringement case;
- $80 million write-off of billed and accrued receivables related to
the Highlands Insurance Company litigation in General corporate;
- $11 million pretax for severance related actions as part of our
planned reorganization of which $5 million related to the
Energy Services Group, $4 million related to the Engineering and
Construction Group and $2 related to General corporate; and
- $28 million pretax gain for the value of stock received from the
demutalization of an insurance provider in General corporate.
In the 2001 first quarter, we incurred $11 million in goodwill amortization of
which $7 million related to the Energy Services Group and $4 million related to
the Engineering and Construction Group. Excluding these items, operating income
decreased by 16%.
Energy Services Group operating income for the 2002 first quarter
decreased $38 million, or 19%, from the 2001 first quarter. Excluding the gain
on the sale of our interest in European Marine Contractors Ltd., the accrued
judgment associated with the BJ Services patent infringement case, severance
charges, and goodwill amortized in the first quarter of 2001, operating income
decreased by 24%. The declining results were significantly impacted by the
slower United States economy, lower gas drilling activity primarily in the
United States onshore operations and increased discount rates. Operating income
for our oilfield services product service line decreased 71% for the 2002 first
quarter as compared to the 2001 first quarter. Excluding the nonrecurring items,
the decline was approximately 18%. Operating income for the pressure pumping
product service line declined by approximately 28% and drilling fluids decreased
by slightly over 30% in the 2002 first quarter, as compared to the 2001 first
quarter. Increased activity in Europe/Africa contributed to higher operating
income for the drilling systems and completion products product service lines.
Drilling systems operating income almost tripled due to this increased activity
and the revenues from Geo-Pilot (TM). Geographically, all international regions
experienced significant improvements with the largest increase in Europe/Africa.
Excluding the sale of our portion of a joint venture, operating income for the
remainder of the segment decreased $8 million primarily due to revised profit
estimates on a major project.
Engineering and Construction Group operating income increased $13
million, or 72%, from the 2001 first quarter to the 2002 first quarter. Despite
the decrease in revenue, our operating margin was almost 1.5% higher in the 2002
first quarter as compared to the 2001 first quarter, and only slightly below our
average for 2001. Onshore operations were substantially higher due to technology
sales that report higher margins and improved performance on several projects.
The increase was partially offset by lower operating income in other product
lines consistent with reduced revenues. Restructuring charges of $4 million
pretax were incurred in the 2002 first quarter, as a result of the planned legal
reorganization.
General corporate expenses for the 2002 first quarter were $70 million
compared to $20 million for the 2001 first quarter. During the 2002 first
quarter, we have written off approximately $35 million in accounts receivable
for amounts paid for claims and defense costs and $45 million of accrued
receivables in relation to estimated insurance recoveries as we were
unsuccessful in our appeal of the Highlands insurance litigation. In addition,
we recorded a $28 million pretax gain on the value of stock received from the
demutalization of an insurance provider.
25
NONOPERATING ITEMS
Interest expense of $32 million for the 2002 first quarter, decreased
$15 million compared to the 2001 first quarter. The decrease is due to lower
average borrowings in 2002, partially offset by the $4 million in interest
related to the BJ Services litigation.
Interest income was $4 million in the first quarter of 2002 and 2001.
Foreign exchange losses, net were $8 million in the current year
quarter compared to $3 million in the first quarter of last year. The increase
is due to the continuing economic and financial crisis in Argentina.
Other, net of $4 million in the 2002 first quarter, includes $3 million
pretax gain associated with the increase on the option component of the European
Marine Contractors Ltd. sale.
Provision for income taxes of $36 million resulted in an effective tax
rate of 39.6%, down slightly from the 2001 first quarter rate of 40.1%.
Income from continuing operations was $50 million in the 2002 first
quarter, compared to $86 million in the 2001 first quarter.
Income (loss) from discontinued operations was a $28 million loss, or
$0.07 per diluted share, for the 2002 first quarter compared to income of $22
million, or $0.05 per diluted share, for the 2001 first quarter. The loss in the
2002 first quarter, includes a $26 million after-tax payment in connection with
Harbison-Walker's bankruptcy filing. Income for the 2001 first quarter
represents the results of Dresser Equipment Group.
Cumulative effect of change in accounting method, net of $1 million in
the 2001 first quarter, reflects the impact of adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities".
