FORM 10-Q/A
(AMENDMENT NO. 1)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 1-3492
HALLIBURTON COMPANY
(a Delaware Corporation)
75-2677995
5 HOUSTON CENTER
1401 MCKINNEY, SUITE 2400
HOUSTON, TEXAS 77010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER - AREA CODE (713) 759-2600
4100 CLINTON DRIVE
HOUSTON, TEXAS 77020
(FORMER ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $2.50 per share:
Outstanding at April 24, 2003 - 437,153,389
Explanatory Note
AMENDMENTS TO OUR HISTORICAL SEGMENT REPORTING
We are amending the segment presentation in our Form 10-Q for the
quarter ended March 31, 2003 to reflect additional segments of business.
Previously, we reported two segments: the Energy Services Group and the
Engineering and Construction Group (known as "KBR"). This amendment now reflects
eight segments: Pressure Pumping, Drilling and Formation Evaluation and Other
Energy Services (collectively, referred to as the Energy Services Group) and
Onshore Operations, Offshore Operations, Government Operations, Operations and
Maintenance Services and Infrastructure Operations (collectively, referred to as
the Engineering and Construction Group, or as KBR). This eight segment
presentation reflects financial information provided to our chief executive
officer (chief operating decision maker or CODM) during the periods presented.
See Note 2 to the condensed consolidated financial statements for a description
of the operations included in each of these segments. We also amended the
segment disclosure in our 2002 Form 10-K to reflect these additional segments of
business. The Form 10-K/A was filed on January 15, 2004.
SEGMENT CHANGES BEGINNING IN THE SECOND QUARTER OF 2003
In the second quarter of 2003, we reorganized our Energy Services Group
into four divisions, which is the basis for the four segments we have been
reporting within the Energy Services Group beginning with our Form 10-Q for the
quarter ended June 30, 2003. 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 CODM now regularly reviews the operating results,
assesses performance and allocates resources. In addition, during the same
period we changed the type of financial information provided to our CODM. The
new CODM financial report reflects relevant financial data for the four new
Energy Services Group divisions, as well as summary financial information for
KBR as a whole. As a result, we have been reporting the following five segments
since the second quarter of 2003:
- Drilling and Formation Evaluation;
- Fluids (which consists of our drilling fluids operations from the
Other Energy Services segment reported in this Form 10-Q/A and
our cementing operations from the Pressure Pumping segment
reported in this Form 10-Q/A);
- Production Optimization (which consists of production enhancement
services and tools and testing services from the Pressure
Pumping segment reported in this Form 10-Q/A and completion
products and services from the Other Energy Services segment
reported in this Form 10-Q/A);
- Landmark and Other Energy Services; and
- Engineering and Construction Group.
Collectively, Drilling and Formation Evaluation, Fluids, Production
Optimization, and Landmark and Other Energy Services make up the Energy Services
Group.
Please see our Form 10-Q for the period ended June 30, 2003 and our
Form 8-K filed on October 28, 2003 for a more detailed discussion of the new
segment structure, including an update of all segment information included in
our Form 10-K for the year ended December 31, 2002. We will continue to report
these five segments for future periods.
CHANGES TO OUR FIRST QUARTER 2003 FORM 10-Q
The sections of the Form 10-Q affected by this amendment are the
following:
- Note 2 - "Business Segment Information";
- Note 3 - "Dispositions";
- Note 10 - "Unapproved Claims and Long-Term Construction
Contracts";
- Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
- Business Environment;
- Results of Operations;
- Forward-Looking Information - "Legal"; and
- Item 6. Exhibits and Reports on Form 8-K.
In order to preserve the nature and character of the disclosures set
forth in such items as originally filed, this report speaks as of the date of
the original filing, and we have not updated the disclosures in this report to
the date of the amended filing. While this report primarily relates to the
historical periods covered, events may have taken place since the original
filing that might have been reflected in this report if they had taken place
prior to the original filing. All information contained in this Amendment No. 1
is subject to updating and supplementing as provided in our reports filed with
the Securities and Exchange Commission subsequent to the date of the original
filing of the Form 10-Q on May 7, 2003.
