FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 1-3492
HALLIBURTON COMPANY
(a Delaware Corporation)
75-2677995
4100 Clinton Drive
Houston, TX 77020
Telephone Number - Area Code (713) 676-3011
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $2.50 per share:
Outstanding at October 24, 2002 - 436,400,337
Halliburton Company has amended disclosures on the calculation of our asbestos
liability in order to utilize the third party expert's conclusion based on a
50-year period and five year claims history in the Hamilton, Rabinovitz &
Alschuler, Inc.'s econometric study. There is no material difference in our
asbestos liability or the related insurance receivables using the revised
assumptions when compared to those assumptions originally used in the third
quarter of 2002. Accordingly, no restatement of our original financial
statements at September 30, 2002 is necessary. The section of the Form 10-Q
affected by the change in calculation is our disclosure in Note 8 - "Commitments
and Contingencies" under the heading "Asbestos study and the valuation of
unresolved current and future asbestos claims, and related insurance
receivables".
HALLIBURTON COMPANY
Index
Page No.
--------
PART I. FINANCIAL INFORMATION 2-30
Item 1. Financial Statements 2-4
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Cash Flows 4
- Notes to Quarterly Financial Statements 5-30
1. Management Representations 5
2. Business Segment Information 5-6
3. Acquisitions and Dispositions 6-7
4. Restricted Cash 7
5. Discontinued Operations 8
6. Unapproved Claims and Long-Term Construction Contracts 8-10
7. Inventories 10
8. Commitments and Contingencies 10-22
9. Income (loss) Per Share 22
10. Comprehensive Income (loss) 22-23
11. Goodwill and Other Intangible Assets 23
12. Accounts Receivable 24
13. Reorganization of Business Operations 24
14. DII Industries, LLC Financial Information 24-30
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 31-46
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
Item 4. Controls and Procedures 47
PART II. OTHER INFORMATION 47-48
Item 6. Listing of Exhibits and Reports on Form 8-K 47-48
Signatures 49
Section 302 Certification - David J. Lesar 50-51
Section 302 Certification - Douglas L. Foshee 52-53
Exhibits: - Halliburton Company Directors' Deferred Compensation Plan
as amended and restated effective October 22, 2002
- Powers of Attorney for Directors
- Powers of Attorney for Executive Officers
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
HALLIBURTON COMPANY
Condensed Consolidated Statements of Operations
(Unaudited)
(Millions of dollars and shares except per share data)
Three Months Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 2,510 $ 2,840 $ 7,789 $ 8,295
Product sales 455 525 1,372 1,506
Equity in earnings of unconsolidated affiliates 17 26 63 73
- --------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,982 $ 3,391 $ 9,224 $ 9,874
- --------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 2,287 $ 2,506 $ 7,892 $ 7,451
Cost of sales 398 449 1,214 1,325
General and administrative 89 94 239 286
(Gain) loss on sale of business assets 17 - (30) -
- --------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses $ 2,791 $ 3,049 $ 9,315 $ 9,062
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) 191 342 (91) 812
Interest expense (29) (34) (91) (115)
Interest income 8 8 24 18
Foreign currency gains (losses), net 1 (2) (12) (6)
Other, net - - 2 -
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes, minority interest, and change in accounting
method, net 171 314 (168) 709
Provision for income taxes (72) (126) (31) (285)
Minority interest in net income of subsidiaries (5) (7) (15) (14)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before change in
accounting method, net 94 181 (214) 410
- --------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations, net of tax
benefit of $0, $1, $34, and $18 - (2) (168) (40)
Gain on disposal of discontinued operations, net of tax
provision
of $0, $0, $0, and $199 - - - 299
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations - (2) (168) 259
- --------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method, net - - - 1
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 94 $ 179 $ (382) $ 670
====================================================================================================================
Basic income (loss) per share:
Income (loss) from continuing operations before change in
accounting method, net $ 0.22 $ 0.42 $ (0.49) $ 0.96
Loss from discontinued operations - - (0.39) (0.09)
Gain on disposal of discontinued operations - - - 0.70
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.22 $ 0.42 $ (0.88) $ 1.57
====================================================================================================================
Diluted income (loss) per share:
Income (loss) from continuing operations before change in
accounting method, net $ 0.22 $ 0.42 $ (0.49) $ 0.95
Loss from discontinued operations - - (0.39) (0.09)
Gain on disposal of discontinued operations - - - 0.70
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.22 $ 0.42 $ (0.88) $ 1.56
====================================================================================================================
Cash dividends per share $ 0.125 $ 0.125 $ 0.375 $ 0.375
Basic average common shares outstanding 432 428 432 427
Diluted average common shares outstanding 434 429 432 430
See notes to quarterly financial statements.
2
HALLIBURTON COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
(Millions of dollars and shares except per share data)
September 30 December 31
2002 2001
- ------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 586 $ 290
Receivables:
Notes and accounts receivable, net 2,494 3,015
Unbilled work on uncompleted contracts 905 1,080
- ------------------------------------------------------------------------------------------------
Total receivables 3,399 4,095
Inventories 769 787
Current deferred income taxes 170 154
Other current assets 256 247
- ------------------------------------------------------------------------------------------------
Total current assets 5,180 5,573
Property, plant and equipment after accumulated
depreciation of $3,305 and $3,281 2,591 2,669
Equity in and advances to related companies 416 551
Goodwill, net 719 720
Noncurrent deferred income taxes 391 410
Insurance for asbestos related liabilities 1,588 612
Other assets 826 431
- ------------------------------------------------------------------------------------------------
Total assets $ 11,711 $ 10,966
================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 29 $ 44
Current maturities of long-term debt 290 81
Accounts payable 1,046 917
Accrued employee compensation and benefits 276 357
Advanced billings on uncompleted contracts 582 611
Deferred revenues 66 99
Income taxes payable - 194
Other current liabilities 564 605
- ------------------------------------------------------------------------------------------------
Total current liabilities 2,853 2,908
Long-term debt 1,120 1,403
Employee compensation and benefits 571 570
Asbestos related liabilities 2,173 737
Minority interest in consolidated subsidiaries 51 41
Other liabilities 622 555
- ------------------------------------------------------------------------------------------------
Total liabilities 7,390 6,214
- ------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 456 and 455 shares 1,141 1,138
Paid-in capital in excess of par value 295 298
Deferred compensation (83) (87)
Accumulated other comprehensive income (179) (236)
Retained earnings 3,781 4,327
- ------------------------------------------------------------------------------------------------
4,955 5,440
Less 20 and 21 shares of treasury stock, at cost 634 688
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 4,321 4,752
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,711 $ 10,966
================================================================================================
See notes to quarterly financial statements.
3
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Nine Months
Ended September 30
------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (382) $ 670
Adjustments to reconcile net income (loss) to net cash from operations:
Loss (income) from discontinued operations 168 (259)
Depreciation, depletion and amortization 402 390
Provision (benefit) for deferred income taxes 3 23
Distributions from (advances to) related companies, net of
equity in (earnings) losses 8 39
Change in accounting method, net - (1)
(Gain) loss on sale of business assets (30) -
Gain on option component of joint venture sale (3) -
Asbestos reserve, net 460 96
Accrued special charges - (6)
Other non-cash items 53 18
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts 492 (354)
Sale of receivables 200 -
Inventories 16 (135)
Accounts payable 54 116
Other working capital, net (361) (121)
Other operating activities (80) 80
- ---------------------------------------------------------------------------------------------------
Total cash flows from operating activities 1,000 556
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (564) (568)
Sales of property, plant and equipment 217 77
(Acquisitions) dispositions of businesses, net 132 (115)
Investments - restricted cash (192) -
Other investing activities (10) (14)
- ---------------------------------------------------------------------------------------------------
Total cash flows from investing activities (417) (620)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings - 425
Payments on long-term borrowings (79) (13)
(Repayments) borrowings of short-term debt, net (22) (1,359)
Payments of dividends to shareholders (164) (161)
Proceeds from exercises of stock options - 25
Payments to reacquire common stock (3) (33)
Other financing activities (4) (6)
- ---------------------------------------------------------------------------------------------------
Total cash flows from financing activities (272) (1,122)
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (15) (19)
Net cash flows from discontinued operations - 1,201
- ---------------------------------------------------------------------------------------------------
Increase in cash and equivalents 296 (4)
Cash and equivalents at beginning of period 290 231
- ---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 586 $ 227
===================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 90 $ 118
Income taxes $ 163 $ 276
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ - $ 40
Liabilities disposed of in dispositions of businesses $ - $ 496
See notes to quarterly financial statements.
4
HALLIBURTON COMPANY
Notes to Quarterly Financial Statements
(Unaudited)
Note 1. Management Representations
We employ accounting policies that are in accordance with generally
accepted accounting principles in the United States of America. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and
assumptions that affect:
- the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements; and
- the reported amounts of revenues and expenses during the reporting
period.
Ultimate results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and applicable rules of
Regulation S-X. Accordingly, these financial statements do not include all
information or footnotes required by generally accepted accounting principles
for complete financial statements and should be read together with our 2001
Annual Report on Form 10-K. All adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary for a fair
presentation of the interim financial statements have been included. Prior
period amounts have been reclassified to be consistent with the current
presentation.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of September 30, 2002, the results of our
operations for the three and nine months ended September 30, 2002 and 2001 and
our cash flows for the nine months then ended. The results of operations for the
three and nine months ended September 30, 2002 and 2001 may not be indicative of
results for the full year.
Note 2. Business Segment Information
During the first quarter of 2002, we announced plans to restructure our
businesses into two operating subsidiary groups. One group is focused on energy
services and the other is focused on engineering and construction. As part of
this restructuring, many support functions which were previously shared were
moved into the two business groups. We also decided that the operations of Major
Projects, Granherne and Production Services better aligned with our Kellogg
Brown & Root subsidiary, or KBR, in the current business environment. These
businesses were moved for management and reporting purposes from the Energy
Services Group segment to the Engineering and Construction Group segment during
the second quarter. All prior period segment results have been restated to
reflect this change. Major Projects, which currently consists of the
Barracuda-Caratinga project in Brazil, is now reported through the Offshore
Operations product line, Granherne is now reported in the Onshore product line
and Production Services is now reported under the Operations and Maintenance
product line.
The tables below present information on our continuing operations
business segments on a comparable basis.
Three Months Nine Months
Ended September 30 Ended September 30
------------------------- ------------------------
Millions of dollars 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------
Revenues:
Energy Services Group $ 1,677 $ 2,098 $ 5,122 $ 5,898
Engineering and Construction Group 1,305 1,293 4,102 3,976
- -----------------------------------------------------------------------------------------------
Total $ 2,982 $ 3,391 $ 9,224 $ 9,874
===============================================================================================
Operating income (loss):
Energy Services Group $ 200 $ 321 $ 439 $ 778
Engineering and Construction Group 12 36 (496) 84
General corporate (21) (15) (34) (50)
- -----------------------------------------------------------------------------------------------
Total $ 191 $ 342 $ (91) $ 812
===============================================================================================
5
Energy Services Group. The Energy Services Group provides a wide range
of discrete services and products and integrated solutions to customers for the
exploration, development, and production of oil and gas. The customers for this
segment are major, national and independent oil and gas companies. This segment
consists of:
- Halliburton Energy Services provides oilfield services and
products including discrete products and services and integrated
solutions for oil and gas exploration, development and production
throughout the world. Products and services include pressure
pumping equipment and services, logging and perforating, drilling
systems and services, drilling fluids systems, drill bits,
specialized completion, and production equipment and services,
well control, and integrated solutions;
- Landmark Graphics provides integrated exploration and production
software information systems, data management services,
professional services to the petroleum industry and reservoir
description; and
- Other product service lines provide installation and servicing of
subsea facilities and pipelines, and manufacture of flexible pipe
for offshore applications. In January 2002, we sold to Saipem, our
joint venture partner, our 50% interest in European Marine
Contractors Ltd., a joint venture that provided pipeline services
for offshore customers. In May 2002, we contributed substantially
all of our Halliburton Subsea assets to a newly formed company,
Subsea 7, Inc. We own 50% of Subsea 7, Inc. and DSND Subsea ASA
owns the other 50%. In September 2002, we sold our 50% interest in
Bredero-Shaw, a pipecoating joint venture, to our partner ShawCor
Ltd. See Note 3.
Engineering and Construction Group. The Engineering and Construction
Group provides engineering, procurement, construction, project management,
program management, and facilities operation and maintenance for oil and gas and
other industrial and governmental customers. The Engineering and Construction
Group, operating as KBR, includes the following five product lines:
- Onshore operations comprise engineering and construction
activities, including liquefied natural gas, ammonia, crude oil
refineries, and natural gas plants;
- Offshore operations include specialty offshore deepwater
engineering and marine technology and worldwide fabrication
capabilities;
- Government operations provide operations, maintenance and
logistics activities for government facilities and installations;
- Operations and maintenance services include plant operations,
maintenance and start up services for both upstream and downstream
oil, gas and petrochemical facilities as well as operations,
maintenance and logistics services for the power, commercial and
industrial markets; and
- Infrastructure provides civil engineering, consulting and project
management services.
Intersegment revenues included in the revenues of the business segments
are immaterial. Our equity in pretax earnings and losses of unconsolidated
affiliates that are accounted for on the equity method is included in revenues
and operating income of the applicable segment.
Note 3. Acquisitions and Dispositions
Magic Earth acquisition. We signed a definitive agreement to purchase
Magic Earth, Inc., a leading 3-D visualization and interpretation technology
company with broad applications in the area of data interpretation for $100
million in April 2001. At the consummation date of the transaction (November 19,
2001), shares with a value of $100 million were issued to complete the purchase.
We issued 4.2 million shares, valued at $23.93 per share, which was based on the
average closing stock price for the 30-day period preceding November 19, 2001.
Magic Earth became a wholly-owned subsidiary and is reported within our Energy
Services Group. We recorded intangible assets of $19 million and goodwill of $71
million, all of which is nondeductible for tax purposes. The intangible assets
will be amortized based on a five year life.
PES acquisition. In February 2000, we acquired the remaining 74% of the
shares of PES (International) Limited that we did not already own for a value of
$126.7 million based on 3.3 million shares of Halliburton common stock valued at
$37.75 per share which was the closing stock price on January 12, 2000. PES is
based in Aberdeen, Scotland, and has developed technology that complements
Halliburton Energy Services' real-time reservoir solutions. To acquire the
remaining 74% of PES, we issued 1.2 million shares of Halliburton common stock.
We also issued rights that resulted in the issuance of 2.1 million additional
6
shares of Halliburton common stock between February 2001 and February 2002. We
issued 1 million shares in February 2001; 400,000 in June 2001; and the
remaining 700,000 shares in February 2002 under these rights. These shares were
included in the cost of the acquisition as a contingent liability. We recorded
$115 million of goodwill in connection with acquiring the remaining 74%.
During the second quarter of 2001, we contributed the majority of PES'
assets and technologies, including $130 million of goodwill associated with the
purchase of PES, to a newly formed joint venture with Shell Technology Ventures
BV, WellDynamics. We received $39 million in cash as an equity equalization
adjustment, which we recorded as a reduction in our investment in the joint
venture. We own 50% of WellDynamics and account for this investment using the
equity method. The formation of WellDynamics resulted in a difference of $90
million between the carrying amount of our investment and our equity in the
underlying net assets of the joint venture, which has been recorded as goodwill
under "Equity in and advances to related companies". The remaining assets and
goodwill of PES relating to completions and well intervention products have been
combined with our existing completions product service line.
PGS Data Management acquisition. In March 2001, we acquired the PGS
Data Management division of Petroleum Geo-Services ASA (PGS) for $164 million.
The agreement also calls for Landmark to provide, for a fee, strategic data
management and distribution services to PGS for three years. We recorded
intangible assets of $14 million and goodwill of $149 million, $9 million of
which is nondeductible for tax purposes.
European Marine Contractors Ltd. disposition. In January 2002, we sold
our 50% interest in European Marine Contractors Ltd., an unconsolidated joint
venture in the Energy Services Group, to our joint venture partner, Saipem. At
the date of sale, we received $115 million in cash and a contingent payment
option valued at $16 million resulting in a pretax operating income gain of $108
million. The contingent payment option was based on a formula linked to the Oil
Service Index performance. In February 2002, we exercised our option receiving
an additional $19 million and recorded a pretax gain of $3 million in Other, net
in the income statement as a result of the increase in value of this option. The
total transaction resulted in an after-tax gain of $68 million, or $0.16 per
diluted share.
Subsea 7 formation. In May 2002, we contributed substantially all of
our Halliburton Subsea assets to a newly formed company, Subsea 7, Inc. We
contributed assets with a book value of approximately $82 million. The
contributed assets were recorded by the new company at a fair value of
approximately $94 million. The $12 million difference is being amortized over
ten years representing the average remaining useful life of the assets
contributed. We own 50% of Subsea 7 and account for this investment using the
equity method. The remaining 50% is owned by DSND Inc.
Bredero-Shaw disposition. On September 30, 2002 we sold our 50%
interest in the Bredero-Shaw joint venture to our partner ShawCor Ltd. The
purchase price of $149 million is comprised of $53 million in cash, a short-term
note due January 2003 for $25 million and 7.7 million of ShawCor Class A
Subordinate shares. Of the $53 million in cash approximately $15 million was
received on September 30, 2002. The remaining cash will be received by the end
of November. In addition to our second quarter impairment charge of $61 million
($0.14 per diluted share after-tax) related to the pending sale of Bredero-Shaw,
we recorded a third quarter pretax charge of $18 million, or $0.04 per diluted
share. Included in this charge was $15 million of cumulative translation
adjustment loss which was realized upon the disposition of our investment in
Bredero-Shaw.
