.
.
.
EXHIBIT 99.5
Item 8. Financial Statements and Supplementary Data.
Page No.
--------
Independent Auditor's Report 3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 4
Consolidated Balance Sheets at December 31, 2002 and 2001 5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 6
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 8
Notes to Annual Financial Statements 10
Selected Financial Data (Unaudited) 50
Quarterly Data and Market Price Information (Unaudited) 53
1
INDEPENDENT AUDITOR'S REPORT
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF HALLIBURTON COMPANY:
We have audited the accompanying consolidated balance sheet of Halliburton
Company and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The accompanying 2001 and
2000 consolidated financial statements of Halliburton Company and subsidiaries
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements,
before the restatement described in Note 4 to the consolidated financial
statements and before the revision described in Note 22 to the consolidated
financial statements, in their report dated January 23, 2002 (except with
respect to matters discussed in Note 9 to those financial statements, as to
which the date was February 21, 2002).
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Halliburton
Company and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 4 to the consolidated financial statements, the Company
changed the composition of its reportable segments in 2003. The amounts in the
2002, 2001 and 2000 consolidated financial statements related to reportable
segments have been restated to conform to the 2003 composition of reportable
segments.
As discussed above, the 2001 and 2000 consolidated financial statements of
Halliburton Company and subsidiaries were audited by other auditors who have
ceased operations. As described above, the Company changed the composition of
its reportable segments in 2003, and the amounts in the 2001 and 2000
consolidated financial statements relating to reportable segments have been
restated. We audited the adjustments that were applied to restate the
disclosures for reportable segments reflected in the 2001 and 2000 consolidated
financial statements. In our opinion, such adjustments are appropriate and have
been properly applied. Also, as described in Note 22, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company as of January 1, 2002.
In our opinion, the disclosures for 2001 and 2000 in Note 22 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of Halliburton Company and
subsidiaries other than with respect to such adjustments and revisions and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 and 2000 consolidated financial statements taken as a whole.
Houston, Texas
March 13, 2003, except for Notes 1, 2 and 4, as to which the date is October 17,
2003
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT, THE PREDECESSOR AUDITOR HAS
NOT REISSUED THIS REPORT, THE PREVIOUSLY ISSUED REPORT REFERS TO FINANCIAL
STATEMENTS NOT PHYSICALLY INCLUDED IN THIS DOCUMENT, AND THE PRIOR-PERIOD
FINANCIAL STATEMENTS HAVE BEEN REVISED OR RESTATED.
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF HALLIBURTON COMPANY:
We have audited the accompanying consolidated balance sheets of Halliburton
Company (a Delaware corporation) and subsidiary companies as of December 31,
2001 and 2000, and the related consolidated statements of income, cash flows,
and shareholders' equity for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Halliburton Company and
subsidiary companies as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Arthur Andersen LLP
Dallas, Texas
January 23, 2002 (Except with respect to certain matters discussed in Note 9, as
to which the date is February 21, 2002.)
3
HALLIBURTON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of dollars and shares except per share data)
Years ended December 31
--------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
REVENUES:
Services $ 10,658 $ 10,940 $ 10,185
Product sales 1,840 1,999 1,671
Equity in earnings of unconsolidated affiliates 74 107 88
- ----------------------------------------------------------------------------------------------------------------
Total revenues $ 12,572 $ 13,046 $ 11,944
- ----------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of services $ 10,737 $ 9,831 $ 9,755
Cost of sales 1,642 1,744 1,463
General and administrative 335 387 352
Gain on sale of marine vessels - - (88)
Gain on sale of business assets (30) - -
- ----------------------------------------------------------------------------------------------------------------
Total operating costs and expenses $ 12,684 $ 11,962 $ 11,482
- ----------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (112) 1,084 462
Interest expense (113) (147) (146)
Interest income 32 27 25
Foreign currency losses, net (25) (10) (5)
Other, net (10) - (1)
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST, AND CHANGE IN ACCOUNTING METHOD, NET (228) 954 335
Provision for income taxes (80) (384) (129)
Minority interest in net income of subsidiaries (38) (19) (18)
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CHANGE IN
ACCOUNTING METHOD, NET (346) 551 188
- ----------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations, net of tax
(provision) benefit of $154, $20, and ($60) (652) (42) 98
Gain on disposal of discontinued operations, net of tax provision
of $0, $199, and $141 - 299 215
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations, net (652) 257 313
- ----------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method, net - 1 -
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (998) $ 809 $ 501
================================================================================================================
BASIC INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations before change
in accounting method, net $ (0.80) $ 1.29 $ 0.42
Income (loss) from discontinued operations (1.51) (0.10) 0.22
Gain on disposal of discontinued operations - 0.70 0.49
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2.31) $ 1.89 $ 1.13
================================================================================================================
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations before change
in accounting method, net $ (0.80) $ 1.28 $ 0.42
Income (loss) from discontinued operations (1.51) (0.10) 0.22
Gain on disposal of discontinued operations - 0.70 0.48
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2.31) $ 1.88 $ 1.12
================================================================================================================
Basic average common shares outstanding 432 428 442
Diluted average common shares outstanding 432 430 446
See notes to annual financial statements.
4
HALLIBURTON COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of dollars and shares except per share data)
December 31
---------------------
2002 2001
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,107 $ 290
Receivables:
Notes and accounts receivable (less allowance for bad debts of $157 and $131) 2,533 3,015
Unbilled work on uncompleted contracts 724 1,080
- ------------------------------------------------------------------------------------------------------
Total receivables 3,257 4,095
Inventories 734 787
Current deferred income taxes 200 154
Other current assets 262 247
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,560 5,573
Net property, plant and equipment 2,629 2,669
Equity in and advances to related companies 413 551
Goodwill 723 720
Noncurrent deferred income taxes 607 410
Insurance for asbestos and silica related liabilities 2,059 612
Other assets 853 431
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 12,844 $ 10,966
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable $ 49 $ 44
Current maturities of long-term debt 295 81
Accounts payable 1,077 917
Accrued employee compensation and benefits 370 357
Advance billings on uncompleted contracts 641 611
Deferred revenues 100 99
Income taxes payable 148 194
Other current liabilities 592 605
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,272 2,908
Long-term debt 1,181 1,403
Employee compensation and benefits 756 570
Asbestos and silica related liabilities 3,425 737
Other liabilities 581 555
Minority interest in consolidated subsidiaries 71 41
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,286 6,214
- ------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common shares, par value $2.50 per share - authorized 600 shares,
issued 456 and 455 shares 1,141 1,138
Paid-in capital in excess of par value 293 298
Deferred compensation (75) (87)
Accumulated other comprehensive income (281) (236)
Retained earnings 3,110 4,327
- ------------------------------------------------------------------------------------------------------
4,188 5,440
Less 20 and 21 shares of treasury stock, at cost 630 688
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,558 4,752
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,844 $ 10,966
======================================================================================================
See notes to annual financial statements.
5
HALLIBURTON COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions of dollars and shares)
Years ended December 31
--------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCK (NUMBER OF SHARES)
Balance at beginning of year 455 453 448
Shares issued under compensation and incentive stock plans,
net of forfeitures -* 1 4
Shares issued for acquisition 1 1 1
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 456 455 453
================================================================================================================
COMMON STOCK (DOLLARS)
Balance at beginning of year $ 1,138 $ 1,132 $ 1,120
Shares issued under compensation and incentive stock plans,
net of forfeitures 1 2 9
Shares issued for acquisition 2 4 3
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,141 $ 1,138 $ 1,132
================================================================================================================
PAID-IN CAPITAL IN EXCESS OF PAR VALUE
Balance at beginning of year $ 298 $ 259 $ 68
Shares issued under compensation and incentive stock plans,
net of forfeitures (24) 30 109
Tax benefit (5) (2) 38
Shares issued for acquisition, net 24 11 44
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ 293 $ 298 $ 259
================================================================================================================
DEFERRED COMPENSATION
Balance at beginning of year $ (87) $ (63) $ (51)
Current year awards, net of tax 12 (24) (12)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ (75) $ (87) $ (63)
================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME
Cumulative translation adjustment $ (121) $ (205) $ (275)
Pension liability adjustment (157) (27) (12)
Unrealized loss on investments and derivatives (3) (4) (1)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ (281) $ (236) $ (288)
================================================================================================================
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of year $ (205) $ (275) $ (185)
Sales of subsidiaries 15 102 11
Current year changes 69 (32) (101)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ (121) $ (205) $ (275)
================================================================================================================
* Actual shares issued in 2002 were 357,000.
(continued on next page)
6
HALLIBURTON COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions of dollars and shares)
(continued)
Years ended December 31
--------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
PENSION LIABILITY ADJUSTMENT
Balance at beginning of year $ (27) $ (12) $ (19)
Sale of subsidiary - 12 7
Current year change, net of tax (130) (27) -
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ (157) $ (27) $ (12)
================================================================================================================
UNREALIZED GAIN (LOSS) ON INVESTMENTS
Balance at beginning of year $ (4) $ (1) $ -
Current year unrealized gain (loss) on investments and
derivatives 1 (3) (1)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ (3) $ (4) $ (1)
================================================================================================================
RETAINED EARNINGS
Balance at beginning of year $ 4,327 $ 3,733 $ 3,453
Net income (loss) (998) 809 501
Cash dividends paid (219) (215) (221)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ 3,110 $ 4,327 $ 3,733
================================================================================================================
TREASURY STOCK (NUMBER OF SHARES)
Beginning of year 21 26 6
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (2) (2) -
Shares issued for acquisition - (4) -
Shares purchased 1 1 20
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 20 21 26
================================================================================================================
TREASURY STOCK (DOLLARS)
Beginning of year $ 688 $ 845 $ 99
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (62) (51) (23)
Shares issued for acquisition - (140) -
Shares purchased 4 34 769
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ 630 $ 688 $ 845
================================================================================================================
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (998) $ 809 $ 501
- ----------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment, net of tax 69 (32) (101)
Less reclassification adjustments for losses included in
net income 15 102 11
- ----------------------------------------------------------------------------------------------------------------
Net cumulative translation adjustment 84 70 (90)
- ----------------------------------------------------------------------------------------------------------------
Current year adjustment to minimum pension liability, net of tax (130) (15) 7
Unrealized gain/(loss) on investments and derivatives 1 (3) (1)
- ----------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ (1,043) $ 861 $ 417
================================================================================================================
See notes to annual financial statements.
7
HALLIBURTON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
Years ended December 31
--------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (998) $ 809 $ 501
Adjustments to reconcile net income to net cash from operations:
Loss (income) from discontinued operations 652 (257) (313)
Depreciation, depletion and amortization 505 531 503
Provision (benefit) for deferred income taxes (151) 26 (6)
Distributions from (advances to) related companies, net of equity 3 8 (64)
in (earnings) losses
Change in accounting method, net - (1) -
Gain on sale of assets (22) - -
Gain on option component of joint venture sale (3) - -
Asbestos and silica related liabilities, net 588 96 4
Accrued special charges - (6) (63)
Other non-cash items 101 (3) (22)
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts 675 (199) (896)
Sale of receivables, net 180 - -
Inventories 62 (91) 8
Accounts payable 71 118 170
Other working capital, net (78) 122 155
Other operating activities (23) (124) (34)
- ----------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities 1,562 1,029 (57)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (764) (797) (578)
Sales of property, plant and equipment 266 120 209
Acquisitions of businesses, net of cash acquired - (220) (10)
Dispositions of businesses, net of cash disposed 170 61 19
Proceeds from sale of securities 62 - -
Investments - restricted cash (187) 4 5
Other investing activities (20) (26) (56)
- ----------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities (473) (858) (411)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 66 425 -
Payments on long-term borrowings (81) (13) (308)
(Repayments) borrowings of short-term debt, net (2) (1,528) 629
Payments of dividends to shareholders (219) (215) (221)
Proceeds from exercises of stock options - 27 105
Payments to reacquire common stock (4) (34) (769)
Other financing activities (8) (17) (20)
- ----------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities (248) (1,355) (584)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (24) (20) (9)
Net cash flows from discontinued operations (1) - 1,263 826
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 817 59 (235)
Cash and equivalents at beginning of year 290 231 466
- ----------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 1,107 $ 290 $ 231
================================================================================================================
(continued on next page)
8
HALLIBURTON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(continued)
Years ended December 31
--------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the year for:
Interest $ 104 $ 132 $ 144
Income taxes $ 94 $ 382 $ 310
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ - $ 92 $ 95
Liabilities disposed of in dispositions of businesses $ - $ 500 $ 499
================================================================================================================
(1) Net cash flows from discontinued operations in 2001 include proceeds of
$1.27 billion from the sale of the remaining businesses in Dresser
Equipment Group and in 2000 proceeds of $913 million from the sales of
Dresser-Rand in 2000 and Ingersoll-Dresser Pump in 1999. See Note 3.
See notes to annual financial statements.
9
HALLIBURTON COMPANY
NOTES TO ANNUAL FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
We employ accounting policies that are in accordance with accounting
principles generally accepted in the United States of America. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America 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.
DESCRIPTION OF COMPANY. Halliburton Company's predecessor was
established in 1919 and incorporated under the laws of the State of Delaware in
1924. We are one of the world's largest oilfield services companies and a
leading provider of engineering and construction services. We have five business
segments that are organized around how we manage our business: Drilling and
Formation Evaluation, Fluids, Production Optimization and Landmark and Other
Energy Services (collectively, the Energy Services Group); and the Engineering
and Construction Group. Through our Energy Services Group, we provide a
comprehensive range of discrete and integrated products and services for the
exploration, development and production of oil and gas. We serve major national
and independent oil and gas companies throughout the world. Our Engineering and
Construction Group (known as KBR) provides a wide range of services to energy
and industrial customers and governmental entities worldwide. See Note 4 for
further discussion of our business segments.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of our company and all of our subsidiaries in which we own
greater than 50% interest or control. All material intercompany accounts and
transactions are eliminated. Investments in companies in which we own a 50%
interest or less and have a significant influence are accounted for using the
equity method and if we do not have significant influence we use the cost
method. Prior year amounts have been reclassified to conform to the current year
presentation.
REVENUE RECOGNITION. We recognize revenues as services are rendered or
products are shipped. Generally the date of shipment corresponds to the date
upon which the customer takes title to the product and assumes all risk and
rewards of ownership. The distinction between services and product sales is
based upon the overall activity of the particular business operation. Training
and consulting service revenues are recognized as the services are performed.
Sales of perpetual software licenses, net of deferred maintenance fees, are
recorded as revenue upon shipment. Sales of use licenses are recognized as
revenue over the license period. Post-contract customer support agreements are
recorded as deferred revenues and recognized as revenue ratably over the
contract period of generally one year's duration.
ENGINEERING AND CONSTRUCTION CONTRACTS. Revenues from engineering and
construction contracts are reported on the percentage of completion method of
accounting using measurements of progress toward completion appropriate for the
work performed. Progress is generally based upon physical progress, man-hours or
costs incurred based upon the appropriate method for the type of job. When
revenue and costs are recorded from engineering and construction contracts, we
comply with paragraph 81 of American Institute of Certified Public Accountants
Statement of Position 81-1, also known as SOP 81-1. Under this method, revenues
are recognized as the sum of costs incurred during the period plus the gross
profit earned, measured using the percentage of completion method of accounting.
All known or anticipated losses on contracts are provided for when they become
evident in accordance with paragraph 85 of SOP 81-1. Claims and change orders
which are in the process of being negotiated with customers, for extra work or
changes in the scope of work, are included in revenue when collection is deemed
probable. For more details of revenue recognition, including other aspects of
engineering and construction accounting, including billings, claims and change
orders and liquidated damages, see Note 8 and Note 12.
RESEARCH AND DEVELOPMENT. Research and development expenses are charged
to income as incurred. Research and development expenses were $233 million in
2002 and 2001 and $231 million in 2000.
SOFTWARE DEVELOPMENT COSTS. Costs of developing software for sale are
charged to expense when incurred, as research and development, until
technological feasibility has been established for the product. Once
technological feasibility is established, software development costs are
capitalized until the software is ready for general release to
10
customers. We capitalized costs related to software developed for resale of $11
million in 2002, $19 million in 2001 and $7 million in 2000. Amortization
expense of software development costs was $19 million for 2002, $16 million for
2001 and $12 million for 2000. Once the software is ready for release,
amortization of the software development costs begins. Capitalized software
development costs are amortized over periods which do not exceed five years.
INCOME PER SHARE. Basic income per share is based on the weighted
average number of common shares outstanding during the year. Diluted income per
share includes additional common shares that would have been outstanding if
potential common shares with a dilutive effect had been issued. See Note 13 for
a reconciliation of basic and diluted income per share.
CASH EQUIVALENTS. We consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
INVENTORIES. Inventories are stated at the lower of cost or market.
Cost represents invoice or production cost for new items and original cost less
allowance for condition for used material returned to stock. Production cost
includes material, labor and manufacturing overhead. Some United States
manufacturing and field service finished products and parts inventories for
drill bits, completion products and bulk materials are recorded using the
last-in, first-out method. The cost of over 90% of the remaining inventory is
recorded on the average cost method, with the remainder on the first-in,
first-out method. See Note 7.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are
reported at cost less accumulated depreciation, which is generally provided on
the straight-line method over the estimated useful lives of the assets. Some
assets are depreciated on accelerated methods. Accelerated depreciation methods
are also used for tax purposes, wherever permitted. Upon sale or retirement of
an asset, the related costs and accumulated depreciation are removed from the
accounts and any gain or loss is recognized. When events or changes in
circumstances indicate that assets may be impaired, an evaluation is performed.
The estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to fair
value is required. We follow the successful efforts method of accounting for oil
and gas properties. See Note 9.
MAINTENANCE AND REPAIRS. Expenditures for maintenance and repairs are
expensed; expenditures for renewals and improvements are generally capitalized.
We use the accrue-in-advance method of accounting for major maintenance and
repair costs of marine vessel dry docking expense and major aircraft overhauls
and repairs. Under this method we anticipate the need for major maintenance and
repairs and charge the estimated expense to operations before the actual work is
performed. At the time the work is performed, the actual cost incurred is
charged against the amounts that were previously accrued with any deficiency or
excess charged or credited to operating expense.
GOODWILL. For acquisitions occurring prior to July 1, 2001, goodwill
was amortized on a straight-line basis over periods not exceeding 40 years
through December 31, 2001. Effective July 1, 2001, we adopted SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets", which precludes amortization of goodwill related to acquisitions
completed subsequent to June 30, 2001. Additionally, SFAS No. 142 precludes the
amortization of existing goodwill related to acquisitions completed prior to
July 1, 2001 for periods beginning January 1, 2002. See Note 22 for discussion
of this accounting change. SFAS No. 142 requires an entity to segregate its
operations into "reporting units," which we have determined to be the same as
our reportable operating segments. Additionally, all goodwill has been assigned
to one of these reporting units for purposes of determining impairment of the
goodwill. Because goodwill and some intangible assets are no longer amortized,
the reported amounts of goodwill and intangible assets are reviewed for
impairment on an annual basis and more frequently when negative conditions such
as significant current or projected operating losses exist. The annual
impairment test is a two-step process and involves comparing the estimated fair
value of each reporting unit to the reporting unit's carrying value, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired, and the second step
of the impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment test
would be performed to measure the amount of impairment loss to be recorded, if
any.
INCOME TAXES. Deferred tax assets and liabilities are recognized for
the expected future tax consequences of events that have been recognized in the
financial statements or tax returns. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these items will either
expire before we are able to realize their benefit, or that future deductibility
is uncertain.
