SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (date of earliest event reported)
SEPTEMBER 29, 1998
Halliburton Company
(Exact name of registrant as specified in its charter)
State or other Commission IRS Employer
jurisdiction File Number Identification
of incorporation Number
Delaware 1-3492 No. 75-2677995
3600 Lincoln Plaza
500 North Akard Street
Dallas, Texas 75201-3391
(Address of principal executive offices)
Registrant's telephone number,
including area code - 214/978-2600
INFORMATION TO BE INCLUDED IN REPORT
Item 2. Acquisition or Disposition of Assets
On September 29, 1998, Halliburton Company ("Halliburton") completed
the acquisition of Dresser Industries, Inc. ("Dresser") pursuant to the
Agreement and Plan of Merger dated as of February 25, 1998 by and among
Halliburton, Halliburton N.C., Inc., a wholly owned direct subsidiary of
Halliburton ("Merger Sub"), and Dresser (the "Merger Agreement"). Pursuant to
the Merger Agreement, Merger Sub was merged (the "Merger") with and into
Dresser, with Dresser surviving as a subsidiary of Halliburton. As a result of
the merger, each outstanding share of Dresser common stock, par value $0.25 per
share ("Dresser Common Stock"), has been converted into the right to receive one
(1.0) share of Halliburton common stock, par value $2.50 per share ("Halliburton
Common Stock"). In the aggregate, Halliburton is issuing approximately 176
million shares of Halliburton Common Stock in exchange for the Dresser Common
Stock. The exchange ratio of 1.0 to 1.0 was determined by negotiations among
Halliburton and Dresser. In addition, as part of the Merger, Halliburton is
reserving approximately 7.3 million shares of Halliburton Common Stock in
exchange for certain rights relating to Dresser's employee and directors plans.
There were no material relationships between Halliburton and Dresser prior to
the consummation of the merger.
The Company sold its 36% ownership interest in M-I L.L.C. ("M-I") to
Smith International, Inc. ("Smith") on August 31, 1998. This transaction
completed Halliburton's commitment to the United States Department of Justice
("DOJ") to sell its M-I interest in connection with the Merger. The purchase
price of $265 million was paid by Smith in the form of a non-interest bearing
promissory note due 240 days from the date of the closing. All of M-I's debt
remains an obligation of M-I. In connection with the Merger, the Company entered
into a consent decree with the DOJ requiring divestiture of Halliburton's
current worldwide logging-while-drilling ("LWD") business. In 1997 the affected
business had revenues of less than $50 million, or approximately 0.4% of the
combined revenues of Halliburton and Dresser. Halliburton's existing directional
drilling service line and Dresser's Sperry-Sun division are not impacted by the
decree. While Halliburton agreed in the consent decree to divest one-half of its
sonic LWD tools, it will continue to provide customers with sonic LWD services
using its existing sonic technologies. The consent decree requires Halliburton
to divest such LWD business by March 28, 1999.
Dresser, which was previously publicly traded, is a leading global
supplier to the total hydrocarbon energy stream. Dresser's product and service
offerings encompass sophisticated drilling and well construction systems as well
as technologies, engineered equipment and project management for the
transportation and conversion of oil and natural gas. Halliburton currently
intends to continue Dresser's business activities.
Item 7. Financial Statements and Exhibits
List below the financial statements, financial information and
exhibits, if any, filed as part of this report.
(c) Exhibits
2(a) Agreement and Plan of Merger, dated as of February 25, 1998, among
Halliburton Company, Halliburton N.C., Inc. and Dresser Industries,
Inc. (incorporated by reference to Exhibit C to Halliburton Company's
Schedule 13D filed on March 9, 1998)
2(b) Stock Option Agreement dated as of February 25, 1998, among Halliburton
Company and Dresser Industries, Inc. (incorporated by reference to
Exhibit B to Halliburton Company's Schedule 13D filed on March 9, 1998)
23(a)* Consent of Arthur Andersen LLP
23(b)* Consent of PricewaterhouseCoopers LLP
27(a)* Financial data schedules for the twelve months ended December 31, 1995
27(b)* Financial data schedules for the three, six, nine, and twelve months
ended December 31, 1996
27(c)* Financial data schedules for the three, six, nine, and twelve months
ended December 31, 1997
27(d)* Financial data schedules for the three and six months ended June 30,
1998
99(a)* Supplemental financial statements for Halliburton Company for the three
years ended December 31, 1997 and six months ended June 30, 1998
99(b) Annual Report on Form 10-K of Dresser Industries, Inc. for the year
ended October 31, 1997 (incorporated by reference to the filing by
Dresser for its fiscal year ended October 31, 1997 filed January 27,
1998)
99(c) Amendment No. 1 to Form 10-K of Dresser Industries, Inc. for the year
ended October 31, 1997 (incorporated by reference to the filing by
Dresser on Form 10-K/A filed April 16, 1998)
99(d)* Report of independent accountants, PricewaterhouseCoopers LLP
99(e) Annual Report on Form 10-K of Halliburton Company for the year ended
December 31, 1997 (incorporated by reference to the filing by
Halliburton for its year ended December 31, 1997 filed February 24,
1998)
99(f) Amendment No. 1 to Form 10-K of Halliburton Company for the year ended
December 31, 1997 (incorporated by reference to the filing by
Halliburton on Form 10-K/A filed March 18, 1998)
* Filed with this Form 8-K/A
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HALLIBURTON COMPANY
October 23, 1998 By: /s/ Gary V. Morris
----------------------------------
Gary V. Morris
Executive Vice President
and Chief Financial Officer
/s/ R. Charles Muchmore, Jr.
-------------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller
Index to exhibits filed with this current report.
Exhibit
Number Description
- ------- --------------------
23(a) Consent of Arthur Andersen LLP
23(b) Consent of PricewaterhouseCoopers LLP
27(a) Financial data schedules for the twelve months ended December 31, 1995
27(b) Financial data schedules for the three, six, nine and twelve months
ended December 31, 1996
27(c) Financial data schedules for the three, six, nine and twelve months
ended December 31, 1997
27(d) Financial data schedules for the three and six months ended June 30,
1998
99(a) Supplemental financial statements for Halliburton Company for the
three years ended December 31, 1998 and six months ended June 30,
1998
99(d) Report of independent accountants, PricewaterhouseCoopers LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants we hereby consent to the incorporation by
reference in this Form 8-K of our report dated January 22, 1998 (except with
respect to the matter discussed in Note 17, as to which the date is February 26,
1998) included in Form 10-K of Halliburton Company for the year ended December
31, 1997.
ARTHUR ANDERSEN LLP
Dallas, Texas
October 23, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-65777, 33-
65772, and 333-32731) and the Registration Statements on Form S-8 (Nos.
33-54881, 333-40717, 333-37533, 333-13475, 333-65373, and 333-55747) of
Halliburton Company of our report dated November 26, 1997 appearing on page 27
of Dresser Industries, Inc.'s Annual Report on Form 10-K for the year ended
October 31, 1997 and included as Exhibit 99(d) of this Current Report on Form
8-K.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
October 23, 1998
5
1000000
USD
12-mos
Dec-31-1995
Jan-1-1995
Dec-31-1995
1
489
0
2487
63
1065
4387
5995
3710
8569
2910
659
0
0
554
3023
8569
3850
11512
0
10148
0
0
95
730
247
462
66
0
16
381
0.88
0.88
5
1000000
USD
3-mos 6-mos 9-mos 12-mos
Dec-31-1996 Dec-31-1996 Dec-31-1996 Dec-31-1996
Jan-1-1996 Jan-1-1996 Jan-1-1996 Jan-1-1996
Mar-31-1996 Jun-30-1996 Sep-30-1996 Dec-31-1996
1 1 1 1
317 271 254 446
0 0 0 0
2591 2712 2805 2854
0 0 0 0
1132 1194 1224 1206
4452 4596 4911 4868
6043 6157 6269 6398
3753 3796 3834 3844
8651 8945 9434 9587
3037 3201 3738 3367
658 662 658 956
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0 0 0 0
554 554 554 554
3184 3245 3199 3187
8651 8945 9434 9587
0 0 0 4352
3168 6629 10126 13947
0 0 0 0
3113 6450 9813 12422
0 0 0 0
0 0 0 0
15 32 52 85
145 347 514 831
52 120 138 248
93 221 365 558
0 0 0 0
0 0 0 0
0 0 0 0
92 221 365 558
0.21 0.51 0.85 1.30
0.21 0.51 0.84 1.29
5
1000000
USD
3-mos 6-mos 9-mos 12-mos
Dec-31-1997 Dec-31-1997 Dec-31-1997 Dec-31-1997
Jan-1-1997 Jan-1-1997 Jan-1-1997 Jan-1-1997
Mar-31-1997 Jun-30-1997 Sep-30-1997 Dec-31-1997
1 1 1 1
285 194 217 384
0 0 0 0
2809 3267 3421 3388
0 0 0 0
1218 1292 1315 1299
4671 5133 5345 5443
6536 6694 6700 6646
3890 3971 3976 3880
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3058 3525 3523 3460
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0 0 0 0
0 0 0 0
556 1113 1134 1134
3458 3256 3338 3183
9550 10218 10466 10702
0 2238 0 4857
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0 0 0 0
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51 0 0 0
0 0 0 0
23 50 80 111
226 523 868 1313
83 195 325 491
135 312 514 772
0 0 0 0
0 0 0 0
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135 312 514 772
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0.31 0.72 1.19 1.77
5
1000000
USD
3-mos 6-mos
Dec-31-1998 Dec-31-1998
Jan-1-1998 Jan-1-1998
Mar-31-1998 Jun-30-1998
1 1
270 281
0 0
3525 3718
0 0
1390 1456
5617 5859
6805 6952
3958 4012
10989 11371
3671 3857
1296 1285
0 0
0 0
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3299 3479
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1005 2119
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0 0
0 0
29 61
338 748
127 281
204 447
0 0
0 0
0 0
204 447
0.46 1.02
0.46 1.01
HALLIBURTON COMPANY
Supplemental Financial Statements
Index
Page No.
Management's Discussion and Analysis of Financial Condition and Results of Operations 3-15
Supplemental Annual Financial Statements
(Audited)
Report of Independent Public Accountants 16
Supplemental Annual Consolidated Financial Statements
Statements of Income for the years ended December 31, 1997, 1996 and 1995 17
Balance Sheets at December 31, 1997 and 1996 18
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 19
Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 20-21
Notes to Financial Statements (List of Notes on Page 2) 22-43
Supplemental Selected Financial Data 44-46
Supplemental Quarterly Data and Market Price Information for the years ended December 31,
1997 and 1996 (Unaudited) 47
Supplemental Quarterly Financial Statements
(Unaudited)
Supplemental Quarterly Condensed Consolidated Financial Statements
Statements of Income for the three and six months ended June 30, 1998 and 1997 48
Balance Sheets at June 30, 1998 and December 31, 1997 49
Statements of Cash Flows for the six months ended June 30, 1998 and 1997 50
Notes to Financial Statements (List of Notes on Page 2) 51-54
Financial Data Schedules
Financial data schedules (included only in the copy of this report filed
electronically with the Commission) for the following periods:
Twelve months ended December 31, 1995
Three, six, nine, and twelve months ended December 31, 1996
Three, six, nine, and twelve months ended December 31, 1997
Three and six months ended June 30, 1998
1
HALLIBURTON COMPANY
List Of Notes To Supplemental Annual Consolidated
Financial Statements
(Audited)
NOTE Page No.
1. Significant accounting policies 22
2. Acquisitions and dispositions 24
3. Business segment information 26
4. Inventories 28
5. Related companies 28
6. Lines of credit, notes payable and long-term debt 29
7. Dresser financial information 30
8. Commitments and contingencies 31
9. Income per share 32
10. Property, plant and equipment 33
11. Special charges 33
12. Income taxes 34
13. Common stock 36
14. Series A junior participating preferred stock 38
15. Financial instruments and risk management 38
16. Retirement plans 39
17. Discontinued operations 42
List Of Notes To Supplemental Quarterly Condensed Consolidated
Financial Statements
(Unaudited)
NOTE Page No.
1. Management representations 51
2. Acquisitions and dispositions 51
3. Business segment information 52
4. Inventories 52
5. Related companies 52
6. Long-term debt 52
7. Dresser financial information 53
8. Commitments and contingencies 53
9. Income per share 54
10. Comprehensive income 54
2
HALLIBURTON COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
HALLIBURTON / DRESSER MERGER
On September 29, 1998, the Merger between Halliburton and Dresser was
completed. See Note 2 to the supplemental annual consolidated financial
statements. Dresser is a diversified company with operations in three business
segments: Petroleum Products and Services; Engineering Services; and Energy
Equipment. Prior to the Merger, the Company operated in two business segments,
the Energy Group and the Engineering and Construction Group. Following the
Merger, the Company will be organized around three business segments: Energy
Services Group; Engineering and Construction Group; and Dresser Equipment Group.
After the Merger the Company's operations cover a broad spectrum of
energy services, engineering, construction and maintenance services, and energy
equipment. The Energy Services Group now includes the operations of the
Company's Energy Group and Dresser's Petroleum Products and Services. The new
Energy Services Group will combine Halliburton's strengths in pressure pumping,
cementing, production enhancement, and completion products and services with
Dresser's strengths in drilling services, drilling fluids, drill bits, and
completion activities. The Energy Services Group also provides upstream oil and
gas engineering, construction and maintenance services, information systems and
professional services along with the integration of products, services, and
technologies to offer integrated solutions for the development of oil and gas
fields, specialty pipecoating and insulation services, and underwater
engineering services including remotely operated vehicles and non-bonded
flexible pipe.
Dresser's Engineering Services becomes a part of the Engineering and
Construction Group. The new Engineering and Construction Group will combine
Brown & Root's expertise in civil infrastructure projects, chemical plants,
refineries, pulp and paper mills and petrochemical plants complemented with M.W.
Kellogg's expertise in technology, engineering, design expertise and
construction in oil and gas production projects, liquefied natural gas (LNG)
projects, olefins, refinery projects and fertilizer plants.
Dresser's Energy Equipment segment continues as Dresser Equipment
Group. Dresser Equipment Group encompasses the operating divisions that design,
manufacture, and market highly engineered products and systems used by the
energy industry to complete the process of finding, extracting, processing, and
delivering petroleum and its related products.
Under the Merger agreement each outstanding share of Dresser common
stock was exchanged for Halliburton common stock at a one-for-one exchange
ratio. The Merger qualified as a tax-free exchange to Dresser's shareholders for
U.S. federal income tax purposes and has been accounted for using the pooling of
interests method of accounting for business combinations. Accordingly, all prior
period results of operations, financial condition and liquidity have been
restated to include Dresser as though it had always been a part of the Company.
Beginning in 1998, Dresser's year-end of October 31 has been conformed to
Halliburton's calendar year-end. Periods through December 1997 contain Dresser's
information on a fiscal year-end basis combined with Halliburton's information
on a calendar year-end basis.
BUSINESS ENVIRONMENT
The Company operates in over 100 countries around the world to provide
a variety of energy services, energy equipment and engineering and construction
services to energy, industrial and governmental customers. The industries served
by the Company are highly competitive with many substantial competitors.
Operations in some countries may be affected by unsettled political conditions,
expropriation or other governmental actions, exchange controls and currency
devaluations. The Company believes the geographic diversification of its
business activities reduces the risk that loss of its operations in any one
country would be material to its consolidated results of operations.
The majority of the Company's revenues are derived from the sale of
services and products, including construction activities, to the energy
industry. The Company offers a comprehensive range of integrated and discrete
services and products as well as project management for oil and natural gas
activities throughout the world. The decline in oil prices in the first half of
1998 caused a decrease in the worldwide average rotary drilling rig count and
hesitation on the part of some customers of the Company to commit to longer-term
projects. In response to potentially weakening markets in some areas of the
world, the Company is implementing plans to reduce the number of employees in
those geographic areas where activity levels are lower than anticipated at the
beginning of 1998, to scale back discretionary spending on capital expenditures
and to curtail discretionary travel and other expenses. The Company will also
reduce its workforce and rationalize assets to eliminate duplicate resources in
connection with the Merger.
3
According to the International Monetary Fund, the global economic
growth rate for 1998 is projected to be lower than 1997 due to the effects of
financial difficulties in several countries. Through the first half of 1998, the
Asian economies have continued to struggle and Russian financial problems have
unsettled many industries. In addition, depressed oil prices have slowed the
economies of many developing countries. Oil and gas prices, global and regional
economic growth rates and the resulting demand for products created from
hydrocarbons affect the spending decisions of the Company's customers. Despite
the current economic uncertainties, over the long-term the Company believes
steadily rising population and greater industrialization efforts will continue
to propel global growth, particularly in developing nations. These factors will
also cause increasing demand for oil and natural gas to supply growing needs for
refined products, petrochemicals, fertilizers, and power.
Energy Services Group. In 1997, the oilfield services industry
experienced a year of exceptional growth with customers worldwide expanding
their petroleum exploration, development and production activities. This
increase was in response to a combination of factors including relatively higher
crude oil and natural gas prices early in 1997, an expectation by customers of
continued improvement in the long-term demand for petroleum and the availability
of investment opportunities with good economic potential. In 1997, predictions
of 1998 worldwide oil and gas exploration and production activities indicated
spending was to grow by 10.9%. This outlook was based on West Texas Intermediate
crude oil prices of $19.23/bbl and United States gas prices of $2.19/mcf. These
predictions have since proved to be overly optimistic. Crude oil and natural gas
price declines beginning late in 1997 and continuing through the first half of
1998 have affected the short-term activities for the oilfield services industry
by reducing or delaying customer spending and increasing discounting of prices.
However, the Company believes its customers will continue to seek opportunities
to lower the overall cost of exploring, developing and enhancing the recovery of
hydrocarbons through increased utilization of integrated solutions, partnering
and alliance arrangements as well as the application of new technology.
The rate of growth experienced by the oilfield services industry in
1997 will not be repeated in 1998. However, the Company believes that long-term
hydrocarbon supply and demand fundamentals will eventually counterbalance
short-term spending delays. The Company believes the long-term outlook for the
oilfield services industry is positive due to expected growth in world demand
for energy combined with production declines in existing oil and gas reserves.
The Company believes that it has good opportunities to expand its revenues and
profit through greater participation in larger projects that allow it to utilize
its project management and integrated services capabilities.
Engineering and Construction Group. Engineering and construction
industry marketing reports in late 1997 indicated that global demand for
engineering and construction services during 1998 might be less robust than
during 1997 due in part to uncertainty in the Asia Pacific region. However, the
Company expects to see demand for such services increase over time. The Company
believes the keys to increasing its revenues and improving profit margins in
slower growing markets will be its ability to partner with other service and
equipment suppliers and customers on larger projects, acceptance of more project
success risk through gain sharing or fixed price contracts, broadening its core
competencies, acquiring and fully utilizing proprietary technology and managing
costs. The Group's improved operating results in 1997 were the result of
focusing on these key factors. During 1997, the Engineering and Construction
Group reexamined its core competencies and decided to exit certain lines of
business that do not offer sufficient opportunity to achieve the Company's
profit objectives. This refocusing prompted the divestiture of the environmental
services business unit at the end of 1997 and a decision to exit certain highway
and paving activities over time. The Group will now focus on key markets in the
LNG, fertilizer, petroleum, chemical and forest products industries in the
United States and international locations. The Company also sees an expanding
market for its government services capabilities in the United States and the
United Kingdom as governmental agencies, including local government units,
continue to expand their use of outsourcing to improve service levels and manage
costs.
Dresser Equipment Group. The Dresser Energy Group's markets are
determined by activity levels within the energy industry. Oil and gas pricing is
the primary determinant in market activity and size. Although not directly
linked to these prices the resultant cash flow will provide funding for process
plant construction, pipeline construction, LNG development, gas transmission and
power generation. These activities are the major markets for the products and
services within the Dresser Energy Group. These markets will, in some cases,
lag the upstream activities.
4
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996 AND 1995
REVENUES
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Energy Services Group $ 8,504.7 $ 6,515.4 $ 5,307.7
Engineering and Construction Group 4,992.8 4,720.7 3,736.5
Dresser Equipment Group 2,779.0 2,710.5 2,467.4
- -----------------------------------------------------------------------------------------------------
Total revenues $16,276.5 $13,946.6 $11,511.6
- -----------------------------------------------------------------------------------------------------
Revenues for 1997 were $16,276.5 million, an increase of 17% over 1996
revenues of $13,946.6 million and an increase of 41% over 1995 revenues of
$11,511.6 million. Approximately 62% of the Company's consolidated revenues were
derived from international activities in 1997 compared with 59% in 1996 and 58%
in 1995.
Energy Services Group revenues were $8,504.7 million for 1997, an
increase of 31% over 1996 revenues of $6,515.4 million and an increase of 60%
over 1995 revenues of $5,307.7 million. The Energy Services Group's increase in
revenues outpaced the 15% increase in the worldwide average rotary rig count for
1997 compared to 1996 and the 23% increase in the worldwide average rotary rig
count for 1997 compared to 1995. Approximately two-thirds of the Energy Services
Group's revenues were derived from international activities each year in 1997,
1996 and 1995.
