FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 1-3492
HALLIBURTON COMPANY
(a Delaware Corporation)
75-2677995
3600 Lincoln Plaza
500 N. Akard
Dallas, Texas 75201
Telephone Number - Area Code (214) 978-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $2.50 per share:
Outstanding at April 30, 2000 - 443,933,045
HALLIBURTON COMPANY
Index
Page No.
PART I. FINANCIAL INFORMATION
2
Item 1. Financial Statements
Quarterly Condensed Consolidated Financial Statements
- Statements of Income for the three months ended March 31, 2000 and 1999 2
- Balance Sheets at March 31, 2000 and December 31, 1999 3
- Statements of Cash Flows for the three months ended March 31, 2000 and 1999 4
- Notes to Financial Statements 5-13
1. Management representations 5
2. Receivables 5
3. Business segment information 5
4. Acquisitions and dispositions 6
5. Discontinued operations 7
6. Inventories 8
7. Dresser financial information 8
8. Commitments and contingencies 9
9. Income per share 11
10. Comprehensive income 12
11. Special charges 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19-20
PART II. OTHER INFORMATION
Item 6. Listing of Exhibits and Reports on Form 8-K 21-23
Signatures 24
Exhibits: - Halliburton Elective Deferral Plan
- Halliburton Executive Performance Plan
- Financial data schedules for the three months ended March
31, 2000 (included only in the copy of this report filed
electronically with the Commission)
- Restated financial data schedules for the three, six,
nine, and twelve months ended December 31, 1999 (included
only in the copy of this report filed electronically with
the Commission)
- Restated financial data schedules for the three, six,
nine, and twelve months ended December 31, 1998 (included
only in the copy of this report filed electronically with
the Commission)
- Restated financial data schedules for the twelve months
ended December 31, 1997 (included only in the copy of this
report filed electronically with the Commission)
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HALLIBURTON COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
(Millions of dollars and shares except per share data)
Three Months
Ended March 31
------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------
Revenues:
Services $ 2,476 $ 2,872
Sales 363 365
Equity in earnings of unconsolidated affiliates 20 24
- ------------------------------------------------------------------------------------------------
Total revenues $ 2,859 $ 3,261
- ------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 2,367 $ 2,761
Cost of sales 328 330
General and administrative 83 72
- ------------------------------------------------------------------------------------------------
Total operating costs and expenses 2,778 3,163
- ------------------------------------------------------------------------------------------------
Operating income 81 98
Interest expense (33) (35)
Interest income 7 31
Foreign currency losses, net (4) (1)
Other, net - 2
- ------------------------------------------------------------------------------------------------
Income from continuing operations before taxes, minority
interest, and change in accounting method 51 95
Provision for income taxes (20) (38)
Minority interest in net income of subsidiaries (4) (4)
- ------------------------------------------------------------------------------------------------
Income from continuing operations before accounting
change 27 53
- ------------------------------------------------------------------------------------------------
Discontinued operations:
Income from discontinued operations, net of tax of $14 and $21 22 28
Gain on disposal of discontinued operations, net of tax of $141 215 -
- ------------------------------------------------------------------------------------------------
Income from discontinued operations 237 28
- ------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method, net
of tax benefit of $11 - (19)
Net income $ 264 $ 62
- ------------------------------------------------------------------------------------------------
Basic income per share:
Income from continuing operations before change in
accounting method $ 0.06 $ 0.12
Income from discontinued operations 0.05 0.06
Gain on disposal of discontinued operations 0.49 -
Change in accounting method - (0.04)
- ------------------------------------------------------------------------------------------------
Net income $ 0.60 $ 0.14
- ------------------------------------------------------------------------------------------------
Diluted income per share:
Income from continuing operations before change in
accounting method $ 0.06 $ 0.12
Income from discontinued operations 0.05 0.06
Gain on disposal of discontinued operations 0.48 -
Change in accounting method - (0.04)
- ------------------------------------------------------------------------------------------------
Net income $ 0.59 $ 0.14
- ------------------------------------------------------------------------------------------------
Cash dividends per share $ 0.125 $ 0.125
Basic average common shares outstanding 442 440
Diluted average common shares outstanding 444 442
<FN>
See notes to quarterly financial statements.
</FN>
2
HALLIBURTON COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
(Millions of dollars and shares except per share data)
March 31 December 31
--------------- ---------------
2000 1999
- ---------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 369 $ 466
Receivables:
Notes and accounts receivable, net 2,589 2,349
Unbilled work on uncompleted contracts 711 625
- ---------------------------------------------------------------------------------------------------
Total receivables 3,300 2,974
Inventories 762 723
Current deferred income taxes 159 171
Net current assets of discontinued operations 210 793
Other current assets 202 235
- ---------------------------------------------------------------------------------------------------
Total current assets 5,002 5,362
Property, plant and equipment after accumulated
depreciation of $3,165 and $3,122 2,357 2,390
Equity in and advances to related companies 402 384
Net goodwill 638 505
Noncurrent deferred income taxes 374 398
Net noncurrent assets of discontinued operations 384 310
Other assets 323 290
- ---------------------------------------------------------------------------------------------------
Total assets $ 9,480 $ 9,639
- ---------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 230 $ 939
Current maturities of long-term debt 309 308
Accounts payable 736 665
Accrued employee compensation and benefits 189 137
Advanced billings on uncompleted contracts 227 286
Income taxes payable 268 120
Accrued special charges 52 69
Other current liabilities 570 509
- ---------------------------------------------------------------------------------------------------
Total current liabilities 2,581 3,033
Long-term debt 1,056 1,056
Employee compensation and benefits 658 672
Other liabilities 582 547
Minority interest in consolidated subsidiaries 41 44
- ---------------------------------------------------------------------------------------------------
Total liabilities 4,918 5,352
- ---------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 449 and 448 shares 1,124 1,120
Paid-in capital in excess of par value 133 68
Deferred compensation (51) (51)
Accumulated other comprehensive income (206) (204)
Retained earnings 3,662 3,453
- ---------------------------------------------------------------------------------------------------
4,662 4,386
Less 6 shares of treasury stock, at cost in both periods 100 99
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 4,562 4,287
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,480 $ 9,639
- ---------------------------------------------------------------------------------------------------
<FN>
See notes to quarterly financial statements.
</FN>
3
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Three Months
Ended March 31
------------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 264 $ 62
Adjustments to reconcile net income to net cash from operations:
Net income from discontinued operations (237) (28)
Depreciation, depletion and amortization 122 120
Provision for deferred income taxes 49 77
Change in accounting method, net - 19
Distributions from (advances to) related companies, net of
equity in (earnings) losses 43 10
Accrued special charges (17) (127)
Other non-cash items 5 17
Other changes, net of non-cash items:
Receivables and unbilled work (286) 240
Inventories (24) 29
Accounts payable (25) 57
Other working capital, net 91 (338)
Other, net (88) (27)
- ---------------------------------------------------------------------------------------------------
Total cash flows from operating activities (103) 111
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (79) (129)
Sales of property, plant and equipment 25 20
Dispositions (acquisitions) of businesses (14) 38
Other investing activities 1 (2)
- ---------------------------------------------------------------------------------------------------
Total cash flows from investing activities (67) (73)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term borrowings - (4)
Net borrowings (repayments) of short-term debt (708) 190
Payments of dividends to shareholders (55) (55)
Proceeds from exercises of stock options 18 14
Payments to re-acquire common stock (4) (3)
Other financing activities - 1
- ---------------------------------------------------------------------------------------------------
Total cash flows from financing activities (749) 143
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (2) (18)
Net cash flows from discontinued operations * 824 53
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (97) 216
Cash and cash equivalents at beginning of period 466 203
- ---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 369 $ 419
- ---------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash payments (refunds) during the period for:
Interest $ 23 $ 25
Income taxes $ (18) $ 20
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 90 $ -
Liabilities disposed of in dispositions of businesses $ 484 $ -
<FN>
* Net cash flows from discontinued operations includes proceeds from the sale of Dresser-Rand and Ingersoll-Dresser
Pump of approximately $914 million. See Note 5.