11
DERIVATIVE INSTRUMENTS. We enter into derivative financial transactions
to hedge existing or projected exposures to changing foreign currency exchange
rates, interest rates and commodity prices. We do not enter into derivative
transactions for speculative or trading purposes. Effective January 1, 2001, we
adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that we recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value and reflected immediately through the results of operations. If the
derivative is designated as a hedge under SFAS No. 133, depending on the nature
of the hedge, changes in the fair value of derivatives are either offset
against:
- the change in fair value of the hedged assets, liabilities or
firm commitments through earnings; or
- recognized in other comprehensive income until the hedged item
is recognized in earnings.
The ineffective portion of a derivative's change in fair value is
immediately recognized in earnings. Recognized gains or losses on derivatives
entered into to manage foreign exchange risk are included in foreign currency
gains and losses on the consolidated statements of income. Gains or losses on
interest rate derivatives are included in interest expense and gains or losses
on commodity derivatives are included in operating income. During the three
years ended December 31, 2002, we did not enter into any significant
transactions to hedge commodity prices. See Note 11 for discussion of interest
rate swaps and Note 19 for further discussion of foreign currency exchange
derivatives.
FOREIGN CURRENCY TRANSLATION. Foreign entities whose functional
currency is the United States dollar translate monetary assets and liabilities
at year-end exchange rates, and non-monetary items are translated at historical
rates. Income and expense accounts are translated at the average rates in effect
during the year, except for depreciation, cost of product sales and revenues,
and expenses associated with non-monetary balance sheet accounts which are
translated at historical rates. Gains or losses from changes in exchange rates
are recognized in consolidated income in the year of occurrence. Foreign
entities whose functional currency is the local currency translate net assets at
year-end rates and income and expense accounts at average exchange rates.
Adjustments resulting from these translations are reflected in the consolidated
statements of shareholders' equity under "Cumulative translation adjustment".
LOSS CONTINGENCIES. We accrue for loss contingencies based upon our
best estimates in accordance with SFAS No. 5, "Accounting for Contingencies".
See Note 12 for discussion of our significant loss contingencies.
STOCK-BASED COMPENSATION. At December 31, 2002, we have six stock-based
employee compensation plans, which are described more fully in Note 17. We
account for those plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No cost for stock options granted is reflected in net income,
as all options granted under our plans have an exercise price equal to the
market value of the underlying common stock on the date of grant.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. The weighted average assumptions and
resulting fair values of options granted are as follows:
Assumptions
----------------------------------------------------------------- Weighted Average
Risk-Free Expected Expected Expected Fair Value of
Interest Rate Dividend Yield Life (in years) Volatility Options Granted
- ---------------------------------------------------------------------------------------------------
2002 2.9% 2.7% 5 63% $ 6.89
2001 4.5% 2.3% 5 58% $ 19.11
2000 5.2% 1.3% 5 54% $ 21.57
===================================================================================================
The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.
12
Years ended December 31
--------------------------------------
Millions of dollars except per share data 2002 2001 2000
- ------------------------------------------------------------------------------------------------
Net income (loss), as reported $ (998) $ 809 $ 501
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (26) (42) (41)
- ------------------------------------------------------------------------------------------------
Net income (loss), pro forma $ (1,024) $ 767 $ 460
================================================================================================
Basic earnings (loss) per share:
As reported $ (2.31) $ 1.89 $ 1.13
Pro forma $ (2.37) $ 1.79 $ 1.04
Diluted earnings (loss) per share:
As reported $ (2.31) $ 1.88 $ 1.12
Pro forma $ (2.37) $ 1.77 $ 1.03
================================================================================================
NOTE 2. ACQUISITIONS AND DISPOSITIONS
MAGIC EARTH ACQUISITION. We acquired Magic Earth, Inc., a 3-D
visualization and interpretation technology company with broad applications in
the area of data interpretation in November 2001 for common shares with a value
of $100 million. At the consummation of the transaction, we issued 4.2 million
shares, valued at $23.93 per share, to complete the purchase. Magic Earth became
a wholly-owned subsidiary and is reported within our Landmark and Other Energy
Services segment. We recorded goodwill of $71 million, all of which is
nondeductible for tax purposes. In addition, we recorded intangible assets of
$19 million, which are being amortized based on a five-year life.
PES ACQUISITION. In February 2000, we acquired the remaining 74% of the
shares of PES (International) Limited that we did not already own for a value of
$126.7 million. This was based on 3.3 million shares of Halliburton common stock
valued at $37.75 per share which was the closing stock price on January 12,
2000. PES is based in Aberdeen, Scotland, and has developed technology that
complements Halliburton's real time reservoir solutions. To acquire the
remaining 74% of PES, we issued 1.2 million shares of Halliburton common stock
in February 2002, and we also issued rights that resulted in the issuance of 2.1
million additional shares of Halliburton common stock between February 2001 and
February 2002. We issued 1 million shares in February 2001; 400,000 shares in
June 2001; and the remaining 700,000 shares in February 2002 under these rights.
These shares were included in the cost of the acquisition as a contingent
liability. We recorded $115 million of goodwill, all of which is non-deductible
for tax purposes.
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 with Shell Technology Ventures
BV, WellDynamics. We received $39 million in cash as an equity equalization
adjustment, which we recorded as a reduction in our investment in the joint
venture. We own 50% of WellDynamics and account for this investment in our
Landmark and Other Energy Services segment using the equity method. The
formation of WellDynamics resulted in a difference of $90 million between the
carrying amount of our investment and our equity in the underlying net assets of
the joint venture, which has been recorded as goodwill under "Equity in and
advances to related companies." The remaining assets and goodwill of PES
relating to completions and well intervention products are reported in our
Production Optimization segment.
PGS DATA MANAGEMENT ACQUISITION. In March 2001, we acquired the PGS
Data Management division of Petroleum Geo-Services ASA (PGS) for $164 million in
cash. The acquisition agreement also calls for Landmark to provide, for a fee,
strategic data management and distribution services to PGS for three years from
the date of acquisition. We recorded intangible assets of $14 million and
goodwill of $149 million in our Landmark and Other Energy Services segment, $9
million of which is non-deductible for tax purposes. The intangible assets are
being amortized based on a three-year life.
13
EUROPEAN MARINE CONTRACTORS LTD. DISPOSITION. In January 2002, we sold
our 50% interest in European Marine Contractors Ltd., an unconsolidated joint
venture reported within our Landmark and Other Energy Services segment, to our
joint venture partner, Saipem. At the date of sale, we received $115 million in
cash and a contingent payment option valued at $16 million resulting in a pretax
operating income gain of $108 million. The contingent payment option was based
on a formula linked to performance of the Oil Service Index. In February 2002,
we exercised our option receiving an additional $19 million and recorded a
pretax gain of $3 million in "Other, net" in the statement of operations as a
result of the increase in value of this option. The total transaction resulted
in an after-tax gain of $68 million, or $0.16 per diluted share.
SUBSEA 7 FORMATION. In May 2002, we contributed substantially all of
our Halliburton Subsea assets to a newly formed company, Subsea 7, Inc. We
contributed assets with a book value of approximately $82 million. The
contributed assets were recorded by the new company at a fair value of
approximately $94 million. The $12 million difference is being amortized over
ten years representing the average remaining useful life of the assets
contributed. We own 50% of Subsea 7, Inc. and account for this investment in our
Production Optimization segment using the equity method. The remaining 50% is
owned by DSND Subsea ASA.
BREDERO-SHAW DISPOSITION. On September 30, 2002 we sold our 50%
interest in the Bredero-Shaw joint venture to our partner ShawCor Ltd. The
purchase price of $149 million is comprised of $53 million in cash, a short-term
note for $25 million and 7.7 million of ShawCor Class A Subordinate shares. In
addition to our second quarter impairment charge of $61 million ($0.14 per
diluted share after-tax) related to the pending sale of Bredero-Shaw, we
recorded a third quarter pretax loss on sale of $18 million, or $0.04 per
diluted share, which is reflected in our Landmark and Other Energy Services
segment. Included in this loss was $15 million of cumulative translation
adjustment loss which was realized upon the disposition of our investment in
Bredero-Shaw. During the 2002 fourth quarter, we recorded in "Other, net" a $9.1
million loss on the sale of ShawCor shares, or $0.02 per diluted share.
DRESSER EQUIPMENT GROUP DISPOSITION. In April 2001, we disposed of the
remaining businesses in the Dresser Equipment Group. See Note 3.
NOTE 3. DISCONTINUED OPERATIONS
For the twelve months ended December 31, 2002, we recorded a $806
million pretax charge in discontinued operations. The $806 million charge is
primarily comprised of the following:
- a $567 million charge during the fourth quarter due to a
revision of our best estimate of our asbestos and silica
liability based upon knowledge gained throughout the
development of the agreement in principle for our proposed
global settlement. The charge consisted of $1,047 million
related to the asbestos and silica claims gross liability,
which was offset by $480 million in anticipated related
insurance recoveries;
- a $153 million charge during the second quarter in connection
with our econometric study. The charge consisted of $1,176
million related to the gross liability on our asbestos and
silica claims, which was offset by $1,023 million in
anticipated insurance recoveries;
- a $40 million payment associated with the Harbison-Walker
bankruptcy filing recorded in the first quarter; and
- $46 million in costs primarily related to the negotiation of
the agreement in principle.
During the second and third quarters of 2001, we recorded a $95 million
pretax expense to discontinued operations. This amount was comprised of a $632
million charge related to the gross liability on Harbison-Walker asbestos
claims, which was offset by $537 million in anticipated related insurance
recoveries. See Note 12.
In late 1999 and early 2000 we sold our interest in two joint ventures
that were a significant portion of our Dresser Equipment Group. These sales
prompted a strategic review of the remaining businesses within the Dresser
Equipment Group. As a result of this review, we determined that these remaining
businesses did not closely fit with our core businesses, long-term goals and
strategic objectives. In April 2000, our Board of Directors approved plans to
sell all the remaining businesses within the Dresser Equipment Group. We sold
these businesses on April 10, 2001 and we recognized a pretax gain of $498
million ($299 million after-tax) during the second quarter of 2001. The
financial results of the Dresser Equipment Group through March 31, 2001 are
presented as discontinued operations in our financial statements. As part of the
terms of the transaction, we retained a 5.1% equity interest of
14
Class A common stock in the Dresser Equipment Group, which has been renamed
Dresser, Inc. In July 2002, Dresser, Inc. announced a reorganization, and we
have exchanged our shares for shares of Dresser Ltd. Our equity interest is
accounted for under the cost method.
Income (loss) from Operations Years ended December 31
of Discontinued Businesses --------------------------------------
Millions of dollars 2002 2001 2000
- ---------------------------------------------------------------------------------------
Revenues $ - $ 359 $ 1,400
=======================================================================================
Operating income $ - $ 37 $ 158
Asbestos litigation claims,
net of insurance recoveries (806) (99) -
Tax benefit (expense) 154 20 (60)
- ---------------------------------------------------------------------------------------
Net income (loss) $ (652) $ (42) $ 98
=======================================================================================
Gain on disposal of discontinued operations reflects 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 February
2000.
Gain on Disposal of Discontinued Operations
Millions of dollars 2001 2000
- -----------------------------------------------------------------------------------
Proceeds from sale, less intercompany settlement $ 1,267 $ 536
Net assets disposed (769) (180)
- -----------------------------------------------------------------------------------
Gain before taxes 498 356
Income taxes (199) (141)
- -----------------------------------------------------------------------------------
Gain on disposal of discontinued operations $ 299 $ 215
===================================================================================
NOTE 4. BUSINESS SEGMENT INFORMATION
Prior to the second quarter of 2003, we operated in two business
segments - the Energy Services Group and the Engineering and Construction Group.
Our segments each represented operating subsidiary groups organized around the
product and services provided to our customers.
During the second quarter of 2003, we restructured our Energy Services
Group into four divisions, which is the basis for the four segments we now
report within the Energy Services Group. We grouped product lines in order to
better align ourselves with how our customers procure our services, and to
capture new business and achieve better integration, including joint research
and development of new products and technologies and other synergies. The new
segments mirror the way our chief executive officer (our chief operating
decision maker) now regularly reviews the operating results, assesses
performance and allocates resources. Our Engineering and Construction Group
segment remains unchanged.
Our five business segments are organized around how we manage the
business: Drilling and Formation Evaluation, Fluids, Production Optimization,
Landmark and Other Energy Services and the Engineering and Construction Group.
We sometimes refer to the combination of the Drilling and Formation
Evaluation, Fluids, Production Optimization and Landmark and Other Energy
Services segments as the Energy Services Group.
Dresser Equipment Group is presented as part of discontinued operations
through March 31, 2001 as a result of the sale in April 2001 of the remaining
businesses within Dresser Equipment Group. See Note 3.
During the first quarter of 2002, we announced plans to restructure our
businesses into two operating subsidiary groups. One group is focused on energy
services and the other is focused on engineering and construction. As part of
this restructuring, many support functions that were previously shared were
moved into the two business groups. We also decided that the operations of Major
Projects (which currently consists of the Barracuda-Caratinga project in
Brazil), Granherne and Production Services better aligned with KBR in the
current business environment. These businesses were moved for management and
reporting purposes from the Energy Services Group to the Engineering and
Construction Group during the second quarter of 2002. In addition, during the
fourth quarter of 2000, we combined all engineering, construction, fabrication
and project management
15
operations into one segment, reported 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.
The amounts in the 2002, 2001 and 2000 consolidated financial
statements related to segments have been restated to conform to the 2003
composition of reportable segments. Following is a summary of our new segments.
DRILLING AND FORMATION EVALUATION. The Drilling and Formation
Evaluation segment is primarily involved in drilling and evaluating the
formations related to bore-hole construction and initial oil and gas formation
evaluation. The products and services in this segment incorporate integrated
technologies, which offer synergies related to drilling activities and data
gathering. The segment consists of drilling services, including directional
drilling and measurement-while-drilling/logging-while-drilling; logging
services; and drill bits. Included in this business segment are Sperry-Sun,
logging and perforating and Security DBS. Also included is our Mono Pumps
business, which we disposed of in the first quarter of 2003.
FLUIDS. The Fluids segment focuses on fluid management and technologies
to assist in the drilling and construction of oil and gas wells. Drilling fluids
are used to provide for well control, drilling efficiency, and as a means of
removing wellbore cuttings. Cementing services provide zonal isolation to
prevent fluid movement between formations, ensure a bond to provide support for
the casing, and provide wellbore reliability. Baroid and cementing, along with
our equity method investment in Enventure Global Technology, LLC, an expandable
casing joint venture, are included in this business segment.
PRODUCTION OPTIMIZATION. The Production Optimization segment primarily
tests, measures and provides means to manage and/or improve well production once
a well is drilled and, in some cases, after it has been producing. This segment
consists of:
- production enhancement services (including fracturing,
acidizing, coiled tubing, hydraulic workover, sand control,
and pipeline and process services);
- completion products and services (including well completion
equipment, slickline and safety systems);
- tools and testing services (including underbalanced
applications and tubular conveyed perforating testing
services); and
- subsea operations conducted in our 50% owned company, Subsea
7, Inc.
LANDMARK AND OTHER ENERGY SERVICES. This segment provides integrated
exploration and production software information systems, consulting services,
real-time operations, smartwells and integrated solutions. Included in this
business segment are Landmark Graphics, Integrated Solutions, Real Time
Operations and our equity method investment in WellDynamics B.V., an intelligent
well completions joint venture. Also included are Wellstream, Bredero-Shaw and
European Marine Contractors Ltd., all of which have been sold.
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
KBR, offers the following:
- Onshore engineering and construction activities, including
engineering and construction of liquefied natural gas, ammonia
and crude oil refineries and natural gas plants;
- Offshore deepwater engineering and marine technology and
worldwide fabrication capabilities;
- Government operations, construction, maintenance and logistics
activities for government facilities and installations;
- Plant operations, maintenance, and start-up services for both
upstream and downstream oil, gas and petrochemical facilities
as well as operations, maintenance and logistics services for
the power, commercial and industrial markets; and
- Civil engineering, consulting and project management services.
GENERAL CORPORATE. General corporate represents assets not included in
a business segment and is primarily composed of cash and cash equivalents,
deferred tax assets and insurance for asbestos and silica litigation claims.
Intersegment revenues included in the revenues of the business segments
and revenues between geographic areas are immaterial. Our equity in pretax
earnings and losses of unconsolidated affiliates that are accounted for on the
equity method is included in revenues and operating income of the applicable
segment.
16
The tables below present information on our continuing operations
business segments.
OPERATIONS BY BUSINESS SEGMENT
Years ended December 31
--------------------------------------
Millions of dollars 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
REVENUES:
Drilling and Formation Evaluation $ 1,633 $ 1,643 $ 1,287
Fluids 1,815 2,065 1,578
Production Optimization 2,554 2,803 2,202
Landmark and Other Energy Services 834 1,300 1,166
- ----------------------------------------------------------------------------------------------------------------
Total Energy Services Group 6,836 7,811 6,233
Engineering and Construction Group 5,736 5,235 5,711
- ----------------------------------------------------------------------------------------------------------------
Total $ 12,572 $ 13,046 $ 11,944
================================================================================================================
OPERATING INCOME (LOSS):
Drilling and Formation Evaluation $ 160 $ 171 $ 1
Fluids 202 308 170
Production Optimization 384 528 252
Landmark and Other Energy Services (108) 29 166
- ----------------------------------------------------------------------------------------------------------------
Total Energy Services Group 638 1,036 589
Engineering and Construction Group (685) 111 (54)
General corporate (65) (63) (73)
- ----------------------------------------------------------------------------------------------------------------
Total $ (112) $ 1,084 $ 462
================================================================================================================
CAPITAL EXPENDITURES:
Drilling and Formation Evaluation $ 190 $ 225 $ 154
Fluids 55 92 62
Production Optimization 118 209 110
Landmark and Other Energy Services Group 149 105 136
Shared Energy Services Assets 91 112 71
- ----------------------------------------------------------------------------------------------------------------
Total Energy Services Group 603 743 533
Engineering and Construction Group 161 54 44
General corporate - - 1
- ----------------------------------------------------------------------------------------------------------------
Total $ 764 $ 797 $ 578
================================================================================================================
DEPRECIATION, DEPLETION AND AMORTIZATION:
Drilling and Formation Evaluation $ 137 $ 126 $ 118
Fluids 48 50 48
Production Optimization 99 95 90
Landmark and Other Energy Services 112 137 110
Shared Energy Services Assets 79 66 69
- ----------------------------------------------------------------------------------------------------------------
Total Energy Services Group 475 474 435
Engineering and Construction Group 29 56 65
General corporate 1 1 3
- ----------------------------------------------------------------------------------------------------------------
Total $ 505 $ 531 $ 503
================================================================================================================
Within the Energy Services Group, only certain assets are associated
with specific segments. Those assets include receivables, inventories, certain
identified property, plant and equipment (including field service equipment),
equity in and advances to related companies and goodwill. The remaining assets,
such as cash and the remaining property, plant and equipment (incuding shared
facilities) are not associated with a segment but are considered to be shared
among the segments within the Energy Services Group. For segment operating
income presentation the depreciation expense associated with these shared ESG
assets is allocated to the ESG segments and general corporate.
