November
15, 2007
MEMORANDUM
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TO:
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Division
of Corporation Finance
United
States Securities and Exchange Commission
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FROM:
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Halliburton
Company
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RE:
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Halliburton
Company
Form
10-K for the Fiscal Year Ended December 31, 2006
Forms
10-Q for the Fiscal Quarters Ended March 31, 2007, June 30, 2007
and
September
30, 2007
File
No. 1-3492
Response
to SEC Staff Comments dated October 31,
2007
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We
are
responding to comments received from the staff of the Division of Corporation
Finance of the Securities and Exchange Commission (the “Commission”) by
letter dated October 31, 2007 regarding our filings referenced
above. Where applicable, our responses refer to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2006 (the “2006 Form
10-K”) or our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2007 (the “June 30, 2007 Form 10-Q”). For
your convenience, our responses are prefaced by the staff’s corresponding
comment in italicized text.
We
respectfully submit that, as our responses below indicate, we do not believe
that amendments to the 2006 Form 10-K or the June 30, 2007 Form 10-Q are
necessary or should be required in connection with the staff’s
comments. We will consider adjusting disclosures in future filings as
noted in this response letter when appropriate.
In
this
respect we note that, as a result of transactions in November 2006 and April
2007,1 our previously wholly owned
subsidiary KBR, Inc. (“KBR”) was reclassified to discontinued operations
in the condensed consolidated financial statements in our June 30, 2007 Form
10-Q and has been and will be reflected as such in all subsequent
filings. For accounting purposes, we ceased including KBR’s
operations in our results effective March 31, 2007. Subsequent to the
KBR separation, in the third quarter of 2007, we also realigned our remaining
products and services to be better aligned with the process of exploring for
and
producing from oil and natural gas wells. The resulting internal
reorganization led to a change in our reportable operating segments in that
period.
If
an
amendment to the 2006 Form 10-K were filed, we believe GAAP calls for the
restatement of the Halliburton financial statements for all periods presented
therein to address the reclassification of KBR as discontinued operations and
our new reportable segments, which would substantially change the presentation
and financial statements in such an amended Form 10-K compared to the 2006
Form
10-K filed on February 28, 2007 that the staff has reviewed. We
understand that the SEC staff unofficially may have a different point of
view. Regardless, given the significant changes in our business
profile during 2007 and the fact that the first, second and a majority of the
staff’s third comments below relate to a business that has been discontinued, we
believe amending the 2006 Form 10-K for these items would not be helpful to
our
current investors or other users of our financial statements.
Form
10-K for the Fiscal Year Ended December 31, 2006
General
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1.
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Please
file all material contracts as exhibits, including the LogCAP III
contract.
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Response: We
believe we have filed as exhibits all contracts required to be filed under
Item
601(b)(10) of Regulation S-K. That item requires registrants to file
as exhibits every contract not made in the ordinary course of business which
is
material to the registrant. Item 601(b)(10)(ii) instructs that, if
the contract is such as ordinarily accompanies the kind of business conducted
by
the registrant and its subsidiaries, it will be deemed to have been made in
the
ordinary course and need not be filed unless it falls within one of four
categories:
(1) contracts
with directors, officers, promoters, etc.;
(2) a
contract upon which the registrant’s business is substantially
dependent;
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(3)
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a
contract for the acquisition or sale of any property, plant or equipment
for consideration exceeding 15% of the fixed assets of the registrant
on a
consolidated basis; or
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(4) a
material lease.
The
LogCAP III contract was entered into in the ordinary course of business, and
we
believe it does not fall within one of the four categories of Item
601(b)(10)(ii) that would require an “ordinary course of business” contract to
be filed.
We
have
filed or incorporated by reference in the 2006 Form 10-K thirty-one (31)
documents that we believe are responsive to Item 601(b)(10) of Regulation S-K,
including material contracts not made in the ordinary course of business and
contracts or arrangements with executive officers and directors. We
believe we have complied with Item 601(b)(10) of Regulation S-K.
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2.