HALLIBURTON COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION 2-50
Item 1. Financial Statements 2-29
- Condensed Consolidated Statements of Income 2
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Cash Flows 4
- Notes to Quarterly Consolidated Financial Statements 5-29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 30-50
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
Item 4. Controls and Procedures 51
PART II. OTHER INFORMATION 52-53
Item 6. Listing of Exhibits and Reports on Form 8-K 52-53
Signatures 54
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HALLIBURTON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Millions of dollars and shares except per share data)
Three Months
Ended March 31
-----------------------------
2003 2002
-------------------------------------------------------------------------------------------------------------
REVENUES:
Services $ 2,629 $ 2,529
Product sales 448 460
Equity in earnings (losses) of unconsolidated affiliates (17) 18
-------------------------------------------------------------------------------------------------------------
Total revenues 3,060 3,007
-------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of services $ 2,454 $ 2,530
Cost of sales 404 409
General and administrative 81 53
Gain on sale of business assets, net (21) (108)
-------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 2,918 2,884
-------------------------------------------------------------------------------------------------------------
OPERATING INCOME 142 123
Interest expense (27) (32)
Interest income 8 4
Foreign currency losses, net (6) (8)
Other, net - 4
-------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST, AND CHANGE IN ACCOUNTING PRINCIPLE, NET 117 91
Provision for income taxes (50) (36)
Minority interest in net income of subsidiaries (8) (5)
-------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE CHANGE
IN ACCOUNTING PRINCIPLE, NET 59 50
Loss from discontinued operations, net of tax
benefit of $4 and $15 (8) (28)
Cumulative effect of change in accounting principle, net of tax
benefit of $5 and $0 (8) -
-------------------------------------------------------------------------------------------------------------
NET INCOME $ 43 $ 22
=============================================================================================================
BASIC INCOME PER SHARE:
Income from continuing operations before change in
accounting principle, net $ 0.14 $ 0.12
Loss from discontinued operations, net (0.02) (0.07)
Cumulative effect of change in accounting principle, net (0.02) -
-------------------------------------------------------------------------------------------------------------
Net income $ 0.10 $ 0.05
=============================================================================================================
DILUTED INCOME PER SHARE:
Income from continuing operations before change in
accounting principle, net $ 0.14 $ 0.12
Loss from discontinued operations, net (0.02) (0.07)
Cumulative effect of change in accounting principle, net (0.02) -
-------------------------------------------------------------------------------------------------------------
Net income $ 0.10 $ 0.05
=============================================================================================================
Cash dividends per share $ 0.125 $ 0.125
Basic weighted average common shares outstanding 434 432
Diluted weighted average common shares outstanding 436 433
See notes to quarterly consolidated financial statements.
2
HALLIBURTON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Millions of dollars and shares except per share data)
March 31 December 31
-----------------------------
2003 2002
-------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 928 $ 1,107
Receivables:
Notes and accounts receivable, net 2,379 2,533
Unbilled work on uncompleted contracts 914 724
-------------------------------------------------------------------------------------------------------------
Total receivables 3,293 3,257
Inventories 757 734
Current deferred income taxes 189 200
Other current assets 271 262
-------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,438 5,560
Property, plant and equipment, net of accumulated
depreciation of $3,327 and $3,323 2,492 2,629
Equity in and advances to related companies 433 413
Goodwill, net 682 723
Noncurrent deferred income taxes 622 607
Insurance for asbestos and silica related liabilities 2,059 2,059
Other assets 858 853
-------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 12,584 $ 12,844
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable $ 9 $ 49
Current maturities of long-term debt 299 295
Accounts payable 949 1,077
Accrued employee compensation and benefits 295 370
Advanced billings on uncompleted contracts 659 641
Deferred revenues 101 100
Income taxes payable 144 148
Other current liabilities 589 592
-------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,045 3,272
Long-term debt 1,175 1,181
Employee compensation and benefits 742 756
Asbestos and silica related liabilities 3,407 3,425
Other liabilities 572 581
Minority interest in consolidated subsidiaries 81 71
-------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,022 9,286
=============================================================================================================
SHAREHOLDERS' EQUITY:
Common shares, par value $2.50 per share - authorized
600 shares, issued 457 and 456 shares 1,142 1,141
Paid-in capital in excess of par value 287 293
Deferred compensation (72) (75)
Accumulated other comprehensive income (281) (281)
Retained earnings 3,098 3,110
-------------------------------------------------------------------------------------------------------------
4,174 4,188
Less 19 and 20 shares of treasury stock, at cost 612 630
-------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,562 3,558
-------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,584 $ 12,844
=============================================================================================================
See notes to quarterly consolidated financial statements.
3
HALLIBURTON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Millions of dollars)
Three Months
Ended March 31
-----------------------------
2003 2002
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43 $ 22
Adjustments to reconcile net income to net cash from operations:
Loss from discontinued operations 8 28
Depreciation, depletion and amortization 127 132
Provision (benefit) for deferred income taxes (4) 7
Distributions from (advances to) related companies, net of
equity in (earnings) losses (7) 27
Change in accounting principle, net 8 -
Gain on sale of assets, net (23) (111)
Other non-cash items (3) 18
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts (73) 120
Inventories (48) (28)
Accounts payable (89) 109
Other working capital, net (81) (247)
Other operating activities (69) 78
-------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities (211) 155
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (101) (235)
Sales of property, plant and equipment 31 28
Dispositions (acquisitions) of businesses, net of
cash disposed (acquired) 155 134
Proceeds from sale of securities 52 -
Other investing activities (4) (4)
-------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities 133 (77)
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (5) (1)
Borrowings (repayments) of short-term debt, net (35) (38)
Payments of dividends to shareholders (55) (54)
Payments to reacquire common stock (4) (1)
Proceeds from exercises of stock options 7 -
Other financing activities (2) 1
-------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities (94) (93)
-------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (7) (9)
-------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (179) (24)
Cash and equivalents at beginning of period 1,107 290
-------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 928 $ 266
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period for:
Interest $ 36 $ 41
Income taxes $ 37 $ 46
See notes to quarterly consolidated financial statements.