17
OPERATIONS BY BUSINESS SEGMENT (CONTINUED)
Years ended December 31
--------------------------------------
Millions of dollars 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS:
Drilling and Formation Evaluation $ 1,163 $ 1,253 $ 1,168
Fluids 830 1,071 1,004
Production Optimization 1,365 1,402 1,370
Landmark and Other Energy Services 1,399 1,766 1,365
Shared Energy Services Assets 1,187 1,072 1,057
- ----------------------------------------------------------------------------------------------------------------
Total Energy Services Group 5,944 6,564 5,964
Engineering and Construction Group 3,104 3,187 2,885
Net assets of discontinued operations - - 690
General corporate 3,796 1,215 653
- ----------------------------------------------------------------------------------------------------------------
Total $ 12,844 $ 10,966 $ 10,192
================================================================================================================
OPERATIONS BY GEOGRAPHIC AREA
Years ended December 31
--------------------------------------
Millions of dollars 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
REVENUES:
United States $ 4,139 $ 4,911 $ 4,073
United Kingdom 1,521 1,800 1,512
Other areas (numerous countries) 6,912 6,335 6,359
- ----------------------------------------------------------------------------------------------------------------
Total $ 12,572 $ 13,046 $ 11,944
================================================================================================================
LONG-LIVED ASSETS:
United States $ 4,617 $ 3,030 $ 2,068
United Kingdom 691 617 525
Other areas (numerous countries) 711 744 776
- ----------------------------------------------------------------------------------------------------------------
Total $ 6,019 $ 4,391 $ 3,369
================================================================================================================
NOTE 5. RESTRICTED CASH
At December 31, 2002, we had restricted cash of $190 million included
in Other assets. Restricted cash consists of:
- $107 million deposit that collateralizes a bond for a patent
infringement judgment on appeal;
- $57 million as collateral for potential future insurance claim
reimbursements; and
- $26 million primarily related to cash collateral agreements
for outstanding letters of credit for various construction
projects.
At December 31, 2001, we had $3 million in restricted cash in Other
assets.
NOTE 6. RECEIVABLES
Our receivables are generally not collateralized. Included in notes and
accounts receivable are notes with varying interest rates totaling $53 million
at December 31, 2002 and $19 million at December 31, 2001.
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding subsidiary sells an undivided ownership interest in this pool of
receivables to entities managed by unaffiliated financial institutions under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable bankruptcy laws, and the assets of the funding
subsidiary are not available to pay any creditors of Halliburton or of its
subsidiaries or affiliates, until such time as the agreement with the
unaffiliated companies is
18
terminated following sufficient collections to liquidate all outstanding
undivided ownership interests. The funding subsidiary retains the interest in
the pool of receivables that are not sold to the unaffiliated companies, and is
fully consolidated and reported in our financial statements.
The amount of undivided interests, which can be sold under the program,
varies based on the amount of eligible Energy Services Group receivables in the
pool at any given time and other factors. The funding subsidiary sold a $200
million undivided ownership interest to the unaffiliated companies, and may from
time to time sell additional undivided ownership interests. No additional
amounts were received from our accounts receivable facility since the second
quarter of 2002. The total amount outstanding under this facility was $180
million as of December 31, 2002. We continue to service, administer and collect
the receivables on behalf of the purchaser. The amount of undivided ownership
interest in the pool of receivables sold to the unaffiliated companies is
reflected as a reduction of accounts receivable in our consolidated balance
sheet and as an increase in cash flows from operating activities in our
consolidated statement of cash flows.
NOTE 7. INVENTORIES
Inventories are stated at the lower of cost or market. Some United
States manufacturing and field service finished products and parts inventories
for drill bits, completion products and bulk materials are recorded using the
last-in, first-out method, totaling $43 million at December 31, 2002 and $54
million at December 31, 2001. If the average cost method had been used, total
inventories would have been $17 million higher than reported at December 31,
2002 and $20 million higher than reported at December 31, 2001.
Over 90% of remaining inventory is recorded on the average cost method,
with the remainder on the first-in, first-out method.
Inventories at December 31, 2002 and December 31, 2001 are composed of
the following:
December 31 December 31
Millions of dollars 2002 2001
- ----------------------------------------------------------------------
Finished products and parts $ 545 $ 520
Raw materials and supplies 141 192
Work in process 48 75
- ----------------------------------------------------------------------
Total $ 734 $ 787
======================================================================
NOTE 8. UNAPPROVED CLAIMS AND LONG-TERM CONSTRUCTION CONTRACTS
Billing practices for engineering and construction projects are
governed by the contract terms of each project based upon costs incurred,
achievement of milestones or pre-agreed schedules. Billings do not necessarily
correlate with revenues recognized under the percentage of completion method of
accounting. Billings in excess of recognized revenues are recorded in "Advance
billings on uncompleted contracts". When billings are less than recognized
revenues, the difference is recorded in "Unbilled work on uncompleted
contracts". With the exception of claims and change orders which are in the
process of being negotiated with customers, unbilled work is usually billed
during normal billing processes following achievement of the contractual
requirements.
Recording of profits and losses on long-term contracts requires an
estimate of the total profit or loss over the life of each contract. This
estimate requires consideration of contract revenue, change orders and claims
reduced by costs incurred and estimated costs to complete. Anticipated losses on
contracts are recorded in full in the period they become evident. Profits are
recorded based upon the total estimated contract profit multiplied by the
current percentage complete for the contract.
When calculating the amount of total profit or loss on a long-term
contract, we include unapproved claims as revenue when the collection is deemed
probable based upon the four criteria for recognizing unapproved claims under
the American Institute of Certified Public Accountants Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Including unapproved claims in this calculation
increases the operating income (or reduces the operating loss) that would
otherwise be recorded without consideration of the probable unapproved claims.
Unapproved claims are recorded to the extent of costs incurred and include no
profit element. In substantially all cases, the probable unapproved claims
included in determining contract profit or loss are less than the actual claim
that will be or has been presented to the customer.
19
When recording the revenue and the associated unbilled receivable for
unapproved claims, we only accrue an amount equal to the costs incurred related
to probable unapproved claims. Therefore, the difference between the probable
unapproved claims included in determining contract profit or loss and the
probable unapproved claims recorded in unbilled work on uncompleted contracts
relates to forecasted costs which have not yet been incurred. The amounts
included in determining the profit or loss on contracts, and the amounts booked
to "Unbilled work on uncompleted contracts" for each period are as follows:
Years ended December 31
------------------------
Millions of dollars 2002 2001
- ------------------------------------------------------------------------------
Probable unapproved claims (included
in determining contract profit or loss) $ 279 $ 137
Unapproved claims in unbilled work on
uncompleted contracts $ 210 $ 102
==============================================================================
The claims at December 31, 2002 listed in the above table relate to ten
contracts, most of which are complete or substantially complete. We are actively
engaged in claims negotiation with the customer in all but one case, and in that
case we have initiated the arbitration process. The probable unapproved claim in
arbitration is $2 million. The largest claim relates to the Barracuda-Caratinga
contract which was approximately 63% complete at the end of 2002. The probable
unapproved claims included in determining this contract's loss were $182 million
at December 31, 2002 and $43 million at December 31, 2001. As the claim for this
contract most likely will not be settled within one year, amounts in unbilled
work on uncompleted contracts of $115 million at December 31, 2002 and $10
million at December 31, 2001 included in the table above have been recorded to
long-term unbilled work on uncompleted contracts which is included in "Other
assets" on the balance sheet. All other claims included in the table above have
been recorded to Unbilled work on uncompleted contracts included in the "Total
receivables" amount on the balance sheet.
A summary of unapproved claims activity for the years ended December
31, 2002 and 2001 is as follows:
Total Probable Unapproved Probable Unapproved Claims
Claims Accrued Revenue
--------------------------------------------------------
Millions of dollars 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------
Beginning balance $ 137 $ 93 $ 102 $ 92
Additions 158 92 105 58
Costs incurred during period - - 19 -
Approved claims (4) (15) (4) (15)
Write-offs (7) (33) (7) (33)
Other * (5) - (5) -
- -----------------------------------------------------------------------------------------------------
Ending balance $ 279 $ 137 $ 210 $ 102
=====================================================================================================
*Other primarily relates to claims in which the customer has agreed to a change
order relating to the scope of work.
In addition, our unconsolidated related companies include probable
unapproved claims as revenue to determine the amount of profit or loss for their
contracts. Our "Equity in earnings of unconsolidated affiliates" includes our
equity percentage of unapproved claims related to unconsolidated projects.
Amounts for unapproved claims from our related companies are included in "Equity
in and advances to related companies" and totaled $9 million at December 31,
2002 and $0.3 million at December 31, 2001.
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2002 and 2001 are
composed of the following:
20
Millions of dollars 2002 2001
- --------------------------------------------------------------------------------
Land $ 86 $ 82
Buildings and property improvements 1,024 942
Machinery, equipment and other 4,842 4,926
- --------------------------------------------------------------------------------
Total 5,952 5,950
Less accumulated depreciation 3,323 3,281
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 2,629 $ 2,669
================================================================================
Buildings and property improvements are depreciated over 5-40 years;
machinery, equipment and other are depreciated over 3-25 years.
Machinery, equipment and other includes oil and gas investments of $356
million at December 31, 2002 and $423 million at December 31, 2001.
NOTE 10. RELATED COMPANIES
We conduct some of our operations through various joint ventures which
are in partnership, corporate and other business forms, and are principally
accounted for using the equity method. Financial information pertaining to
related companies for our continuing operations is set out below. This
information includes the total related company balances and not our proportional
interest in those balances.
Our larger unconsolidated entities include Subsea 7, Inc., a 50% owned
subsidiary, formed in May of 2002 and the partnerships created to construct the
Alice Springs to Darwin rail line in Australia. During 2002, we sold our 50%
interest in European Marine Contractors and Bredero-Shaw. See Note 2.
Combined summarized financial information for all jointly owned
operations that are not consolidated is as follows:
Years ended December 31
COMBINED OPERATING RESULTS --------------------------------------
Millions of dollars 2002 2001 2000
- ------------------------------------------------------------------------------------
Revenues $ 1,948 $ 1,987 $ 3,098
====================================================================================
Operating income $ 200 $ 231 $ 192
====================================================================================
Net income $ 159 $ 169 $ 169
====================================================================================
December 31
COMBINED FINANCIAL POSITION -------------------------
Millions of dollars 2002 2001
- --------------------------------------------------------------------------------
Current assets $ 1,404 $ 1,818
Noncurrent assets 1,876 1,672
- --------------------------------------------------------------------------------
Total $ 3,280 $ 3,490
================================================================================
Current liabilities $ 1,155 $ 1,522
Noncurrent liabilities 1,367 1,272
Minority interests - 2
Shareholders' equity 758 694
- --------------------------------------------------------------------------------
Total $ 3,280 $ 3,490
================================================================================
NOTE 11. LINES OF CREDIT, NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2002, we had committed lines of credit totaling $350
million which expire in August 2006. There were no borrowings outstanding under
these lines of credit. These lines are not available if our senior unsecured
long-term debt is rated lower than BBB- by Standard & Poor's Ratings Service
Group or lower than Baa3 by Moody's Investors' Services. Fees for committed
lines of credit were immaterial.
Short-term debt at December 31, 2002 consists primarily of $37 million
in overdraft facilities and $12 million of other facilities with varying rates
of interest.
21
Long-term debt at the end of 2002 and 2001 consists of the following:
Millions of dollars 2002 2001
- --------------------------------------------------------------------------------
7.6% debentures due August 2096 $ 300 $ 300
8.75% debentures due February 2021 200 200
8% senior notes due April 2003 139 139
Variable interest credit facility maturing
September 2009 66 -
Medium-term notes due 2002 through 2027 750 825
Effect of interest rate swaps 13 3
Term loans at LIBOR (GBP) plus 0.75% payable in
semiannual installments through March 2002 - 4
Other notes with varying interest rates 8 13
- --------------------------------------------------------------------------------
Total long-term debt 1,476 1,484
Less current portion 295 81
- --------------------------------------------------------------------------------
Noncurrent portion of long-term debt $ 1,181 $ 1,403
================================================================================
The 7.6% debentures due 2096, 8.75% debentures due 2021, and 8% senior
notes due 2003 may not be redeemed prior to maturity and do not have sinking
fund requirements.
In the fourth quarter of 2002, our 51% owned and consolidated
subsidiary, Devonport Management Limited (DML), signed an agreement for a credit
facility of (pound)80 million ($126 million as of December 31, 2002) maturing in
September 2009. This credit facility has a variable interest rate that was equal
to 5.375% on December 31, 2002. There are various financial covenants which must
be maintained by DML. DML has drawn down an initial amount of $66 million as of
December 31, 2002. Under this agreement, payments of approximately $4.5 million
are due in quarterly installments. As of December 31, 2002, the available credit
under this facility was approximately $60 million.
On July 12, 2001, we issued $425 million of two and five-year notes
under our medium-term note program. The notes consist of $275 million 6% fixed
rate notes due August 2006 and $150 million LIBOR + 0.15% floating rate notes
due July 2003. At December 31, 2002, we have outstanding notes under our
medium-term note program as follows:
Amount Due Rate Issue Price
- -------------------------------------------------------------
$ 150 million 07/2003 Floating% Par
$ 275 million 08/2006 6.00% 99.57%
$ 150 million 12/2008 5.63% 99.97%
$ 50 million 05/2017 7.53% Par
$ 125 million 02/2027 6.75% 99.78%
=============================================================
Each holder of the 6.75% medium-term notes has the right to require us
to repay the holder's notes in whole or in part on February 1, 2007. We may
redeem the 5.63% and 6.00% medium-term notes in whole or in part at any time.
Other notes issued under the medium-term note program may not be redeemed prior
to maturity. The medium-term notes do not have sinking fund requirements.
In the second quarter of 2002, we terminated our interest rate swap
agreement on our 8% senior note. The notional amount of the swap agreement was
$139 million. This interest rate swap was designated as a fair value hedge under
SFAS No. 133. Upon termination, the fair value of the interest rate swap was
$0.5 million. In the fourth quarter 2002, we terminated the interest rate swap
agreement on our 6% fixed rate medium-term note. The notional amount of the swap
agreement was $150 million. This interest rate swap was designated as a fair
value hedge under SFAS No. 133. Upon termination, the fair value of the interest
rate swap was $13 million. These swaps had previously been classified in "Other
assets" on the balance sheet. The fair value adjustment to these debt
instruments that were hedged will remain and be amortized as a reduction in
interest expense using the "Effective Yield Method" over the remaining life of
the notes.
22
Our debt excluding the effects of our interest rate swaps matures as
follows: $295 million in 2003; $21 million in 2004; $20 million in 2005; $293
million in 2006; $8 million in 2007; and $826 million thereafter.
NOTE 12. COMMITMENTS AND CONTINGENCIES
LEASES. At year-end 2002, we were obligated under noncancelable
operating leases, principally for the use of land, offices, equipment, field
facilities and warehouses. Total rentals, net of sublease rentals, for
noncancelable leases in 2002, 2001 and 2000 were as follows:
Millions of dollars 2002 2001 2000
- --------------------------------------------------------------
Rental expense $ 149 $ 172 $ 149
==============================================================
Future total rentals on noncancelable operating leases are as follows:
$119 million in 2003; $83 million in 2004; $63 million in 2005; $55 million in
2006; $40 million in 2007; and $249 million thereafter.
ASBESTOS LITIGATION. Several of our subsidiaries, particularly DII
Industries, LLC (DII Industries) and Kellogg, Brown & Root, Inc. (Kellogg, Brown
& Root), are defendants in a large number of asbestos-related lawsuits. The
plaintiffs allege injury as a result of exposure to asbestos in products
manufactured or sold by former divisions of DII Industries or in materials used
in construction or maintenance projects of Kellogg, Brown & Root. These claims
are in three general categories:
- refractory claims;
- other DII Industries claims; and
- construction claims.
REFRACTORY CLAIMS. Asbestos was used in a small number of products
manufactured or sold by Harbison-Walker Refractories Company, which DII
Industries acquired in 1967. The Harbison-Walker operations were conducted as a
division of DII Industries (then named Dresser Industries, Inc.) until those
operations were transferred to another then-existing subsidiary of DII
Industries in preparation for a spin-off. Harbison-Walker was spun-off by DII
Industries in July 1992. At that time, Harbison-Walker assumed liability for
asbestos claims filed after the spin-off and it agreed to defend and indemnify
DII Industries from liability for those claims, although DII Industries
continues to have direct liability to tort claimants for all post spin-off
refractory claims. DII Industries retained responsibility for all asbestos
claims pending as of the date of the spin-off. The agreement governing the
spin-off provided that Harbison-Walker would have the right to access DII
Industries historic insurance coverage for the asbestos-related liabilities that
Harbison-Walker assumed in the spin-off. After the spin-off, DII Industries and
Harbison-Walker jointly negotiated and entered into coverage-in-place agreements
with a number of insurance companies that had issued historic general liability
insurance policies which both DII Industries and Harbison-Walker had the right
to access for, among other things, bodily injury occurring between 1963 and
1985. These coverage-in-place agreements provide for the payment of defense
costs, settlements and court judgments paid to resolve refractory asbestos
claims.
As Harbison-Walker's financial condition worsened in late 2000 and
2001, Harbison-Walker began agreeing to pay more in settlement of the post
spin-off refractory claims than it historically had paid. These increased
settlement amounts led to Harbison-Walker making greater demands on the shared
insurance asset. By July 2001, DII Industries determined that the demands that
Harbison-Walker was making on the shared insurance policies were not acceptable
to DII Industries and that Harbison-Walker probably would not be able to fulfill
its indemnification obligation to DII Industries. Accordingly, DII Industries
took up the defense of unsettled post spin-off refractory claims that name it as
a defendant in order to prevent Harbison-Walker from unnecessarily eroding the
insurance coverage both companies access for these claims. These claims are now
stayed in the Harbison-Walker bankruptcy proceeding.
As of December 31, 2002, there were approximately 6,000 open and
unresolved pre-spin-off refractory claims against DII Industries. In addition,
there were approximately 142,000 post spin-off claims that name DII Industries
as a defendant.
OTHER DII INDUSTRIES CLAIMS. As of December 31, 2002, there were
approximately 147,000 open and unresolved claims alleging injuries from asbestos
used in other products formerly manufactured by DII Industries. Most of these
claims involve gaskets and packing materials used in pumps and other industrial
products.
23
CONSTRUCTION CLAIMS. Our Engineering and Construction Group includes
engineering and construction businesses formerly operated by The M.W. Kellogg
Company and Brown & Root, Inc., now combined as Kellogg, Brown & Root. As of
December 31, 2002, there were approximately 52,000 open and unresolved claims
alleging injuries from asbestos in materials used in construction and
maintenance projects, most of which were conducted by Brown & Root, Inc.
Approximately 2,200 of these claims are asserted against The M.W. Kellogg
Company. We believe that Kellogg, Brown & Root has a good defense to these
claims, and a prior owner of The M.W. Kellogg Company provides Kellogg, Brown &
Root a contractual indemnification for claims against The M.W. Kellogg Company.
HARBISON-WALKER CHAPTER 11 BANKRUPTCY. On February 14, 2002,
Harbison-Walker filed a voluntary petition for reorganization under Chapter 11
of the United States Bankruptcy Code in the Bankruptcy Court in Pittsburgh,
Pennsylvania. In its bankruptcy-related filings, Harbison-Walker said that it
would seek to utilize Sections 524(g) and 105 of the Bankruptcy Code to propose
and seek confirmation of a plan of reorganization that would provide for
distributions for all legitimate, pending and future asbestos claims asserted
directly against Harbison-Walker or asserted against DII Industries for which
Harbison-Walker is required to indemnify and defend DII Industries.
Harbison-Walker's failure to fulfill its indemnity obligations, and its
erosion of insurance coverage shared with DII Industries, required DII
Industries to assist Harbison-Walker in its bankruptcy proceeding in order to
protect the shared insurance from dissipation. At the time that Harbison-Walker
filed its bankruptcy, DII Industries agreed to provide up to $35 million of
debtor-in-possession financing to Harbison-Walker during the pendency of the
Chapter 11 proceeding, of which $5 million was advanced during the first quarter
of 2002. On February 14, 2002, in accordance with the terms of a letter
agreement, DII Industries also paid $40 million to Harbison-Walker's United
States parent holding company, RHI Refractories Holding Company. This payment
was charged to discontinued operations in our financial statements in the first
quarter of 2002.