Engineering and Construction Group revenues were $4,992.8 million for
1997, an increase of 6% from 1996 revenues of $4,720.7 million and an increase
of 34% over 1995 revenues of $3,736.5 million. The increase in revenues
reflects LNG activities and oil recovery work in Africa, fertilizer activities
in Latin America along with the completion of several large projects. This
increase in revenues was aided by the consolidation of Devonport Management
Limited revenues as a result of the Company's increased ownership percentage in
that subsidiary. See Note 2 to the supplemental annual consolidated financial
statements for additional information. Lower levels of activity under service
contracts with the U.S. Department of Defense to provide technical and
logistical support for military peacekeeping operations in Bosnia resulted in
revenue reductions of approximately $294 million in 1997 compared to 1996.
Dresser Equipment Group revenues were $2,779.0 million in 1997, an
increase of 3% over 1996 revenues of $2,710.5 million, and an increase of 13%
over 1995 revenues of $2,467.4 million. Most of the increase in 1997 compared to
1996 came from the compressor joint venture with Ingersol-Rand and the
measurement product lines. In 1996 each of the Dresser Equipment Group's product
lines generated higher revenues compared to 1995. In addition, 1996 included a
full year's revenue of Grove S.p.A., which was acquired in June 1995.
5
OPERATING INCOME
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Energy Services Group $ 1,019.4 $ 698.0 $ 544.5
Engineering and Construction Group 219.0 134.0 96.6
Dresser Equipment Group 248.3 229.3 200.7
General corporate (71.8) (72.3) (70.8)
- -----------------------------------------------------------------------------------------------------------------
Operating income before special charges 1,414.9 989.0 771.0
Loss on sale of SubSea assets (9.7) - -
Merger costs associated with NUMAR acquisition (8.6) - -
Gain on extension of Bredero-Shaw joint venture agreement 41.7 - -
Restructuring charges applicable to Dresser-Rand and
Ingersoll-Dresser Pump joint ventures (18.0) - -
Write-down of assets with impaired values and
early retirement incentives (21.6) - -
Landmark write-off of acquired in-process research
and development - (11.3) (3.7)
Merger costs associated with Landmark acquisition - (12.4) -
Realignment of products and service lines and support services - (61.2) -
Landmark restructuring and merger costs - (0.9) (4.7)
- -----------------------------------------------------------------------------------------------------------------
Operating income $ 1,398.7 $ 903.2 $ 762.6
- -----------------------------------------------------------------------------------------------------------------
Operating income was $1,398.7 million for 1997 compared to $903.2
million for 1996 and $762.6 million for 1995. Excluding special charges of $16.2
million, $85.8 million and $8.4 million during 1997, 1996 and 1995,
respectively, operating income for 1997 increased by 43% over 1996 and by 84%
over 1995 as shown in the preceding table. See Note 11 to the supplemental
annual consolidated financial statements for additional information on the
special charges.
Excluding special charges noted above, approximately 59% of the
Company's consolidated operating income was derived from international
activities in 1997 compared to 67% for 1996 and 66% for 1995. Consolidated
international operating margins before special charges were 8.3% in 1997, 8.1%
in 1996 and 7.8% for 1995.
Energy Services Group operating income in 1997 was $1,019.4 million, an
increase of 46% over 1996 operating income of $698.0 million and an increase of
87% over 1995 operating income of $544.5 million. Operating margins were 12.0%
in 1997 compared with 10.7% in 1996 and 10.3% in 1995. Approximately 59%, 63%
and 65% of the Energy Services Group's operating income was derived from
international activities for 1997, 1996 and 1995, respectively. Operating income
in 1997 for the group's largest business unit, Halliburton Energy Services,
increased substantially due primarily to increased activity levels and increased
prices charged to customers for pressure pumping services in North America.
Operating income for drilling fluids increased in 1997 over 1996 and 1995 due to
market share gains and to the growth of higher quality wells being drilled,
particularly in the Gulf of Mexico. Operating income growth for Halliburton
Energy Services in 1996 over 1995 was due primarily to substantially increased
services provided in North America and Europe and, to a lesser degree, increases
in Latin America and the Middle East. Energy Services Group results for 1996
include $35 million of gain sharing revenue on the group's second largest
business unit, Brown & Root Energy Services, portion of the cost savings
realized on the BP Andrew alliance. The alliance completed the project seven
months ahead of the scheduled production of oil and achieved a $125 million
savings compared with the targeted cost. The effect of the gain sharing was
offset by a $20.7 million reduction in operating income due to lower activity
levels in 1996 compared to 1995 by Brown & Root Energy Services' 50% owned joint
venture, European Marine Contractors, Limited. Operating income from pipecoating
activities were substantially improved in 1997 compared to 1996 due to higher
activity levels in the Far East, Middle East and the United States. Increased
operating income for pipecoating activities in 1996 compared to 1995 was
primarily from a large contract in the North Sea awarded in the latter part of
1995 coupled with increased activity in the United States markets as the result
of an acquisition in 1995.
Engineering and Construction Group operating income for 1997 of $219
million increased 63% over 1996 and 127% over 1995. Operating margins were 4.4%
for 1997, 2.8% for 1996, and 2.6% for 1995. Improvement in operating income in
6
1997 over 1996 was realized through overhead reductions, a focus on higher
margin business lines and the consolidation of Devonport Management Limited as a
result of the Company's increased ownership percentage in that subsidiary. See
Note 2 to the supplemental annual consolidated financial statements. The 1997
operating income improvements over 1996 were aided by LNG activities and oil
recovery work in Africa together with fertilizer activities in Latin America.
Higher activity levels on projects in the United Kingdom, Uzbekistan, Africa and
the United States and increased operating income from support services in Bosnia
also contributed to 1996 operating income improvements over 1995. This increase
in 1996 operating income compared to 1995 was partially offset by a $17.1
million charge for the impairment of the Engineering and Construction Group's
investment in the Dulles Greenway toll road extension project.
Dresser Equipment Group operating income in 1997 was $248.3 million
for an increase of 8% over 1996 operating income of $229.3 million.
Operating income for 1997 increased 24% over 1995 operating income of $200.7
million. The increased operating income in 1997 compared to 1996 was primarily
attributable to the Ingersoll-Dresser Pump joint venture (profit improvement
initiatives started in prior years); Wayne fuel dispensing systems (introduction
of new technologies) and Energy Valve (improved margins and product mix). The
improved results in 1996 compared to 1995 were driven by results from
Dresser-Rand and Ingersoll-Dresser Pump (improved margins and cost control
initiatives) and higher earnings from flow control products (higher revenues and
a full year of earnings from Grove S.p.A.). These gains were partially offset by
lower earnings from Wayne fuel dispensing systems caused by pricing pressure and
increased software development costs.
General corporate expenses for 1997 have increased at a substantially
slower rate than overall growth in consolidated revenues, and as a percent of
revenues, have declined to 0.4% in 1997 from 0.5% in 1996 and 0.6% in 1995.
NONOPERATING ITEMS
Interest expense was $111.3 million for 1997 compared to $84.6 million
in 1996 and $94.5 million in 1995. The increase in 1997 over 1996 is due to the
issuance of debt under the Company's medium-term note program in 1997 and a full
year's interest on $300.0 million of long-term debentures issued in August 1996
at a higher interest rate than the previous short-term debt. The decrease in
1996 as compared to 1995 was due to the redemption of the Company's $390.7
million of zero coupon convertible subordinated debentures in September 1995 and
the redemption of its $42 million term loan in December 1995.
Interest income decreased to $21.9 million for 1997 from $26.9 million
in 1996 and $53.6 million in 1995. The decrease for 1996 compared to 1995 is due
to lower amounts of invested cash resulting from debt redeemed during 1995.
Foreign currency gains (losses) netted to a loss of $0.7 million in
1997 compared to a $19.1 million loss in 1996 and a $0.2 million gain in 1995.
The 1996 losses were primarily due to devaluations of the Venezuelan bolivar and
costs of hedging foreign exchange exposures of an Italian subsidiary.
Provision for income taxes was higher in 1997 than in 1996 and 1995 due
in part to improved earnings. The effective income tax rate was 37.4% in 1997,
compared with 29.9% in 1996 and 33.8% in 1995. The lower effective income tax
rate and provision for 1996 are due to credits of $43.7 million recorded during
the third quarter of 1996 to recognize certain net operating loss carryforwards
and the settlement of various issues with the Internal Revenue Service.
Excluding the tax benefits recorded in 1996, the effective income tax rate for
1996 was 35.2%. See Note 11 to the supplemental annual consolidated financial
statements.
Minority interest in net income of consolidated subsidiaries increased
to $49.3 million in 1997 as compared to $24.7 million in 1996 and $20.7 million
in 1995. The increase in 1997 is due primarily to the Company's ownership
interests in Dresser-Rand and Devonport Management Limited, which increased from
approximately 30% to 51% during March 1997.
Income from continuing operations for 1997, 1996 and 1995 of $772.4
million, $557.9 million and $462.3 million, respectively, resulted in diluted
income per share from continuing operations of $1.77, $1.29 and $1.07,
respectively.
Discontinued operations in 1995 consists of the Company's Insurance
Services Group. The Company declared a dividend on December 26, 1995 and
subsequently distributed its property and casualty insurance subsidiary,
Highlands Insurance Group, Inc. (HIGI), to its shareholders in a tax-free
spin-off on January 23, 1996. The operations of the Insurance Services Group
have been classified as discontinued operations. During 1995, HIGI increased its
reserves for claim losses and related expenses and provisions for certain legal
matters which together with certain other provisions associated with the
7
Company's complete exit from the insurance industry resulted in a $67.2 million
charge against net earnings. See Note 17 to the supplemental annual consolidated
financial statements.
Cumulative effect of accounting change in 1995 reflects the effect of
adopting Statement of Financial Accounting Standards No. 112, Employers'
Accounting for Postemployment Benefits. The Company recorded a charge of $16.0
million (net of tax of $9.0 million) or $0.04 per share in the first quarter of
1995 for the cumulative effect of changing its postemployment benefits as
required by the standard. See Note 1 to the supplemental annual consolidated
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended 1997 with cash and equivalents of $384.1 million
compared with $446.0 million in 1996 and $488.3 million in 1995.
Cash flows from operating activities were $833.1 million for 1997
compared to $864.2 million and $1,094.6 million for 1996 and 1995, respectively.
In 1997, the primary use of cash for operating activities was to fund increased
working capital requirements related to increased revenues.
Cash flows used in investing activities were $873.3 million for 1997
compared to $759.1 million used in 1996 and $837.0 million used in 1995. The
majority of the increase in cash used for investing activities during 1997 is
due to an increase in capital expenditures of 20% over 1996 and 49% over 1995.
While increased capital expenditures during 1997 were due in part to investments
in capital equipment and deployment of new technologies, increased capital
expenditures also reflect certain strategic investments in oil and gas
developments and in the Company's infrastructure. In 1997, the Company invested
$97.8 million in oil and gas developments, with the most significant development
being its 25% share of the Sangu gas field twenty-five miles offshore Bangladesh
in the Bay of Bengal. The Company will consider similar investments during 1998
as the Company identifies opportunities that allow it to use its unique set of
core competencies and which provide adequate returns. The Company also invested
$49.5 million in an enterprise-wide information systems initiative. Cash used in
investing activities in 1997 also includes the acquisition of OGC of
approximately $118.3 million and Kinhill of approximately $34 million, and an
interest in PES (International) Limited of approximately $33.6 million offset by
the sale of the Company's environmental business for about $32.0 million. In
1996, investing activities included a $41.3 million expenditure for the
Company's share of the purchase price of a subsidiary acquired by the Company's
former 36% owned affiliate, M-I Drilling Fluids Company, L.L.C. Also in 1996,
several other acquisitions were made which used $32.2 million of investing
activities cash. Included within investing activities for 1995 are the following
acquisitions: Grove S.p.A. for $162.7 million; Wellstream for $62.4 million;
Subtec for $37.6 million; and North Sea Assets for $30.4 million.
Cash flows from financing activities used $20.6 million for 1997
compared to $148.4 million and $721.4 million for 1996 and 1995, respectively.
During 1997 cash was provided by proceeds from debt issued under the Company's
medium-term note program of $300.0 million plus $3.2 million of other long-term
borrowings and proceeds from the exercise of stock options of $71.5 million
offset by payments on long-term debt of $17.7 million, net repayments on
short-term borrowings of $85.8 million, payments to reacquire common stock of
$44.1 million, and dividend payments of $250.3 million. Cash used for financing
activities during 1996 consisted primarily of dividend payments of $239.6
million and payments to reacquire common stock of $235.2 million offset by
proceeds from long-term borrowings of $295.6 million and proceeds from the
exercise of stock options of $42.6 million. In 1995, the increased amount of
cash used by financing activities was primarily due to the redemption of the
Company's $390.7 million zero coupon convertible debentures and a $42.0 million
term loan. The Company's combined short-term notes payable and long-term debt
was 24%, 23% and 18% of total capitalization at the end of 1997, 1996 and 1995,
respectively.
The Company has the ability to borrow additional short-term and
long-term funds if necessary. See Note 6 to the supplemental annual consolidated
financial statements regarding the Company's various short-term lines of credit,
notes payable and long-term debt.
8
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
Second Quarter of 1998 Compared with the Second Quarter of 1997
Second Quarter
REVENUES ------------------------------- Increase
Millions of dollars 1998 1997 (decrease)
- -----------------------------------------------------------------------------------------------------
Energy Services Group $2,380.7 $2,119.9 $260.8
Engineering and Construction Group 1,437.8 1,219.2 218.6
Dresser Equipment Group 766.7 663.3 103.4
- -----------------------------------------------------------------------------------------------------
Total revenues $4,585.2 $4,002.4 $582.8
- -----------------------------------------------------------------------------------------------------
Consolidated revenues increased 15% to $4,585.2 million in the second
quarter of 1998 compared with $4,002.4 million in the same quarter of the prior
year.
Energy Services Group revenues increased by 12% for the second quarter
of 1998 over the same quarter of the prior year notwithstanding an 8% decrease
in drilling activity as measured by the worldwide rotary rig count. Most of the
increased revenues were from activities for pressure pumping, drilling fluids
and drilling services, and upstream oil and gas engineering services.
Engineering and Construction Group revenues were $1,437.8 million in
the second quarter of 1998 compared to $1,219.2 million in the same quarter of
the prior year. Revenues increased 18% due to major LNG projects in Asia and
Africa, an enhanced oil recovery project in Africa and a major ethylene project
in Singapore along with increased revenues in Asia/Pacific from Kinhill, which
was acquired in the third quarter of 1997. Revenues were negatively impacted by
the sale of the environmental services business in December 1997, lower activity
in the pulp and paper industry, and lower activity levels in the Group's
contract to provide technical and logistical support for military peacekeeping
operations in Bosnia.
Dresser Equipment Group revenues increased 16% to $766.7 million for
the second quarter of 1998 as compared to $663.3 million for the second quarter
of 1997. Most of the increase in revenues came from the compressor joint
venture. The flow control product line also contributed to the increased
revenues over the prior year quarter. The flow control increase is a result of
increased demand for pipeline valve products.
Second Quarter
OPERATING INCOME ------------------------------ Increase
Millions of dollars 1998 1997 (decrease)
- -----------------------------------------------------------------------------------------------------
Energy Services Group $304.4 $232.1 $ 72.3
Engineering and Construction Group 74.3 49.1 25.2
Dresser Equipment Group 76.7 57.7 19.0
General corporate (19.3) (17.3) (2.0)
- -----------------------------------------------------------------------------------------------------
Total operating income $436.1 $321.6 $114.5
- -----------------------------------------------------------------------------------------------------
Consolidated operating income increased 36% to $436.1 million in the
second quarter of 1998 compared with $321.6 million in the same quarter of the
prior year.
Energy Services Group operating income increased 31% to $304.4 million
in the second quarter of 1998 compared with $232.1 million in the same quarter
of the prior year. The operating margin for the second quarter of 1998 was 12.8%
compared to the prior year second quarter operating margin of 10.9%. Improved
operating income was largely due to increased activities in pressure pumping,
drilling fluids and drilling services, improved margins on sales of completion
products, and upstream oil and gas engineering services in Europe and North
America.
Engineering and Construction Group operating income increased 51% to
$74.3 million in the second quarter of 1998 compared to $49.1 million in the
second quarter of the prior year. Operating margins were 5.2% in the second
quarter of 1998 compared to 4.0% in the prior year second quarter. Included in
second quarter operating income are improved results from construction and
engineering services for the chemicals and refining lines of business. Second
quarter operating income also benefited from a claim on a Middle Eastern
construction project. Excluding this settlement, operating margins for the
second quarter of 1998 for the Group were about 4.1%.
Dresser Equipment Group operating income for the second quarter was
$76.7 million, an increase of 33% over the prior year second quarter of $57.7
million. The benefits of the Dresser-Rand and Ingersoll-Dresser Pump
9
restructuring initiatives begun in late 1997, along with the increase in
revenues, contributed to improved results for these joint ventures. The flow
control product service line showed higher operating income due to cost
improvements, better product mix, and increased volume. Operating income from
the measurement product line for the second quarter of 1998 is higher than the
prior year quarter due to successful product introductions in the United States,
Europe and South America. Improved earnings at flow control and measurement were
offset by lower earnings within the power systems product line.
NONOPERATING ITEMS
Interest expense increased to $31.7 million in the second quarter of
1998 compared to $26.7 million in the same quarter of the prior year due
primarily to the Company's issuance of debt under the Company's medium-term note
program in 1997 for working capital, capital expenditures and acquisitions.
Interest income in the second quarter of 1998 increased to $7.2 million
from $4.1 million in the second quarter of 1997 primarily due to higher levels
of invested cash.
The effective income tax rate decreased slightly to 37.5% for the
second quarter of 1998 from 37.6% for the second quarter of 1997.
Minority interest in net income of consolidated subsidiaries for the
second quarter of 1998 increased to $13.0 million compared to $9.3 million for
the second quarter of 1997 primarily driven by improvements from majority owned
joint ventures in Dresser Equipment Group.
Net income in the second quarter of 1998 increased 38% to $243.2
million, or $0.55 per diluted share, compared with $176.7 million, or $0.41 per
diluted share, in the same quarter of the prior year.
First Six Months of 1998 Compared with the First Six Months of 1997
Six Months
REVENUES ------------------------------ Increase
Millions of dollars 1998 1997 (decrease)
- -----------------------------------------------------------------------------------------------------
Energy Services Group $4,665.5 $3,859.9 $ 805.6
Engineering and Construction Group 2,785.1 2,453.6 331.5
Dresser Equipment Group 1,389.4 1,290.9 98.5
- -----------------------------------------------------------------------------------------------------
Total revenues $8,840.0 $7,604.4 $1,235.6
- -----------------------------------------------------------------------------------------------------
Consolidated revenues increased 16% to $8,840.0 million in the first
six months of 1998 compared with $7,604.4 million in the same period of the
prior year.
Energy Services Group revenues increased 21% for the first six months
of 1998 over the same period of the prior year compared with a 1% increase in
drilling activity as measured by the worldwide rotary rig count. A majority of
the increase in revenues was from upstream oil and gas engineering services with
pressure pumping also reporting increased revenues.
Engineering and Construction Group revenues increased 14% to $2,785.1
million in the first six months of 1998 compared with $2,453.6 million in the
same six month period of the prior year. This increase was from major LNG
projects in Asia and Africa, an enhanced oil recovery project in Africa and a
major ethylene project in Singapore and increased revenues in Asia/Pacific from
Kinhill, which was acquired in the third quarter of 1997. Revenues were
negatively impacted by the sale of the environmental services business in
December 1997, lower activity in the pulp and paper industry and lower activity
levels in the Group's contract to provide technical and logistical support for
military peacekeeping operations in Bosnia.
Dresser Equipment Group revenues of $1,389.4 million were about 8%
higher than 1997 revenues in the first six months of $1,290.9 million. Most of
the increase in revenues came from the compressor joint venture. The flow
control and measurement product lines also reported increased revenues as
compared to the first six months of 1997. The flow control increase is a result
of increased demand for pipeline valve products whereas the increase within the
measurement product line was driven by strengthened demand for fuel dispensing
systems.
10
Six Months
OPERATING INCOME ----------------------------- Increase
Millions of dollars 1998 1997 (decrease)
- -----------------------------------------------------------------------------------------------------
Energy Services Group $587.4 $418.4 $169.0
Engineering and Construction Group 133.3 99.4 33.9
Dresser Equipment Group 116.1 81.4 34.7
General corporate (39.6) (35.1) (4.5)
- -----------------------------------------------------------------------------------------------------
Total operating income $797.2 $564.1 $233.1
- -----------------------------------------------------------------------------------------------------
Consolidated operating income increased 41% to $797.2 million in the
first six months of 1998 compared with $564.1 million in the same period of the
prior year.
Energy Services Group operating income increased 40% to $587.4 million
in the first six months of 1998 compared with $418.4 million in the same period
of the prior year. The operating margin for the first six months of 1998 was
12.6% compared to the prior year operating margin for the same period of 10.8%.