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Please
disclose in necessary detail the information that Item 101(c)(1)(ix)
of
Regulation S-K requires. In this regard, we note the statement
in Note 1 at page 77 that “[s]imilar to many cost-reimbursable contracts,
these government contracts are typically subject to audit and adjustment
by our customer.”
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Response: Item
101(c)(1)(ix) of Regulation S-K requires a “description of any material portion
of the business that may be subject to renegotiation of profits or termination
of contracts or subcontracts at the election of the Government.”
While
we
do not repeat all the discussions regarding these government contracts in the
“Business” section, we have substantial disclosure regarding termination,
forfeiture of profits, suspension of payments, fines, and suspensions or
debarment from doing business with the government in:
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•
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“Business
Environment and Results of Operations – KBR – Government and
Infrastructure segment” on pages 32-33 where we
discuss:
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§
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Specific
major contract awards
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§
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Duration
of the contracts
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§
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Expected
work completion dates
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•
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“Critical
Accounting Estimates – Accounting for Government Contracts” on pages 45-46
and Note 1 to the consolidated financial statements, “Revenue Recognition
– Accounting for Government Contracts” on page 77 where we discuss that
our U.S. Government contracts had an award fee revenue element which
is a
variable profit percentage and subject to the government’s
discretion.
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•
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“Forward
Looking Information and Risk Factors – Customers and Business –
Governmental and Capital Spending” on pages 61-62, where we discuss the
risk of a decline in governmental spending and outsourcing for military
and logistical support.
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•
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“Forward
Looking Information and Risk Factors – United States Government Contract
Work” on pages 52-55 and the entirety of Note 12 to the consolidated
financial statements on pages 96-99, which address in substantial
detail
the requirements of Item 101(c)(1)(ix) of Regulation
S-K.
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For
example, both on page 52 and in Note 12 to the consolidated financial
statements, we disclose the following with regard to United States government
contact work:
Given
the
demands of working in Iraq and elsewhere for the United States government,
we
expect that from time to time we will have disagreements or experience
performance issues with the various government customers for which we
work. If performance issues arise under any of our government
contracts, the government retains the right to pursue remedies which could
include threatened termination or termination, under any affected
contract. If any contract were so terminated, we may not receive
award fees under the affected contract, and our ability to secure future
contracts could be adversely affected, although we would receive payment for
amounts owed for our allowable costs under cost-reimbursable
contracts. Other remedies that could be sought by our government
customers for any improper activities or performance issues include sanctions
such as forfeiture of profits, suspension of payments, fines, and suspensions
or
debarment from doing business with the government. Further, the
negative publicity that could arise from disagreements with our customers or
sanctions as a result thereof could have an adverse effect on our reputation
in
the industry, reduce our ability to compete for new contracts, and may also
have
a material adverse effect on our business, financial condition, results of
operations, and cash flow.
In
addition, beginning on page 52 and also in Note 12 to the consolidated financial
statements, we disclose the following with regard to DCAA audit issues under
United States government contact work:
Our
operations under United States government contracts are regularly reviewed
and
audited by the Defense Contract Audit Agency (DCAA) and other governmental
agencies. The DCAA serves in an advisory role to our
customer. When issues are found during the governmental agency audit
process, these issues are typically discussed and reviewed with
us. The DCAA then issues an audit report with its recommendations to
our customer’s contracting officer. In the case of management systems
and other contract administrative issues, the contracting officer is generally
with the Defense Contract Management Agency (DCMA). We then work with
our customer to resolve the issues noted in the audit report. If our
customer or a government auditor finds that we improperly charged any costs
to a
contract, these costs are not reimbursable, or, if already reimbursed, the
costs
must be refunded to the customer.
We
also
disclose in Note 12 to the consolidated financial statements (with substantially
similar language under “Forward Looking Information and Risk Factors -- United
States Government Contract Work” beginning on page 52) that:
The
DCAA
is continuously performing audits of costs incurred for the foregoing and other
services provided by us under our government contracts. During these
audits, there have been questions raised by the DCAA about the reasonableness
or
allowability of certain costs or the quality or quantity of supporting
documentation. The DCAA might recommend withholding some portion of
the questioned costs while the issues are being resolved with our
customer. Because of the intense scrutiny involving our government
contracts operations, issues raised by the DCAA may be more difficult to
resolve. We do not believe any potential withholding will have a
significant or sustained impact on our liquidity.