The terms of the letter agreement also requires DII Industries to pay
to RHI Refractories an additional $35 million if a plan of reorganization is
proposed in the Harbison-Walker bankruptcy proceedings, and an additional $85
million if a plan is confirmed in the Harbison-Walker bankruptcy proceedings, in
each case acceptable to DII Industries in its sole discretion. The letter
agreement provides that a plan acceptable to DII Industries must include an
injunction channeling to a Section 524(g)/105 trust all present and future
asbestos claims against DII Industries, arising out of the Harbison-Walker
business or other DII Industries' businesses that share insurance with
Harbison-Walker.
By contrast, the proposed global settlement being pursued by
Halliburton contemplates that DII Industries and Harbison-Walker, among others
including Halliburton, would receive in a DII Industries and Kellogg, Brown &
Root bankruptcy the benefits of an injunction channeling to a Section 524(g)/105
trust all present and future asbestos claims, including with respect to DII
Industries, Kellogg, Brown & Root and Halliburton, claims that do not relate to
the Harbison-Walker business or share insurance with Harbison-Walker.
Harbison-Walker has not yet submitted a proposed plan of reorganization
to the Bankruptcy Court. Moreover, although possible, at this time we do not
believe it likely that Harbison-Walker will propose or ultimately there would be
confirmed a plan of reorganization in its bankruptcy proceeding that is
acceptable to DII Industries. In general, in order for a Harbison-Walker plan of
reorganization involving a Section 524(g)/105 trust to be confirmed, among other
things the creation of the trust would require the approval of 75% of the
asbestos claimant creditors of Harbison-Walker. There can be no assurance that
any plan proposed by Harbison-Walker would obtain the necessary approval or that
it would provide for an injunction channeling to a Section 524(g)/105 trust all
present and future asbestos claims against DII Industries arising out of the
Harbison-Walker business or that share insurance with Harbison-Walker.
In addition, we anticipate that a significant financial contribution to
the Harbison-Walker estate could be required from DII Industries to obtain
confirmation of a Harbison-Walker plan of reorganization if that plan were to
include an injunction channeling to a Section 524(g)/105 trust all present and
future asbestos claims against DII Industries arising out of the Harbison-Walker
business or that have claims to shared insurance with the Harbison-Walker
business. This contribution to the estate would be in addition to DII
Industries' contribution of its interest to insurance coverage for refractory
claims to the Section 524(g)/105 trust. At this time, we are not able to
quantify the amount of this contribution in light of numerous uncertainties.
These include the amount of Harbison-Walker assets available to satisfy its
asbestos and trade creditors and the results of negotiations that must be
completed among
24
Harbison-Walker, the asbestos claims committee under its Chapter 11 proceeding,
a legal representative for future asbestos claimants (which has not yet been
appointed by the Bankruptcy Court), DII Industries and the relevant insurance
companies.
Whether or not Halliburton has completed, is still pursuing or has
abandoned its previously announced global settlement, DII Industries would be
under no obligation to make a significant financial contribution to the
Harbison-Walker estate, although Halliburton intends to consider all of its
options if in the future it ceased pursuing the global settlement.
For the reasons outlined above among others, we do not believe it
probable that DII Industries will be obligated to make either of the additional
$35 million and $85 million payments to RHI Refractories described above. During
February 2003, representatives of RHI A.G., the ultimate corporate parent of RHI
Refractories, met with representatives of DII Industries and indicated that they
believed that DII Industries would be obligated to pay RHI Refractories the $35
million and the $85 million in the event that our proposed global settlement
were to be consummated. For a number of reasons, DII Industries believes that
the global settlement would not be the cause of a failure of a Harbison-Walker
plan to be acceptable to DII Industries and intends vigorously to defend against
this claim if formally asserted.
In connection with the Chapter 11 filing by Harbison-Walker, the
Bankruptcy Court on February 14, 2002 issued a temporary restraining order
staying all further litigation of more than 200,000 asbestos claims currently
pending against DII Industries in numerous courts throughout the United States.
The period of the stay contained in the temporary restraining order has been
extended to July 21, 2003.Currently, there is no assurance that a stay will
remain in effect beyond July 21, 2003, that a plan of reorganization will be
proposed or confirmed for Harbison-Walker, or that any plan that is confirmed
will provide relief to DII Industries.
The stayed asbestos claims are those covered by insurance that DII
Industries and Harbison-Walker each access to pay defense costs, settlements and
judgments attributable to both refractory and non-refractory asbestos claims.
The stayed claims include approximately 142,000 post-1992 spin-off refractory
claims, 6,000 pre-spin-off refractory claims and approximately 135,000 other
types of asbestos claims pending against DII Industries. Approximately 51,000 of
the claims in the third category are claims made against DII Industries based on
more than one ground for recovery and the stay affects only the portion of the
claim covered by the shared insurance. The stay prevents litigation from
proceeding while the stay is in effect and also prohibits the filing of new
claims. One of the purposes of the stay is to allow Harbison-Walker and DII
Industries time to develop and propose a plan of reorganization.
ASBESTOS INSURANCE COVERAGE. DII Industries has substantial insurance
for reimbursement for portions of the costs incurred defending asbestos and
silica claims, as well as amounts paid to settle claims and court judgments.
This coverage is provided by a large number of insurance policies written by
dozens of insurance companies. The insurance companies wrote the coverage over a
period of more than 30 years for DII Industries, its predecessors or its
subsidiaries and their predecessors. Large amounts of this coverage are now
subject to coverage-in-place agreements that resolve issues concerning amounts
and terms of coverage. The amount of insurance available to DII Industries and
its subsidiaries depends on the nature and time of the alleged exposure to
asbestos or silica, the specific subsidiary against which an asbestos or silica
claim is asserted and other factors.
REFRACTORY CLAIMS INSURANCE. DII Industries has approximately $2.1
billion in aggregate limits of insurance coverage for refractory asbestos and
silica claims, of which over one-half is with Equitas or other London-based
insurance companies. Most of this insurance is shared with Harbison-Walker. Many
of the issues relating to the majority of this coverage have been resolved by
coverage-in-place agreements with dozens of companies, including Equitas and
other London-based insurance companies. Coverage-in-place agreements are
settlement agreements between policyholders and the insurers specifying the
terms and conditions under which coverage will be applied as claims are
presented for payment. These agreements in an asbestos claims context govern
such things as what events will be deemed to trigger coverage, how liability for
a claim will be allocated among insurers and what procedures the policyholder
must follow in order to obligate the insurer to pay claims. Recently, however,
Equitas and other London-based companies have attempted to impose new
restrictive documentation requirements on DII Industries and other insureds.
Equitas and the other London-based companies have stated that the new
requirements are part of an effort to limit payment of settlements to claimants
who are truly impaired by exposure to asbestos and can identify the product or
premises that caused their exposure.
25
On March 21, 2002, Harbison-Walker filed a lawsuit in the United States
Bankruptcy Court for the Western District of Pennsylvania in its Chapter 11
bankruptcy proceeding. This lawsuit is substantially similar to DII Industries
lawsuit filed in Texas State Court in 2001 and seeks, among other relief, a
determination as to the rights of DII Industries and Harbison-Walker to the
shared general liability insurance. The lawsuit also seeks damages against
specific insurers for breach of contract and bad faith, and a declaratory
judgment concerning the insurers' obligations under the shared insurance.
Although DII Industries is also a defendant in this lawsuit, it has asserted its
own claim to coverage under the shared insurance and is cooperating with
Harbison-Walker to secure both companies' rights to the shared insurance. The
Bankruptcy Court has ordered the parties to this lawsuit to engage in
non-binding mediation. The first mediation session was held on July 26, 2002 and
additional sessions have since taken place and further sessions are scheduled to
take place, provided the Bankruptcy Court's mediation order remains in effect.
Given the early stages of these negotiations, DII Industries cannot predict
whether a negotiated resolution of this dispute will occur or, if such a
resolution does occur, the precise terms of such a resolution.
Prior to the Harbison-Walker bankruptcy, on August 7, 2001, DII
Industries filed a lawsuit in Dallas County, Texas, against a number of these
insurance companies asserting DII Industries rights under an existing
coverage-in-place agreement and under insurance policies not yet subject to
coverage-in-place agreements. The coverage-in-place agreements allow DII
Industries to enter into settlements for small amounts without requiring
claimants to produce detailed documentation to support their claims, when DII
Industries believes the settlements are an effective claims management strategy.
DII Industries believes that the new documentation requirements are inconsistent
with the current coverage-in-place agreements and are unenforceable. The
insurance companies that DII Industries has sued have not refused to pay larger
claim settlements where documentation is obtained or where court judgments are
entered.
On May 10, 2002, the London-based insuring entities and companies
removed DII Industries' Dallas County State Court Action to the United States
District Court for the Northern District of Texas alleging that federal court
jurisdiction existed over the case because it is related to the Harbison-Walker
bankruptcy. DII Industries has filed an opposition to that removal and has asked
the federal court to remand the case back to the Dallas County state court. On
June 12, 2002, the London-based insuring entities and companies filed a motion
to transfer the case to the federal court in Pittsburgh, Pennsylvania. DII
Industries has filed an opposition to that motion to transfer. The federal court
in Dallas has yet to rule on any of these motions. Regardless of the outcome of
these motions, because of the similar insurance coverage lawsuit filed by
Harbison-Walker in its bankruptcy proceeding, it is unlikely that DII Industries
case will proceed independently of the bankruptcy.
OTHER DII INDUSTRIES CLAIMS INSURANCE. DII Industries has substantial
insurance to cover other non-refractory asbestos claims. Two coverage-in-place
agreements cover DII Industries for companies or operations that DII Industries
either acquired or operated prior to November 1, 1957. Asbestos claims that are
covered by these agreements are currently stayed by the Harbison-Walker
bankruptcy because the majority of this coverage also applies to refractory
claims and is shared with Harbison-Walker. Other insurance coverage is provided
by a number of different policies that DII Industries acquired rights to access
when it acquired businesses from other companies. Three coverage-in-place
agreements provide reimbursement for asbestos claims made against DII Industries
former Worthington Pump division. There is also other substantial insurance
coverage with approximately $2.0 billion in aggregate limits that has not yet
been reduced to coverage-in-place agreements.
On August 28, 2001, DII Industries filed a lawsuit in the 192nd
Judicial District of the District Court for Dallas County, Texas against
specific London-based insuring entities that issued insurance policies that
provide coverage to DII Industries for asbestos-related liabilities arising out
of the historical operations of Worthington Corporation or its successors. This
lawsuit raises essentially the same issue as to the documentation requirements
as the August 7, 2001 Harbison-Walker lawsuit filed in the same court. The
London-based insuring entities filed a motion in that case seeking to compel the
parties to binding arbitration. The trial court denied that motion and the
London-based insuring entities appealed that decision to the state appellate
court. The state appellate courts denied the appeal and, most recently, the
London-based insuring entities have removed the case from the state court to the
federal court. DII Industries was successful in remanding the case back to the
state court.
A significant portion of the insurance coverage applicable to
Worthington claims is alleged by Federal-Mogul Products, Inc. to be shared with
it. In 2001, Federal-Mogul Products, Inc. and a large number of its affiliated
companies filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court in Wilmington, Delaware.
26
In response to Federal-Mogul's allegations, on December 7, 2001, DII
Industries filed a lawsuit in the Delaware Bankruptcy Court asserting its rights
to insurance coverage under historic general liability policies issued to
Studebaker-Worthington, Inc. and its successor for asbestos-related liabilities
arising from, among other operations, Worthington's and its successors' historic
operations. This lawsuit also seeks a judicial declaration concerning the
competing rights of DII Industries and Federal-Mogul, if any, to this insurance
coverage. DII Industries recently filed a second amended complaint in that
lawsuit and the parties are now beginning the discovery process. The parties to
this litigation, including Federal-Mogul, have agreed to mediate this dispute.
The first mediation session is scheduled for April 2, 2003. Unlike the
Harbison-Walker insurance coverage litigation, in which the litigation is stayed
while the mediation proceeds, the insurance coverage litigation concerning the
Worthington-related asbestos liabilities has not been stayed and such litigation
will proceed simultaneously with the mediation.
At the same time, DII Industries filed its insurance coverage action in
the Federal-Mogul bankruptcy, DII Industries also filed a second lawsuit in
which it has filed a motion for preliminary injunction seeking a stay of all
Worthington asbestos-related lawsuits against DII Industries that are scheduled
for trial within the six months following the filing of the motion. The stay
that DII Industries seeks, if granted, would remain in place until the competing
rights of DII Industries and Federal-Mogul to the allegedly shared insurance are
resolved. The Court has yet to schedule a hearing on DII Industries motion for
preliminary injunction.
A number of insurers who have agreed to coverage-in-place agreements
with DII Industries have suspended payment under the shared Worthington policies
until the Federal-Mogul Bankruptcy Court resolves the insurance issues.
Consequently, the effect of the Federal-Mogul bankruptcy on DII Industries
rights to access this shared insurance is uncertain.
CONSTRUCTION CLAIMS INSURANCE. Nearly all of our construction asbestos
claims relate to Brown & Root, Inc. operations before the 1980s. Our primary
insurance coverage for these claims was written by Highlands Insurance Company
during the time it was one of our subsidiaries. Highlands was spun-off to our
shareholders in 1996. On April 5, 2000, Highlands filed a lawsuit against us in
the Delaware Chancery Court. Highlands asserted that the insurance it wrote for
Brown & Root, Inc. that covered construction asbestos claims was terminated by
agreements between Halliburton and Highlands at the time of the 1996 spin-off.
In March 2001, the Chancery Court ruled that a termination did occur and that
Highlands was not obligated to provide coverage for Brown & Root, Inc.'s
asbestos claims. This decision was affirmed by the Delaware Supreme Court on
March 13, 2002. As a result of this ruling, we wrote-off approximately $35
million in accounts receivable for amounts paid for claims and defense costs and
$45 million of accrued receivables in relation to estimated insurance recoveries
claims settlements from Highlands in the first quarter 2002. In addition, we
dismissed the April 24, 2000 lawsuit we filed against Highlands in Harris
County, Texas.
As noted in our 2001 Form 10-K, the amount of the billed insurance
receivable related to Highlands Insurance Company included in accounts
receivable was $35 million.
As a consequence of the Delaware Supreme Court's decision, Kellogg,
Brown & Root no longer has primary insurance coverage from Highlands for
asbestos claims. However, Kellogg, Brown & Root has significant excess insurance
coverage. The amount of this excess coverage that will reimburse us for an
asbestos claim depends on a variety of factors. On March 20, 2002, Kellogg,
Brown & Root filed a lawsuit in the 172nd Judicial District of the District
Court of Jefferson County, Texas, against Kellogg, Brown & Root's historic
insurers that issued these excess insurance policies. In the lawsuit, Kellogg,
Brown & Root seeks to establish the specific terms under which it can seek
reimbursement for costs it incurs in settling and defending asbestos claims from
its historic construction operations. On January 6, 2003, this lawsuit was
transferred to the 11th Judicial District of the District Court of Harris
County, Texas. Until this lawsuit is resolved, the scope of the excess insurance
will remain uncertain. We do not expect the excess insurers will reimburse us
for asbestos claims until this lawsuit is resolved.
SIGNIFICANT ASBESTOS JUDGMENTS ON APPEAL. During 2001, there were
several adverse judgments in trial court proceedings that are in various stages
of the appeal process. All of these judgments concern asbestos claims involving
Harbison-Walker refractory products. Each of these appeals, however, has been
stayed by the Bankruptcy Court in the Harbison-Walker Chapter 11 bankruptcy.
On November 29, 2001, the Texas District Court in Orange, Texas,
entered judgments against Dresser Industries, Inc. (now DII Industries) on a $65
million jury verdict rendered in September 2001 in favor of five plaintiffs. The
$65 million amount includes $15 million of a $30 million judgment against DII
Industries and
27
another defendant. DII Industries is jointly and severally liable for $15
million in addition to $65 million if the other defendant does not pay its share
of this judgment. Based upon what we believe to be controlling precedent, which
would hold that the judgment entered is void, we believe that the likelihood of
the judgment being affirmed in the face of DII Industries' appeal is remote. As
a result, we have not accrued any amounts for this judgment. However, a
favorable outcome from the appeal is not assured.
On November 29, 2001, the same District Court in Orange, Texas, entered
three additional judgments against Dresser Industries, Inc. (now DII Industries)
in the aggregate amount of $35.7 million in favor of 100 other asbestos
plaintiffs. These judgments relate to an alleged breach of purported settlement
agreements signed early in 2001 by a New Orleans lawyer hired by
Harbison-Walker, which had been defending DII Industries pursuant to the
agreement by which Harbison-Walker was spun-off by DII Industries in 1992. These
settlement agreements expressly bind Harbison-Walker Refractories Company as the
obligated party, not DII Industries, which is not a party to the agreements. For
that reason, and based upon what we believe to be controlling precedent, which
would hold that the judgment entered is void, we believe that the likelihood of
the judgment being affirmed in the face of DII Industries' appeal is remote. As
a result, we have not accrued any amounts for this judgment. However, a
favorable outcome from the appeal is not assured.
On December 5, 2001, a jury in the Circuit Court for Baltimore County,
Maryland, returned verdicts against Dresser Industries, Inc. (now DII
Industries) and other defendants following a trial involving refractory asbestos
claims. Each of the five plaintiffs alleges exposure to Harbison-Walker
products. DII Industries portion of the verdicts was approximately $30 million,
which we have fully accrued at December 31, 2002. DII Industries intends to
appeal the judgment to the Maryland Supreme Court. While we believe we have a
valid basis for appeal and intend to vigorously pursue our appeal, any favorable
outcome from that appeal is not assured.
On October 25, 2001, in the Circuit Court of Holmes County,
Mississippi, a jury verdict of $150 million was rendered in favor of six
plaintiffs against Dresser Industries, Inc. (now DII Industries) and two other
companies. DII Industries share of the verdict was $21.3 million which we have
fully accrued at December 31, 2002. The award was for compensatory damages. The
jury did not award any punitive damages. The trial court has entered judgment on
the verdict. While we believe we have a valid basis for appeal and intend to
vigorously pursue our appeal, any favorable outcome from that appeal is not
assured.
ASBESTOS CLAIMS HISTORY. Since 1976, approximately 578,000 asbestos
claims have been filed against us. Almost all of these claims have been made in
separate lawsuits in which we are named as a defendant along with a number of
other defendants, often exceeding 100 unaffiliated defendant companies in total.
During the fourth quarter of 2002, we received approximately 32,000 new claims
and we closed approximately 13,000 claims. The number of open claims pending
against us is as follows:
Total Open
Period Ending Claims
- ------------------------------------------------
December 31, 2002 347,000
September 30, 2002 328,000
June 30, 2002 312,000
March 31, 2002 292,000
December 31, 2001 274,000
September 30, 2001 146,000
June 30, 2001 145,000
March 31, 2001 129,000
December 31, 2000 117,000
===============================================
The claims include approximately 142,000 at December 31, 2002 and
September 30, 2002, 139,000 at June 30, 2002, 133,000 at March 31, 2002 and
125,000 at December 31, 2001 of post spin-off Harbison-Walker refractory related
claims that name DII Industries as a defendant. All such claims have been
factored into the calculation of our asbestos liability.
We manage asbestos claims to achieve settlements of valid claims for
reasonable amounts. When reasonable settlement is not possible, we contest
claims in court. Since 1976, we have closed approximately 231,000 claims through
settlements and court proceedings at a total cost of approximately $202 million.
We have received or
28
expect to receive from our insurers all but approximately $93 million of this
cost, resulting in an average net cost per closed claim of about $403.
ASBESTOS STUDY AND THE VALUATION OF UNRESOLVED CURRENT AND FUTURE
ASBESTOS CLAIMS.
Asbestos Study. In late 2001, DII Industries retained Dr. Francine F.