The improvement in operating income was due largely to increased activities in
pressure pumping, drilling fluids and drilling services, improved margins on
sales of completion products, and upstream oil and gas engineering services in
Europe and North America.
Engineering and Construction Group operating income for the first six
months of 1998 increased 34% to $133.3 million compared to 1997 operating income
of $99.4 million for the same period. Operating margins improved to 4.8% for the
first six months of 1998 from 4.1% for the same period in 1997. Operating income
for the first six months of 1998 include improved results from construction and
engineering services for the chemicals and refining lines of business resulting
from activities from major LNG projects in Asia and Africa, an enhanced oil
recovery project in Africa and a major ethylene project in Singapore. Operating
income includes settlement of a claim on a Middle Eastern construction project.
Excluding this settlement, operating margins for the first six months of 1998
for the Group were about 4.2%.
Dresser Equipment Group operating income was $116.1 million for the
first six months of 1998 for an increase of about 43% compared to $81.4 million
operating income for the first six months of 1997. Except for power systems,
operating profit for the six months increased in virtually all product lines,
due to the restructuring initiatives and increased revenues at Dresser-Rand;
cost improvements, better product mix, and increased volume at flow control; and
successful product introductions in the United States, Europe and South America
within the measurement product line.
NONOPERATING ITEMS
Interest expense increased to $61.3 million in the first six months of
1998 compared to $50.1 million in the same period of the prior year due
primarily to the Company's issuance of debt under the Company's medium-term note
program in 1997 for working capital, capital expenditures and acquisitions.
Interest income in the first six months of 1998 increased to $14.2
million from $10.8 million in the same period of 1997 primarily due to higher
levels of invested cash.
The effective income tax rate was 37.5% for the first six months of
1998 and 37.3% for the same period of 1997.
Net income in the first six months of 1998 increased 43% to $446.6
million, or $1.01 per diluted share, compared with $311.8 million, or $0.72 per
diluted share, in the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the second quarter of 1998 with cash and equivalents
of $281.4 million, a decrease of $64.9 million from the end of 1997. To conform
Dresser's fiscal year-end to Halliburton's calendar year-end, Dresser's cash
flows are measured from December 31, 1997, rather than from the October 31, 1997
balances included on the supplemental consolidated balance sheets.
Operating activities. Cash flows from operating activities were $144.4
million in the first six months of 1998, as compared to $24.6 million in the
first six months of 1997. The major operating activity use of cash in 1998 was
to fund working capital requirements related to increased revenues from the
Energy Services Group and for Engineering and Construction Group projects.
Operating cash was also used in funding cash needs of unconsolidated
subsidiaries.
11
Investing activities. Capital expenditures were $469.9 million for the
first six months of 1998, an increase of 26% over the same period of the prior
year. The increase in capital spending primarily reflects investments in
equipment and infrastructure for the Energy Services Group which includes
strategic investments in oil and gas projects. The Company also continued its
planned investments in its enterprise-wide information system.
During March 1997, DML, which is 51% owned by the Company, completed
the acquisition of Devonport Royal Dockyard plc, which owns and operates the
Government of the United Kingdom's Royal Dockyard in Plymouth, England, for
approximately $64.9 million. Concurrent with the acquisition of the Royal
Dockyard, the Company's ownership interest in DML increased from about 30% to
51% and DML borrowed $56.3 million under term loans (the Dockyard Loans) bearing
interest at approximately LIBOR plus 0.75% payable in semi-annual installments
through March 2004. Pursuant to certain terms of the Dockyard Loans, the Company
was required to provide initially a compensating balance of $28.7 million which
is restricted as to use by the Company. The compensating balance amount
decreases in proportion to the outstanding debt related to the Dockyard Loans
and earns interest at a rate equal to that of the Dockyard Loans.
During April 1997, the Company completed its acquisition of the
outstanding common stock of OGC International plc (OGC) for approximately $118.3
million. OGC is engaged in providing a variety of engineering, operations and
maintenance services, primarily to the North Sea oil and gas production
industry.
Also in April 1997, the Company purchased a 26% ownership interest in
Petroleum Engineering Services (PES) for approximately $33.6 million. PES
provides specialist well completions and interventions, completion services and
completion solutions.
Financing activities. Cash flows from financing activities were $243.7
million in the first six months of 1998 compared to cash flows of $209.7 million
in the first six months of 1997. The Company borrowed $370.4 million in
short-term funds consisting of commercial paper and bank loans in the first six
months of 1998. Proceeds from exercises of stock options provided cash flows of
$40.3 million in the first six months of 1998 compared to $48.0 million in the
same period of the prior year.
In the first six months of 1997, the Company borrowed $127.3 million in
short-term funds net of repayments consisting of commercial paper and bank
loans. Also in the first six months of 1997, the Company issued $125.0 million
principal amount of 6.75% notes and $50.0 million principal amount of 7.53%
notes under the Company's medium-term note program.
The Company believes it has sufficient borrowing capacity to fund its
working capital requirements and investing activities. The Company's combined
short-term notes payable and long-term debt was 28% of total capitalization at
June 30, 1998 compared to 24% at December 31, 1997.
FINANCIAL INSTRUMENT MARKET RISK
The Company is currently exposed to market risk from changes in foreign
currency exchange rates, and to a lesser extent, to changes in interest rates.
To mitigate market risk, the Company selectively hedges its foreign currency
exposure through the use of currency derivative instruments. The objective of
such hedging is to protect the Company's cash flows from fluctuations in
currency rates of sales or purchases of goods or services. Inherent in the use
of derivative instruments are certain types of market risk: volatility of the
currency rates, tenor (time horizon) of the derivative instruments, market
cycles and the type of derivative instruments used. The Company does not use
derivative instruments for trading purposes. See Note 1 to the supplemental
annual consolidated financial statements for additional information on the
Company's accounting policies on derivative instruments. See Note 15 to the
supplemental annual consolidated financial statements for additional disclosures
related to derivative instruments.
Foreign exchange. While the Company operates in over 100 countries, the
Company hedges only foreign currencies that are highly liquid and selects
derivative instruments or a combination of instruments whose fluctuation in
value is offset by the fluctuation in value to the underlying exposure. These
hedges generally have expiration dates that do not exceed two years. Exposures
to certain currencies are generally not hedged due primarily to the lack of
available markets or cost considerations (non-traded currencies). The Company
manages its foreign exchange hedging activities through a control system which
includes monitoring of cash balances in traded currencies, analytical techniques
such as value at risk estimations, and other procedures.
Interest rates. The Company currently has exposure to interest rate
risk from its long-term debt with interest based on LIBOR plus 0.75% which was
incurred in connection with its acquisition of the Royal Dockyard in Plymouth,
England (the Dockyard Loans). This risk is partially offset by a compensating
balance of approximately one-half of the outstanding debt amount which earns
interest at a rate equal to that of the Dockyard Loans. The compensating balance
12
is restricted as to use by the Company and is included in other assets on the
Company's supplemental consolidated balance sheets. See Note 6 to the
supplemental annual consolidated financial statements for additional discussion
of the Dockyard Loans.
Value at risk. The Company uses a statistical model to estimate the
potential loss related to derivative instruments used to hedge the market risk
of its foreign exchange exposure. The model utilizes historical price and
volatility patterns to estimate the change in value of the derivative
instruments which could occur from adverse movements in foreign exchange rates
for a specified time period at a specified confidence interval. The model is an
undiversified calculation based on the variance-covariance statistical modeling
technique and includes all foreign exchange derivative instruments outstanding
at June 30, 1998. The resulting value at risk of $3.0 million estimates with a
95% confidence interval the potential loss the Company could incur in a one-day
period from foreign exchange derivative instruments due to adverse foreign
exchange rate changes.
Interest rate exposures. The following table represents principal (or
notional) amounts at December 31, 1997, and related weighted average interest
rates by year of maturity for the Company's restricted cash and long-term debt
obligations. Other notes with varying interest rates of $8.9 million as shown in
Note 6 to the supplemental annual consolidated financial statements are excluded
from the following table.
Expected maturity date
------------------------------------------------------------------ Fair
Millions of dollars 1998 1999 2000 2001 2002 Thereafter Total Value
- ------------------------------------------------------------------------------------------------------------------------
Assets:
Restricted cash - British
pound sterling 3.6 4.2 4.2 4.2 4.2 2.4 22.8 22.8
Average variable rate 8.45% 8.07% 7.83% 7.69% 7.58% 7.51% 8.03%
Long-term debt:
US dollar - 50.0 300.0 - 75.0 824.5 1,249.5 1,326.0
Average fixed rate - 6.27% 6.25% - 6.30% 7.93% 7.88%
British pound sterling
(Dockyard Loans) 7.1 8.4 8.3 8.3 8.3 5.5 45.9 45.9
Average variable rate 8.45% 8.07% 7.83% 7.69% 7.58% 7.51% 8.03%
- ------------------------------------------------------------------------------------------------------------------------
Weighted average variable rates are based on implied forward rates in
the yield curve at December 31, 1997. These implied forward rates should not be
viewed as predictions of actual future interest rates. Restricted cash and the
Dockyard Loans earn interest at LIBOR plus 0.75%. Instruments that are
denominated in currencies other than the US dollar reporting currency are
subject to foreign exchange rate risk as well as interest rate risk. The
Company's interest rate exposures at June 30, 1998 were not materially changed
from December 31, 1997.
SPECIAL CHARGES - 1998
The Company plans to recognize special charges to operating income of
approximately $900 million in the third quarter of 1998. The primary components
of the charges include Company plans to write-off excess and duplicated assets;
consolidate and close facilities that are redundant, including activities such
as disposal cost and cancellation of lease agreements; severance costs for
combining business unit operations and support, corporate and shared services
personnel; and merger transaction costs including fees for investment banking,
legal and accounting, filing fees and other related charges.
ENVIRONMENTAL MATTERS
The Company is involved as a potentially responsible party in remedial
activities to clean up several "Superfund" sites under applicable federal law
which imposes joint and several liability, if the harm is indivisible, on
certain persons without regard to fault, the legality of the original disposal
or ownership of the site. Although it is very difficult to quantify the
potential impact of compliance with environmental protection laws, management of
the Company believes that any liability of the Company with respect to all but
one of such sites will not have a material adverse effect on the results of
operations of the Company. See Note 8 to the supplemental annual consolidated
financial statements for additional information on the one site.
13
YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is the risk that systems, products and
equipment utilizing date-sensitive software or computer chips with two-digit
date fields will fail to properly recognize the Year 2000. Such failures by the
Company's software and hardware or that of government entities, service
providers, suppliers and customers could result in interruptions of the
Company's business which could have a material adverse impact on the Company.
In response to the Y2K issue, the Company has implemented an
enterprise-wide Year 2000 Program designed to identify, assess and address
significant Y2K issues in the Company's key business operations, including
products and services, suppliers, business and engineering applications,
information technology systems, facilities and infrastructure and joint venture
projects.
The Year 2000 Program is a comprehensive, integrated, multi-phase
process covering information technology systems and hardware as well as
equipment and products with embedded computer chips technology. The primary
phases of the program are: (1) inventorying existing equipment and systems; (2)
analyzing equipment and systems to identify those which are not Y2K ready and to
prioritize critical items; (3) remediating, repairing or replacing non-Y2K ready
equipment and systems; and (4) testing to verify Y2K readiness has been
achieved. The Company anticipates having the Company's products and
mission-critical systems and equipment Y2K ready during the first half of 1999
with the balance of the year reserved for testing and implementation of new and
modified programs as required.
At the end of the second quarter of 1998, the inventory of equipment
and systems was substantially complete. The analysis phase is underway.
Remediation/installation for the majority of these systems will be performed
internally. The Company is utilizing outside contractors for remediation of
major legacy accounting and administrative systems. Some information technology
systems and Company manufactured products and developed software have been
remediated and have entered the testing phase.
The Company is in contact with its major suppliers and service
providers to establish a mutual understanding of Y2K issues and to develop
solutions with those suppliers. These suppliers are being surveyed as to their
ability to provide products that are Y2K ready and to provide uninterrupted
services. Critical suppliers are being further evaluated to review their Y2K
programs. No suppliers have been identified who expect interruption of services
or supplies to the Company.
Independent of, but concurrent with, the Company's Y2K review, the
Company is installing an enterprise-wide business information system which is
scheduled to replace some of the Company's key finance, administrative and
marketing software systems by the end of 1999 and is Y2K ready. In addition, the
Company is in the process of replacing its desktop computing equipment and
software and updating its communications infrastructure. The Company has
determined that although some of the replaced desktop computing equipment and
software may not be strictly Y2K compliant, such replacements are nevertheless
suitable for the usage intended by the Company.
On September 29, 1998 the Company completed the Merger. The Company is
in the process of reviewing and assessing Dresser's Y2K program for future
disclosures. Preliminary assessments have determined that the Y2K programs of
Halliburton and Dresser are similar in overall approach and timing.
Based on the Company's review to date, it does not expect the cost of
software replacement or modification not currently included in the Company's
enterprise-wide information system to be material to its financial position or
results of operations.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard defines reporting
requirements for operating segments and related information about products and
services, geographic areas and reliance on major customers. The Company has
adopted this standard effective with this report on its results of operations,
financial condition and liquidity restated for the acquisition of Dresser.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This standard revises
existing requirements for employers' disclosures for pensions and other
postretirement benefit plans. The standard does not change measurement or
recognition standards for these plans. The Company plans to present the revised
disclosure requirements in its 1998 Annual Report.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides
guidelines for companies to capitalize or expense costs incurred to develop or
obtain internal use software. The guidelines set forth in SOP 98-1 do not differ
14
significantly from the Company's current accounting policy for internal use
software and therefore the Company does not expect a material impact on its
results of operations or financial position from the adoption of SOP 98-1. The
Company plans to adopt SOP 98-1 effective January 1, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is evaluating when it
will adopt SOP 98-5 and is currently analyzing the impact on its results of
operations from the adoption of SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" (SFAS 133). This standard requires
entities to recognize all derivatives on the statement of financial position as
assets or liabilities and to measure the instruments at fair value. Accounting
for gains and losses from changes in those fair values are specified in the
standard depending on the intended use of the derivative and other criteria.
SFAS 133 is effective for the Company beginning July 1, 1999. The Company is
currently evaluating SFAS 133 to identify implementation and compliance methods
and has not yet determined the effect, if any, on its results of operations or
financial position.
FORWARD-LOOKING INFORMATION
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
quarterly report and elsewhere, which are forward-looking and which provide
other than historical information, involve risks and uncertainties that may
impact the Company's actual results of operations. While such forward-looking
information reflects the Company's best judgment based on current information,
it involves a number of risks and uncertainties and there can be no assurance
that other factors will not affect the accuracy of such forward-looking
information. While it is not possible to identify all factors, the Company
continues to face many risks and uncertainties that could cause actual results
to differ from those forward-looking statements. Such factors include:
litigation; unsettled political conditions, war, civil unrest, currency controls
and governmental actions in over 100 countries of operation; trade restrictions
and economic embargoes imposed by the United States and other countries;
environmental laws, including those that require emission performance standards
for new and existing facilities; the magnitude of governmental spending for
military and logistical support of the type provided by the Company; operations
in countries with significant amounts of political risk, including, without
limitation, Algeria and Nigeria; technological and structural changes in the
industries served by the Company; computer software and hardware and other
equipment utilizing computer technology used by governmental entities, service
providers, vendors, customers and the Company which may be impacted by the Y2K
issue; integration of acquired businesses, including Dresser and its
subsidiaries, into the Company; the risk inherent in the use of derivative
instruments which could cause a change in value of the derivative instruments
from adverse movements in foreign exchange rates; changes in the price of oil
and natural gas; changes in the price of commodity chemicals used by the
Company; changes in capital spending by customers in the hydrocarbon industry
for exploration, development, production, processing, refining and pipeline
delivery networks; increased competition in the hiring and retention of
employees in certain areas coupled with an announced reduction-in-force in other
areas; changes in capital spending by customers in the wood pulp and paper
industries for plants and equipment; risks from entering into fixed fee
engineering, procurement and construction projects where failure to meet
schedule, cost estimates or performance targets could result in non-reimbursable
costs which cause the project not to meet expected profit margins; and changes
in capital spending by governments for infrastructure. In addition, future
trends for pricing, margins, revenues and profitability remain difficult to
predict in the industries served by the Company.
15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Halliburton Company:
We have audited the accompanying supplemental consolidated balance
sheets of Halliburton Company (a Delaware corporation) and subsidiary companies
as of December 31, 1997 and 1996, and the related supplemental consolidated
statements of income, cash flows and shareholders equity for each of the three
years in the period ended December 31, 1997. We did not audit the supplemental
consolidated financial statements of Dresser Industries, Inc., a company
acquired during 1998 in a transaction accounted for as a pooling of interests,
as discussed in Note 2. Such statements are included in the supplemental
consolidated financial statements of Halliburton Company and reflect total
assets of 48% and 54% for the years ended December 31, 1997 and 1996, and total
revenue of 46%, 47% and 49% for the years ended December 31, 1997, 1996, and
1995, respectively, of the related consolidated totals. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for Dresser Industries, Inc. is based
solely upon the report of the other auditors. These supplemental financial
statements are the responsibility of Halliburton Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
accounting standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Halliburton Company
and subsidiary companies as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the Supplemental Consolidated Financial
Statements, the Company changed its accounting for postemployment benefits as
required by Statement of Financial Accounting Standards No. 112, "Employer's
Accounting for Postemployment Benefits."
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 23, 1998
16
HALLIBURTON COMPANY
Supplemental Consolidated Statements of Income
(Millions of dollars except per share data)
Years ended December 31
------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 11,256.3 $ 9,461.1 $ 7,557.0
Sales 4,857.0 4,351.7 3,850.1
Equity in earnings of unconsolidated affiliates 163.2 133.8 104.5
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 16,276.5 $ 13,946.6 $ 11,511.6
- -----------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 10,163.9 $ 8,708.0 $ 6,918.4
Cost of sales 4,032.7 3,628.3 3,220.8
General and administrative 665.0 621.3 601.4
Special charges and credits 16.2 85.8 8.4
- -----------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 14,877.8 13,043.4 10,749.0
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 1,398.7 903.2 762.6
Interest expense (111.3) (84.6) (94.5)
Interest income 21.9 26.9 53.6
Foreign currency gains (losses) (0.7) (19.1) 0.2
Other nonoperating income, net 4.5 4.6 8.1
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes,
minority interest and accounting change 1,313.1 831.0 730.0
Provision for income taxes (491.4) (248.4) (247.0)
Minority interest in net income of consolidated subsidiaries (49.3) (24.7) (20.7)
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before accounting change 772.4 557.9 462.3
Loss from discontinued operations - - (65.5)
Cumulative effect of accounting change - - (16.0)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 772.4 $ 557.9 $ 380.8
- -----------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share:
Continuing operations $ 1.79 $ 1.30 $ 1.07
Discontinued operations - - (0.15)
Cumulative effect of accounting change - - (0.04)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1.79 $ 1.30 $ 0.88
- -----------------------------------------------------------------------------------------------------------------------------
Diluted income (loss) per common share:
Continuing operations $ 1.77 $ 1.29 $ 1.07
Discontinued operations - - (0.15)
Cumulative effect of accounting change - - (0.04)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1.77 $ 1.29 $ 0.88
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 431.1 429.2 431.1
Diluted 436.1 432.1 432.3
See notes to supplemental annual financial statements.
17
HALLIBURTON COMPANY
Supplemental Consolidated Balance Sheets
(Millions of dollars and shares except per share data)
Years ended December 31
--------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 384.1 $ 446.0
Receivables:
Notes and accounts receivable (less allowance for bad debts of $58.6 and $65.3) 2,980.4 2,548.1
Unbilled work on uncompleted contracts 407.2 306.3
- --------------------------------------------------------------------------------------------------------------------
Total receivables 3,387.6 2,854.4
Inventories 1,299.2 1,205.8
Deferred income taxes, current 202.6 192.5
Other current assets 169.7 168.8
- --------------------------------------------------------------------------------------------------------------------
Total current assets 5,443.2 4,867.5
Property, plant and equipment:
At cost 6,646.0 6,397.5
Less accumulated depreciation 3,879.6 3,843.5
- --------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,766.4 2,554.0
Equity in and advances to related companies 659.0 417.4
Excess of cost over net assets acquired (net of accumulated amortization
of $207.6 and $184.4) 1,126.8 1,104.5
Deferred income taxes, noncurrent 273.0 282.6
Other assets 433.4 360.8
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 10,701.8 $ 9,586.8
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 50.5 $ 130.7
Current maturities of long-term debt 7.4 1.7
Accounts payable 1,132.4 1,015.6
Accrued employee compensation and benefits 516.1 444.1
Advance billings on uncompleted contracts 638.3 796.1
Accrued warranty cost 56.6 51.4
Income taxes payable 335.2 247.1
Deferred revenues 38.4 18.9
Other current liabilities 685.4 660.9
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,460.3 3,366.5
Long-term debt 1,296.9 956.3
Employee compensation and benefits 1,013.7 1,013.5
Other liabilities 450.6 352.1
Minority interest in consolidated subsidiaries 163.4 157.0
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and minority interest 6,384.9 5,845.4
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized 600.0 shares,
issued 453.7 (post-split) and 221.7 (pre-split) shares 1,134.3 554.3
Paid-in capital in excess of par value 123.9 592.2
Accumulated other comprehensive income (131.1) (100.8)
Retained earnings 3,563.4 3,077.1
- --------------------------------------------------------------------------------------------------------------------
4,690.5 4,122.8
Less 15.8 (post-split) and 8.6 (pre-split) shares treasury stock, at cost 373.6 381.4
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,316.9 3,741.4
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,701.8 $ 9,586.8
- --------------------------------------------------------------------------------------------------------------------
See notes to supplemental annual financial statements.