In
addition, although we have not repeated the language in this response letter,
we
have additional detailed disclosure under either “Forward Looking Information
and Risk Factors -- United States Government Contract Work” beginning on page 52
of the 2006 Form 10-K or in Note 12 to the consolidated financial statements,
or
in both places, regarding specific services provided under the LogCAP III
contract (including security services, laundry services, containers, dining
services and other matters) and any issues with the government customer with
respect to billing, payment, cost reimbursement or documentation.
Given
the
extent of the disclosure in other sections of the 2006 Form 10-K addressing
the
descriptions referenced in Item 101(c)(1)(ix) of Regulation S-K, we respectfully
submit that amendment of the 2006 Form 10-K should not be required simply to
repeat the information in the “Business” section of the 2006 Form
10-K.
Consolidated
Financial Statements
Note
13, Other Commitments and Contingencies, page 99
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1.
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We
note your discussion of numerous legal and other contingencies here
and
within other footnotes to your financial statements. For
certain matters, you indicate that, as of December 31, 2006, you
have not
accrued any amounts regarding the matters, or that amounts accrued
are not
material. For these matters, your disclosure does not indicate
the estimated additional loss, or range of loss, that is reasonably
possible. A statement that a contingency is not expected to be
material does not satisfy the requirements of SFAS 5 if it is at
least a
reasonable possibility that a loss exceeding amounts already recognized
may have been incurred and the amount of that additional loss would
be
material. In that case, you must either disclose the estimated
additional loss, or range of loss, that is reasonably possible, or
state
that such an estimate cannot be
made.
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Response: We
have reviewed our disclosures for legal and other contingent matters in the
notes to our financial statements in light of your comment. It should
be noted that the decision to disclose a number of issues in the notes to the
consolidated financial statements was not driven by the requirements of SFAS
5. Instead, we disclosed these matters as a result or in anticipation
of the significant amount of media and/or other governmental agency attention
given to the issues. In some cases, we originally disclosed the
matter following prior SEC comments resulting from media articles. We
believe that most of these matters were not material from a SFAS 5 standpoint,
and we believed it remote that a material loss would be incurred with respect
to
these matters. Specifically, the following matters fall under this
category:
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Note
12
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DCAA
Audit Issues
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Investigations
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–
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DCMA
System Reviews
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–
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The
Balkans
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•
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Note
13
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–
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Possible
Algerian Investigation
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–
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Improper
Payments Reported to the SEC
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–
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Operations
in Iran
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–
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David
Hudak and International Hydrocut Technologies
Corp.
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–
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McBride
qui tam suit
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–
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Wilson
and Warren qui tam suit
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With
regard to the “Securities and related litigation” and the “M-I, LLC antitrust
litigation,” we had not accrued any amounts under the provisions of SFAS 5
because we did not believe that a loss was probable with respect to either
of
the matters. Further, we are unable to estimate a loss or range of
possible loss related to these matters. We will adjust future
disclosures to include a statement clarifying that it is not possible to
estimate the loss or range of possible loss for these two matters.
Form
10-Q for the Fiscal Quarter Ended June 30, 2007
Note
2, KBR, Inc. Separation, page 6
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2.
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You
have disclosed a $190 million reduction of the gain on the disposition
of
KBR, Inc. to reflect the estimated fair value of the disclosed indemnities
and guarantees. We note you were subject to some of these same
contingencies prior to the separation of KBR, Inc., for which you
have now
provided indemnifications. To assist us in understanding how
these items have been accounted for, please provide us with the following
information:
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•
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Explain
to us how these contingencies were accounted for in your financial
statements prior to the
separation;
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Reconcile,
and explain the reasons for, any differences in the amounts recorded
in
your financial statements relating to these contingencies prior to
the
separation with the $190 million liability recorded upon
separation;
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Tell
us whether the gain on the separation of KBR, Inc. includes accounting
for
the derecognition of these liabilities previously recorded in your
financial statements;
and,
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•
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How
this disclosure meets the requirements of Financial Accounting Standards
Board Interpretation
45.
