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 June 30, 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 July 31, 2001 - 429,791,394
HALLIBURTON COMPANY
Index
Page No.
----------
PART I. FINANCIAL INFORMATION 2-20
Item 1. Financial Statements 2-4
- Condensed Consolidated Statements of Income 2
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Cash Flows 4
- Notes to Quarterly Financial Statements 5-20
1. Management Representations 5
2. Business Segment Information 5-6
3. Acquisitions and Dispositions 6-7
4. Discontinued Operations 7-8
5. Receivables 8
6. Inventories 8-9
7. Commitments and Contingencies 9-14
8. Income Per Share 14
9. Comprehensive Income 15
10. Engineering and Construction Reorganization 15
11. Dresser Financial Information 15-20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 21-29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
PART II. OTHER INFORMATION 30-32
Item 4. Submission of Matters to a Vote of Security Holders 30-31
Item 6. Listing of Exhibits and Reports on Form 8-K 31-32
Signatures 33
Exhibits: - Supplemental Executive Retirement Plan as amended and restated
effective January 1, 2001
- Benefit Restoration Plan as amended and restated effective
January 1, 2001
- Employment Agreement
- Powers of Attorney for Directors
- Powers of Attorney
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 Six Months
Ended June 30 Ended June 30
-----------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 2,812 $ 2,461 $ 5,455 $ 4,937
Sales 498 393 981 756
Equity in earnings of unconsolidated affiliates 29 14 47 34
- --------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,339 $ 2,868 $ 6,483 $ 5,727
- --------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 2,512 $ 2,317 $ 4,945 $ 4,684
Cost of sales 454 348 876 676
General and administrative 101 77 192 160
- --------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses $ 3,067 $ 2,742 $ 6,013 $ 5,520
- --------------------------------------------------------------------------------------------------------------------
Operating income 272 126 470 207
Interest expense (34) (33) (81) (66)
Interest income 6 3 10 10
Foreign currency losses, net (1) (3) (4) (7)
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes, minority
interest, and accounting change 243 93 395 144
Provision for income taxes (98) (36) (159) (56)
Minority interest in net income of subsidiaries (2) (5) (7) (9)
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations before accounting change 143 52 229 79
- --------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income (loss) from discontinued operations, net of tax
(provision) benefit of $32, ($14), $17, and ($28) (60) 23 (38) 45
Gain on disposal of discontinued operations, net of tax
of $199, $0, $199, and $141 299 - 299 215
- --------------------------------------------------------------------------------------------------------------------
Income from discontinued operations 239 23 261 260
- --------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net - - 1 -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 382 $ 75 $ 491 $ 339
====================================================================================================================
Basic income per share:
Income from continuing operations before accounting change $ 0.34 $ 0.12 $ 0.54 $ 0.18
Income (loss) from discontinued operations (0.14) 0.05 (0.09) 0.10
Gain on disposal of discontinued operations 0.70 - 0.70 0.49
- --------------------------------------------------------------------------------------------------------------------
Net income $ 0.90 $ 0.17 $ 1.15 $ 0.77
====================================================================================================================
Diluted income per share:
Income from continuing operations before accounting change $ 0.33 $ 0.12 $ 0.53 $ 0.18
Income (loss) from discontinued operations (0.14) 0.05 (0.09) 0.10
Gain on disposal of discontinued operations 0.70 - 0.70 0.48
- --------------------------------------------------------------------------------------------------------------------
Net income $ 0.89 $ 0.17 $ 1.14 $ 0.76
====================================================================================================================
Cash dividends per share $ 0.125 $ 0.125 $ 0.25 $ 0.25
Basic average common shares outstanding 427 444 427 443
Diluted average common shares outstanding 430 449 430 447
<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)
June 30 December 31
2001 2000
- ---------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 328 $ 231
Receivables:
Notes and accounts receivable, net 3,249 3,029
Unbilled work on uncompleted contracts 961 816
- ---------------------------------------------------------------------------------------------------
Total receivables 4,210 3,845
Inventories 855 723
Current deferred income taxes 225 235
Net current assets of discontinued operations - 298
Other current assets 242 236
- ---------------------------------------------------------------------------------------------------
Total current assets 5,860 5,568
Property, plant and equipment after accumulated
depreciation of $3,202 and $3,150 2,483 2,410
Equity in and advances to related companies 500 400
Goodwill, net 608 597
Noncurrent deferred income taxes 300 340
Net noncurrent assets of discontinued operations - 391
Insurance for asbestos litigation claims 575 51
Other assets 335 346
- ---------------------------------------------------------------------------------------------------
Total assets $ 10,661 $ 10,103
===================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 717 $ 1,570
Current maturities of long-term debt 7 8
Accounts payable 832 782
Accrued employee compensation and benefits 318 267
Advanced billings on uncompleted contracts 475 288
Deferred revenues 105 98
Income taxes payable 239 113
Other current liabilities 664 700
- ---------------------------------------------------------------------------------------------------
Total current liabilities 3,357 3,826
Long-term debt 1,039 1,049
Employee compensation and benefits 472 662
Asbestos litigation claims 699 80
Other liabilities 570 520
Minority interest in consolidated subsidiaries 44 38
- ---------------------------------------------------------------------------------------------------
Total liabilities 6,181 6,175
- ---------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 455 and 453 shares 1,138 1,132
Paid-in capital in excess of par value 339 259
Deferred compensation (70) (63)
Accumulated other comprehensive income (218) (288)
Retained earnings 4,117 3,733
- ---------------------------------------------------------------------------------------------------
5,306 4,773
Less 25 and 26 shares of treasury stock, at cost 826 845
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 4,480 3,928
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,661 $ 10,103
===================================================================================================
<FN>
See notes to quarterly financial statements.
</FN>
3
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Six Months
Ended June 30
------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 491 $ 339
Adjustments to reconcile net income to net cash from operations:
Income from discontinued operations (261) (260)
Depreciation, depletion and amortization 258 249
Provision for deferred income taxes 50 38
Distributions from (advances to) related companies, net of
equity in (earnings) losses 26 (1)
Accounting change (1) -
Accrued special charges (6) (24)
Other non-cash items 20 66
Other changes, net of non-cash items:
Receivables and unbilled work (346) (579)
Inventories (145) (33)
Accounts payable 79 12
Other working capital, net 42 (30)
Other operating activities 137 (52)
- ---------------------------------------------------------------------------------------------------
Total cash flows from operating activities 344 (275)
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (344) (190)
Sales of property, plant and equipment 39 36
(Acquisitions) dispositions of businesses, net (139) (12)
Other investing activities (8) (21)
- ---------------------------------------------------------------------------------------------------
Total cash flows from investing activities (452) (187)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term borrowings (9) (305)
(Repayments) borrowings of short-term debt, net (854) (66)
Payments of dividends to shareholders (107) (111)
Proceeds from exercises of stock options 24 57
Payments to reacquire common stock (8) (6)
Other financing activities (3) -
- ---------------------------------------------------------------------------------------------------
Total cash flows from financing activities (957) (431)
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (12) (14)
Net cash flows from discontinued operations 1,174 804
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 97 (103)
Cash and cash equivalents at beginning of period 231 466
- ---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 328 $ 363
===================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 16 $ 65
Income taxes $ 145 $ 130
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 18 $ 90
Liabilities disposed of in dispositions of businesses $ 430 $ 498
<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:
- the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements; and
- the reported amounts of revenues and expenses during the reporting
period.
