edjune200910q_final.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q


[X]   Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2009

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 001-03492


HALLIBURTON COMPANY

(a Delaware corporation)
75-2677995

5 Houston Center
1401 McKinney, Suite 2400
Houston, Texas  77010
(Address of Principal Executive Offices)

Telephone Number – Area Code (713) 759-2600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     X       No           
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  _____  No _____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer   [X]
Non-accelerated filer     [   ]
Accelerated filer                    [   ]
Smaller reporting company  [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes              No     X    

As of July 17, 2009, 901,714,840 shares of Halliburton Company common stock, $2.50 par value per share, were outstanding.

 
 

 

HALLIBURTON COMPANY

Index

   
Page No.
PART I.
FINANCIAL INFORMATION
3
     
Item 1.
Financial Statements
3
     
 
-       Condensed Consolidated Statements of Operations
3
 
-       Condensed Consolidated Balance Sheets
4
 
-       Condensed Consolidated Statements of Cash Flows
5
 
-       Notes to Condensed Consolidated Financial Statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and
18
 
Results of Operations
 
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
38
     
Item 4.
Controls and Procedures
38
     
PART II.
OTHER INFORMATION
39
     
Item 1.
Legal Proceedings
39
     
Item 1(a).
Risk Factors
39
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
39
     
Item 3.
Defaults Upon Senior Securities
39
     
Item 4.
Submission of Matters to a Vote of Security Holders
39
     
Item 5.
Other Information
41
     
Item 6.
Exhibits
42
     
Signatures
  43

 
 

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

HALLIBURTON COMPANY
Condensed Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
Millions of dollars and shares except per share data
 
2009
   
2008
   
2009
   
2008
 
Revenue:
                       
Services
  $ 2,542     $ 3,292     $ 5,492     $ 6,256  
Product sales
    952       1,195       1,909       2,260  
Total revenue
    3,494       4,487       7,401       8,516  
Operating costs and expenses:
                               
Cost of services
    2,164       2,480       4,575       4,753  
Cost of sales
    807       1,012       1,635       1,885  
General and administrative
    48       71       100       143  
Gain on sale of assets, net
    (1 )     (25 )     (1 )     (61 )
Total operating costs and expenses
    3,018       3,538       6,309       6,720  
Operating income
    476       949       1,092       1,796  
Interest expense
    (82 )     (42 )     (135 )     (84 )
Interest income
    3       9       5       29  
Other, net
    (14 )     (2 )     (19 )     (3 )
Income from continuing operations before income taxes
                               
and noncontrolling interest
    383       914       943       1,738  
Provision for income taxes
    (117 )     (288 )     (296 )     (526 )
Income from continuing operations
    266       626       647       1,212  
Loss from discontinued operations, net of income
                               
tax benefit of $1, $1, $1, and $0
    (1 )     (116 )     (2 )     (115 )
Net income
  $ 265     $ 510     $ 645     $ 1,097  
Noncontrolling interest in net income of subsidiaries
    (3 )     (6 )     (5 )     (13 )
Net income attributable to company
  $ 262     $ 504     $ 640     $ 1,084  
Amounts attributable to company shareholders:
                               
Income from continuing operations
  $ 263     $ 620     $ 642     $ 1,199  
Loss from discontinued operations, net
    (1 )     (116 )     (2 )     (115 )
Net income attributable to company
  $ 262     $ 504     $ 640     $ 1,084  
Basic income per share attributable to company shareholders:
                               
Income from continuing operations
  $ 0.29     $ 0.71     $ 0.71     $ 1.37  
Loss from discontinued operations, net
          (0.13 )           (0.13 )
Net income per share
  $ 0.29     $ 0.58     $ 0.71     $ 1.24  
Diluted income per share attributable to company shareholders:
                               
Income from continuing operations
  $ 0.29     $ 0.68     $ 0.71     $ 1.31  
Loss from discontinued operations, net
          (0.13 )           (0.13 )
Net income per share
  $ 0.29     $ 0.55     $ 0.71     $ 1.18  
                                 
Cash dividends per share
  $ 0.09     $ 0.09     $ 0.18     $ 0.18  
Basic weighted average common shares outstanding
    898       875       898       877  
Diluted weighted average common shares outstanding
    900       918       899       916  
See notes to condensed consolidated financial statements.