See notes to quarterly financial statements.
</FN>
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. In preparing financial
statements in conformity with generally accepted accounting principles we must
make estimates and assumptions that affect:
- the reported amounts of assets and liabilities,
- the 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 and 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 in conjunction with our
1999 Annual Report on Form 10-K. Prior year amounts have been reclassified to
conform to the current year presentation.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of March 31, 2000, and the results of our
operations for the three months ended March 31, 2000 and 1999 and our cash flows
for the three months then ended. The results of operations for the three months
ended March 31, 2000 and 1999 may not be indicative of results for the full
year.
Note 2. Receivables
Our receivables are generally not collateralized. With the exception of
claims and change orders which are in the process of being negotiated with
customers, unbilled work on uncompleted contracts generally represents work
currently billable, and this work is usually billed during normal billing
processes in the next month. These claims and change orders included in unbilled
receivables amounted to $98 million at March 31, 2000 and December 31, 1999.
These amounts are generally expected to be collected within one year.
Note 3. Business Segment Information
With the announcement that we intend to sell Dresser Equipment Group,
we now have two business segments. These segments are organized around the
products and services provided to the customers they serve. See the table below
for financial information on our business segments. The Dresser Equipment Group
segment is presented as discontinued operations and discussed in Note 5.
The Energy Services Group segment provides pressure pumping equipment
and services, logging and perforating, drilling systems and services, drilling
fluids systems, drill bits, specialized completion and production equipment and
services, well control, integrated solutions, and reservoir description. Also
included in the Energy Services Group are upstream oil and gas engineering,
construction and maintenance services, specialty pipe coating, insulation,
underwater engineering services, integrated exploration and production
information systems, and professional services to the petroleum industry. The
Energy Services Group has three business units: Halliburton Energy Services,
Brown & Root Energy Services and Landmark Graphics. The long-term performance
for these business units is linked to the long-term demand for oil and gas. The
products and services the group provides are designed to help discover, develop
and produce oil and gas. The customers for this segment are major oil companies,
national oil companies and independent oil and gas companies.
The Engineering and Construction Group segment provides engineering,
procurement, construction, project management, and facilities operation and
maintenance for hydrocarbon processing and other industrial and governmental
customers. The Engineering and Construction Group has two business units:
Kellogg Brown & Root and Brown & Root Services. Both business units are engaged
in the delivery of engineering and construction services.
Our equity in pretax income or losses of related companies is included
in revenues and operating income of the applicable segment. Intersegment
revenues included in the revenues of the other business segments are immaterial.
5
The table below presents revenues and operating income by segment.
Three Months
Ended March 31
-----------------------------
Millions of dollars 2000 1999
- -------------------------------------------------------------------------
Revenues:
Energy Services Group $ 1,723 $ 1,753
Engineering and Construction Group 1,136 1,508
- -------------------------------------------------------------------------
Total $ 2,859 $ 3,261
- -------------------------------------------------------------------------
Operating income:
Energy Services Group $ 62 $ 57
Engineering and Construction Group 36 58
General corporate (17) (17)
- -------------------------------------------------------------------------
Total $ 81 $ 98
- -------------------------------------------------------------------------
Note 4. Acquisitions and Dispositions
PES acquisition. In February 2000, our offer to acquire the remaining
74% of the shares of PES (International) Ltd. that we did not already own was
accepted by PES shareholders. 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. As further consideration we also issued
rights that will result in the issuance of between 850,000 to 2.1 million
additional shares of Halliburton common stock over the next 12 to 36 months. We
have preliminarily recorded, subject to the final valuation of intangible assets
and other costs, $115 million of goodwill which will be amortized over 20 years.
PES is part of the Energy Services Group.
Joint venture divestitures. In October 1999, we announced the sales of
our 49% interest in the Ingersoll-Dresser Pump joint venture and our 51%
interest in the Dresser-Rand joint venture to Ingersoll-Rand. The sales were
triggered by Ingersoll-Rand's exercise of its option under the joint venture
agreements to cause us to either buy their interests or sell ours. Both joint
ventures were part of the Dresser Equipment Group segment. In April 2000 we
announced plans to sell the remaining businesses within the Dresser Equipment
Group. See Note 5. Our Ingersoll-Dresser Pump interest was sold in December 1999
for approximately $515 million. We recorded a gain on disposition of
discontinued operations of $253 million before tax, or $159 million after-tax,
for a net gain of $0.36 per diluted share in 1999 for the sale of
Ingersoll-Dresser Pump. Proceeds from the sale, after payment of our
intercompany balance, were received in the form of a $377 million promissory
note with an annual interest rate of 3.5% due and collected on January 14, 2000.
On February 2, 2000 we completed the sale of our 51% interest in Dresser-Rand
for a price of approximately $579 million. Proceeds from the sale, net of
intercompany amounts payable to the joint venture, were $536 million, resulting
in a gain on disposition of discontinued operations of $352 million before tax,
or $215 million after-tax, for a net gain of $0.48 per diluted share in the
first quarter of 2000. The proceeds from these sales were used to reduce
short-term borrowings and for other general corporate purposes.
LWD divestiture. In March 1999, in connection with the Dresser merger,
we sold the majority of our pre-merger worldwide logging-while-drilling business
and a portion of the pre-merger measurement-while-drilling business. The sale
was in accordance with a consent decree with the United States Department of
Justice. The financial impact of the sale was reflected in the third quarter
1998 special charge. See Note 11. These businesses were previously part of the
Energy Services Group. We continue to provide separate logging-while-drilling
services through our Sperry-Sun Drilling Systems business line, which was
acquired as part of the merger with Dresser and is now part of the Energy
Services Group. In addition, we will continue to provide sonic
logging-while-drilling services using technologies we had before the merger with
Dresser.
6
Note 5. Discontinued Operations
On April 25, 2000 our Board of Directors approved plans to sell our
Dresser Equipment Group segment. The Dresser Equipment Group in 1999 was
comprised of six operating divisions and two joint ventures that manufacture and
market equipment used primarily in the energy, petrochemical, power and
transportation industries. In late 1999 we announced our intentions to sell, and
have subsequently sold, our interests in the two joint ventures within this
segment. These joint ventures represented nearly half of the group's revenues
and operating profit in 1999. See Note 4. Dresser DMD and Roots Divisions were
recently consolidated into one operating division. The remaining businesses
comprising the Dresser Equipment Group, all of which were obtained in the 1998
merger with Dresser, include:
- Dresser Valve Division - manufactures valves, actuators and
chemical injection pumps;
- Dresser DMD-Roots Division - manufactures rotary blowers for
industrial applications as well as rotary gas meters for natural
gas distribution;
- Dresser Instrument Division - manufactures pressure gauges,
thermometers, transducers, transmitters, pressure and temperature
switches, calibration equipment, recorders, and other instruments
for applications in the process, petrochemical, power generation,
pulp and paper, water resources, and general industry;
- Dresser Wayne Division - manufactures retail automation and fuel
dispensing systems; and
- Dresser Waukesha Division - manufactures natural gas engines and
engine generator sets.
The sale of our interests in the segment's joint ventures prompted a
strategic review of the remaining businesses within the Dresser Equipment Group
segment. As a result of this review, we have determined that these businesses do
not closely fit with our core businesses, long-term goals and strategic
objectives. We expect the sales of these businesses to be completed during the
fourth quarter of 2000 and the first quarter of 2001.
The financial results of the Dresser Equipment Group segment are
presented as discontinued operations in our financial statements. Prior periods
are restated to reflect this presentation.
Three Months
Ended March 31
------------------------------------
Millions of dollars 2000 1999
- --------------------------------------------------------------------
Revenues $ 337 $ 663
- --------------------------------------------------------------------
Operating income $ 36 $ 54
Other income and expense - (1)
Taxes (14) (21)
Minority interest - (4)
- --------------------------------------------------------------------
Net income $ 22 $ 28
- --------------------------------------------------------------------
Gain on disposal of discontinued operations in the first quarter of
2000 reflects the gain on the sale of Dresser-Rand in February 2000.