Ultimate results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and applicable rules of
Regulation S-X. Accordingly, these financial statements do not include all
information or footnotes required by generally accepted accounting principles
for complete financial statements and should be read together with our 2000
Annual Report on Form 10-K. Prior period amounts have been reclassified to be
consistent with the current presentation.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of June 30, 2001, the results of our operations
for the three and six months ended June 30, 2001 and 2000 and our cash flows for
the six months then ended. The results of operations for the three and six
months ended June 30, 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. 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 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 Six Months
Ended June 30 Ended June 30
------------------------- ----------------------
Millions of dollars 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------
Revenues:
Energy Services Group $ 2,214 $ 1,615 $ 4,245 $ 3,038
Engineering and Construction Group 1,125 1,253 2,238 2,689
- ---------------------------------------------------------------------------------------------
Total $ 3,339 $ 2,868 $ 6,483 $ 5,727
=============================================================================================
Operating income:
Energy Services Group $ 267 $ 113 $ 467 $ 162
Engineering and Construction Group 25 30 43 79
General corporate (20) (17) (40) (34)
- ---------------------------------------------------------------------------------------------
Total $ 272 $ 126 $ 470 $ 207
=============================================================================================
5
Energy Services Group. The Energy Services Group provides a wide range
of discrete services and products and integrated solutions to customers for the
exploration, development, and production of oil and gas. The customers for this
segment are major, national and independent oil and gas companies. This segment
consists of:
- Halliburton Energy Services provides oilfield services and
products including discrete products and services and integrated
solutions for oil and gas exploration, development and production
throughout the world. Products and services include pressure
pumping equipment and services, logging and perforating, drilling
systems and services, drilling fluids systems, drill bits,
specialized completion and production equipment and services, well
control, integrated solutions, and reservoir description,
- Landmark Graphics provides integrated exploration and production
software information systems and professional services to the
petroleum industry, and
- Other product service lines include surface/subsea operations and
large integrated engineering, procurement, and construction
projects containing both surface and sub-surface components.
Surface/subsea operations 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, project management, detailed engineering,
maintenance, procurement, construction site management,
commissioning, startup and debottlenecking of both onshore and
offshore facilities.
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:
- Onshore operations comprises engineering and construction
activities, including liquefied natural gas, ammonia, crude oil
refineries, and natural gas plants,
- Offshore operations includes specialty offshore deepwater
engineering and marine technology and worldwide fabrication
capabilities,
- Government operations provides operations, maintenance and logistics
activities for government facilities and installations,
- Operations and maintenance provides services for private sector
customers, primarily industrial, hydrocarbon and commercial
applications, and
- 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 our wholly
owned subsidiary and a part of the Energy Services Group. Under the agreement,
Halliburton will issue stock valued at $100 million, subject to final purchase
price adjustments, to acquire Magic Earth. The transaction is expected to be
completed later this year after various regulatory and other approvals are
received.
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 that calls for Landmark to provide, for a fee,
strategic data management and distribution services to PGS for three years. We
have preliminarily recorded goodwill of $155 million, subject to the final
valuation of intangible assets and other costs. Goodwill, based on a 15 year
life, will only be amortized through the end of 2001 in accordance with FASB
Statement No. 142.
6
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 2002. In February
2001 we issued 1.0 million shares under the rights. In June 2001, we issued
another 400,000 shares under the rights, leaving up to 700,000 shares to be
issued. We recorded $115 million of goodwill in connection with acquiring the
remaining 74%.
During the second quarter of 2001, we contributed the majority of PES'
assets and technologies, including $130 million of goodwill associated with the
purchase of PES, to a newly formed joint venture, WellDynamics. We received $39
million in cash as an equity equalization adjustment. The remaining assets of
PES relating to completions and well intervention products have been combined
with our existing completions product service line. We own 50% of WellDynamics
and account for this investment using the equity method.
Note 4. Discontinued Operations
In 1999 the Dresser Equipment Group was comprised of six operating
divisions and two joint ventures that manufactured and marketed 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. 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. As a result of this review, we determined that the 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.
In January 2001, we signed a definitive agreement and closed on the
sale of these businesses on April 10, 2001. As part of the terms of the
transaction, we retained a 5.1% equity interest in the Dresser Equipment Group,
which has been renamed Dresser, Inc. In the second quarter of 2001, we
recognized a preliminary pretax gain on the sale of discontinued operations of
$498 million ($299 million after-tax) subject to final purchase price
adjustments. Total value under the agreement was $1.55 billion less assumed
liabilities that resulted in cash proceeds of $1.27 billion from the sale. In
connection with the sale, we accrued certain disposition related costs, realized
$68 million of noncurrent deferred income tax assets, and reduced employee
compensation and benefit liabilities by $152 million for liabilities assumed by
the purchaser. The employee compensation and benefit liabilities were previously
included in "Employee compensation and benefits" in the condensed consolidated
balance sheets.
Gain on disposal of discontinued operations represents the gain on the
sale of the remaining businesses within the Dresser Equipment Group in the
second quarter of 2001 and the gain on the sale of Dresser-Rand in the first
quarter of 2000.
Three Months Six Months
Gain on Disposal of Discontinued Ended June 30 Ended June 30
Operations ---------------------- ----------------------
Millions of dollars 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------
Proceeds from sale, less
intercompany settlement $ 1,267 $ - $ 1,267 $ 536
Net assets disposed (769) - (769) (180)
- --------------------------------------------------------------------------------------------------
Gain before taxes 498 - 498 356
Income taxes (199) - (199) (141)
- --------------------------------------------------------------------------------------------------
Gain on disposal of discontinued operations $ 299 $ - $ 299 $ 215
==================================================================================================
7
The financial results of the Dresser Equipment Group through March 31,
2001 are presented as discontinued operations in our financial statements.
During the three months ended June 30, 2001, we recorded as discontinued
operations a provision of $92 million as follows:
- $90 million for liabilities less anticipated insurance recoveries
for asbestos claims arising after the 1992 divestiture of INDRESCO,
previously reported as discontinued operations. See Note 7.
- $2 million for other non-engineering and construction related
asbestos claims for businesses previously disposed of by Dresser
Industries, Inc. which were accounted for as continuing operations
in prior periods.
Three Months Six Months
Income (loss) from Discontinued Ended June 30 Ended June 30
Operations ------------------------- -----------------------
Millions of dollars 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Revenues $ - $ 354 $ 359 $ 691
===============================================================================================
Operating income $ - $ 37 $ 37 $ 73
Asbestos litigation claims, net of
insurance recoveries (92) - (92) -
Tax benefit (expense) 32 (14) 17 (28)
- -----------------------------------------------------------------------------------------------
Net income (loss) $ (60) $ 23 $ (38) $ 45
===============================================================================================
Net Assets of Discontinued Operations December 31
Millions of dollars 2000
- --------------------------------------------------------------------
Receivables $ 286
Inventories 255
Other current assets 22
Accounts payable (104)
Other current liabilities (161)
- --------------------------------------------------------------------
Net current assets of discontinued operations $ 298
====================================================================
Net property, plant and equipment $ 219
Goodwill, net 257
Other assets 30
Employee compensation and benefits (113)
Other liabilities (2)
- --------------------------------------------------------------------
Net noncurrent assets of discontinued operations $ 391
====================================================================
Note 5. Receivables
Our receivables are generally not collateralized. With the exception of
claims and change orders that 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 several months. Claims and change orders included in
unbilled receivables amounted to $154 million and $113 million at June 30, 2001
and December 31, 2000, respectively.
Note 6. Inventories
Inventories to support continuing operations at June 30, 2001 and
December 31, 2000 are composed of the following:
June 30 December 31
---------------- ---------------
Millions of dollars 2001 2000
- --------------------------------------------------------------------
Finished products and parts $ 541 $ 486
Raw materials and supplies 226 178
Work in process 88 59
- --------------------------------------------------------------------
Total $ 855 $ 723
====================================================================
8
Inventories on the last-in, first-out method were $77 million at June
30, 2001 and $66 million at December 31, 2000. If the average cost method had
been used, total inventories would have been about $29 million higher than
reported at June 30, 2001 and $28 million higher than reported at 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.
Dresser's discussions with London-based carriers and Equitas lead us to believe
that they are attempting to impose new documentation requirements on many
insureds. The current coverage-in-place agreements that Dresser has with some of
these carriers contains specific but different documentation requirements. We
believe that any new documentation requirements are inconsistent with the
current coverage-in-place agreements and are unenforceable.