 
3

 

HALLIBURTON COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
   
June 30,
   
December 31,
 
Millions of dollars and shares except per share data
 
2009
   
2008
 
Assets
 
Current assets:
           
Cash and equivalents
  $ 1,568     $ 1,124  
Receivables (less allowance for bad debts of $76 and $60)
    3,152       3,795  
Inventories
    1,832       1,828  
Investments in marketable securities
    753        
Current deferred income taxes
    179       246  
Other current assets
    524       418  
Total current assets
    8,008       7,411  
Property, plant, and equipment, net of accumulated depreciation of $4,935 and $4,566
    5,357       4,782  
Goodwill
    1,068       1,072  
Investments in marketable securities
    763        
Other assets
    1,019       1,120  
Total assets
  $ 16,215     $ 14,385  
Liabilities and Shareholders’ Equity
 
Current liabilities:
               
Accounts payable
  $ 755     $ 898  
Accrued employee compensation and benefits
    454       643  
Deferred revenue
    226       231  
Department of Justice (DOJ) and Securities and Exchange Commission (SEC) settlement
               
and indemnity, current
    190       373  
Current maturities of long-term debt
    27       26  
Other current liabilities
    568       610  
Total current liabilities
    2,220       2,781  
Long-term debt
    4,573       2,586  
Employee compensation and benefits
    521       539  
Other liabilities
    577       735  
Total liabilities
    7,891       6,641  
Shareholders’ equity:
               
Common shares, par value $2.50 per share – authorized 2,000 shares, issued 1,067 shares
    2,667       2,666  
Paid-in capital in excess of par value
    395       484  
Accumulated other comprehensive loss
    (198 )     (215 )
Retained earnings
    10,521       10,041  
Treasury stock, at cost – 167 and 172 shares
    (5,084 )     (5,251 )
Company shareholders’ equity
    8,301       7,725  
Noncontrolling interest in consolidated subsidiaries
    23       19  
Total shareholders’ equity
    8,324       7,744  
Total liabilities and shareholders’ equity
  $ 16,215     $ 14,385  
See notes to condensed consolidated financial statements.


 
4

 

HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
   
Six Months Ended
 
   
June 30
 
Millions of dollars
 
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 645     $ 1,097  
Adjustments to reconcile net income to net cash from operations:
               
Depreciation, depletion, and amortization
    439       342  
Payments of DOJ and SEC settlement and indemnity
    (322 )      
Provision for deferred income taxes, continuing operations
    153       155  
Other changes:
               
Receivables
    639       (410 )
Accounts payable
    (150 )     180  
Inventories
    (2 )     (277 )
Other
    (384 )     (102 )
Total cash flows from operating activities
    1,018       985  
Cash flows from investing activities:
               
Sales (purchases) of investments in marketable securities
    (1,518 )     388  
Capital expenditures
    (950 )     (837 )
Acquisitions of assets, net of cash acquired
    (14 )     (150 )
Other investing activities
    62       58  
Total cash flows from investing activities
    (2,420 )     (541 )
Cash flows from financing activities:
               
Proceeds from long-term borrowings, net of offering costs
    1,975        
Payments of dividends to shareholders
    (162 )     (158 )
Payments to reacquire common stock
    (11 )     (381 )
Other financing activities
    58       124  
Total cash flows from financing activities
    1,860       (415 )
Effect of exchange rate changes on cash
    (14 )     4  
Increase in cash and equivalents
    444       33  
Cash and equivalents at beginning of period
    1,124       1,847  
Cash and equivalents at end of period
  $ 1,568     $ 1,880  
Supplemental disclosure of cash flow information:
               
Cash payments during the period for:
               
Interest from continuing operations
  $ 91     $ 72  
Income taxes from continuing operations
  $ 344     $ 473  
See notes to condensed consolidated financial statements.