18
HALLIBURTON COMPANY
Supplemental Consolidated Statements of Cash Flows
(Millions of dollars)
Years ended December 31
------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 772.4 $ 557.9 $ 380.8
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 564.3 497.7 466.4
Provision (benefit) for deferred income taxes 2.6 (13.4) 51.2
Distributions from (advances to) related companies, net of equity in
(earnings) or losses (84.6) (57.2) (13.6)
Appreciation of zero coupon bonds - - 15.0
Net loss from discontinued operations - - 65.5
Cumulative effect of accounting change - - 16.0
Other non-cash items 59.2 33.1 11.6
Other changes, net of non-cash items:
Receivables (408.8) (363.5) (162.8)
Inventories (117.1) (147.5) (71.6)
Accounts payable (49.7) 98.8 205.3
Contract advances (187.0) 159.0 195.5
Other working capital, net 182.3 185.6 (4.3)
Other net 99.5 (86.3) (60.4)
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities 833.1 864.2 1,094.6
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (880.1) (731.1) (591.5)
Sales of property, plant and equipment 180.6 64.4 71.6
Acquisitions of businesses, net of cash acquired (161.5) (60.5) (327.4)
Dispositions of businesses, net of cash disposed 37.6 21.6 25.9
Other investing activities (49.9) (53.5) (15.6)
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities (873.3) (759.1) (837.0)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings of long-term debt 303.2 295.6 -
Payments on long-term debt (17.7) (8.2) (482.2)
Net borrowings (payments) of short-term debt (85.8) (7.3) 31.2
Payments of dividends to shareholders (250.3) (239.6) (238.6)
Proceeds from exercises of stock options 71.5 42.6 14.9
Payments to reacquire common stock (44.1) (235.2) (49.0)
Other financing activities 2.6 3.7 2.3
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities (20.6) (148.4) (721.4)
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1.1) 1.0 (4.2)
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (61.9) (42.3) (468.0)
Cash and equivalents at beginning of year 446.0 488.3 956.3
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 384.1 $ 446.0 $ 488.3
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 106.1 $ 76.1 $ 72.3
Income taxes 307.4 191.1 112.5
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 337.1 $ 39.4 $ 173.2
Liabilities disposed of in dispositions of businesses 205.5 9.8 14.6
See notes to supplemental annual financial statements.
19
HALLIBURTON COMPANY
Supplemental Consolidated Statements of Shareholders' Equity
(Millions of dollars and shares except per share data)
Years ended December 31
-----------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Common stock (number of shares)
Balance at beginning of year 221.7 221.3 220.8
Shares issued (forfeited) under incentive stock plans, net 1.3 0.3 0.2
Cancellation of treasury stock - (0.1) -
Shares issued in connection with acquisition 8.2 - 0.1
Two-for-one common stock split 222.5 - -
Shares issued pursuant to stock warrant agreement - 0.2 -
Shares issued under benefit and dividend reinvestment plan - - 0.2
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 453.7 221.7 221.3
- -----------------------------------------------------------------------------------------------------------------------
Common stock (dollars)
Balance at beginning of year $ 554.3 $ 553.3 $ 552.0
Shares issued (forfeited) under incentive stock plans, net 3.2 0.9 0.6
Cancellation of treasury stock - (0.3) -
Shares issued in connection with acquisition 20.5 - 0.1
Two-for-one common stock split 556.3 - -
Shares issued pursuant to stock warrant agreement - 0.4 -
Shares issued under benefit and dividend reinvestment plan - - 0.6
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,134.3 $ 554.3 $ 553.3
- -----------------------------------------------------------------------------------------------------------------------
Capital in excess of par value
Balance at beginning of year $ 592.2 $ 570.0 $ 563.1
Shares issued (forfeited) under incentive stock plans, net 53.4 22.9 4.4
Cancellation of treasury stock - (3.6) -
Shares issued in connection with acquisition 36.6 - -
Two-for-one common stock split (556.3) - -
Shares issued pursuant to stock warrant agreement - 7.5 -
Shares issued under benefit and dividend reinvestment plan (2.0) (4.6) 2.5
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 123.9 $ 592.2 $ 570.0
- -----------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance at beginning of year $ 3,077.1 $ 2,758.8 $ 2,869.2
Net income 772.4 557.9 380.8
Cash dividends paid (250.3) (239.6) (238.6)
Spin-off of Highlands Insurance Group, Inc. - - (268.6)
Net change in unrealized gains (losses) on investments
held by discontinued operation - - 16.3
Pooling of interests acquisition (35.8) - -
Shares issued in connection with acquisition - - (0.3)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 3,563.4 $ 3,077.1 $ 2,758.8
- -----------------------------------------------------------------------------------------------------------------------
See notes to supplemental annual financial statements.
20
HALLIBURTON COMPANY
Supplemental Consolidated Statements of Shareholders' Equity
(continued)
(Millions of dollars and shares except per share data)
Years ended December 31
-----------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment
Balance at beginning of year $ (93.9) $ (104.7) $ (86.2)
Translation rate changes, net of tax (33.3) 10.8 (18.5)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (127.2) $ (93.9) $ (104.7)
- -----------------------------------------------------------------------------------------------------------------------
Pension liability adjustment
Balance at beginning of year $ (6.9) $ (7.0) $ (7.6)
Current year adjustment 3.0 0.1 0.6
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (3.9) $ (6.9) $ (7.0)
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income $ 772.4 $ 557.9 $ 380.8
Translation rate changes, net of tax (33.3) 10.8 (18.5)
Current year adjustment to minimum pension liability 3.0 0.1 0.6
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 742.1 $ 568.8 $ 362.9
- -----------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Cumulative translation adjustment $ (127.2) $ (93.9) $ (104.7)
Pension liability adjustment (3.9) (6.9) (7.0)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (131.1) $ (100.8) $ (111.7)
- -----------------------------------------------------------------------------------------------------------------------
Treasury stock (number of shares)
Beginning of year 8.6 5.6 5.1
Shares issued under incentive stock plans, net (0.8) (0.7) (0.5)
Shares purchased 0.7 4.3 1.2
Cancellation of treasury stock - (0.1) -
Two-for-one common stock split 8.0 - -
Shares issued under benefit and dividend reinvestment plan (0.7) (0.5) (0.2)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 15.8 8.6 5.6
- -----------------------------------------------------------------------------------------------------------------------
Treasury shares (dollars)
Beginning of year $ 381.4 $ 193.4 $ 168.0
Shares issued under incentive stock plans, net (25.3) (23.8) (15.2)
Shares purchased 44.1 235.2 49.0
Cancellation of treasury stock - (3.9) -
Shares issued under benefit and dividend reinvestment plan (26.6) (19.5) (8.4)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 373.6 $ 381.4 $ 193.4
- -----------------------------------------------------------------------------------------------------------------------
See notes to supplemental annual financial statements.
21
HALLIBURTON COMPANY
Notes to Supplemental Annual Financial Statements
Note 1. Significant Accounting Policies
The Company employs accounting policies that are in accordance with
generally accepted accounting principles in the United States. The preparation
of financial statements in conformity with generally accepted accounting
principles requires Company management 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.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and all majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
other affiliated companies in which the Company has at least 20% ownership and
does not have management control are accounted for on the equity method. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Revenues and Income Recognition. The Company recognizes revenues as
services are rendered or products are shipped. The distinction between services
and product sales is based upon the overall business intent of the particular
business operation. Revenues from construction contracts are reported on the
percentage of completion method of accounting using measurements of progress
toward completion appropriate for the work performed. All known or anticipated
losses on contracts are provided for currently. Claims for additional
compensation are recognized during the period such claims are resolved.
Post-contract customer support agreements are recorded as deferred revenues and
recognized as revenue ratably over the contract periods of generally one year
duration. Training and consulting service revenue is recognized as the services
are performed.
Research and Development. Research and development expenses are charged
to income as incurred. Such charges were $284.7 million in 1997, $243.9 million
in 1996 and $209.6 million in 1995.
Software Development Costs. Costs of developing software for sale are
charged to expense when incurred as research and development until technological
feasibility has been established for the product. Thereafter, software
development costs are capitalized until the software is ready for general
release to customers. The Company capitalized costs of $14.5 million in 1997,
$12.9 million in 1996 and $8.8 million in 1995 related to software developed for
resale. Amortization expense related to these costs was $15.0 million, $12.5
million and $10.3 million for 1997, 1996 and 1995, respectively. Once the
software is ready for release, amortization of the software development costs
begins. Capitalized software development costs are amortized over periods which
do not exceed three years.
Income Per Share. Basic income per share amounts are based on the
weighted average number of common shares outstanding during the year. Diluted
income per share includes additional common shares that would have been
outstanding if potential common shares with a dilutive effect had been issued.
See Note 9 for a reconciliation of basic and diluted income per share from
continuing operations. Prior year amounts have been adjusted for the two-for-one
common stock split declared on June 9, 1997 and effected in the form of a stock
dividend and paid on July 21, 1997.
Cash Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market.
Cost represents invoice or production cost for new items and original cost less
allowance for condition for used material returned to stock. Production cost
includes material, labor and manufacturing overhead. The cost of most
inventories is determined using either the first-in, first-out (FIFO) method or
the average cost method while the cost of certain U.S. inventories is determined
using the last-in, first-out (LIFO) method. Inventories of sales items owned by
foreign subsidiaries and inventories of operating supplies and parts are
generally valued at average cost.
Property, Plant and Equipment. Property, plant and equipment is
reported at cost less accumulated depreciation, which is generally provided on
the straight-line method over the estimated useful lives of the assets. Certain
assets are depreciated on accelerated methods. Accelerated depreciation methods
are also used for tax purposes, wherever permitted. Expenditures for maintenance
and repairs are expensed; expenditures for renewals and improvements are
generally capitalized. Upon sale or retirement of an asset, the related costs
and accumulated depreciation are removed from the accounts and any gain or loss
is recognized. When events or changes in circumstances indicate that assets may
be impaired, an evaluation is performed comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
22
required. The Company follows the successful efforts method of accounting for
oil and gas properties. At December 31, 1997, there were no significant oil and
gas properties in the production stage of development. The Company is
implementing an enterprise-wide information system. External direct costs of
materials and services and payroll-related costs of employees working solely on
development of the software system portion of the project are capitalized.
Capitalized costs of the project will be amortized over periods of three to ten
years beginning when the system is placed in service. Training costs and costs
to reengineer business processes are expensed as incurred.
Excess of Cost Over Net Assets Acquired. The excess of cost over net
assets acquired is amortized on a straight-line basis over periods not exceeding
40 years. Excess of cost over net assets acquired that is identified with
impaired assets, if any, will be evaluated using undiscounted future cash flows
as the basis for determining if impairment exists under the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS 121). To the extent impairment is indicated to exist, an impairment loss
will be recognized under SFAS 121 based on fair value. Otherwise, in the event
facts and circumstances indicate the carrying amount of excess of cost over net
assets acquired associated with an acquisition is impaired, the carrying amount
will be reduced to an amount representing the estimated undiscounted future cash
flows before interest to be generated by the operation.
Income Taxes. A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before the Company
is able to realize their benefit, or that future deductibility is prohibited or
uncertain. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been realized in the financial
statements or tax returns.
Derivative Instruments. The Company primarily enters into derivative
financial transactions to hedge existing or projected exposures to changing
foreign exchange rates and from time to time enters into derivatives to hedge
exposures to interest rates or commodity prices. The Company does not enter into
derivative transactions for speculative or trading purposes. Derivative
financial instruments to hedge exposure with an indeterminable maturity date are
generally carried at fair value with the resulting gains and losses reflected in
the results of operations. Gains or losses on hedges of identifiable commitments
are deferred and recognized when the offsetting gains or losses on the related
hedged items are recognized. Deferred gains or losses for hedges which are
terminated prior to the transaction date are recognized currently. In the event
an identifiable commitment is no longer expected to be realized, any deferred
gains or losses on hedges associated with the commitment are recognized
currently. Costs associated with entering into such contracts are presented in
other assets, while deferred gains or losses are included in other liabilities
or other assets, respectively, on the consolidated balance sheets. Recognized
gains or losses on derivatives entered into to manage foreign exchange risk are
included in foreign currency gains and losses on the supplemental consolidated
statements of income, while gains or losses on interest rate derivatives and
commodity derivatives are included in interest expense and operating income,
respectively. During the years ended December 31, 1997, 1996 and 1995, the
Company did not enter into any significant transactions to hedge interest rates
or commodity prices.
Foreign Currency Translation. Foreign entities whose functional
currency is the U.S. dollar translate monetary assets and liabilities at
year-end exchange rates and non-monetary items are translated at historical
rates. Income and expense accounts are translated at the average rates in effect
during the year, except for depreciation and cost of product sales which are
translated at historical rates. Gains or losses from changes in exchange rates
are recognized in consolidated income in the year of occurrence. Foreign
entities whose functional currency is the local currency translate net assets at
year-end rates and income and expense accounts at average exchange rates.
Adjustments resulting from these translations are reflected in the supplemental
consolidated statements of shareholders' equity titled "cumulative translation
adjustment".
Accounting Change. Effective with the period ending December 31, 1995,
the Company changed its accounting for postemployment benefits as required by
Statement of Financial Accounting Standards No. 112, "Employer's Accounting for
Postemployment Benefits" (SFAS 112). Postemployment benefits include salary
continuations, disability, and health care for former or inactive employees who
are not retired. Medical benefits for employees on long-term disability are the
most significant of the benefits. SFAS 112 requires accrual of the cost of these
benefits currently. The Company had previously accrued the liability for salary
continuation but had expensed the other benefits as paid. The supplemental
consolidated statements of income for 1995 includes a charge of $16.0 million
(net of tax of $9.0 million) or $0.04 per diluted share for the cumulative
effect of the accounting change.
23
Note 2. Acquisitions and Dispositions
Dresser Merger. On February 26, 1998, the Company and Dresser announced
that a definitive merger agreement was approved by the board of directors of
both companies and executed on February 25, 1998, subject to regulatory
approvals in the United States and several other countries and customary closing
conditions. On April 20, 1998, the Company and Dresser announced that the
companies had received requests for additional information concerning the
proposed merger from the Antitrust Division of the U.S. Department of Justice.
The requests were not unexpected and the companies responded to the requests.
The Company offered its commitment to divest its 36% interest in M-I L.L.C. On
June 25, 1998, shareholders of the Company voted their approval for (1) an
amendment to the Company's restated certificate of incorporation to increase the
number of authorized common shares from 400 million to 600 million and (2) the
issuance of Company common stock pursuant to the merger agreement between the
Company and Dresser. Also, at a separate meeting on June 25, 1998, shareholders
of Dresser approved the merger agreement between Halliburton and Dresser. On
July 6, 1998, the Company and Dresser received the European Commission's
decision that the Commission would not oppose the merger of the two companies.
On July 9, 1998, the Company announced receipt of an Advance Ruling Certificate
from the Canadian Bureau of Competition Policy clearing the Merger. On August
31, 1998, the Company sold its 36% interest in M-I L.L.C. (M-I). See Note 5. On
September 29, 1998, the Company received final regulatory approval from the U.S.
Department of Justice. In connection with the Merger, the Company entered into a
consent decree with the United States Department of Justice requiring
divestiture of Halliburton's current worldwide logging-while-drilling (LWD)
business. In 1997 the affected business had revenues of less than $50 million,
or approximately 0.4% of the combined revenues of Halliburton and Dresser.
Halliburton's existing directional drilling service line and Dresser's
Sperry-Sun division are not impacted by the decree. While Halliburton agreed in
the consent decree to divest one-half of its sonic LWD tools, it will continue
to provide customers with sonic LWD services using its existing sonic
technologies. The consent decree requires Halliburton to divest such LWD
business by March 28, 1999.
On September 29, 1998 the Company completed the Merger and the
conversion of the outstanding Dresser common stock into an aggregate of
approximately 176 million shares of Common Stock of the Company. The Company has
also reserved approximately 7.3 million shares of common stock for outstanding
Dresser stock options and other employee and directors plans. The merger
qualified as a tax-free exchange to Dresser's shareholders for U.S. federal
income tax purposes and was accounted for using the pooling of interests method
of accounting for business combinations. Accordingly, the Company's financial
statements have been restated to include the results of Dresser for all periods
presented.
Beginning in 1998, Dresser's year-end of October 31 has been conformed
to Halliburton's calendar year-end. Periods through December 1997 contain
Dresser's information on a fiscal year-end basis combined with Halliburton's
information on a calendar year-end basis. There were no material transactions
between Halliburton and Dresser prior to the Merger.
The results of operations for the separate companies and the combined
amounts are presented in the consolidated financial statements below:
Years ended December 31
--------------------------------------------------
Millions of dollars 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Halliburton $ 8,818.6 $ 7,385.1 $ 5,882.9
Dresser 7,457.9 6,561.5 5,628.7
- ---------------------------------------------------------------------------------------------------------------
Combined $ 16,276.5 $ 13,946.6 $ 11,511.6
- ---------------------------------------------------------------------------------------------------------------
Net income:
Halliburton $ 454.4 $ 300.4 $ 183.7
Dresser 318.0 257.5 197.1
- ---------------------------------------------------------------------------------------------------------------
Combined $ 772.4 $ 557.9 $ 380.8
- ---------------------------------------------------------------------------------------------------------------
Other Acquisitions and Dispositions. See Note 17 regarding the
disposition of the Company's insurance segment.
During March 1997, the Devonport management consortium, Devonport
Management Limited (DML), which is 51% owned by the Company, completed the
acquisition of Devonport Royal Dockyard plc, which owns and operates the
24
Government of the United Kingdom's Royal Dockyard in Plymouth, England, for
approximately $64.9 million. Concurrent with the acquisition of the Royal
Dockyard, the Company's ownership interest in DML increased from about 30% to
51% and DML borrowed $56.3 million under term loans. The dockyard principally
provides repair and refitting services for the British Royal Navy's fleet of
submarines and surface ships.
During April 1997, the Company completed its acquisition of the
outstanding common stock of OGC International plc (OGC) for approximately $118.3
million. OGC is engaged in providing a variety of engineering, operations and
maintenance services, primarily to the North Sea oil and gas production
industry.
During July 1997, the Company acquired all of the outstanding common
stock and convertible debentures of Kinhill Holdings Limited (Kinhill) for
approximately $34 million. Kinhill, headquartered in Australia, provides
engineering in mining and minerals processing, petroleum and chemicals, water
and wastewater, transportation and commercial and civil infrastructure. Kinhill
markets its services primarily in Australia, Indonesia, Thailand, Singapore,
India and the Philippines.
In 1997, the Company recorded approximately $99.1 million excess of
cost over net assets acquired primarily related to the acquisitions of OGC and
Kinhill.
On September 30, 1997, the Company completed its acquisition of NUMAR
through the merger of a subsidiary of the Company with and into NUMAR, the
conversion of the outstanding NUMAR common stock into an aggregate of
approximately 8.2 million shares of common stock of the Company and the
assumption by the Company of the outstanding NUMAR stock options (for the
exercise of which the Company has reserved an aggregate of approximately 0.9
million shares of common stock of the Company). The merger qualified as a
tax-free exchange and was accounted for using the pooling of interests method of
accounting for business combinations. The Company has not restated its financial
statements to include NUMAR's historical operating results because they were not
material to the Company. NUMAR's assets and liabilities on September 30, 1997
were included in the Company's accounts of the same date, resulting in an
increase in net assets of $21.3 million. Headquartered in Malvern, Pennsylvania,
NUMAR designs, manufactures and markets the Magnetic Resonance Imaging Logging
(MRIL(R)) tool which utilizes magnetic resonance imaging technology to evaluate
subsurface rock formations in newly drilled oil and gas wells.
See Note 5 for acquisitions or dispositions of unconsolidated
affiliates.
In June 1997, the Company sold certain assets of its SubSea operations
to Global Industries, Ltd. for $102.0 million cash. The Company recognized a
loss of $6.3 million (net of tax of $3.4 million) on the sale.
In October 1997, the Company announced it had reached an agreement to
sell its environmental services business to Tetra Tech, Inc. for approximately
$32 million. The transaction was completed on December 31, 1997. The sale was
prompted by the Company's desire to divest non-core businesses and had no
significant effect on net income for the year.