Three Months
Ended March 31
Millions of dollars 2000
- ----------------------------------------------------------------------
Proceeds from sale, less intercompany
settlement $ 536
Net assets disposed (180)
- ----------------------------------------------------------------------
Gain before taxes 356
Income taxes (141)
- ----------------------------------------------------------------------
Gain on disposal of discontinued operations $ 215
- ----------------------------------------------------------------------
7
Net assets of discontinued operations are comprised of the following
items:
March 31 December 31
---------------- ----------------
Millions of dollars 2000 1999
- ------------------------------------------------------------------------------
Receivables $ 263 $ 904
Inventories 239 515
Other current assets 18 34
Accounts payable (152) (267)
Other current liabilities (158) (393)
- ------------------------------------------------------------------------------
Net current assets of discontinued
operations $ 210 $ 793
- ------------------------------------------------------------------------------
Net property, plant and equipment $ 218 $ 401
Net goodwill 255 263
Other assets 52 74
Employee compensation and benefits (114) (313)
Other liabilities (27) (5)
Minority interest in consolidated
subsidiaries - (110)
- ------------------------------------------------------------------------------
Net noncurrent assets of discontinued
operations $ 384 $ 310
- ------------------------------------------------------------------------------
The decrease in revenues, net income, assets, and liabilities primarily
relate to the sales of Dresser-Rand and Ingersoll-Dresser Pump joint ventures.
See Note 4.
Note 6. Inventories
The cost of most United States manufacturing and field service
inventories is determined using the last-in, first-out (LIFO) method.
Inventories on the last-in, first-out method were $64 million at March 31, 2000
and $66 million at December 31, 1999. If the average cost method had been used
for these inventories, total inventories would have been about $35 million
higher than reported at both March 31, 2000 and December 31, 1999.
March 31 December 31
---------------- ----------------
Millions of dollars 2000 1999
- ---------------------------------------------------------------------
Finished products and parts $ 592 $ 619
Raw materials and supplies 118 79
Work in process 52 25
- ---------------------------------------------------------------------
Total $ 762 $ 723
- ---------------------------------------------------------------------
Note 7. Dresser Financial Information
Since becoming a wholly-owned subsidiary, Dresser Industries, Inc. has
ceased filing periodic reports with the Securities and Exchange Commission.
Dresser's 8% guaranteed senior notes, which were initially issued by Baroid
Corporation, remain outstanding and are fully and unconditionally guaranteed by
Halliburton. As long as these notes remain outstanding, summarized financial
information of Dresser will be presented in our periodic reports filed on Form
10-K and Form 10-Q. We have not presented separate financial statements and
other disclosures concerning Dresser because we determined that the information
is not material to the holders of these notes.
In January 1999, as part of a legal reorganization associated with the
merger, Halliburton Delaware, Inc., a first tier holding company subsidiary, was
merged into Dresser. The majority of our operating assets and activities are now
included within Dresser and its subsidiaries.
8
Dresser Industries, Inc. March 31 December 31
Financial Position ---------------- ---------------
Millions of dollars 2000 1999
- ----------------------------------------------------------------
Current assets $ 4,748 $ 5,011
Noncurrent assets 5,908 5,106
- ----------------------------------------------------------------
Total $ 10,656 $ 10,117
- ----------------------------------------------------------------
Current liabilities $ 2,369 $ 2,133
Noncurrent liabilities 1,606 1,633
Minority interest 42 45
Shareholders' equity 6,639 6,306
- ----------------------------------------------------------------
Total $ 10,656 $ 10,117
- ----------------------------------------------------------------
Three Months
Dresser Industries, Inc. Ended March 31
Operating Results -----------------------------------
Millions of dollars 2000 1999
- --------------------------------------------------------------------------------------------
Revenues $ 2,859 $ 3,261
- --------------------------------------------------------------------------------------------
Operating income $ 90 $ 103
- --------------------------------------------------------------------------------------------
Income from continuing operations before taxes,
minority interest, and change in accounting
method $ 59 $ 82
Income taxes (23) (34)
Minority interest (4) (4)
Discontinued operations, net 237 28
Change in accounting method, net - (19)
- --------------------------------------------------------------------------------------------
Net income $ 269 $ 53
- --------------------------------------------------------------------------------------------
Note 8. Commitments and Contingencies
Asbestosis litigation. Since 1976, our subsidiary, Dresser Industries,
Inc. and its former divisions or subsidiaries have been involved in litigation
resulting from allegations that third parties sustained injuries and damage from
the inhalation of asbestos fibers contained in some products manufactured by
Dresser, its former divisions or subsidiaries or by companies acquired by
Dresser.
Dresser has entered into agreements with insurance carriers which
cover, in whole or in part, indemnity payments, legal fees and expenses for
specific categories of claims. Dresser is in negotiation with insurance carriers
for coverage for the remaining categories of claims. Because these agreements
are governed by exposure dates, payment type and the product involved, the
covered amount varies by individual claim. In addition, lawsuits are pending
against several carriers seeking to recover additional amounts related to these
claims.
Our Engineering and Construction Group is also involved in litigation
resulting from allegations that third parties sustained injuries and damage from
the inhalation of asbestos fibers contained in some of the materials which in
the past were used in various construction and renovation projects where it is
alleged that our Brown & Root subsidiary, now named Kellogg Brown & Root, Inc.,
was involved. The insurance coverage for Kellogg Brown & Root for the periods in
issue was written by Highlands Insurance Company. Highlands was a subsidiary of
Halliburton prior to its spin-off to our shareholders in early 1996. Our
negotiations with Highlands concerning insurance coverage have failed to produce
an agreement on the amount of coverage for asbestos and defense costs. On April
5, 2000, Highlands filed suit in Delaware Chancery Court alleging that, as part
of the spin-off in 1996, Halliburton assumed liability for all claims filed
against Halliburton after the spin-off. Highlands also alleges that, Halliburton
did not adequately disclose to Highlands the existence of Halliburton's
subsidiaries' potential asbestos liability. We believe that Highland's Delaware
lawsuit is without merit and that Highlands is contractually obligated to
provide to us insurance coverage for the asbestos claims filed against Kellogg
Brown & Root. We intend to assert our right to the insurance coverage
vigorously. On April 24, 2000, Halliburton filed suit against Highlands in
Harris County, Texas, alleging that Highlands has breached its contractual
obligation to provide insurance coverage. We have asked the Harris County Court
to order that Highlands is obligated to provide coverage for asbestos claims
pursuant to guaranteed cost policies issued by Highlands to our Kellogg Brown &
Root subsidiary prior to the spin-off.
9
Since 1976, approximately 252,550 claims have been filed against
various current and former divisions and subsidiaries. Most of these claims
relate to Dresser and its former divisions or subsidiaries. Approximately
146,000 of these claims have been settled or disposed of at gross cost of
approximately $105 million with insurance carriers responsible for all but
approximately $26 million. Claims continue to be filed, with about 15,250 new
claims filed in the first quarter of 2000. We have established a reserve
estimating our liability for known asbestos claims. Our estimate is based on our
historical litigation experience, settlements and expected recoveries from
insurance carriers. Our expected insurance recoveries are based on agreements
with carriers or, where agreements are still under negotiation or litigation,
our estimate of recoveries. We believe that the insurance carriers will be able
to meet their share of future obligations under the agreements. At March 31,
2000, there were about 106,550 open claims, including 9,000 for which
settlements are pending. This number of claims compares with 107,650 open claims
at the end of 1999. The accrued liabilities for these claims and corresponding
receivables from carriers were as follows:
March 31 December 31
---------------- ----------------
Millions of dollars 2000 1999
- ---------------------------------------------------------------------------------
Accrued liability $ 88 $ 80
Receivables from insurance companies 63 55
- ---------------------------------------------------------------------------------
Net asbestos liability $ 25 $ 25
- ---------------------------------------------------------------------------------
We recognize the uncertainties of litigation and the possibility that a
series of adverse court rulings or new legislation affecting the claims
settlement process could materially impact the expected resolution of asbestos
related claims. However, based upon:
- our historical experience with similar claims;
- the time elapsed since Dresser and its former divisions or
subsidiaries discontinued sale of products containing asbestos;
- the time elapsed since Kellogg Brown & Root used asbestos in any
construction process; and
- our understanding of the facts and circumstances that gave rise to
asbestos claims,
we believe that the pending asbestos claims will be resolved without material
effect on our financial position or results of operations.