 
5

 

HALLIBURTON COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1.  Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X.  Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our 2008 Annual Report on Form 10-K.
Our accounting policies are in accordance with generally accepted accounting principles in the United States of America.  The preparation of financial statements in conformity with these accounting principles 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 revenue and expenses during the reporting period.
Ultimate results could differ from our estimates.
In our opinion, the condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position as of June 30, 2009, the results of our operations for the three and six months ended June 30, 2009 and 2008, and our cash flows for the six months ended June 30, 2009 and 2008.  Such adjustments are of a normal recurring nature.  The results of operations for the three and six months ended June 30, 2009 may not be indicative of results for the full year.
We have evaluated subsequent events through July 24, 2009, the date of issuance of the condensed consolidated financial statements.
In the first quarter of 2009, we reclassified certain services between our operating segments to re-establish a new service offering.  In addition, during the first six months of 2009, we adopted the provisions of new accounting standards.  See Notes 3, 8, and 11 for further information.  All prior periods presented have been restated to reflect these changes.

Note 2.  KBR Separation
During 2007, we completed the separation of KBR, Inc. (KBR) from us by exchanging KBR common stock owned by us for our common stock.  In addition, we recorded a liability reflecting the estimated fair value of the indemnities and guarantees provided to KBR as described below.  Since the separation, we have recorded adjustments to our liability for indemnities and guarantees to reflect changes to our estimation of our remaining obligation.  All such adjustments are recorded in “Loss from discontinued operations, net of income tax.”
We entered into various agreements relating to the separation of KBR, including, among others, a master separation agreement, a registration rights agreement, a tax sharing agreement, transition services agreements, and an employee matters agreement.  The master separation agreement provides for, among other things, KBR’s responsibility for liabilities related to its business and our responsibility for liabilities unrelated to KBR’s business.  We provide indemnification in favor of KBR under the master separation agreement for certain contingent liabilities, including our indemnification of KBR and any of its greater than 50%-owned subsidiaries as of November 20, 2006, the date of the master separation agreement, for:
 
-
fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of a claim made or assessed by a governmental authority in the United States, the United Kingdom, France, Nigeria, Switzerland, and/or Algeria, or a settlement thereof, related to alleged or actual violations occurring prior to November 20, 2006 of the United States Foreign Corrupt Practices Act (FCPA) or particular, analogous applicable foreign statutes, laws, rules, and regulations in connection with investigations pending as of that date, including with respect to the construction and subsequent expansion by a consortium of engineering firms comprised of Technip SA of France, Snamprogetti Netherlands B.V., JGC Corporation of Japan, and Kellogg Brown & Root LLC (TSKJ) of a natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria; and

 
6

 