Dresser Equipment Group disposition. In April 2001, we disposed of the
remaining businesses in the Dresser Equipment Group. See Note 5.
Note 4. Restricted Cash
At September 30, 2002, we had restricted cash of $192 million included
in Other assets. Restricted cash consists of:
- $107 million deposit that collateralizes a bond for a patent
infringement judgment on appeal;
- $56 million as collateral for potential future insurance claim
reimbursements; and
- $29 million primarily related to cash collateral agreements for
outstanding letters of credit for various construction projects.
7
Note 5. Discontinued Operations
In late 1999 and early 2000 we sold our interest in two joint ventures
which were a significant portion of our Dresser Equipment Group. These sales
prompted a strategic review of the remaining businesses within the Dresser
Equipment Group. As a result of this review, we determined that these remaining
businesses did not closely fit with our core businesses, long-term goals and
strategic objectives. In April 2000, our Board of Directors approved plans to
sell all the remaining businesses within the Dresser Equipment Group. We sold
these businesses on April 10, 2001 and we recognized a pretax gain of $498
million ($299 million after-tax) during the second quarter of 2001. The
financial results of the Dresser Equipment Group through March 31, 2001 are
presented as discontinued operations in our financial statements. As part of the
terms of the transaction, we retained a 5.1% equity interest of Class A Common
stock in the Dresser Equipment Group, which has been renamed Dresser, Inc. In
July 2002, Dresser Inc. announced a reorganization and we have been asked to
exchange our shares for shares of Dresser Ltd. Our equity interest is accounted
for under the cost method.
For the nine months ended September 30, 2002, we recorded a $202
million pretax charge in discontinued operations. Included in this charge was
$153 million taken in the second quarter 2002, in connection with our asbestos
econometric study, for existing and future asbestos claims and defense costs
related to previously disposed businesses, net of anticipated insurance
recoveries. The $153 million charge was comprised of $1,176 million related to
the gross exposure on our asbestos claims, which was offset by $1,023 million in
amounts to be received from our insurance carriers related to asbestos claims.
Also included in the $202 million is a $40 million payment associated with the
Harbison-Walker bankruptcy filing recorded in the first quarter. Due to the
recording of our best estimate of current and future asbestos claims in the
second quarter of 2002, there were no additional discontinued operations
expenses for asbestos exposures in the third quarter of 2002. During the second
and third quarters of 2001, we recorded a $95 million pretax expense to
discontinued operations. This amount was comprised of a $632 million charge
related to the gross exposure on our asbestos claims, which was offset by $537
million in amounts to be received from our insurance carriers related to
asbestos claims. See Note 8.
Three Months Nine Months
Loss from Discontinued Ended September 30 Ended September 30
Operations ------------------------- ------------------------
Millions of dollars 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------
Revenues $ - $ - $ - $ 359
===============================================================================================
Operating income $ - $ - $ - $ 37
Asbestos litigation claims, net of
insurance recoveries - (3) (202) (95)
Tax benefit - 1 34 18
- -----------------------------------------------------------------------------------------------
Net loss $ - $ (2) $ (168) $ (40)
===============================================================================================
Note 6. Unapproved Claims and Long-Term Construction Contracts
Billing practices for engineering and construction projects are
governed by the contract terms of each project based upon costs incurred,
achievement of milestones, or pre-agreed schedules. Billings do not necessarily
correlate with revenues recognized under the percentage of completion method of
accounting. Billings in excess of recognized revenues are recorded in "Advance
billings on uncompleted contracts". When billings are less than recognized
revenues, the difference is recorded in "Unbilled work on uncompleted
contracts". With the exception of claims and change orders which are in the
process of being negotiated with customers, unbilled work is usually billed
during normal billing processes following achievement of the contractual
requirements.
Recording of profits and losses on long-term contracts requires an
estimate of the total profit or loss over the life of each contract. This
estimate requires consideration of contract revenue, change orders and claims;
less costs incurred and estimated costs to complete. Anticipated losses on
contracts are recorded in full in the period they are identified. Profits are
recorded based upon the total estimated contract profit times the current
percentage complete for the contract.
When calculating the amount of total profit or loss on a long-term
contract, we include unapproved claims as revenue when the collection is deemed
probable based upon the four criteria for recognizing unapproved claims under
the American Institute of Certified Public Accountants' Statement of Position
8
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Including unapproved claims in this calculation
increases the operating income that would otherwise be recorded without
consideration of the probable unapproved claims. Unapproved claims are recorded
to the extent of costs incurred and include no profit. In substantially all
cases, the probable unapproved claims included in determining contract profit or
loss are less than the actual claim that will be or has been presented to the
customer.
When recording the revenue and the associated unbilled receivable for
unapproved claims, we only accrue an amount equal to the costs incurred related
to probable unapproved claims. Therefore, the difference between the probable
unapproved claims included in determining contract profit or loss and the
probable unapproved claims recorded in unbilled work on uncompleted contracts
relates to forecasted costs which have not yet been incurred. The amounts
included in determining the profit or loss on contracts, and the amount booked
to unbilled work on uncompleted contracts for each period is as follows:
September 30 December 31
---------------- ---------------
Millions of dollars 2002 2001
- ---------------------------------------------------------------------------------
Probable unapproved claims (included
in determining contract profit or loss) $ 199 $ 137
Unapproved claims in unbilled work on
uncompleted contracts $ 153 $ 102
=================================================================================
The claims at September 30, 2002 listed in the above table relate to
eight contracts, most of which are complete or substantially complete. We are
actively engaged in claims negotiation with the customer in all but one case,
and in that case we have initiated the arbitration process. The probable
unapproved claim in arbitration is $5 million. The largest claim relates to the
Barracuda-Caratinga contract which is approximately 54% complete at the end of
the third quarter of 2002. The probable unapproved claims included in
determining this contract's loss were $101 million at September 30, 2002 and $43
million at December 31, 2001 based on the project's percentage completion. As
the claim for this contract most likely will not be settled within one year,
amounts in unbilled work on uncompleted contracts of $55 million at September
30, 2002 and $10 million at December 31, 2001 included in the table above have
been recorded to long-term unbilled work on uncompleted contracts which is
included in Other assets on the balance sheet. All other claims included in
the table above have been recorded to Unbilled work on uncompleted contracts
included in the Total receivables amount on the balance sheet.
A summary of unapproved claims activity for the three and nine months
ended September 30, 2002 is as follows:
Total Probable Unapproved Probable Unapproved Claim
Claims Accrued Revenue
-------------------------------------------------- ----------------
Three Months Nine Months Three Months Nine Months
Millions of dollars Ended Ended Ended Ended
- --------------------------------------------------------------------------------------------------------
Beginning balance $ 193 $137 $135 $102
Additions 7 87 7 51
Costs incurred during period - - 12 25
Approved claim (1) (6) (1) (6)
Write-offs - (3) - (3)
Other * - (16) - (16)
- --------------------------------------------------------------------------------------------------------
Ending balance $ 199 $199 $153 $153
========================================================================================================
* Other primarily relates to claims which the customer has agreed to a change
order relating to the scope of work.
9
In addition, our unconsolidated related companies include probable
unapproved claims as revenue to determine the amount of profit or loss for their
contracts. Our "Equity in earnings of unconsolidated affiliates" includes our
equity percentage of unapproved claims related to unconsolidated projects.
Amounts for unapproved claims from our related companies are included in equity
in and advances to related companies and totaled $9 million at September 30,
2002 and $0.3 million at December 31, 2001.
Note 7. Inventories
Inventories are stated at the lower of cost or market. Some United
States manufacturing and field service finished products and parts inventories
for drill bits, completion products, and bulk materials are recorded using the
LIFO method. Included in the table below are inventories on the last-in,
first-out method of $50 million at September 30, 2002 and $54 million at
December 31, 2001. If the average cost method had been used, total inventories
would have been about $20 million higher than reported at September 30, 2002 and
December 31, 2001.
Over 90% of remaining inventory is recorded on the average cost method,
with the remainder on the first-in, first-out (FIFO) method.
Inventories at September 30, 2002 and December 31, 2001 are composed of
the following:
September 30 December 31
---------------- ---------------
Millions of dollars 2002 2001
- --------------------------------------------------------------------
Finished products and parts $ 521 $ 520
Raw materials and supplies 180 192
Work in process 68 75
- --------------------------------------------------------------------
Total $ 769 $ 787
====================================================================
Note 8. Commitments and Contingencies
Asbestos litigation. Several of our subsidiaries, particularly DII
Industries, LLC (See Note 14) and Kellogg Brown & Root, Inc., are defendants in
a large number of asbestos-related lawsuits. The plaintiffs allege injury as a
result of exposure to asbestos in products manufactured or sold by former
divisions of DII Industries, LLC or in materials used in construction or
maintenance projects of Kellogg Brown & Root, Inc. These claims are in three
general categories:
- refractory claims;
- other DII Industries, LLC claims; and
- construction claims.
Refractory claims. Asbestos was used in a small number of products
manufactured or sold by Harbison-Walker Refractories Company, which DII
Industries, LLC acquired in 1967. The Harbison-Walker operations were conducted
as a division of DII Industries, LLC (then named Dresser Industries, Inc.) until
those operations were transferred to another then existing subsidiary of DII
Industries, LLC in preparation for a spin-off. Harbison-Walker was spun-off by
DII Industries, LLC in July 1992. At that time, Harbison-Walker assumed
liability for asbestos claims filed after the spin-off and it agreed to defend
and indemnify DII Industries, LLC from liability for those claims, although DII
Industries, LLC continues to have direct liability to tort claimants for all
post spin-off refractory claims. DII Industries, LLC retained responsibility for
all asbestos claims pending as of the date of the spin-off. The agreement
governing the spin-off provided that Harbison-Walker would have the right to
access DII Industries, LLC's historic insurance coverage for the
asbestos-related liabilities that Harbison-Walker assumed in the spin-off. After
the spin-off, DII Industries, LLC and Harbison-Walker jointly negotiated and
entered into coverage-in-place agreements with a number of insurance companies
that had issued historic general liability insurance policies which both DII
Industries, LLC and Harbison-Walker had the right to access for, among other
things, bodily injury occurring between 1963 and 1985. These coverage-in-place
agreements provide for the payment of defense costs, settlements and court
judgments paid to resolve refractory asbestos claims.
10
As Harbison-Walker's financial condition worsened in late 2000 and
2001, Harbison-Walker began agreeing to pay more in settlement of the post
spin-off refractory claims than it historically had paid. These increased
settlement amounts led to Harbison-Walker making greater demands on the shared
insurance asset. By July 2001, DII Industries, LLC determined that the demands
that Harbison-Walker was making on the shared insurance policies were not
acceptable to DII Industries, LLC and that Harbison-Walker probably would not be
able to fulfill its indemnification obligation to DII Industries, LLC.
Accordingly, DII Industries, LLC took up the defense of unsettled post spin-off
refractory claims that name it as a defendant in order to prevent
Harbison-Walker from unnecessarily eroding the insurance coverage both companies
access for these claims. These claims are now stayed in the Harbison-Walker
bankruptcy proceeding.
As of September 30, 2002, there were approximately 6,000 open and
unresolved pre-spin-off refractory claims against DII Industries, LLC. In
addition, there were approximately 142,000 post spin-off claims that name DII
Industries, LLC as a defendant.
Other DII Industries, LLC claims. As of September 30, 2002, there were
approximately 136,000 open and unresolved claims alleging injuries from asbestos
used in other products formerly manufactured by DII Industries, LLC. Most of
these claims involve gaskets and packing materials used in pumps and other
industrial products.
Construction claims. Our Engineering and Construction Group includes
engineering and construction businesses formerly operated by The M.W. Kellogg
Company and Brown & Root, Inc., now combined as Kellogg Brown & Root, Inc. As of
September 30, 2002, there were approximately 45,000 open and unresolved claims
alleging injuries from asbestos in materials used in construction and
maintenance projects, most of which were conducted by Brown & Root, Inc.
Approximately 1,500 of these claims are asserted against The M.W. Kellogg
Company. We believe that Kellogg Brown & Root has a good defense to these
claims, and a prior owner of The M.W. Kellogg Company provides Kellogg Brown &
Root a contractual indemnification for claims against The M.W. Kellogg Company.
Harbison-Walker Chapter 11 bankruptcy. On February 14, 2002,
Harbison-Walker filed a voluntary petition for reorganization under Chapter 11
of the United States Bankruptcy Code in the Bankruptcy Court in Pittsburgh,
Pennsylvania. In its bankruptcy-related filings, Harbison-Walker said that it
would seek to utilize Sections 524(g) and 105 of the Bankruptcy Code to propose
and have confirmed a plan of reorganization that would provide for distributions
for all legitimate, pending and future asbestos claims asserted directly against
it or asserted against DII Industries, LLC for which Harbison-Walker is required
to indemnify and defend DII Industries, LLC. However, Harbison-Walker has not
yet submitted a proposed plan of reorganization to the Bankruptcy Court. If such
a plan of reorganization is submitted and confirmed, all pending and future
refractory asbestos claims against Harbison-Walker or DII Industries, LLC would
be channeled to a Section 524(g)/105 trust for resolution and payment. In order
for a trust to be confirmed, at least a majority of the equity ownership of
Harbison-Walker would have to be contributed to the trust. Creation of a trust
would also require the approval of 75% of the asbestos claimant creditors of
Harbison-Walker.
We also anticipate a significant financial contribution would also be
required from DII Industries, LLC to obtain the necessary approvals for such
trust. However, we are not able to quantify the amount of such contribution in
light of numerous unresolved issues such as the amount of Harbison-Walker assets
available to satisfy its asbestos and trade creditors and the negotiations that
must be completed among Harbison-Walker, the asbestos claims committee under its
Chapter 11 proceeding, a legal representative for future asbestos claimants
(which has not yet been appointed by the Bankruptcy Court), DII Industries, LLC
and the relevant insurance companies. In establishing our reserve for asbestos
liability, we have included all post spin-off claims against Harbison-Walker
that name DII Industries, LLC as a defendant.
Harbison-Walker's failure to fulfill its indemnity obligations, and its
excessive erosion of the insurance coverage, required DII Industries, LLC to
assist Harbison-Walker in its bankruptcy proceeding in order to protect the
shared insurance from dissipation. This insurance will be needed if a trust is
to be worked out with the asbestos claimants. As a result, DII Industries, LLC
agreed to provide up to $35 million of debtor-in-possession financing to
Harbison-Walker during the pendency of the Chapter 11 proceeding, of which $5
11
million was advanced during the first quarter of 2002. On February 14, 2002, DII
Industries, LLC also paid $40 million to Harbison-Walker's United States parent
holding company, RHI Refractories Holding Company. This payment was made when
Harbison-Walker filed its bankruptcy petition and was charged to discontinued
operations in our financial statements in the first quarter of 2002. The payment
to RHI Refractories led RHI Refractories to forgive intercompany debt owed to it
by Harbison-Walker, thus increasing the assets of Harbison-Walker. DII
Industries, LLC will pay another $35 million to RHI Refractories if a plan of
reorganization acceptable to DII Industries, LLC is proposed in the bankruptcy
proceedings. A further $85 million will be paid to RHI Refractories if a plan
acceptable to DII Industries, LLC is approved by 75% of the Harbison-Walker
asbestos claimant creditors and confirmed by the Bankruptcy Court.
In connection with the Chapter 11 filing by Harbison-Walker, the
Bankruptcy Court on February 14, 2002 issued a temporary restraining order
staying all further litigation of more than 200,000 asbestos claims currently
pending against DII Industries, LLC in numerous courts throughout the United
States. As a result of DII Industries, LLC's continuing settlement negotiations
with the Asbestos Claimants Committee, or ACC, which was formed as part of the
Harbison-Walker bankruptcy, and certain law firms that represent a substantial
percentage of the plaintiffs that have asserted Harbison-Walker-related claims
against DII Industries, LLC, the temporary restraining order originally entered
by the Bankruptcy Court on February 14, 2002 has been consensually extended
until at least December 11, 2002. To the extent that the settlement negotiations
continue to make progress, DII Industries, LLC anticipates that the ACC will
consent to have the temporary restraining order extended for an additional
period of time. Currently, there is no assurance that a stay will remain in
effect beyond a short period of time, that a plan of reorganization will be
proposed or confirmed for Harbison-Walker, or that any plan that is confirmed
will provide relief to DII Industries, LLC. If a plan is not confirmed that
provides relief to DII Industries, LLC or if the stay is terminated, DII
Industries, LLC will be required to defend all open claims in the courts in
which they have been filed, possibly with reduced access to the insurance shared
with Harbison-Walker.
The stayed asbestos claims are those covered by insurance that DII
Industries, LLC and Harbison-Walker each access to pay defense costs,
settlements and judgments attributable to both refractory and non-refractory
asbestos claims. The stayed claims include approximately 142,000 post-1992
spin-off refractory claims, 6,000 pre-spin-off refractory claims and
approximately 135,000 other types of asbestos claims pending against DII
Industries, LLC. Approximately 51,000 of the claims in the third category are
claims made against DII Industries, LLC based on more than one ground for
recovery and the stay affects only the portion of the claim covered by the
shared insurance. The stay prevents litigation from proceeding while the stay is
in effect and also prohibits the filing of new claims. One of the purposes of
the stay is to allow Harbison-Walker and DII Industries, LLC time to develop and
propose a plan of reorganization.