Dispute with Global Industrial Technologies, Inc. Under an agreement
entered into at the time of the spin-off of Global Industrial Technologies,
Inc., formerly INDRESCO, Inc., from Dresser Industries, Inc., Global assumed
liability for all asbestos related claims filed against Dresser after July 31,
1992 relating to refractory products manufactured or marketed by the former
Harbison-Walker Refractories division of Dresser. Those business operations were
transferred to Global in the spin-off. These asbestos claims are subject to
agreements with Dresser insurance carriers that cover expense and indemnity
payments. However, the insurance coverage is incomplete and Global has to date
paid the uncovered portion of those asbestos claims with its own funds.
Global now disputes that it assumed liability for any of these asbestos
claims which were based upon Dresser's negligence, the acts of Harbison-Walker
prior to its merger with Dresser in 1967, or punitive damages.
In order to resolve this dispute, Global invoked the dispute resolution
provisions of the 1992 agreement, which require binding arbitration. Global has
not claimed a specific amount of damages. We expect that Global's claim for
reimbursement will be in excess of $40 million. In addition, Global is seeking
relief from responsibility for pending claims based upon Dresser's negligence,
the pre-1967 acts of Harbison-Walker, punitive damages, and for all similar
future claims. On February 25, 2000, the arbitrator ruled that Global did assume
responsibility for claims based on Dresser's negligence and for punitive
damages. The arbitrator did not decide whether Global also assumed
responsibility for the pre-1967 acts of Harbison-Walker, but reserved his
decision pending further proceedings, although no timetable was set for those
proceedings.
In 1999 Dresser brought suit against Global to enjoin it from suing
Dresser's insurance carrier, Continental Insurance Company, for specific
asbestos claims. Although a Texas court in Dallas entered a temporary
injunction, a Texas appellate court reversed that decision and the matter
remains pending before the trial court. Since then, in late 1999, Global sued
Continental in federal court in Pennsylvania seeking coverage under Dresser
insurance policies for claims we believe are covered by the pending arbitration.
Dresser was not named in the lawsuit, and Continental has responded to Global by
moving to dismiss that lawsuit because Dresser was not included. We believe that
the issues involving Continental should be resolved in the pending arbitration.
We believe that all of Global's claims and assertions are without merit and we
intend to vigorously defend against them.
10
Environmental. We are subject to numerous environmental legal and
regulatory requirements related to our operations worldwide. As a result of
those obligations, we are involved in specific environmental litigation and
claims, the clean-up of properties we own or have operated, and efforts to meet
or correct compliance-related matters.
Some of our subsidiaries and former operating entities are involved as
a potentially responsible party or PRP in remedial activities to clean-up
several "Superfund" sites under federal law and comparable state laws. Kellogg
Brown & Root, Inc., one of our subsidiaries, is one of nine PRPs named at the
Tri-State Mining District "Superfund" Site, which is also known as the Jasper
County "Superfund" Site. The site contains lead and zinc mine tailings produced
from mining activities that occurred from the 1800s through the mid-1950s in the
southwestern portion of Missouri. The PRPs have agreed to perform a Remedial
Investigation/Feasibility study at this site. Kellogg Brown & Root's share of
the cost of this study is not expected to be material. In addition to the
"Superfund" issues, the State of Missouri has indicated that it may pursue
natural resource damage claims against the PRPs. At present, Kellogg Brown &
Root cannot determine the extent of its liability, if any, for remediation costs
or natural resource damages.
We take a proactive approach in evaluating and addressing the
environmental impact of sites where we are operating or have maintained
operations. As a result we incur costs each year assessing and remediating
contaminated properties to avoid future liabilities, complying with legal and
regulatory requirements, and responding to claims by third parties.
Finally, we incur costs related to compliance with ever-changing
environmental legal and regulatory requirements in the jurisdictions where we
operate. It is very difficult to quantify the potential liabilities. Except for
our potential liability at the Jasper County "Superfund" site, we do not expect
these expenditures to have a material adverse effect on our consolidated
financial position or our results of operations.
Our accrued liabilities for environmental matters were $32 million as
of March 31, 2000 and $30 million as of December 31, 1999.
Other. We are a party to various other legal proceedings. However, we
believe any liabilities which may arise from these proceedings will not be
material to our consolidated financial position and results of operations.
Note 9. Income Per Share
Basic income per share amounts are based on the weighted average number
of common shares outstanding during the period. Diluted income per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. Excluded from the
computation of diluted income per share are options to purchase 7 million shares
in 2000 and 4 million shares in 1999 which were outstanding during the three
months ended March 31, 2000 and March 31, 1999, respectively. These options were
excluded because the option exercise price was greater than the average market
price of the common shares. Also excluded from the computation are rights we
issued in connection with the PES acquisition for between 850,000 to 1.2 million
shares of Halliburton common stock. These rights will result in additional
shares of common stock to be issued over the next 12 to 36 months. See Note 4.
Three Months
Ended March 31
Millions of dollars and shares except ------------------------------------
per share data 2000 1999
- ----------------------------------------------------------------------------------------
Income from continuing operations before
change in accounting method $ 27 $ 53
- ----------------------------------------------------------------------------------------
Basic weighted average shares 442 440
Effect of common stock equivalents 2 2
- ----------------------------------------------------------------------------------------
Diluted weighted average shares 444 442
- ----------------------------------------------------------------------------------------
Income per common share from continuing
operations before change in accounting
method:
Basic $ 0.06 $ 0.12
- ----------------------------------------------------------------------------------------
Diluted $ 0.06 $ 0.12
- ----------------------------------------------------------------------------------------
In addition, fully diluted income per share from discontinued
operations was $0.05 for the first three months ended March 31, 2000.
11
Note 10. Comprehensive Income
The cumulative translation adjustment of some of our foreign entities
and minimum pension liability adjustments are the only components of other
comprehensive income adjustments to net income.
Three Months
Ended March 31
-----------------------------------
Millions of dollars 2000 1999
- -------------------------------------------------------------------------------------
Net income $ 264 $ 62
Cumulative translation adjustment, net of tax (21) (24)
Current quarter adjustment to minimum
pension liability - (7)
- -------------------------------------------------------------------------------------
Total comprehensive income $ 243 $ 31
- -------------------------------------------------------------------------------------
Accumulated other comprehensive income at March 31, 2000 and December
31, 1999 consisted of the following:
March 31 December 31
--------------- ----------------
Millions of dollars 2000 1999
- -----------------------------------------------------------------------------------------
Cumulative translation adjustment $ (194) $ (185)
Minimum pension liability (12) (19)
- -----------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (206) $ (204)
- -----------------------------------------------------------------------------------------
Note 11. Special Charges
During the third and fourth quarters of 1998, we incurred special
charges totaling $980 million to provide for costs associated with the merger
with Dresser and with the industry downturn resulting from declining oil and gas
prices. During the second quarter of 1999, we reversed $47 million of the 1998
charges based on the most recent assessment of total costs to be incurred to
complete the actions covered in our special charges. These charges were
reflected in the following captions of the condensed consolidated statements of
income (special charges related to Dresser Equipment Group are presented in the
captions for discontinued operations):
Twelve Months
Ended December 31
----------------------
Millions of dollars 1998
- ------------------------------------------------------
Cost of services $ 68
Cost of sales 16
Special charges and credits 875
Discontinued operations 21
- ------------------------------------------------------
Total $ 980
- ------------------------------------------------------
The table below includes the components of the pretax special charges
and the amounts utilized and adjusted through March 31, 2000.