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. Highlands was a subsidiary of Halliburton Energy Services, Inc. prior
to its spin-off to our shareholders in early 1996. Most claims filed against
Kellogg Brown & Root allege exposure to asbestos prior to the spin-off of
Highlands and are disposed of for less than the limits of the Highlands
policies. We were unable, in negotiations with Highlands during 1999 and early
2000, to reach an agreement on the amount of insurance coverage Highlands is
obligated to 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 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.
On March 21, 2001 the Delaware Chancery Court ruled that Highlands was
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 have covered 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, which will hear oral
argument on September 17, 2001. 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.
9
Since 1976, approximately 327,000 asbestos claims have been filed
against us in regards to the above claims. About 30,000 of these claims relate
to Brown & Root, now part of Kellogg Brown & Root. The balance of these claims
relate to former Dresser divisions and subsidiaries or other Halliburton
entities. Approximately 182,000 of these claims have been settled or disposed of
at a gross cost of approximately $138 million, with recoveries from insurance
companies paying or expected to pay all but approximately $37 million. Asbestos
claims continue to be filed against us, with about 45,000 claims filed in 2000
and about 46,000 filed in the first two quarters of 2001. At June 30, 2001,
there were about 145,000 open asbestos claims asserted against us, including
about 24,000 associated with insurance recoveries we expect to collect from
Highlands. This number of open claims compares with approximately 117,000 open
claims at the end of 2000. Open claims at June 30, 2001 also include 13,000
claims for which settlements are pending.
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 $131.3 million as of March 31, 2001, up from
$127.4 million at the end of the year 2000, and 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 the litigation is successfully concluded in our favor.
Harbison-Walker Asbestos Claims
Our subsidiary, Dresser Industries, Inc., acquired Harbison-Walker
Refractories Company in 1967. After the acquisition, Dresser operated the
refractory business as a division. In 1992, Dresser placed the refractory
business and several other businesses in a subsidiary, INDRESCO, Inc., and
spun-off INDRESCO to Dresser's shareholders as a new publicly held company. In
conjunction with the spin-off, Dresser and Harbison-Walker, then called
INDRESCO, entered into an agreement, which allocated between them responsibility
for asbestos claims related to the refractory business. Dresser agreed to retain
claims filed prior to the spin-off. Harbison-Walker agreed to assume claims
filed after the spin-off and to indemnify and defend Dresser from those claims.
They also agreed that Harbison-Walker would have access to substantial amounts
of Dresser's insurance coverage. This insurance would reimburse Harbison-Walker
for defense costs and indemnity payments incurred defending the asbestos claims
Harbison-Walker assumed. This insurance requires Harbison-Walker to first pay
defense and indemnity costs and then seek reimbursement. This insurance, which
includes policies issued by more than 20 different insurance carriers, including
the Lloyds-related Equitas, also covers other types of claims against Dresser,
including asbestos claims from other former Dresser businesses.
Subsequent to the spin-off, INDRESCO formed a new holding company,
Global Industrial Technologies, Inc. and changed INDRESCO's name to
Harbison-Walker Refractories Company, leaving it as a subsidiary of Global. At
the end of 1999, RHI AG, an Austrian company, acquired Global.
10
In June 2001, Harbison-Walker informed Dresser that it was unable to
pay a large number of asbestos claims settlements it had negotiated with
plaintiffs. Harbison-Walker requested that Dresser provide it with financial
assistance to pay these settlements. Since receiving its request, we have
conducted an investigation of the status of the asbestos claims assumed by
Harbison-Walker. We believe that at June 30, 2001, Harbison-Walker was defending
approximately 112,000 open claims it assumed under the 1992 agreement, including
approximately 35,000 new refractory related claims which were filed during the
first half of this year, many of which name Dresser as a defendant based on its
prior ownership of the refractory business. Based upon information we developed,
including our own experience managing asbestos claims and our analysis of
Harbison-Walker's claims management, we have estimated our exposure on these
open claims. Harbison-Walker's average historical claim settlements have been
significantly higher than we have experienced with our similar refractory claim
settlements. In addition, Harbison-Walker appears to have entered into
settlements of 47,000 to 52,000 additional claims for an aggregate amount that
may exceed $320 million. Harbison-Walker has historically recovered more than
90% of their asbestos claims settlements through their insurance coverage. None
of the above Harbison-Walker claims have been included in previous asbestos
claims reported by Halliburton due to our reliance on Harbison-Walker's defense
and indemnity obligations under the 1992 spin-off agreement.
Based on its request for assistance, we believe that Harbison-Walker
does not have the financial ability to comply with its defense and indemnity
requirements under the 1992 spin-off agreement. Dresser's discussions with some
of the insurance carriers obligated to provide coverage for these claims
indicate that it is likely that they will refuse to pay Harbison-Walker's
existing settlements. In addition, Equitas and other London-based insurance
carriers have notified Harbison-Walker and Dresser that they will attempt to
impose new documentation requirements on reimbursement claims made on this
insurance. The current coverage-in-place agreement that Dresser and
Harbison-Walker have with these carriers contains specific but different
documentation requirements. We believe that any new documentation requirements
are inconsistent with the current coverage-in-place agreement and are
unenforceable.
Based on our investigation, Dresser has decided that it will not
provide financial assistance to Harbison-Walker to pay the settlements
Harbison-Walker has negotiated but is unable to pay. Dresser has also decided
that it will not relieve Harbison-Walker of its obligations under the 1992
agreement. We believe that Harbison-Walker is no longer able to provide and is
not providing Dresser with an adequate defense and indemnity as required under
the 1992 agreement. As a result, Dresser will separately and aggressively assert
its own defense of those claims that name Dresser as a defendant, including any
new claims.
On August 2, 2001, Harbison-Walker filed a lawsuit in the District
Court of Jefferson County, Texas alleging that Dresser and Halliburton breached,
among other things, provisions of the 1992 spin-off agreement and the
coverage-in-place agreements as well as commercially disparaged Harbison-Walker
and tortiously interfered with its contractual relationships. Harbison-Walker's
lawsuit bases these allegations on the press releases issued by Halliburton on
June 28, 2001 and July 25, 2001.
We believe that these allegations are without merit and will vigorously
defend against them. On August 7, 2001, Dresser and Halliburton filed a Motion
to Compel Arbitration in the Jefferson County action based on the arbitration
provision contained in the 1992 spin-off agreement. In our motion, we asked the
Court to dismiss Harbison-Walker's lawsuit and order the parties to arbitrate
all of the disputes arising out of the interpretation and implementation of the
spin-off agreement.
Also on August 7, 2001, Dresser filed a lawsuit, in the United States
District Court for the Northern District of Texas, against Harbison-Walker's
parent company, RHI AG, an Austrian corporation, Harbison-Walker's affiliates,
and Dresser's insurance companies. In this lawsuit, Dresser alleges that:
- Harbison-Walker, in concert with its affiliates and agents,
fraudulently billed Dresser's historic general liability insurers
for asbestos-related costs that Harbison-Walker had yet to pay;
- Harbison, its affiliates and agents have violated federal mail
fraud and money laundering statutes, and thus, have violated the
Racketeer Influenced Corrupt Organizations Act, commonly referred
to as a RICO action; and
- The actions of Harbison-Walker, its affiliates and agents constitute
common law conversion and conspiracy.
11
Finally, Dresser also seeks a declaratory judgment that the amounts
these insurance companies improperly paid to Harbison-Walker in response to the
fraudulent billings do not erode the insurance coverage available to Dresser for
its asbestos-related liabilities.