Asbestos insurance coverage. DII Industries, LLC has substantial
insurance that reimburses it for portions of the costs incurred defending
asbestos claims, as well as amounts paid to settle claims and court judgments.
This coverage is provided by a large number of insurance policies written by
dozens of insurance companies. The insurance companies wrote the coverage over a
period of more than 30 years for DII Industries, LLC, its predecessors or its
subsidiaries and their predecessors. Large amounts of this coverage are now
subject to coverage-in-place agreements that resolve issues concerning amounts
and terms of coverage. The amount of insurance available to DII Industries, LLC
and its subsidiaries depends on the nature and time of the alleged exposure to
asbestos, the specific subsidiary against which an asbestos claim is asserted
and other factors.
Refractory claims insurance. DII Industries, LLC has approximately $2.1
billion in aggregate limits of insurance coverage for refractory asbestos
claims, of which over one-half is with Equitas or other London-based insurance
companies. Most of this insurance is shared with Harbison-Walker. Many of the
issues relating to the majority of this coverage have been resolved by
coverage-in-place agreements with dozens of companies, including Equitas and
other London-based insurance companies. Coverage-in-place agreements are
settlement agreements between policyholders and the insurers specifying the
terms and conditions under which coverage will be applied as claims are
presented for payment. These agreements in an asbestos claims context govern
12
such things as what events will be deemed to trigger coverage, how liability for
a claim will be allocated among insurers and what procedures the policyholder
must follow in order to obligate the insurer to pay claims. Recently, however,
Equitas and other London-based companies have attempted to impose new
restrictive documentation requirements on DII Industries, LLC and other
insureds. Equitas and the other London-based companies have stated that the new
requirements are part of an effort to limit payment of settlements to claimants
who are truly impaired by exposure to asbestos and can identify the product or
premises that caused their exposure.
On March 21, 2002, Harbison-Walker filed a lawsuit in the United States
Bankruptcy Court for the Western District of Pennsylvania in its Chapter 11
bankruptcy proceeding. This lawsuit is substantially similar to DII Industries,
LLC's lawsuit filed in Texas State Court in 2001 and seeks, among other relief,
a determination as to the rights of DII Industries, LLC and Harbison-Walker to
the shared general liability insurance. The lawsuit also seeks damages against
certain insurers for breach of contract and bad faith, and a declaratory
judgment concerning the insurers' obligations under the shared insurance.
Although DII Industries, LLC is also a defendant in this lawsuit, it has
asserted its own claim to coverage under the shared insurance and is cooperating
with Harbison-Walker to secure both companies' rights to the shared insurance.
The Bankruptcy Court has ordered the parties to this lawsuit to engage in
non-binding mediation. The first mediation session was held on July 26, 2002 and
additional sessions have since taken place and further sessions are scheduled to
take place, provided the Bankruptcy Court's mediation order remains in effect,
in November 2002. Given the early stages of these negotiations, DII Industries,
LLC cannot predict whether a negotiated resolution of this dispute will occur
or, if such a resolution does occur, the precise terms of such a resolution.
Prior to the Harbison-Walker bankruptcy, on August 7, 2001, DII
Industries, LLC filed a lawsuit in Dallas County, Texas, against a number of
these insurance companies asserting DII Industries, LLC rights under an existing
coverage-in-place agreement and under insurance policies not yet subject to
coverage-in-place agreements. The coverage-in-place agreements allow DII
Industries, LLC to enter into settlements for small amounts without requiring
claimants to produce detailed documentation to support their claims, when DII
Industries, LLC believes the settlements are an effective claims management
strategy. DII Industries, LLC believes that the new documentation requirements
are inconsistent with the current coverage-in-place agreements and are
unenforceable. The insurance companies that DII Industries, LLC has sued have
not refused to pay larger claim settlements where documentation is obtained or
where court judgments are entered. Also, they continue to pay previously agreed
to amounts of defense costs that DII Industries, LLC incurs defending refractory
asbestos claims.
On May 10, 2002, the London-based insuring entities and companies
removed DII Industries, LLC's Dallas County State Court Action to the United
States District Court for the Northern District of Texas alleging that federal
court jurisdiction existed over the case because it is related to the
Harbison-Walker bankruptcy. DII Industries, LLC has filed an opposition to that
removal and has asked the federal court to remand the case back to the Dallas
County state court. On June 12, 2002, the London-based insuring entities and
companies filed a motion to transfer the case to the federal court in
Pittsburgh, Pennsylvania. DII Industries, LLC has filed an opposition to that
motion to transfer. The federal court in Dallas has yet to rule on any of these
motions. Regardless of the outcome of these motions, because of the similar
insurance coverage lawsuit filed by Harbison-Walker in its bankruptcy
proceeding, it is unlikely that DII Industries, LLC's case will proceed
independently of the bankruptcy.
Other DII Industries, LLC claims insurance. DII Industries, LLC has
substantial insurance to cover other non-refractory asbestos claims. Two
coverage-in-place agreements cover DII Industries, LLC for companies or
operations that DII Industries, LLC, either acquired or operated prior to
November 1, 1957. Asbestos claims that are covered by these agreements are
currently stayed by the Harbison-Walker bankruptcy because the majority of this
coverage also applies to refractory claims and is shared with Harbison-Walker.
Other insurance coverage is provided by a number of different policies that DII
Industries, LLC acquired rights to access when it acquired businesses from other
companies. Three coverage-in-place agreements provide reimbursement for asbestos
claims made against DII Industries, LLC's former Worthington Pump division.
There is also other substantial insurance coverage with approximately $2.0
billion in aggregate limits that has not yet been reduced to coverage-in-place
agreements.
13
On August 28, 2001, DII Industries, LLC filed a lawsuit in the 192nd
Judicial District of the District Court for Dallas County, Texas against certain
London-based insuring entities that issued insurance policies that provide
coverage to DII Industries, LLC for asbestos-related liabilities arising out of
the historical operations of Worthington Corporation or its successors. This
lawsuit raises essentially the same issue as to the documentation requirements
as the August 7, 2001 Harbison-Walker lawsuit filed in the same court. The
London-based insuring entities filed a motion in that case seeking to compel the
parties to binding arbitration. The trial court denied that motion and the
London-based insuring entities appealed that decision to the state appellate
court. The state appellate courts denied the appeal and, most recently, the
London-based insuring entities have removed the case from the state court to the
federal court. DII Industries, LLC has moved to remand the case back to the
state court, but that motion has not yet been ruled upon.
A significant portion of the insurance coverage applicable to
Worthington claims is alleged by Federal-Mogul Products, Inc. to be shared with
it. In 2001, Federal-Mogul Products, Inc. and a large number of its affiliated
companies filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court in Wilmington, Delaware.
In response to Federal-Mogul's allegations, on December 7, 2001, DII
Industries, LLC filed a lawsuit in the Delaware Bankruptcy Court asserting its
rights to insurance coverage under historic general liability policies issued to
Studebaker-Worthington, Inc. and its successor for asbestos-related liabilities
arising from, among other operations, Worthington's and its successors' historic
operations. This lawsuit also seeks a judicial declaration concerning the
competing rights of DII Industries, LLC and Federal-Mogul, if any, to this
insurance coverage. DII Industries, LLC recently filed a second amended
complaint in that lawsuit and the parties are now beginning the discovery
process.
At the same time, DII Industries, LLC filed its insurance coverage
action in the Federal-Mogul bankruptcy, DII Industries, LLC also filed a second
lawsuit in which it has filed a motion for preliminary injunction seeking a stay
of all Worthington asbestos-related lawsuits against DII Industries, LLC that
are scheduled for trial within the six months following the filing of the
motion. The stay that DII Industries, LLC seeks, if granted, would remain in
place until the competing rights of DII Industries, LLC and Federal-Mogul to the
allegedly shared insurance are resolved. The Court has yet to schedule a hearing
on DII Industries, LLC motion for preliminary injunction.
A number of insurers who have agreed to coverage-in-place agreements
with DII Industries, LLC have suspended payment under the shared Worthington
policies until the Federal-Mogul Bankruptcy Court resolves the insurance issues.
Consequently, the effect of the Federal-Mogul bankruptcy on DII Industries,
LLC's rights to access this shared insurance is uncertain.
Construction claims insurance. Nearly all of our construction asbestos
claims relate to Brown & Root, Inc. operations before the 1980s. Our primary
insurance coverage for these claims was written by Highlands Insurance Company
during the time it was one of our subsidiaries. Highlands was spun-off to our
shareholders in 1996. On April 5, 2000, Highlands filed a lawsuit against us in
the Delaware Chancery Court. Highlands asserted that the insurance it wrote for
Brown & Root, Inc. that covered construction asbestos claims was terminated by
agreements between Halliburton and Highlands at the time of the 1996 spin-off.
In March 2001, the Chancery Court ruled that a termination did occur and that
Highlands was not obligated to provide coverage for Brown & Root, Inc.'s
asbestos claims. This decision was affirmed by the Delaware Supreme Court on
March 13, 2002. As a result of this ruling, we wrote-off approximately $35
million in accounts receivable for amounts paid for claims and defense costs and
$45 million of accrued receivables in relation to estimated insurance recoveries
claims settlements from Highlands in the first quarter 2002. In addition, we
dismissed the April 24, 2000 lawsuit we filed against Highlands in Harris
County, Texas.
As noted in our 2001 Form 10-K, the amount of the billed insurance
receivable related to Highlands Insurance Company included in accounts
receivable was $35 million.
As a consequence of the Delaware Supreme Court's decision, Kellogg
Brown & Root no longer has primary insurance coverage from Highlands for
asbestos claims. However, Kellogg Brown & Root has significant excess insurance
coverage. The amount of this excess coverage that will reimburse us for an
14
asbestos claim depends on a variety of factors. On March 20, 2002, Kellogg Brown
& Root filed a lawsuit in the 172nd Judicial District of the District Court of
Jefferson County, Texas, against Kellogg Brown & Root's historic insurers that
issued these excess insurance policies. In the lawsuit, Kellogg Brown & Root
seeks to establish the specific terms under which it can seek reimbursement for
costs it incurs in settling and defending asbestos claims from its historic
construction operations. Until this lawsuit is resolved, the scope of the excess
insurance will remain uncertain. We do not expect the excess insurers will
reimburse us for asbestos claims until this lawsuit is resolved.
Significant asbestos judgments on appeal. During 2001, there were
several adverse judgments in trial court proceedings that are in various stages
of the appeal process. All of these judgments concern asbestos claims involving
Harbison-Walker refractory products. Each of these appeals, however, has been
stayed by the Bankruptcy Court in the Harbison-Walker Chapter 11 bankruptcy.
On November 29, 2001, the Texas District Court in Orange, Texas,
entered judgments against DII Industries, LLC on a $65 million jury verdict
rendered in September 2001 in favor of five plaintiffs. The $65 million amount
includes $15 million of a $30 million judgment against DII Industries, LLC and
another defendant. DII Industries, LLC is jointly and severally liable for $15
million in addition to $65 million if the other defendant does not pay its share
of this judgment. We believe that during the trial the court committed numerous
errors, including prohibiting DII Industries, LLC from presenting evidence that
the alleged illness of the plaintiffs was caused by products of other companies
that had previously settled with the plaintiffs. We intend to appeal this
judgment and believe that the Texas appellate courts will ultimately reverse
this judgment.
On November 29, 2001, the same District Court in Orange, Texas, entered
three additional judgments against DII Industries, LLC in the aggregate amount
of $35.7 million in favor of 100 other asbestos plaintiffs. These judgments
relate to an alleged breach of purported settlement agreements signed early in
2001 by a New Orleans lawyer hired by Harbison-Walker, which had been defending
DII Industries, LLC pursuant to the agreement by which Harbison-Walker was
spun-off by DII Industries, LLC in July 1992. These settlement agreements
expressly bind Harbison-Walker Refractories Company as the obligated party, not
DII Industries, LLC. DII Industries, LLC intends to appeal these three judgments
on the grounds that it was not a party to the settlement agreements and it did
not authorize anyone to settle on its behalf. We believe that these judgments
are contrary to applicable law and will be reversed.
On December 5, 2001, a jury in the Circuit Court for Baltimore City,
Maryland, returned verdicts against DII Industries, LLC and other defendants
following a trial involving refractory asbestos claims. Each of the five
plaintiffs alleges exposure to Harbison-Walker products. DII Industries, LLC
portion of the verdicts was approximately $30 million. DII Industries, LLC
believes that the trial court committed numerous errors and that the trial
evidence did not support the verdicts. The trial court has entered judgment on
these verdicts. DII Industries, LLC intends to appeal the judgment to the
Maryland Supreme Court where we expect the judgment will be significantly
reduced, if not totally reversed.
On October 25, 2001, in the Circuit Court of Holmes County,
Mississippi, a jury verdict of $150 million was rendered in favor of six
plaintiffs against DII Industries, LLC and two other companies. DII Industries,
LLC share of the verdict was $21.3 million. The award was for compensatory
damages. The jury did not award any punitive damages. The trial court has
entered judgment on the verdict. We believe there were serious errors during the
trial and we intend to appeal this judgment to the Mississippi Supreme Court. We
believe the judgment will ultimately be reversed because there was a total lack
of evidence that the plaintiffs were exposed to a Harbison-Walker product or
that they suffered compensatory damages. Also, there were procedural errors in
the selection of the jury.
Asbestos claims history. Since 1976, approximately 546,000 asbestos
claims have been filed against us. Almost all of these claims have been made in
separate lawsuits in which we are named as a defendant along with a number of
other defendants, often exceeding 100 unaffiliated defendant companies in total.
During the third quarter of 2002, we received approximately 21,000 new claims
and we closed approximately 5,000 claims. The number of open claims pending
against us is as follows:
15
Total Open
Period Ending Claims
- --------------------------------------------
September 30, 2002 328,000
June 30, 2002 312,000
March 31, 2002 292,000
December 31, 2001 274,000
September 30, 2001 146,000
June 30, 2001 145,000
March 31, 2001 129,000
December 31, 2000 117,000
============================================
The claims include approximately 142,000 at September 30, 2002, 139,000
at June 30, 2002, 133,000 at March 31, 2002 and 125,000 at December 31, 2001 of
post spin-off Harbison-Walker refractory related claims that name DII
Industries, LLC as a defendant. All such claims have been factored into the
calculation of our asbestos liability.
We manage asbestos claims to achieve settlements of valid claims for
reasonable amounts. When reasonable settlement is not possible, we contest
claims in court. Since 1976, we have closed approximately 218,000 claims through
settlements and court proceedings at a total cost of approximately $189 million.
We have received or expect to receive from our insurers all but approximately
$82 million of this cost, resulting in an average net cost per closed claim of
about $376.
Asbestos study and the valuation of unresolved current and future
asbestos claims, and related insurance receivables. DII Industries, LLC retained
Dr. Francine F. Rabinovitz of Hamilton, Rabinovitz & Alschuler, Inc. to estimate
the probable number and value, including defense costs, of unresolved current
and future asbestos-related bodily injury claims asserted against DII
Industries, LLC and its subsidiaries. Dr. Rabinovitz is a nationally renowned
expert in conducting such analyses, has been involved in a number of
asbestos-related and other toxic tort-related valuations of current and future
liabilities, has served as the expert for two representatives of future
claimants in asbestos related bankruptcies and has had her valuation
methodologies accepted by numerous courts. Further, the methodology utilized by
Dr. Rabinovitz is the same methodology that is utilized by the expert who is
routinely retained by the asbestos claimants committee in asbestos-related
bankruptcies. Dr. Rabinovitz estimated the probable number and value of
unresolved current and future asbestos-related bodily injury claims asserted
against DII Industries, LLC and its subsidiaries over a 50 year period.
The methodology utilized by Dr. Rabinovitz to project DII Industries,
LLC's and its subsidiaries' asbestos-related liabilities and defense costs
relied upon and included:
- an analysis of DII Industries, LLC's, Kellogg, Brown & Root,
Inc.'s and Harbison-Walker Refractories Company's historical
asbestos settlements and defense costs to develop average
settlement values and average defense costs for specific
asbestos-related diseases and for the specific business operation
or entity allegedly responsible for the asbestos-related diseases;
- an analysis of DII Industries, LLC's, Kellogg, Brown & Root,
Inc.'s and Harbison-Walker Refractories Company's pending
inventory of asbestos-related claims by specific asbestos-related
diseases and by the specific business operation or entity
allegedly responsible for the asbestos-related disease;
- an analysis of the claims filing history for asbestos-related
claims against DII Industries, LLC, Kellogg, Brown & Root, Inc.
and Harbison-Walker Refractories Company since January 2000
(two-year claims history) and alternatively since January 1997
(five-year claims history) by specific asbestos-related disease
and by business operation or entity allegedly responsible for
the asbestos-related disease;
16
- an analysis of the population likely to have been exposed or claim
exposure to products manufactured by DII Industries, LLC, its
predecessors and Harbison-Walker or to Brown & Root construction
and renovation projects; and
- epidemiological studies to estimate the number of people who might
allege exposure to products manufactured by DII Industries LLC,
its predecessors and Harbison-Walker or to Brown & Root
construction and renovation projects that would be likely to
develop asbestos-related diseases.