Asset Facility Merger
Related Personnel Consolidation Transaction Other
Millions of dollars Charges Charges Charges Charges Charges Total
- ------------------------------------------------------------------------------------------------------------------
1998 Charges to Expense by
Business Segment:
Energy Services Group $ 453 $ 157 $ 93 $ - $ 18 $ 721
Engineering & Construction Group 8 19 8 - 5 40
Discontinued operations 18 1 2 - - 21
General corporate 30 58 23 64 23 198
- ------------------------------------------------------------------------------------------------------------------
Total 509 235 126 64 46 980
Utilized and adjusted (509) (226) (93) (64) (19) (911)
- ------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 - 9 33 - 27 69
Utilized in 2000 - (8) (7) - (2) (17)
- ------------------------------------------------------------------------------------------------------------------
Balance March 31, 2000 $ - $ 1 $ 26 $ - $ 25 $ 52
- ------------------------------------------------------------------------------------------------------------------
12
Personnel charges include severance and related costs incurred for
announced employee reductions of 10,850 affecting all business segments,
corporate and shared service functions. Personnel charges also include personnel
costs related to change of control. In June 1999, management revised the planned
employee reductions to 10,100 due in large part to higher than anticipated
voluntary employee resignations. As of March 31, 2000, terminations of
employees, consultants and contract personnel related to the 1998 special charge
have been substantially completed. The remaining severance payments will occur
as affected projects are completed and facilities are closed.
Through March 31, 2000, we have vacated 94%, and sold or returned to
the owner 78%, of the service and administrative facilities related to the 1998
special charge. The majority of the sold, returned or vacated properties are
located in North America and have been eliminated from the Energy Services
Group. The remaining expenditures will be made as the remaining properties are
vacated and sold.
Other charges include the estimated contract exit costs associated with
the elimination of duplicate agents and suppliers in various countries
throughout the world. Through March 31, 2000, we have utilized $21 million other
special charge costs. The balance will be utilized during 2000, in connection
with our renegotiations of agency agreements, supplier and other duplicate
contracts.
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:
- what factors impact our business;
- why our earnings and expenses for the first quarter of 2000 differ
from the first quarter of 1999;
- what our capital expenditures were;
- what factors impacted our cash flows; and
- other items that materially affect our financial condition or
earnings.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking statements. Forward-looking statements
involve risks and uncertainties that may impact our actual results of
operations. Statements in this Form 10-Q and elsewhere, which are
forward-looking and which provide other than historical information, involve
those risks and uncertainties. Our forward-looking information reflects our best
judgement based on current information. From time to time we may also provide
oral or written forward-looking statements in other materials we release to the
public. We draw your attention that actual future results and/or events may
differ from any or all of our forward-looking statements in this report and in
any other materials we release to the public. Our forward-looking statements
involve a number of risks and uncertainties. In addition, our forward-looking
statements can be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties. There can be no assurance that other factors
will not affect the accuracy of our forward-looking information. As a result, no
forward-looking statement can be guaranteed. Actual results may vary materially.
While it is not possible to identify all factors, we continue to face
many risks and uncertainties that could cause actual results to differ from our
forward-looking statements including:
Geopolitical and legal.
- trade restrictions and economic embargoes imposed by the United
States and other countries;
- unsettled political conditions, war, civil unrest, currency
controls and governmental actions in the numerous countries in
which we operate;
- operations in countries with significant amounts of political risk,
for example, Nigeria, Angola, Russia, Libya, and Algeria;
- changes in foreign exchange rates;
- changes in governmental regulations in the numerous countries in
which we operate including, for example, regulations that:
- encourage or mandate the hiring of local contractors; and
- require foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction;
- litigation, including, for example, asbestosis litigation and
environmental litigation; and
- environmental laws, including those that require emission
performance standards for new and existing facilities;
13
Weather related.
- the effects of severe weather conditions, including hurricanes and
tornadoes, on operations and facilities;
- the impact of prolonged mild weather conditions on the demand for
and price of oil and natural gas;
Customers and vendors.
- the magnitude of governmental spending for military and logistical
support of the type that we provide;
- 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;
- changes in capital spending by customers in the wood pulp and
paper industries for plants and equipment;
- consolidation of customers in the oil and gas industry;
- claim negotiations with engineering and construction customers on
cost variances and change orders on major projects;
- computer software, hardware and other equipment utilizing computer
technology used by governmental entities, service providers,
vendors, customers and Halliburton Company may not be compatible;
Industry.
- technological and structural changes in the industries that we
serve;
- changes in the price of oil and natural gas, including;
- OPEC's ability to set and maintain production levels and prices
for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration for and
production and development of their oil and natural gas
reserves; and
- the level of demand for oil and natural gas;
- changes in the price of commodity chemicals that we use;
- risks that result from entering into fixed fee engineering,
procurement and construction projects of the types that we provide
where failure to meet schedules, cost estimates or performance
targets could result in non-reimbursable costs which cause the
project not to meet our expected profit margins;
- the risk inherent in the use of derivative instruments of the sort
that we use which could cause a change in value of the derivative
instruments as a result of:
- adverse movements in foreign exchange rates, interest rates, or
commodity prices, or
- the value and time period of the derivative being different
than the exposures or cash flows being hedged;
Personnel and mergers/dispositions.
- increased competition in the hiring and retention of employees in
specific areas, for example, energy services operations,
accounting and treasury;
- disposition of the assets of discontinued operations;
- replacing discontinued lines of businesses with acquisitions that
add value and complement our core businesses;
- integration of acquired businesses, including Dresser Industries,
Inc. and its subsidiaries, 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.
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. We do advise you to review any additional
disclosures we make in our 10-Q, 8-K and 10-K reports to the Securities and
Exchange Commission. We also suggest that you listen to our quarterly earnings
release conference calls with financial analysts. You may find information on
how to access those calls at our web site www.halliburton.com.
14
BUSINESS ENVIRONMENT
With the announcement that we intend to sell the Dresser Equipment
Group, our business is organized around two business segments:
- Energy Services Group and
- Engineering and Construction Group.
The majority of our revenues are derived from the sale of services and
products, including construction activities, to the oil and gas industry. We
conduct business in over 120 countries to provide a variety of services,
equipment, maintenance, and engineering and construction to energy, industrial
and governmental customers. We offer a comprehensive range of integrated and
discrete services and products as well as project management for oil and natural
gas activities throughout the world. These services and products are used in the
earliest phases of exploration and development of oil and gas reserves and
continue through the refining, processing and distribution process. The
industries we serve are highly competitive and we have many substantial
competitors. Unsettled political conditions, expropriation or other governmental
actions, exchange controls and currency devaluations may result in increased
business risk in some countries in which we operate. Those countries include,
among others, Nigeria, Angola, Russia, Libya, and Algeria. However, we believe
the geographic diversification of our business activities helps to reduce the
risk that loss of business in any one country would be material to our
consolidated results of operations.
Energy Services Group.
During the first quarter of 2000, our oilfield services and products
business experienced continued increases in activity that began during the
latter half of 1999 within selected geographic areas, primarily North America,
and selected product service lines. The increased activity reflects the
increases in oil and gas rig counts which began increasing after oil and gas
prices began to rise in the last half of 1999. Activity picked up primarily in
the United States where we traditionally see recovery first.
International rig counts have been slow to recover as our customers
continued to take a wait-and-see approach to expanding capital spending and
developing their year 2000 budgets. Accordingly, our international results
during the latter half of 1999 and into the first quarter of 2000 continued to
lag the recovery noted in North America. Many international projects are large,
complex field developments with long lead times, particularly deepwater projects
in areas like West Africa and Latin America. Our customers have been reluctant
to start new projects of this type until they have confidence of sustained oil
prices that will provide the returns required to justify investments in these
projects. We are encouraged that oil prices have remained at levels that we
believe will allow our customers to begin many of these large, capital-intensive
projects that have been delayed during the past year. Large, capital-intensive
projects provide opportunities for integrated products and services by the
business units within our Energy Services Group segment and can contribute to an
upturn in our international business. While we expect activity levels in the
United States to continue to improve during the year, we do not expect to see
any significant increase in international activity until the second half of the
year. We also do not anticipate many large field development projects to be
approved and awarded by our customers until the latter half of the year.
Merger activity amongst our customers has resulted in their postponing
major projects and purchases of integrated exploration and production
information systems.
Engineering and Construction Group.
Most of the factors that adversely affected the Energy Services Group
during 1999 and into 2000 also affected the Engineering and Construction Group.
Just as we have seen reluctance by our customers to start large,
capital-intensive projects within the Energy Services Group, we have seen
similar delays in large downstream engineering and construction projects by our
oil and gas industry customers within our Engineering and Construction Group.
Customers of the group are more reluctant to start large capital projects,
including refineries and petrochemical plants, during periods of uncertain oil
prices. In addition, many customers continue to rationalize their requirements
following mergers within the industry. However, since the group's large projects
for customers tend to have long completion periods and complex financing
arrangements, customers seldom stop projects in progress in response to sudden
shifts of oil prices. The comparative declines in the group's revenues reflect
the delays in the timing of new projects while we continue to work on projects
already in backlog. As in the Energy Services Group, we do not anticipate many
major projects to be approved and awarded by our customers until the latter half
of the year.
We continue to believe that continued economic improvement in Asia
Pacific and continued strengthening of the general global economy will provide
long-term growth opportunities for the Engineering and Construction Group. The
group also sees improving opportunities to provide support services to the
United States military, to other United States agencies, and to government
15
agencies of other countries, including the United Kingdom. The demand for these
services is expected to grow as governments at all levels seek to control costs
and improve services by outsourcing various functions.
Discontinued Operations.
Our financial statements now reflect Dresser Equipment Group as
discontinued operations and we have restated prior periods for this
presentation. See Note 5.
Dresser Equipment Group's business is primarily affected by the demand
from customers in the energy, power, chemical, and transportation industries for
its products and services. Sales and earnings are also affected by changes in
competitive prices and overall general economic conditions, fluctuations in
capital spending by our customers, and the stability of oil and gas prices that
ultimately produce cash flow for our customers. Declines in capital spending and
mergers and consolidations by our customers all contributed to a decline in
revenues for the group as orders and projects were delayed during 1999 and into
the first quarter of 2000. Because of the impact of these economic conditions,
during 1999 the group took additional steps to reduce manufacturing and overhead
costs in order to improve operating performance and remain a low cost provider.
The benefits of these cost reduction efforts began to materialize during the
fourth quarter of 1999 and into the first quarter of 2000, as the group was able
to improve operating margins on lower revenues, particularly within the Valve
division.
Although its business environment is highly competitive, strong demand
exists for Dresser Equipment Group's products and services. An increase in
demand in 2000 will depend on many of the same factors affecting our other
businesses. While we believe Dresser Equipment Group's businesses have
significant potential to strategic buyers, the businesses do not fit with our
current strategic objectives. We intend to invest the proceeds from the sales of
these businesses in our core energy services and construction businesses where
we feel we can have the greatest effect on our returns and in repurchases of our
common stock.
Halliburton Company.
While the results of operations have been negatively impacted by the
lower activity levels in the oil and gas industry, we believe the long-term
fundamentals of the oil and gas industry remain sound. Steadily rising
population and greater industrialization efforts should continue to propel
worldwide economic expansion, especially in developing nations. These factors
should cause increasing demand for oil and gas to produce refined products,
petrochemicals, fertilizers and power.
RESULTS OF OPERATIONS IN 2000 COMPARED TO 1999
First Quarter of 2000 Compared with the First Quarter of 1999
First Quarter
REVENUES --------------------------------- Increase
Millions of dollars 2000 1999 (decrease)
- ----------------------------------------------------------------------------------------------
Energy Services Group $ 1,723 $ 1,753 $ (30)
Engineering and Construction Group 1,136 1,508 (372)
- ----------------------------------------------------------------------------------------------
Total revenues $ 2,859 $ 3,261 $ (402)
- ----------------------------------------------------------------------------------------------
Consolidated revenues in the first quarter of 2000 of $2.9 billion
decreased 12% compared to the first quarter of 1999. International revenues were
66% of total revenues for the first quarter of 2000 and 71% in the first quarter
of 1999.
Energy Services Group revenues decreased 2% compared to the first
quarter of 1999. International revenues were 68% of total revenues in the first
quarter of 2000 compared to 72% in the same quarter of the prior year. These
percentages reflect the segment's reliance on the recovery in international rig
counts and activity to complement the increased activity experienced in the
United States and North America during the first quarter of 2000. Pressure
pumping and logging services revenue increased due to higher rig counts and
increased remedial activities in the United States. Increased revenues from
North America were offset by declines in all other international regions,
negatively impacting revenues for all other oilfield services product lines.
Lower levels of international activity, primarily offshore activities in the
North Sea, led to reduced revenues in our upstream oil and gas engineering and
construction business. Increased revenues from projects in Latin America,
particularly Mexico, where work progress on several large engineering,
procurement and construction projects helped minimize the reductions in other
geographic areas. Revenues from integrated exploration and production
information systems increased 10% compared to the prior year first quarter
primarily due to higher software sales.
16
Engineering and Construction Group revenues were 25% lower in the first
quarter of 2000 compared to the first quarter of 1999. The decrease in revenues
was primarily due to the timing of projects. About 63% of the group's revenues
were from international activities compared to 70% in the prior year quarter.
Lower activity levels and delayed timing of major gas and liquefied natural gas
projects were partially offset by higher activities for the logistics support
services to military peacekeeping efforts in the Balkans which peaked in the
fourth quarter of 1999 as the main construction and procurement phases of the
contract were completed. This project moved into a support and maintenance phase
during the first quarter of 2000.
First Quarter
OPERATING INCOME --------------------------------- Increase
Millions of dollars 2000 1999 (decrease)
- ----------------------------------------------------------------------------------------------
Energy Services Group $ 62 $ 57 $ 5
Engineering and Construction Group 36 58 (22)
General corporate (17) (17) -
- ----------------------------------------------------------------------------------------------
Total operating income $ 81 $ 98 $ (17)
- ----------------------------------------------------------------------------------------------
Consolidated operating income of $81 million was 17% lower in the first
quarter of 2000 compared to the first quarter of 1999.
Energy Services Group operating income for the first quarter of 2000
increased 9% over the first quarter of 1999. Strong North American profit growth
resulted from increased activity and firming of prices in the United States for
pressure pumping. Logging services and drilling fluids also had improved income.
Operating income also benefited from the combination of higher activity levels
and lower cost structure as a result of our various restructuring efforts since
September 1998. Operating income from upstream oil and gas engineering and
construction projects for the quarter was unchanged compared to the prior year
quarter. Income on several large projects in Latin America and Algeria partially
offset lower offshore operations' operating income which reflected lower
activity levels, particularly in Europe and Asia Pacific. Low utilization of
vessels and manufacturing capacity also negatively impacted results from
upstream oil and gas engineering and construction work. Operating income from
integrated exploration and production information systems was $3 million
compared to breakeven in the prior year quarter due to higher software sales.
Engineering and Construction Group operating income for the first
quarter of 2000 was 38% lower than the first quarter of 1999 in line with lower
activity levels and delayed timing of major gas and liquefied natural gas
projects. New project awards in the latter half of 1999 will primarily benefit
operating income in the latter part of 2000. Operating income from the logistics
support contract in the Balkans, which peaked in the fourth quarter of 1999, was
higher in 2000 than in the first quarter of 1999 in line with increased
activity.
General corporate expenses for the quarter was unchanged from the prior
year first quarter.
NONOPERATING ITEMS
Interest expense of $33 million for the first quarter of 2000 decreased
$2 million compared to the first quarter of 1999.
Interest income was $7 million in the first quarter of 2000, a
significant decrease from the prior year's interest income of $31 million. The
1999 amounts included interest income from tax refunds and imputed interest on
the note receivable from the sale of M-I L.L.C.
Foreign exchange losses, net were $4 million in the current year
quarter compared to $1 million in the prior year first quarter.
Provision for income taxes of $20 million resulted in an effective tax
rate of 39.2%, down slightly from the first quarter of 1999 rate of 40.0%.
Income from continuing operations was $27 million in the first quarter
of 1999 compared to $53 million in the prior year quarter.
Income from discontinued operations of $22 million in 2000 and $28
million in 1999 reflects the operations of Dresser Equipment Group. See Note 5.
The 1999 results include Dresser-Rand which was sold in early February 2000 and
our equity in earnings from Ingersoll-Dresser Pump which was sold in late
December 1999. See Note 4. These joint ventures represented nearly half of the
group's revenues and operating profit in 1999. As a result of a strategic review
triggered by the dispositions of our joint venture interests in Dresser-Rand and
Ingersoll-Dresser Pump, we decided to sell the remaining businesses comprising
the Dresser Equipment Group. Excluding the results of Dresser-Rand and
Ingersoll-Dresser Pump, revenues from discontinued operations were down 4%
compared to the prior year first quarter while operating income increased 7%.
The increase in operating income despite lower revenues reflects the benefits of
restructuring activities in 1999, particularly within the Valve division.
17
Gain on disposal of discontinued operations of $215 million after-tax
or $0.48 per diluted share in 2000 resulted from the sale of our 51% interest in
Dresser-Rand to Ingersoll-Rand. See Note 5.
Cumulative effect of change in accounting method, net of $19 million
after-tax, or $0.04 per diluted share, in 1999 reflects our adoption of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
Estimated annual expense under Statement of Position 98-5 after recording the
cumulative effect of the change is not expected to be materially different from
amounts expensed under the prior accounting treatment.
Net income for the first quarter of 2000 was $264 million or $0.59 per
diluted share. The prior year's net income was $62 million or $0.14 per diluted
share.
LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2000 with cash and equivalents of $369
million, a decrease of $97 million from the end of 1999.
Operating activities. Cash flows used for operating activities of
continuing operations were $103 million in the first three months of 2000
compared to providing $111 million in the first three months of the prior year.
Special charges for personnel reductions, facility closures and integration
costs used $17 million of cash in the first three months of 2000 and $113
million of cash in the first three months of the prior year. Working capital
items, which include receivables, inventories, accounts payable and other
working capital, net, used $244 million of cash in the first three months of
2000 compared to $12 million in the same period of the prior year. Increased
business activity levels required increased working capital in 2000 compared to
1999.
Investing activities. Cash flows used for investing activities of
continuing operations were $67 million in the first three months of 2000 and $73
million in 1999. Capital expenditures in the first three months of 2000 were
approximately $50 million lower than in the same period of the prior year.
Although reduced, we feel our level of capital spending is appropriate.
Financing activities. Cash flows used for financing activities of
continuing operations were $749 million in the first three months of 2000. In
the same period of the prior year financing activities provided $143 million. We
used the proceeds from the sales of Dresser-Rand and Ingersoll-Dresser Pump for
net repayments of $708 million of our short-term notes. We paid dividends of $55
million to our shareholders in the first three months of both 2000 and 1999.
Discontinued operations. Net cash flows from discontinued operations
provided $824 million in the first three months of 2000 and $53 million in the
first three months of 1999. Amounts for the first three months of 2000 include
proceeds from the sales of Dresser-Rand and Ingersoll-Dresser Pump of
approximately $914 million.
Capital resources. We believe we have sufficient resources from
internally generated funds and access to capital markets to fund our working
capital requirements and investing activities. Our combined short-term notes
payable and long-term debt was 26% of total capitalization at March 31, 2000
compared to 35% at December 31, 1999.
SUBSEQUENT EVENT
On April 25, 2000 our Board of Directors approved plans to sell our
Dresser Equipment Group segment and implement a share repurchase program for up
to 44 million shares, or about 10% of our outstanding common stock.
The sale of Dresser Equipment Group's remaining businesses are not
expected to close until the fourth quarter of 2000 or first quarter of 2001.
Proceeds from the planned sales of these businesses will be used for a
combination of acquisitions supporting core activities and for internal
investment opportunities. Because we cannot predict the timing of future
acquisitions to replace the earnings from Dresser Equipment Group, we feel the
implementation of a share repurchase program is timely and is an appropriate
means of utilizing our strong and liquid balance sheet in the interim. The share
repurchases will be effected from time-to-time through open market purchases or
privately negotiated transactions. The plan gives management full discretion for
its implementation and has no expiration date.
RESTRUCTURING ACTIVITIES
During the third and fourth quarters of 1998, we incurred special
charges totaling $980 million related to the Dresser merger and industry
downturn. During the second quarter of 1999, we reversed $47 million of our 1998
special charges based on our reassessment of total costs to be incurred to
complete the actions covered in the charges.
18
Most restructuring activities accrued for in the 1998 special charges
were completed and expended by the end of 1999. The amounts that remain to be
expended relate to severance payments not yet disbursed, sales of facilities to
be disposed of, and any other actions which may require negotiations with
outside parties. Cumulative through March 31, 2000, we used $345 million in cash
for items associated with the 1998 special charges. The unutilized special
charge reserve balance at March 31, 2000 is expected to result in cash outlays
of $52 million during the remainder of year 2000.
YEAR 2000 ISSUE
In prior years, we discussed in detail our enterprise-wide Year 2000
(Y2K) program which was implemented to identify, assess and address significant
Y2K issues. At December 31, 1999, we assessed our Y2K issue tasks as being
substantially complete. The work performed under our Y2K program was focused on
risk identification and mitigation, most likely worst case analyses, and
business continuity plans involving significant systems and relationships with
third parties. The cumulative amount spent on our Y2K program was $44 million.
Based on our experience through the filing date of this report, we
believe:
- our Y2K liability to third parties is not material to our business,
results of operations or financial condition;
- our future Y2K expenditures will not be material to our business,
results of operations or financial condition; and
- that further Y2K reporting is not merited.
However, it is possible that the full impact of the Y2K issue has not
been fully recognized. For example, it is possible that Y2K or similar issues
including leap-year related problems may occur with billing, payroll, or
financial closings as of month, quarter or year-end. We believe that these
problems are likely to be minor and correctable. In addition, our business could
still be negatively affected if our customers or suppliers are adversely
affected by Y2K or similar issues.
Forward-looking statements relating to the Year 2000. Our discussion
related to the Y2K issue is based on our best assumptions and estimates as of
the filing date of this report. Assumptions and estimates, which are not
necessarily all of the assumptions and estimates, include:
- assessments as to which systems are significant;
- identification of potential failures related to Y2K issues;
- assessments of the risk of our relationships with third
parties; and
- implementation of our business continuity plans.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory
requirements related to our operations worldwide. As a result of those
obligations, we are involved in specific environmental litigation and claims,
the clean-up of properties we own or have operated, and efforts to meet or
correct compliance-related matters. Except as noted in Note 8 to the condensed
consolidated financial statements related to one site, none of these
expenditures is expected by our management to have a material adverse effect on
our results of operations.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." This standard requires entities to
recognize all derivatives on the statement of financial position as assets or
liabilities and to measure the instruments at fair value. Accounting for gains
and losses from changes in those fair values are specified in the standard
depending on the intended use of the derivative and other criteria. Statement of
Financial Accounting Standards No. 133 is effective for us beginning January 1,
2001. We are currently evaluating Statement of Financial Accounting Standards
No. 133 to identify implementation and compliance methods, and we have not yet
determined the effect, if any, on our results of operations or financial
position.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and, on occasion, from commodity prices. We currently use
derivative instruments only in hedging our foreign currency exposures. To
19
mitigate market risk, we selectively hedge our foreign currency exposure through
the use of currency derivative instruments. The objective of our hedging is to
protect our cash flows related to sales or purchases of goods or services from
fluctuations in currency rates. The use of derivative instruments includes the
following types of market risk:
- volatility of the currency rates;
- time horizon of the derivative instruments;
- market cycles; and
- the type of derivative instruments used.