Rabinovitz of Hamilton, Rabinovitz & Alschuler, Inc. to estimate the probable
number and value, including defense costs, of unresolved current and future
asbestos and silica-related bodily injury claims asserted against DII Industries
and its subsidiaries. Dr. Rabinovitz is a nationally renowned expert in
conducting such analyses, has been involved in a number of asbestos-related and
other toxic tort-related valuations of current and future liabilities, has
served as the expert for three representatives of future claimants in asbestos
related bankruptcies and has had her valuation methodologies accepted by
numerous courts. Further, the methodology utilized by Dr. Rabinovitz is the same
methodology that is utilized by the expert who is routinely retained by the
asbestos claimants committee in asbestos-related bankruptcies. Dr. Rabinovitz
estimated the probable number and value of unresolved current and future
asbestos and silica-related bodily injury claims asserted against DII Industries
and its subsidiaries over a 50 year period. The report took approximately seven
months to complete.
Methodology. The methodology utilized by Dr. Rabinovitz to project DII
Industries and its subsidiaries' asbestos-related liabilities and defense costs
relied upon and included:
- an analysis of DII Industries, Kellogg, Brown & Root's and
Harbison-Walker Refractories Company's historical asbestos
settlements and defense costs to develop average settlement
values and average defense costs for specific asbestos-related
diseases and for the specific business operation or entity
allegedly responsible for the asbestos-related diseases;
- an analysis of DII Industries, Kellogg, Brown & Root's and
Harbison-Walker Refractories Company's pending inventory of
asbestos-related claims by specific asbestos-related diseases
and by the specific business operation or entity allegedly
responsible for the asbestos-related disease;
- an analysis of the claims filing history for asbestos-related
claims against DII Industries, Kellogg, Brown & Root and
Harbison-Walker Refractories Company for the approximate
two-year period from January 2000 to May 31, 2002, and for the
approximate five-year period from January 1997 to May 31, 2002
by specific asbestos-related disease and by business operation
or entity allegedly responsible for the asbestos-related
disease;
- an analysis of the population likely to have been exposed or
claim exposure to products manufactured by DII Industries, its
predecessors and Harbison-Walker or to Brown & Root
construction and renovation projects; and
- epidemiological studies to estimate the number of people who
might allege exposure to products manufactured by DII
Industries, its predecessors and Harbison-Walker or to Brown &
Root construction and renovation projects that would be likely
to develop asbestos-related diseases. Dr. Rabinovitz's
estimates are based on historical data supplied by DII
Industries, Kellogg, Brown & Root and Harbison-Walker and
publicly available studies, including annual surveys by the
National Institutes of Health concerning the incidence of
mesothelioma deaths.
In her estimates, Dr. Rabinovitz relied on the source data provided by
our management; she did not independently verify the accuracy of the source
data. The source data provided by us was based on our 24-year history in
gathering claimant information and defending and settling asbestos claims.
In her analysis, Dr. Rabinovitz projected that the elevated and
historically unprecedented rate of claim filings of the last several years
(particularly in 2000 and 2001), especially as expressed by the ratio of
nonmalignant claim filings to malignant claim filings, would continue into the
future for five more years. After that, Dr. Rabinovitz projected that the ratio
of nonmalignant claim filings to malignant claim filings will gradually decrease
for a 10 year period ultimately returning to the historical claiming rate and
claiming ratio. In making her calculation, Dr. Rabinovitz alternatively assumed
a somewhat lower rate of claim filings, based on an average of the last five
years of claims experience, would continue into the future for five more years
and decrease thereafter.
Otherimportant assumptions utilized in Dr. Rabinovitz's estimates,
which we relied upon in making our accrual are:
- there will be no legislative or other systemic changes to the
tort system;
- that we will continue to aggressively defend against asbestos
claims made against us;
29
- an inflation rate of 3% annually for settlement payments and
an inflation rate of 4% annually for defense costs; and
- we would receive no relief from our asbestos obligation due to
actions taken in the Harbison-Walker bankruptcy.
Range of Liabilities. Based upon her analysis, Dr. Rabinovitz estimated
total, undiscounted asbestos and silica liabilities, including defense costs, of
DII Industries, Kellogg, Brown & Root and some of their current and former
subsidiaries. Through 2052, Dr. Rabinovitz estimated the current and future
total undiscounted liability for personal injury asbestos and silica claims,
including defense costs, would be a range between $2.2 billion and $3.5 billion
as of June 30, 2002 (which includes payments related to the claims currently
pending). The lower end of the range is calculated by using an average of the
last five years of asbestos claims experience and the upper end of the range is
calculated using the more recent two-year elevated rate of asbestos claim
filings in projecting the rate of future claims.
2nd Quarter 2002 Accrual. Based on that estimate, in the second quarter
of 2002, we accrued asbestos and silica claims liability and defense costs for
both known outstanding and future refractory, other DII Industries, and
construction asbestos and silica claims using the low end of the range of Dr.
Rabinovitz's study, or approximately $2.2 billion. In establishing our liability
for asbestos, we included all post spin-off claims against Harbison-Walker that
name DII Industries as a defendant. Our accruals are based on an estimate of
personal injury asbestos claims through 2052 based on the average claims
experience of the last five years. At the end of the second quarter of 2002, we
did not believe that any point in the expert's range was better than any other
point, and accordingly, based our accrual on the low end of the range in
accordance with FIN 14.
AGREEMENT REGARDING PROPOSED GLOBAL SETTLEMENT. In December 2002, we
announced that we had reached an agreement in principle that could result in a
global settlement of all personal injury asbestos and silica claims against us.
The proposed settlement provides that up to $2.775 billion in cash, 59.5 million
shares of our common stock (with a value of $1.1 billion using the stock price
at December 31, 2002 of $18.71) and notes with a net present value expected to
be less than $100 million would be paid to a trust for the benefit of current
and future asbestos personal injury claimants and current silica personal injury
claimants. Under the proposed agreement, Kellogg, Brown & Root and DII
Industries will retain the rights to the first $2.3 billion of any insurance
proceeds with any proceeds received between $2.3 billion and $3.0 billion going
to the trust. The proposed settlement will be implemented through a pre-packaged
Chapter 11 filing of DII Industries and Kellogg, Brown & Root as well as some
other DII Industries and Kellogg, Brown & Root subsidiaries with U.S.
operations. The funding of the settlement amounts would occur upon receiving
final and non-appealable court confirmation of a plan of reorganization of DII
Industries and Kellogg, Brown & Root and their subsidiaries in the Chapter 11
proceeding.
Subsequently, as of March 2003, DII Industries and Kellogg, Brown &
Root have entered into definitive written agreements finalizing the terms of the
agreement in principle. The proposed global settlement also includes silica
claims as a result of current or past exposure. These silica claims are less
than 1% of the personal injury claims included in the proposed global
settlement. We have approximately 2,500 open silica claims.
The agreement contemplated that we would conduct due diligence on the
asbestos claims, and that we and attorneys for the claimants would use
reasonable efforts to execute definitive settlement agreements. While all the
required settlement agreements have not yet been executed, we and attorneys for
some of the asbestos claimants have now reached agreement on what they believe
will be a template for such settlement agreements. These agreements are subject
to a number of conditions, including agreement on a Chapter 11 plan of
reorganization for DII Industries, Kellogg, Brown & Root and some of their
subsidiaries, approval by 75% of current asbestos claimants to the plan of
reorganization, the negotiation of financing acceptable to us, approval by
Halliburton's Board of Directors, and confirmation of the plan of reorganization
by a bankruptcy court. The template settlement agreement also grants the
claimants' attorneys a right to terminate the definitive settlement agreement on
ten days' notice if Halliburton's DII Industries subsidiary does not file a plan
of reorganization under the bankruptcy code on or before April 1, 2003.
We are conducting due diligence on the asbestos claims, which is not
expected to be completed by April 1, 2003. Therefore, we do not expect DII
Industries, Kellogg, Brown & Root and some of their subsidiaries to file a plan
of reorganization prior to April 1. Although there can be no assurances, we do
not believe the claimants' attorneys will terminate the settlement agreements on
April 1, 2003 as long as adequate progress is being made toward a Chapter 11
filing. In March 2003, we agreed with Harbison-Walker and the asbestos creditors
committee
30
in the Harbison-Walker bankruptcy to consensually extend the period of the stay
contained in the Bankruptcy Court's temporary restraining order until July 21,
2003. The court's temporary restraining order, which was originally entered on
February 14, 2002, stays more than 200,000 pending asbestos claims against DII
Industries. The agreement provides that if the pre-packaged Chapter 11 filing by
DII Industries, Kellogg, Brown & Root and their subsidiaries is not made by July
14, 2003, the Bankruptcy Court will hear motions to lift the stay on July 21,
2003. The asbestos creditors committee also reserves the right to monitor
progress toward the filing of the Chapter 11 proceeding and seek an earlier
hearing to lift the stay if satisfactory progress toward the Chapter 11 filing
is not being made.
REVIEW OF ACCRUALS. As a result of the proposed settlement, in the
fourth quarter of 2002, we re-evaluated our accruals for known outstanding and
future asbestos claims. Although we have reached an agreement in principle with
respect to a proposed settlement, we do not believe the settlement is "probable"
under SFAS No. 5 at the current time. Among the prerequisites to reaching a
conclusion of the settlement are:
- agreement on the amounts to be contributed to the trust for
the benefit of silica claimants;
- our review of the more than 347,000 current claims to
establish that the claimed injuries are based on exposure to
products of DII Industries, Kellogg, Brown & Root, their
subsidiaries or former businesses or subsidiaries;
- completion of our medical review of the injuries alleged to
have been sustained by plaintiffs to establish a medical basis
for payment of settlement amounts;
- finalizing the principal amount of the notes to be contributed
to the trust;
- agreement with a proposed representative of future claimants
and attorneys representing current claimants on procedures for
distribution of settlement funds to individuals claiming
personal injury;
- definitive agreement with the attorneys representing current
asbestos claimants and a proposed representative of future
claimants on a plan of reorganization for the Chapter 11
filings of DII Industries, Kellogg, Brown & Root and some of
their subsidiaries; and agreement with the attorneys
representing current asbestos claimants with respect to, and
completion and mailing of, a disclosure statement explaining
the pre-packaged plan of reorganization to the more than
347,000 current claimants;
- arrangement of financing on terms acceptable to us to fund the
cash amounts to be paid in the settlement;
- Halliburton board approval;
- obtaining affirmative votes to the plan of reorganization from
at least the required 75% of known present asbestos claimants
and from a requisite number of silica claimants needed to
complete the plan of reorganization; and
- obtaining final and non-appealable bankruptcy court approval
and federal district court confirmation of the plan of
reorganization.
Because we do not believe the settlement is currently probable as
defined by Statement of Financial Standards No. 5, we have continued to
establish our accruals in accordance with the analysis performed by Dr.
Rabinovitz. However, as a result of the settlement and the payment amounts
contemplated thereby, we believed it appropriate to adjust our accrual to use
the upper end of the range of probable and reasonably estimable liabilities for
current and future asbestos liabilities contained in Dr. Rabinovitz's study,
which estimated liabilities through 2052 and assumed the more recent two-year
elevated rate of claim filings in projecting the rate of future claims.
As a result, in the fourth quarter of 2002, we have determined that the
best estimate of the probable loss is the $3.5 billion estimate in Dr.
Rabinovitz's study, and accordingly, we have increased our accrual for probable
and reasonably estimable liabilities for current and future asbestos and silica
claims to $3.4 billion.
INSURANCE. In 2002, we retained Peterson Consulting, a
nationally-recognized consultant in asbestos liability and insurance, to work
with us to project the amount of insurance recoveries probable in light of the
projected current and future liabilities accrued by us. Using Dr. Rabinovitz's
projection of liabilities through 2052 using the two-year elevated rate of
asbestos claim filings, Peterson Consulting assisted us in conducting an
analysis to determine the amount of insurance that we estimate is probable that
we will recover in relation to the projected claims and defense costs. In
conducting this analysis, Peterson Consulting:
31
- reviewed DII Industries historical course of dealings with its
insurance companies concerning the payment of asbestos-related
claims, including DII Industries 15 year litigation and
settlement history;
- reviewed our insurance coverage policy database containing
information on key policy terms as provided by outside
counsel;
- reviewed the terms of DII Industries prior and current
coverage-in-place settlement agreements;
- reviewed the status of DII Industries and Kellogg, Brown &
Root's current insurance-related lawsuits and the various
legal positions of the parties in those lawsuits in relation
to the developed and developing case law and the historic
positions taken by insurers in the earlier filed and settled
lawsuits;
- engaged in discussions with our counsel; and
- analyzed publicly-available information concerning the ability
of the DII Industries insurers to meet their obligations.
Based on that review, analyses and discussions, Peterson Consulting
assisted us in making judgments concerning insurance coverage that we believe
are reasonable and consistent with our historical course of dealings with our
insurers and the relevant case law to determine the probable insurance
recoveries for asbestos liabilities. This analysis factored in the probable
effects of self-insurance features, such as self-insured retentions, policy
exclusions, liability caps and the financial status of applicable insurers, and
various judicial determinations relevant to the applicable insurance programs.
The analysis of Peterson Consulting is based on its best judgment and
information provided by us.
PROBABLE INSURANCE RECOVERIES. Based on this analysis of the probable
insurance recoveries, in the second quarter of 2002, we recorded a receivable of
$1.6 billion for probable insurance recoveries.
In connection with our adjustment of our accrual for asbestos liability
and defense costs in the fourth quarter of 2002, Peterson Consulting assisted us
in re-evaluating our receivable for insurance recoveries deemed probable through
2052, assuming $3.5 billion of liabilities for current and future asbestos
claims using the same factors cited above through that date. Based on Peterson
Consulting analysis of the probable insurance recoveries, we increased our
insurance receivable to $2.1 billion as of the fourth quarter of 2002. The
insurance receivable recorded by us does not assume any recovery from insolvent
carriers and assumes that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections. However, there can be no assurance that these assumptions will be
correct. These insurance receivables do not exhaust the applicable insurance
coverage for asbestos-related liabilities.
CURRENT ACCRUALS. The current accrual of $3.4 billion for probable and
reasonably estimable liabilities for current and future asbestos and silica
claims and the $2.1 billion in insurance receivables are included in noncurrent
assets and liabilities due to the extended time periods involved to settle
claims. In the second quarter of 2002, we recorded a pretax charge of $483
million, and, in the fourth quarter of 2002, we recorded a pretax charge of $799
million ($675 million after-tax).
In the fourth quarter of 2002, we recorded pretax charges of $232
million ($212 million after-tax) for claims related to Brown & Root construction
and renovation projects under the Engineering and Construction Group segment.
The balance of $567 million ($463 million after-tax) related to claims
associated with businesses no longer owned by us and was recorded as
discontinued operations. The low effective tax rate on the asbestos charge is
due to the recording of a valuation allowance against the United States Federal
deferred tax asset associated with the accrual as the deferred tax asset may not
be fully realizable based upon future taxable income projections.
The total estimated claims through 2052, including the 347,000 current
open claims, are approximately one million. A summary of our accrual for all
claims and corresponding insurance recoveries is as follows:
32
December 31
----------------------------
Millions of dollars 2002 2001
- ----------------------------------------------------------------------------------------------
Gross liability - beginning balance $ 737 $ 80
Accrued liability 2,820 696
Payments on claims (132) (39)
- ---------------------------------------------------------------------------------------------
Gross liability - ending balance $ 3,425 $ 737
=============================================================================================
Estimated insurance recoveries:
Highlands Insurance Company - beginning balance $ (45) $ (39)
Accrued insurance recoveries - (18)
Write-off of recoveries 45 -
Insurance billings - 12
- ---------------------------------------------------------------------------------------------
Highlands Insurance Company - ending balance - $ (45)
=============================================================================================
Other insurance carriers - beginning balance $ (567) $ (12)
Accrued insurance recoveries (1,530) (563)
Insurance billings 38 8
- ---------------------------------------------------------------------------------------------
Other insurance carriers - ending balance $(2,059) $ (567)
=============================================================================================
Total estimated insurance recoveries $(2,059) $ (612)
=============================================================================================
Net liability for known asbestos claims $ 1,366 $ 125
=============================================================================================
Accounts receivable for billings to insurance companies for payments
made on asbestos claims were $44 million at December 31, 2002, and $18 million
at December 31, 200l, excluding $35 million in accounts receivable written off
at the conclusion of the Highlands litigation.
POSSIBLE ADDITIONAL ACCRUALS. When and if the currently proposed global
settlement becomes probable under SFAS No. 5, we would increase our accrual for
probable and reasonably estimable liabilities for current and future asbestos
claims up to $4.0 billion, reflecting the amount in cash and notes we would pay
to fund the settlement combined with the value of 59.5 million shares of
Halliburton common stock using $18.71, which was trading value of the stock at
the end of the fourth quarter of 2002. In addition, at such time as the
settlement becomes probable, we would adjust our accrual for liabilities for
current and future asbestos claims and we would expect to increase the amount of
our insurance receivables to $2.3 billion. As a result, we would record at such
time an additional pretax charge of $322 million ($288 million after-tax).
Beginning in the first quarter in which the settlement becomes probable, the
accrual would then be adjusted from period to period based on positive and
negative changes in the market price of our common stock until the payment of
the shares into the trust.
CONTINUING REVIEW. Projecting future events is subject to many
uncertainties that could cause the asbestos-related liabilities and insurance
recoveries to be higher or lower than those projected and booked such as:
- the number of future asbestos-related lawsuits to be filed
against DII Industries and Kellogg, Brown & Root;
- the average cost to resolve such future lawsuits;
- coverage issues among layers of insurers issuing different
policies to different policyholders over extended periods of
time;
- the impact on the amount of insurance recoverable in light of
the Harbison-Walker and Federal-Mogul bankruptcies; and
- the continuing solvency of various insurance companies.
Given the inherent uncertainty in making future projections, we plan to
have the projections of current and future asbestos and silica claims
periodically reexamined, and we will update them if needed based on our
experience and other relevant factors such as changes in the tort system, the
resolution of the bankruptcies of various asbestos defendants and the
probability of our settlement of all claims becoming effective. Similarly, we
will re-evaluate our projections concerning our probable insurance recoveries in
light of any updates to Dr. Rabinovitz's projections, developments in DII
Industries and Kellogg, Brown & Root's various lawsuits against its insurance
companies and other developments that may impact the probable insurance.
33
BARRACUDA-CARATINGA PROJECT. In June 2000, KBR entered into a contract
with the project owner, Barracuda & Caratinga Leasing Company B.V., to develop
the Barracuda and Caratinga crude oil fields, which are located off the coast of
Brazil. The project manager and owner representative is Petrobras, the Brazilian
national oil company. When completed, the project will consist of two converted
supertankers which will be used as floating production, storage and offloading
platforms, or FPSO's, 33 hydrocarbon production wells, 18 water injection wells,
and all sub-sea flow lines and risers necessary to connect the underwater wells
to the FPSO's.
KBR's performance under the contract is secured by:
- two performance letters of credit, which together have an
available credit of approximately $261 million and which
represent approximately 10% of the contract amount, as amended
to date by change orders;
- a retainage letter of credit in an amount equal to $121
million as of December 31, 2002 and which will increase in
order to continue to represent 10% of the cumulative cash
amounts paid to KBR; and
- a guarantee of KBR's performance of the agreement by
Halliburton Company in favor of the project owner.
The project owner has procured project finance funding obligations from
various banks to finance the payments due to KBR under the contract.