Dr. Rabinovitz's estimates are based on historical data supplied by DII
Industries, LLC, Kellogg, Brown & Root, Inc. and Harbison-Walker and publicly
available studies, including annual surveys by the National Institutes of Health
concerning the incidence of mesothelioma deaths. In her estimates, Dr.
Rabinovitz relied on the source data provided by our management; she did not
independently verify the accuracy of the source data. In her analysis, Dr.
Rabinovitz projected that the elevated and historically unprecedented rate of
claim filings of the last several years (particularly for 2000 and 2001),
especially as expressed by the ratio of nonmalignant claim filings to malignant
claim filings, would continue into the future for 5 more years. After that, Dr.
Rabinovitz projected that the ratio of nonmalignant claim filings to malignant
claim filings will gradually decrease for a 10 year period ultimately returning
to the historical claiming rate and claiming ratio. In making her calculation
Dr. Rabinovitz alternately assumed a somewhat lower rate of claim filings, based
on an average of the last five years of claims experience, would continue into
the future for five more years and decrease thereafter.
Other important assumptions utilized in Dr. Rabinovitz's estimates,
which we relied upon in making our accrual are:
- an assumption that there will be no legislative or other systemic
changes to the tort system;
- that the Company will continue to aggressively defend against
asbestos claims made against the Company; and
- an inflation rate of 3% annually for settlement payments and an
inflation rate of 4% annually for defense costs.
Based upon her analysis, Dr. Rabinovitz estimated DII Industries, LLC's
total, undiscounted asbestos liabilities, including defense costs, through 2052
to be within a range from $2.2 billion to $3.5 billion. As of September 30,
2002, we do not believe there is a better amount within the expert's range and,
therefore, we based our estimated accrual for asbestos liability on the low-end
of the expert's range, or $2.2 billion , in accordance with SFAS 5 and related
interpretations (which includes payments related to the approximately 328,000
claims currently pending).
If we had adjusted our accrual for asbestos liabilities for current and
future asbestos claims up to the high-end of the expert's range, or $3.5
billion, and adjusted the related probable insurance recovery up to $2.0
billion, we would have recorded an additional pretax charge of $879 million
($753 million after-tax).
Using Dr. Rabinovitz's projections, we then conducted an analysis to
determine the amount of insurance that we estimate is probable that we will
recover in relation to the projected claims and defense costs through 2052. In
conducting this analysis, we:
- reviewed DII Industries, LLC's historical course of dealings with
its insurance companies concerning the payment of asbestos-related
claims, including DII Industries, LLC's 15 year litigation and
settlement history;
- reviewed the terms of DII Industries, LLC's prior and current
coverage-in-place settlement agreements;
- reviewed the status of DII Industries, LLC's and Kellogg, Brown &
Root, Inc.'s current insurance-related lawsuits and the various
legal positions of the parties in those lawsuits in relation to
the developed and developing case law and the historic positions
taken by insurers in the earlier filed and settled lawsuits;
17
- engaged in discussions with our counsel; and
- analyzed publicly-available information concerning the ability of
the DII Industries, LLC's insurers to meet their obligations.
Based on that review, analyses and discussions, we made judgments
concerning insurance coverage that we believe are reasonable and consistent with
our historical course of dealings with our insurers and the relevant case law to
determine the probable insurance recoveries for DII Industries, LLC's asbestos
liabilities through 2052. This analysis factored in the probable effects of
self-insurance features, such as self-insured retentions, policy exclusions,
liability caps and current and anticipated financial status of applicable
insurers, and various judicial determinations relevant to applicable insurance
programs. Based on our analysis of the probable insurance recoveries, we
recorded receivables for the insurance recoveries that are deemed probable
through 2052 of $1.6 billion.
The reserve of $2.2 billion for probable and reasonably estimable
liabilities for current and future asbestos claims and the $1.6 billion in
insurance receivables are included in noncurrent assets and liabilities due to
the extended time periods involved to settle claims. In the second quarter of
2002, we recorded a pretax charge of $483 million. Of this pretax charge, $330
million, $268 million after-tax, was recorded for claims related to Brown & Root
construction and renovation projects and was recorded under the Engineering and
Construction Group segment. The balance of $153 million, $123 million after-tax,
related to claims associated with businesses no longer owned by us and was
recorded as discontinued operations. The low effective tax rate on the asbestos
charge is due to the recording of a valuation allowance against the United
States federal deferred tax asset associated with the accrual as the deferred
tax asset may not be fully realizable based upon future taxable income
projections.
The total estimated claims through 2052, including the 328,000 current
open claims, are approximately one million. A summary of our reserves for these
claims and corresponding insurance recoveries is as follows:
September 30, 2002
-----------------------------------------
Three Months Nine Months
Millions of dollars Ended Ended
- --------------------------------------------------------------------------------------------------------
Gross asbestos litigation claims - beginning balance $ 2,196 $ 737
- --------------------------------------------------------------------------------------------------------
Accrued reserves - 1,542
Payments on claims (23) (106)
- --------------------------------------------------------------------------------------------------------
Gross asbestos litigation claims - ending balance $ 2,173 $ 2,173
- --------------------------------------------------------------------------------------------------------
Estimated insurance recoveries:
Highlands Insurance Company - beginning balance $ - $ (45)
Write-off of receivable - 45
- --------------------------------------------------------------------------------------------------------
Highlands Insurance Company - ending balance - -
- --------------------------------------------------------------------------------------------------------
Other insurance carriers - beginning balance $(1,594) $ (567)
Accrued insurance recoveries - (1,051)
Insurance billings 6 30
- --------------------------------------------------------------------------------------------------------
Other insurance carriers - ending balance $(1,588) $ (1,588)
- --------------------------------------------------------------------------------------------------------
Total estimated insurance recoveries $(1,588) $ (1,588)
- --------------------------------------------------------------------------------------------------------
Net liability for known asbestos claims $ 585 $ 585
========================================================================================================
Accounts receivable for billings to insurance companies for payments
made on asbestos claims were $35 million at September 30, 2002, and $18 million
at December 31, 200l, excluding $35 million in accounts receivable written off
at the conclusion of the Highlands litigation.
The insurance recoveries we have recorded do not assume any recovery
from insolvent insurers or from any state insurance guaranty association and
assume that all but one of our insurance companies that are currently solvent
will continue to be solvent throughout the period of the applicable recoveries
in the projections. However, there can be no assurances that these
assumptions will be correct. The insurance receivables do not exhaust
the applicable insurance coverage for asbestos-related liabilities.
18
Projecting future events is subject to many uncertainties that could
cause the asbestos-related liabilities and insurance recoveries to be higher or
lower than those projected and booked such as:
- the number of future asbestos-related lawsuits to be filed against
DII Industries, LLC and Kellogg Brown & Root, Inc.;
- the average cost to resolve such future lawsuits;
- coverage issues among layers of insurers issuing different
policies to different policyholders over extended periods of
time;
- the impact on the amount of insurance recoverable in light of the
Harbison-Walker and Federal-Mogul bankruptcies; and
- the continuing solvency of various insurance companies.
Given the inherent uncertainty in making future projections, we plan to
have the projections periodically reexamined, and update them based on our
experience and other relevant factors such as changes in the tort system and the
resolution of the bankruptcies of various asbestos defendants. Similarly, we
will re-evaluate our projections concerning our probable insurance recoveries in
light of any updates to Dr. Rabinovitz's projections, developments in DII
Industries, LLC's and Kellogg, Brown & Root, Inc.'s various lawsuits against its
insurance companies and other developments that may impact the probable
insurance recoveries.
Global settlement negotiations. DII Industries, LLC is continuing
settlement negotiations with the law firms that represent a substantial majority
of plaintiffs that have asserted Harbison-Walker-related claims against DII
Industries, LLC. These negotiations have not been limited to
Harbison-Walker-related claims. Rather, DII Industries, LLC is exploring with
these law firms the possibility of resolving, on a global basis, all of the
refractory asbestos claims, all of the other DII Industries, LLC asbestos claims
(including claims related to historic DII Industries, LLC manufacturing
operations and Worthington Corporation) and all of the construction
asbestos-related claims, including all future asbestos-related claims. These
broader negotiations involve difficult and complex issues. At this time there is
no assurance that DII Industries, LLC will be able to reach an acceptable
agreement.
Securities and Exchange Commission ("SEC") Preliminary Inquiry and
Fortune 500 Review. In late May 2002, we received a letter from the Fort Worth
District Office of the Securities and Exchange Commission stating that it was
initiating a preliminary inquiry into certain of our accounting practices. On
June 11, 2002, we received an additional letter requesting information regarding
our accounting for cost overruns on construction projects and requesting our
voluntary assistance. We responded to that request promptly and met with members
of the SEC staff to discuss our response. We received a further request for
voluntary assistance on July 11, 2002, which requested additional explanations
and supporting documentation. Since then, we have communicated and corresponded
regularly with the SEC and, to date, have produced approximately 200,000
documents to the SEC. We continue to fully cooperate and actively engage in
assisting in the SEC's review.
The SEC's preliminary inquiry largely relates to our accruals of
revenue from unapproved claims on engineering and construction contracts and
whether we timely disclosed our accrual practice. Accrual of revenue from
unapproved claims is an accepted and widely followed accounting practice for
companies in the engineering and construction business. Although we accrued
unapproved claims in 1998, we first disclosed the accruals in our 1999 Annual
Report on Form 10-K. We believe we properly applied the required methodology of
the American Institute of Certified Public Accountants' Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," and satisfied the relevant criteria for accruing
this revenue. The SEC may conclude otherwise.
On December 21, 2001, the SEC's Division of Corporation Finance
announced that it would review the annual reports of all Fortune 500 companies
that file periodic reports with the SEC. We received the SEC's comments in
letter form dated September 20, 2002 and have since responded. We are confident
that our responses adequately addressed each of the SEC's comments.
Securities and related litigation. On June 3, 2002, a class action
lawsuit was filed against us in the United States District Court for the
Northern District of Texas on behalf of purchasers of our common stock alleging
violations of the federal securities laws. After that date, in excess of fifteen
similar class actions were filed against us in that or other federal district
courts. Several of those lawsuits also named as defendants Arthur Andersen, LLP
19
("Arthur Andersen"), our independent accountants for the period covered by the
lawsuit, and several of our present or former officers and directors. Those
lawsuits allege that we violated federal securities laws in failing to disclose
a change in the manner in which we accounted for unapproved claims on
engineering and construction contracts, and that we overstated revenue by
accruing the unapproved claims. One such action has since been dismissed
voluntarily, without prejudice, upon motion by the filing plaintiff. The federal
securities fraud class actions have all been transferred to the U.S. District
Court for the Northern District of Texas and are in the process of being
consolidated before the Honorable Judge David Godbey.
Another case, also filed in the United States District Court for the
Northern District of Texas on behalf of three individuals, and based upon the
same revenue recognition practices and accounting treatment that is the subject
of the securities class actions, alleges only common law and statutory fraud in
violation of Texas state law. We moved to dismiss that action on October 24,
2002 as required by the court's scheduling order on the bases of lack of federal
subject matter jurisdiction and failure to plead with that degree of
particularity required by the rules of procedure.
In addition to the securities class actions, one additional class
action, alleging violations of ERISA in connection with the Company's Benefits
Committee's purchase of the Company's stock for the accounts of participants in
our 401 (k) retirement plan during the period we allegedly knew or should have
known that our revenue was overstated as a result of the accrual of revenue in
connection with unapproved claims, was filed and subsequently voluntarily
dismissed.
Finally, on October 11, 2002, a shareholder derivative action against
present and former directors and our former CFO was filed alleging breach of
fiduciary duty and corporate waste arising out of the same events and
circumstances upon which the securities class actions are based. We believe the
action is without merit and we intend to aggressively contest it.
The damages in all of these cases are unspecified. We believe that our
actions in accruing revenue for unresolved construction contract claims and
related disclosures were appropriate, and that the various lawsuits described
above should be resolved in our favor. Therefore, we intend to deny any
wrongdoing and to vigorously defend against these lawsuits. However, at this
point all of these lawsuits are in a very preliminary stage, we have not been
called upon to file responsive pleadings or, except as specifically noted above,
dispositive motions, and discovery has not commenced. Although we believe that
our position ultimately will be vindicated, it is not possible to estimate the
amount of loss or range of possible loss that might result from adverse
judgments or settlements of these matters.
BJ Services Company patent litigation. On April 12, 2002, a federal
court jury in Houston, Texas, returned a verdict against Halliburton Energy
Services, Inc. in the patent infringement lawsuit brought by BJ Services
Company, or BJ. The lawsuit alleged that a well fracturing fluid system used by
Halliburton Energy Services infringed a patent issued to BJ in January 2000 for
a method of well fracturing using a specific fracturing fluid. The jury awarded
BJ approximately $98 million in damages, plus pre-judgment interest, less than
one-quarter of BJ's claim at the beginning of the trial. A total of $102 million
was accrued in the first quarter which was comprised of the $98 million judgment
and $4 million in pre-judgment interest costs. The jury also found that there
was no intentional infringement by Halliburton Energy Services. As a result of
the jury's determination of infringement, the court has enjoined us from further
use of our Phoenix fracturing fluid. We have posted a supersedeas bond in the
amount of approximately $106 million to cover the damage award, pre-judgment and
post-judgment interest, and awardable costs. We have timely appealed this
verdict and filed our brief in the Court of Appeals for the Federal Circuit,
which hears all appeals of patent cases. We believe that BJ's patent is invalid
and unenforceable on a number of grounds, and intend to pursue vigorously our
appeal. We have alternative products to use in our fracturing operations, and do
not expect the loss of the use of the Phoenix fracturing fluid to have a
material adverse impact on our overall energy services business.
Improper payments reported to the Securities and Exchange Commission.
We have reported to the SEC that one of our foreign subsidiaries operating in
Nigeria made improper payments of approximately $2.4 million to an entity owned
by a Nigerian national who held himself out as a tax consultant when in fact he
20
was an employee of a local tax authority. The payments were made to obtain
favorable tax treatment and clearly violated our Code of Business Conduct and
our internal control procedures. The payments were discovered during an audit of
the foreign subsidiary. We have conducted an investigation assisted by outside
legal counsel. Based on the findings of the investigation we have terminated
several employees. None of our senior officers were involved. We are cooperating
with the SEC in its review of the matter. We plan to take further action to
ensure that our foreign subsidiary pays all taxes owed in Nigeria, which may be
as much as an additional $3 million, which amount was fully accrued as of March
31, 2002. The integrity of our Code of Business Conduct and our internal control
procedures are essential to the way we conduct business.
Environmental. We are subject to numerous environmental, legal and
regulatory requirements related to our operations worldwide. In the United
States, these laws and regulations include the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), the Resources Conservation
and Recovery Act (RCRA), the Clean Air Act, the Federal Water Pollution Control
Act and the Toxic Substances Control Act, among others. In addition to the
federal laws and regulations, states where we do business may have equivalent
laws and regulations by which we must also abide. We take an active approach
evaluating and addressing the environmental impact of our operations. We
assess and remediate contaminated properties in order to avoid future
liabilities and comply with legal and regulatory requirements. On occasion, we
are involved in specific environmental litigation and claims, including the
clean-up of properties we own or have operated as well as efforts to meet or
correct compliance-related matters.
We do not expect costs related to these requirements to have a material
adverse effect on our consolidated financial position or our results of
operations. Our accrued liabilities for environmental matters were $50 million
as of September 30, 2002 and $49 million as of December 31, 2001. The reserve
covers numerous properties and no individual property accounts for more than 10%
of the current reserve balance. In certain instances, we have been named a
potentially responsible party by a regulatory agency, but in each of those
cases, we do not believe we have any material liability.
Letters of credit. In the normal course of business, we have agreements
with banks under which approximately $1.4 billion of letters of credit or bank
guarantees have been issued, including $218 million which relate to our joint
ventures' operations. Subsequent to quarter end, we amended an agreement with
banks under which $260 million of letters of credit have been issued. The
amended agreement removes the provision that previously allowed the banks to
require collateralization if ratings of Halliburton debt fell below investment
grade ratings. The revised agreements include provisions that require us to
maintain certain ratios of debt (the definition of debt includes our asbestos
liability) to total capital and of total earnings before interest, taxes,
depreciation and amortization to interest expense.
If our debt ratings fall below investment grade, we would be in
technical breach of a bank agreement covering another $176 million of letters of
credit at September 30, 2002, which might entitle the bank to set-off rights. In
addition, a $151 million letter of credit line, of which $103 million has been
issued, includes provisions that allow the bank to require cash
collateralization for the full line if debt ratings of either rating agency fall
below the rating of BBB by Standard & Poor's or Baa2 by Moody's Investors'
Services. These letters of credit and bank guarantees generally relate to our
guaranteed performance or retention payments under our long-term contracts and
self-insurance.
In the past, no significant claims have been made against letters of
credit we have issued. We do not anticipate material losses to occur as a result
of these financial instruments.
Liquidated damages. Most of our contracts have certain milestone due
dates that must be met or we may be subject to penalties for liquidated damages
if claims are asserted and we were responsible for the delays. These generally
relate to delivery of parts to a project or specified activities within a
project by a set contractual date, and many times are linked to a certain level
of output or throughput of a plant we construct. Each contract defines the
conditions under which a customer may make a claim for liquidated damages. In
most instances, liquidated damages are never asserted by the customer but the
potential to do so is used in negotiating claims and closing out the contract.