 
-
all out-of-pocket cash costs and expenses, or cash settlements or cash arbitration awards in lieu thereof, KBR may incur after the effective date of the master separation agreement as a result of the replacement of the subsea flowline bolts installed in connection with the Barracuda-Caratinga project.
Additionally, we provide indemnities, performance guarantees, surety bond guarantees, and letter of credit guarantees that are currently in place in favor of KBR’s customers or lenders under project contracts, credit agreements, letters of credit, and other KBR credit instruments.  These indemnities and guarantees will continue until they expire at the earlier of:  (1) the termination of the underlying project contract or KBR obligations thereunder; (2) the expiration of the relevant credit support instrument in accordance with its terms or release of such instrument by the customer; or (3) the expiration of the credit agreements.  Further, KBR and we have agreed that, until December 31, 2009, we will issue additional guarantees, indemnification, and reimbursement commitments for KBR’s benefit in connection with:  (a) letters of credit necessary to comply with KBR’s Egypt Basic Industries Corporation ammonia plant contract, KBR’s Allenby & Connaught project, and all other KBR project contracts that were in place as of December 15, 2005; (b) surety bonds issued to support new task orders pursuant to the Allenby & Connaught project, two job order contracts for KBR’s Government and Infrastructure segment, and all other KBR project contracts that were in place as of December 15, 2005; and (c) performance guarantees in support of these contracts.  KBR is compensating us for these guarantees.  We have also provided a limited indemnity, with respect to FCPA and anti-trust governmental and third-party claims, to the lender parties under KBR’s revolving credit agreement expiring in December 2010.  KBR has agreed to indemnify us, other than for the FCPA and Barracuda-Caratinga bolts matter, if we are required to perform under any of the indemnities or guarantees related to KBR’s revolving credit agreement, letters of credit, surety bonds, or performance guarantees described above.
In February 2009, the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC) FCPA investigations were resolved.  The total of fines and disgorgement was $579 million, of which KBR consented to pay $20 million.  As of June 30, 2009, we had paid $322 million, consisting of $145 million as a result of the DOJ settlement and the indemnity we provided to KBR upon separation and $177 million as a result of the SEC settlement.  Our KBR indemnities and guarantees are primarily included in “Department of Justice (DOJ) and Securities and Exchange Commission (SEC) settlement and indemnity, current” and “Other liabilities” on the condensed consolidated balance sheets and totaled $309 million at June 30, 2009 and $631 million at December 31, 2008.  Excluding the remaining amounts necessary to resolve the DOJ and SEC investigations and under the indemnity we provided to KBR, our estimation of the remaining obligation for other indemnities and guarantees provided to KBR upon separation was $72 million at June 30, 2009.  See Note 7 for further discussion of the FCPA and Barracuda-Caratinga matters.
The tax sharing agreement provides for allocations of United States and certain other jurisdiction tax liabilities between us and KBR.

Note 3.  Business Segment and Geographic Information
We operate under two divisions, which form the basis for the two operating segments we report:  the Completion and Production segment and the Drilling and Evaluation segment.  In the first quarter of 2009, we moved a portion of our completion tools and services from the Completion and Production segment to the Drilling and Evaluation segment to re-establish our testing and subsea services offering, which resulted in a change to our operating segments.  Testing and subsea services provide acquisition and analysis of dynamic reservoir information and reservoir optimization solutions to the oil and gas industry utilizing downhole test tools, data acquisition services using telemetry and electronic memory recording, fluid sampling, surface well testing, subsea safety systems, and reservoir engineering services.  All periods presented reflect reclassifications related to the change in operating segments.
The following table presents information on our business segments.  “Corporate and other” includes expenses related to support functions and corporate executives.  Also included are certain gains and losses not attributable to a particular business segment.
Intersegment revenue was immaterial.  Our equity in earnings and losses of unconsolidated affiliates that are accounted for by the equity method are included in revenue and operating income of the applicable segment.


 
7

 


   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
Millions of dollars
 
2009
   
2008
   
2009
   
2008
 
Revenue:
                       
Completion and Production
  $ 1,752     $ 2,357     $ 3,780     $ 4,479  
Drilling and Evaluation
    1,742       2,130       3,621       4,037  
Total revenue
  $ 3,494     $ 4,487     $ 7,401     $ 8,516  
                                 
Operating income:
                               
Completion and Production
  $ 243     $ 537     $ 606     $ 1,041  
Drilling and Evaluation
    284       504       588       913  
Total operations
    527       1,041       1,194       1,954  
Corporate and other
    (51 )     (92 )     (102 )     (158 )
Total operating income
  $ 476     $ 949     $ 1,092     $ 1,796  
Interest expense
    (82 )     (42 )     (135 )     (84 )
Interest income
    3       9       5       29  
Other, net
    (14 )     (2 )     (19 )     (3 )
Income from continuing operations before
                               
income taxes and noncontrolling interest
  $ 383     $ 914     $ 943     $ 1,738  

Receivables
As of June 30, 2009, 24% of our gross trade receivables were from customers in the United States.  As of December 31, 2008, 34% of our gross trade receivables were from customers in the United States.