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In
your response, discuss the material contingencies and indemnifications and
guarantees and their related amounts, both before and after the separation
of
KBR, Inc., on an individual basis.
Response: On
April 5, 2007, we completed the separation of KBR from
Halliburton. In connection with the separation, Halliburton entered
into various agreements with KBR governing issues ranging from tax sharing
to
transition services. A primary agreement related to the separation
was the Master Separation Agreement, which generally provides for, among other
things, KBR’s responsibility for liabilities related to its business and
Halliburton’s responsibility for liabilities unrelated to KBR’s
business. However, Halliburton did provide indemnification in favor
of KBR for certain aspects of KBR’s contingent liabilities related to its
Barracuda-Caratinga arbitration and the FCPA
investigations. Additionally, Halliburton agreed to continue to
provide certain limited credit support through performance, letter-of-credit
and
surety bond guarantees as defined in the Master Separation
Agreement. Each of these areas of indemnities and guarantees has been
fully described in the notes to our quarterly financial statements.
With
regard to the FCPA investigations, it has been difficult to objectively separate
between KBR and Halliburton the issues and contingent risks, since no
indictments, specific charges or other claims have been formally asserted
against either company. Prior to the KBR separation, our conclusion
had been that a loss for the combined company was probable of occurring, but
that it was impossible to reasonably estimate the range of that probable loss.
As a result, there were no previously recorded liabilities related to the FCPA
investigations to derecognize upon recording the gain related to the separation
of KBR from Halliburton.
Post-separation,
because KBR is no longer a subsidiary of Halliburton and we have agreed to
indemnify KBR for certain aspects of these matters, we have, by necessity,
analyzed Halliburton’s and KBR’s SFAS 5 exposure separately. Our
analysis concluded:
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As
to KBR, based upon the relevant facts and our discussions with legal
counsel and in accordance with SFAS 5, we believe that a loss
specifically related to KBR’s liability under the FCPA issues is
probable. Again, however, because nothing has been formally
asserted, it is currently impossible to reasonably estimate the specific
amount of loss or range of loss KBR would incur under the standards
of
SFAS 5.
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As
to Halliburton, based upon the relevant facts and our discussions
with
legal counsel and in accordance with SFAS 5, we believe that a loss
specifically related to Halliburton’s liability under FCPA matters is
possible, but not probable. Further, we are unable to estimate
a range of possible loss related to these matters as it relates to
Halliburton directly. Therefore, we have not accrued any
amounts related to this matter.
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Given
the
seriousness of the overall issue, the financial risk that could arise from
the
ongoing investigation and the possibility that the relative accountability
for
the issues between Halliburton and KBR could change, we have continued to
disclose the entirety of the facts of the FCPA investigation.
With
regard to the Barracuda-Caratinga arbitration, we did not believe prior to
the
KBR separation, nor do we believe today, that any loss by KBR is probable as
defined in SFAS 5, Accounting for
Contingencies. We do, however, believe a loss by KBR is
reasonably possible. Further, we believe no number in the range of
possible outcomes is better than any other. In accordance with
SFAS 5, as the range of possible loss is significant, we have consistently
disclosed the facts concerning the Barracuda-Caratinga arbitration in the notes
to our financial statements, including the range of possible loss from $0 to
$220 million. There were no previously recorded liabilities to
derecognize upon recording the gain related to the separation of KBR from
Halliburton.