We have not accrued a liability for $288 million at September 30, 2002 and $97
million at December 31, 2001 of possible liquidated damages as we believe
21
payment is remote. We believe we have valid claims for schedule extensions
against the customers which would eliminate any liability for liquidated
damages. Of the total liquidated damages, $260 million at September 30, 2002 and
$77 million at December 31, 2001 relate to unasserted liquidated damages for the
Barracuda-Caratinga project. The estimated schedule impact of change orders
requested by the customer is expected to cover approximately one-half of the
$260 million exposure at September 30, 2002 and claims for schedule extension
are expected to cover the remaining exposure.
Other. We are a party to various other legal proceedings. We expense
the cost of legal fees related to these proceedings. We believe any liabilities
we may have arising from these proceedings will not be material to our
consolidated financial position or results of operations.
Note 9. Income (loss) Per Share
Three Months Nine Months
Ended September 30 Ended September 30
Millions of dollars and shares except ---------------------------- ----------------------------
per share data 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
change in accounting method, net $ 94 $ 181 $ (214) $ 410
==================================================================================================================
Basic weighted average shares 432 428 432 427
Effect of common stock equivalents 2 1 - 3
Diluted weighted average shares 434 429 432 430
==================================================================================================================
Income (loss) per common share from continuing
operations before change in
accounting method, net:
Basic $ 0.22 $ 0.42 $ (0.49) $ 0.96
==================================================================================================================
Diluted $ 0.22 $ 0.42 $ (0.49) $ 0.95
==================================================================================================================
Basic income (loss) per share is based on the weighted average number
of common shares outstanding during the period. Diluted income (loss) per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. For the nine months ended
September 30, 2002, we have used the basic weighted average shares in the
calculation as the effect of the common stock equivalents would be anti-dilutive
based upon the net loss from continuing operations. Included in the computation
of diluted income per share at September 30, 2001 are rights we issued in
connection with the PES acquisition for 0.7 million shares of Halliburton common
stock. Excluded from the computation of diluted income per share are options to
purchase 17.1 million shares of common stock which were outstanding during the
three months ended September 30, 2002, options to purchase 10.6 million shares
which were outstanding during the three months ended September 30, 2001 and
options to purchase 8.1 million shares which were outstanding during the nine
months ended September 30, 2001. These options were outstanding during the
applicable period, but were excluded because the option exercise price was
greater than the average market price of the common shares.
Note 10. Comprehensive Income (loss)
The components of other comprehensive income adjustments to net income
(loss) include the cumulative translation adjustment of some of our foreign
entities, minimum pension liability adjustments and unrealized gains on
investments and derivatives.
22
Three Months Nine Months
Ended September 30 Ended September 30
---------------------------- ----------------------------
Millions of dollars 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 94 $ 179 $ (382) $ 670
Cumulative translation adjustment 9 20 44 (26)
Realization of losses included in net income 15 - 15 102
- ------------------------------------------------------------------------------------------------------------------
Net cumulative translation adjustment 24 20 59 76
Adjustment to minimum pension liability - - - 12
Unrealized gains (losses) on investments
and derivatives (2) (2) (2) -
- ------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 116 $ 197 $ (325) $ 758
==================================================================================================================
Accumulated other comprehensive income at September 30, 2002 and
December 31, 2001 consisted of the following:
September 30 December 31
--------------- ---------------
Millions of dollars 2002 2001
-------------------------------------------------------------------------------------------
Cumulative translation adjustment $ (146) $ (205)
Pension liability adjustments (27) (27)
Unrealized losses on investments and derivatives (6) (4)
-------------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (179) $ (236)
===========================================================================================
Note 11. Goodwill and Other Intangible Assets
Effective January 1, 2002, we adopted the Financial Accounting
Standards Board SFAS No. 142 "Goodwill and Other Intangible Assets", and in
accordance with the statement, amortization of goodwill has been discontinued.
We have reviewed this new statement and determined that our reporting units as
defined under SFAS No. 142 will be the same as our reportable operating
segments: Energy Services Group and Engineering and Construction Group. We have
completed the impairment tests of goodwill as of January 1, 2002 and determined
that our goodwill for each reporting unit is not impaired. We also reevaluated
our intangible assets and determined that their remaining useful life is
appropriate.
Had we been accounting for our goodwill under SFAS No. 142 for all
periods presented, our net income (loss) and earnings (loss) per share would
have been as follows:
Three Months Nine Months
Ended September 30 Ended September 30
------------------------- ------------------------
Millions of dollars 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------
Reported net income (loss) $ 94 $ 179 $ (382) $ 670
Goodwill amortization, net of tax - 7 - 26
- -----------------------------------------------------------------------------------------------
Adjusted net income (loss) $ 94 $ 186 $ (382) $ 696
===============================================================================================
Basic earnings (loss) per share:
Reported net income (loss) $ 0.22 $ 0.42 $ (0.88) $ 1.57
Goodwill amortization, net of tax - 0.02 - 0.06
- -----------------------------------------------------------------------------------------------
Adjusted net income (loss) $ 0.22 $ 0.44 $ (0.88) $ 1.63
===============================================================================================
Diluted earnings (loss) per share:
Reported net income (loss) $ 0.22 $ 0.42 $ (0.88) $ 1.56
Goodwill amortization, net of tax - 0.02 - 0.06
- -----------------------------------------------------------------------------------------------
Adjusted net income (loss) $ 0.22 $ 0.44 $ (0.88) $ 1.62
===============================================================================================
23
Note 12. Accounts Receivable
Our receivables are generally not collateralized.
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding subsidiary sells an undivided ownership interest in this pool of
receivables to entities managed by unaffiliated financial institutions under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable bankruptcy laws, and the assets of the funding
subsidiary are not available to pay any creditors of Halliburton or of its
subsidiaries or affiliates, until such time as the agreement with the
unaffiliated companies is terminated following sufficient collections to
liquidate all outstanding undivided ownership interests. The funding subsidiary
retains the interest in the pool of receivables that are not sold to the
unaffiliated companies, and is fully consolidated and reported in our financial
statements.
The amount of undivided interests, which can be sold under the program,
varies based on the amount of eligible Energy Services Group receivables in the
pool at any given time and other factors. As of June 30, 2002 and September 30,
2002, the funding subsidiary had sold a $200 million undivided ownership
interest to the unaffiliated companies, and may from time to time sell
additional undivided ownership interests. We continue to service, administer and
collect the receivables on behalf of the purchaser. The amount of undivided
ownership interest in the pool of receivables sold to the unaffiliated companies
is reflected as a reduction of accounts receivable in our consolidated balance
sheet and as an increase in cash flows from operating activities in our
consolidated statement of cash flows.
Note 13. Reorganization of Business Operations
On March 18, 2002 we announced plans to restructure our businesses into
two operating subsidiary groups, the Energy Services Group and the Engineering
and Construction Group. As part of this reorganization, we are separating and
consolidating the entities in our Energy Services Group together as direct and
indirect subsidiaries of Halliburton Energy Services, Inc. We are also
separating and consolidating the entities in our Engineering and Construction
Group together as direct and indirect subsidiaries of the former Dresser
Industries Inc., which became a limited liability company during the second
quarter of 2002 and was renamed DII Industries, LLC. The reorganization of
business operations will facilitate the separation, organizationally,
financially, and operationally, of our two business segments, which we believe
will significantly improve operating efficiencies in both, while streamlining
management and easing manpower requirements. In addition, many support functions
which were previously shared were moved into the two business groups. As a
result, we took actions in the first nine months of 2002 to reduce our cost
structure by reducing personnel, moving previously shared support functions into
the two business groups and realigning ownership of international subsidiaries
by group. In the 2002 third quarter, we incurred approximately $11 million, for
a total of $78 million for the year, of personnel reduction costs and asset
related write-offs. Of this amount, $6 million remains in accruals for severance
arrangements. We expect these remaining payments will be made during the fourth
quarter of 2002. Reorganization charges for the year consisted of $47 million in
personnel related expense, $16 million of asset related write-downs, $11 million
in professional fees related to the restructuring, and $4 million related to
contract terminations. Although we have no specific plans currently, the
reorganization would facilitate separation of the ownership of the two
businesses in the future if we identify an opportunity that produces greater
value for our shareholders than continuing to own both businesses.
Note 14. DII Industries, LLC Financial Information
Dresser Industries, Inc. was converted into a Delaware limited
liability company during the second quarter of 2002 and its name was changed to
DII Industries, LLC. Since becoming a wholly-owned subsidiary, DII Industries,
LLC has ceased filing periodic reports with the Securities and Exchange
Commission. DII Industries, LLC's 8% guaranteed senior notes, which were
initially issued by Baroid Corporation, remain outstanding and are fully and
unconditionally guaranteed by Halliburton. In January 1999, as part of a legal
24
reorganization associated with the 1998 merger, Halliburton Delaware, Inc., our
first tier holding company subsidiary, was merged into DII Industries, LLC. The
majority of our operating assets and activities are now included in DII
Industries, LLC and its subsidiaries. In August 2000, the Securities and
Exchange Commission released revised rules governing the financial statements of
guarantors and issuers of guaranteed registered securities. The following
condensed consolidating financial information presents Halliburton and our
subsidiaries on a stand-alone basis using the equity method of accounting for
our interest in our subsidiaries.
25
Condensed Consolidating Statements of Income
Quarter ended September 30, 2002
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,982 $ 102 $ 101 $ (203) $ 2,982
Cost of revenues (2,702) - - - (2,702)
General and administrative (89) - - - (89)
Interest expense (12) (6) (11) - (29)
Interest income 6 2 15 (15) 8
Other, net 2 (1) - - 1
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 187 97 105 (218) 171
Benefit (provision) for income taxes (80) 4 4 - (72)
Minority interest in net income of
subsidiaries (5) - - - (5)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 102 $ 101 $ 109 $ (218) $ 94
=======================================================================================================================
Condensed Consolidating Statements of Income
Quarter ended September 30, 2001
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,391 $ 209 $ 197 $ (406) $ 3,391
Cost of revenues (2,955) - - - (2,955)
General and administrative (94) - - - (94)
Interest expense (9) (10) (15) - (34)
Interest income 7 4 14 (17) 8
Other, net 5 (4) (2) (1) (2)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 345 199 194 (424) 314
Benefit (provision) for income taxes (129) - 3 - (126)
Minority interest in net income of
subsidiaries (7) - - - (7)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 209 199 197 (424) 181
Loss from discontinued operations - (2) - - (2)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 209 $ 197 $ 197 $ (424) $ 179
=======================================================================================================================
26
Condensed Consolidating Statements of Operations
Nine Months ended September 30, 2002
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Total revenues $ 9,224 $ (345) $ (356) $ 701 $ 9,224
Cost of revenues (9,076) - - - (9,076)
General and administrative (239) - - - (239)
Interest expense (34) (22) (35) - (91)
Interest income 21 6 43 (46) 24
Other, net (6) (4) - - (10)
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
before taxes and minority interest (110) (365) (348) 655 (168)
Benefit (provision) for income taxes (52) 9 12 - (31)
Minority interest in net income of
subsidiaries (15) - - - (15)
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (177) (356) (336) 655 (214)
Loss from discontinued operations (168) - - - (168)
- ----------------------------------------------------------------------------- -------------------------------------------
Net loss $ (345) $ (356) $ (336) $ 655 $ (382)
=========================================================================================================================
Condensed Consolidating Statements of Income
Nine Months ended September 30, 2001
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Total revenues $ 9,874 $ 515 $ 870 $(1,385) $ 9,874
Cost of revenues (8,776) - - - (8,776)
General and administrative (286) - - - (286)
Interest expense (30) (27) (59) 1 (115)
Interest income 16 10 43 (51) 18
Other, net 4 142 (6) (146) (6)
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes, minority interest and
change in accounting method, net 802 640 848 (1,581) 709
Benefit (provision) for income taxes (296) (7) 18 - (285)
Minority interest in net income of
subsidiaries (14) - - - (14)
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
change in accounting method, net 492 633 866 (1,581) 410
Income from discontinued operations 22 237 - - 259
Cumulative effect of accounting change, 1 - - - 1
net
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 515 $ 870 $ 866 $(1,581) $ 670
=========================================================================================================================
27
Condensed Consolidating Balance Sheets
September 30, 2002
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 272 $ 8 $ 306 $ - $ 586
Receivables:
Notes and accounts receivable, net 2,491 2 1 - 2,494
Unbilled work on uncompleted contracts 903 - 2 - 905
- -----------------------------------------------------------------------------------------------------------------------
Total receivables 3,394 2 3 - 3,399
Inventories 769 - - - 769
Other current assets 413 1 12 - 426
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 4,848 11 321 - 5,180
Property, plant and equipment, net 2,591 - - - 2,591
Equity in and advances to
unconsolidated affiliates 416 - - - 416
Intercompany receivable from
consolidated affiliates - - 1,640 (1,640) -
Equity in and advances to
consolidated affiliates - 5,317 3,709 (9,026) -
Goodwill, net 719 - - - 719
Insurance for asbestos related liabilities 1,588 - - - 1,588
Other assets 1,109 22 86 - 1,217
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 11,271 $ 5,350 $ 5,756 $(10,666) $11,711
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 1,074 $ 141 $ 150 $ - $ 1,365
Other current liabilities 1,453 - 35 - 1,488
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,527 141 185 - 2,853
Long-term debt 207 300 613 - 1,120
Intercompany payable to
consolidated affiliates 166 1,190 - (1,356) -
Asbestos related liabilities 2,173 - - - 2,173
Other liabilities 1,092 10 91 - 1,193
Minority interest in consolidated
subsidiaries 51 - - - 51
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 6,216 1,641 889 (1,356) 7,390
Shareholders' equity:
Common shares 175 - 1,141 (175) 1,141
Other shareholders' equity 4,880 3,709 3,726 (9,135) 3,180
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,055 3,709 4,867 (9,310) 4,321
- -------------------------------------------------------------------------------------------------------- --------------
Total liabilities and shareholders' equity $ 11,271 $ 5,350 $ 5,756 $(10,666) $11,711
=======================================================================================================================
28
Condensed Consolidating Balance Sheets
December 31, 2001
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 213 $ - $ 77 $ - $ 290
Receivables:
Notes and accounts receivable, net 3,002 13 - - 3,015
Unbilled work on uncompleted contracts 1,080 - - - 1,080
- -----------------------------------------------------------------------------------------------------------------------
Total receivables 4,082 13 - - 4,095
Inventories 787 - - - 787
Other current assets 323 71 7 - 401
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 5,405 84 84 - 5,573
Property, plant and equipment, net 2,669 - - - 2,669
Equity in and advances to
unconsolidated affiliates 551 - - - 551
Intercompany receivable from
consolidated affiliates 198 - 1,805 (2,003) -
Equity in and advances to
consolidated affiliates - 6,583 4,409 (10,992) -
Goodwill, net 636 84 - - 720
Insurance for asbestos related liabilities 612 - - - 612
Other assets 793 27 21 - 841
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 10,864 $ 6,778 $ 6,319 $(12,995) $10,966
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 808 $ 129 $ 105 $ - $ 1,042
Other current liabilities 1,791 20 55 - 1,866
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,599 149 160 - 2,908
Long-term debt 211 439 753 - 1,403
Intercompany payable to
consolidated affiliates - 1,765 - (1,765) -
Asbestos related liabilities 737 - - - 737
Other liabilities 1,016 16 93 - 1,125
Minority interest in consolidated
subsidiaries 41 - - - 41
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 4,604 2,369 1,006 (1,765) 6,214
Shareholders' equity:
Common shares 175 - 1,138 (175) 1,138
Other shareholders' equity 6,085 4,409 4,175 (11,055) 3,614
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,260 4,409 5,313 (11,230) 4,752
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,864 $ 6,778 $ 6,319 $(12,995) $10,966
=======================================================================================================================
29
Condensed Consolidating Statements of Cash Flows
Nine Months ended September 30, 2002
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- ------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 986 $ (9) $ 23 $ - $ 1,000
Capital expenditures (564) - - - (564)
Sales of property, plant and equipment 217 - - - 217
Other investing activities (13) - 451 (508) (70)
Payments on long-term borrowings (4) - (75) - (79)
Borrowings (repayments) of
short-term debt, net 3 - (25) - (22)
Payments of dividends to shareholders - - (164) - (164)
Payments to reacquire common stock - - (3) - (3)
Other financing activities (551) 17 22 508 (4)
Effect of exchange rate on cash (15) - - - (15)
- ------------------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents $ 59 $ 8 $ 229 $ - $ 296
========================================================================================================================
Condensed Consolidating Statements of Cash Flows
Nine Months ended September 30, 2001
Non-issuer/ DII Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 561 $ (25) $ 20 $ - $ 556
Capital expenditures (568) - - - (568)
Sales of property, plant and equipment 77 - - - 77
Other investing activities (129) - 1,096 (1,096) (129)
Proceeds from long-term borrowings - - 425 - 425
Payments on long-term borrowings (8) (5) - - (13)
Borrowings (repayments) of
short-term debt, net - - (1,359) - (1,359)
Payments of dividends to shareholders - - (161) - (161)
Proceeds from exercises of stock options - - 25 - 25
Payments to reacquire common stock - - (33) - (33)
Other financing activities 42 (1,182) 38 1,096 (6)
Effect of exchange rate on cash (19) - - - (19)
Net cash flows from discontinued
operations - 1,201 - - 1,201
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents $ (44) $ (11) $ 51 $ - $ (4)
=======================================================================================================================
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
In this section, we discuss the operating results and general financial
condition of Halliburton Company and its subsidiaries. We explain:
- factors and risks that impact our business;
- results of our quarterly and year-to-date operating results;
- factors that impacted our cash flows and our liquidity; and
- other items that materially affect our financial condition or
earnings.
BUSINESS ENVIRONMENT
Our business is organized around two business segments:
- Energy Services Group; and
- Engineering and Construction Group.
The results of Dresser Equipment Group are reported as discontinued
operations through March 31, 2001.
We currently operate in over 100 countries throughout the world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry, and to other industrial and governmental customers. The
majority of our consolidated revenues are derived from the sale of services and
products, including engineering and construction activities, to major, national
and independent oil and gas companies. These services and products are used
throughout the energy industry, from the earliest phases of exploration,
development, and production of oil and gas resources through refining and
processing.
The industries we serve are highly competitive with many substantial
competitors within each segment. The United States represents 33% of our total
revenue for the first nine months of 2002 and the United Kingdom represents 12%.
No other country accounts for more than 10% of our revenues. Unsettled political
conditions, acts of terrorism, expropriation or other governmental actions,
inflation, exchange controls or currency devaluation may result in increased
business risk in any one country. We believe the geographic diversification of
our business activities reduces the risk that loss of business in any one
country would be material to our consolidated results of operations.
Halliburton Company
Activity levels within our two business segments are significantly
impacted by the following:
- spending on exploration, development and production programs by
major, national and independent oil and gas companies;
- capital expenditures for refining and processing facilities; and
- government spending levels.
Also impacting our activity is the status of the global economy, which
indirectly impacts oil and gas consumption, demand for petrochemical products
and investment in infrastructure projects.
One of the more significant barometers of current and future spending
levels of oil and gas companies is worldwide drilling activity. High levels of
worldwide drilling activity during the first half of 2001 (as measured by the
Baker Hughes Incorporated rig count), particularly in the United States for gas
drilling, began to decline in the latter part of that year reaching a low in
April 2002. The decline was partially due to general business conditions caused
by global economic unrest and uncertainty which was accelerated by the terrorist
attacks on September 11, 2001.
Quarterly average natural gas price at Henry Hub increased from $2.84
per million cubic feet (mcf) in the 2001 third quarter to $3.40 per mcf in the
2002 second quarter and decreased to $3.19 per mcf during the 2002 third
quarter. Based upon data from Cambridge Energy Research Associates, the gas
price at Henry Hub is expected to average slightly above $3.00 per mcf for the
2002 fourth quarter and 2003 first quarter.
While gas prices in the United States have historically varied somewhat
geographically, this year we have seen significantly higher fluctuations in
regional gas prices in the United States. For example, while the price was $3.19
per mcf at Henry Hub, it was less than a $1.00 per mcf in various parts of the
Western United States during the third quarter. This is resulting in significant
variation in gas drilling activity by region in the United States and much lower
drilling and stimulation activity in gas basins of the Western United States.
31
During the 2002 third quarter, crude oil prices (West Texas
Intermediate - expressed in United States dollars per barrel) remained above
$25.00 per barrel. Quarterly average WTI decreased from $26.74 in the 2001 third
quarter, to $25.75 in the 2002 second quarter and increased to $28.23 during the
2002 third quarter. We believe that current oil prices reflect a war premium due
to the risk of supply disruption in the event of hostilities in the Middle East.
Prices for the remainder of the year will be impacted by the ability of OPEC to
manage country production quotas, political tensions in the Middle East and
level of production by major non-OPEC countries, namely, Norway, Russia and
former Soviet Union countries of the Commonwealth of Independent States as well
as global demand.
Energy Services Group
Lower natural gas and crude oil drilling activity since the 2001 third
quarter resulted in decreased demand for the services and products provided by
the Energy Services Group. The quarterly average rig count based on the Baker
Hughes Incorporated rig count information is as follows:
Third Quarter Second Quarter Third Quarter
Average rig counts 2002 2002 2001
- ------------------------------------------------------------------------------------------
United States 853 806 1,241
Canada 250 147 320
International (excluding Canada) 718 725 757
- ------------------------------------------------------------------------------------------
Worldwide total 1,821 1,678 2,318
==========================================================================================
The decrease in the 2002 third quarter worldwide rig count as compared
to the third quarter of 2001 was primarily due to the decrease in rig count in
North America. In the past, there has generally been a good correlation between
the price of oil and gas in the United States and rig activity. However,
this was not the case in recent months where the rig count has declined as
compared to the third quarter 2001, while WTI oil and Henry Hub gas prices have
increased. We believe this is due to the uncertainty, which we expect to
continue into at least the next quarter or two, created by the following:
- oil prices include a premium for war risk;
- differences in gas prices geographically in the United States;
- less spending due to current uncertain global economic
environment;
- risk of war in the Middle East;
- budgetary constraints of our customers;
- weather in the upcoming winter months and its impact on United
States gas consumption; and
- higher level of gas storage in the Northeast (as reported by
Energy Information Administration) as compared to the 5-year
average.
The worldwide rig count increase from the second quarter 2002 to the
third quarter 2002 was attributable to increased Canadian rig counts resulting
from seasonal variations as the second quarter is historically lower due to
reduced drilling activity during the spring thaw season, and increased gas
drilling activity in the United States prior to the winter heating season.
The decreased rig activity in the third quarter 2002 from the third
quarter 2001 in the United States has increased pressure on the oilfield
services product service lines to discount prices. The price increases we
implemented last year have mostly been eroded by additional pricing pressures
and discounts. Our operations have also been impacted by political and economic
instability in Latin America, primarily in Venezuela and Argentina, as well as
disruptions due to Tropical Storm Isidore and Hurricane Lili in the Gulf of
Mexico. Our pressure pumping product service line has been significantly
impacted by the current economic slowdown due to its dependence on United States
gas drilling. Deepwater activity has not been as adversely impacted as land
activity by the downturn in the industry, due to the level of investment and the
long term nature of contracts. Our drilling systems product service line, which
has a large percentage of its business outside the United States and is heavily
involved in deepwater oil and gas exploration and development drilling and
longer term contracts, has remained relatively strong despite the overall
decline in the energy industry.
32
Based upon data from Spears and Associates, drilling activity in the
United States and Canada is expected to remain constant for the rest of the year
as compared to the third quarter 2002. This is lower than earlier projections
because oil and gas producers appear to continue to take a cautionary attitude
on new investments due to lack of confidence in sustainability of current oil
and gas prices and have an increased focus on reducing debt. International
drilling activity is expected to decline slightly in the fourth quarter 2002.
Until economic, political and weather related uncertainties impeding customer
spending become clearer, we expect oilfield services activity to be essentially
flat in the short term. In the longer term, we expect increased global demand
for oil and natural gas demand, additional customer spending to replace
depleting reserves and our continued technological advances to provide growth
opportunities.
Engineering and Construction Group
Our engineering and construction projects are longer term in nature and
are not as impacted by short-term fluctuations in oil and gas prices. The global
economy's fragile recovery is continuing, but its strength and sustainability
are not assured. Based on the uncertain economic recovery and a continuing
excess capacity in petrochemical supplies, customers have continued to delay
project awards or reduce the scope of projects involving hydrocarbons and
manufacturing. A number of large-scale gas and liquefied natural gas
development, offshore deepwater, government, and infrastructure projects are
being awarded or actively considered. However, in light of terrorist threats,
increasing instability in the Middle East and the modest growth of the global
economy, many customers could delay some of their capital commitments and
international investment.
Growth opportunities also exist to provide additional security and
defense support to government agencies in the United States and other countries.
Demands for these services are expected to grow as governmental agencies seek to
control costs and efficiencies by outsourcing these functions and due to new
demands created by increased efforts to combat terrorism.
Engineering and construction contracts can be broadly categorized as
fixed-price (sometimes referred to as lump sum) or cost reimbursable contracts.
Cost reimbursable contracts include contracts where the price is variable based
upon actual costs incurred for time and materials, or for variable quantities of
work priced at defined unit rates. Profit elements on cost reimbursable
contracts may be based upon a percentage of costs incurred and/or a fixed
amount.
Fixed-price contracts are for a fixed fee to cover all costs and any
profit element for a defined scope of work. Fixed-price contracts entail more
risk to us, as we must pre-determine both the quantities of work to be performed
and the costs associated with executing the work. The risks to us arise from
having to judge the technical aspects and effort involved to accomplish the work
within the contract schedule, labor availability and productivity, supplier and
subcontractor pricing and performance, and other risks. Fixed-price EPC/EPIC
(i.e., engineering, procurement, installation and construction/commissioning)
involve even greater risks including:
- bidding a fixed-price and completion date before detailed
engineering work has been performed;
- bidding a fixed-price and completion date before locking in price
and delivery of significant procurement components (often items
which are specifically designed and fabricated for the project);
- bidding a fixed-price and completion date before finalizing
subcontractors terms and conditions;
- the risk of subcontractors' individual performance and combined
interdependencies of multiple subcontractors (the majority of all
construction and installation work is performed by
subcontractors);
- contracts covering longer periods of time;
- contract values generally for much greater amounts; and
- contracts with significant liquidated damages provisions.
Cost reimbursable contracts are generally less risky as the owner retains many
of the risks. While fixed-price contracts involve greater risk, they also
potentially are more profitable for the contractor as the owners pay a premium
to transfer the risks to the contractor. Some contracts can involve both
fixed-price and cost reimbursable elements.
After careful consideration, we have decided to no longer pursue lump
sum engineering, procurement, installation and commissioning (EPIC) contracts
for the offshore oil and gas industry where we are required to make lump sum,
33
fixed price commitments. An important aspect of our reorganization process was
to look closely at each of our businesses to insure that they are
self-sufficient including their use of capital and liquidity. In that process,
we found that the EPIC offshore business was using a disproportionate share of
our bonding and letter of credit capacity relative to its profit contribution.
The risk/reward relationship in that segment is no longer attractive to us. We
provide a range of engineering, fabrication and project management services to
the offshore industry which we will continue to service through a variety of
other contracting forms. We have seven fixed price EPIC offshore projects
underway and we are fully committed to successful completion of these projects,
several of which are substantially complete.
We plan to retain our offshore engineering and services capabilities.
Backlog
Our total backlog at September 30, 2002, was $10 billion, comprised of
$9.8 billion for the Engineering and Construction Group and $0.2 billion for the
Energy Services Group. Approximately 34% of our backlog is for fixed-price
contracts. About 46% of backlog is estimated to be performed in the next 12
months. Backlog relating to EPIC contracts for the offshore oil and gas industry
totaled $1.1 billion.
Reorganization of Business Operations
Earlier this year we announced plans to restructure our businesses into
two operating subsidiary groups, the Energy Services Group and the Engineering
and Construction Group. As part of this reorganization, we are separating and
consolidating the entities in our Energy Services Group together as direct and
indirect subsidiaries of Halliburton Energy Services, Inc. We are also
separating and consolidating the entities in our Engineering and Construction
Group together as direct and indirect subsidiaries of the former Dresser
Industries Inc., which became a limited liability company during the second
quarter and was renamed DII Industries, LLC. The reorganization of business
operations will facilitate the separation, organizationally, financially, and
operationally, of our two business segments, which we believe will significantly
improve operating efficiencies in both, while streamlining management and easing
manpower requirements. In addition, many support functions which were previously
shared were moved into the two business groups. Although we have no specific
plans currently, the reorganization would facilitate separation of the ownership
of the two businesses in the future if we identify an opportunity that produces
greater value for our shareholders than continuing to own both businesses.
The corporate reorganization is largely complete and is expected to be
concluded by the end of the year. In the third quarter of 2002 we have incurred
pretax restructuring charges of $11 million, which brings the year-to-date
restructuring costs to $78 million. The year-to-date charges include $47 million
in personnel related costs, $16 million in asset write-downs, $11 million
primarily in professional fees related to the restructuring and $4 million in
contract terminations. We expect to incur additional charges in the fourth
quarter of approximately $12 million. We anticipate that the cost savings will
increase so that in 2003 they will result in annualized cost savings of $200
million compared to costs prior to the corporate reorganization.
As a part of the reorganization, we decided that the operations of
Major Projects, Granherne and Production Services were better aligned with KBR
in the current business environment and these businesses were moved from the
Energy Services Group to the Engineering and Construction Group during the
second quarter. All prior period segment results have been restated to reflect
this change. Major Projects, which currently consists of the Barracuda-Caratinga
project in Brazil, is now reported through the Offshore Operations product line,
Granherne is now reported in the Onshore product line and Production Services is
now reported under the Operations and Maintenance product line.
Asbestos
Due to the recording of our best estimate of current and future
asbestos claims in the second quarter of 2002, there were no additional charges
for asbestos exposures in the third quarter of 2002.
34
RESULTS OF OPERATIONS IN 2002 COMPARED TO 2001
Third Quarter of 2002 Compared with the Third Quarter of 2001
Third Quarter
REVENUES ----------------------- Increase
Millions of dollars 2002 2001 (decrease)
- ----------------------------------------------------------------------------------
Energy Services Group $ 1,677 $ 2,098 $ (421)
Engineering and Construction Group 1,305 1,293 12
- ----------------------------------------------------------------------------------
Total revenues $ 2,982 $ 3,391 $ (409)
==================================================================================
Consolidated revenues in the 2002 third quarter of $3 billion decreased
$0.4 billion compared to the 2001 third quarter. International revenues were 66%
of total revenues for the 2002 third quarter and 61% in the 2001 third quarter,
highlighting the reduction in business levels in the United States.
Energy Services Group revenues were $1.7 billion for the 2002 third
quarter, a decrease of 20% from the 2001 third quarter. International revenues
were 58% of total revenues in the 2002 third quarter compared to 52% in the 2001
third quarter due to decreased United States drilling activity.
Our oilfield services product service line revenues of over $1.5
billion in the 2002 third quarter declined 15% from the 2001 third quarter,
primarily due to reduced rig activity, particularly in the United States, and
increased discounts. The change in revenues in oilfield services is broken out
by product service line as follows:
- pressure pumping was down 20%;
- logging was down 18%;
- completion products was down 11%;
- drilling fluids was down 15%;
- drill bits was down 8%; partially offset by
- drilling systems which was up 4% due to increased international
activity, especially in Thailand and Saudi Arabia, offsetting
lower activity levels in the United States.
On a geographic basis:
- North America decreased 28%, reflecting lower drilling activity in
both the United States and Canada;
- Latin America decreased 14% due to political instability in
Venezuela, and the impact of the Argentina economic crisis;
- Europe/Africa increased 3% and the Middle East increased over
17% due to increased activity in Algeria, Nigeria, Russia, Saudi
Arabia, and Oman; and
- Asia Pacific increased 2%.
Revenues for the balance of the segment decreased $144 million for the
2002 third quarter as compared to the 2001 third quarter, primarily due to the
formation of Subsea 7 on May 23, 2002. We account for our 50% ownership interest
in Subsea 7 on the equity method of accounting versus full consolidation of the
Halliburton Subsea revenue in the 2001 third quarter. Had it not been for the
change to the equity method of accounting in connection with the transaction,
revenues for the balance of the segment would have been flat for the 2002 third
quarter as compared to the 2001 third quarter. Integrated exploration and
production information systems revenues experienced growth of 7%, primarily due
to increased data management services at Landmark Graphics Corporation.
Engineering and Construction Group revenues of $1.3 billion in the 2002
third quarter were 1% higher than the 2001 third quarter. Our revenue comparison
of the 2002 third quarter versus the 2001 third quarter by product line is as
follows:
- revenue in our Offshore operations increased 24% due to progress
on the Barracuda-Caratinga project during 2002;
- we had a 16% increase in Onshore operations due to the start-up of
new projects and progress on several existing large projects;
35
- Infrastructure revenue increased 13% due to additional revenue
from the Alice Springs to Darwin rail line project in Australia
which started during third quarter of 2001;
- Government operations revenue declined 32%, due to completion of a
major project at our shipyard in the United Kingdom and lower
volumes in our logistical support contract in the Balkans. The
initial phase of the contract involved extensive procurement and
construction related to building facilities to support the US Army
in the Balkans. We have now moved out of the initial phase of
the contract and are providing ongoing support at these
facilities; and
- Operations and Maintenance revenue declined 5% due to decreased
maintenance revenues on three international projects.
International revenues were 76% for the third quarter of 2002 and 75%
for the third quarter of 2001. On a geographic basis, our revenues changed
between the 2002 third quarter and the 2001 third quarter as follows:
- North America increased 3%;
- Latin America increased 41% due to progress on
Barracuda-Caratinga;
- Europe/Africa declined 11% due to the lower activity levels in the
project at our United Kingdom shipyard and in our Balkans
logistical support contract;
- Middle East declined 16% due to project completions; and
- Asia Pacific declined 2%.
Third Quarter
OPERATING INCOME -------------------------- Increase
Millions of dollars 2002 2001 (decrease)
- -------------------------------------------------------------------------------------
Energy Services Group $ 200 $ 321 $ (121)
Engineering and Construction Group 12 36 (24)
General corporate (21) (15) (6)
- -------------------------------------------------------------------------------------
Total operating income $ 191 $ 342 $ (151)
=====================================================================================
We had a consolidated operating income of $191 million in the 2002
third quarter compared to $342 million of operating income in the 2001 third
quarter. In the 2002 third quarter, we incurred certain charges, which included:
- $11 million in pretax expense related to restructuring charges, of
which $5 million related to the Energy Services Group, $2 million
related to the Engineering and Construction Group and $4 million
related to General corporate; and
- $18 million pretax loss in the Energy Services Group on the sale
of our 50% equity investment in the Bredero-Shaw joint venture, of
which $15 million related to cumulative translation adjustment
losses which were realized on the disposition of our investment.
In the 2001 third quarter, we incurred $9 million in goodwill
amortization, of which $7 million related to the Energy Services Group and $2
million related to the Engineering and Construction Group.
Energy Services Group operating income for the 2002 third quarter
decreased $121 million, or 38%, from the 2001 third quarter. Excluding the loss
on the sale of our 50% investment in Bredero-Shaw and restructuring charges in
the third quarter 2002, and goodwill amortized in the third quarter 2001,
operating income decreased by 32%. On the same basis, operating margin for the
2002 third quarter was 13% compared to 16% for the 2001 third quarter. The
results were significantly impacted by the slower United States economy, lower
gas drilling activity primarily in the United States onshore operations and
increased discount rates for our services in the United States. The political
and economic instability in Latin America, and tropical storms in the Gulf of
Mexico also negatively impacted our operations. Results were positively impacted
by net pretax income of $21 million on integrated solutions projects. The $21
million was made up of a sale of investments in integrated solutions projects in
the United States for $130 million in cash with a pretax gain of $48 million,
offset by $27 million in pretax losses in other investments in integrated
solution projects in Indonesia, Colombia and the United States.
Operating income for our oilfield services product service line
decreased 36% for the 2002 third quarter as compared to the 2001 third quarter.
Excluding the above noted items, the decline was approximately 35%. Over 85% of
the decline related to pressure pumping activities in the United States.
36
Geographically, approximately 70% of the decline was in the United
States. Operating income in Latin America declined 17% due to lower activity
resulting from political and economic instability in Venezuela and Argentina.
Excluding the loss on the sale of our 50% interest in the Bredero-Shaw
joint venture and restructuring charges in the 2002 third quarter, and goodwill
amortization in the 2001 third quarter, operating income for the remainder of
the segment increased about $3 million. Increased income at integrated
exploration and product information systems, Subsea, and Wellstream offset
operating income reduction due to the sale of our interests in Bredero-Shaw and
EMC during 2002.
Engineering and Construction Group operating income decreased $24
million, from the 2001 third quarter to the 2002 third quarter. Operating income
declined $27 million, excluding the impact of the third quarter 2002
restructuring costs and the third quarter 2001 goodwill amortization and
asbestos charge. On the same basis, operating margin for the 2002 third quarter
was 1% as compared to 3% in the 2001 third quarter. Operating income decreases
by product line are as follows:
- Offshore operations declined due to lower activity on a project in
Nigeria, as well as projects in the Philippines and Brazil
(Barracuda-Caratinga) for which no project income was recorded;
- Onshore operations declined due to several jobs being at or near
their completion stages;
- Government operations declined due to lower income on the Balkan
Support Contract; and
- these decreases were partially offset by higher operating income
in Infrastructure and Operations and Maintenance.
The effect on operating income from additional unapproved claims during the
quarter was $7 million.
General corporate expenses for the 2002 third quarter were $21 million
compared to $15 million for the 2001 third quarter. Excluding 2002 restructuring
costs, general corporate expenses were $17 million or an increase of 13%
compared to the 2001 third quarter.
NONOPERATING ITEMS
Interest expense of $29 million for the 2002 third quarter, decreased
$5 million compared to the 2001 third quarter. The decrease is due to lower
average borrowings in 2002.
Interest income was $8 million in the third quarter of 2002 and $8
million in the third quarter of 2001.
Foreign currency gains, net were $1 million in the third quarter 2002
compared to a $2 million loss in the third quarter of last year.
Provision for income taxes of $72 million in the 2002 third quarter
resulted in an effective tax rate of 42%, versus a rate of 40% in the 2001 third
quarter. Excluding the impact of the loss on the sale of our interest in
Bredero-Shaw, our effective tax rate was approximately 39%. The Bredero-Shaw
sale did not create a significant tax loss as the tax basis was substantially
lower than the book basis. In addition, the tax loss created is a capital loss
which would only free up foreign tax credits and future realization of those
credits is uncertain. Therefore, no tax benefit was recorded for the loss.
Income from continuing operations was $94 million in the 2002 third
quarter, compared to income from continuing operations of $181 million in the
2001 third quarter.
Loss from discontinued operations was $2 million, or less than one-half
of one cent per diluted share, for the 2001 third quarter.
Net income for the 2002 third quarter was $94 million, or $0.22 per
diluted share. Net income was $179 million, or $0.42 per diluted share for the
2001 third quarter.
First Nine Months of 2002 Compared with the First Nine Months of 2001
First Nine Months
REVENUES --------------------------------- Increase
Millions of dollars 2002 2001 (decrease)
- ----------------------------------------------------------------------------------------------
Energy Services Group $ 5,122 $ 5,898 $ (776)
Engineering and Construction Group 4,102 3,976 126
- ----------------------------------------------------------------------------------------------
Total revenues $ 9,224 $ 9,874 $ (650)
==============================================================================================
37
Consolidated revenues in the first nine months of 2002 of $9.2 billion
decreased 7% compared to the first nine months of 2001. International revenues
were 67% of total revenues for the first nine months of 2002 and 61% in the
first nine months of 2001. International revenues increased $123 million
partially offsetting a $773 million revenue decline in the United States where
oilfield services drilling activity declined 32%, putting pressure on pricing
and discounting.
Energy Services Group revenues declined 13% or $776 million in the
first nine months of 2002. International revenues were 59% of total revenues for
the first nine months of 2002 as compared to 52% for the first nine months of
2001.
Revenues from our oilfield services product service lines were $4.6
billion for the first nine months of 2002 compared to $5.2 billion for the first
nine months of 2001. The decline in revenue is attributable to lower levels of
activity primarily in North America, which also put pressure on pricing and
discounting of work in the United States. The change in revenues in oilfield
services is broken out by product service line as follows:
- pressure pumping declined 16%;
- logging was down 13%;
- completion products was down 10%;
- drilling fluids was down 12%;
- drill bits was down 10%; partially offset by
- drilling systems which was up 7% due to increased activity in
Saudi Arabia, Thailand, Brazil, and the United Arab Emirates.
On a geographic basis, our decrease in oilfield services revenues is as
follows:
- North America decreased 26%, due to lower rig activity;
- Latin America decreased 7% primarily in Argentina due to currency
devaluation and in Venezuela due to lower activity brought on by
uncertain market and political conditions; and
- partially offsetting these declines were increased revenues in
Europe/Africa, the Middle East and Asia Pacific, where our
activity increased in Saudi Arabia, Algeria, Nigeria, Angola,
Russia, and the former Commonwealth of Independent States.
Revenues for the remainder of the segment decreased $193 million
year-over-year. We account for our 50% ownership interest in Subsea 7, which
began operations in May 2002, on the equity method of accounting versus full
consolidation of the Halliburton Subsea revenue prior to the formation of Subsea
7. Had it not been for the change to the equity method of accounting in
connection with the transaction, revenues for the balance of the segment would
have been up $16 million for the first nine months of 2002 as compared to the
first nine months of 2001. Integrated exploration and production information
systems revenues increased 9% compared to the first nine months of 2001.
Engineering and Construction Group revenues increased $126 million, or
3%, in the first nine months of 2002 compared to the first nine months of 2001.
Year-over-year revenues were 3% lower in North America while increasing 5%
outside North America. Our revenue comparison by product line is as follows:
- Offshore revenues increased 27% due to progress on the
Barracuda-Caratinga project in Brazil;
- Infrastructure revenues were higher by 12% due to increased
progress on the Alice Springs to Darwin Rail Line project in
Australia;
- Onshore revenues increased by 5% primarily due to progress on
several new projects in 2002 including gas and LNG projects in
Algeria, Nigeria and Egypt;
- Government operations product line revenues were 14% lower due to
completion of a major project at our shipyard in the United
Kingdom and lower volumes of logistical support in the Balkans;
and
- Operations and Maintenance revenue declined 7% primarily due to
reduced downstream maintenance activity.
38
First Nine Months
OPERATING INCOME --------------------------------- Increase
Millions of dollars 2002 2001 (decrease)
- ----------------------------------------------------------------------------------------------
Energy Services Group $ 439 $ 778 $ (339)
Engineering and Construction Group (496) 84 (580)
General corporate (34) (50) 16
- ----------------------------------------------------------------------------------------------
Total operating income $ (91) $ 812 $ (903)
==============================================================================================
The first nine months of 2002 resulted in a consolidated operating loss
of $91 million compared to $812 million of operating income in the first nine
months of 2001. In the 2002 first nine months, we incurred gains and losses,
which included:
- $78 million in pretax expense related to restructuring charges, of
which $47 million related to the Energy Services Group, $16
million related to the Engineering and Construction Group and $15
million related to General corporate;
- $119 million pretax loss in the Engineering and Construction Group
on the Barracuda-Caratinga project in Brazil;
- $330 million pretax loss in the Engineering and Construction Group
related to asbestos exposures;
- $79 million pretax loss in the Energy Services Group on the sale
of our 50% equity investment in the Bredero-Shaw joint venture;
- $108 million pretax gain in the Energy Services Group on the sale
of our 50% interest in European Marine Contractors;
- $98 million pretax expense in the Energy Services Group related to
a patent infringement case;
- $80 million pretax write-off of billed and accrued receivables
related to the Highlands Insurance Company litigation in the
Engineering and Construction Group, formerly reported in General
corporate; and
- $28 million pretax gain for the value of stock received from the
demutualization of an insurance provider in General corporate.
In the first nine months of 2001 we incurred $32 million in goodwill
amortization of which $19 million related to the Energy Services Group and $13
million related to the Engineering and Construction Group.
Energy Services Group operating income for the first nine months of
2002 declined $339 million, or 44%, as compared to the first nine months of
2001. Excluding a $79 million loss on the sale of our 50% interest in the
Bredero-Shaw joint venture, a $108 million gain on the sale of our interest in
European Marine Contractors, $98 million related to the BJ Services judgment and
$47 million in restructuring charges in 2002, and 2001 goodwill amortization of
$19 million, operating income declined 30%. On the same basis, operating margin
for the first nine months 2002 was 11% compared to 14% for the first nine months
of 2001.
Operating income in our oilfield services product service line declined
$386 million or 50%. Excluding the above noted items, the decline was $256
million or 33%, reflecting lower rig activity primarily in North America and net
pretax losses of $11 million on integrated solutions projects. The change in
operating income in oilfield services is broken out by product service line as
follows:
- pressure pumping operating income decreased 39%, which has been
adversely impacted by reduced oil and gas drilling in North
America;
- our logging and drilling fluids product services lines were also
affected by the rig count decline with operating income declining
66% in logging and 32% in drilling fluids;
- offsetting the declines were improved results in the drilling
systems product service line with operating income increasing 27%
benefiting from improved international activity; and
- our completion products and services product service line had a
30% increase in operating income.
Operating income in the United States for our oilfield services product service
line decreased $402 million due to lower activity levels and pricing pressures
while international operating income increased $16 million.
39
Operating income for the remainder of the segment increased $47 million
in the first nine months of 2002 compared to the first nine months of 2001.
Excluding the $79 million loss on the sale of our 50% interest in the
Bredero-Shaw joint venture, $108 million gain on the sale of our interest in
European Marine Contractors and $9 million in restructuring charges in 2002, and
goodwill amortization for the first nine months of 2001 of $13 million,
operating income for the remainder of the segment increased $14 million due to
improved profitability of software sales and professional services at Landmark
Graphics Corporation.
Engineering and Construction Group operating income declined by $580
million compared to the first nine months of 2001. Excluding the $119 million
loss on unapproved claims for the Barracuda-Caratinga project in Brazil, $410
million accrued expenses related to net asbestos liability, $16 million in
restructuring costs, goodwill amortization for the first nine months of 2001 of
$13 million, and asbestos charges for the first nine months of 2001 of $8
million, operating income declined $56 million. On the same basis, operating
margin for the first nine months of 2002 was 1% as compared to 3% for the first
nine months in 2001. This decline occurred in Offshore operations where
operating income decreased $54 million primarily due to a $33 million loss on a
project in the Philippines.
The effect on operating income from additional unapproved claims during
the first nine months of 2002 was a reduction of approximately $87 million in
losses that would have otherwise been recorded.
General corporate expenses for the first nine months of 2002 were $34
million compared to $50 million in the first nine months of 2001. Excluding
restructuring charges and gain from the value of stock received from
demutualization of an insurance provider, expenses would have been $47 million.
NONOPERATING ITEMS
Interest expense of $91 million for the first nine months of 2002
decreased $24 million compared to the first nine months of 2001. The decrease is
due to lower average borrowings in 2002, partially offset by the $4 million in
interest related to the patent infringement judgment which we are appealing.
Interest income was $24 million in the first nine months of 2002
compared to $18 million in the first nine months of 2001. The increased interest
income is for interest on a note receivable from a customer which had been
deferred until collection.
Foreign currency losses, net were $12 million in the first nine months
of 2002 compared to $6 million in the first nine months of 2001. The increase is
due to the continuing economic and financial crisis in Argentina.
Other, net of $2 million in the first nine months of 2002, includes $3
million pretax gain associated with the realized gain on the option component of
the European Marine Contractors Ltd. sale.
Provision for income taxes was $31 million in the first nine months of
2002 compared to a provision for income taxes of $285 million in the first nine
months of 2001. Excluding the tax impact of the loss on the sale of our interest
in Bredero-Shaw and charges associated with our asbestos exposure, our effective
tax rate was approximately 39%, compared to 40% for the first nine months of
2001. The asbestos accrual generates a United States Federal deferred tax asset
which may not be fully realizable based upon future taxable income projections.
As a result we have recorded a partial valuation allowance. The Bredero-Shaw
sale did not create a significant tax loss as the tax basis was substantially
lower than the book basis. In addition, the tax loss created is a capital loss
which would only free up foreign tax credits and future realization of those
credits is uncertain. Therefore, no tax benefit was recorded for the loss.
Loss from continuing operations was $214 million in the first nine
months of 2002 compared to income from continuing operations of $410 million in
the first nine months of 2001.
Loss from discontinued operations was $202 million pretax, $168 million
after-tax, or $0.39 per diluted share in the first nine months of 2002 compared
to a loss of $58 million pretax, $40 million after-tax, or $0.09 per diluted
share in the first nine months of 2001. The loss in 2002 was due primarily to
charges recorded for asbestos exposures. We also recorded pretax expense of $6
million associated with the Harbison-Walker bankruptcy filing. The pretax loss
for 2001 represents operating income of $37 million from Dresser Equipment Group
through March 31, 2001 offset by a $95 million pretax asbestos accrual primarily
related to Harbison-Walker.
40
Gain on disposal of discontinued operations of $299 million after-tax,
or $0.70 per diluted share, in 2001 resulted from the sale of our remaining
businesses in the Dresser Equipment Group in April 2001.
Cumulative effect of accounting change, net in 2001 of $1 million
reflects the impact of adoption of Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and for Hedging Activities."
After recording the cumulative effect of the change our estimated annual expense
under Financial Accounting Standards No. 133 is not expected to be materially
different from amounts expensed under the prior accounting treatment.
Net loss for the first nine months of 2002 was $382 million, or $0.88
per diluted share. Net income for the first nine months of 2001 was $670
million, or $1.56 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
We ended the third quarter of 2002 with cash and equivalents of $586
million, an increase of $296 million from the end of 2001.
Cash flows from operating activities provided $1 billion in the first
nine months of 2002 compared to $556 million in the first nine months of 2001.
Working capital items, which include receivables, sales of receivables,
inventories, accounts payable and other working capital, net, provided $401
million of cash in the first nine months of 2002 compared to using $494 million
in the same period of 2001. Included in changes to other operating activities
for the first nine months of 2002 is a $40 million payment related to the
Harbison-Walker bankruptcy filing. The 2002 change in sales of receivables
relates to the sale of $200 million of undivided ownership interest to
unaffiliated companies by the funding subsidiary under the account receivable
securitization agreement. See Note 12.
Cash flows from investing activities used $417 million in the first
nine months of 2002 and $620 million in the first nine months of 2001. Capital
expenditures in the first nine months of 2002 were $564 million as compared to
$568 million for the first nine months of 2001. Capital spending in the first
nine months of 2002 continued to be primarily directed to Halliburton Energy
Services, for fracturing equipment and directional and logging-while-drilling
tools. In addition, we invested $60 million in an integrated solutions project.
Currently, we expect capital expenditures in 2002 to be about $700 million.
Included in sales of property, plant and equipment is $130 million collected
from the sale of Integrated Solutions projects. Dispositions of businesses in
the first nine months of 2002 include $134 million collected from the sale of
our European Marine Contractors Ltd. joint venture. Included in the change in
restricted cash for the first nine months of 2002 is a $107 million deposit that
collateralizes an appeal bond for a patent infringement judgment on appeal and
$56 million as collateral for potential future insurance claim reimbursements.
Also included in changes in restricted cash is $29 million primarily related to
cash collateral agreements for letters of credit we currently have outstanding
for various construction projects. In March 2001, we acquired PGS Data
Management division of Petroleum Geo-Services ASA for $164 million cash.