Note 4.  Inventories
Inventories are stated at the lower of cost or market.  In the United States, we manufacture certain finished products and have parts inventories for drill bits, completion products, bulk materials, and other tools that are recorded using the last-in, first-out method totaling $79 million at June 30, 2009 and $92 million at December 31, 2008.  If the average cost method was used, total inventories would have been $33 million higher than reported at June 30, 2009 and $31 million higher than reported at December 31, 2008.  The cost of the remaining inventory was recorded on the average cost method.  Inventories consisted of the following:

   
June 30,
   
December 31,
 
Millions of dollars
 
2009
   
2008
 
Finished products and parts
  $ 1,227     $ 1,312  
Raw materials and supplies
    568       446  
Work in process
    37       70  
Total
  $ 1,832     $ 1,828  

Finished products and parts are reported net of obsolescence reserves of $95 million at June 30, 2009 and $81 million at December 31, 2008.

Note 5.  Debt
Senior unsecured indebtedness
In the first quarter of 2009, we issued $1 billion aggregate principal amount of senior notes due September 2039 bearing interest at a fixed rate of 7.45% and $1 billion aggregate principal amount of senior notes due September 2019 bearing interest at a fixed rate of 6.15%.  We may redeem some of the notes of each series from time to time or all of the notes of each series at any time at the redemption prices, plus accrued and unpaid interest.  The notes are general, senior unsecured indebtedness and rank equally with all of our existing and future senior unsecured indebtedness.

 
8

 
Revolving credit facility
In March 2009, we terminated the $400 million unsecured, six-month revolving credit facility established in October 2008 to provide additional liquidity and for other general corporate purposes.

Note 6.  Shareholders’ Equity
The following tables summarize our shareholders’ equity activity.

               
Noncontrolling
 
   
Total
   
Company
   
interest in
 
   
shareholders’
   
shareholders’
   
consolidated
 
Millions of dollars
 
equity
   
equity
   
subsidiaries
 
Balance at December 31, 2008
  $ 7,744     $ 7,725     $ 19  
Transactions with shareholders
    80       81       (1 )
Comprehensive income:
                       
Net income
    645       640       5  
Other comprehensive income
    17       17        
Total comprehensive income
    662       657       5  
Dividends paid on common stock
    (162 )     (162 )      
Balance at June 30, 2009
  $ 8,324     $ 8,301     $ 23  

               
Noncontrolling
 
   
Total
   
Company
   
interest in
 
   
shareholders’
   
shareholders’
   
consolidated
 
Millions of dollars
 
equity
   
equity
   
subsidiaries
 
Balance at December 31, 2007
  $ 6,966     $ 6,873     $ 93  
Share repurchases
    (360 )     (360 )      
Other transactions with shareholders
    136       142       (6 )
Comprehensive income:
                       
Net income
    1,097       1,084       13  
Other comprehensive income
    4       4        
Total comprehensive income
    1,101       1,088       13  
Dividends paid on common stock
    (158 )     (158 )      
Balance at June 30, 2008
  $ 7,685     $ 7,585     $ 100  

The following table summarizes comprehensive income for the quarterly periods presented.

   
Three Months Ended
 
   
June 30
 
Millions of dollars
 
2009
   
2008
 
Net income
  $ 265     $ 510  
Other comprehensive income
    26       2  
Total comprehensive income
  $ 291     $ 512  
Comprehensive income attributable to noncontrolling interest
    3       6  
Comprehensive income attributable to company
    288       506  

Accumulated other comprehensive loss consisted of the following: