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, 2001
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, 2001 - 429,054,000
HALLIBURTON COMPANY
Index
Page No.
-----------
PART I. FINANCIAL INFORMATION 2-23
Item 1. Financial Statements 2-4
o Condensed Consolidated Statements of Income 2
o Condensed Consolidated Balance Sheets 3
o Condensed Consolidated Statements of Cash Flows 4
o Notes to Quarterly Financial Statements 5-17
1. Management Representations 5
2. Business Segment Information 5-6
3. Acquisitions and Dispositions 6
4. Discontinued Operations 7
5. Receivables 8
6. Inventories 8
7. Commitments and Contingencies 8-11
8. Income Per Share 11
9. Comprehensive Income 11-12
10. Engineering and Construction Reorganization 12
11. Dresser Financial Information 12-16
12. Accounting Change 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION 24-25
Item 6. Listing of Exhibits and Reports on Form 8-K 24-25
Signatures 26
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
-----------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------
Revenues:
Services $ 2,643 $ 2,476
Sales 483 363
Equity in earnings of unconsolidated affiliates 18 20
- ----------------------------------------------------------------------------------------------------
Total revenues 3,144 2,859
- ----------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 2,433 $ 2,367
Cost of sales 422 328
General and administrative 91 83
- ----------------------------------------------------------------------------------------------------
Total operating costs and expenses 2,946 2,778
- ----------------------------------------------------------------------------------------------------
Operating income 198 81
Interest expense (47) (33)
Interest income 4 7
Foreign currency losses, net (3) (4)
- ----------------------------------------------------------------------------------------------------
Income from continuing operations before taxes, minority
interest, and accounting change 152 51
Provision for income taxes (61) (20)
Minority interest in net income of subsidiaries (5) (4)
- ----------------------------------------------------------------------------------------------------
Income from continuing operations before accounting change 86 27
- ----------------------------------------------------------------------------------------------------
Discontinued operations:
Income from discontinued operations, net of tax of $15 and $14 22 22
Gain on disposal of discontinued operations, net of tax of $141 - 215
- ----------------------------------------------------------------------------------------------------
Income from discontinued operations 22 237
- ----------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net 1 -
- ----------------------------------------------------------------------------------------------------
Net income $ 109 $ 264
====================================================================================================
Basic income per share:
Income from continuing operations before accounting change $ 0.20 $ 0.06
Income from discontinued operations 0.05 0.05
Gain on disposal of discontinued operations - 0.49
- ----------------------------------------------------------------------------------------------------
Net income $ 0.25 $ 0.60
====================================================================================================
Diluted income per share:
Income from continuing operations before accounting change $ 0.20 $ 0.06
Income from discontinued operations 0.05 0.05
Gain on disposal of discontinued operations - 0.48
- ----------------------------------------------------------------------------------------------------
Net income $ 0.25 $ 0.59
====================================================================================================
Cash dividends per share $ 0.125 $ 0.125
Basic average common shares outstanding 426 442
Diluted average common shares outstanding 430 444
<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
--------------- ---------------
2001 2000
- ---------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 278 $ 231
Receivables:
Notes and accounts receivable, net 3,034 3,029
Unbilled work on uncompleted contracts 789 816
- ---------------------------------------------------------------------------------------------------
Total receivables 3,823 3,845
Inventories 821 723
Current deferred income taxes 227 235
Net current assets of discontinued operations 333 298
Other current assets 238 236
- ---------------------------------------------------------------------------------------------------
Total current assets 5,720 5,568
Property, plant and equipment after accumulated
depreciation of $3,178 and $3,150 2,415 2,410
Equity in and advances to related companies 417 400
Goodwill, net 740 597
Noncurrent deferred income taxes 335 340
Net noncurrent assets of discontinued operations 393 391
Other assets 398 397
- ---------------------------------------------------------------------------------------------------
Total assets $ 10,418 $ 10,103
===================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 1,840 $ 1,570
Current maturities of long-term debt 8 8
Accounts payable 737 782
Accrued employee compensation and benefits 251 267
Advanced billings on uncompleted contracts 377 288
Deferred revenues 115 98
Income taxes payable 110 113
Other current liabilities 607 700
- ---------------------------------------------------------------------------------------------------
Total current liabilities 4,045 3,826
Long-term debt 1,040 1,049
Employee compensation and benefits 624 662
Other liabilities 661 600
Minority interest in consolidated subsidiaries 42 38
- ---------------------------------------------------------------------------------------------------
Total liabilities 6,412 6,175
- ---------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 454 and 453 shares 1,136 1,132
Paid-in capital in excess of par value 318 259
Deferred compensation (78) (63)
Accumulated other comprehensive income (332) (288)
Retained earnings 3,788 3,733
- ---------------------------------------------------------------------------------------------------
4,832 4,773
Less 25 and 26 shares of treasury stock, at cost 826 845
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 4,006 3,928
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,418 $ 10,103
===================================================================================================
<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
------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 109 $ 264
Adjustments to reconcile net income to net cash from operations:
Income from discontinued operations (22) (237)
Depreciation, depletion and amortization 134 122
Provision for deferred income taxes 13 49
Distributions from (advances to) related companies, net of
equity in (earnings) losses (17) 43
Accounting change (1) -
Accrued special charges - (17)
Other non-cash items 19 5
Other changes, net of non-cash items:
Receivables and unbilled work 2 (286)
Inventories (99) (24)
Accounts payable (31) (25)
Other working capital, net 38 91
Other operating activities 21 (88)
- ---------------------------------------------------------------------------------------------------
Total cash flows from operating activities 166 (103)
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (145) (79)
Sales of property, plant and equipment 21 25
Dispositions (acquisitions) of businesses, net (174) (14)
Other investing activities (2) 1
- ---------------------------------------------------------------------------------------------------
Total cash flows from investing activities (300) (67)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term borrowings (9) -
Borrowings (repayments) of short-term debt, net 269 (708)
Payments of dividends to shareholders (54) (55)
Proceeds from exercises of stock options 19 18
Payments to reacquire common stock (4) (4)
Other financing activities (2) -
- ---------------------------------------------------------------------------------------------------
Total cash flows from financing activities 219 (749)
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (14) (2)
Net cash flows from discontinued operations (24) 824
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 47 (97)
Cash and cash equivalents at beginning of period 231 466
- ---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 278 $ 369
===================================================================================================
Supplemental disclosure of cash flow information:
Cash payments (refunds) during the period for:
Interest $ 61 $ 23
Income taxes $ 58 $ (18)
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 14 $ 90
Liabilities disposed of in dispositions of businesses $ - $ 484
<FN>
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. Preparation of financial
statements in conformity with generally accepted accounting principles requires
us to make estimates and assumptions that affect:
o the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements; and
o the reported amounts of revenues and expenses during the reporting
period.
Ultimate results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and applicable rules of
Regulation S-X. Accordingly, these financial statements do not include all
information or footnotes required by generally accepted accounting principles
for complete financial statements and should be read together with our 2000
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, 2001, the results of our
operations for the three months ended March 31, 2001 and 2000 and our cash flows
for the three months then ended. The results of operations for the three months
ended March 31, 2001 and 2000 may not be indicative of results for the full
year.
Note 2. Business Segment Information
We have two business segments - Energy Services Group and Engineering
and Construction Group. Dresser Equipment Group is presented as discontinued
operations resulting from the decision of the Board of Directors to sell Dresser
Equipment Group. See Note 4. Our segments are organized around the products and
services provided to our customers. During the fourth quarter of 2000, we
announced restructuring plans to combine all engineering, construction,
fabrication and project management operations into one company, Kellogg Brown &
Root, reporting as our Engineering and Construction Group. This restructuring
resulted in some activities moving from the Energy Services Group to the
Engineering and Construction Group, effective January 1, 2001. Prior periods
have been restated for this change.
The following table presents revenues and operating income by business
segment on a comparable basis.
Three Months
Ended March 31
-----------------------------
Millions of dollars 2001 2000
- -------------------------------------------------------------------------
Revenues:
Energy Services Group $ 2,031 $ 1,423
Engineering and Construction Group 1,113 1,436
- -------------------------------------------------------------------------
Total $ 3,144 $ 2,859
=========================================================================
Operating income:
Energy Services Group $ 200 $ 49
Engineering and Construction Group 18 49
General corporate (20) (17)
- -------------------------------------------------------------------------
Total $ 198 $ 81
=========================================================================
5
Energy Services Group. The Energy Services Group provides a wide range
of discrete services and products and integrated solutions to customers for the
exploration, development, and production of oil and gas. The customers for this
segment are major, national and independent oil and gas companies. This segment
consists of:
o Halliburton Energy Services provides oilfield services and
products including discrete products and services and integrated
solutions for oil and gas exploration, development and production
throughout the world. Products and services include pressure
pumping equipment and services, logging and perforating, drilling
systems and services, drilling fluids systems, drill bits,
specialized completion and production equipment and services, well
control, integrated solutions, and reservoir description,
o Landmark Graphics provides integrated exploration and production
software information systems and professional services to the
petroleum industry, and
o Other product service lines provide construction, installation and
servicing of subsea facilities; flexible pipe for offshore
applications; pipeline services for offshore customers;
pipecoating services; feasibility, conceptual and front-end
engineering and design, detailed engineering, procurement,
construction site management, commissioning, startup and
debottlenecking of both onshore and offshore facilities; and large
integrated engineering, procurement, and construction projects
containing both surface and sub-surface components.
Engineering and Construction Group. The Engineering and Construction
Group provides engineering, procurement, construction, project management, and
facilities operation and maintenance for oil and gas and other industrial and
governmental customers. The Engineering and Construction Group, operating as
Kellogg Brown & Root, includes the following five product lines:
o Onshore operations comprises engineering and construction
activities, including liquefied natural gas, ammonia, crude oil
refineries, and natural gas plants,
o Offshore operations includes specialty offshore deepwater
engineering and marine technology and worldwide fabrication
capabilities,
o Government operations provides operations, maintenance and
logistics activities for government facilities and installations,
o Operations and maintenance provides services for private sector
customers, primarily industrial, hydrocarbon and commercial
applications, and
o Asia Pacific operations, based in Australia, provides civil
engineering and consulting services.
Note 3. Acquisitions and Dispositions
Magic Earth acquisition. In April 2001 we signed a definitive agreement
to acquire Magic Earth, Inc., a leading 3-D visualization and interpretation
technology company with broad applications in the area of data mining. Once the
transaction is completed, Magic Earth will become a wholly owned subsidiary and
a part of the Energy Services Group. Under the agreement, Halliburton will issue
stock valued at $100 million to acquire Magic Earth. The agreement is subject to
various regulatory and other approvals.
PGS Data Management acquisition. In March 2001 Landmark Graphics
acquired the PGS Data Management division of Petroleum Geo-Services ASA (PGS)
for $175 million, subject to a final working capital adjustment. Terms of the
agreement also include a contract where Landmark will provide strategic data
management and distribution services to PGS for three years. We have
preliminarily recorded goodwill of $155 million to be amortized over 15 years,
subject to the final valuation of intangible assets and other costs.
PES acquisition. In February 2000 we acquired the remaining 74% of the
shares of PES (International) Limited that we did not already own. PES is based
in Aberdeen, Scotland, and has developed technology that complements Halliburton
Energy Services' real-time reservoir solutions. To acquire the remaining 74% of
PES, we issued 1.2 million shares of Halliburton common stock. We also issued
rights that will result in the issuance of up to 2.1 million additional shares
of Halliburton common stock between February 2001 and February 2003. In February
2001 we issued 1.0 million shares under the rights leaving 1.1 million shares to
be issued. We recorded $115 million of goodwill to be amortized over 20 years.
6
Note 4. Discontinued Operations
In 1999 the Dresser Equipment Group 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 and early 2000 we 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. 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
determined that these remaining businesses did not closely fit with our core
businesses, long-term goals and strategic objectives. In April 2000 our Board of
Directors approved plans to sell all the remaining businesses within the Dresser
Equipment Group segment. In January 2001 we signed a definitive agreement and
closed on the sale of these businesses on April 10, 2001. Total value under the
agreement was $1.55 billion in cash and assumed liabilities, and is subject to
adjustments at closing for changes in net assets. In the second quarter we
expect to recognize a gain of approximately $300 million after-tax. As part of
the terms of the transaction, we retained a 5.1% equity interest in the Dresser
Equipment Group.
The financial results of the Dresser Equipment Group segment are
presented as discontinued operations in our financial statements.
Three Months
Income from Operations Ended March 31
of Discontinued Businesses -------------------------------
Millions of dollars 2001 2000
- ----------------------------------------------------------------
Revenues $ 359 $ 337
================================================================
Operating income $ 37 $ 36
Taxes (15) (14)
- ----------------------------------------------------------------
Net income $ 22 $ 22
================================================================
Gain on disposal of discontinued operations in the first quarter of
2000 reflects the gain on the sale of Dresser-Rand in February 2000.
Gain on Disposal of Discontinued Three Months
Operations 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
====================================================================
Net Assets of Discontinued Operations March 31 December 31
Millions of dollars 2001 2000
- ----------------------------------------------------------------------------------------
Receivables $ 285 $ 286
Inventories 265 255
Other current assets 28 22
Accounts payable (106) (104)
Other current liabilities (139) (161)
- ----------------------------------------------------------------------------------------
Net current assets of discontinued operations $ 333 $ 298
========================================================================================
Net property, plant and equipment $ 212 $ 219
Goodwill, net 255 257
Other assets 31 30
Employee compensation and benefits (105) (113)
Other liabilities - (2)
- ----------------------------------------------------------------------------------------
Net noncurrent assets of discontinued operations $ 393 $ 391
========================================================================================
7
Note 5. 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. Claims and change orders included in unbilled
receivables amounted to $155 million and $113 million at March 31, 2001 and
December 31, 2000, respectively.
Note 6. Inventories
Inventories to support continuing operations at March 31, 2001 and
December 31, 2000 are composed of the following:
March 31 December 31
---------------- ---------------
Millions of dollars 2001 2000
- --------------------------------------------------------------------
Finished products and parts $ 539 $ 486
Raw materials and supplies 204 178
Work in process 78 59
- --------------------------------------------------------------------
Total $ 821 $ 723
====================================================================
Inventories on the last-in, first-out method were $74 million at March
31, 2001 and $66 million at December 31, 2000. If the average cost method had
been used, total inventories would have been about $28 million higher than
reported at March 31, 2001 and December 31, 2000.
Note 7. Commitments and Contingencies
Asbestos litigation. Since 1976, our subsidiary, Dresser Industries,
Inc. and its former divisions or subsidiaries have been defending numerous
lawsuits in which it is alleged that some products they manufactured contained
asbestos and as a result the individual plaintiffs were injured through
inhalation of asbestos fibers. Since then, we have entered into agreements with
our insurance companies, to recover in whole or in part, indemnity payments,
legal fees and expenses for specific categories of asbestos claims. We are
negotiating with those insurance companies for coverage for the remaining
categories of these claims. Because these agreements are governed by exposure
dates, payment type and the product involved, the covered amount varies by
claim. In addition, we have brought lawsuits against several other insurance
companies to recover additional amounts related to these asbestos claims.
Our Engineering and Construction Group is also involved in asbestos
claims litigation. In these lawsuits, claimants allege they have sustained
injuries from the inhalation of asbestos fibers contained in some of the
materials used in various construction and renovation projects involving our
Kellogg Brown & Root subsidiary. Our primary insurance coverage for Kellogg
Brown & Root for the applicable years was written by Highlands Insurance
Company. Most claims filed against Kellogg Brown & Root allege exposure to
asbestos prior to the spin-off and are disposed of for less than the limits of
the Highlands policies. Highlands was a subsidiary of Halliburton prior to its
spin-off to our shareholders in early 1996. We were unable, in negotiations with
Highlands during 1999 and early 2000, to reach an agreement on the amount of
insurance coverage Highlands would provide for these claims. On April 5, 2000,
Highlands filed a lawsuit in Delaware Chancery Court alleging that, as part of
the spin-off in 1996, Halliburton assumed liability for all asbestos claims
filed against Halliburton after the spin-off. Highlands also alleged that
Halliburton did not adequately disclose to Highlands the existence of
Halliburton's subsidiaries' potential asbestos liability. On August 23, 2000,
Highlands issued a letter denying coverage under the policies based on its
assertions in the Delaware lawsuit. We believe, however, that Highlands is
contractually obligated to provide insurance coverage for asbestos claims filed
against Kellogg Brown & Root and we are asserting our right to insurance
coverage vigorously. On April 24, 2000, Halliburton filed a lawsuit against
Highlands in Harris County, Texas, claiming that Highlands breached its
contractual obligation to provide insurance coverage. We have asked the Texas
court to order Highlands to provide coverage for asbestos claims under the
guaranteed cost policies issued by Highlands to Kellogg Brown & Root. This
lawsuit is stayed pending resolution of the Delaware litigation.
8
On March 21, 2001 the Delaware Chancery Court ruled that Highlands is
not obligated to provide insurance coverage for asbestos claims filed against
Kellogg Brown & Root. The court ruled that, the agreements entered into by
Highlands and Halliburton at the time of the spin-off terminated the policies
previously written by Highlands that would otherwise cover these claims. This
ruling, if it is not reversed on appeal, would eliminate our primary insurance
covering asbestos claims against Kellogg Brown & Root for periods prior to the
spin-off. We and our legal counsel, Vinson & Elkins L.L.P., believe, however,
that the court's ruling is wrong. We are in the process of appealing the ruling
to the Delaware Supreme Court. It may be early 2002 before the Delaware Supreme
Court rules on our appeal. Vinson & Elkins has rendered an opinion to us that it
is very likely that the ruling of the Chancery Court will be reversed because
the ruling clearly contravenes the provisions of the applicable agreements
between Highlands and Halliburton. Vinson & Elkins has also opined to us that it
is likely that we will ultimately prevail in this litigation.
Since 1976, approximately 300,000 asbestos claims have been filed
against us. About 27,000 of these claims relate to Kellogg Brown & Root. The
balance of these claims relate to former Dresser divisions and subsidiaries.
Approximately 171,000 of these claims have been settled or disposed of at a
gross cost of approximately $127 million, with recoveries from insurance
companies paying or expected to pay all but approximately $33 million. Asbestos
claims continue to be filed against us, with about 45,000 claims filed in 2000
and about 18,000 filed in the first quarter of 2001. At March 31, 2001, there
were about 129,000 open asbestos claims asserted against us, including about
26,000 associated with insurance recoveries we expect to collect from Highlands.
Open claims at March 31, 2001 also include 15,000 claims for which settlements
are pending. This number of open claims compares with approximately 117,000 open
claims at the end of 2000.
We have accrued reserves for our estimate of our liability for known
asbestos claims that have been asserted against us. Our estimate of the cost of
resolving asserted asbestos claims is based on our historical litigation
experience, our prior completed settlements and our estimate of amounts we will
recover from insurance companies. Our estimate of recoveries from insurance
companies, other than Highlands Insurance Company, is based on agreements we
have with a number of insurance companies, or in those instances in which
agreements are still in negotiation or in litigation, our estimate of our
ultimate recovery from insurance companies. We believe that the insurance
companies with which we have signed agreements will be able to meet their share
of future obligations under these agreements.
Highlands' parent company, Highlands Insurance Group, Inc., has stated
in its SEC filings that, if Highlands is ultimately required to pay asbestos
claims asserted against Kellogg Brown & Root, the payments could have a material
adverse impact on its financial position. Highlands has reported that its
statutory capital surplus was $127.4 million at the end of the year 2000, down
from $166.7 million at the end of 1999. On April 3, 2001 Standard & Poor's
announced that it had lowered its financial strength rating on Highlands and its
affiliates to `BBpi' to reflect uncertainty regarding the adequacy of their
capitalization and liquidity. On April 20, 2001 A.M. Best, a leading insurance
rating agency, downgraded Highlands and its affiliates to "B" (Fair) from "B++"
(Very Good) to reflect concerns about the group's capitalization adequacy and
poor operating results. Although we do not know the extent of the impact of
these developments on Highlands, we believe that Highlands still has the ability
to pay substantially all of the asbestos claims at issue in the pending
litigation, assuming it is successfully concluded in our favor.
Our reserves for open asbestos claims and corresponding estimated
insurance recoveries included in noncurrent assets are as follows:
March 31 December 31
---------------- ---------------
Millions of dollars 2001 2000
- ------------------------------------------------------------------------------------
Accrued liability for open claims $ 84 $ 80
Estimated insurance recoveries:
Highlands Insurance Company (40) (39)
Other insurance carriers (14) (12)
- ------------------------------------------------------------------------------------
Net liability for known open asbestos claims $ 30 $ 29
====================================================================================
9
In addition, as of March 31, 2001, we have recorded accounts receivable
we expect to collect from Highlands Insurance Company of $14 million for
payments we already have made on asbestos claims. If our appeal of the Chancery
Court's ruling in the Highlands litigation is unsuccessful, we will be unable to
collect this $14 million as well as the $40 million estimated recovery from
Highlands. This may have a material adverse impact on the results of our
operations and our financial position at that time.
Accounts receivable for billings to other insurance carriers for
payments made on asbestos claims were $10 million at March 31, 200l and $13
million at December 31, 2000.
We recognize the uncertainties of asbestos litigation and the
possibility that a series of adverse court rulings or new legislation affecting
the asbestos claims litigation or settlement process could materially impact our
expected resolution of asbestos claims. However, based upon:
o our historical experience with similar claims;
o the time elapsed since Dresser and its former divisions or
subsidiaries discontinued sale of products containing asbestos;
o the time elapsed since Kellogg Brown & Root used materials
containing asbestos in any construction process;
o our understanding of the facts and circumstances that gave rise to
asbestos claims; and
o our estimate of amounts we will recover from insurance companies,
we believe that the open asbestos claims asserted against us will be resolved
without a material adverse effect on our financial position or results of
operations.
Fort Ord litigation. Brown & Root Services, now operating as Kellogg
Brown & Root, is a defendant in civil litigation pending in federal court in
Sacramento, California. The lawsuit alleges that Brown & Root Services violated
provisions of the False Claims Act while performing work for the United States
Army at Fort Ord in California. This lawsuit was filed by a former employee in
1997. Brown & Root Services has denied the allegations and is preparing to
defend itself at trial. Further proceedings in this civil lawsuit have been
stayed while the investigation referred to in the next paragraph is ongoing. We
believe that it is remote that this civil litigation will result in any material
amount of damages being assessed against us, although the cost of our defense
could well exceed $1 million before the matter is brought to a conclusion.
Although in 1998 the United States Department of Justice declined to
join this litigation, it has advised us that Brown & Root Services is the target
of a federal grand jury investigation regarding the contract administration
issues raised in the civil litigation. Brown & Root Services has been served
with grand jury subpoenas, which required the production of documents relating
to the Fort Ord contract and similar contracts at other locations. We have also
been informed that several current and former employees will be called to
testify before the grand jury. We have retained independent counsel for these
employees. We are cooperating in this investigation. The United States
Department of Justice has not made any specific allegations against Brown & Root
Services.
Environmental. We are subject to numerous environmental legal and
regulatory requirements related to our operations worldwide. We take a proactive
approach to evaluating and addressing the environmental impact of our
operations. Each year we assess and remediate contaminated properties in order
to avoid future liabilities and comply with legal and regulatory requirements.
On occasion we are involved in specific environmental litigation and claims,
including the clean-up of properties we own or have operated as well as efforts
to meet or correct compliance-related matters.
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 United States federal law and comparable state
laws. Kellogg Brown & Root is one of nine PRP's named at the Tri-State Mining
District "Superfund" Site, also known as the Jasper County "Superfund" Site.
Based on our negotiations with federal regulatory authorities and our evaluation
of our responsibility for remediation at small portions of this site, we do not
believe we will be compelled to make expenditures which will have a material
adverse effect on our financial position or results of operations. However, the
United States Department of the Interior and the State of Missouri have
indicated that they might make a separate claim against Kellogg Brown & Root for
natural resource damages. Discussions with them have not been concluded and we
are unable to make a judgement about the amount of damages they may seek.
10
We also 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. 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 $31 million as
of March 31, 2001 and December 31, 2000.
Other. We are a party to various other legal proceedings. We expense
the cost of legal fees related to these proceedings. We believe any liabilities
we may have arising from these proceedings will not be material to our
consolidated financial position or our results of operations.
Note 8. Income Per Share
Three Months
Ended March 31
Millions of dollars and shares ---------------------------
except per share data 2001 2000
- ----------------------------------------------------------------------------------------
Income from continuing operations before
change in accounting method $ 86 $ 27
========================================================================================
Basic weighted average shares 426 442
Effect of common stock equivalents 4 2
- ----------------------------------------------------------------------------------------
Diluted weighted average shares 430 444
========================================================================================
Income per common share from continuing operations before change in accounting
method:
Basic $0.20 $0.06
========================================================================================
Diluted $0.20 $0.06
========================================================================================
Income per common share from discontinued operations:
Basic $0.05 $0.54
=======================================================================================-
Diluted $0.05 $0.53
========================================================================================
Income per share from discontinued operations in 2000 includes $0.49
basic and $0.48 diluted from the gain on the sale of discontinued operations.
Basic income per share is 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. Included in the computation of
diluted income per share are rights we issued in connection with the PES
acquisition of up to 2.1 million shares of Halliburton common stock. In February
2001 we issued 1.0 million shares under the rights leaving 1.1 million shares to
be issued. Excluded from the computation of diluted income per share are options
to purchase 2 million shares of common stock in 2001 and 7 million shares in
2000. These options were outstanding during these respective periods, but were
excluded because the option exercise price was greater than the average market
price of the common shares.
Note 9. Comprehensive Income
The components of other comprehensive income adjustments to net income
include the cumulative translation adjustment of some of our foreign entities,
minimum pension liability adjustments and unrealized gains or (losses) on
investments and derivatives.
11
Three Months
Ended March 31
---------------------------
Millions of dollars 2001 2000
- --------------------------------------------------------------------------------
Net income $ 109 $ 264
Cumulative translation adjustment, net of tax (42) (21)
Unrealized losses on investments and derivatives (2) -
- --------------------------------------------------------------------------------
Total comprehensive income $ 65 $ 243
================================================================================
Accumulated other comprehensive income at March 31, 2001 and December
31, 2000 consisted of the following:
March 31 December 31
--------------- ---------------
Millions of dollars 2001 2000
- ----------------------------------------------------------------------------------------
Cumulative translation adjustment $ (317) $ (275)
Minimum pension liability (12) (12)
Unrealized losses on investments and derivatives (3) (1)
- ----------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (332) $ (288)
========================================================================================
Note 10. Engineering and Construction Reorganization
As a result of the reorganization of our engineering and construction
businesses, we took actions in the fourth quarter of 2000 to rationalize our
cost structure including asset-related charges of $20 million and personnel
related charges of $16 million. Asset related write-offs of equipment,
engineering reference designs and capitalized software were all completed by
December 31, 2000. Personnel related payments of $10 million have been made and
the terminations of approximately 30 senior management positions are
substantially complete. We expect remaining payments under the severance
arrangements to be completed during the second half of 2001.
Note 11. 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. In January 1999, as part of a legal reorganization associated with
the merger, Halliburton Delaware, Inc., our first tier holding company
subsidiary, was merged into Dresser. The majority of our operating assets and
activities are now included in Dresser and its subsidiaries. In August 2000, the
Securities and Exchange Commission released a new rule governing the financial
statements of guarantors and issuers of guaranteed securities registered with
the SEC. The following condensed consolidating financial information presents
Halliburton and our subsidiaries on a stand-alone basis using the equity method
of accounting for our interest in our subsidiaries.
12
Condensed Consolidating Statements of Income
Quarter ended March 31, 2001
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,144 $ 136 $ 148 $ (284) $ 3,144
Cost of revenues (2,855) - - - (2,855)
General and administrative (91) - - - (91)
Interest expense (5) (9) (34) 1 (47)
Interest income 4 3 - (3) 4
Other, net (11) 21 13 (26) (3)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 186 151 127 (312) 152
Provision for income taxes (68) (3) 10 - (61)
Minority interest in net income of
subsidiaries (5) - - - (5)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 113 148 137 (312) 86
Income from discontinued operations 22 - - - 22
Cumulative effect of change in
accounting method, net 1 - - - 1
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 136 $ 148 $ 137 $ (312) $ 109
=======================================================================================================================
Condensed Consolidating Statements of Income
Quarter ended March 31, 2000
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,859 $ 73 $ 306 $ (379) $ 2,859
Cost of revenues (2,695) - - - (2,695)
General and administrative (83) - - - (83)
Interest expense (4) (13) (16) - (33)
Interest income 7 29 14 (43) 7
Other, net (4) - - - (4)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 80 89 304 (422) 51
Provision for income taxes (25) 2 3 - (20)
Minority interest in net income of
subsidiaries (4) - - - (4)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 51 91 307 (422) 27
Income from discontinued operations 22 - - - 22
Gain on disposal of discontinued
operations, net of tax - 215 - - 215
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 73 $ 306 $ 307 $ (422) $ 264
=======================================================================================================================
13
Condensed Consolidating Balance Sheets
March 31, 2001
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 186 $ - $ 92 $ - $ 278
Receivables:
Notes and accounts receivable, net 2,981 53 - - 3,034
Unbilled work on uncompleted contracts 787 - 2 - 789
- -----------------------------------------------------------------------------------------------------------------------
Total receivables 3,768 53 2 - 3,823
Inventories 821 - - - 821
Other current assets 779 15 4 - 798
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 5,554 68 98 - 5,720
Property, plant and equipment, net 2,415 - - - 2,415
Equity in and advances to
unconsolidated affiliates 417 - - - 417
Intercompany receivable from
consolidated affiliates - - 3,015 (3,015) -
Equity in and advances to
consolidated affiliates - 6,117 3,650 (9,767) -
Goodwill, net 654 86 - - 740
Other assets 1,121 5 - - 1,126
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 10,161 $ 6,276 $ 6,763 $(12,782) $10,418
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 755 $ 8 $ 1,822 $ - $ 2,585
Other current liabilities 1,440 11 9 - 1,460
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,195 19 1,831 - 4,045
Long-term debt 201 439 400 - 1,040
Intercompany payable from
consolidated affiliates 874 2,141 - (3,015) -
Other liabilities 1,142 27 116 - 1,285
Minority interest in consolidated
subsidiaries 42 - - - 42
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 4,454 2,626 2,347 (3,015) 6,412
Shareholders' equity:
Common shares 391 - 1,136 (391) 1,136
Other shareholders' equity 5,316 3,650 3,280 (9,376) 2,870
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,707 3,650 4,416 (9,767) 4,006
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,161 $ 6,276 $ 6,763 $(12,782) $10,418
=======================================================================================================================
14
Condensed Consolidating Balance Sheets
December 31, 2000
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 216 $ 11 $ 4 $ - $ 231
Receivables:
Notes and accounts receivable, net 2,966 63 - - 3,029
Unbilled work on uncompleted contracts 816 - - - 816
- -----------------------------------------------------------------------------------------------------------------------
Total receivables 3,782 63 - - 3,845
Inventories 723 - - - 723
Other current assets 753 1 15 - 769
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 5,474 75 19 - 5,568
Property, plant and equipment, net 2,410 - - - 2,410
Equity in and advances to
unconsolidated affiliates 258 142 - - 400
Intercompany receivable from
consolidated affiliates 68 - 2,138 (2,206) -
Equity in and advances to
consolidated affiliates - 6,558 4,220 (10,778) -
Goodwill, net 510 87 - - 597
Other assets 1,109 5 14 - 1,128
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,829 $ 6,867 $ 6,391 $(12,984) $10,103
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 756 $ 64 $ 1,540 $ - $ 2,360
Other current liabilities 1,374 36 56 - 1,466
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,130 100 1,596 - 3,826
Long-term debt 205 444 400 - 1,049
Intercompany payable from
consolidated affiliates - 2,206 - (2,206) -
Other liabilities 1,118 26 118 - 1,262
Minority interest in consolidated
subsidiaries 38 - - - 38
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 3,491 2,776 2,114 (2,206) 6,175
Shareholders' equity:
Common shares 391 - 1,132 (391) 1,132
Other shareholders' equity 5,947 4,091 3,145 (10,387) 2,796
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,338 4,091 4,277 (10,778) 3,928
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,829 $ 6,867 $ 6,391 $(12,984) $10,103
=======================================================================================================================
15
Condensed Consolidating Statements of Cash Flows
Quarter ended March 31, 2001
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 112 $ 36 $ 18 $ - $ 166
Capital expenditures (145) - - - (145)
Sales of property, plant and equipment 21 - - - 21
Other investing activities (176) - (175) 175 (176)
Payments on long-term borrowings (4) (5) - - (9)
Borrowings (repayments) of
short-term debt, net (15) - 284 - 269
Payments of dividends to shareholders - - (54) - (54)
Proceeds from exercises of stock options - - 19 - 19
Payments to reacquire common stock - - (4) - (4)
Other financing activities 215 (42) - (175) (2)
Effect of exchange rate on cash (14) - - - (14)
Net cash flows from discontinued
operations (24) - - - (24)
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
equivalents $ (30) $ (11) $ 88 $ - $ 47
=======================================================================================================================
Condensed Consolidating Statements of Cash Flows
Quarter ended March 31, 2000
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ (108) $ 4 $ 1 $ - $ (103)
Capital expenditures (79) - - - (79)
Sales of property, plant and equipment 25 - - - 25
Other investing activities (13) - 656 (656) (13)
Borrowings (repayments) of
short-term debt, net - - (708) - (708)
Payments of dividends to shareholders - - (55) - (55)
Proceeds from exercises of stock options - - 18 - 18
Payments to reacquire common stock - - (4) - (4)
Other financing activities (791) 135 - 656 -
Effect of exchange rate on cash (2) - - - (2)
Net cash flows from discontinued
operations 824 - - - 824
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
equivalents $ (144) $ 139 $ (92) $ - $ (97)
=======================================================================================================================
16
Note 12. Accounting Change
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," subsequently amended by SFAS No. 137
and SFAS No. 138. 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. We adopted SFAS 133 effective January 2001
and recorded a gain of $1 million after-tax for the cumulative effect of
adopting the change in accounting method. We do not expect future measurements
at fair value under the new accounting method to have a material effect on our
financial condition or results of operations.
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:
o factors and risks that impact our business;
o why our earnings and expenses for the first quarter of 2001 differ
from the first quarter of 2000;
o factors that impacted our cash flows; and
o other items that materially affect our financial condition or
earnings.
BUSINESS ENVIRONMENT
Our continuing business is organized around two business segments:
o Energy Services Group; and
o Engineering and Construction Group.
We report the results of Dresser Equipment Group, which was sold on
April 10, 2001, as discontinued operations.
As the largest provider of products and services to the petroleum and
energy industries, the majority of our consolidated revenues are derived from
the sale of services and products to large oil and gas companies. We conduct
business in over 120 countries with energy, industrial and governmental
customers. These services and products are used in the earliest phases of
exploration and development of oil and gas reserves through the refining and
distribution process. The industries we serve are highly competitive with many
substantial competitors for each segment. No country other than the United
States or the United Kingdom accounts for more than 10% of our operations.
Unsettled political conditions, expropriation or other governmental actions,
exchange controls and currency devaluations may result in increased business
risk in any one country, including, among others, Algeria, Angola, Libya,
Nigeria, and Russia. We believe the geographic diversification of our business
activities reduces the risk that loss of business in any one country would be
material to our consolidated results of operations.
Halliburton Company
The first quarter of 2001 showed continuing improved activity levels
within our Energy Services Group. Increased drilling activity in North America,
primarily related to demand for natural gas, contributed significantly to higher
activity levels within our oilfield service product service lines. Higher
sustained crude oil prices have also contributed to increasing levels of
exploration and production activity throughout the world. Current estimates for
2001 anticipate capital spending for oil and gas exploration to increase 20%
compared to 2000. Within the Engineering and Construction Group higher prices
for natural gas and crude oil have not yet translated into increased spending
for engineering and construction projects, particularly projects in the
liquefied natural gas, refining and petrochemical industries. Continued strength
in energy services activity should be followed by increased spending on large
oil and gas related engineering and construction projects. Increasing demand for
natural gas used in power generation, low natural gas storage levels within the
United States, and the need to replace oil and gas reserves by our customers are
all current factors that should provide opportunities for growth in our business
segments.
17
Energy Services Group
Increasing business activity within the segment that started in 2000
continued throughout the first quarter of 2001. Sustained levels of high natural
gas and crude oil prices have contributed to higher demand for the products and
services provided by the Energy Services Group. Activity has been highest in
North America, reflecting primarily the increased levels of drilling for natural
gas. The rotary rig count in North America continued to increase and averaged
1,654 rigs in the first quarter of 2001, an increase of 31% over the average for
2000. Natural gas prices continued to climb as a result of North America
experiencing the coldest weather in recent years and low volumes of gas in
storage. Henry Hub gas prices for the first quarter of 2001 averaged $6.55/MCF,
well above the $6.20/MCF average for the fourth quarter of 2000 and
significantly above the $2.59/MCF average price for the first quarter of 2000.
Higher activity levels have increased our equipment and personnel utilization,
resulting in increased profitability and pricing strength, particularly within
North America. Crude oil prices, another business indicator, remained at or near
record highs throughout the quarter, with West Texas Intermediate averaging
nearly $29 per barrel, down from the average fourth quarter 2000 price of $32
per barrel. These continued high commodity prices bode well for the industry and
should encourage our customers to increase investments in exploration and
production.
The turnaround in international rig activity continued through the
first quarter, with the highest average rig count since 1998 at 724 rigs working
compared to 710 in the fourth quarter of 2000 and 576 working in the first
quarter of 2000. Compared to the first quarter of 2000, revenues for the Energy
Services Group were higher across all geographic areas. These increases reflect
both the strong demand for our products and services within North America as
well as the continued increases in exploration and production spending elsewhere
by our customers. In the short-term, we expect the Energy Services Group to
provide continued growth in both revenues and earnings in North America and
internationally, especially in the North Sea, Latin America, West Africa, and
the Middle East.
Engineering and Construction Group
Our Engineering and Construction Group has not yet benefited from the
positive factors which provided opportunities for growth in the Energy Services
Group. While both segments provide products and services to many of the same
customers, oilfield service activities have been first to benefit from the
increased activity levels. The downturn in the energy industry that began in
1998 led our customers to severely curtail many large engineering and
construction projects during 2000 and into 2001. Our Engineering and
Construction Group has also been impacted by a series of mergers and
consolidations among its major customers resulting in an additional period of
internal focus and capacity rationalization by our customers. The lack of
opportunities existing throughout 2000, combined with an extremely competitive
global engineering and construction environment, resulted in the restructuring
of our Engineering and Construction Group in late 2000 and the first quarter of
2001. All of our engineering, construction, fabrication and project management
capabilities are now part of one operating company - Kellogg Brown & Root. A
flatter, more responsive organization is now positioned to benefit from the
expected increases in engineering and construction project spending, which are
anticipated as we move into the second half of 2001. Several recent project
awards also provide optimism. In addition, we also see improving opportunities
to provide additional support services to agencies of the United States
government and to government 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.
RESULTS OF OPERATIONS IN 2001 COMPARED TO 2000
First Quarter of 2001 Compared with the First Quarter of 2000
First Quarter
REVENUES ----------------------- Increase
Millions of dollars 2001 2000 (decrease)
- ----------------------------------------------------------------------------------
Energy Services Group $ 2,031 $ 1,423 $ 608
Engineering and Construction Group 1,113 1,436 (323)
- ----------------------------------------------------------------------------------
Total revenues $ 3,144 $ 2,859 $ 285
==================================================================================
18
Consolidated revenues in the first quarter of 2001 of $3.1 billion
increased $285 million compared to the first quarter of 2000. International
revenues were 62% of total revenues for the first quarter of 2001 and 66% in the
first quarter of 2000.
Energy Services Group revenues were $2.0 billion for the first quarter
of 2001, an increase of 43% from the first quarter in 2000. International
revenues were 58% of total revenues in the first quarter of 2001 compared to 63%
in the same quarter of the prior year. Revenues increased across all geographic
regions as all product service lines benefited significantly from the increased
activity related to higher rig counts and higher prices for our products and
services. Revenues of just over $1.5 billion from our oilfield service product
service lines represented an increase of 40% compared to the prior year. The
pressure pumping product service line experienced growth of 45% while logging
services achieved revenue growth of 66%. Revenues for drilling fluids, drilling
services and drill bits increased 57%, 29% and 26%, respectively.
Geographically, North American oilfield services revenues increased by 60%,
while Latin America and Middle East revenues increased by 33% and 29%,
respectively. Revenues have been slower to pick up in Europe/Africa, which
increased 19% and Asia Pacific, which was slightly positive. Particularly strong
revenue improvements were reported in Argentina, Brazil, Venezuela, Egypt, Oman
and Saudi Arabia. Revenues for the remainder of the segment increased $165
million compared to the prior year. This increase was due primarily to the
start-up of a major project in Brazil in late 2000 as well as increased levels
of work within the subsea and production services product service lines, which
increased 33% and 29%, respectively.
Engineering and Construction Group revenues were $323 million, or 23%,
lower in the first quarter of 2001 compared to the first quarter of 2000. About
71% of the group's revenues were from international activities compared to 69%
in the prior year quarter. Decreases in revenues were mostly attributable to the
completion of large onshore and offshore projects and replacement projects have
not been awarded. Government services product line revenues from a logistical
support contract in the Balkans region decreased about $60 million as the
project has moved from the construction phase to a sustainment phase. Partially
offsetting the revenue declines in other product lines, the operations and
maintenance product line increased 12% year-over-year, reflecting continued
focus by our customers in existing facility maintenance, plant operations and
other maintenance projects.
First Quarter
OPERATING INCOME -------------------------- Increase
Millions of dollars 2001 2000 (decrease)
- -------------------------------------------------------------------------------------
Energy Services Group $ 200 $ 49 $ 151
Engineering and Construction Group 18 49 (31)
General corporate (20) (17) (3)
- -------------------------------------------------------------------------------------
Total operating income $ 198 $ 81 $ 117
=====================================================================================
Consolidated operating income of $198 million was 144% higher in the
first quarter of 2001 compared to the first quarter in 2000. Higher equipment
utilization and manufacturing capacity combined with improved pricing within the
Energy Services Group, particularly within North America, significantly offset
lower activity levels in the Engineering and Construction Group.
Energy Services Group operating income for the first quarter of 2001
increased $151 million or 308% compared to the first quarter of 2000. Operating
income in our oilfield services product service lines increased $138 million
over the same period in 2000. This improvement largely reflects increased
activity levels, high equipment utilization, and improvement in pricing in North
America which more than offset the impact of higher fuel and energy costs.
Operating income increased across all product service lines with pressure
pumping, logging, drilling systems and drill bits all increasing over 200%.
Profitability growth was greatest in North America, with significant
improvements also in the Middle East and Latin America. North America benefited
from price increases implemented last year and during January of 2001. The
strong demand for our services, combined with increasing utilization of our
equipment and personnel, has enabled us to continue to improve our pricing, net
of discounts. An additional price increase is expected later this summer.
Operating income for the remainder of the segment increased $13 million
consistent with higher revenues.
19
Engineering and Construction Group operating income for the first
quarter of 2001 decreased $31 million from the same period in 2000 on lower
revenues. The reduction reflects lower activity levels and operating margins.
General corporate expense for the quarter increased $3 million due
primarily to expenses incurred for the retirement of several executives.
NONOPERATING ITEMS
Interest expense of $47 million for the first quarter of 2001 increased
$14 million compared to the first quarter of 2000. The increase is due to
additional short-term debt incurred to repurchase our common stock under our
repurchase program, mostly during the fourth quarter of 2000, and borrowings
associated with the acquisition of PGS Data Management during the first quarter
of 2001. We expect net interest expense to decrease significantly in the second
quarter of 2001 because we have paid down short-term debt with the proceeds from
the sale of the Dresser Equipment Group.
Interest income was $4 million in the first quarter of 2001, a decrease
from the prior year's interest income of $7 million.
Foreign exchange losses, net were $3 million in the current year
quarter compared to $4 million in the prior year first quarter.
Provision for income taxes of $61 million resulted in an effective tax
rate of 40.1%, up slightly from the first quarter of 2000 rate of 39.2%.
Income from continuing operations was $86 million in the first quarter
of 2000 compared to $27 million in the prior year quarter.
Income from discontinued operations was $22 million for the first
quarter of 2001 and 2000.
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.
Cumulative effect of change in accounting method, net of $1 million
reflects the impact of adoption of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and for Hedging Activities."
After recording the cumulative effect of the change our estimated annual expense
under Financial Accounting Standards No. 133 is not expected to be materially
different from amounts expensed under the prior accounting treatment.
Net income for the first quarter of 2001 was $109 million, or $0.25 per
diluted share. The prior year's net income was $264 million, or $0.59 per
diluted share.
LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2001 with cash and equivalents of $278
million, an increase of $47 million from the end of 2000.
Cash flows from operating activities provided $166 million in the first
quarter of 2001 compared to using $103 million in the first quarter of the prior
year. Working capital items, which include receivables, inventories, accounts
payable and other working capital, net, used $90 million of cash in the first
quarter of 2001 compared to $244 million in the same period of the prior year.
Included in changes to working capital and other net changes is $10 million cash
used for personnel reductions, facility closures and integration costs in the
first quarter of 2001 and $17 million in the first quarter of the prior year.
Cash flows used in investing activities were $300 million in the first
quarter of 2001 and $67 million in the same period of 2000. Capital expenditures
in the first quarter of 2001 were $145 million as compared to $79 million for
the same period in the prior year. In March 2001 we acquired the PGS Data
Management division of Petroleum Geo-Services ASA for approximately $175 million
of cash.
Cash flows from financing activities provided $219 million in the first
quarter of 2001. In the same period of the prior year, financing activities used
$749 million as we repaid short-term debt with the proceeds from the sale of
Dresser-Rand and Ingersoll-Dresser Pump. We paid dividends of $54 million to our
shareholders in the first quarter of 2001 as compared to $55 million in the
first quarter of 2000.
20
Cash flows from discontinued operations used $24 million in the first
quarter of 2001 as compared to providing $824 million for the same period in
2000. Cash flows for 2000 include proceeds of $913 million from the sales of
Dresser-Rand and Ingersoll-Dresser Pump.
Capital resources from internally generated funds and access to capital
markets are sufficient to fund our working capital requirements and investing
activities. Our combined short-term notes payable and long-term debt was 42% of
total capitalization at March 31, 2001 compared to 40% at December 31, 2000. In
April 2001 we used proceeds from the sale of the Dresser Equipment Group to
repay debt. This action will return our debt-to-capitalization ratio to the low
30% range during the second quarter of 2001.
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 environmental litigation and claims, the
clean-up of properties we own or have operated, and efforts to meet or correct
compliance-related matters.
DISCONTINUED OPERATIONS AND SHARE REPURCHASE PROGRAM
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. As of March
31, 2001 we had repurchased over 20 million shares at a cost of $759 million. No
shares of common stock were repurchased during the first quarter of 2001 under
this plan; however, we may periodically repurchase our common stock as we deem
appropriate.
On April 10, 2001 we announced the sale of our Dresser Equipment Group
segment for $1.55 billion in cash and assumed liabilities, subject to
adjustments at closing for changes in net assets. The transaction resulted in
our receiving $1.3 billion in cash and will result in an approximately $300
million after-tax gain. The transaction will be reported in the second quarter
of 2001. Proceeds from the sale of this business were used to repay short-term
debt.
CONVERSION TO THE EURO CURRENCY
In 1999 some member countries of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency (euro). This action was the first step towards transition from
existing national currencies to the use of the euro as a common currency. The
transition period for the introduction of the euro ends June 30, 2002. Issues
resulting from the introduction of the euro include converting information
technology systems, reassessing currency risk, negotiating and amending existing
contracts and processing tax and accounting records. We are addressing these
issues and do not expect the transition to the euro to have a material effect on
our financial condition or results of operations.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking. We may also provide oral or
written forward-looking information in other materials we release to the public.
Forward-looking information involves risks and uncertainties. Forward-looking
information we provide reflects our best judgement based on current information.
Our results of operations can be affected by inaccurate assumptions we make or
by known or unknown risks and uncertainties. In addition, other factors may
affect the accuracy of our forward-looking information. As a result, no
forward-looking information can be guaranteed. Actual events and the results of
operations may vary materially.
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.
o trade restrictions and economic embargoes imposed by the United
States and other countries;
o unsettled political conditions, war, civil unrest, currency
controls and governmental actions in the numerous countries in
which we operate;
21
o operations in countries with significant amounts of political
risk, including, for example, Algeria, Angola, Libya, Nigeria, and
Russia;
o changes in foreign exchange rates;
o 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;
o litigation, including, for example, contract disputes, asbestos
litigation and environmental litigation; and
o environmental laws, including, for example, those that require
emission performance standards for facilities;
Weather related.
o the effects of severe weather conditions, including, for example,
hurricanes and tornadoes, on operations and facilities; and
o the impact of prolonged severe or mild weather conditions on the
demand for and price of oil and natural gas;
Customers and vendors.
o the magnitude of governmental spending and outsourcing for
military and logistical support of the type that we provide;
o changes in capital spending by customers in the oil and gas
industry for exploration, development, production, processing,
refining, and pipeline delivery networks;
o changes in capital spending by governments for infrastructure
projects of the sort that we perform;
o consolidation of customers in the oil and gas industry; and
o claim negotiations with engineering and construction customers on
cost variances and change orders on major projects;
Industry.
o technological and structural changes in the industries that we
serve;
o sudden changes in energy prices that could undermine the
fundamental strength of the world economy or our customers;
o changes in the price of oil and natural gas, resulting from:
- OPEC's ability to set and maintain production levels
and prices for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration for and
production and development of their oil and natural gas
reserves; and
- the level of demand for oil and natural gas;
o changes in the price or the availability of commodities that we
use;
o 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 nonreimbursable costs which cause the
project not to meet our expected profit margins;
o risks that result from entering into complex business arrangements
for technically demanding projects where failure by one or more
parties could result in monetary penalties; and
o 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;
22
Personnel and mergers/reorganizations/dispositions.
o increased competition in the hiring and retention of employees in
specific areas, including, for example, energy services
operations, accounting and finance;
o integration of acquired businesses into Halliburton, including:
- standardizing information systems or integrating data from
multiple systems;
- maintaining uniform standards, controls, procedures and
policies; and
- combining operations and personnel of acquired businesses
with ours;
o effectively reorganizing operations and personnel within
Halliburton;
o replacing discontinued lines of businesses with acquisitions that
add value and complement our core businesses; and
o successful completion of planned dispositions.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial instrument market risk from changes in
foreign currency exchange rates, interest rates and to a limited extent,
commodity prices. We selectively hedge these exposures through the use of
derivative instruments to mitigate our market risk from these exposures. 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. Our use of
derivative instruments includes the following types of market risk:
o volatility of the currency rates;
o time horizon of the derivative instruments;
o market cycles; and
o the type of derivative instruments used.
We do not use derivative instruments for trading purposes. We do not
consider any of our hedging activities to be material.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement and Plan of Recapitalization as amended and restated
effective April 10, 2001 (incorporated by reference to
Halliburton's Form 8-K/A dated as of May 10, 2001).
* Filed with this Form 10-Q.
(b) Reports on Form 8-K
Date Filed Date of Earliest Event Description of Event
- --------------------------- ------------------------ ----------------------------------------------------------
During the first quarter of 2001:
January 2, 2001 January 2, 2001 Item 5. Other Events for a press release announcing a
definitive agreement to acquire PGS Data Management.
January 3, 2001 January 2, 2001 Item 5. Other Events for a press release announcing the
board of directors approval of the acquisition of PGS
Data Management.
February 2, 2001 January 30, 2001 Item 5. Other Events for a press release announcing 2000
fourth quarter earnings.
February 2, 2001 January 31, 2001 Item 5. Other Events for a press release announcing
Halliburton's agreement to sell Dresser Equipment Group
for $1.55 billion in cash and assumed liabilities.
February 20, 2001 February 15, 2001 Item 5. Other Events for a press release announcing the
board of directors has declared a 2001 first quarter
dividend of 12.5 cents a share on common stock payable
to shareholders of record at the close of business on
March 1, 2001.
March 6, 2001 January 31, 2001 Item 5. Other Events for the Agreement and Plan of
Recapitalization dated January 30, 2001 among
Halliburton Company, Dresser B.V. and DEG Acquisitions,
LLC.
March 13, 2001 March 12, 2001 Item 5. Other Events for a press release announcing the
acquisition of PGS Data Management Division by
Halliburton and Landmark Graphics.
March 23, 2001 March 22, 2001 Item 5. Other Events for a press release announcing
Halliburton's plan to appeal Delaware Chancery Court
ruling against Kellogg Brown & Root in litigation with
Highlands Insurance Group, Inc.
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Date Filed Date of Earliest Event Description of Event
- --------------------------- ------------------------ ----------------------------------------------------------
During the second quarter of 2001:
April 11, 2001 April 10, 2001 Item 5. Other Events for a press release announcing the
sale of Dresser Equipment Group to an investor group for
$1.55 billion in cash and assumed liabilities.
April 27, 2001 April 25, 2001 Item 5. Other Events for a press release announcing 2001
first quarter earnings.
May 1, 2001 April 30, 2001 Item 5. Other Events for a press release announcing the
signing of a definitive agreement to acquire Magic
Earth, Inc., a leading 3-D visualization and
interpretation technology company with broad
applications in the area of data mining.
May 10, 2001 April 10, 2001 Item 5. Other Events for a press release on the
Agreement and Plan of Recapitalization as amended and
restated effective April 10, 2001 among Halliburton
Company, Dresser B.V. and DEG Acquisitions, LLC.
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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 11, 2001 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
26