Also on August 7, 2001, Dresser filed a comprehensive insurance
coverage lawsuit, in the District Court of Dallas County, Texas, against its
historic general liability insurers. Dresser seeks, among other relief, a
declaratory judgment that Dresser is entitled to insurance coverage for all of
its asbestos-related liabilities arising out of its pre-November 1, 1985
operations or the operations of its predecessors acquired prior to November 1,
1985. Dresser filed this lawsuit to further protect its insurance coverage asset
in light of several developments including:
- Harbison-Walker's attempt to improperly access insurance
coverage; and
- London-based insurers' lawsuits against other unrelated
policyholders seeking to unilaterally and improperly modify
existing coverage-in-place agreements.
Summary
Based on our analysis of the believed number of current claims pending
against Harbison-Walker and our experience with our other asbestos claims, we
recorded as discontinued operations in the 2001 second quarter an accrual of $92
million ($60 million, after tax) for potential liabilities for open and settled
asbestos claims at June 30, 2001.
Discontinued Operations Asbestos Reserve June 30
Millions of dollars 2001
- ---------------------------------------------------------------------------------
Harbison-Walker open claims liability $ 576
Estimated insurance recoveries - Harbison-Walker (518)
Harbison-Walker settled but not paid liability 32
Dresser Industries, Inc. claims on disposed businesses 14
Estimated insurance recoveries - Dresser Industries, Inc. (12)
- ---------------------------------------------------------------------------------
Asbestos claims in discontinued operations, net of insurance $ 92
=================================================================================
A summary of our reserves for all open asbestos claims and
corresponding estimated insurance recoveries, including the above, is as
follows:
June 30 December 31
--------------- ----------------
Millions of dollars 2001 2000
- --------------------------------------------------------------------------------------
Asbestos litigation claims $ 699 $ 80
Estimated insurance recoveries:
Highlands Insurance Company (37) (39)
Other insurance carriers (538) (12)
- --------------------------------------------------------------------------------------
Insurance for asbestos litigation claims (575) (51)
- --------------------------------------------------------------------------------------
Net liability for known open asbestos claims $ 124 $ 29
======================================================================================
The above are included in noncurrent assets and liabilities due to the
extended time periods involved to settle claims.
In addition to the above, accounts receivable include amounts we expect
to collect from Highlands Insurance Company of $20 million for payments we
already have made on asbestos claims. If our appeal of the Chancery Court's
ruling in the Highlands litigation is ultimately unsuccessful, we will be unable
to collect this $20 million as well as the $37 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.
12
Accounts receivable for billings to other insurance carriers for
payments made on asbestos claims were $11 million at June 30, 200l and $13
million at December 31, 2000.
The uncertainties of asbestos litigation, resolution of the newly filed
Harbison-Walker and insurance litigation, and the possibility that a series of
adverse court rulings or new legislation affecting the asbestos claims
litigation or settlement process make it difficult to accurately predict and
could materially impact the resolution of our asbestos claims. Subject to this
difficulty, however, and 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 materials
containing asbestos in any construction process;
- our understanding of the facts and circumstances that gave rise to
asbestos claims; and
- our estimate of amounts we will recover from insurance companies,
we believe that the known 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.
13
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.
During the second quarter of 2001, we accrued $15 million for
environmental matters related to liabilities retained on properties included in
the sale of Dresser Equipment Group. Our accrued liabilities for environmental
matters were $49 million as of June 30, 2001 and $31 million as of 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 Six Months
Ended June 30 Ended June 30
Millions of dollars and shares except ---------------------------- ---------------------------
per share data 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations before
accounting change $ 143 $ 52 $ 229 $ 79
================================================================================================================
Basic weighted average shares 427 444 427 443
Effect of common stock equivalents 3 5 3 4
- ----------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 430 449 430 447
================================================================================================================
Income per common share from continuing
operations before accounting change:
Basic $ 0.34 $ 0.12 $ 0.54 $ 0.18
================================================================================================================
Diluted $ 0.33 $ 0.12 $ 0.53 $ 0.18
================================================================================================================
Income from discontinued operations:
Basic $ 0.56 $ 0.05 $ 0.61 $ 0.59
================================================================================================================
Diluted $ 0.56 $ 0.05 $ 0.61 $ 0.58
================================================================================================================
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 the outstanding rights issued in connection with
the PES acquisition of up to 2.1 million shares of Halliburton common stock. See
Note 3. Excluded from the computation of diluted income per share are options to
purchase 1.9 million and 1.0 million shares of common stock which were
outstanding during the three months ended June 30, 2001 and June 30, 2000,
respectively. Also excluded from the computation of diluted income per share are
options to purchase 2.1 million and 1.3 million shares of common stock which
were outstanding during the six months ended June 30, 2001 and June 30, 2000,
respectively. 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.
14
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.
Three Months Six Months
Ended June 30 Ended June 30
---------------------------- ----------------------------
Millions of dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net income $ 382 $ 75 $ 491 $ 339
Cumulative translation adjustment, net of tax (4) (40) (46) (50)
Less reclassification adjustment for (gains)
included in net income 102 - 102 (11)
Adjustment to minimum pension liability 12 - 12 -
Unrealized gains on investments and derivatives 4 - 2 -
- ------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 496 $ 35 $ 561 $ 278
==================================================================================================================
Accumulated other comprehensive income at June 30, 2001 and December
31, 2000 consisted of the following:
June 30 December 31
--------------- ---------------
Millions of dollars 2001 2000
- ------------------------------------------------------------------------------------------------
Cumulative translation adjustment $ (219) $ (275)
Minimum pension liability - (12)
Unrealized gains (losses) on investments and derivatives 1 (1)
- ------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (218) $ (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 reduce 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 $11 million have been made and the
elimination of approximately 30 senior management positions is substantially
complete. We expect remaining payments under severance arrangements to be
completed during 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 revised rules governing the
financial statements of guarantors and issuers of guaranteed registered
securities. The following condensed consolidating financial information presents
Halliburton and our subsidiaries on a stand-alone basis using the equity method
of accounting for our interest in our subsidiaries.
15
Condensed Consolidating Statements of Income
Quarter ended June 30, 2001
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,339 $ 170 $ 525 $ (695) $ 3,339
Cost of revenues (2,966) - - - (2,966)
General and administrative (101) - - - (101)
Interest expense (16) (8) (10) - (34)
Interest income 5 3 29 (31) 6
Other, net 10 125 (17) (119) (1)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 271 290 527 (845) 243
Provision for income taxes (99) (4) 5 - (98)
Minority interest in net income of
subsidiaries (2) - - - (2)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 170 286 532 (845) 143
Income from discontinued operations - 239 - - 239
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 170 $ 525 $ 532 $ (845) $ 382
=======================================================================================================================
Condensed Consolidating Statements of Income
Quarter ended June 30, 2000
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,868 $ 96 $ 119 $ (215) $ 2,868
Cost of revenues (2,665) - - - (2,665)
General and administrative (77) - - - (77)
Interest expense (10) (14) (9) - (33)
Interest income 3 36 15 (51) 3
Other, net (2) - (1) - (3)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 117 118 124 (266) 93
Provision for income taxes (39) 1 2 - (36)
Minority interest in net income of
subsidiaries (5) - - - (5)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 73 119 126 (266) 52
Income from discontinued operations 23 - - - 23
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 96 $ 119 $ 126 $ (266) $ 75
=======================================================================================================================
16
Condensed Consolidating Statements of Income
Six Months ended June 30, 2001
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -------------------------------------------------------------------------------------------------------------------------
Total revenues $ 6,483 $ 306 $ 673 $ (979) $ 6,483
Cost of revenues (5,821) - - - (5,821)
General and administrative (192) - - - (192)
Interest expense (21) (17) (44) 1 (81)
Interest income 9 6 29 (34) 10
Other, net (1) 146 (4) (145) (4)
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes, minority interest and
accounting change 457 441 654 (1,157) 395
Provision for income taxes (167) (7) 15 - (159)
Minority interest in net income of
subsidiaries (7) - - - (7)
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before accounting change 283 434 669 (1,157) 229
Income from discontinued operations 22 239 - - 261
Cumulative effect of accounting change, net 1 - - - 1
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 306 $ 673 $ 669 $(1,157) $ 491
=========================================================================================================================
Condensed Consolidating Statements of Income
Six Months ended June 30, 2000
Dresser
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor Inc. Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 5,727 $ 169 $ 425 $ (594) $ 5,727
Cost of revenues (5,360) - - - (5,360)
General and administrative (160) - - - (160)
Interest expense (14) (27) (25) - (66)
Interest income 10 65 29 (94) 10
Other, net (6) - (1) - (7)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 197 207 428 (688) 144
Provision for income taxes (64) 3 5 - (56)
Minority interest in net income of
subsidiaries (9) - - - (9)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 124 210 433 (688) 79
Income from discontinued operations 45 215 - - 260
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 169 $ 425 $ 433 $ (688) $ 339
=======================================================================================================================
17
Condensed Consolidating Balance Sheets
June 30, 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 $ 166 $ 6 $ 156 $ - $ 328
Receivables:
Notes and accounts receivable, net 1,556 1,693 - - 3,249
Unbilled work on uncompleted contracts 959 - 2 - 961
- -----------------------------------------------------------------------------------------------------------------------
Total receivables 2,515 1,693 2 - 4,210
Inventories 855 - - - 855
Other current assets 461 1 5 - 467
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 3,997 1,700 163 - 5,860
Property, plant and equipment, net 2,483 - - - 2,483
Equity in and advances to
unconsolidated affiliates 457 43 - - 500
Intercompany receivable from
consolidated affiliates - - 2,638 (2,638) -
Equity in and advances to
consolidated affiliates - 5,351 3,182 (8,533) -
Goodwill, net 523 85 - - 608
Insurance for asbestos litigation claims 57 518 - 575
Other assets 585 37 13 - 635
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 8,102 $ 7,734 $ 5,996 $(11,171) $10,661
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 796 $ 58 $ 702 $ - $ 1,556
Other current liabilities 1,539 219 43 - 1,801
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,335 277 745 - 3,357
Long-term debt 200 439 400 - 1,039
Intercompany payable from
consolidated affiliates (585) 3,223 - (2,638) -
Asbestos litigation claims 90 609 - 699
Other liabilities 955 4 83 - 1,042
Minority interest in consolidated
subsidiaries 44 - - - 44
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 3,039 4,552 1,228 (2,638) 6,181
Shareholders' equity:
Common shares 391 - 1,138 (391) 1,138
Other shareholders' equity 4,672 3,182 3,630 (8,142) 3,342
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,063 3,182 4,768 (8,533) 4,480
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,102 $ 7,734 $ 5,996 $(11,171) $10,661
=======================================================================================================================
18
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
=======================================================================================================================
19
Condensed Consolidating Statements of Cash Flows
Six Months ended June 30, 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 $ 251 $ 46 $ 47 $ - $ 344
Capital expenditures (344) - - - (344)
Sales of property, plant and equipment 39 - - - 39
Other investing activities (147) - 1,032 (1,032) (147)
Payments on long-term borrowings (4) (5) - - (9)
Borrowings (repayments) of
short-term debt, net (18) - (836) - (854)
Payments of dividends to shareholders - - (107) - (107)
Proceeds from exercises of stock options - - 24 - 24
Payments to reacquire common stock - (8) - (8)
Other financing activities 185 (1,220) - 1,032 (3)
Effect of exchange rate on cash (12) - - - (12)
Net cash flows from discontinued
operations - 1,174 - - 1,174
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents $ (50) $ (5) $ 152 $ - $ 97
========================================================================================================================
Condensed Consolidating Statements of Cash Flows
Six Months ended June 30, 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 $ (291) $ 27 $ (11) $ - $ (275)
Capital expenditures (190) - - - (190)
Sales of property, plant and equipment 36 - - - 36
Other investing activities (33) - 87 (87) (33)
Payments on long-term borrowings (5) (300) - - (305)
Borrowings (repayments) of
short-term debt, net 28 - (94) - (66)
Payments of dividends to shareholders - - (111) - (111)
Proceeds from exercises of stock options - - 57 - 57
Payments to reacquire common stock - - (6) - (6)
Other financing activities (330) 243 - 87 -
Effect of exchange rate on cash (14) - - - (14)
Net cash flows from discontinued
operations 804 - - - 804
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents $ 5 $ (30) $ (78) $ - $ (103)
=======================================================================================================================
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
In this section, we discuss the operating results and general financial
condition of Halliburton Company and its subsidiaries. We explain:
- factors and risks that impact our business;
- why our earnings and expenses for the second quarter of 2001 differ
from the second quarter of 2000;
- why our earnings and expenses for the first six months of 2001
differ from the first six months of 2000;
- factors that impacted our cash flows; and
- other items that materially affect our financial condition or
earnings.
BUSINESS ENVIRONMENT
Our continuing business is organized around two business segments:
- Energy Services Group; and
- Engineering and Construction Group.
The results of Dresser Equipment Group are reported as discontinued
operations.
We currently operate in over 100 countries throughout the world,
providing a comprehensive range of discreet and integrated products and services
to the petroleum industry, and to other industrial and governmental customers.
The majority of our consolidated revenues is derived from the sale of services
and products, including engineering and construction activities, to large oil
and gas companies. These services and products are used throughout the energy
industry, from 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 or
currency devaluation may result in the increased business risk in any one
country. We believe the geographic diversification of our business activities
reduces the risk that loss of business in any one country would be material to
our consolidated results of operations.
Halliburton Company
Spending on exploration and production activities and investments in
capital expenditures for refining and distribution facilities by large oil and
gas companies have a significant impact on the activity levels within our two
business segments. Based on industry surveys, 2001 capital spending by our
customers for oil and gas exploration and production is estimated to increase by
at least 20% compared to 2000. Through the first six months of 2001, this
increased spending has contributed to higher levels of worldwide drilling
activity.
Drilling activity increases in North America, primarily related to
demand for natural gas, has generated much of the growth in demand for our
products and services during 2001. Despite recent volatility in crude oil and
United States natural gas prices, and speculation about future supply and demand
imbalances, we expect average activity levels within North America in 2001 to be
higher than 2000. Internationally, sustained strong crude oil prices have
resulted in steadily increasing levels of capital spending and drilling,
primarily by major oil and gas companies, including national oil companies.
Generally, international oil and gas field development projects, particularly
deepwater projects in West Africa and Brazil, have longer lead times, economics
based on longer-term commodity prices, and are less likely to be delayed due to
fluctuating short-term prices. We anticipate improvements in rig activity
outside North America through the end of 2001 to benefit our Energy Services
Group operations. In addition we expect our engineering and construction backlog
to benefit later this year from projects in the process of contract finalization
and increased bid activity on new and previously delayed projects.
Over the longer-term, we expect increased global demand for oil and
natural gas, additional spending to replace depleting reserves and continued
technological advances in our products and services to provide growth
opportunities for our products and services.
21
Energy Services Group
High natural gas and crude oil prices during the first half of 2001
have contributed to increased demand for the products and services provided by
the Energy Services Group. Activity has been highest in the United States,
reflecting primarily the increased levels of drilling for natural gas. The
rotary rig count in the United States continued to increase and averaged 1,188
rigs in the first half of 2001, an increase of 47% over the average for the
first half of 2000. Despite recent volatility in natural gas prices, Henry Hub
gas prices for the first six months of 2001 averaged $5.51/MCF, well above the
$3.08/MCF average for the first half of 2000. Higher activity levels have
increased our equipment and personnel utilization, resulting in increased
profitability and pricing strength, particularly within the United States. Crude
oil prices, another business indicator, remained strong throughout the first
half of 2001, with West Texas Intermediate averaging nearly $29 per barrel,
which is basically flat with the first six-month average in 2000. While some
uncertainty exists in the United States about natural gas and crude oil prices,
we expect activity to remain at strong levels through the third quarter of 2001.
Future spending by our customers will become clearer as they begin to prepare
their capital budgets for 2002 and as visibility of future oil and gas prices
improves during the second half of 2001.
The turnaround in international rig activity continued through the
first half of 2001, with the average rig count at 737 rigs working compared to
an average of 602 in the first six-month period of 2000, an increase of 22%.
Compared to the second 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 the United States 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 the United States and
internationally, especially in the North Sea, Latin America, 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. During this time, a series of
mergers and consolidations among our major customers also reduced our customers'
levels of investment in refining and distribution facilities as they evaluated
existing capacities. Due to the lack of opportunities existing throughout 2000,
combined with an extremely competitive global engineering and construction
environment, we restructured our Engineering and Construction Group in late 2000
and the first quarter of 2001. Engineering, construction, fabrication and
project management capabilities are now part of one operating company - Kellogg
Brown & Root. This flatter, more responsive organization is now positioned to
benefit from the expected increases in engineering and construction project
spending. Based upon our technologies and proven capabilities on complex
projects, combined with recent and pending project awards and increasing levels
of bid activity, we are optimistic about our financial performance continuing to
improve later this year and as we move into 2002. In addition, we also see
emerging engineering and construction project opportunities in liquefied natural
gas, gas-to-liquids, and deepwater production. Growth opportunities exist to
provide additional support services to governmental agencies in the United
States and 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
- ----------------------------------------------
Second Quarter of 2001 Compared with the Second Quarter of 2000
Second Quarter
REVENUES ---------------------------- Increase
Millions of dollars 2001 2000 (decrease)
- ---------------------------------------------------------------------------------------
Energy Services Group $ 2,214 $ 1,615 $ 599
Engineering and Construction Group 1,125 1,253 (128)
- ---------------------------------------------------------------------------------------
Total revenues $ 3,339 $ 2,868 $ 471
=======================================================================================
22
Consolidated revenues in the second quarter of 2001 of $3.3 billion
increased $471 million, or 16%, compared to the second quarter of 2000.
International revenues were 60% of total revenues for the second quarter of 2001
and 67% in the second quarter of 2000.
Energy Services Group revenues were $2.2 billion for the second quarter
of 2001, an increase of 37% over the second quarter of 2000. International
revenues were 55% of total revenues in the second quarter of 2001 as compared to
63% in the second quarter of 2000. North America benefited from higher rig
counts and gas prices, increased equipment utilization and pricing improvements.
Our oilfield services product service line revenue of $1.8 billion increased 40%
year-over-year. Pressure pumping, which represents almost 50% of that revenue,
achieved revenue growth of 48% while drilling fluids and drilling services
increased 41% and 39%, respectively. Revenues from the remaining oilfield
product service lines also showed substantial increases year-over-year.
Geographically, North America oilfield services revenues increased 58%, while
Latin America and Europe/Africa revenues increased 33% and 24%, respectively.
Oilfield services revenues in the Middle East and Asia Pacific both rose by
approximately 13%. Particularly strong revenue improvements were reported in
Russia, Venezuela, Egypt, Brazil, United Kingdom, Nigeria, and Indonesia.
Revenues for the remainder of the segment increased $100 million over the second
quarter of 2000 with the largest increase attributable to a major project in
Brazil that began in late 2000. Integrated exploration and production
information systems revenues increased 25% for the second quarter as compared to
the second quarter of 2000 reflecting the positive impact of the data management
acquisition. Activity in our surface/subsea operations was basically flat
year-over-year.
Engineering and Construction Group revenues were $128 million, or 10%,
lower in the second quarter of 2001 compared to the second quarter of 2000.
About 69% of the segment's revenues were from international activities as
compared to 72% in the second quarter last year. Decreases in revenues were
mostly attributable to the completion of large onshore projects that have not
been replaced with new projects. Our customers have continued to delay major
projects in the downstream sector and focus on maintaining existing facilities.
This focus contributed to the 18% increase in revenues from our operations and
maintenance product line revenues year-over-year. Revenues from the government
services product line were 5% higher for the second quarter of 2001 as compared
to the second quarter in 2000 with increases in ship refitting in the United
Kingdom and management and engineering. Increases in the government operations
product line were partially offset by a $36 million decrease in a logistical
support contract in the Balkans which has progressed from the construction phase
to the sustainment phase over the past 12 months.
Second Quarter
OPERATING INCOME -------------------------- Increase
Millions of dollars 2001 2000 (decrease)
- -------------------------------------------------------------------------------------
Energy Services Group $ 267 $ 113 $ 154
Engineering and Construction Group 25 30 (5)
General corporate (20) (17) (3)
- -------------------------------------------------------------------------------------
Total operating income $ 272 $ 126 $ 146
=====================================================================================
Consolidated operating income of $272 million was 116% higher in the
second quarter of 2001 compared to the second quarter of 2000.
Energy Services Group operating income for the second quarter of 2001
more than doubled compared to the second quarter of 2000. Oilfield services
product service lines operating income increased by $169 million, or 172%,
year-over-year due to higher equipment and personnel use combined with improved
pricing. Operating income increased over 150% in our pressure pumping, logging,
drill bits, and drilling services businesses. All oilfield services' geographic
regions had significant increases in operating income, particularly in North
America where operating income rose 126% reflecting pricing improvements and
higher activity levels. Operating income for the remainder of the segment
declined by $15 million. Increased operating income from our major project in
Brazil was offset by lower utilization and activity levels in our surface/subsea
product service line. The second quarter of 2000 also benefited from the impact
of a $4 million favorable resolution of a royalty issue in our integrated
exploration and production information systems business.
23
Engineering and Construction Group operating income for the second
quarter of 2001 decreased by $5 million from the same period in 2000 on lower
revenues. Operating margins were basically flat year-over-year.
General corporate expense for the second quarter of 2001 was $20
million.
NONOPERATING ITEMS
Interest expense of $34 million for the second quarter of 2001
increased $1 million compared to the second quarter of 2000.
Interest income was $6 million in the second quarter of 2001, an
increase from the second quarter of 2000 interest income of $3 million.
Foreign exchange losses, net were $1 million in the current year
quarter compared to $3 million in the prior year second quarter.
Provision for income taxes of $98 million resulted in an effective tax
rate of 40.3%, up slightly from the second quarter of 2000 rate of 38.7%.
Income from continuing operations was $143 million in the second
quarter of 2001 compared to $52 million in the prior year quarter.
Income (loss) from discontinued operations was ($60) million for the
second quarter of 2001 as compared to $23 million for the second quarter of
2000. Loss from discontinued operations for the current year quarter represents
$90 million, before tax, of accrued expenses related to asbestos claims net of
insurance recoveries arising after the divestiture of INDRESCO which related to
the Harbison-Walker business as well as $2 million for other Dresser Industries,
Inc. non-engineering and construction asbestos claims related to businesses
disposed in prior years which were previously accounted for in continuing
operations. See Note 7. The second quarter of 2000 consists of the Dresser
Equipment Group's net income.
Gain on disposal of discontinued operations of $299 million after-tax
or $0.70 per diluted share in 2001, resulted from the sale of our remaining
businesses in the Dresser Equipment Group.
Net income for the second quarter of 2001 was $382 million, or $0.89
per diluted share. The prior year's quarterly net income was $75 million, or
$0.17 per diluted share.
First Six Months of 2001 Compared with the First Six Months of 2000
First Six Months
REVENUES --------------------------------- Increase
Millions of dollars 2001 2000 (decrease)
- ----------------------------------------------------------------------------------------------
Energy Services Group $ 4,245 $ 3,038 $ 1,207
Engineering and Construction Group 2,238 2,689 (451)
- ----------------------------------------------------------------------------------------------
Total revenues $ 6,483 $ 5,727 $ 756
==============================================================================================
Consolidated revenues in the first six months of 2001 of $6.5 billion
increased 13% compared to the first six months of 2000. International revenues
were 61% of total revenues for the first half of 2001 and 66% in the first half
of 2000 as activity and pricing in the United States increased more rapidly than
internationally.
Energy Services Group revenues were higher by $1.2 billion in the first
half of 2001, an increase of 40% from the first half of 2000. International
revenues were 57% of total revenues for the first six months of 2001 as compared
to 63% for the first six months of 2000. Revenues increased across all
geographical regions and all product service lines within our oilfield services
operations. This improvement was primarily due to increased activity
attributable to higher rig counts. Pricing improvements in the United States
also contributed to increased revenues. Revenues from our oilfield services
product service lines were $3.4 billion for the first six months of 2001
compared to $2.4 billion for the first six months of 2000. Our pressure pumping
business experienced growth of 47% while logging revenues grew by 55%. Other
business within the oilfield services product service lines achieved growth
rates of 15% to 49%. Geographically, our oilfield service's product service
lines achieved a 59% growth rate in North America with significant increases
internationally in Venezuela, Brazil, Russia, Norway, Egypt, and Saudi Arabia.
Revenues for the remainder of the segment increased $265 million year-over-year
which was primarily due to the start-up of a major project in Brazil.
24
Engineering and Construction Group revenues decreased $451 million, or
17%, from the first six months of 2001 compared to the first six months of 2000.
Year-over-year revenues were 14% lower in North America and decreased 18%
outside North America. The decline in international revenues is mainly due to
the completion of several onshore and offshore projects. Government operations
product line revenues were lower by 10% due to the contract in the Balkans
moving from the construction phase to the sustainment phase. As a result of our
customers' focus on plant operations and maintaining existing facilities, the
operations and maintenance product line increased 15% partially offsetting the
revenue declines in other product lines.
First Six Months
OPERATING INCOME --------------------------------- Increase
Millions of dollars 2001 2000 (decrease)
- ----------------------------------------------------------------------------------------------
Energy Services Group $ 467 $ 162 $ 305
Engineering and Construction Group 43 79 (36)
General corporate (40) (34) (6)
- ----------------------------------------------------------------------------------------------
Total operating income $ 470 $ 207 $ 263
==============================================================================================
Consolidated operating income of $470 million was 127% higher in the
first six months of 2001 compared to the first six months of 2000.
Energy Services Group operating income for the first half of 2001
increased $305 million, or 188%, as compared to the first half of 2000.
Operating income in our oilfield services product service line tripled
reflecting increased activity and pricing improvements especially in the United
States. Significant improvements were also made in Latin America and the Middle
East. Operating income increased within all areas of the oilfield services
product service lines with the most substantial increases in pressure pumping,
logging, drilling services and drill bits. Operating income for the remainder of
the segment decreased $2 million. Operating income decreased because the prior
year included a $4 million favorable resolution of disputed royalties by our
integrated exploration and production information systems and lower operating
margins in our surface/subsea product service line partially offset by improved
operating income from our major project in Brazil.
Engineering and Construction Group operating income declined by $36
million from the first half of 2001 as compared to the first half of 2000. The
reduction reflects lower activity levels.
General corporate expenses for the first half of 2001 were $40 million.
The increase of $6 million over the first half of 2000 is due partially to
expenses incurred for the retirement of several executives earlier this year.
NONOPERATING ITEMS
Interest expense of $81 million for the first six months of 2001
increased $15 million compared to the first six months of 2000. The increase is
due to additional short-term debt incurred in the fourth quarter of 2000 and
outstanding through early April, 2001. This increase in short-term debt was
primarily due to repurchases of our common stock under our repurchase program
and borrowings associated with the PGS Data Management acquisition. Cash
received of $1.3 billion in April, 2001 from the sale of our remaining
businesses within the Dresser Equipment Group was used to repay our short-term
borrowings.
Interest income was $10 million in the first six months of 2001 and was
flat compared to the first six months in 2000.
Foreign exchange losses, net were $4 million in the first six months of
2001 compared to $7 million in the first six months of 2000.
Provision for income taxes of $159 million resulted in an effective tax
rate of 40.3% for the first six months of 2001, up slightly from the rate of
38.9% for the first six months of 2000.
Income from continuing operations was $229 million in the first six
months of 2001 compared to $79 million in the first six months of 2000.
25
Income (loss) from discontinued operations of ($38) million in 2001
primarily represents $90 million, before tax, of accrued expenses related to
asbestos claims net of insurance recoveries arising after the divestiture of
INDRESCO involving the Harbison-Walker business (see Note 7), net of income from
the Dresser Equipment Group for the first quarter of 2001. Income from
discontinued operations of $45 million for the first six months of 2000 is
composed of net earnings from the Dresser Equipment Group.
Gain on disposal of discontinued operations of $299 million after-tax,
or $0.70 per diluted share, in 2001 resulted from the sale of our remaining
businesses in the Dresser Equipment Group in April 2001. For the first six
months of 2000, the gain on disposal of discontinued operations of $215 million
after-tax, or $0.48 per diluted share, resulted from the sale of our 51%
interest in Dresser-Rand to Ingersoll-Rand in January 2000.
Cumulative effect of accounting change, net of $1 million reflects the
impact of adoption of Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and for Hedging Activities." After
recording the cumulative effect of the change our estimated annual expense under
Financial Accounting Standards No. 133 is not expected to be materially
different from amounts expensed under the prior accounting treatment.
Net income for the first six months of 2001 was $491 million, or $1.14
per diluted share. Net income for the first six months of 2000 was $339 million,
or $0.76 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
We ended the second quarter of 2001 with cash and equivalents of $328
million, an increase of $97 million from the end of 2000.
Cash flows from operating activities provided $344 million in the first
half of 2001 compared to using $275 million in the same period of 2000. Working
capital items, which include receivables, inventories, accounts payable and
other working capital, net, used $370 million of cash in the first six months of
2001 compared to $630 million in the same period of 2000.
Cash flows used in investing activities were $452 million in the first
half of 2001 and $187 million in the same period of 2000. Capital expenditures
in the first six months of 2001 were $344 million as compared to $190 million
for the first six months of 2000. In March 2001 we acquired the PGS Data
Management division of Petroleum Geo-Services ASA for approximately $175 million
cash.
Cash flows from financing activities used $957 million in the first six
months of 2001 as compared to $431 million for the first six months of 2000.
With the proceeds from the sale of the remaining businesses in Dresser Equipment
Group in April 2001 and Dresser-Rand and Ingersoll-Dresser Pump in 2000, we
repaid our short-term debt. We paid dividends of $107 million to our
shareholders in the first six months of 2001 as compared to $111 million in the
first six months of 2000. On July 12, 2001 we issued $425 million of two and
five year medium-term notes under our medium-term note program. The notes
consist of $275 million of 6% fixed rate notes due August 1, 2006 and $150
million of floating rate notes due July 16, 2003. Net proceeds from the two
medium-term note offerings were used to reduce short-term debt.
Cash flows from discontinued operations provided $1.2 billion in the
first six months of 2001 as compared to $804 million for the first six months of
2000. Cash flows for 2001 and 2000 include the proceeds from the sale of the
remainder of Dresser Equipment Group of $1,267 million and Dresser-Rand and
Ingersoll-Dresser Pump of $913 million, respectively.
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 28% of
total capitalization at June 30, 2001 compared to 40% at December 31, 2000.
ASBESTOS LITIGATION
During the second quarter of 2001, we experienced an upward trend in
the rate that new asbestos claims are filed against us. In addition, during the
quarter we became aware that a former subsidiary of Dresser, Harbison-Walker
Refractories Company, is failing to provide us with an adequate indemnity and
defense from asbestos claims it assumed when it was spun-off by Dresser in 1992.
A more complete discussion of these matters is contained in Note 7 to our
Quarterly Financial Statements.
26
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.
SHARE REPURCHASE PROGRAM
On April 25, 2000 our Board of Directors approved plans to implement a
share repurchase program for up to 44 million shares, or about 10% of our
outstanding common stock. As of June 30, 2001 we had repurchased over 20 million
shares at a cost of $759 million. No shares of common stock were repurchased
during the first half of 2001 under this plan; however, we may periodically make
repurchases of our common stock under this program as we deem appropriate.
ACCOUNTING CHANGES
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" which requires
the purchase method of accounting for business combination transactions
initiated after June 30, 2001.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets". The statement requires that goodwill recorded on acquisitions completed
prior to July 1, 2001 be amortized through December 31, 2001. Goodwill
amortization is precluded on acquisitions completed after June 30, 2001.
Effective January 1, 2002, goodwill will no longer be amortized but will be
tested for impairment as set forth in the statement. We are currently reviewing
the new standard and evaluating the effects of this standard on our future
financial condition, results of operations, and accounting policies and
practices. Amortization of goodwill for the first six months of 2001 totaled $23
million.
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 and use words like "may," "may
not," "believes," "do not believe," "expects," "do not expect," "do not
anticipate," and similar expressions. We may also provide oral or written
forward-looking information in other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best 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
- 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;
27
- operations in countries with significant amounts of political risk,
including, for example, Algeria, Angola, Libya, Nigeria, and Russia;
- 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, contract disputes, asbestos
litigation, insurance litigation, and environmental litigation; and
- environmental laws, including, for example, those that require
emission performance standards for facilities;
Weather related
- the effects of severe weather conditions, including, for example,
hurricanes and tornadoes, on operations and facilities; and
- the impact of prolonged severe or mild weather conditions on the
demand for and price of oil and natural gas;
Customers
- the magnitude of governmental spending and outsourcing 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;
- consolidation of customers in the oil and gas industry; and
- claim negotiations with engineering and construction customers on
cost variances and change orders on major projects;
Industry
- technological and structural changes in the industries that we
serve;
- sudden changes in energy prices that could undermine the fundamental
strength of the world economy or our customers;
- 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;
- changes in the price or the availability of commodities 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 nonreimbursable costs which cause the
project not to meet our expected profit margins;
- risks that result from entering into complex business arrangements
for technically demanding projects where failure by one or more
parties could result in monetary penalties; and
- the risk inherent in the use of derivative instruments of the sort
that we use which could cause a change in value of the derivative
instruments as a result of:
- adverse movements in foreign exchange rates, interest rates, or
commodity prices, or
- the value and time period of the derivative being different than
the exposures or cash flows being hedged;
28
Personnel and mergers/reorganizations/dispositions
- increased competition in the hiring and retention of employees in
specific areas, including, for example, energy services operations,
accounting and finance;
- integration of acquired businesses into Halliburton, including:
- standardizing information systems or integrating data from
multiple systems;
- maintaining uniform standards, controls, procedures and
policies; and
- combining operations and personnel of acquired businesses with
ours;
- effectively reorganizing operations and personnel within
Halliburton;
- replacing discontinued lines of businesses with acquisitions that
add value and complement our core businesses; and
- successful completion of planned dispositions.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. You should review any additional
disclosures we make in our 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 interest rates
and sales or purchases of goods or services from market fluctuations. Our use of
derivative instruments includes the following types of market risk:
- volatility of the currency and interest 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 do not
consider any of our hedging activities to be material.
29
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At our Annual Meeting of Stockholders held on May 15, 2001,
stockholders were asked to consider and act upon:
(1) the election of Directors for the ensuing year,
(2) a proposal to ratify the appointment of Arthur Andersen LLP as
independent accountants to examine the financial statements and
books and records of Halliburton for 2001,
(3) a stockholder proposal on work performed in Myanmar (Burma),
(4) a stockholder proposal on indexing executive stock options, and
(5) a stockholder proposal on the executive compensation system.
The following table sets out, for each matter where applicable, the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes.
(1) Election of Directors:
Name of Nominee Votes For Votes Withheld
Lord Clitheroe 353,073,550 6,059,561
Robert L. Crandall 353,143,397 5,989,714
Kenneth T. Derr 353,299,822 5,833,289
Charles J. DiBona 353,159,817 5,973,294
Lawrence S. Eagleburger 344,947,671 14,185,440
William R. Howell 353,148,146 5,984,965
Ray L. Hunt 300,487,137 58,645,974
David J. Lesar 353,176,448 5,956,663
Aylwin B. Lewis 353,144,149 5,988,962
J. Landis Martin 347,909,211 11,223,900
Jay A. Precourt 353,358,887 5,774,224
Debra L. Reed 353,159,141 5,973,970
C. J. Silas 353,286,750 5,846,361
(2) Proposal to ratify the appointment of Arthur Andersen LLP as the
independent auditors for Halliburton for the year 2001:
Number of Votes For 355,558,953
Number of Votes Against 2,275,328
Number of Votes Abstain 1,298,830
Number of Broker Non-Votes 0
(3) Proposal on work performed in Myanmar(Burma):
Number of Votes For 32,183,611
Number of Votes Against 270,625,586
Number of Votes Abstain 13,175,536
Number of Broker Non-Votes 43,148,378
30
(4) Proposal on indexing executive stock options:
Number of Votes For 42,046,243
Number of Votes Against 268,952,953
Number of Votes Abstain 4,985,537
Number of Broker Non-Votes 43,148,378
(5) Proposal on executive compensation system:
Number of Votes For 24,390,208
Number of Votes Against 286,618,757
Number of Votes Abstain 4,975,768
Number of Broker Non-Votes 43,148,378
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
* 10.1 Supplemental Executive Retirement Plan as amended and restated
effective January 1, 2001.
* 10.2 Benefit Restoration Plan as amended and restated effective
January 1, 2001.
* 10.3 Employment agreement.
* 24.1 Powers of attorney for the following directors signed in May 2001:
Kenneth T. Derr
Aylwin B. Lewis
Debra L. Reed
* 24.2 Powers of attorney for Douglas L. Foshee, Robert R. Harl and
Edgar J. Ortiz.
* Filed with this Form 10-Q.
(b) Reports on Form 8-K
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.
31
Date Filed Date of Earliest Event Description of Event
- --------------------------- ------------------------ ----------------------------------------------------------
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.
May 16, 2001 May 15, 2001 Item 5. Other Events for a press release announcing that
shareholders have elected all thirteen nominees to the
board of directors, ratified the appointment of Arthur
Andersen LLP to audit the financial statements for the
year 2001, and voted against three shareholder
proposals. The board of directors has declared a second
quarter dividend of 12.5 cents a share on common stock,
payable June 27, 2001 to shareholders of record at the
close of business on June 6, 2001.
June 7, 2001 June 4, 2001 Item 5. Other Events for a press release announcing
Grandbasin as a Landmark Company.
June 29, 2001 June 28, 2001 Item 5. Other Events for a press release announcing
Harbison-Walker Refractories Company request for
financial assistance for asbestos claims.
During the third quarter of 2001:
July 12, 2001 July 12, 2001 Item 5. Other Events for a press release announcing the
issuance of $275 million of fixed-rate notes due August
1, 2006 and $150 million of floating notes due July 16,
2003 for a total of $425 million in medium-term notes.
July 20, 2001 July 19, 2001 Item 5. Other Events for a press release announcing the
board of directors declared a 2001 third quarter
dividend of 12.5 cents a share payable September 27,
2001 to shareholders of record at the close of business
on September 6, 2001.
July 27, 2001 July 25, 2001 Item 5. Other Events for a press release announcing 2001
second quarter earnings.
July 27, 2001 July 25, 2001 Item 5. Other Events for a press release announcing
Douglas L. Foshee as executive vice president and chief
financial officer effective August 6, 2001.
32
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: August 9, 2001 By: /s/ Gary V. Morris
--------------------------------------
Gary V. Morris
Executive Vice President
/s/ R. Charles Muchmore, Jr.
--------------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller and
Principal Accounting Officer
33