As of December 31, 2002, the project was approximately 63% complete and
KBR had recorded a loss of $117 million related to the project. The probable
unapproved claims included in determining the loss on the project were $182
million as of December 31, 2002. The claims for the project most likely will not
be settled within one year. Accordingly, probable unapproved claims of $115
million at December 31, 2002 have been recorded to long-term unbilled work on
uncompleted contracts. Those amounts are included in "Other assets" on the
balance sheet. KBR has asserted claims for compensation substantially in excess
of $182 million. The project owner, through its project manager, Petrobras, has
denied responsibility for all such claims. Petrobras has, however, agreed in
principle to the scope, but not yet the amount, of issues valued by KBR of
approximately $29 million which are not related to the $182 million in probable
unapproved claims. Additionally we are in discussion with Petrobras about
responsibility for $78 million of new tax costs that were not foreseen in the
contract price.
KBR expects the project will likely be completed more than 12 months
later than the original contract completion date. KBR believes that the
project's delay is due primarily to the actions of Petrobras. In the event that
any portion of the delay is determined to be attributable to KBR and any phase
of the project is completed after the milestone dates specified in the contract,
KBR could be required to pay liquidated damages. These damages would be
calculated on an escalating basis of up to $1 million per day of delay caused by
KBR subject to a total cap on liquidated damages of 10% of the final contract
amount (yielding a cap of approximately $263 million as of December 31, 2002).
We are in discussions with Petrobras regarding a settlement of the amount of
unapproved claims. There can be no assurance that we will reach any settlement
regarding these claims. We expect any settlement, if reached, will result in a
schedule extension that would eliminate liability for liquidated damages based
on the currently forecasted schedule. We have not accrued any amounts for
liquidated damages, since we consider the imposition of liquidated damages to be
unlikely.
The project owner currently has no other committed source of funding on
which we can necessarily rely other than the project finance funding for the
project. If the banks cease to fund the project, the project owner may not have
the ability to continue to pay KBR for its services. The original bank documents
provide that the banks are not obligated to continue to fund the project if the
project has been delayed for more than 6 months. In November 2002, the banks
agreed to extend the 6-month period to 12 months. Other provisions in the bank
documents may provide for additional time extensions. However, delays beyond 12
months may require bank consent in order to obtain additional funding. While we
believe the banks have an incentive to complete the financing of the project,
there is no assurance that they would do so. If the banks did not consent to
extensions of time or otherwise ceased funding the project, we believe that
Petrobras would provide for or secure other funding to complete the project,
although there is no assurance that it would do so. To date, the banks have made
funds available, and the project owner has continued to disburse funds to KBR as
payment for its work on the project even though the project completion has been
delayed. In the event that KBR is alleged to be in default under the contract,
the project owner may assert a right to draw upon the letters of credit. If the
letters of credit were drawn, KBR would be required to
34
fund the amount of the draw to the issuing bank. In the event that KBR was
determined after an arbitration proceeding to have been in default under the
contract, and if the project was not completed by KBR as a result of such
default (i.e., KBR's services are terminated as a result of such default), the
project owner may seek direct damages (including completion costs in excess of
the contract price and interest on borrowed funds, but excluding consequential
damages) against KBR for up to $500 million plus the return of up to $300
million in advance payments that would otherwise have been credited back to the
project owner had the contract not been terminated.
In addition, although the project financing includes borrowing capacity
in excess of the original contract amount, only $250 million of this additional
borrowing capacity is reserved for increases in the contract amount payable to
KBR and its subcontractors other than Petrobras. Because our claims, together
with change orders that are currently under negotiation, exceed this amount, we
cannot give assurance that there is adequate funding to cover current or future
KBR claims. Unless the project owner provides additional funding or permits us
to defer repayment of the $300 million advance, and assuming the project owner
does not allege default on our part, we may be obligated to fund operating cash
flow shortages over the remaining project life in an amount we currently
estimate to be up to approximately $400 million.
The possible Chapter 11 pre-packaged bankruptcy filing by KBR in
connection with the settlement of its asbestos claims would constitute an event
of default under the loan documents with the banks unless waivers are obtained.
KBR believes that it is unlikely that the banks will exercise any right to cease
funding given the current status of the project and the fact that a failure to
pay KBR may allow KBR to cease work on the project without Petrobras having a
readily available substitute contractor.
KBR and Petrobras are currently attempting to resolve any disputes
through ongoing negotiations between the parties and each has appointed a
high-level team for this purpose.
SECURITIES AND EXCHANGE COMMISSION ("SEC") INVESTIGATION AND FORTUNE
500 REVIEW. In late May 2002, we received a letter from the Fort Worth District
Office of the Securities and Exchange Commission stating that it was initiating
a preliminary inquiry into some of our accounting practices. In mid-December
2002, we were notified by the SEC that a formal order of investigation had been
issued. Since that time, the SEC has issued subpoenas calling for the production
of documents and requiring the appearance of a number of witnesses to testify
regarding those accounting practices, which relate to the recording of revenues
associated with cost overruns and unapproved claims on long-term engineering and
construction projects. Throughout the informal inquiry and during the pendency
of the formal investigation, we have provided approximately 300,000 documents to
the SEC. The production of documents is essentially complete and the process of
providing witnesses to testify is ongoing. To our knowledge, the SEC's
investigation has focused on the compliance with generally accepted accounting
principles of our recording of revenues associated with cost overruns and
unapproved claims for long-term engineering and construction projects, and the
disclosure of our accrual practice. Accrual of revenue from unapproved claims is
an accepted and widely followed accounting practice for companies in the
engineering and construction business. Although we accrued revenue related to
unapproved claims in 1998, we first made disclosures regarding the accruals in
our 1999 Annual Report on Form 10-K. We believe we properly applied the required
methodology of the American Institute of Certified Public Accountants' Statement
of Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," and satisfied the relevant criteria for accruing
this revenue, although the SEC may conclude otherwise.
On December 21, 2001, the SEC's Division of Corporation Finance
announced that it would review the annual reports of all Fortune 500 companies
that file periodic reports with the SEC. We received the SEC's initial comments
in letter form dated September 20, 2002 and responded on October 31, 2002. Since
then, we have received and responded to three follow-up sets of comments, most
recently in March 2003.
SECURITIES AND RELATED LITIGATION. On June 3, 2002, a class action
lawsuit was filed against us in the United States District Court for the
Northern District of Texas on behalf of purchasers of our common stock alleging
violations of the federal securities laws. After that date, approximately twenty
similar class actions were filed against us in that or other federal district
courts. Several of those lawsuits also named as defendants Arthur Andersen, LLP
("Arthur Andersen"), our independent accountants for the period covered by the
lawsuit, and several of our present or former officers and directors. Those
lawsuits allege that we violated federal securities laws in failing to disclose
a change in the manner in which we accounted for revenues associated with
unapproved claims on long-term
35
engineering and construction contracts, and that we overstated revenue by
accruing the unapproved claims. One such action was subsequently dismissed
voluntarily, without prejudice, upon motion by the filing plaintiff. The federal
securities fraud class actions have all been transferred to the U.S. District
Court for the Northern District of Texas and consolidated before the Honorable
Judge David Godbey. The amended consolidated class action complaint in that
case, styled Richard Moore v. Halliburton, was scheduled to be filed in February
2003, but that date has been extended by agreement of the parties. It is unclear
as of this time when the amended consolidated class action complaint will be
filed. However, we believe that we have meritorious defenses to the claims and
intend to vigorously defend against them.
Another case, also filed in the United States District Court for the
Northern District of Texas on behalf of three individuals, and based upon the
same revenue recognition practices and accounting treatment that is the subject
of the securities class actions, alleges only common law and statutory fraud in
violation of Texas state law. We moved to dismiss that action on October 24,
2002, as required by the court's scheduling order, on the bases of lack of
federal subject matter jurisdiction and failure to plead with that degree of
particularity required by the rules of procedure. That motion has now been fully
briefed and is before the court awaiting ruling.
In addition to the securities class actions, one additional class
action, alleging violations of ERISA in connection with the Company's Benefits
Committee's purchase of our stock for the accounts of participants in our 401
(k) retirement plan during the period we allegedly knew or should have known
that our revenue was overstated as a result of the accrual of revenue in
connection with unapproved claims, was filed and subsequently voluntarily
dismissed.
Finally, on October 11, 2002, a shareholder derivative action against
present and former directors and our former CFO was filed alleging breach of
fiduciary duty and corporate waste arising out of the same events and
circumstances upon which the securities class actions are based. We have moved
to dismiss that action and a hearing on that motion is presently scheduled to
take place in March 2003. We believe the action is without merit and we intend
to vigorously defend it.
BJ SERVICES COMPANY PATENT LITIGATION. On April 12, 2002, a federal
court jury in Houston, Texas, returned a verdict against Halliburton Energy
Services, Inc. in a patent infringement lawsuit brought by BJ Services Company,
or BJ. The lawsuit alleged that our Phoenix fracturing fluid infringed a patent
issued to BJ in January 2000 for a method of well fracturing using a specific
fracturing fluid. The jury awarded BJ approximately $98 million in damages, plus
pre-judgment interest, which was less than one-quarter of BJ's claim at the
beginning of the trial. A total of $102 million was accrued in the first
quarter, which was comprised of the $98 million judgment and $4 million in
pre-judgment interest costs. The jury also found that there was no intentional
infringement by Halliburton Energy Services, Inc.. As a result of the jury's
determination of infringement, the court has enjoined us from further use of our
Phoenix fracturing fluid. We have posted a supersedeas bond in the amount of
approximately $107 million to cover the damage award, pre-judgment and
post-judgment interest, and awardable costs. We timely appealed the judgment and
the appeal has now been fully briefed and we are awaiting notice of a date of
hearing before the United States Court of Appeals for the Federal Circuit, which
hears all appeals of patent cases. While we believe we have a valid basis for
appeal and intend to vigorously pursue our appeal, any favorable outcome from
that appeal is not assured. We have alternative products to use in our
fracturing operations, and do not expect the loss of the use of the Phoenix
fracturing fluid to have a material adverse impact on our overall energy
services business.
ANGLO-DUTCH (TENGE). We have been sued in the District Court of Harris
County, Texas by Anglo-Dutch (Tenge) L.L.C. and Anglo-Dutch Petroleum
International, Inc. for allegedly breaching a confidentiality agreement related
to an investment opportunity we considered in the late 1990s in an oil field in
the former Soviet republic of Kazakhstan. While we believe the claims raised in
that lawsuit are without merit and are vigorously defending against them, the
plaintiffs have announced their intention to seek approximately $680 million in
damages. We have moved for summary judgment and a hearing on that motion was
held on March 12, 2003. The court's ruling on this motion is still pending.
Trial is set for April 21, 2003.
IMPROPER PAYMENTS REPORTED TO THE SECURITIES AND EXCHANGE COMMISSION.
We have reported to the SEC that one of our foreign subsidiaries operating in
Nigeria made improper payments of approximately $2.4 million to an entity owned
by a Nigerian national who held himself out as a tax consultant when in fact he
was an employee of a local tax authority. The payments were made to obtain
favorable tax treatment and clearly violated our Code of Business Conduct and
our internal control procedures. The payments were discovered during an audit of
the foreign
36
subsidiary. We have conducted an investigation assisted by outside legal
counsel. Based on the findings of the investigation we have terminated several
employees. None of our senior officers were involved. We are cooperating with
the SEC in its review of the matter. We plan to take further action to ensure
that our foreign subsidiary pays all taxes owed in Nigeria, which may be as much
as an additional $3 million, which amount was fully accrued as of March 31,
2002. The integrity of our Code of Business Conduct and our internal control
procedures are essential to the way we conduct business.
ENVIRONMENTAL. We are subject to numerous environmental, legal and
regulatory requirements related to our operations worldwide. In the United
States, these laws and regulations include the Comprehensive Environmental
Response, Compensation and Liability Act, the Resources Conservation and
Recovery Act, the Clean Air Act, the Federal Water Pollution Control Act and the
Toxic Substances Control Act, among others. In addition to the federal laws and
regulations, states where we do business may have equivalent laws and
regulations by which we must also abide. We evaluate and address the
environmental impact of our operations by assessing and remediating contaminated
properties in order to avoid future liabilities and comply with environmental,
legal and regulatory requirements. On occasion, we are involved in specific
environmental litigation and claims, including the remediation of properties we
own or have operated as well as efforts to meet or correct compliance-related
matters.
We do not expect costs related to these remediation requirements to
have a material adverse effect on our consolidated financial position or our
results of operations. Our accrued liabilities for environmental matters were
$48 million as of December 31, 2002 and $49 million as of December 31, 2001. The
liability covers numerous properties and no individual property accounts for
more than 10% of the current liability balance. In some instances, we have been
named a potentially responsible party by a regulatory agency, but in each of
those cases, we do not believe we have any material liability. We have
subsidiaries that have been named as potentially responsible parties along with
other third parties for ten federal and state superfund sites for which we have
established liabilities. As of December 31, 2002, those ten sites accounted for
$8 million of our total $48 million liability.
LETTERS OF CREDIT. In the normal course of business, we have agreements
with banks under which approximately $1.4 billion of letters of credit or bank
guarantees were issued, including $204 million which relate to our joint
ventures' operations. Effective October 9, 2002, we amended an agreement with
banks under which $261 million of letters of credit have been issued. The
amended agreement removes the provision that previously allowed the banks to
require collateralization if ratings of Halliburton debt fell below investment
grade ratings. The revised agreements include provisions that require us to
maintain ratios of debt to total capital and of total earnings before interest,
taxes, depreciation and amortization to interest expense. The definition of debt
includes our asbestos liability. The definition of total earnings before
interest, taxes, depreciation and amortization excludes any non-cash charges
related to the proposed global asbestos settlement through December 31, 2003.
If our debt ratings fall below investment grade, we would be in
technical breach of a bank agreement covering another $160 million of letters of
credit at December 31, 2002, which might entitle the bank to set-off rights. In
addition, a $151 million letter of credit line, of which $121 million has been
issued, includes provisions that allow the bank to require cash
collateralization for the full line if debt ratings of either rating agency fall
below the rating of BBB by Standard & Poor's or Baa2 by Moody's Investors'
Services. These letters of credit and bank guarantees generally relate to our
guaranteed performance or retention payments under our long-term contracts and
self-insurance.
In the past, no significant claims have been made against letters of
credit we have issued. We do not anticipate material losses to occur as a result
of these financial instruments.
LIQUIDATED DAMAGES. Many of our engineering and construction contracts
have milestone due dates that must be met or we may be subject to penalties for
liquidated damages if claims are asserted and we were responsible for the
delays. These generally relate to specified activities within a project by a set
contractual date or achievement of a specified level of output or throughput of
a plant we construct. Each contract defines the conditions under which a
customer may make a claim for liquidated damages. In most instances, liquidated
damages are never asserted by the customer but the potential to do so is used in
negotiating claims and closing out the contract. We had not accrued a liability
for $364 million at December 31, 2002 and $97 million at December 31, 2001 of
possible liquidated damages as we consider the imposition of liquidated damages
to be unlikely. We believe we have valid claims for schedule extensions against
the customers which would eliminate any liability for liquidated damages. Of the
total liquidated damages, $263 million at December 31, 2002 and $77 million at
December 31, 2001 relate to
37
unasserted liquidated damages for the Barracuda-Caratinga project. The estimated
schedule impact of change orders requested by the customer is expected to cover
approximately one-half of the $263 million exposure at December 31, 2002 and
claims for schedule extension are expected to cover the remaining exposure.
OTHER. We are a party to various other legal proceedings. We expense
the cost of legal fees related to these proceedings as incurred. We believe any
liabilities we may have arising from these proceedings will not be material to
our consolidated financial position or results of operations.
NOTE 13. INCOME (LOSS) PER SHARE
Millions of dollars and shares except per share data 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
change in accounting method, net $ (346) $ 551 $ 188
=====================================================================================================
Basic weighted average shares 432 428 442
Effect of common stock equivalents - 2 4
- -----------------------------------------------------------------------------------------------------
Diluted weighted average shares 432 430 446
=====================================================================================================
Income (loss) per common share from continuing operations
before change in accounting method, net:
Basic $ (0.80) $ 1.29 $ 0.42
=====================================================================================================
Diluted $ (0.80) $ 1.28 $ 0.42
=====================================================================================================
Basic income (loss) per share is based on the weighted average number
of common shares outstanding during the period. Diluted income (loss) per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. For 2002, we have used the
basic weighted average shares in the calculation as the effect of the common
stock equivalents would be antidilutive based upon the net loss from continuing
operations. Included in the computation of diluted income per share in 2001 and
2000 are rights we issued in connection with the PES acquisition for between
850,000 and 2.1 million shares of Halliburton common stock. Excluded from the
computation of diluted income per share are options to purchase 10 million
shares of common stock in 2001 and 1 million shares in 2000. These options were
outstanding during these years, but were excluded because the option exercise
price was greater than the average market price of the common shares.
NOTE 14. REORGANIZATION OF BUSINESS OPERATIONS
On March 18, 2002 we announced plans to restructure our businesses into
two operating subsidiary groups, the Energy Services Group and the Engineering
and Construction Group. As part of this reorganization, we separated and
consolidated the entities in our Energy Services Group together as direct and
indirect subsidiaries of Halliburton Energy Services, Inc. We also separated and
consolidated the entities in our Engineering and Construction Group together as
direct and indirect subsidiaries of the former Dresser Industries, Inc., which
became a limited liability company during the second quarter of 2002 and was
renamed DII Industries. The reorganization of subsidiaries facilitated the
separation, organizationally and financially of our business groups, which we
believe will significantly improve operating efficiencies in both, while
streamlining management and easing manpower requirements. In addition, many
support functions, which were previously shared, were moved into the two
business groups. As a result, we took actions during 2002 to reduce our cost
structure by reducing personnel, moving previously shared support functions into
the two business groups and realigning ownership of international subsidiaries
by group.
In 2002, we incurred costs related to the restructuring of
approximately $107 million which consisted of the following:
- $64 million in personnel related expense;
- $17 million of asset related write-downs;
38
- $20 million in professional fees related to the restructuring;
and
- $6 million related to contract terminations.
Of this amount, $8 million remains in accruals for severance
arrangements and approximately $2 million for other items. We expect these
remaining payments will be made during 2003.
Although we have no specific plans currently, the reorganization would
facilitate separation of the ownership of the two business groups in the future
if we identify an opportunity that produces greater value for our shareholders
than continuing to own both business groups.
In the fourth quarter of 2000 we approved a plan to reorganize our
engineering and construction businesses into one business unit. This
restructuring was undertaken because our engineering and construction businesses
continued to experience delays in customer commitments for new upstream and
downstream projects. With the exception of deepwater projects, short-term
prospects for increased engineering and construction activities in either the
upstream or downstream businesses were not positive. As a result of the
reorganization of the engineering and construction businesses, we took actions
to rationalize our operating structure including write-offs of equipment and
licenses of $10 million, engineering reference designs of $4 million,
capitalized software of $6 million, and recorded severance costs of $16 million.
Of these charges, $30 million was reflected under the captions Cost of services
and $6 million as General and administrative in our 2000 consolidated statements
of income. Severance and related costs of $16 million were for the reduction of
approximately 30 senior management positions. In January 2002, the last of the
personnel actions was completed and we have no remaining accruals related to the
2000 restructuring.
NOTE 15. CHANGE IN ACCOUNTING METHOD
In July 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets." Effective January 1, 2002, goodwill
is no longer amortized but is tested for impairment as set forth in the
statement. We now perform our goodwill impairment test for each of our reporting
units in accordance with SFAS No. 142 and those tests indicate that none of the
goodwill we currently have recorded is impaired. Amortization of goodwill for
2001 totaled $42 million pretax and $38 million after-tax.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" which requires the purchase method of accounting
for business combination transactions initiated after June 30, 2001. 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. We ceased amortization
of goodwill on December 31, 2001.
NOTE 16. INCOME TAXES
The components of the (provision) benefit for income taxes are:
Years ended December 31
--------------------------------------
Millions of dollars 2002 2001 2000
- --------------------------------------------------------------------------------------
Current income taxes:
Federal $ 71 $ (146) $ (16)
Foreign (173) (157) (114)
State 4 (20) (5)
- -------------------------------------------------------------------------------------
Total (98) (323) (135)
- -------------------------------------------------------------------------------------
Deferred income taxes:
Federal (11) (58) (20)
Foreign and state 29 (3) 26
- -------------------------------------------------------------------------------------
Total 18 (61) 6
- -------------------------------------------------------------------------------------
Total continuing operations $ (80) $ (384) $ (129)
- -------------------------------------------------------------------------------------
Discontinued operations:
Current income taxes 21 (15) (60)
Deferred income taxes 133 35 -
Disposal of discontinued operations - (199) (141)
- -------------------------------------------------------------------------------------
Total $ 74 $ (563) $ (330)
=====================================================================================
39
Included in the current (provision) benefit for income taxes are
foreign tax credits of $89 million in 2002, $106 million in 2001 and $113
million in 2000. The United States and foreign components of income before
income taxes, minority interests, discontinued operations, and change in
accounting method are as follows:
Years ended December 31
---------------------------------
Millions of dollars 2002 2001 2000
- -----------------------------------------------------------
United States $ (537) $ 565 $ 128
Foreign 309 389 207
- -----------------------------------------------------------
Total $ (228) $ 954 $ 335
===========================================================
The primary components of our deferred tax assets and liabilities and
the related valuation allowances, including federal deferred tax assets of
discontinued operations are as follows:
December 31
------------------------
Millions of dollars 2002 2001
- ----------------------------------------------------------------------------
Gross deferred tax assets:
Employee compensation and benefits $ 282 $ 214
Capitalized research and experimentation 75 46
Accrued liabilities 102 121
Insurance accruals 78 82
Construction contract accounting methods 114 100
Inventory 46 53
Asbestos and silica related liabilities 1,201 258
Intercompany profit 32 54
Net operating loss carryforwards 81 44
Foreign tax credit carryforward 49 -
AMT credit carryforward 5 -
Intangibles 6 18
Allowance for bad debt 40 36
Other 23 41
- ----------------------------------------------------------------------------
Total $ 2,134 $ 1,067
- ----------------------------------------------------------------------------
Gross deferred tax liabilities:
Insurance for asbestos and silica related
liabilities $ 724 $ 214
Depreciation and amortization 188 106
Nonrepatriated foreign earnings 36 36
All other 13 101
- ----------------------------------------------------------------------------
Total $ 961 $ 457
- ----------------------------------------------------------------------------
Valuation allowances:
Net operating loss carryforwards $ 77 $ 38
Future tax attributes related to asbestos
litigation 233 -
Foreign tax credit limitation 49 -
All other 7 8
- ----------------------------------------------------------------------------
Total 366 46
- ----------------------------------------------------------------------------
Net deferred income tax asset $ 807 $ 564
============================================================================
We have $158 million of net operating loss carryforwards that expire
from 2003 through 2011 and net operating loss carryforwards of $71 million with
indefinite expiration dates. The federal alternative minimum tax credits are
available to reduce future U.S. federal income taxes on an indefinite basis.
40
We have accrued for the potential repatriation of undistributed
earnings of our foreign subsidiaries and consider earnings above the amounts on
which tax has been provided to be permanently reinvested. While these additional
earnings could become subject to additional tax if repatriated, repatriation is
not anticipated. Any additional amount of tax is not practicable to estimate.
We have established a $49 million valuation allowance against the 2002
foreign tax credit carryovers, on the basis that we believe these credits will
not be utilized in the statutory carryover period. We also have recorded a $233
million valuation allowance on the asbestos liabilities based on the anticipated
impact of the future asbestos deductions on our ability to utilize future
foreign tax credits. We anticipate that a portion of the asbestos deductions
will displace future foreign tax credits and those credits will expire
unutilized.
Pension liability adjustment included in Other comprehensive income is
net of a tax benefit of $69 million in 2002, and $15 million in 2001.
Reconciliations between the actual provision for income taxes and that
computed by applying the United States statutory rate to income from continuing
operations before income taxes and minority interest are as follows:
Years ended December 31
----------------------------------
Millions of dollars 2002 2001 2000
- -------------------------------------------------------------------------------------------------
(Provision) benefit computed at statutory rate $ 83 $ (334) $ (117)
Reductions (increases) in taxes resulting from:
Rate differentials on foreign earnings (4) (32) (14)
State income taxes, net of federal income tax benefit 2 (13) (3)
Prior years 33 - -
Loss on disposals of equity method investee (28) - -
Non-deductible goodwill - (11) (11)
Valuation allowance (163) - -
Other items, net (3) 6 16
- ------------------------------------------------------------------------------------------------
Total continuing operations (80) (384) (129)
Discontinued operations 154 20 (60)
Disposal of discontinued operations - (199) (141)
- ------------------------------------------------------------------------------------------------
Total $ 74 $ (563) $ (330)
================================================================================================
We have recognized a $114 million valuation allowance in continuing
operations and $119 million in discontinued operations associated with the
asbestos charges net of insurance recoveries. In addition, continuing operations
has recorded a valuation allowance of $49 million related to potential excess
foreign tax credit carryovers. Further, our impairment loss on Bredero-Shaw
cannot be fully benefited for tax purposes due to book and tax basis differences
in that investment and the limited benefit generated by a capital loss
carryback. Settlement of unrealized prior period tax exposures had a favorable
impact to the overall tax rate.
Exclusive of the asbestos and silica charges net of insurance
recoveries and the impairment loss on Bredero-Shaw, our 2002 effective tax rate
from continuing operations would be 38.9% for fiscal 2002 compared to 40.3% in
2001.
NOTE 17. COMMON STOCK
Our 1993 Stock and Long-Term Incentive Plan provides for the grant of
any or all of the following types of awards:
- stock options, including incentive stock options and
non-qualified stock options;
- stock appreciation rights, in tandem with stock options or
freestanding;
- restricted stock;
- performance share awards; and
- stock value equivalent awards.
Under the terms of the 1993 Stock and Long-Term Incentive Plan as amended, 49
million shares of common stock have been reserved for issuance to key employees.
The plan specifies that no more than 16 million shares can be awarded as
restricted stock. At December 31, 2002, 19 million shares were available for
future grants under the 1993 Stock and Long-Term Incentive Plan of which 10
million shares remain available for restricted stock awards.
41
In connection with the acquisition of Dresser Industries, Inc. in 1998,
we assumed the outstanding stock options under the stock option plans maintained
by Dresser Industries, Inc. Stock option transactions summarized below include
amounts for the 1993 Stock and Long-Term Incentive Plan and stock plans of
Dresser Industries, Inc. and other acquired companies. No further awards are
being made under the stock plans of acquired companies.
The following table represents our stock options granted, exercised and
forfeited during the past three years:
Number of Exercise Weighted Average
Shares Price per Exercise Price
Stock Options (in millions) Share per Share
- ---------------------------------------------------------------------------------------
Outstanding at December 31, 1999 17.1 $ 3.10 - 61.50 $ 32.03
- ---------------------------------------------------------------------------------------
Granted 1.7 34.75 - 54.00 41.61
Exercised (3.6) 3.10 - 45.63 25.89
Forfeited (0.5) 12.20 - 54.50 37.13
- ---------------------------------------------------------------------------------------
Outstanding at December 31, 2000 14.7 $ 8.28 - 61.50 $ 34.54
- ---------------------------------------------------------------------------------------
Granted 3.6 12.93 - 45.35 35.56
Exercised (0.7) 8.93 - 40.81 25.34
Forfeited (0.5) 12.32 - 54.50 36.83
- ---------------------------------------------------------------------------------------
Outstanding at December 31, 2001 17.1 $ 8.28 - 61.50 $ 35.10
- ---------------------------------------------------------------------------------------
Granted 2.6 9.10 - 19.75 12.57
Exercised - * 8.93 - 17.21 11.39
Forfeited (1.2) 8.28 - 54.50 31.94
- ---------------------------------------------------------------------------------------
Outstanding at December 31, 2002 18.5 $ 9.10 - 61.50 $ 32.10
=======================================================================================
* Actual exercises for 2002 were approximately 30,000 shares.
Options outstanding at December 31, 2002 are composed of the following:
Outstanding Exercisable
------------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices (in millions) Life Price (in millions) Price
- ------------------------------------------------------------------------------------------
$ 9.10 - 19.27 3.2 7.4 $ 13.41 0.7 $ 16.96
$ 19.28 - 30.14 5.1 4.8 27.50 4.8 27.79
$ 30.15 - 39.54 6.3 6.5 37.30 4.8 38.55
$ 39.55 - 61.50 3.9 6.7 45.28 2.2 48.34
- ------------------------------------------------------------------------------------------
$ 9.10 - 61.50 18.5 6.2 $ 32.10 12.5 $ 34.98
==========================================================================================
There were 10.7 million options exercisable with a weighted average
exercise price of $34.08 at December 31, 2001, and 8.8 million options
exercisable with a weighted average exercise price of $32.81 at December 31,
2000.
All stock options under the 1993 Stock and Long-Term Incentive Plan,
including options granted to employees of Dresser Industries, Inc. since its
acquisition, are granted at the fair market value of the common stock at the
grant date.
Stock options generally expire 10 years from the grant date. Stock
options under the 1993 Stock and Long-Term Incentive Plan vest ratably over a
three or four year period. Other plans have vesting periods ranging from three
to 10 years. Options under the Non-Employee Directors' Plan vest after six
months. Restricted shares awarded under the 1993 Stock and Long-Term Incentive
Plan were 1,706,643 in 2002, 1,484,034 in 2001, and 695,692 in 2000. The shares
awarded are net of forfeitures of 46,894 in 2002, 170,050 in 2001, and 69,402 in
2000. The weighted average fair market value per share at the date of grant of
shares granted was $14.95 in 2002, $30.90 in 2001, and $42.25 in 2000.
42
Our Restricted Stock Plan for Non-Employee Directors allows for each
non-employee director to receive an annual award of 400 restricted shares of
common stock as a part of compensation. We reserved 100,000 shares of common
stock for issuance to non-employee directors. Under this plan we issued 4,400
restricted shares in 2002, 4,800 restricted shares in 2001, and 3,600 restricted
shares in 2000. At December 31, 2002, 38,000 shares have been issued to
non-employee directors under this plan. The weighted average fair market value
per share at the date of grant of shares granted was $12.56 in 2002, $34.35 in
2001, and $46.81 in 2000.
Our Employees' Restricted Stock Plan was established for employees who
are not officers, for which 200,000 shares of common stock have been reserved.
At December 31, 2002, 152,650 shares (net of 42,750 shares forfeited) have been
issued. Forfeitures were 400 in 2002, 800 in 2001, and 6,450 in 2000. No further
grants are being made under this plan.
Under the terms of our Career Executive Incentive Stock Plan, 15
million shares of our common stock were reserved for issuance to officers and
key employees at a purchase price not to exceed par value of $2.50 per share. At
December 31, 2002, 11.7 million shares (net of 2.2 million shares forfeited)
have been issued under the plan. No further grants will be made under the Career
Executive Incentive Stock Plan.
Restricted shares issued under the 1993 Stock and Long-Term Incentive
Plan, Restricted Stock Plan for Non-Employee Directors, Employees' Restricted
Stock Plan and the Career Executive Incentive Stock Plan are limited as to sale
or disposition. These restrictions lapse periodically over an extended period of
time not exceeding 10 years. Restrictions may also lapse for early retirement
and other conditions in accordance with our established policies. Upon
termination of employment, shares in which restrictions have not lapsed must be
returned to us, resulting in restricted stock forfeitures. The fair market value
of the stock, on the date of issuance, is being amortized and charged to income
(with similar credits to paid-in capital in excess of par value) generally over
the average period during which the restrictions lapse. At December 31, 2002,
the unamortized amount is $75 million. We recognized compensation costs of $38
million in 2002, $23 million in 2001, and $18 million in 2000.
During 2002, our Board of Directors approved the 2002 Employee Stock
Purchase Plan (ESPP) and reserved 12 million shares for issuance. Under the
ESPP, eligible employees may have up to 10% of their earnings withheld, subject
to some limitations, to be used to purchase shares of our common stock. Unless
the Board of Directors shall determine otherwise, each 6-month offering period
commences on January 1 and July 1 of each year. The price at which common stock
may be purchased under the ESPP is equal to 85% of the lower of the fair market
value of the common stock on the commencement date or last trading day of each
offering period. There were approximately 541,000 shares sold through the ESPP
in 2002.
On April 25, 2000, our Board of Directors approved plans to implement a
share repurchase program for up to 44 million shares. No shares were repurchased
in 2002. We repurchased 1.2 million shares at a cost of $25 million in 2001 and
20.4 million shares at a cost of $759 million in 2000.
NOTE 18. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
We previously declared a dividend of one preferred stock purchase right
on each outstanding share of common stock. The dividend is also applicable to
each share of our common stock that was issued subsequent to adoption of the
Rights Agreement entered into with Mellon Investor Services LLC. Each preferred
stock purchase right entitles its holder to buy one two-hundredth of a share of
our Series A Junior Participating Preferred Stock, without par value, at an
exercise price of $75. These preferred stock purchase rights are subject to
anti-dilution adjustments, which are described in the Rights Agreement entered
into with Mellon. The preferred stock purchase rights do not have any voting
rights and are not entitled to dividends.
The preferred stock purchase rights become exercisable in limited
circumstances involving a potential business combination. After the preferred
stock purchase rights become exercisable, each preferred stock purchase right
will entitle its holder to an amount of our common stock, or in some
circumstances, securities of the acquirer, having a total market value equal to
two times the exercise price of the preferred stock purchase right. The
preferred stock purchase rights are redeemable at our option at any time before
they become exercisable. The preferred stock purchase rights expire on December
15, 2005. No event during 2002 made the preferred stock purchase rights
exercisable.
43
NOTE 19. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and for Hedging Activities",
subsequently amended by SFAS No. 137 and SFAS No. 138. This standard requires
entities to recognize all derivatives on the balance sheet as assets or
liabilities and to measure the instruments at fair value. Accounting for gains
and losses from changes in those fair values is specified in the standard
depending on the intended use of the derivative and other criteria. We adopted
SFAS No. 133 effective January 2001 and recorded a $1 million after-tax credit
for the cumulative effect of adopting the change in accounting method. We do not
expect future measurements at fair value under the new accounting method to have
a material effect on our financial condition or results of operations.
FOREIGN EXCHANGE RISK. Techniques in managing foreign exchange risk
include, but are not limited to, foreign currency borrowing and investing and
the use of currency derivative instruments. We selectively manage significant
exposures to potential foreign exchange losses considering current market
conditions, future operating activities and the associated cost in relation to
the perceived risk of loss. The purpose of our foreign currency risk management
activities is to protect us from the risk that the eventual dollar cash flows
resulting from the sale and purchase of products and services in foreign
currencies will be adversely affected by changes in exchange rates. We do not
hold or issue derivative financial instruments for trading or speculative
purposes.
We manage our currency exposure through the use of currency derivative
instruments as it relates to the major currencies, which are generally the
currencies of the countries for which we do the majority of our international
business. These contracts generally have an expiration date of two years or
less. Forward exchange contracts, which are commitments to buy or sell a
specified amount of a foreign currency at a specified price and time, are
generally used to manage identifiable foreign currency commitments. Forward
exchange contracts and foreign exchange option contracts, which convey the
right, but not the obligation, to sell or buy a specified amount of foreign
currency at a specified price, are generally used to manage exposures related to
assets and liabilities denominated in a foreign currency. None of the forward or
option contracts are exchange traded. While derivative instruments are subject
to fluctuations in value, the fluctuations are generally offset by the value of
the underlying exposures being managed. The use of some contracts may limit our
ability to benefit from favorable fluctuations in foreign exchange rates.
Foreign currency contracts are not utilized to manage exposures in some
currencies due primarily to the lack of available markets or cost considerations
(non-traded currencies). We attempt to manage our working capital position to
minimize foreign currency commitments in non-traded currencies and recognize
that pricing for the services and products offered in these countries should
cover the cost of exchange rate devaluations. We have historically incurred
transaction losses in non-traded currencies.
ASSETS, LIABILITIES AND FORECASTED CASH FLOWS DENOMINATED IN FOREIGN
CURRENCIES. We utilize the derivative instruments described above to manage the
foreign currency exposures related to specific assets and liabilities, which are
denominated in foreign currencies; however, we have not elected to account for
these instruments as hedges for accounting purposes. Additionally, we utilize
the derivative instruments described above to manage forecasted cash flows
denominated in foreign currencies generally related to long-term engineering and
construction projects. While we enter into these instruments to manage the
foreign currency risk on these projects, we have chosen not to seek hedge
accounting treatment for these contracts. The fair value of these contracts was
immaterial as of the end of 2002 and 2001.
NOTIONAL AMOUNTS AND FAIR MARKET VALUES. The notional amounts of open
forward contracts and options for continuing operations were $609 million at
December 31, 2002 and $505 million at December 31, 2001. The notional amounts of
our foreign exchange contracts do not generally represent amounts exchanged by
the parties, and thus, are not a measure of our exposure or of the cash
requirements relating to these contracts. The amounts exchanged are calculated
by reference to the notional amounts and by other terms of the derivatives, such
as exchange rates.
CREDIT RISK. Financial instruments that potentially subject us to
concentrations of credit risk are primarily cash equivalents, investments and
trade receivables. It is our practice to place our cash equivalents and
investments in high-quality securities with various investment institutions. We
derive the majority of our revenues from sales and services, including
engineering and construction, to the energy industry. Within the energy
industry, trade receivables are generated from a broad and diverse group of
customers. There are concentrations of receivables in
44
the United States and the United Kingdom. We maintain an allowance for losses
based upon the expected collectibility of all trade accounts receivable.
There are no significant concentrations of credit risk with any
individual counterparty related to our derivative contracts. We select
counterparties based on their profitability, balance sheet and a capacity for
timely payment of financial commitments which is unlikely to be adversely
affected by foreseeable events.
INTEREST RATE RISK. We have several debt instruments outstanding which
have both fixed and variable interest rates. We manage our ratio of fixed to
variable-rate debt through the use of different types of debt instruments and
derivative instruments.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS. The estimated fair market
value of long-term debt at year-end for both 2002 and 2001 was $1.3 billion as
compared to the carrying amount of $1.5 billion at year-end for both 2002 and
2001. The fair market value of fixed rate long-term debt is based on quoted
market prices for those or similar instruments. The carrying amount of variable
rate long-term debt approximates fair market value because these instruments
reflect market changes to interest rates. See Note 11. The carrying amount of
short-term financial instruments, cash and equivalents, receivables, short-term
notes payable and accounts payable, as reflected in the consolidated balance
sheets approximates fair market value due to the short maturities of these
instruments. The currency derivative instruments are carried on the balance
sheet at fair value and are based upon third-party quotes. The fair market
values of derivative instruments used for fair value hedging and cash flow
hedging were immaterial.
NOTE 20. RETIREMENT PLANS
Our Company and subsidiaries have various plans which cover a
significant number of their employees. These plans include defined contribution
plans, which provide retirement contributions in return for services rendered,
provide an individual account for each participant and have terms that specify
how contributions to the participant's account are to be determined rather than
the amount of pension benefits the participant is to receive. Contributions to
these plans are based on pretax income and/or discretionary amounts determined
on an annual basis. Our expense for the defined contribution plans for both
continuing and discontinued operations totaled $80 million in 2002 compared to
$129 million in 2001 and $140 million in 2000. Other retirement plans include
defined benefit plans, which define an amount of pension benefit to be provided,
usually as a function of age, years of service or compensation. These plans are
funded to operate on an actuarially sound basis. Plan assets are primarily
invested in cash, short-term investments, real estate, equity and fixed income
securities of entities domiciled in the country of the plan's operation. Plan
assets, expenses and obligations for retirement plans in the following tables
include both continuing and discontinued operations.