Effective February 29, 1996, the Company entered into an agreement to
form a joint venture with Shaw Industries Ltd. (Shaw) by contributing its
Bredero Price assets and Shaw contributing its Shaw Pipe Protection assets on a
worldwide basis. During the fourth quarter of 1997, the Company and Shaw agreed
to a long-term extension of their strategic pipe coating alliance, Bredero-Shaw.
In connection with the new agreement, Shaw agreed to pay the Company $50 million
over a four-year period. This transaction resulted in a fourth quarter pretax
gain of $41.7 million which is reported in the supplemental consolidated
statement of income in the caption "special charges and credits". For balance
sheet purposes, at year-end the Company deconsolidated Bredero-Shaw and
accounted for its 50% interest in the joint venture as an equity investment. The
Company includes its share of equity earnings in the results of operations
beginning January 1, 1998 under the equity method.
In October 1996, the Company completed its acquisition of Landmark
through the merger of Landmark with and into a subsidiary of the Company, the
conversion of the outstanding Landmark common stock into an aggregate of
approximately 20.4 million shares of common stock of the Company (after giving
effect to the Company's two-for-one stock split) and the assumption by the
Company of the outstanding Landmark stock options. The merger qualified as a
tax-free exchange and was accounted for using the pooling of interests method of
accounting for business combinations. The Company's financial statements have
been restated to include the results of Landmark for all periods presented prior
to the date of acquisition.
Prior to the Landmark merger with Halliburton, Landmark had a fiscal
year-end of June 30. Landmark's results have been restated to conform with
Halliburton Company's calendar year-end. Combined and separate results of
Halliburton and Landmark for the periods preceding the merger were as follows:
25
Nine Months Twelve Months
Ended Ended
-------------------- --------------------
Millions of dollars September 30, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------
Revenues:
Halliburton $ 5,251.5 $ 5,698.7
Landmark 143.9 184.2
- -----------------------------------------------------------------------------------------------
Combined $ 5,395.4 $ 5,882.9
- -----------------------------------------------------------------------------------------------
Net income:
Halliburton $ 201.2 $ 168.3
Landmark (8.4) 15.4
- -----------------------------------------------------------------------------------------------
Combined $ 192.8 $ 183.7
- -----------------------------------------------------------------------------------------------
The Company acquired several other businesses during 1997, 1996 and
1995 for $3.6 million, $32.2 million and $13.6 million, respectively. These
businesses did not have a significant effect on revenues or earnings.
During fiscal 1995, the Company acquired Subtec Asia Ltd., a Sharjah,
United Arab Emirates company, which provides underwater technology services
primarily to the offshore oil and gas industry, for $37.6 million in cash
including repayment of debt. On May 1, 1995, the Company acquired the assets of
Wellstream Company L.P., which was engaged in the production of high-pressure
flexible pipe and riser systems, for $62.4 million in cash, including repayment
of debt. On May 2, 1995, the Company acquired North Sea Assets P.L.C., the
remotely operated vehicle business of NSA/HMB Group, for approximately $30.4
million in cash.
Effective May 31, 1995, the Company acquired all the outstanding shares
of Grove S.p.A. (Grove), an Italian corporation, for $162.7 million in cash,
including repayment of debt. Grove is a multinational company engaged in the
production of oilfield valves and regulators.
The Company recorded $244.1 million excess of cost over net assets
acquired for the businesses purchased in 1995.
Note 3. Business Segment Information
The Company has three business segments. The Energy Services Group
includes pressure pumping equipment and services, logging and perforating,
drilling systems and services, drilling fluids systems, drill bits, specialized
completion and production equipment and services and well control. Also included
in the Energy Services Group are upstream oil and gas, engineering, construction
and maintenance services, integrated exploration and production information
systems and professional services to the petroleum industry. The Engineering and
Construction Group provides engineering, procurement, construction, project
management, and facilities operation and maintenance for hydrocarbon processing
and other industrial and governmental customers. The Dresser Equipment Group
designs, manufactures and markets highly engineered products and systems for oil
and gas producers, transporters, processors, distributors and petroleum users
throughout the world.
The Company's equity in pretax income or losses of related companies is
included in revenues and operating income of each applicable segment.
Intersegment revenues included in the revenues of the other business segments
and sales between geographic areas are immaterial. General corporate assets are
primarily comprised of cash and equivalents and certain other investments.
The tables below represent the Company's adoption of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131).
26
Operations by Business Segment
Years ended December 31
-----------------------------------------
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Revenues:
Energy Services Group $ 8,504.7 $ 6,515.4 $ 5,307.7
Engineering and Construction Group 4,992.8 4,720.7 3,736.5
Dresser Equipment Group 2,779.0 2,710.5 2,467.4
- -----------------------------------------------------------------------------------------------------
Total $ 16,276.5 $ 13,946.6 $ 11,511.6
- -----------------------------------------------------------------------------------------------------
Operating income:
Energy Services Group $ 1,019.4 $ 698.0 $ 544.5
Engineering and Construction Group 219.0 134.0 96.6
Dresser Equipment Group 248.3 229.3 200.7
Special charges (16.2) (85.8) (8.4)
General corporate (71.8) (72.3) (70.8)
- -----------------------------------------------------------------------------------------------------
Total $ 1,398.7 $ 903.2 $ 762.6
- -----------------------------------------------------------------------------------------------------
Capital expenditures:
Energy Services Group $ 682.9 $ 493.9 $ 409.5
Engineering and Construction Group 61.5 105.6 62.2
Dresser Equipment Group 76.4 119.0 117.9
General corporate 59.3 12.6 1.9
- -----------------------------------------------------------------------------------------------------
Total $ 880.1 $ 731.1 $ 591.5
- -----------------------------------------------------------------------------------------------------
Depreciation and amortization:
Energy Services Group $ 395.0 $ 338.5 $ 313.8
Engineering and Construction Group 63.3 58.7 55.9
Dresser Equipment Group 98.6 92.8 85.9
General corporate 7.4 7.7 10.8
- -----------------------------------------------------------------------------------------------------
Total $ 564.3 $ 497.7 $ 466.4
- -----------------------------------------------------------------------------------------------------
Total assets:
Energy Services Group $ 5,810.4 $ 5,036.3 $ 4,429.3
Engineering and Construction Group 1,931.4 1,835.3 1,633.2
Dresser Equipment Group 2,117.3 2,129.1 2,014.3
General corporate 842.7 586.1 492.6
- -----------------------------------------------------------------------------------------------------
Total $ 10,701.8 $ 9,586.8 $ 8,569.4
- -----------------------------------------------------------------------------------------------------
Research and development:
Energy Services Group $ 173.8 $ 150.1 $ 124.8
Engineering and Construction Group 2.1 4.0 4.2
Dresser Equipment Group 108.8 89.8 80.6
- -----------------------------------------------------------------------------------------------------
Total $ 284.7 $ 243.9 $ 209.6
- -----------------------------------------------------------------------------------------------------
27
Operations by Geographic Area
Years ended December 31
------------------------------------------
Millions of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Revenues:
United States $ 6,178.7 $ 5,730.0 $ 4,897.0
United Kingdom 2,315.0 1,504.6 1,279.6
Other areas (over 120 countries) 7,782.8 6,712.0 5,335.0
- ------------------------------------------------------------------------------------------------------
Total $ 16,276.5 $ 13,946.6 $ 11,511.6
- ------------------------------------------------------------------------------------------------------
Long-lived assets:
United States $ 2,518.9 $ 2,432.9 $ 2,272.5
United Kingdom 775.0 626.9 552.7
Other areas (over 120 countries) 982.8 956.6 843.8
- ------------------------------------------------------------------------------------------------------
Total $ 4,276.7 $ 4,016.4 $ 3,669.0
- ------------------------------------------------------------------------------------------------------
Export sales:
Mid-East/Far East and Africa $ 1,013.8 $ 1,200.7 $ 874.5
Latin America 726.2 556.6 482.7
Europe 274.6 362.9 229.5
Canada 103.2 110.9 97.8
- ------------------------------------------------------------------------------------------------------
Total $ 2,117.8 $ 2,231.1 $ 1,684.5
- ------------------------------------------------------------------------------------------------------
Note 4. Inventories
Inventories at December 31, 1997 and 1996 are comprised of the
following:
Millions of dollars 1997 1996
- ---------------------------------------------------------------------------------------
Finished products and parts $ 670.9 $ 570.3
Raw materials and supplies 213.7 235.4
Work in process 535.8 518.6
Progress payments (121.2) (118.5)
- ---------------------------------------------------------------------------------------
Total $ 1,299.2 $ 1,205.8
- ---------------------------------------------------------------------------------------
Inventories on the last-in, first-out (LIFO) method were $195.9 and
$163.9 at December 31, 1997 and December 31, 1996, respectively. If the average
cost method had been in use for inventories on the LIFO basis, total inventories
would have been about $100.8 million and $112.0 million higher than reported at
December 31, 1997 and 1996, respectively.
Note 5. Related Companies
The Company conducts some of its operations through various joint
ventures which are in partnership, corporate and other business forms, which are
principally accounted for using the equity method. European Marine Contractors,
Limited (EMC), which is 50% owned by the Company and part of the Energy Services
Group, specializes in engineering, procurement and construction of marine
pipelines. Bredero-Shaw, which is 50% owned by the Company and part of the
Energy Services Group, specializes in pipe coating. Ingersoll-Dresser Pump,
which is 49% owned by the Company and part of the Dresser Equipment Group,
manufactures a broad range of pump products and services. Summarized financial
statements for the combined jointly-owned operations which are not consolidated
are as follows:
28
Combined Operating Results
Millions of dollars 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Revenues $ 4,559.8 $ 3,809.0 $ 3,364.3
- ----------------------------------------------------------------------------------------------
Operating income $ 395.3 $ 289.3 $ 247.8
- ----------------------------------------------------------------------------------------------
Net income $ 303.3 $ 196.3 $ 170.9
- ----------------------------------------------------------------------------------------------
Combined Financial Position
Millions of dollars 1997 1996
- ---------------------------------------------------------------------------
Current assets $ 2,215.1 $ 2,026.2
Noncurrent assets 1,009.5 917.8
- ---------------------------------------------------------------------------
Total $ 3,224.6 $ 2,944.0
- ---------------------------------------------------------------------------
Current liabilities $ 1,042.5 $ 1,145.4
Noncurrent liabilities 727.2 614.5
Minority interests 8.1 6.6
Shareholder's equity 1,446.8 1,177.5
- ---------------------------------------------------------------------------
Total $ 3,224.6 $ 2,944.0
- ---------------------------------------------------------------------------
In the second quarter of 1996, M-I, a 36% owned joint venture,
purchased Anchor Drilling Fluids. The Company's share of the purchase price was
$41.3 million and is included in cash flows from other investing activities. The
Company sold its 36% ownership interest in M-I to Smith International, Inc. on
August 31, 1998. This transaction completed Halliburton's commitment to the DOJ
to sell its M-I interest in connection with its merger with Dresser. The
purchase price of $265 million was paid by Smith in the form of a non-interest
bearing promissory note due April, 1999. All of M-I's debt will remain an
obligation of M-I.
Note 6. Lines of Credit, Notes Payable and Long-Term Debt
At year-end 1997, the Company had committed short-term lines of credit
totaling $480.0 million available and unused, and other short-term lines of
credit totaling $275.0 million with several U.S. banks. No borrowings were
outstanding under these facilities at year-end 1997. In addition, the Company
had $50.5 million of short-term debt outstanding. This debt consists of $2.7
million in foreign bank overdrafts with an interest rate of 7.31% and $47.8
million of foreign loans denoted primarily in foreign currencies with an average
interest rate of 6.72%.
At year-end 1996, the Company had committed short-term lines of credit
totaling $465 million available and unused, and other short-term lines of credit
totaling $275.0 million, under which $25.0 million in borrowings was outstanding
with several U.S. banks. The interest on these borrowings was 5.65%. In
addition, the Company had $105.7 million of short-term debt outstanding. This
debt consists of $21.3 million in commercial paper with an interest rate of
5.85% and $84.4 million of foreign bank loans denoted primarily in foreign
currencies with an average interest rate of 5.35%.
29
Long-term debt at the end of 1997 and 1996 consists of the following:
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------
6.25% notes due June 1, 2000 $ 300.0 $ 300.0
7.6% debentures due August 15, 2096 300.0 300.0
8.75% debentures due February 15, 2021 200.0 200.0
8 % senior notes due April 15, 2003 149.5 149.3
Medium-term notes due February 1, 2027 125.0 -
Medium-term notes due August 5, 2002 75.0 -
Medium-term notes due May 12, 2017 50.0 -
Medium-term notes due July 8, 1999 50.0 -
Term loans at LIBOR plus 0.75% payable in semi-annual
installments through March 2004 45.9 -
Other notes with varying interest rates 8.9 8.7
- ------------------------------------------------------------------------------------
1,304.3 958.0
Less current portion 7.4 1.7
- ------------------------------------------------------------------------------------
Total long-term debt $ 1,296.9 $ 956.3
- ------------------------------------------------------------------------------------
The Company's 8.75% debentures due February 15, 2021 do not have
sinking fund requirements and are not redeemable prior to maturity. During 1997,
the Company issued notes under its medium-term note program as follows:
Amount Issue Date Due Rate Prices Yield
-----------------------------------------------------------------------------------------------------------
$ 125 million 02/11/97 02/01/2027 6.75% 99.78% 6.78%
$ 50 million 05/12/97 05/12/2017 7.53% Par 7.53%
$ 50 million 07/08/97 07/08/1999 6.27% Par 6.27%
$ 75 million 08/05/97 08/05/2002 6.30% Par 6.30%
-----------------------------------------------------------------------------------------------------------
The medium-term notes may not be redeemed at the option of the Company
prior to maturity. There is no sinking fund applicable to the notes. Each holder
of the 6.75% medium-term notes has the right to require the Company to repay
such holder's notes, in whole or in part, on February 1, 2007. The net proceeds
from the sale of the notes were used for general corporate purposes.
During March 1997, the Company incurred $56.3 million of term loans in
connection with the acquisition of the Royal Dockyard in Plymouth, England (the
Dockyard Loans). The Dockyard Loans are denominated in Sterling and bear
interest at LIBOR plus 0.75% payable in semi-annual installments through March
2004. Pursuant to certain terms of the Dockyard Loans, the Company was required
to provide initially a compensating balance of $28.7 million which is restricted
as to use by the Company. The compensating balance amount decreases in
proportion to the outstanding debt related to the Dockyard Loans and earns
interest at a rate equal to that of the Dockyard Loans. At December 31, 1997,
the compensating balance of $22.8 million is included in other assets in the
supplemental consolidated balance sheets.
Long-term debt matures over the next five years as follows: $7.4
million in 1998; $59.8 million in 1999; $308.4 million in 2000; $9.0 million in
2001; and $89.0 million in 2002.
Note 7. Dresser Financial Information
Subject to approval from the Securities and Exchange Commission (the
Commission), Dresser will cease filing periodic reports with the Commission. The
Company will fully guarantee Dresser's 8% senior notes due 2003 (the Notes). See
Note 6. As long as the Notes remain outstanding, summarized financial
information of Dresser will be presented in periodic reports filed by the
Company.
30
Dresser Industries, Inc.
Financial Position Year-end
- -------------------------------------------------------------------------------------------
Millions of dollars 1997 1996
- -------------------------------------------------------------------------------------------
Current assets $ 2,471.6 $ 2,469.5
Noncurrent assets 2,627.2 2,680.7
- -------------------------------------------------------------------------------------------
Total $ 5,098.8 $ 5,150.2
- -------------------------------------------------------------------------------------------
Current liabilities $ 1,687.4 $ 1,861.8
Noncurrent liabilities 1,679.2 1,706.2
Shareholders' equity 1,732.2 1,582.2
- -------------------------------------------------------------------------------------------
Total $ 5,098.8 $ 5,150.2
- -------------------------------------------------------------------------------------------
Dresser Industries, Inc.
Operating Results Years-ended
-------------------------------------------------------
Millions of dollars 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 7,457.9 $ 6,561.5 $ 5,628.7
- -------------------------------------------------------------------------------------------------------------------
Operating income $ 600.6 $ 485.3 $ 361.7
- -------------------------------------------------------------------------------------------------------------------
Income before taxes and minority interest $ 546.8 $ 426.8 $ 342.2
Income taxes (191.4) (145.1) (109.3)
Minority interest (37.4) (24.2) (19.8)
Cumulative effect of accounting change - - (16.0)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 318.0 $ 257.5 $ 197.1
- -------------------------------------------------------------------------------------------------------------------
Note 8. Commitments and Contingencies
Leases. At year end 1997, the Company was obligated under noncancelable
operating leases, expiring on various dates through 2020, principally for the
use of land, offices, equipment, field facilities, and warehouses. Aggregate
rentals charged to operations for such leases totaled $202.8 million in 1997,
$177.8 million in 1996 and $177.1 million in 1995. Future aggregate rentals on
noncancelable operating leases are as follows: 1998, $118.3 million; 1999, $74.4
million; 2000, $52.5 million; 2001, $38.7 million; 2002, $31.7 million; and
thereafter, $111.1 million.
General Litigation. The purchasers of the Company's former hand tool
division sued the Company for fraud in connection with the October 1983
transaction. In May 1994, the jury returned a verdict awarding the plaintiffs
$4.0 million in compensatory damages and $50.0 million in punitive damages. On
October 13, 1994, the Court ordered a reduction of damages from $54.0 to $12.0
million. On October 15, 1996, the Court of Appeals issued its decision reversing
the trial court's decision as to compensatory and punitive damages and remanding
the case for a new trial on damages. On remand, the trial court ordered that the
new trial contemplated by the appellate decision be limited to compensatory
damages only, despite the express statement that punitive damages were also
reversed, and decided that the court would review the original punitive damages
verdict after the retrial on compensatory damages. The Company is preparing to
defend itself vigorously at the new trial on compensatory damages, which is
scheduled to begin in October 1998, and throughout the post-trial review
process.
Based on a review of the current facts and circumstances, management
has provided for what is believed to be a reasonable estimate of the exposure to
loss associated with this matter. While acknowledging the uncertainties of
litigation, management believes that this matter will be resolved without a
material effect on the Company's financial position or results of operations.
Asbestosis Litigation. Since 1976, the Company has been involved in
litigation resulting from allegations that third parties had sustained injuries
and damage from the inhalation of asbestos fibers contained in certain products
manufactured by the Company or companies acquired by the Company.
Over the last 20 years approximately 154,000 claims have been filed
against the Company. Claims continue to be filed with 22,000 new claims filed in
1997. The Company has entered into agreements with insurance carriers which
cover, in whole or in part, indemnity payments, legal fees and expenses for
certain categories of claims. The Company is in negotiation with carriers over
coverage for the remaining categories of claims. Because these agreements are
31
governed by exposure dates, payment type and the product involved, the covered
amount varies by individual claim. In addition, lawsuits are pending against
several carriers seeking to recover additional amounts related to these claims.
Since 1976, the Company has settled or disposed of 88,000 claims for a
gross cost of approximately $75 million with insurance carriers paying all but
$28 million. Provision has been made for the estimated exposure, based on
historical experience and expected recoveries from insurance carriers, related
to the 66,000 claims which were open at the end of 1997 including 25,000 for
which settlements are pending. Management has no reason to believe that the
insurance carriers will not be able to meet their share of future obligations
under the agreements.
Pursuant to an agreement entered into at the time of the spin-off of
INDRESCO, Inc., now Global Industrial Technologies, Inc. (Global), claims filed
after July 31, 1992 related to refractory products manufactured by the
Harbison-Walker Refractories Division of the Company are the responsibility of
Global. Certain agreements with insurance carriers referred to above also cover
these claims.
Management recognizes the uncertainties of litigation and the
possibility that a series of adverse rulings could materially impact operating
results. However, based upon the Company's historical experience with similar
claims, the time elapsed since the Company discontinued sale of products
containing asbestos, and management's understanding of the facts and
circumstances that gave rise to such claims, management believes that the
pending asbestos claims will be resolved without material effect on the
Company's financial position or results of operations.
Environmental. The Company is involved through its subsidiaries as a
potential responsible party (PRP) in remedial activities to clean up various
"Superfund" sites under applicable federal law which imposes joint and several
liability, if the harm is indivisible, on certain persons without regard to
fault, the legality of the original disposal, or ownership of the site. Although
it is very difficult to quantify the potential impact of compliance with
environmental protection laws, management of the Company believes that any
liability of the Company with respect to all but one of such sites will not have
a material adverse effect on the results of operations of the Company.