Net income for the 2002 first quarter was $22 million, or $0.05 per
diluted share. Net income was $109 million, or $0.25 per diluted share for the
2001 first quarter.
LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2002 with cash and equivalents of $266
million, a decrease of $24 million from the end of 2001.
Cash flows from operating activities provided $155 million in the first
quarter of 2002 compared to $166 million in the first quarter of 2001. Working
capital items, which include receivables, inventories, accounts payable and
other working capital, net, used $46 million of cash in the first quarter of
2002 compared to $90 million in the same period of 2001. Included in changes to
other operating activities for the first quarter of 2002 is a $40 million
payment related to the Harbison-Walker bankruptcy filing. Included in other
working capital, net and other operating activities are special charge usages
for personnel reductions, facility closures, merger transaction costs, and
integration costs of $10 million in the first quarter of 2001.
Cash flows used in investing activities were $77 million in the first
quarter of 2002 and $300 million in the same period of 2001. Capital
expenditures of $235 million in the first quarter of 2002 were about 62% higher
than in the first quarter of 2001. Capital spending in the first quarter of 2002
continued to be primarily directed to Halliburton Energy Services, for
fracturing equipment and directional and logging-while-drilling tools. We also
invested $60 million in integrated solutions projects. Dispositions of
businesses in the first quarter of 2002 include $115 million collected from the
sale of our European Marine Contractors Ltd. joint venture as well as a $19
million contingent payment. In the first quarter of 2001 we acquired PGS Data
Management division of Petroleum Geo-Services ASA for $164 million cash.
Cash flows from financing activities used $93 million in the first
quarter of 2002. In the first quarter of 2001, financing activities provided
$219 million. Proceeds from exercises of stock options provided cash flows of
$19 million in the first quarter of 2001. Dividends to shareholders used $54
million of cash in the first quarter of 2002 and 2001.
Cash flows from discontinued operations used $24 million in the first
quarter of 2001.
26
Capital resources from internally generated funds and access to capital
markets are sufficient to fund our working capital requirements and investing
activities. Our combined short-term notes payable and long-term debt was 24% of
total capitalization at March 31, 2002 and December 31, 2001. We currently have
$26 million in restricted cash included in other current assets. See Note 5. In
addition, on April 15, 2002, we entered into an agreement to sell accounts
receivable to provide additional liquidity. See Note 13.
Late in 2001 and early in 2002, Moody's Investors' Services lowered its
ratings of our long-term senior unsecured debt to Baa2 and our short-term credit
and commercial paper ratings to P-2. In addition, Standard & Poor's lowered its
ratings of our long-term senior unsecured debt to A- and our short-term credit
and commercial paper ratings to A-2. The ratings were lowered due to the
agencies' concerns about asbestos litigation and the general weakening in the
oilfield services sector. Although the long-term ratings continue at investment
grade levels and the short-term ratings allow participation in the commercial
paper market, the cost of new borrowing is higher and our access to the debt
markets is more volatile at the new rating levels. Reduced ratings and concerns
about asbestos litigation, along with recent changes in the banking and
insurance markets, will also result in higher cost and more limited access to
markets for other credit products including letters of credit and surety bonds.
At this time, it is not possible to compute the increased costs of credit
products we may need in the future but it is not expected to be material based
upon the current forecast of our credit needs.
We have $700 million of committed lines of credit from banks that are
available if we maintain an investment grade rating. Investment grade ratings
are BBB- or higher for Standard & Poor's and Baa3 or higher for Moody's
Investors' Services and we are currently above these levels. As of March 31,
2002, no amounts have been borrowed under these lines.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory
requirements related to our operations worldwide. As a result of those
obligations, we are involved in environmental litigation and claims, the
clean-up of properties we own or have operated, and efforts to meet or correct
compliance-related matters.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, some member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (euro). This was the first step towards
transition from existing national currencies to the use of the euro as a common
currency. Euro notes and coins were introduced on January 1, 2002 and the
transition period for the introduction of the euro ended February 28, 2002.
Issues resulting from the introduction of the euro include converting
information technology systems, reassessing currency risk, negotiating and
amending existing contracts and processing tax and accounting records. We
addressed these issues before December 31, 2001. In addition, our operations in
the eurozone countries began transacting most of their businesses in euros
before December 31, 2001. Thus far in 2002, we have not experienced any major
issues related to converting to the euro and do not anticipate any material
impacts in the future.
ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143 "Accounting for Asset Retirement Obligations" which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated assets' retirement
costs. The new standard will be effective for us beginning January 1, 2003, and
we are currently reviewing and evaluating the effects this standard will have on
our future financial condition, results of operations, and accounting policies
and practices.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This
statement supercedes:
- SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of"; and
27
- the accounting and reporting provisions of APB 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, Extraordinary, Unusual and Infrequently
Occurring Events and Transactions".
The new standard was effective for us beginning January 1, 2002, and we do not
believe the effects of this standard will have a material effect on our future
financial condition or operations.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like "may," "may
not," "believes," "do not believe," "expects," "do not expect," "do not
anticipate," and similar expressions. We may also provide oral or written
forward-looking information in other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and the results of operations may vary materially.
While it is not possible to identify all factors, we continue to face
many risks and uncertainties that could cause actual results to differ from our
forward-looking statements including:
Legal
- asbestos litigation including the recent judgments against us
and related appeals;
- asbestos-related insurance litigation;
- other litigation, including, for example, contract disputes,
patent infringements and environmental matters;
- trade restrictions and economic embargoes imposed by the
United States and other countries;
- changes in governmental regulations in the numerous countries
in which we operate including, for example, regulations that:
- encourage or mandate the hiring of local
contractors; and
- require foreign contractors to employ citizens of, or
purchase supplies from, a particular
jurisdiction; and
- environmental laws, including, for example, those that require
emission performance standards for facilities;
Geopolitical
- unsettled political conditions, war, the effects of terrorism,
civil unrest, currency controls and governmental actions in
the numerous countries in which we operate;
- operations in countries with significant amounts of political
risk, including, for example, Algeria, Angola, Argentina,
Libya, Nigeria, Russia, and Venezuela; and
- changes in foreign exchange rates and exchange controls as
were experienced in Argentina in late 2001 and early 2002;
Liquidity
- reductions in debt ratings by rating agencies such as our
recent reductions by Standard & Poor's and Moody's Investors'
Services;
- access to lines of credit and credit markets;
- ability to issue letters of credit; and
- ability to raise capital via the sale of stock;
Weather related
- the effects of severe weather conditions, including, for
example, hurricanes and typhoons, on offshore operations and
facilities; and
- the impact of prolonged severe or mild weather conditions on
the demand for and price of oil and natural gas;
28
Customers
- the magnitude of governmental spending and outsourcing for
military and logistical support of the type that we provide,
including, for example, support services in Bosnia;
- changes in capital spending by customers in the oil and gas
industry for exploration, development, production, processing,
refining, and pipeline delivery networks;
- changes in capital spending by governments for infrastructure
projects of the sort that we perform;
- consolidation of customers in the oil and gas industry such as
the recent merger of Conoco and Phillips Petroleum; and
- claim negotiations with engineering and construction customers
on cost variances and change orders on major projects;
Industry
- technological and structural changes in the industries that we
serve;
- changes that impact the demand for oil and gas such as the
slowdown in the global economy following the terrorist attacks
on the United States on September 11, 2001;
- changes in the price of oil and natural gas, resulting from:
- OPEC's ability to set and maintain production levels
and prices for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration for
and production and development of their oil and
natural gas reserves; and
- the level of demand for oil and natural gas,
especially natural gas in the United States where
demand is currently below last years' usage; and
- changes in the price or the availability of commodities that
we use;
- risks that result from entering into fixed fee engineering,
procurement and construction projects, such as the Barracuda-
Caratinga project in Brazil, where failure to meet schedules,
cost estimates or performance targets could result in
non-reimbursable costs which cause the project not to meet our
expected profit margins or incur a loss;
- risks that result from entering into complex business
arrangements for technically demanding projects where failure
by one or more parties could result in monetary penalties; and
- the risk inherent in the use of derivative instruments of the
sort that we use which could cause a change in value of the
derivative instruments as a result of:
- adverse movements in foreign exchange rates, interest
rates, or commodity prices; or
- the value and time period of the derivative being
different than the exposures or cash flows being
hedged;
Personnel and mergers/reorganizations/dispositions
- increased competition in the hiring and retention of employees
in specific areas, including, for example, energy services
operations, accounting and finance;
- integration of acquired businesses into Halliburton, such as
our 2001 acquisitions of Magic Earth, Inc. and PGS Data
Management, including:
- standardizing information systems or integrating data
from multiple systems;
- maintaining uniform standards, controls, procedures
and policies; and
- combining operations and personnel of acquired
businesses with ours;
- effectively restructuring operations and personnel within
Halliburton such as the reorganization of our engineering and
construction business in early 2001 and the recently announced
segregation of our business into two separate legal entities;
- ensuring acquisitions and new products and services add value
and complement our core businesses; and
- successful completion of planned dispositions.