2002 2001
------------------------------ ------------------------------
Millions of dollars United States International United States International
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 140 $ 1,968 $ 288 $ 1,670
Service cost 1 72 2 60
Interest cost 9 102 13 89
Plan participants' contributions - 14 - 14
Effect of business combinations and new plans - 70 - -
Amendments 1 (4) - -
Divestitures - (5) (111) (90)
Settlements/curtailments (1) (1) (46) -
Currency fluctuations - 102 - 15
Actuarial gain/(loss) 5 (27) 8 270
Benefits paid (11) (52) (14) (60)
- ----------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 144 $ 2,239 $ 140 $ 1,968
================================================================================================================
45
2002 2001
------------------------------ ------------------------------
Millions of dollars United States International United States International
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 130 $ 1,827 $ 313 $ 2,165
Actual return on plan assets (6) (69) (22) (294)
Employer contribution 1 36 7 30
Settlements (1) - (46) -
Plan participants' contributions - 14 1 14
Effect of business combinations and new plans - 45 - -
Divestitures - (5) (109) (45)
Currency fluctuations - 89 - 15
Benefits paid (11) (51) (14) (58)
- ----------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 113 $ 1,886 $ 130 $ 1,827
================================================================================================================
Funded status $ (31) $ (353) $ (10) $ (141)
Unrecognized transition obligation/(asset) - (2) (1) (3)
Unrecognized actuarial (gain)/loss 56 477 34 308
Unrecognized prior service cost/(benefit) 1 (70) (2) (96)
- ----------------------------------------------------------------------------------------------------------------
Net amount recognized $ 26 $ 52 $ 21 $ 68
================================================================================================================
We recognized an additional minimum pension liability for the
underfunded defined benefit plans. The additional minimum liability is equal to
the excess of the accumulated benefit obligation over plan assets and accrued
liabilities. A corresponding amount is recognized as either an intangible asset
or a reduction of shareholders' equity. For the year ended December 31, 2002 we
recognized $212 million in additional minimum pension liability of which $130
million was recorded as Other comprehensive income, net of tax.
2002 2001
------------------------------ ------------------------------
Millions of dollars United States International United States International
- -------------------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
Prepaid benefit cost $ 30 $ 102 $ 7 $ 85
Accrued benefit liability including
additional minimum liability (59) (250) (10) (36)
Intangible asset 2 12 1 1
Accumulated other comprehensive income,
net of tax 35 122 15 12
Deferred tax asset 18 66 8 6
- ----------------------------------------------------------------------------------------------------------------
Net amount recognized $ 26 $ 52 $ 21 $ 68
================================================================================================================
Assumed long-term rates of return on plan assets, discount rates for
estimating benefit obligations and rates of compensation increases vary for the
different plans according to the local economic conditions. The rates used are
as follows:
46
Weighted-average assumptions 2002 2001 2000
- -------------------------------------------------------------------------------
Expected return on plan assets:
United States plans 9.0% 9.0% 9.0%
International plans 5.5% to 8.16% 5.5% to 9.0% 3.5% to 9.0%
Discount rate:
United States plans 7.0% 7.25% 7.5%
International plans 5.25% to 20.0% 5.0% to 8.0% 4.0% to 8.0%
Rate of compensation increase:
United States plans 4.5% 4.5% 4.5%
International plans 3.0% to 21.0% 3.0% to 7.0% 3.0% to 7.6%
===============================================================================
2002 2001 2000
----------------------- ----------------------- -----------------------
United United United
Millions of dollars States International States International States International
- -------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 1 $ 72 $ 2 $ 60 $ 4 $ 57
Interest cost 9 102 13 89 20 87
Expected return on plan assets (13) (106) (18) (95) (26) (99)
Transition amount - (2) - (2) - -
Amortization of prior service cost (2) (6) (2) (6) (1) (6)
Settlements/curtailments - (2) 16 - 10 -
Recognized actuarial (gain)/loss 1 3 (1) (9) - (10)
- ----------------------------------------------------------------------------------------------------------------
Net periodic benefit (income) cost $ (4) $ 61 $ 10 $ 37 $ 7 $ 29
================================================================================================================
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets as of December 31, 2002 and 2001 are as
follows:
Millions of dollars 2002 2001
- ---------------------------------------------------------
Projected benefit obligation $ 2,319 $ 235
Accumulated benefit obligation $ 2,121 $ 215
Fair value of plan assets $ 1,942 $ 175
=========================================================
POSTRETIREMENT MEDICAL PLAN. We offer postretirement medical plans to
specific eligible employees. For some plans, our liability is limited to a fixed
contribution amount for each participant or dependent. The plan participants
share the total cost for all benefits provided above our fixed contribution and
participants' contributions are adjusted as required to cover benefit payments.
We have made no commitment to adjust the amount of our contributions; therefore,
the computed accumulated postretirement benefit obligation amount is not
affected by the expected future health care cost inflation rate.
Other postretirement medical plans are contributory but we generally
absorb the majority of the costs. We may elect to adjust the amount of our
contributions for these plans. As a result, the expected future health care cost
inflation rate affects the accumulated postretirement benefit obligation amount.
These plans have assumed health care trend rates (weighted based on the current
year benefit obligation) for 2002 of 13% which are expected to decline to 5% by
2007.
Obligations and expenses for postretirement medical plans in the
following tables include both continuing and discontinued operations.
47
Millions of dollars 2002 2001
- ---------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 157 $ 296
Service cost 1 2
Interest cost 11 15
Plan participants' contributions 11 12
Settlements/curtailments - (144)
Actuarial gain 33 5
Benefits paid (27) (29)
- --------------------------------------------------------------------------
Benefit obligation at end of year $ 186 $ 157
==========================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ - $ -
Employer contribution 16 17
Plan participants' contributions 11 12
Benefits paid (27) (29)
- --------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ -
==========================================================================
Funded status $ (186) $ (157)
Employer contribution 2 2
Unrecognized actuarial gain 20 (14)
Unrecognized prior service cost 2 3
- --------------------------------------------------------------------------
Net amount recognized $ (162) $ (166)
==========================================================================
Millions of dollars 2002 2001
- ---------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
Accrued benefit liability $ (162) $ (166)
- --------------------------------------------------------------------------
Net amount recognized $ (162) $ (166)
==========================================================================
Weighted-average assumptions 2002 2001 2000
- -----------------------------------------------------------------------------
Discount rate 7.0% 7.25% 7.50%
- ----------------------------------------------------------------------------
Millions of dollars 2002 2001 2000
- ------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 1 $ 2 $ 3
Interest cost 11 15 20
Amortization of prior service cost - (3) (7)
Settlements/curtailments - (221) -
Recognized actuarial gain (1) (1) (1)
- -----------------------------------------------------------------------------
Net periodic benefit cost $ 11 $ (208) $ 15
=============================================================================
Assumed health care cost trend rates have a significant effect on the
amounts reported for the total of the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
48
One-Percentage-Point
----------------------
Millions of dollars Increase (Decrease)
- --------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 1 $ (1)
Effect on the postretirement benefit obligation $ 10 $ (9)
================================================================================
NOTE 21. DRESSER INDUSTRIES, INC. FINANCIAL INFORMATION
Since becoming a wholly owned subsidiary of Halliburton, DII Industries
(formerly Dresser Industries, Inc.) has ceased filing periodic reports with the
United States Securities and Exchange Commission. DII Industries 8% guaranteed
senior notes, which were initially issued by Baroid Corporation, remain
outstanding and are fully and unconditionally guaranteed by Halliburton. Under
the terms of a Fourth Supplemental Indenture, Halliburton Company in December
2002 assumed as co-obligor the payment of principle and interest on the notes,
and the performance of all of the covenants and conditions of the related
indenture.
NOTE 22. GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted the SFAS No. 142 "Goodwill and Other Intangible Assets", and
in accordance with the statement, amortization of goodwill has been
discontinued. Goodwill for the Energy Service Group was $402 million (net of
$118 million accumulated amortization) in 2002, $386 million (net of $118
million accumulated amortization) in 2001, and $310 million (net of $97 million
accumulated amortization) in 2000. Goodwill for the Engineering and Construction
Group was $321 million (net of $152 million accumulated amortization) in 2002,
$334 million (net of $151 million accumulated amortization) in 2001, and $287
million (net of $134 million accumulated amortization) in 2000.
Had we been accounting for our goodwill under SFAS No. 142 for all
periods presented, our net income (loss) and earnings (loss) per share would
have been as follows:
Years ended December 31
------------------------------
Millions of dollars except per share data 2002 2001 2000
- -----------------------------------------------------------------------------
Reported net income (loss) $ (998) $ 809 $ 501
Goodwill amortization, net of tax - 38 36
- -----------------------------------------------------------------------------
Adjusted net income (loss) $ (998) $ 847 $ 537
=============================================================================
Basic earnings (loss) per share:
Reported net income (loss) $ (2.31) $ 1.89 $ 1.13
Goodwill amortization, net of tax - 0.09 0.08
- -----------------------------------------------------------------------------
Adjusted net income (loss) $ (2.31) $ 1.98 $ 1.21
=============================================================================
Diluted earnings (loss) per share:
Reported net income (loss) $ (2.31) $ 1.88 $ 1.12
Goodwill amortization, net of tax - 0.09 0.08
- -----------------------------------------------------------------------------
Adjusted net income (loss) $ (2.31) $ 1.97 $ 1.20
=============================================================================
49
HALLIBURTON COMPANY
SELECTED FINANCIAL DATA
(Unaudited)
Years ended December 31
Millions of dollars and shares ---------------------------------------------------------------
except per share and employee data 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 12,572 $ 13,046 $ 11,944 $ 12,313 $ 14,504
============================================================================================================
TOTAL OPERATING INCOME (LOSS) (1) (112) 1,084 462 401 170
Nonoperating income (expense), net (2) (116) (130) (127) (94) (115)
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST (228) 954 335 307 55
Provision for income taxes (3) (80) (384) (129) (116) (155)
Minority interest in net income of
consolidated subsidiaries (38) (19) (18) (17) (20)
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ (346) $ 551 $ 188 $ 174 $ (120)
============================================================================================================
Income (loss) from discontinued operations $ (652) $ 257 $ 313 $ 283 $ 105
============================================================================================================
Net income (loss) $ (998) $ 809 $ 501 $ 438 $ (15)
============================================================================================================
BASIC INCOME (LOSS) PER COMMON SHARE
Continuing operations $ (0.80) $ 1.29 $ 0.42 $ 0.40 $ (0.27)
Net income (loss) (2.31) 1.89 1.13 1.00 (0.03)
DILUTED INCOME (LOSS) PER COMMON SHARE
Continuing operations (0.80) 1.28 0.42 0.39 (0.27)
Net income (loss) (2.31) 1.88 1.12 0.99 (0.03)
Cash dividends per share 0.50 0.50 0.50 0.50 0.50
Return on average shareholders' equity (24.02)% 18.64% 12.20% 10.49% (0.35)%
- ------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Net working capital $ 2,288 $ 2,665 $ 1,742 $ 2,329 $ 2,129
Total assets 12,844 10,966 10,192 9,639 10,072
Property, plant and equipment, net 2,629 2,669 2,410 2,390 2,442
Long-term debt (including current maturities) 1,476 1,484 1,057 1,364 1,426
Shareholders' equity 3,558 4,752 3,928 4,287 4,061
Total capitalization 5,083 6,280 6,555 6,590 5,990
Shareholders' equity per share 8.16 10.95 9.20 9.69 9.23
Average common shares outstanding (basic) 432 428 442 440 439
Average common shares outstanding (diluted) 432 430 446 443 439
- ------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Capital expenditures $ (764) $ (797) $ (578) $ (520) $ (841)
Long-term borrowings (repayments), net (15) 412 (308) (59) 122
Depreciation, depletion and amortization
expense 505 531 503 511 500
Goodwill amortization included in
depreciation, depletion and amortization
expense:
Energy Services Group - 24 19 12 22
Engineering and Construction Group - 18 25 21 14
Payroll and employee benefits (4) (4,875) (4,818) (5,260) (5,647) (5,880)
Number of employees (4), (5) 83,000 85,000 93,000 103,000 107,800
============================================================================================================
(continued on next page)
50
HALLIBURTON COMPANY
SELECTED FINANCIAL DATA
(Unaudited)
(continued)
Years ended December 31
Millions of dollars and shares ---------------------------------------------------------------
except per share and employee data 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 13,498 $ 11,236 $ 9,045 $ 8,540 $ 9,145
=============================================================================================================
TOTAL OPERATING INCOME (LOSS) (1) 1,178 674 562 402 8
Nonoperating income (expense), net (2) (82) (70) (34) 333 (61)
- -------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST 1,096 604 528 735 (53)
Provision for income taxes (3) (406) (158) (167) (275) (18)
Minority interest in net income of
consolidated subsidiaries (30) - (1) (14) (24)
- -------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 660 $ 446 $ 360 $ 446 $ (95)
=============================================================================================================
Income from discontinued operations $ 112 $ 112 $ 36 $ 97 $ 81
=============================================================================================================
Net income (loss) $ 772 $ 558 $ 381 $ 543 $ (14)
=============================================================================================================
BASIC INCOME (LOSS) PER COMMON SHARE
Continuing operations $ 1.53 $ 1.04 $ 0.83 $ 1.04 $ (0.23)
Net income (loss) 1.79 1.30 0.88 1.26 (0.04)
DILUTED INCOME (LOSS) PER COMMON SHARE
Continuing operations 1.51 1.03 0.83 1.03 (0.23)
Net income (loss) 1.77 1.29 0.88 1.26 (0.04)
Cash dividends per share 0.50 0.50 0.50 0.50 0.50
Return on average shareholders' equity 19.16% 15.25% 10.44% 15.47% (0.43)%
- -------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Net working capital $ 1,985 $ 1,501 $ 1,477 $ 2,197 $ 1,563
Total assets 9,657 8,689 7,723 7,774 8,087
Property, plant and equipment, net 2,282 2,047 1,865 1,631 1,747
Long-term debt (including current maturities) 1,303 957 667 1,119 1,129
Shareholders' equity 4,317 3,741 3,577 3,723 3,296
Total capitalization 5,647 4,828 4,378 4,905 4,746
Shareholders' equity per share 9.86 8.78 8.29 8.63 7.70
Average common shares outstanding (basic) 431 429 431 431 422
Average common shares outstanding (diluted) 436 432 432 432 422
- -------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Capital expenditures $ (804) $ (612) $ (474) $ (358) $ (373)
Long-term borrowings (repayments), net 285 286 (481) (120) 192
Depreciation, depletion and amortization
expense 465 405 380 387 574
Goodwill amortization included in
depreciation, depletion and amortization
expense:
Energy Services Group 20 19 17 14 11
Engineering and Construction Group 12 7 7 7 7
Payroll and employee benefits (4) (5,479) (4,674) (4,188) (4,222) (4,429)
Number of employees (4), (5) 102,000 93,000 89,800 86,500 90,500
=============================================================================================================
(continued on next page)
51
HALLIBURTON COMPANY
SELECTED FINANCIAL DATA
(Unaudited)
(continued)
(1) Operating income includes the following special charges and credits:
1999 - $47 million: reversal of a portion of the 1998 special charges.
1998 - $959 million: asset related charges ($491 million), personnel
reductions ($234 million), facility consolidations ($124 million), merger
transaction costs ($64 million), and other related costs ($46 million).
1997 - $11 million: merger costs ($9 million), write-downs on impaired
assets and early retirement incentives ($10 million), losses from the sale
of assets ($12 million), and gain on extension of joint venture ($42
million).
1996 - $86 million: merger costs ($13 million), restructuring, merger and
severance costs ($62 million), and write-off of acquired in-process research
and development costs ($11 million).
1995 - $8 million: restructuring costs ($5 million) and write-off of
acquired in-process research and development costs ($3 million).
1994 - $19 million: merger costs ($27 million), litigation ($10 million),
and litigation and insurance recoveries ($18 million).
1993 - $419 million: loss on sale of business ($322 million), merger costs
($31 million), restructuring ($5 million), litigation ($65 million), and
gain on curtailment of medical plan ($4 million).
(2) Nonoperating income in 1994 includes a gain of $276 million from the sale of
an interest in Western Atlas International, Inc. and a gain of $102 million
from the sale of our natural gas compression business.
(3) Provision for income taxes in 1996 includes tax benefits of $44 million due
to the recognition of net operating loss carryforwards and the settlement of
various issues with the Internal Revenue Service.
(4) Includes employees of Dresser Equipment Group which is accounted for as
discontinued operations for the years 1993 through 2000.
(5) Does not include employees of less than 50%-owned affiliated companies.
52
HALLIBURTON COMPANY
QUARTERLY DATA AND MARKET PRICE INFORMATION
(Unaudited)
Quarter
------------------------------------------------------
Millions of dollars except per share data First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------------
2002
Revenues $ 3,007 $ 3,235 $ 2,982 $ 3,348 $12,572
Operating income (loss) 123 (405) 191 (21) (112)
Income (loss) from continuing operations 50 (358) 94 (132) (346)
Loss from discontinued operations (28) (140) - (484) (652)
Net income (loss) 22 (498) 94 (616) (998)
Earnings per share:
Basic income (loss) per common share:
Income (loss) from continuing operations 0.12 (0.83) 0.22 (0.30) (0.80)
Loss from discontinued operations (0.07) (0.32) - (1.12) (1.51)
Net income (loss) 0.05 (1.15) 0.22 (1.42) (2.31)
Diluted income (loss) per common share:
Income (loss) from continuing operations 0.12 (0.83) 0.22 (0.30) (0.80)
Loss from discontinued operations (0.07) (0.32) - (1.12) (1.51)
Net income (loss) 0.05 (1.15) 0.22 (1.42) (2.31)
Cash dividends paid per share 0.125 0.125 0.125 0.125 0.50
Common stock prices (1)
High 18.00 19.63 16.00 21.65 21.65
Low 8.60 14.60 8.97 12.45 8.60
========================================================================================================================
2001
Revenues $ 3,144 $ 3,339 $ 3,391 $ 3,172 $13,046
Operating income 198 272 342 272 1,084
Income from continuing operations before
change in accounting method, net 86 143 181 141 551
Income (loss) from discontinued operations 22 (60) (2) (2) (42)
Gain on disposal of discontinued operations - 299 - - 299
Change in accounting method, net 1 - - - 1
Net income 109 382 179 139 809
========================================================================================================================
(continued on next page)
53
HALLIBURTON COMPANY
QUARTERLY DATA AND MARKET PRICE INFORMATION
(Unaudited)
(continued)
Quarter
--------------------------------------------------
Millions of dollars except per share data First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------------
2001
Earnings per share:
Basic income (loss) per common share:
Income from continuing operations 0.20 0.34 0.42 0.33 1.29
Income (loss) from discontinued operations 0.05 (0.14) - (0.01) (0.10)
Gain on disposal of discontinued operations - 0.70 - - 0.70
Net income 0.25 0.90 0.42 0.32 1.89
Diluted income (loss) per common share:
Income from continuing operations 0.20 0.33 0.42 0.33 1.28
Income (loss) from discontinued operations 0.05 (0.14) - (0.01) (0.10)
Gain on disposal of discontinued operations - 0.70 - - 0.70
Net income 0.25 0.89 0.42 0.32 1.88
Cash dividends paid per share 0.125 0.125 0.125 0.125 0.50
Common stock prices (1)
High 45.91 49.25 36.79 28.90 49.25
Low 34.81 32.20 19.35 10.94 10.94
========================================================================================================================
(1) New York Stock Exchange-composite transactions high and low intraday
price.
54