FASB
Interpretation 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others (“FIN 45”) requires recognition of third party
indemnities at their inception. While not truly their “inception,”
practice also requires recognition of related party indemnities upon separation
of the intercompany relationship. As contrasted with a determination
under SFAS 5, indemnities are required to be recorded at their fair value
under FIN 45, which contemplates both the non-contingent “stand ready”
obligation to pay as well as the contingent obligation related to the amount
ultimately necessary to satisfy the related contingency. Therefore,
in accordance with FIN 45, we recorded an estimate of the fair
market value of these Halliburton indemnities and guarantees as of the date
of
KBR’s separation from Halliburton. The amounts were recorded as an
offset to the gain recognized by Halliburton on the disposition of KBR, and
included in Discontinued Operations. The amounts recorded under
FIN 45, by their nature, are not designed to address the requirements of
SFAS 5 and, as a result, a reconciliation is not possible.
The
amounts recorded by Halliburton for the FCPA and Barracuda-Caratinga indemnities
in favor of KBR were based upon an analysis of FTI Consulting, Inc., a third
party valuation expert, who was retained by Baker Botts LLP, our corporate
and
SEC counsel. The Halliburton guarantees of letters-of-credit,
sureties and contract performance are tracked by project and period, and we
completed a separate internal calculation for the fair value of the guarantees
and related receivable. We used the amounts being charged KBR for
these guarantees, since the rates being charged approximated market rates set
at
the time we entered into the Master Separation Agreement.
At
June
30, 2007, we recorded $205 million, after tax, under FIN 45 as the estimate
of the fair market value of the Halliburton indemnities and guarantees in favor
of KBR as of the date of KBR’s separation from Halliburton. The fair
value of the guarantees of letters of credit, sureties, and contract performance
was offset with a $15 million receivable from KBR for the
guarantees. The receivable amount was recorded as prescribed by
paragraph 11a of FIN 45.
In
addition, we addressed the disclosure requirements of paragraph 13 of
FIN 45 related to these indemnities and guarantees, as
follows:
13. Since
all of these indemnities and guarantees arose from our divestiture of KBR,
we
believe they are a group of similar “guarantees” and, therefore, we have
disclosed the aggregate net-of-tax liability of $190 million for these
indemnities. In addition, we believe that a further breakdown is not
meaningful since the overall indemnity amount of $190 million represents only
3%
of Halliburton’s total liabilities and is part of a $1.0 billion gain from the
divestiture of KBR.
13a.
For
the Barracuda-Caratinga indemnity, the FCPA matters indemnity, and the
guarantees of letters of credit and sureties, we have disclosed the relevant
facts as outlined above in the notes to our consolidated financial
statements.
13b.
For
the Barracuda-Caratinga indemnity, the maximum potential amount of $220 million
has been disclosed in the notes to our consolidated financial
statements. For the FCPA matter indemnity, the maximum potential
amount is indeterminable, but we have disclosed how the fines and penalties
could be calculated in the notes to our consolidated financial
statements. For the guarantees of letters of credit and sureties, we
have disclosed the actual amount guaranteed in the notes to our consolidated
financial statements.
13c.
The
separate footnote disclosure concerning the FCPA investigation and the
Barracuda-Caratinga arbitrations outline the SFAS 5 considerations
concerning these individual matters. Since no amounts have been
recorded under SFAS 5 related to these issues, we believe further
disclosure beyond the amount recorded for the overall indemnity is not
required.
13d.
There are no recourse provisions nor are any assets held in collateral;
therefore, we do not believe this requirement of FIN 45 is
applicable.
* * *
Halliburton
Company hereby acknowledges that (i) it is responsible for the adequacy and
accuracy of the disclosure in the filings referenced above, (ii) staff
comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to the filings; and
(iii) it may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws
of
the United States.
Please
contact Mark McCollum of Halliburton Company at (281) 575-4450 with any
questions or comments.
1
In November 2006,
KBR completed an initial public offering, in which it sold approximately
32
million shares of KBR common stock at $17.00 per share. On
April 5, 2007, we completed the separation of KBR from Halliburton by
exchanging the 135.6 million shares of KBR common stock owned by Halliburton
on
that date for 85.3 million shares of Halliburton common stock. As of
April 5, 2007, Halliburton ceased to own any interest in
KBR.