With respect to a site in Jasper County, Missouri (Jasper County
Superfund Site), sufficient information that would enable management to quantify
the Company's potential liability has not been developed and management believes
the process of determining the nature and extent of remediation at this site and
the total costs thereof will be lengthy. Brown & Root, Inc. (Brown & Root), a
subsidiary of the Company, has been named as a PRP with respect to the Jasper
County Superfund Site by the Environmental Protection Agency (EPA). The Jasper
County Superfund Site includes areas of mining activity that occurred from the
1800s through the mid 1950s in the southwestern portion of Missouri. The site
contains lead and zinc mine tailings produced from mining activities. Brown &
Root is one of nine participating PRPs that have agreed to perform a Remedial
Investigation/Feasibility Study (RI/FS), which, due to various delays, is not
expected to be completed until sometime in 1999. Although the entire Jasper
County Superfund Site comprises 237 square miles as listed on the National
Priorities List, in the RI/FS scope of work, the EPA has only identified seven
areas, or subsites, within this area that need to be studied and then possibly
remediated by the PRPs. Additionally, the Administrative Order on Consent for
the RI/FS only requires Brown & Root to perform RI/FS work at one of the
subsites within the site, the Neck/Alba subsite, which only comprises 3.95
square miles. Brown & Root's share of the cost of such a study is not expected
to be material. In addition to the Superfund issues, the State of Missouri has
indicated that it may pursue natural resource damage claims against the PRPs. At
the present time Brown & Root cannot determine the extent of its liability, if
any, for remediation costs or natural resource damages on any reasonably
practicable basis.
Other. The Company and its subsidiaries are parties to various other
legal proceedings. Although the ultimate dispositions of such proceedings are
not presently determinable, in the opinion of the Company any liability that may
ensue will not be material in relation to the consolidated financial position
and results of operations of the Company.
Note 9. Income Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share." Options to purchase 1.1 million, 2.6 million and 0.9
million shares of common stock were outstanding during 1997, 1996 and 1995,
respectively, but were not included in the computation of diluted earnings per
share because the option exercise price was greater than the average market
price of the common shares. During 1995, there were 6.6 million weighted average
shares and $12.5 million in income related to the conversion of the zero coupon
convertible debentures that were excluded from the computation because they were
antidilutive.
32
Note 10. Property, Plant and Equipment
Property, plant and equipment at December 31, 1997 and 1996 is
comprised of the following:
Millions of dollars 1997 1996
- -------------------------------------------------------------------------------------
Land $ 136.0 $ 162.3
Buildings and property improvements 1,055.9 1,041.7
Machinery and equipment 4,920.8 4,918.6
Other 533.3 274.9
-------------------------
Total $ 6,646.0 $ 6,397.5
- -------------------------------------------------------------------------------------
At December 31, 1997 and 1996, other property includes oil and gas
investments of approximately $101.7 million and $5.9 million and software
developed for internal use of $59.5 million and $10.0 million, respectively.
Note 11. Special Charges
In June 1997, the Company sold certain assets of its SubSea operations
to Global Industries, Ltd. for $102 million cash. The Company recognized a loss
of $9.7 million ($6.3 million after tax) on the sale.
In September 1997, the Company recorded special charges of $8.6 million
(also $8.6 million after tax) for transaction costs incurred by the Company and
NUMAR to complete the merger of a subsidiary of the Company with and into NUMAR.
The Company settled these obligations during the fourth quarter of 1997 with
funds provided by operations.
During the fourth quarter of 1997, the Company and Shaw Industries Ltd.
agreed to a long-term extension of their strategic pipe coating alliance. See
Note 2. This transaction resulted in a pre-tax gain of $41.7 million dollars.
Prior to October 31, 1997 the Company, along with its joint venture
partner Ingersoll-Rand Company, approved profit initiatives at Dresser-Rand
Company and Ingersoll-Dresser Pump Company. Profit improvement initiatives at
the Dresser-Rand and Ingersoll-Dresser Pump joint ventures will include the
closure of a Dresser-Rand European plant, personnel reductions in administrative
and sales support, consolidation of repair and service operations and the
discontinuance of certain product lines. The Company's share of these
initiatives is $48.2 million. Of this amount, $18.0 million ($7.5 million after
tax and minority interest) was recorded in the fourth quarter of 1997. The
remaining $30.2 million ($12.0 million after tax and minority interest) was
recorded in the two months ended December 1997 upon notification of employee
terminations and has been included in retained earnings in the supplemental
condensed consolidated balance sheets at June 30, 1998.
During 1997, the Company recorded a pretax charge of $21.6 million
($14.0 million after tax) to write-down certain assets whose carrying value has
been impaired and to provide for early retirement incentives.
During September 1996, the Company recorded special charges of $65.3
million ($42.7 million after tax), which included provisions of $41.0 million to
terminate approximately one thousand employees related to reorganization efforts
by the Engineering and Construction Group and plans to combine various
administrative support functions into combined shared services for the Company;
$20.2 million to restructure certain Engineering and Construction Group
businesses, provide for excess lease space and other items; and $4.1 million
($3.5 million after tax) for costs related to the acquisition of Landmark. The
Company has substantially completed its reorganization plans initiated during
the third quarter of 1996. Approximately $57.6 million has been charged or
allocated to this reserve with the remaining amount to be charged over the
remaining term of excess leases through August 2003.
In September 1996, Landmark recorded special charges of $8.3 million
($7.6 million after tax) for costs incurred for merging with the Company. During
March 1996, Landmark recorded special charges of $12.2 million ($8.7 million
after tax) for the write-off of in-process research and development activities
acquired in connection with the purchase by Landmark of certain assets and the
assumption of certain liabilities of Western Atlas International, Inc. and the
write-off of related redundant assets and activities.
The special charges to net income in the third quarter of 1996 were
offset by tax credits during the same quarter of $43.7 million due to the
recognition of net operating loss carryforwards and the settlement during the
quarter of various issues with the Internal Revenue Service (IRS). The Company
reached agreement with the IRS and recognized net operating loss carryforwards
of $62.5 million ($22.5 million in tax benefits) from the 1989 tax year. The net
operating loss carryforwards were utilized in the 1996 tax year. In addition,
the Company also reached agreement with the IRS on issues related to
intercompany pricing of goods and services for the tax years 1989 through 1992
and entered into an advanced pricing agreement for the tax years 1993 through
33
1998. As a result of these agreements with the IRS, the Company recognized tax
benefits of $16.1 million. The Company also recognized net operating loss
carryforwards of $14.0 million ($5.1 million in tax benefits) in certain foreign
areas due to improving profitability and restructuring of foreign operations.
In 1995, Landmark recorded special charges of $8.4 million, primarily
for the write-off of research and development activities of acquired companies,
merger costs and restructuring charges.
Note 12. Income Taxes
The components of the (provision) benefit for income taxes are:
Millions of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Current income taxes
Federal $ (167.2) $ (82.0) $ (37.0)
Foreign (306.1) (169.8) (149.8)
State (15.5) (10.0) (9.0)
- ------------------------------------------------------------------------------------------------
Total (488.8) (261.8) (195.8)
- ------------------------------------------------------------------------------------------------
Deferred income taxes
Federal 5.4 61.2 (5.5)
Foreign and state (8.0) (47.8) (45.7)
- ------------------------------------------------------------------------------------------------
Total (2.6) 13.4 (51.2)
- ------------------------------------------------------------------------------------------------
Total $ (491.4) $ (248.4) $ (247.0)
- ------------------------------------------------------------------------------------------------
Included in income taxes are foreign tax credits of $154.0 million in
1997, $109.2 million in 1996 and $91.1 million in 1995. The United States and
foreign components of income from continuing operations before income taxes and
minority interests are as follows:
Millions of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------
United States $ 736.8 $ 484.2 $ 412.4
Foreign 576.3 346.8 317.6
- ------------------------------------------------------------------------------------------------
Total $ 1,313.1 $ 831.0 $ 730.0
- ------------------------------------------------------------------------------------------------
The primary components of the Company's deferred tax assets and
liabilities and the related valuation allowances are as follows:
34
Millions of dollars 1997 1996
- ----------------------------------------------------------------------------------
Gross deferred tax assets
Employee benefit plans $ 334.4 $ 328.7
Accrued liabilities 79.4 89.5
Insurance accruals 71.5 63.7
Construction contract accounting methods 70.6 56.5
Intercompany profit 39.3 34.2
Net operating loss carryforwards 46.7 87.4
Inventory 37.4 33.9
Foreign tax credits 21.2 29.8
Alternative minimum tax carryforward 15.1 19.3
All other 80.1 76.5
- ----------------------------------------------------------------------------------
Total 795.7 819.5
- ----------------------------------------------------------------------------------
Gross deferred tax liabilities
Depreciation and amortization 124.5 121.3
Unrepatriated foreign earnings 35.6 34.1
Safe harbor leases 11.0 12.0
All other 85.0 89.3
- ----------------------------------------------------------------------------------
Total 256.1 256.7
- ----------------------------------------------------------------------------------
Valuation allowances
Net operating loss carryforwards 30.7 53.7
All other 33.3 34.0
- ----------------------------------------------------------------------------------
Total 64.0 87.7
- ----------------------------------------------------------------------------------
Net deferred income tax asset $ 475.6 $ 475.1
- ----------------------------------------------------------------------------------
The Company has provided for the potential repatriation of certain
undistributed earnings of its foreign subsidiaries and considers earnings above
the amounts on which tax has been provided to be permanently reinvested. While
these additional earnings could become subject to additional tax if repatriated,
such a repatriation is not anticipated. Any additional amount of tax is not
practicable to estimate.
The Company has foreign tax credits which expire in 2000 of $21.2
million. The Company has net operating loss carryforwards which expire as
follows: 1998 through 2002, $67.2 million; 2003 through 2007, $15.7 million;
2008 through 2010, $5.1 million. The Company also has net operating loss
carryforwards of $49.1 million with indefinite expiration dates. Reconciliations
between the actual provision for income taxes and that computed by applying the
U.S. statutory rate to income from continuing operations before income taxes and
minority interest are as follows:
Millions of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Provision computed at statutory rate $ (459.6) $ (290.9) $ (255.5)
Reductions (increases) in taxes resulting from:
Tax differentials on
foreign earnings (4.3) 14.2 (30.0)
State income taxes, net of
federal income tax benefit (12.0) (7.0) (7.5)
Net operating losses - 22.7 58.0
Federal income tax settlement - 16.1 -
Nondeductible goodwill (12.5) (8.9) (7.5)
Other items, net (3.0) 5.4 (4.5)
- ------------------------------------------------------------------------------------------------
Total $ (491.4) $ (248.4) $ (247.0)
- ------------------------------------------------------------------------------------------------
35
The Company has received statutory notices of deficiency for the 1990
and 1991 tax years from the Internal Revenue Service (IRS) of $92.9 million and
$16.8 million, respectively, excluding any penalties or interest. The Company
believes it has meritorious defenses and does not expect that any liability
resulting from the 1990 or 1991 tax years will result in a material adverse
effect on its results of operations or financial position. In 1996, the Company
reached settlements with the IRS for certain matters including the 1989 taxable
year. As a result of the settlement for the 1989 taxable year, the Company
recognized tax benefits and net income was increased by $16.1 million in 1996
(see Note 11).
Note 13. Common Stock
On June 25, 1998, the Company's shareholders voted to increase the
Company's number of authorized shares from 400.0 million to 600.0 million.
On May 20, 1997, the Company's shareholders voted to increase the
Company's number of authorized shares from 200.0 million shares to 400.0 million
shares. On June 9, 1997, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend distributed on July 21,
1997 to shareholders of record on June 26, 1997. The par value of the Company's
common stock of $2.50 per share remained unchanged. As a result of the stock
split, $556.3 million was transferred from paid-in capital in excess of par
value to common stock. Historical share and per share amounts presented on the
supplemental consolidated statements of income and in the discussion below
concerning stock options and restricted stock have been restated to reflect the
stock split.
The Company's 1993 Stock and Long-Term Incentive Plan (1993 Plan)
provides for the grant of any or all of the following types of awards: (1) stock
options, including incentive stock options and non-qualified stock options; (2)
stock appreciation rights, in tandem with stock options or freestanding; (3)
restricted stock; (4) performance share awards; and (5) stock value equivalent
awards. Under the terms of the 1993 Plan as amended, 27 million shares of the
Company's Common Stock have been reserved for issuance to key employees. At
December 31, 1997, 14.8 million shares were available for future grants under
the 1993 Plan.
In connection with the acquisitions of Dresser, Landmark Graphics
Corporation (Landmark) and NUMAR Corporation (NUMAR) (see Note 2), outstanding
stock options under the stock option plans maintained by Dresser, Landmark and
NUMAR were assumed by the Company. Stock option transactions summarized below
include amounts for the 1993 Plan, the Dresser plans using the acquisition
exchange rate of 1 share for each Dresser share, the Landmark plans using the
acquisition exchange rate of 1.148 shares for each Landmark share, and the NUMAR
plans using the acquisition exchange rate of .9664 shares for each NUMAR share.
Exercise Weighted Average
Number of Price per Exercise Price
Stock Options Shares Share per Share
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 9,268,737 $ 0.53 - 29.73 $ 16.92
- ---------------------------------------------------------------------------------------------------
Granted 4,431,207 15.68 - 25.32 20.71
Exercised (1,115,630) 0.53 - 23.04 14.79
Forfeited (294,664) 4.48 - 28.77 17.52
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 12,289,650 2.90 - 29.73 18.53
- ---------------------------------------------------------------------------------------------------
Granted 4,295,409 14.48 - 29.57 27.49
Exercised (2,722,828) 2.90 - 23.88 16.72
Forfeited (445,660) 8.71 - 28.09 18.81
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 13,416,571 3.49 - 29.73 21.77
- ---------------------------------------------------------------------------------------------------
Options assumed in acquisition 854,050 3.10 - 22.12 12.22
Granted 2,194,972 30.69 - 61.50 46.18
Exercised (3,684,923) 3.10 - 29.56 17.95
Forfeited (395,833) 9.15 - 39.88 22.69
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 12,384,837 $ 3.10 - 61.50 $ 26.55
- ---------------------------------------------------------------------------------------------------
36
Options outstanding at December 31, 1997 are composed of the following:
Outstanding Exercisable
------------------------------------------------ --------------------------------
Weighted
Number of Average Weighted Number of Weighted
Shares at Remaining Average Shares at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1997 Life Price 1997 Price
- -----------------------------------------------------------------------------------------------------------
$ 3.10 - 11.11 395,674 4.52 $ 7.20 389,878 $ 7.13
11.25 - 18.13 2,628,212 6.68 16.13 2,234,747 16.05
18.24 - 29.19 4,595,285 7.02 23.13 3,184,342 22.85
29.56 - 61.50 4,765,666 9.21 37.20 1,157,059 31.17
- -----------------------------------------------------------------------------------------------------------
$ 3.10 - 61.50 12,384,837 7.71 $ 26.55 6,966,026 $ 21.17
- -----------------------------------------------------------------------------------------------------------
There were 6.5 million options exercisable with a weighted average
exercise price of $18.57 at December 31, 1996, and 4.5 million options
exercisable with a weighted average exercise price of $17.64 at December 31,
1995.
All stock options under the 1993 Plan, including options granted to
employees of Dresser, Landmark and NUMAR since the acquisition of such
companies, are granted at the fair market value of the Common Stock at the grant
date. Landmark, prior to its acquisition by the Company, had provisions in its
plans that allowed Landmark to set option exercise prices at a defined
percentage below fair market value. The fair value of options at the date of
grant was estimated using the Black-Scholes option pricing model. The weighted
average assumptions and resulting fair values of options granted are as follows:
Assumptions Weighted Average
---------------------------------------------------------------------
Risk-Free Expected Expected Expected Fair Value of
Interest Rate Dividend Yield Life (in years) Volatility Options Granted
- ---------------------------------------------------------------------------------------------------------------
1997 6.0 - 6.4% 1.0 - 2.7% 5 - 6.5 22.8 - 43.3% $ 8.94 - 22.71
1996 5.8 - 5.9% 1.6 - 2.7% 5 - 6.5 23.1 - 39.7% $ 5.67 - 10.24
1995 6.2 - 7.0% 1.6 - 2.8% 5 - 6.5 23.3 - 38.4% $ 5.37 - 7.16
- ---------------------------------------------------------------------------------------------------------------
Stock options generally expire ten years from the grant date. Stock
options vest over a three-year period, with one-third of the shares becoming
exercisable on each of the first, second and third anniversaries of the grant
date.
The Company accounts for the 1993 Plan in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for the Company's
stock option programs been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company's pro forma net income for 1997, 1996 and 1995 would have been
$750.3 million, $547.1 million and $377.0 million, respectively, resulting in
diluted earnings per share of $1.72, $1.27 and $0.87, respectively. Because the
SFAS 123 method of accounting has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Restricted shares awarded under the 1993 Plan for 1997, 1996 and 1995
were 515,650; 363,800; and 412,700, respectively. The shares awarded are net of
forfeitures of 34,900; 34,600; and 9,800 shares in 1997, 1996 and 1995,
respectively. The weighted average fair market value per share at the date of
grant of shares granted in 1997, 1996 and 1995 was $45.29, $28.24 and $20.44,
respectively.
The Company's Restricted Stock Plan for Non-Employee Directors
(Restricted Stock Plan) allows for each non-employee director to receive an
annual award of 400 restricted shares of Common Stock as a part of compensation.
The Company reserved 100,000 shares of Common Stock for issuance to non-employee
directors. The Company issued 3,200; 3,600 and 3,200 restricted shares in 1997,
1996 and 1995, respectively, under this plan. At December 31, 1997, 17,200
shares have been issued to non-employee directors under this plan. The weighted
average fair market value per share at the date of grant of shares granted in
1997, 1996 and 1995 was $46.06, $26.57 and $20.38, respectively.
37
The Company's Employees' Restricted Stock Plan was established for
employees who are not officers, for which 200,000 shares of Common Stock have
been reserved. The Company awarded 3,500 restricted shares in 1995. Forfeitures
were 14,600; 8,400 and 1,800 in 1997, 1996 and 1995, respectively. No awards
were made in 1997 or 1996 and no further grants are being made under this plan.
At December 31, 1997, 172,200 shares (net of 24,800 shares forfeited) have been
issued. The weighted average fair market value per share at the date of grant
for shares granted in 1995 was $17.50.
Under the terms of the Company's Career Executive Incentive Stock Plan,
15 million shares of the Company's Common Stock were reserved for issuance to
officers and key employees at a purchase price not to exceed par value of $2.50
per share. At December 31, 1997, 11.7 million shares (net of 2.1 million shares
forfeited) have been issued under the plan. No further grants will be made under
the Career Executive Incentive Stock Plan.
Restricted shares issued under the 1993 Plan, Restricted Stock Plan,
Employees' Restricted Stock Plan and the Career Executive Incentive Stock Plan
are limited as to sale or disposition with such restrictions lapsing
periodically over an extended period of time not exceeding ten years. The fair
market value of the stock, on the date of issuance, is being amortized and
charged to income (with similar credits to paid-in capital in excess of par
value) generally over the average period during which the restrictions lapse.
Compensation costs recognized in income for 1997, 1996 and 1995 were $7.1
million, $6.9 million and $7.0 million, respectively. At December 31, 1997, the
unamortized amount is $44.3 million.
Note 14. Series A Junior Participating Preferred Stock
The Company has previously declared a dividend of one preferred stock
purchase right (a Right) on each outstanding share of Common Stock. Each Right
entitles the holder thereof to buy one two-hundredth of a share of the Company's
Series A Junior Participating Preferred Stock, without par value, at an exercise
price of $75, subject to certain antidilution adjustments, upon the terms and
subject to the conditions set forth in the Rights Agreement entered into with
ChaseMellon Shareholder Services, L.L.C. as Rights Agent. The Rights do not have
any voting rights and are not entitled to dividends.
The Rights become exercisable in certain limited circumstances
involving a potential business combination. Following certain other events after
the Rights become exercisable, each Right will entitle its holder to an amount
of Common Stock of the Company, or in certain circumstances, securities of the
acquirer, having a then-current market value of two times the exercise price of
the Right. The Rights are redeemable at the Company's option at any time before
they become exercisable. The Rights expire on December 15, 2005. No event during
1997 made the Rights exercisable.
Note 15. Financial Instruments and Risk Management
Foreign Exchange Risk. Techniques in managing foreign exchange risk
include, but are not limited to, foreign currency borrowing and investing and
the use of currency derivative instruments. The Company selectively hedges
significant exposures to potential foreign exchange losses considering current
market conditions, future operating activities and the cost of hedging the
exposure in relation to the perceived risk of loss. The purpose of the Company's
foreign currency hedging activities is to protect the Company from the risk that
the eventual cash flows resulting from the sale and purchase of products will be
adversely affected by changes in exchange rates. The Company does not hold or
issue derivative financial instruments for trading or speculative purposes.
The Company hedges its currency exposure through the use of currency
derivative instruments. Such contracts generally have an expiration date of two
years or less. Forward exchange contracts (commitments to buy or sell a
specified amount of a foreign currency at a specified price and time) are
generally used to hedge identifiable foreign currency commitments. Losses of
$2.6 million for identifiable foreign currency commitments were deferred at
December 31, 1997. Forward exchange contracts and foreign exchange option
contracts (which convey the right, but not the obligation, to sell or buy a
specified amount of foreign currency at a specified price) are generally used to
hedge foreign currency commitments with an indeterminable maturity date. None of
the forward or option contracts are exchange traded.
While hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposures being
hedged. The use of some contracts may limit the Company's ability to benefit
from favorable fluctuations in foreign exchange rates. The notional amounts of
open forward contracts and options were $697.2 million and $444.0 million at
year-end 1997 and 1996, respectively. The notional amounts of the Company's
38
foreign exchange contracts do not generally represent amounts exchanged by the
parties, and thus, are not a measure of the exposure of the Company or of the
cash requirements relating to these contracts. The amounts exchanged are
calculated by reference to the notional amounts and by other terms of the
derivatives, such as exchange rates. The Company actively monitors its foreign
currency exposure and adjusts the amounts hedged as appropriate.
Exposures to certain currencies are generally not hedged due primarily
to the lack of available markets or cost considerations (non-traded currencies).
The Company attempts to manage its working capital position to minimize foreign
currency commitments in non-traded currencies and recognizes that pricing for
the services and products offered in such countries should cover the cost of
exchange rate devaluations. The Company has historically incurred transaction
losses in non-traded currencies.
Credit Risk. Financial instruments which potentially subject the
Company to concentrations of credit risk are primarily cash equivalents,
investments and trade receivables. It is the Company's practice to place its
cash equivalents and investments in high quality securities with various
investment institutions. The Company derives the majority of its revenues from
sales and services to, including engineering and construction for, the energy
industry. Within the energy industry, trade receivables are generated from a
broad and diverse group of customers. There are concentrations of receivables in
the United States, the United Kingdom and Italy. The Company maintains an
allowance for losses based upon the expected collectibility of all trade
accounts receivable.
There are no significant concentrations of credit risk with any
individual counterparty or groups of counterparties related to the Company's
derivative contracts. Counterparties are selected by the Company based on
creditworthiness, which the Company continually monitors, and on the
counterparties' ability to perform their obligations under the terms of the
transactions. The Company does not expect any counterparties to fail to meet
their obligations under these contracts given their high credit ratings and, as
such, considers the credit risk associated with its derivative contracts to be
minimal.
Fair Value of Financial Instruments. The estimated fair value of
long-term debt at year-end 1997 and 1996 was $1,380.8 million and $989.1
million, respectively, as compared to the carrying amount of $1,304.3 million at
year-end 1997 and $958.0 million at year-end 1996. The fair value of fixed rate
long-term debt is based on quoted market prices for those or similar
instruments. The carrying amount of variable rate long-term debt and restricted
cash (see Note 6) approximates fair value because such instruments reflect
market changes to interest rates. The carrying amount of short-term financial
instruments (cash and equivalents, receivables, short-term notes payable and
accounts payable) as reflected in the consolidated balance sheets approximates
fair value due to the short maturities of these instruments. The fair value of
currency derivative instruments generally approximates their carrying amount
based upon third party quotes.
Note 16. Retirement Plans
The Company has various plans which cover a significant number of its
employees. These plans include defined contribution plans, which provide
retirement contributions in return for services rendered, provide an individual
account for each participant and have terms that specify how contributions to
the participant's account are to be determined rather than the amount of pension
benefits the participant is to receive. Contributions to these plans are based
on pre-tax income and/or discretionary amounts determined on an annual basis.
The Company's expense for the defined contribution plans totaled $213.2 million,
$156.0 million, and $119.5 million in 1997, 1996 and 1995. Other retirement
plans include defined benefit plans, which define an amount of pension benefit
to be provided, usually as a function of age, years of service or compensation.
These plans are funded to operate on an actuarially sound basis. Plan assets are
primarily invested in cash, short-term investments, real estate, equity and
fixed income securities of entities domiciled in the country of the plan's
operation. Assumed long-term rates of return on plan assets, discount rates for
estimating benefit obligations and rates of compensation increases vary for the
different plans according to the local economic conditions. The rates used are
as follows:
39
Percentages 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Return on plan assets:
United States plans 8.5% to 9% 8% to 9% 8.5% to 9.0%
International plans 7.0% to 13.5% 7.0% to 13.5% 6.5% to 13.50%
Discount rate:
United States plans 7.25% to 8% 7% to 8% 7% to 8.25%
International plans 7.0% to 12.5% 7.0% to 12.5% 4% to 12.50%
Compensation increase:
United States plans 4.0% to 5.5% 4.0% to 5.5% 4.0% to 5.5%
International plans 4.0% to 11.0% 4.0% to 11.0% 1.0% to 11.0%
- ----------------------------------------------------------------------------------------------------------------------
The net periodic pension cost (benefit) for defined benefit plans is as
follows:
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Service cost - benefits earned during period $ 52.7 $ 31.3 $ 27.0
Interest cost on projected benefit obligation 131.8 73.5 68.5
Actual return on plan assets (266.8) (109.8) (91.4)
Net amortization and deferral 95.2 10.0 11.5
- -----------------------------------------------------------------------------------------------------------
Net periodic pension cost (benefit) $ 12.9 $ 5.0 $ 15.6
- -----------------------------------------------------------------------------------------------------------
The reconciliation of the funded status for defined benefit plans where
assets exceed accumulated benefits is as follows:
Millions of dollars 1997 1996
- -------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ (1,686.4) $ (603.5)
- -------------------------------------------------------------------------------------------
Accumulated benefit obligation $ (1,706.9) $ (614.4)
- -------------------------------------------------------------------------------------------
Projected benefit obligation $ (1,844.5) $ (666.4)
Plan assets at fair value 2,146.1 906.3
- -------------------------------------------------------------------------------------------
Funded status 301.6 239.9
Unrecognized prior service cost (18.2) (21.4)
Unrecognized net gain (190.0) (131.9)
Unrecognized net transition (asset) obligation (12.1) (20.1)
- -------------------------------------------------------------------------------------------
Net prepaid (accrued) pension cost $ 81.3 $ 66.5
- -------------------------------------------------------------------------------------------
Included in the 1997 reconciliation of the funded status for defined
benefit plans where assets exceed accumulated benefits are the benefit
obligations and plan assets associated with Devonport Management Limited, the
Company's 51% owned subsidiary. See Note 2.
The reconciliation of the funded status for defined benefit plans where
accumulated benefits exceed assets is as follows:
40
Millions of dollars 1997 1996
- -------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ (87.3) $ (248.6)
- -------------------------------------------------------------------------------------------
Accumulated benefit obligation $ (97.1) $ (267.2)
- -------------------------------------------------------------------------------------------
Projected benefit obligation $ (103.0) $ (304.1)
Plan assets at fair value 50.7 217.6
- -------------------------------------------------------------------------------------------
Funded status (52.3) (86.5)
Unrecognized prior service cost 5.3 24.3
Unrecognized net gain (7.6) (4.6)
Unrecognized net transition (asset) obligation 2.8 7.8
Adjustment required to recognize additional
minimum liability (11.1) (32.5)
- -------------------------------------------------------------------------------------------
Net prepaid (accrued) pension cost $ (62.9) $ (91.5)
- -------------------------------------------------------------------------------------------
The Company recognized an additional minimum pension liability for
underfunded defined benefit plans. The additional minimum liability is equal to
the excess of the accumulated benefit obligation over plan assets and accrued
liabilities. A corresponding amount is recognized as either an intangible asset
or a reduction of shareholders' equity. As of year-end 1997 and 1996 the Company
had recorded additional minimum liabilities of $11.1 million and $32.5 million,
intangible assets of $5.0 million and $20.9 million, and adjustments to
shareholders' equity, (net of income taxes and minority interest) of $3.9
million and $6.9 million, respectively.
Postretirement Medical Plan. The Company offers postretirement medical
plans to certain eligible employees. In some plans the Company's liability is
limited to a fixed contribution amount for each participant or dependent. The
plan participants share the total cost for all benefits provided above the fixed
Company contribution and participants' contributions are adjusted as required to
cover benefit payments. The Company has made no commitment to adjust the amount
of its contributions; therefore, the computed accumulated postretirement benefit
obligation amount is not affected by the expected future healthcare cost
inflation rate.
Other postretirement medical plans are contributory but the Company
generally absorbs the majority of the costs. In these plans the Company may
elect to adjust the amount of its contributions. As a result the computed
accumulated postretirement benefit obligation amount is affected by the expected
future healthcare cost inflation rate. The future healthcare cost inflation rate
assumed in the calculation of the accumulated postretirement benefit obligation
for this type of plan at year-end was as follows:
Health care trend rate (weighted based on participant count) - 9.0%
for 1997 and 10.0% for 1996 and 1995, declining to 5.5% in 2002 and
level thereafter.
A one percentage-point increase in the assumed healthcare cost trend
rate for each year would increase the net postretirement benefit
expense for 1997 by approximately $3.1 million and would increase the
accumulated postretirement benefit obligation at year-end by
approximately $26.2 million.
The weighted average discount rates used to calculate the accumulated
postretirement benefit obligation were 7.25% to 8% for 1997, 7.75% to
8.0% for 1996 and 7% to 8.25% for 1995.
During 1997, the Company adopted amendments to eliminate certain postretirement
medical benefit programs. These amendments resulted in a curtailment gain of
$11.2 million, including $8.4 million at Dresser-Rand Company.
Net periodic postretirement benefit cost is as follows:
Millions of dollars 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Service cost-benefits attributed to service during period $ 4.4 $ 4.7 $ 4.7
Interest cost on accumulated postretirement benefit obligation 29.3 30.9 31.8
Net amortization and deferral (30.1) (20.4) (19.5)
- -------------------------------------------------------------------------------------------------------------------
Net period pension cost (benefit) $ 3.6 $ 15.2 $ 17.0
- -------------------------------------------------------------------------------------------------------------------
41
Postretirement medical benefits are funded by the Company when
incurred. The Company's postretirement medical plan's funded status reconciled
with the amounts included in the Company's consolidated balance sheets at
year-end is as follows:
Millions of dollars 1997 1996
- -----------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees and related beneficiaries $ 255.8 $ 266.0
Fully eligible active plan participants 56.2 56.2
Other active plan participants not fully eligible 61.0 72.2
- -----------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 373.0 394.4
Unrecognized prior service cost 6.3 7.4
Unrecognized gain 98.7 101.1
Unamortized gains from plan amendments 155.5 158.8
- -----------------------------------------------------------------------------------------------
Net postretirement liability $ 633.5 $ 661.7
- -----------------------------------------------------------------------------------------------
Note 17. Discontinued Operations
On January 23, 1996, the Company spun-off its property and casualty
insurance subsidiary, Highlands Insurance Group, Inc. (HIGI), in a tax-free
distribution to holders of Halliburton Company Common Stock. Each common
shareholder of the Company received one share of common stock of HIGI for every
ten (pre-split) shares of Halliburton Company Common Stock. Approximately 11.4
million common shares of HIGI were issued in conjunction with the spin-off.
The following summarizes the results of operations of the discontinued
operations:
Millions of dollars 1995
- ---------------------------------------------------------------------------
Revenues $ 252.6
- ---------------------------------------------------------------------------
Loss before income taxes $ (126.3)
Benefit for income taxes 67.5
Loss on disposition (7.6)
Benefit for income taxes 0.9
- ---------------------------------------------------------------------------
Loss from discontinued operations $ (65.5)
- ---------------------------------------------------------------------------
In the third quarter of 1995, HIGI conducted an extensive review of its
loss and loss adjustment expense reserves to assess HIGI's reserve position. The
review process consisted of gathering new information and refining prior
estimates and primarily focused on assumed reinsurance and overall environmental
and asbestos exposure. As a result of such review, HIGI increased its reserves
for loss and loss adjustment expenses and certain legal matters and the Company
also recognized the estimated expenses related to the spin-off transaction and
additional compensation costs and other regulatory and legal provisions directly
associated with discontinuing the insurance services business segment as
follows:
Income (Loss)
before Net Income
Millions of dollars Income Taxes (Loss)
- --------------------------------------------------------------------------------------------
Additional claim loss reserves for environmental
and asbestos exposure and other exposures $ (117.0) $ (76.4)
Realization of deferred income tax valuation allowance - 25.9
Provisions for legal matters (8.0) (5.2)
Expenses related to the spin-off transaction (7.6) (6.7)
Other insurance services expenses (7.4) (4.8)
- ---------------------------------------------------------------------------------------------
Total charges $ (140.0) $ (67.2)
- ---------------------------------------------------------------------------------------------
42
In the third quarter of 1995, the review of the insurance policies and
reinsurance agreements was based upon an actuarial study and HIGI management's
best estimates using facts and trends currently known, taking into consideration
the current legislative and legal environment. Developed case law and adequate
claim history do not exist for such claims. Estimates of the liability were
reviewed and updated continually. Due to the significant uncertainties related
to these types of claims, past claim experience may not be representative of
future claim experience.
The Company also realized a valuation allowance for deferred tax assets
primarily related to HIGI's insurance claim loss reserves. The Company had
provided a valuation allowance for all temporary differences related to HIGI
based upon its intent announced in 1992 that it was pursuing the sale of HIGI. A
taxable transaction would have made it more likely than not that the related
benefit or future deductibility would not be realized. The spin-off transaction
was tax-free and allowed HIGI to retain its tax basis and the value of its
deferred tax asset.
43
HALLIBURTON COMPANY
Supplemental Selected Financial Data(a)
Millions of dollars and shares except per share and employee data
Years ended December 31
--------------------------------------------------------------
1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Operating results
Net revenues
Energy Services Group $ 8,504.7 $ 6,515.4 $ 5,307.7 $ 4,977.5
Engineering and Construction Group 4,992.8 4,720.7 3,736.5 3,562.3
Dresser Equipment Group 2,779.0 2,710.5 2,467.4 2,452.0
- -----------------------------------------------------------------------------------------------------------------
Total revenues $ 16,276.5 $ 13,946.6 $ 11,511.6 $ 10,991.8
- -----------------------------------------------------------------------------------------------------------------
Operating income (loss)
Energy Services Group $ 1,019.4 $ 698.0 $ 544.5 $ 405.8
Engineering and Construction Group 219.0 134.0 96.6 71.0
Dresser Equipment Group 248.3 229.3 200.7 198.1
Special charges (b) (16.2) (85.8) (8.4) (24.6)
General corporate (71.8) (72.3) (70.8) (56.2)
- -----------------------------------------------------------------------------------------------------------------
Total operating income (loss) (b) 1,398.7 903.2 762.6 594.1
Nonoperating income (expense), net (c) (85.6) (72.2) (32.6) 323.1
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and minority interest 1,313.1 831.0 730.0 917.2
Provision for income taxes (d) (491.4) (248.4) (247.0) (346.9)
Minority interest in net income of
consolidated subsidiaries (49.3) (24.7) (20.7) (33.1)
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 772.4 $ 557.9 $ 462.3 $ 537.2
- -----------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share
Continuing operations $ 1.79 $ 1.30 $ 1.07 $ 1.25
Net income 1.79 1.30 0.88 1.26
Diluted income (loss) per share
Continuing operations 1.77 1.29 1.07 1.24
Net income 1.77 1.29 0.88 1.26
Cash dividends per share (e) 0.50 0.50 0.50 0.50
Return on average shareholders' equity 19.17% 15.25% 10.43% 15.47%
- -----------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 1,982.9 $ 1,501.0 $ 1,476.7 $ 2,196.7
Total assets 10,701.8 9,586.8 8,569.4 8,521.0
Property, plant and equipment, net 2,766.4 2,554.0 2,285.0 2,047.0
Long-term debt (including current maturities) 1,304.3 958.0 666.8 1,119.8
Shareholders' equity 4,316.9 3,741.4 3,577.0 3,722.5
Total capitalization 5,671.7 4,830.1 4,377.9 4,905.9
Shareholders' equity per share (e) 9.86 8.78 8.29 8.63
Average common shares outstanding (basic) (e) 431.1 429.2 431.1 430.6
Average common shares outstanding (diluted) (e) 436.1 432.1 432.3 431.5
- -----------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 833.1 $ 864.2 $ 1,094.6 $ 793.1
Capital expenditures 880.1 731.1 591.5 432.1
Long-term borrowings (repayments), net 285.5 287.4 (482.2) (120.8)
Depreciation and amortization expense 564.3 497.7 466.4 487.6
Payroll and employee benefits 5,478.9 4,674.3 4,188.0 4,222.3
Number of employees (f) 102,000 93,000 89,800 86,500
- -----------------------------------------------------------------------------------------------------------------
44
HALLIBURTON COMPANY
Supplemental Selected Financial Data (a)
Millions of dollars and shares except per share and employee data
Years ended December 31
--------------------------------------------------------------
1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
Operating results
Net revenues
Energy Services Group $ 5,470.5 $ 5,038.6 $ 5,155.5 $ 4,894.5
Engineering and Construction Group 3,674.9 4,409.6 4,721.2 4,596.8
Dresser Equipment Group 2,281.6 1,660.1 1,760.3 1,622.4
- -----------------------------------------------------------------------------------------------------------------
Total revenues $ 11,427.0 $ 11,108.3 $ 11,637.0 $ 11,113.7
- -----------------------------------------------------------------------------------------------------------------
Operating income (loss)
Energy Services Group $ 413.8 $ 303.3 $ 377.8 $ 473.0
Engineering and Construction Group 76.0 32.2 47.9 50.9
Dresser Equipment Group 208.4 168.5 163.7 155.1
Special charges (b) (426.9) (342.9) (144.7) -
General corporate (63.5) (58.3) (56.2) (48.9)
- -----------------------------------------------------------------------------------------------------------------
Total operating income (loss) (b) 207.8 102.8 388.5 630.1
Nonoperating income (expense), net (63.5) (60.7) (20.5) 11.9
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and minority interest 144.3 42.1 368.0 642.0
Provision for income taxes (95.8) (78.3) (182.5) (269.4)
Minority interest in net income of
consolidated subsidiaries (42.8) (8.6) (18.5) (16.6)
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 5.7 $ (44.8) $ 167.0 $ 356.0
- -----------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share
Continuing operations $ 0.01 $ (0.11) $ 0.41 $ 0.89
Net income (0.04) (1.18) 0.45 1.11
Diluted income (loss) per share
Continuing operations 0.01 (0.11) 0.41 0.89
Net income (0.04) (1.18) 0.45 1.11
Cash dividends per share (e) 0.50 0.50 0.50 0.50
Return on average shareholders' equity -0.45% -12.75% 4.15% 10.29%
- -----------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 1,562.9 $ 1,423.0 $ 1,775.1 $ 1,905.5
Total assets 8,764.2 8,087.2 8,265.5 7,813.0
Property, plant and equipment, net 2,154.7 2,128.2 1,891.7 1,766.9
Long-term debt (including current maturities) 1,130.9 873.3 928.1 611.7
Shareholders' equity 3,295.7 3,276.6 4,314.8 4,426.0
Total capitalization 4,748.1 4,179.5 5,266.8 5,063.2
Shareholders' equity per share (e) 7.70 7.99 10.61 11.03
Average common shares outstanding (basic) (e) 421.9 408.4 405.4 397.8
Average common shares outstanding (diluted) (e) 422.2 408.7 405.7 398.1
- -----------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 468.0 $ 624.9 $ 595.2 $ 437.7
Capital expenditures 463.5 457.5 633.6 494.6
Long-term borrowings (repayments), net 192.4 (187.4) 459.5 83.1
Depreciation and amortization expense 671.6 516.1 440.7 375.5
Payroll and employee benefits 4,428.9 4,590.3 4,660.8 4,415.4
Number of employees (f) 90,500 96,400 104,500 109,700
- -----------------------------------------------------------------------------------------------------------------
45
(a) Information presented has been restated for the Merger. Beginning in 1998,
Dresser's year-end of October 31 has been conformed to Halliburton's
calendar year-end. Periods through December 1997 contain Dresser's
information on a fiscal year-end basis combined with Halliburton's
information on a calendar year-end basis.
(b) Operating income (loss) includes the following special charges:
- 1997 $16.2 million: acquisition costs ($8.6 million), gain on
extension of joint venture ($41.7 million), restructuring of joint
ventures ($18.0 million), write-downs on impaired assets and early
retirement incentives ($21.6 million), losses from the sale of assets
($9.7 million).
- 1996 $85.8 million: merger costs ($12.4 million), restructuring,
merger and severance costs ($62.1 million), write-off of acquired in-
process research and development costs ($11.3 million).
- 1995 $8.4 million: restructuring costs ($4.7 million) and write-off
of acquired in-process research and development costs ($3.7 million).
- 1994 $24.6 million: merger costs ($27.3 million), restructuring costs
($6.2 million), litigation ($9.5 million), and litigation and
insurance recoveries ($18.4 million).
- 1993 $426.9 million: loss on sale of business ($321.8 million),
merger costs ($31.0 million), restructuring ($13.2 million),
litigation ($65.0 million), gain on curtailment of medical plan ($4.1
million).
- 1992 $342.9 million: merger costs ($272.9 million), restructuring and
severance ($70.0 million).
- 1991 $144.7 million: restructuring ($123.4 million), loss of sale of
business ($21.3 million).
(c) Nonoperating income in 1994 includes a gain of $275.7 million from the sale
of an interest in Western Atlas International, Inc. and a gain of $102.0 million
from the sale of the Company's natural gas compression business.
(d) Provision for income taxes in 1996 includes tax benefits of $43.7
million due to the recognition of net operating loss carryforwards and the
settlement of various issues with the Internal Revenue Service.
(e) Weighted average shares, cash dividends paid per share and shareholders'
equity per share have been restated to reflect the two-for-one common stock
split declared on June 9, 1997, and effected in the form of a stock dividend and
paid on July 21, 1997.
(f) Does not include employees of 50% or less owned affiliated companies.
46
HALLIBURTON COMPANY
Supplemental Quarterly Data and Market Price Information
(Unaudited)
(Millions of dollars except per share data)
Quarter
-----------------------------------------------------
First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------------
1997 (1)
Revenues $ 3,602.0 $ 4,002.4 $ 4,177.0 $ 4,495.1 $ 16,276.5
Operating income 242.5 321.6 372.2 462.4 1,398.7
Net income 135.1 176.7 202.6 258.0 772.4
Earnings per share: (2), (3)
Basic net income per share 0.32 0.41 0.47 0.59 1.79
Diluted net income per share 0.31 0.41 0.47 0.58 1.77
Cash dividends paid per share (3), (4) 0.125 0.125 0.125 0.125 0.50
Common stock prices (3), (4), (5)
High 36.69 41.00 52.88 62.69 62.69
Low 30.00 32.06 42.00 47.25 30.00
- -------------------------------------------------------------------------------------------------------------------------
1996 (1)
Revenues $ 3,167.6 $ 3,460.4 $ 3,497.9 $ 3,820.7 $ 13,946.6
Operating income 154.8 222.6 182.2 343.6 903.2
Net income 92.1 129.0 143.8 193.0 557.9
Earnings per share: (2), (3)
Basic net income per share 0.21 0.30 0.34 0.45 1.30
Diluted net income per share 0.21 0.30 0.33 0.45 1.29
Cash dividends paid per share (3), (4) 0.125 0.125 0.125 0.125 0.50
Common stock prices (3), (4), (5)
High 29.19 29.38 28.63 31.44 31.44
Low 22.88 25.00 25.38 25.94 22.88
- -------------------------------------------------------------------------------------------------------------------------
(1) Amounts for revenues, operating income, net income, and earnings per share
have been restated to reflect the merger with Dresser accounted for using
the pooling of interests method of accounting for business combinations.
(2) Presented in accordance with Statement of Financial Accounting Standards
No. 128.
(3) Amounts presented reflect the two-for-one common stock split declared on
June 9, 1997, and effected in the form of a stock dividend and paid on July
21, 1997.
(4) Represents Halliburton Company amounts prior to the merger with Dresser.
(5) New York Stock Exchange - composite transactions high and low closing stock
price.
47
HALLIBURTON COMPANY
Supplemental Condensed Consolidated Statements of Income
(Unaudited)
(Millions of dollars except per share data)
Three Months Six Months
Ended June 30 Ended June 30
------------------------------- -------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 3,256.1 $ 2,799.4 $ 6,265.9 $ 5,286.5
Sales 1,269.2 1,154.7 2,461.3 2,238.3
Equity in earnings of unconsolidated affiliates 59.9 48.3 112.8 79.6
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 4,585.2 $ 4,002.4 $ 8,840.0 $ 7,604.4
- --------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 2,869.9 $ 2,470.5 $ 5,598.6 $ 4,662.2
Cost of sales 1,114.0 1,050.9 2,118.8 2,069.8
General and administrative 165.2 159.4 325.4 308.3
- --------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 4,149.1 3,680.8 8,042.8 7,040.3
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 436.1 321.6 797.2 564.1
Interest expense (31.7) (26.7) (61.3) (50.1)
Interest income 7.2 4.1 14.2 10.8
Foreign currency losses (1.6) (1.0) (1.8) (2.2)
Other nonoperating income (expense) net (0.4) (0.1) (0.6) 0.6
- --------------------------------------------------------------------------------------------------------------------------------
Income before taxes and minority interest 409.6 297.9 747.7 523.2
Provision for income taxes (153.4) (111.9) (280.7) (195.0)
Minority interest in net income of subsidiaries (13.0) (9.3) (20.4) (16.4)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 243.2 $ 176.7 $ 446.6 $ 311.8
- --------------------------------------------------------------------------------------------------------------------------------
Income per share:
Basic $ 0.55 $ 0.41 $ 1.02 $ 0.73
Diluted $ 0.55 $ 0.41 $ 1.01 $ 0.72
Cash dividends per share * $ 0.125 $ 0.125 $ 0.25 $ 0.25
Weighted average common shares outstanding:
Basic 438.4 429.3 438.3 428.9
Diluted 443.0 432.7 442.7 432.4
* Amounts represent Halliburton Company prior to the merger with Dresser.
See notes to supplemental quarterly financial statements.
48
HALLIBURTON COMPANY
Supplemental Condensed Consolidated Balance Sheets
(Unaudited)
(Millions of dollars and shares except per share data)
June 30 December 31
------- -----------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 281.4 $ 384.1
Receivables:
Notes and accounts receivable 3,203.8 2,980.4
Unbilled work on uncompleted contracts 514.6 407.2
- -------------------------------------------------------------------------------------------------------------------------
Total receivables 3,718.4 3,387.6
Inventories 1,456.2 1,299.2
Deferred income taxes, current 225.3 202.6
Other current assets 177.4 169.7
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 5,858.7 5,443.2
Property, plant and equipment:
Less accumulated depreciation of $4,012.1 and $3,879.6 2,940.1 2,766.4
Equity in and advances to related companies 731.2 659.0
Excess of cost over net assets acquired 1,140.1 1,126.8
Deferred income taxes, noncurrent 259.5 273.0
Other assets 441.1 433.4
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,370.7 $ 10,701.8
- -------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 515.9 $ 50.5
Current maturities of long-term debt 8.4 7.4
Accounts payable 1,199.7 1,132.4
Accrued employee compensation and benefits 480.4 516.1
Advance billings on uncompleted contracts 545.0 638.3
Accrued warranty cost 52.1 56.6
Income taxes payable 290.9 335.2
Deferred revenues 44.9 38.4
Other current liabilities 720.0 685.4
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,857.3 3,460.3
Long-term debt 1,284.7 1,296.9
Employee compensation and benefits 993.1 1,013.7
Other liabilities 458.9 450.6
Minority interest in consolidated subsidiaries 162.2 163.4
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and minority interest 6,756.2 6,384.9
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share -
authorized 600.0 shares, issued 454.4 and 453.7 shares 1,136.0 1,134.3
Paid-in capital in excess of par value 135.2 123.9
Accumulated other comprehensive income (161.9) (131.1)
Retained earnings 3,879.7 3,563.4
- -------------------------------------------------------------------------------------------------------------------------
4,989.0 4,690.5
Less 15.2 and 15.8 shares of treasury stock, at cost 374.5 373.6
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,614.5 4,316.9
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,370.7 $ 10,701.8
- -------------------------------------------------------------------------------------------------------------------------
See notes to supplemental quarterly financial statements.
49
HALLIBURTON COMPANY
Supplemental Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Six Months
Ended June 30
--------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 446.6 $ 311.8
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 291.1 274.2
Benefit for deferred income taxes (8.3) (9.5)
Distributions from (advances to) related companies, net of
equity in (earnings) or losses (133.2) (58.5)
Other non-cash items 25.2 15.2
Other changes, net of non-cash items:
Receivables (365.8) (233.6)
Inventories (149.1) (85.7)
Accounts payable 178.2 (143.8)
Other working capital, net (183.1) (69.9)
Other, net 42.8 24.4
- -----------------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities 144.4 24.6
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (469.9) (373.8)
Sales of property, plant and equipment 54.4 51.9
Sales (purchases) of businesses, net of cash (disposed) acquired (36.4) (128.3)
Other investing activities (1.5) (35.9)
- -----------------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities (453.4) (486.1)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings of long-term debt 1.2 175.6
Payments on long-term debt (12.7) (1.9)
Net borrowings of short-term debt 370.4 127.3
Payments of dividends to shareholders (132.9) (123.1)
Proceeds from exercises of stock options 40.3 48.0
Payments to reacquire common stock (17.8) (19.7)
Other financing activities (4.8) 3.5
- -----------------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities 243.7 209.7
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 0.4 0.2
- -----------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (64.9) (251.6)
Cash and equivalents at beginning of year 346.3 * 446.0
- -----------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 281.4 $ 194.4
- -----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information: Cash payments during the
period for:
Interest $ 51.4 $ 41.3
Income taxes 194.6 55.6
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 33.2 $ 286.9
Liabilities disposed of in dispositions of businesses $ 13.4 $ 90.6
* Cash balance at the beginning of 1998 does not agree to the prior year ending
cash balance in order to conform Dresser's fiscal year to Halliburton's calendar
year.
See notes to supplemental quarterly financial statements.
50
HALLIBURTON COMPANY
Notes to Supplemental Quarterly Financial Statements
(Unaudited)
Note 1. Management Representations
The Company, which now consolidates Dresser (see Note 2), employs
accounting policies that are in accordance with generally accepted accounting
principles in the United States. The preparation of financial statements in
conformity with generally accepted accounting principles requires Company
management 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 supplemental condensed consolidated
financial statements present information in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q and applicable rules of Regulation S-X. Accordingly, they do not
include all information or footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the Company's 1997 Supplemental Annual Financial Statements included with
this Form 8-K/A.
In the opinion of the Company, the supplemental condensed consolidated
financial statements include all adjustments necessary to present fairly the
Company's financial position as of June 30, 1998, and the results of its
operations for the three and six months ended June 30, 1998 and 1997 and its
cash flows for the six months then ended. The results of operations for the
three and six months ended June 30, 1998 and 1997 may not be indicative of
results for the full year. Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2. Acquisitions and Dispositions
On September 29, 1998, the Merger was completed. See Note 2 to the
supplemental annual financial statements. Beginning in 1998, Dresser's year-end
of October 31 has been conformed to Halliburton's calendar year-end. Periods
through December 1997 contain Dresser's information on a fiscal year-end basis
combined with Halliburton's information on a calendar year-end basis. For the
two months ended December 31, 1997, Dresser had revenues of $1,110.2 million,
operating income of $53.2 million, and net income of $35.8 million. Operating
income for the two-month period includes a pretax special charge of $30.2
million ($12.0 million after tax and minority interest) related to Dresser's
share of profit improvement initiatives at the Dresser-Rand and
Ingersoll-Dresser Pump joint ventures. Results for the two-month period have
been included in retained earnings and dividends of $33.2 million paid in
December, 1997 have been deducted from retained earnings in the supplemental
condensed consolidated balance sheets at June 30, 1998. In addition, for the
period between October 31, 1997 and December 31, 1997 the change to Dresser's
cumulative translation adjustment account was $14.8 million. There were no
material transactions between Halliburton and Dresser prior to the Merger.
The results of operations for the separate companies and the combined
amounts are presented in the consolidated financial statements below:
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------- ---------------------------------
Millions of dollars 1998 1997 1998 1997
--------------------------------------------------------------------------------------------
Revenues:
Halliburton $ 2,475.6 $ 2,231.1 $ 4,830.9 $ 4,128.6
Dresser 2,109.6 1,771.3 4,009.1 3,475.8
--------------------------------------------------------------------------------------------
Combined $ 4,585.2 $ 4,002.4 $ 8,840.0 $ 7,604.4
--------------------------------------------------------------------------------------------
Net income:
Halliburton $ 136.5 $ 101.9 $ 254.3 $ 184.9
Dresser 106.7 74.8 192.3 126.9
--------------------------------------------------------------------------------------------
Combined $ 243.2 $ 176.7 $ 446.6 $ 311.8
--------------------------------------------------------------------------------------------
Other Acquisitions and Dispositions. See Note 2 to the supplemental
annual financial statements.
51
Note 3. Business Segment Information
The Company has three business segments. The Energy Services Group
includes pressure pumping equipment and services, logging and perforating,
drilling systems and services, drilling fluids systems, drill bits, specialized
completion and production equipment and services and well control. Also included
in the Energy Services Group are upstream oil and gas, engineering, construction
and maintenance services, integrated exploration and production information
systems and professional services to the petroleum industry. The Engineering and
Construction Group provides engineering, procurement, construction, project
management, and facilities operation and maintenance for hydrocarbon processing
and other industrial and governmental customers. The Dresser Equipment Group
designs, manufactures and markets highly engineered products and systems for oil
and gas producers, transporters, processors, distributors and petroleum users
throughout the world.
The Company's equity in pretax income or losses of related companies is
included in revenues and operating income of each applicable segment.
Intersegment revenues included in the revenues of the other business segments
are immaterial.
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------- ---------------------------------
Millions of dollars 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------------------
Revenues:
Energy Services Group $ 2,380.7 $ 2,119.9 $ 4,665.5 $ 3,859.9
Engineering and Construction Group 1,437.8 1,219.2 2,785.1 2,453.6
Dresser Equipment Group 766.7 663.3 1,389.4 1,290.9
-----------------------------------------------------------------------------------------------------------------
Total $ 4,585.2 $ 4,002.4 $ 8,840.0 $ 7,604.4
-----------------------------------------------------------------------------------------------------------------
Operating income:
Energy Services Group $ 304.4 $ 232.1 $ 587.4 $ 418.4
Engineering and Construction Group 74.3 49.1 133.3 99.4
Dresser Equipment Group 76.7 57.7 116.1 81.4
General corporate (19.3) (17.3) (39.6) (35.1)
-----------------------------------------------------------------------------------------------------------------
Total $ 436.1 $ 321.6 $ 797.2 $ 564.1
-----------------------------------------------------------------------------------------------------------------
Note 4. Inventories
June 30 December 31
-------------- -----------------
Millions of dollars 1998 1997
---------------------------------------------------------------------
Finished products and parts $ 721.4 $ 670.9
Raw materials and supplies 270.3 213.7
Work in process 634.0 535.8
Progress payments (169.5) (121.2)
---------------------------------------------------------------------
Total $ 1,456.2 $ 1,299.2
---------------------------------------------------------------------
The cost of certain U.S. inventories is determined using the last-in,
first-out (LIFO) method. If the average cost method had been in use for
inventories on the LIFO basis, total inventories would have been about $100.5
million and $100.8 million higher than reported at June 30, 1998 and December
31, 1997, respectively.
Note 5. Related Companies
See Note 5 to the supplemental annual consolidated financial
statements.
Note 6. Long-Term Debt
See Note 6 to the supplemental annual consolidated financial
statements.
52
Note 7. Dresser Financial Information
Subject to approval from the Securities and Exchange Commission (the
Commission), Dresser will cease filing periodic reports with the Commission. The
Company will fully guarantee Dresser's 8% senior notes due 2003 (the Notes). As
long as the Notes remain outstanding, summarized financial information of
Dresser will be presented in periodic reports filed by the Company.
Dresser Industries, Inc.
Financial Position June 30 Year-end
------------ --------------
Millions of dollars 1998 1997
- ---------------------------------------------------------------------------------
Current assets $ 2,525.4 $ 2,471.6
Noncurrent assets 2,659.3 2,627.2
- ---------------------------------------------------------------------------------
Total 5,184.7 5,098.8
- ---------------------------------------------------------------------------------
Current liabilities $ 1,712.0 $ 1,687.4
Noncurrent liabilities 1,654.3 1,679.2
Shareholders' equity 1,818.4 1,732.2
- ---------------------------------------------------------------------------------
Total $ 5,184.7 $ 5,098.8
- ---------------------------------------------------------------------------------
Dresser Industries, Inc.
Operating Results Second Quarter First Six Months
------------------------------ -------------------------------
Millions of dollars 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 2,109.6 $ 1,771.3 $ 4,009.1 $ 3,475.8
- -------------------------------------------------------------------------------------------------------------------
Operating income $ 197.7 $ 139.6 $ 354.8 $ 243.4
- -------------------------------------------------------------------------------------------------------------------
Income before taxes and minority interest $ 180.9 $ 123.9 $ 320.6 $ 210.7
Income taxes (65.1) (43.4) (115.4) (73.8)
Minority interest (9.1) (5.7) (12.9) (10.0)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 106.7 $ 74.8 $ 192.3 $ 126.9
- -------------------------------------------------------------------------------------------------------------------
Note 8. Commitments and Contingencies
Asbestosis Litigation. The Company has approximately 63,000 pending
claims with approximately 26,000 new claims filed and approximately 29,000
claims resolved during the current year. Certain settlements previously
reported, covering approximately 14,900 claims, are carried as pending until
releases are signed. The settlements reached during the year are consistent with
the Company's historical experience and management continues to believe that
provisions recorded are adequate to cover the estimated loss from asbestosis
litigation.
Environmental. The Company is involved as a potentially responsible
party (PRP) in remedial activities to clean up various "Superfund" sites under
applicable Federal law which imposes joint and several liability, if the harm is
indivisible, on certain persons without regard to fault, the legality of the
original disposal, or ownership of the site. Although it is very difficult to
quantify the potential impact of compliance with environmental protection laws,
management of the Company believes that any liability of the Company with
respect to all but one of such sites will not have a material adverse effect on
the results of operations of the Company. With respect to a site in Jasper
County, Missouri (Jasper County Superfund Site), sufficient information has not
been developed to permit management to make such a determination and management
believes the process of determining the nature and extent of remediation at this
site and the total costs thereof will be lengthy. Brown & Root, Inc. (Brown &
Root), a subsidiary of the Company, has been named as a PRP with respect to the
Jasper County Superfund Site by the Environmental Protection Agency (EPA). The
Jasper County Superfund Site includes areas of mining activity that occurred
from the 1800s through the mid 1950s in the southwestern portion of Missouri.
The site contains lead and zinc mine tailings produced from mining activity.
Brown & Root is one of nine participating PRPs which have agreed to perform a
Remedial Investigation/Feasibility Study (RI/FS), which, due to various delays,
is not expected to be completed until sometime in 1999. Although the entire
Jasper County Superfund Site comprises 237 square miles as listed on the
National Priorities List, in the RI/FS scope of work, the EPA has only
identified seven areas, or subsites, within this area that need to be studied
and then possibly remediated by the PRPs. Additionally, the Administrative Order
53
on Consent for the RI/FS only requires Brown & Root to perform RI/FS work at one
of the subsites within the site, the Neck/Alba subsite, which only comprises
3.95 square miles. Brown & Root's share of the cost of such a study is not
expected to be material. In addition to the superfund issues, the State of
Missouri has indicated that it may pursue natural resource damage claims against
the PRPs. At the present time Brown & Root cannot determine the extent of its
liability, if any, for remediation costs or natural resource damages on any
reasonably practicable basis.
Merger Litigation. In connection with the Merger Dresser and its
directors have been named as defendants in three lawsuits filed in late February
and early March in the Delaware Court of Chancery. The lawsuits each purport to
be a class action filed on behalf of Dresser's stockholders and allege that the
consideration to be paid to Dresser's stockholders in the Merger is inadequate
and does not reflect the true value of Dresser. The complaints also each allege
that the directors of Dresser have breached their fiduciary duties in approving
the Merger. One of the actions further alleges self-dealing on the part of the
individual defendants and assert that the directors are obliged to conduct an
auction to assure that stockholders receive the maximum realizable value for
their shares. All three actions seek preliminary and permanent injunctive relief
as well as damages. On June 10, 1998 the court issued an order consolidating the
three lawsuits which requires the plaintiffs to file an amended consolidated
complaint "as soon as practicable." To date, plaintiffs have not filed an
amended complaint. The Company believes that the lawsuits are without merit and
intends to defend the lawsuits vigorously.
Other. The Company and its subsidiaries are parties to various other
legal proceedings. Although the ultimate dispositions of such proceedings are
not presently determinable, in the opinion of the Company any liability that may
ensue will not be material in relation to the consolidated financial position
and results of operations of the Company.
Note 9. Income Per Share
Basic income per share amounts are 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. Options to purchase 1.1
million shares of common stock which were outstanding during the six months
ended June 30, 1998 were not included in the computation of diluted net income
per share because the option exercise price was greater than the average market
price of the common shares.
Note 10. Comprehensive Income
Three Months Six Months
Ended June 30 Ended June 30
---------------------------- ------------------------------
Millions of dollars 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------
Net income $ 243.2 $ 176.7 $ 446.6 $ 311.8
Cumulative translation
Adjustment, net of tax (7.0) (14.2) (16.0) (26.4)
--------------------------------------------------------------------------------------------------
Total comprehensive income $ 236.2 $ 162.5 $ 430.6 $ 285.4
--------------------------------------------------------------------------------------------------
The cumulative translation adjustment of certain foreign entities and
minimum pension liability are the only such direct adjustments recorded by the
Company. Adjustments to the minimum pension liability are typically made once a
year in the fourth quarter.
Accumulated other comprehensive income at June 30, 1998 and December
31, 1997 consisted of the following:
June 30 December 31
------------- ------------------
Millions of dollars 1998 1997
-----------------------------------------------------------------------------------
Cumulative translation adjustment $ (158.0) $ (127.2)
Minimum pension liability (3.9) (3.9)
-----------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (161.9) $ (131.1)
-----------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the balance sheets, the statements of income, of cash flows and
of shareholders' equity of Dresser Industries, Inc. and subsidiaries (not
presented separately herein) present fairly, in all material respects, its
financial position at October 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting For Postemployment Benefits," effective as of November 1,
1994.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
November 26, 1997