We do not use derivative instruments for trading purposes.
We use a statistical model to estimate the potential loss related to
derivative instruments used to hedge the market risk of our foreign exchange
exposure. The model utilizes historical price and volatility patterns to
estimate the change in value of the derivative instruments. Changes in value
could occur from adverse movements in foreign exchange rates for a specified
time period at a specified confidence interval. The model is a calculation based
on the diversified variance-covariance statistical modeling technique and
includes all foreign exchange derivative instruments outstanding at March 31,
2000. The resulting value-at-risk of $1 million estimates, with a 95% confidence
interval, the potential loss we could incur in a one-day period from foreign
exchange derivative instruments due to adverse foreign exchange rate changes.
Our interest rate exposures at March 31, 2000 were not materially
changed from December 31, 1999.
20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 10.1 Halliburton Elective Deferral Plan as amended and restated
effective January 1, 2000.
* 10.2 Halliburton Executive Performance Plan effective January 1,
2000.
* 27.1 Financial data schedules for the three months ended March 31,
2000.
* 27.2 Restated financial data schedules for the three, six, nine, and
twelve months ended December 31, 1999.
* 27.3 Restated financial data schedules for the three, six, nine, and
twelve months ended December 31, 1998.
* 27.4 Restated financial data schedules for the twelve months ended
December 31, 1997.
* Filed with this Form 10-Q
(b) Reports on Form 8-K
During the first quarter of 2000:
Date Filed Date of Earliest Event Description of Event
- --------------------------- ------------------------ ----------------------------------------------------------
January 4, 2000 December 30, 1999 Item 5. Other Events for a press release announcing
subsidiary Dresser Industries, Inc. has completed the
sale of its 49% joint venture interest in
Ingersoll-Dresser Pump Company to a subsidiary of its
joint venture partner, Ingersoll-Rand Company. Also the
sale of Dresser Industries, Inc.'s 51% joint venture
interest in Dresser-Rand to Ingersoll-Rand is ready
pending a remaining clearance from competition
regulatory authorities in Argentina.
January 6, 2000 January 4, 2000 Item 5. Other Events for a press release announcing that
Brown & Root Energy Services has been selected by TM
Power Ventures L.L.C., a joint venture between TECO
Power Services Corporation and Mosbacher Power
Partners. Brown & Root Energy Services will provide
engineering, construction and procurement services for a
312-megawatt electric generating facility on the
Delmarva Peninsula in Accomack County, Virginia.
January 28, 2000 January 23, 2000 Item 5. Other Events for a press release announcing that
a Kellogg Brown & Root consortium has been awarded a
United States $1.5 billion lump sum contract by Malaysia
LNG TIGA Sdn. Bhd. Kellogg Brown & Root will execute a
major expansion of the liquefied natural gas (LNG)
complex in Bintulu, Sarawak.
February 1, 2000 January 27,2000 Item 5. Other Events for a press release announcing 1999
fourth quarter earnings.
21
Date Filed Date of Earliest Event Description of Event
- --------------------------- ------------------------ ----------------------------------------------------------
February 8, 2000 January 25, 2000 Item 5. Other Events for a press release announcing that
Halliburton SubSea, a division of Brown & Root Energy
Services, has entered into an agreement with Chevron USA
Production Company's Gulf of Mexico Deepwater Business
Unit. SubSea will provide remotely operated vehicle
(ROV) services in support of deepwater drilling
operations involving the drillship Transocean
"Discoverer Deep Seas," at a contract value of
approximately $10 million.
February 8, 2000 January 27, 2000 Item 5. Other Events for a press release announcing that
an advanced stage conclusion has been reached with
Barracuda and Caratinga Development Corporation (BCDC)
for the development of both the Barracuda and the
Caratinga offshore fields in Brazil. The agreement has
resulted in a satisfactory price for BCDC and an agreed
execution plan and delivery schedule. Subject to the
completion of financing for the project, final
negotiations are scheduled to be complete in late
February. The contract, valued at more than $2.5
billion, is anticipated to be signed in late March with
both Brown & Root Energy Services and Halliburton Energy
Services business units carrying out the performance of
the contract.
February 8, 2000 February 1, 2000 Item 5. Other Events for a press release announcing that
Chief Executive Officer, Richard B. Cheney, will succeed
retiring Chairman William "Bill" Bradford, and will
continue in his current position as Chief Executive
Officer.
February 8, 2000 February 2, 2000 Item 5. Other Events for a press release announcing that
subsidiary Dresser Industries, Inc. has completed the
sale of its 51% joint venture interest in Dresser-Rand
Company (DR) to a subsidiary of its joint venture
partner, Ingersoll-Rand Company, for a price of $579
million.
February 18, 2000 February 16, 2000 Item 5. Other Events for a press release announcing our
offer to acquire the approximately 74% of PES
(International) Ltd. shares that we did not already own
was accepted by PES shareholders.
February 18, 2000 February 17, 2000 Item 5. Other Events for a press release announcing the
first quarter 2000 dividend.
March 30, 2000 March 27, 2000 Item 5. Other Events for a press release announcing that
Halliburton Company and McMoRan Exploration Co. have
formed a strategic alliance to conduct operations for
McMoRan's recently announced major new oil and gas
exploration program in the Gulf of Mexico to develop 160
blocks of the Gulf of Mexico shelf.
22
Date Filed Date of Earliest Event Description of Event
- --------------------------- ------------------------ ----------------------------------------------------------
April 3, 2000 March 31, 2000 Item 5. Other Events for a press release announcing
Halliburton's new management leadership assignments for
the Energy Services Group, its Halliburton Energy
Services and Brown & Root Energy Services business units
and the Brown & Root Services business unit.
During the second quarter of 2000:
April 12, 2000 April 10, 2000 Item 5. Other Events for a press release announcing the
intention to form a joint venture with Science Applications
International Corporation to provide web-based portals for
exploration and production professionals.
April 13, 2000 April 12, 2000 Item 5. Other Events for a press release announcing the
intention to form a joint venture with Shell
International Exploration and Production B.V. to develop
and market Halliburton's SmartWell(TM)technology and
Shell's iWell(TM)technology.
April 21, 2000 April 17, 2000 Item 5. Other Events for a press release announcing that
Brown & Root Energy Services has been selected by Shell
Petroleum Development Company of Nigeria Limited (SPDC)
to work on the development of the first major offshore
oil and gas facility for SPDC in Nigeria.
May 1, 2000 April 26, 2000 Item 5. Other Events for a press release announcing 2000
first quarter earnings and approval of plans to sell
Dresser Equipment Group and implement a share repurchase
program.
May 5, 2000 May 2, 2000 Item 5. Other Events for a press release announcing
that Halliburton Energy Services' initial trials of its
new technology, the Anaconda Advanced Well Construction
System, have been successfully completed.
23
SIGNATURES
As required by the Securities Exchange Act of 1934, the registrant has
authorized this report to be signed on behalf of the registrant by the
undersigned authorized individuals.
HALLIBURTON COMPANY
Date: May 12, 2000 By: /s/ Gary V. Morris
-------------------- -------------------------------
Gary V. Morris
Executive Vice President and
Chief Financial Officer
/s/ R. Charles Muchmore, Jr.
-------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller and
Principal Accounting Officer
24
Index to exhibits filed with this quarterly report.
Exhibit
Number Description
- --------- -------------------------------------
10.1 Halliburton Elective deferral Plan as amended and restated
effective January 1, 2000.
10.2 Halliburton Executive Performance Plan effective January 1, 2000.
27.1 Financial data schedules for the three months ended March 31,
2000.
27.2 Restated financial data schedules for the three, six, nine, and
twelve months ended December 31, 1999.
27.3 Restated financial data schedules for the three, six, nine, and
twelve months ended December 31, 1998.
27.4 Restated financial data schedules for the twelve months ended
December 31, 1997.