Cash flows from financing activities used $272 million in the first
nine months of 2002 as compared to $1.1 billion for the first nine months of
2001. We paid dividends of $164 million to our shareholders in the first nine
months of 2002 compared to $161 million in the first nine months of 2001. We
repaid a $75 million medium-term note during the third quarter 2002. Proceeds
from exercises of stock options provided cash flows of $25 million in the first
nine months of 2001. We used the proceeds from the sale of the Dresser Equipment
Group in April 2001 to repay short-term debt in 2001.
Cash flows from discontinued operations provided $1.2 billion in the
first nine months of 2001. Discontinued operations cash flows for 2001 include
the proceeds from the sale of the Dresser Equipment Group.
Capital resources from internally generated funds and access to capital
markets are sufficient to fund our working capital requirements and investing
activities. Our combined short-term notes payable and long-term debt was 25% of
total capitalization at September 30, 2002 and 24% at December 31, 2001. At
September 30, 2002, we have $192 million in restricted cash included in Other
assets. See Note 4. In addition, on April 15, 2002, we entered into an agreement
to sell accounts receivable to provide additional liquidity. See Note 12.
41
Late in 2001 and early in 2002, Moody's Investors' Services lowered its
ratings of our long-term senior unsecured debt to Baa2 and our short-term credit
and commercial paper ratings to P-2. In addition, Standard & Poor's lowered its
ratings of our long-term senior unsecured debt to A- and our short-term credit
and commercial paper ratings to A-2. The ratings were lowered due to the
agencies' concerns about asbestos litigation and the general weakening in the
oilfield services sector. Although our long-term ratings continue at investment
grade levels, the cost of new borrowing is higher and our access to the debt
markets is more volatile at the new rating levels. Reduced ratings and concerns
about asbestos litigation, along with recent changes in the banking and
insurance markets, will also result in higher cost and more limited access to
markets for other credit products including letters of credit and surety bonds.
Investment grade ratings are BBB- or higher for Standard & Poor's and Baa3 or
higher for Moody's Investors' Services. Our current ratings are three levels
above BBB- on Standard & Poor's and one level above Baa3 on Moody's Investors'
Services.
We have $350 million of committed lines of credit from banks that are
available if we maintain an investment grade rating. This facility expires on
August 16, 2006. As of September 30, 2002, no amounts have been borrowed under
these lines.
In the normal course of business, we have agreements with banks under
which approximately $1.4 billion of letters of credit or bank guarantees were
issued, including $218 million which relate to our joint ventures' operations.
During the quarter we amended an agreement with banks under which $260 million
of letters of credit have been issued. The amended agreement removes the
provision that previously allowed the banks to require collateralization if
ratings of Halliburton debt fell below investment grade ratings. The revised
agreements include provisions that require us to maintain certain ratios of debt
(the definition of debt includes our asbestos liability) to total capital and of
total earnings before interest, taxes, depreciation and amortization to interest
expense.
If our debt ratings fall below investment grade, we would also be in
technical breach of a bank agreement covering another $176 million of letters of
credit at September 30, 2002, which might entitle the bank to set-off rights. In
addition, a $151 million letter of credit line, of which $103 million has been
issued, includes provisions that allow the banks to require cash
collateralization for the full line if debt ratings of either rating agency fall
below the rating of BBB by Standard & Poor's, three downgrades from our current
rating or Baa2 by Moody's Investors' Services, one downgrade from our current
rating.
In the event the ratings of our debt by either agency falls, we may
have to issue additional debt or equity securities or obtain additional credit
facilities in order to satisfy the cash collateralization requirements under the
instruments referred to above and meet our other liquidity needs. We anticipate
that any such new financing would not be on terms as attractive as those we have
currently and that we would also be subject to increased borrowing costs and
interest rates. These letters of credit and bank guarantees relate to our
guaranteed performance or retention payments under our long-term contracts and
self-insurance.
In the past, no significant claims have been made against letters of
credit we have issued. We do not anticipate material losses to occur as a result
of these financial instruments.
Our Halliburton Elective Deferral Plan has a provision that if the
Standard & Poor's rating falls below BBB the amounts credited to the
participants' accounts will be paid to the participants in a lump-sum within 45
days. At September 30, 2002 this was approximately $47 million.
On July 12, 2001 we issued $425 million of two and five year
medium-term notes under our medium-term note program. The notes consist of $275
million of 6% fixed rate notes due August 1, 2006 and $150 million of floating
rate notes due July 16, 2003. Net proceeds from the two medium-term note
offerings were used to reduce short-term debt in 2001.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory
requirements related to our operations worldwide. In the United States, these
laws and regulations include the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), the Resources Conservation and Recovery
Act (RCRA), the Clean Air Act, the Federal Water Pollution Control Act and the
Toxic Substances Control Act, among others. In addition to the federal laws and
42
regulations, states where we do business may have equivalent laws and
regulations by which we must also abide. We take an active approach to
evaluating and addressing the environmental impact of our operations. We assess
and remediate contaminated properties in order to avoid future liabilities and
comply with legal and regulatory requirements. On occasion we are involved in
specific environmental litigation and claims, including the clean-up of
properties we own or have operated as well as efforts to meet or correct
compliance-related matters.
We do not expect costs related to these requirements to have a material
adverse effect on our consolidated financial position or our results of
operations. In certain instances, we have been named a potentially responsible
party by a regulatory agency, but in each of those cases we do not believe we
have any material liability.
ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated assets' retirement
costs. SFAS No. 143 requires that the fair value of a liability associated with
an asset retirement be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated retirement costs
are capitalized as part of the carrying amount of the long-lived asset and
subsequently depreciated over the life of the asset. We currently account for
liabilities associated with asset retirement obligations under existing
accounting standards, such as SFAS 19, SFAS 5, SOP 96-1, and EITF 89-30, which
does not require the asset retirement obligations to be recorded at fair value
and in some instances does not require the costs to be recognized in the
carrying amount of the related asset. The new standard will be effective for us
beginning January 1, 2003, and we are currently reviewing and evaluating the
effects this standard will have on our future financial condition, results of
operations, and accounting policies and practices.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt", the amendment to
SFAS No. 4, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". SFAS No. 145 also amends paragraph 14(a) of SFAS No.
13, "Accounting for Leases", to eliminate an inconsistency between the
accounting for sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This new
standard will not have a material effect on our future financial condition or
operations.
In July 2002 the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". The
standard requires companies to recognize costs associated with exit or disposal
activities when the liabilities are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and some employee severance costs that
are associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like "may," "may
not," "believes," "do not believe," "expects," "do not expect," "do not
anticipate," and other expressions. We may also provide oral or written
forward-looking information in other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and the results of operations may vary materially.
43
While it is not possible to identify all factors, we continue to face
many risks and uncertainties that could cause actual results to differ from our
forward-looking statements including:
Asbestos
- asbestos litigation including the judgments against us in late
2001 and their related appeals;
- the ability of our insurers for our asbestos exposures to pay
claims in the future;
- the ability to access insurance policies shared with
Harbison-Walker Refractories Company and Federal-Mogul
Products, Inc.;
- future asbestos claims settlement and defense costs including
current negotiations on a possible global settlement;
- continuation of the temporary restraining order in the
Harbison-Walker bankruptcy court; and
- number and type of future asbestos claims;
Legal
- litigation, including, for example, class action shareholder
and derivative lawsuits, contract disputes, patent
infringements, and environmental matters;
- trade restrictions and economic embargoes imposed by the
United States and other countries;
- restrictions on our ability to provide products and services
to Iran, Iraq and Libya, all of which are significant
producers of oil and gas;
- many of the countries that we operate in are developing
economies which have protective governmental regulations
including, for example, regulations that:
- encourage or mandate the hiring of local
contractors; and
- require foreign contractors to employ citizens of,
or purchase supplies from, a particular
jurisdiction;
- potentially adverse customer reaction, and time and expense
responding to, the increased scrutiny of Halliburton by the
media and others;
- environmental laws and regulations, including, for example,
those that:
- require emission performance standards for
facilities; and
- the potential regulation in the United States of
our Energy Services Group's hydraulic fracturing
services and products as underground injection;
- the proposed excise tax in the United States targeted at heavy
equipment of the type we own and use in our operations would
negatively impact our Energy Services Group operating income;
- any unexpected adverse outcome of the SEC's current inquiries
into Halliburton's accounting policies, practices and
procedures; and
- adverse results of increased review and scrutiny of
Halliburton by regulatory authorities, media and others;
Geopolitical
- due to the unsettled political conditions in many oil
producing countries and countries in which we provide
governmental logistical support our revenues and profit are
subject to the adverse consequences of war, the effects of
terrorism, civil unrest, strikes, currency controls and
governmental actions. Countries where we operate which have
significant amounts of political risk include: Algeria,
Angola, Argentina, Colombia, Indonesia, Libya, Nigeria,
Russia, and Venezuela. For example, recent strikes by offshore
workers in Norway and general strikes in Venezuela as well as
seizures of offshore oil rigs by protestors in Nigeria have
disrupted our Energy Services Group's ability to provide
services and products to our customers in these countries;
- any changes in foreign exchange rates and exchange controls as
were experienced in Argentina in late 2001 and early 2002. For
example, the changes in Argentina exchange rates in late 2001
and early 2002 were detrimental to results of our Energy
Services Group operations in Argentina. Continued economic
unrest in Argentina has reduced the demand for our services
and products in Argentina; and
- potential military action in the Middle East could:
44
- impact the demand and pricing for oil and gas;
- disrupt our operations in the region and
elsewhere; and
- increase our costs for security worldwide;
Liquidity
- additional reductions in debt ratings by rating agencies
impacting:
- access to lines of credit, credit markets and
credit from suppliers under acceptable terms;
- borrowing costs in the future;
- ability to issue letters of credit and surety bonds
with or without cash collateral; and
- debt and letter of credit covenants;
- volatility in the surety bond market;
- availability of financing from the United States Export/Import
Bank; and
- ability to raise capital via the sale of stock;
Weather related
- our business is impacted by severe weather, particularly in
the Gulf of Mexico where we have significant operations.
Impacts may include:
- evacuation of personnel and curtailment of
services;
- weather related damage to offshore drilling rigs
resulting in suspension of operations;
- weather related damage to our facilities;
- inability to deliver materials to jobsites in
accordance with contract schedules; and
- loss of productivity;
- demand for natural gas in the United States drives a
disproportionate amount of our Energy Services Group's United
States business. As a result, warmer than normal winters in
the United States are detrimental to the demand for our
services to gas producers. Conversely, colder than normal
winters in the United States result in increased demand for
our services to gas producers;
Customers
- the magnitude of governmental spending and outsourcing for
military and logistical support of the type that we provide,
including, for example, support services in the Balkans;
- changes in capital spending by customers in the oil and gas
industry for exploration, development, production, processing,
refining, and pipeline delivery networks;
- changes in capital spending by governments for infrastructure
projects of the sort that we perform;
- consolidation of customers including, for example, the merger
of Conoco and Phillips Petroleum, has caused customers to
reduce their capital spending which has negatively impacted
the demand for our services and products;
- customer personnel changes due to mergers and consolidation
which impacts the timing of contract negotiations and
settlements of claims;
- claim negotiations with engineering and construction customers
on cost variances and change orders on major projects,
including, for example, the Barracuda-Caratinga project in
Brazil; and
- ability of our customers to timely pay the amounts due us;
Industry
- our operations are tied to the price of oil and natural gas.
Changes in oil and gas prices resulting from:
- OPEC's ability to set and maintain production
levels and prices for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration
for and production and development of their oil and
natural gas reserves;
- the level of demand for oil and natural gas,
especially natural gas in the United States where
demand is currently below last years' usage;
- obsolescence of our proprietary technologies, equipment and
facilities, or work processes;
45
- changes in the price or the availability of commodities that
we use;
- ability to obtain key insurance coverage at acceptable prices;
- nonperformance, default or bankruptcy of joint venture
partners, key suppliers or subcontractors;
- risks that result from performing fixed-price projects, where
failure to meet schedules, cost estimates or performance
targets could result in reduced profit margins or losses;
- risks that result from entering into complex business
arrangements for technically demanding projects where failure
by one or more parties could result in monetary penalties; and
- the risk inherent in the use of derivative instruments of the
sort that we use which could cause a change in value of the
derivative instruments as a result of:
- adverse movements in foreign exchange rates,
interest rates, or commodity prices; or
- the value and time period of the derivative being
different than the exposures or cash flows being
hedged;
Systems
- the successful deployment of SAP throughout our remaining
Energy Services Group businesses, principally Sperry-Sun; and
- the successful identification, procurement and installation
of a new financial system to replace the current system for
the Engineering and Construction Group;
Personnel and mergers/reorganizations/dispositions
- integration of acquired businesses into Halliburton,
including:
- standardizing information systems or integrating
data from multiple systems;
- maintaining uniform standards, controls,
procedures, and policies; and
- combining operations and personnel of acquired
businesses with ours;
- effectively restructuring operations and personnel within
Halliburton including, for example, the segregation of our
business into two separate entities under Halliburton;
- ensuring acquisitions and new products and services add value
and complement our core businesses; and
- successful completion of planned dispositions.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. You should review any additional
disclosures we make in our press releases and Forms 10-Q, 8-K and 10-K to the
United States Securities and Exchange Commission. We also suggest that you
listen to our quarterly earnings release conference calls with financial
analysts.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
We are exposed to financial instrument market risk from changes in
foreign currency exchange rates, interest rates and to a limited extent,
commodity prices. We selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these exposures. The
objective of our risk management is to protect our cash flows related to sales
or purchases of goods or services from market fluctuations in currency rates.
Our use of derivative instruments includes the following types of market risk:
- volatility of the currency rates and commodity prices;
- time horizon of the derivative instruments;
- market cycles; and
- the type of derivative instruments used.
We do not use derivative instruments for trading purposes. We do not
consider any of these risk management activities to be material.
46
Item 4. Controls and Procedures
- --------------------------------
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
* 10.1 Halliburton Company Directors' Deferred Compensation Plan as
amended and restated effective as of October 22, 2002.
* 24.1 Powers of attorney for the following directors:
Robert L. Crandall
Kenneth T. Derr
Charles J. DiBona
Lawrence S. Eagleburger
W. R. Howell
Ray L. Hunt
David J. Lesar
Aylwin B. Lewis
J. Landis Martin
Jay A. Precourt
Debra L. Reed
C. J. Silas
* 24.2 Powers of attorney for the following executive officers:
Jerry H. Blurton
Lester L. Coleman
Albert O. Cornelison, Jr.
Douglas L. Foshee
Robert R. Harl
Arthur D. Huffman
Weldon J. Mire
R. Charles Muchmore, Jr.
Edgar Ortiz
David R. Smith
* Filed with this Form 10-Q.
47
(b) Reports on Form 8-K
Date Filed Date of Earliest Event Description of Event
- --------------------------- ------------------------ ----------------------------------------------------------
During the third quarter of 2002:
July 11, 2002 July 10, 2002 Item 5. Other Events for a press release announcing the
response to the news of the Judicial Watch Lawsuit.
July 24, 2002 July 16, 2002 Item 5. Other Events for a press release announcing that
asbestos plaintiffs agree to extend current stay on
asbestos claims until September 18, 2002.
July 24, 2002 July 22, 2002 Item 5. Other Events for a press release announcing
second quarter charges.
July 29, 2002 July 22, 2002 Item 5. Other Events for a press release announcing that
a letter of intent has been signed to sell interest in
Bredero-Shaw to ShawCor Ltd.
July 30, 2002 July 24, 2002 Item 5. Other Events for a press release announcing
second quarter results.
August 7, 2002 August 1, 2002 Item 5. Other Events for a press release announcing a
response to false statements by Citizensworks.
August 13, 2002 August 13, 2002 Item 9. Regulation FD Disclosure for the filing of
certificates pertaining to facts and circumstances
relating to Exchange Act filings.
August 14, 2002 August 13, 2002 Item 9. Regulation FD Disclosure for the filing of
statements pertaining to the Sarbanes-Oxley Act.
August 23, 2002 August 23, 2002 Item 5. Other Events for a press release announcing the
dividend.
September 18, 2002 September 18, 2002 Item 5. Other Events for a press release announcing
asbestos plaintiffs agree to extend current stay on
asbestos claims until November 7, 2002.
October 1, 2002 September 30, 2002 Item 5. Other Events for a press release announcing the
selling of our interest in Bredero-Shaw to ShawCor Ltd.
During the fourth quarter of 2002:
October 2, 2002 October 1, 2002 Item 5. Other Events for a press release announcing a
conference call to discuss third quarter financial
results.
November 5, 2002 November 4, 2002 Item 9. Regulation FD Disclosure for a press release
announcing the revision of credit rating agreements.
48
SIGNATURES
As required by the Securities Exchange Act of 1934, the registrant has
authorized this report to be signed on behalf of the registrant by the
undersigned authorized individuals.
HALLIBURTON COMPANY
Date: March 28, 2003 By: /s/ Douglas L. Foshee
-------------------- ----------------------------------
Douglas L. Foshee
Executive Vice President and
Chief Financial Officer
/s/ R. Charles Muchmore, Jr.
---------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller and
Principal Accounting Officer
49
I, David J. Lesar, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Halliburton
Company for the period ending September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
50
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ David J. Lesar
---------------------------------
David J. Lesar
Chief Executive Officer
51
I, Douglas L. Foshee, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Halliburton
Company for the period ending September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
52
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Douglas L. Foshee
----------------------------------------
Douglas L. Foshee
Executive Vice President and Chief Financial Officer
53