29
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. You should review any additional
disclosures we make in our press releases and Forms 10-Q, 8-K and 10-K to the
United States Securities and Exchange Commission. We also suggest that you
listen to our quarterly earnings release conference calls with financial
analysts.
30
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
We are exposed to financial instrument market risk from changes in
foreign currency exchange rates, interest rates and to a limited extent,
commodity prices. We selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these exposures. The
objective of our risk management is to protect our cash flows related to sales
or purchases of goods or services from market fluctuations in currency rates.
Our use of derivative instruments includes the following types of market risk:
- volatility of the currency rates;
- time horizon of the derivative instruments;
- market cycles; and
- the type of derivative instruments used.
We do not use derivative instruments for trading purposes. We do not
consider any of these risk management activities to be material.
31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
Date of
Date Filed Earliest Event Description of Event
- -------------------------------------------------------------------------------------------------------------------
During the first quarter of 2002:
January 4, 2002 January 4, 2002 Item 5. Other Events for a press release denying rumors.
January 8, 2002 July 16, 2001 Item 5. Other Events for a press release detailing the terms of
the $275 million fixed-rate note due August 1, 2006 and $150
million of floating notes due July 16, 2003.
January 28, 2002 January 23, 2002 Item 5. Other Events for a press release announcing 2001 fourth
quarter earnings.
January 28, 2002 January 23, 2002 Item 5. Other Events for a press release announcing Moody's
Investors' Services continued credit rating at investment grade.
February 1, 2002 January 30, 2002 Item 5. Other Events for a press release announcing A-/A2 credit
ratings reaffirmed by Standard & Poor's.
February 13, 2002 February 7, 2002 Item 5. Other Events for a press release announcing that Kellogg
Brown & Root, Inc. settled Qui Tam lawsuit.
February 15, 2002 February 13, 2002 Item 5. Other Events for a press release announcing the Board of
Directors declared a 2002 first quarter dividend of 12.5 cents a
share payable March 21, 2002 to shareholders of record at the
close of business on February 28, 2002. The annual meeting of
shareholders was set for May 15, 2002 in Dallas, Texas.
February 15, 2002 February 14, 2002 Item 5. Other Events for a press release announcing that a U.S.
Bankruptcy Court has issued a temporary restraining order staying
certain pending asbestos claims.
February 27, 2002 February 22, 2002 Item 5. Other Events for a press release announcing that the U.S.
Bankruptcy Court restraining order on staying certain pending
asbestos claims has extended the time period of such stay until
April 4, 2002.
32
Date of
Date Filed Earliest Event Description of Event
- ---------------------------------------------------------------------------------------------------------------------
March 14, 2002 March 14, 2002 Item 5. Other Events for a press release affirming the judgment of
the Court of Chancery in the litigation with Highlands.
March 21, 2002 March 19, 2002 Item 5. Other Events for a press release announcing John Gibson as
President of Halliburton Energy Services.
During the second quarter of 2002:
April 15, 2002 April 12, 2002 Item 5. Other Events for a press release announcing a verdict
rendered against Halliburton in a patent infringement case by BJ
Services Company.
April 18, 2002 April 17, 2002 Item 5. Other Events for a press release announcing KPMG LLP as
independent auditors for the year ending December 31, 2002.
33
SIGNATURES
As required by the Securities Exchange Act of 1934, the registrant has
authorized this report to be signed on behalf of the registrant by the
undersigned authorized individuals.
HALLIBURTON COMPANY
Date: May 8, 2002 By: /s/ Douglas L. Foshee
-------------------- ----------------------------------
Douglas L. Foshee
Executive Vice President and
Chief Financial Officer
/s/ R. Charles Muchmore, Jr.
----------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller and
Principal Accounting Officer
34