4
HALLIBURTON COMPANY
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. MANAGEMENT REPRESENTATIONS
Our accounting policies are in accordance with generally accepted
accounting principles 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.
The accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Regulation S-X.
Accordingly, these financial statements do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements and should be read together with our 2002 Annual Report on
Form 10-K. Prior period amounts have been reclassified to be consistent with the
current presentation.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of March 31, 2003, the results of our
operations for the three months ended March 31, 2003 and 2002 and our cash flows
for the three months then ended. The results of operations for the three months
ended March 31, 2003 and 2002 may not be indicative of results for the full
year.
NOTE 2. BUSINESS SEGMENT INFORMATION
Disclosures regarding business segments have been restated to reflect
eight business segments. Previously we reported two segments, the Energy
Services Group and the Engineering and Construction Group (known as KBR). The
following eight segment presentation reflects financial information provided to
our chief executive officer (chief operating decision maker) during the periods
presented:
- Pressure Pumping;
- Drilling and Formation Evaluation;
- Other Energy Services;
- Onshore Operations;
- Offshore Operations;
- Government Operations;
- Operations and Maintenance Services; and
- Infrastructure Operations.
Pressure Pumping, Drilling and Formation Evaluation and Other Energy
Services are collectively referred to as the Energy Services Group, and Offshore
Operations, Onshore Operations, Government Operations, Operations and
Maintenance Services and Infrastructure Operations are collectively referred to
as the Engineering and Construction Group, or KBR.
PRESSURE PUMPING. The Pressure Pumping segment provides services used
to complete oil and gas wells and to increase the amount of oil or gas
recoverable from those wells. Major services and products offered include:
- production enhancement services (including fracturing,
acidizing, coiled tubing, hydraulic workover, sand control,
and pipeline and process services);
- cementing services provide zonal isolation to prevent fluid
movement between formations, ensure a bond to provide support
for the casing, and provide wellbore reliability; and
- tools and testing services (including underbalanced
applications and tubing-conveyed perforating testing
services).
DRILLING AND FORMATION EVALUATION. The Drilling and Formation
Evaluation segment is primarily involved in 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-
5
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.
OTHER ENERGY SERVICES. This segment provides drilling fluids systems,
completion products, integrated exploration and production software information
systems, consulting services, real-time operations, smartwells, and subsea
operations. Drilling fluids are used to provide for well control, drilling
efficiency, and as a means of removing wellbore cuttings. Completion products
and services include well completion equipment, slickline and safety systems.
Included in this business segment are Baroid, Landmark Graphics, Integrated
Solutions, Real Time Operations, our equity method investment in Enventure
Global Technology, LLC, an expandable casing joint venture, subsea 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.
ONSHORE OPERATIONS. The Onshore Operations segment provides engineering
and construction activities, including engineering and construction of liquefied
natural gas, ammonia and crude oil refineries and natural gas plants.
OFFSHORE OPERATIONS. The Offshore Operations segment provides deepwater
engineering and marine technology and worldwide fabrication capabilities.
GOVERNMENT OPERATIONS. The Government Operations segment provides
construction, maintenance and logistics activities for government facilities and
installations.
OPERATIONS AND MAINTENANCE SERVICES. The Operations and Maintenance
Services segment provides 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.
INFRASTRUCTURE OPERATIONS. The Infrastructure Operations segment
provides civil engineering, consulting and project management services.
ASBESTOS AND SILICA CHARGES. Asbestos and silica charges related to our
Engineering and Construction Group are not allocated to a specific segment as
these charges are reviewed by management in total.
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.
The tables below present information on our continuing operations
business segments.
6
Three Months
Ended March 31
-------------------------
Millions of dollars 2003 2002
-------------------------------------------------------------------------------------
REVENUES:
Pressure Pumping $ 706 $ 668
Drilling and Formation Evaluation 379 399
Other Energy Services 526 622
-------------------------------------------------------------------------------------
Total Energy Services Group 1,611 1,689
-------------------------------------------------------------------------------------
Onshore Operations 430 375
Offshore Operations 291 312
Government Operations 440 330
Operations and Maintenance Services 210 224
Infrastructure Operations 78 77
-------------------------------------------------------------------------------------
Total Engineering and Construction Group 1,449 1,318
-------------------------------------------------------------------------------------
Total $ 3,060 $ 3,007
=====================================================================================
OPERATING INCOME (LOSS):
Pressure Pumping $ 96 $ 102
Drilling and Formation Evaluation 66 38
Other Energy Services 18 29
-------------------------------------------------------------------------------------
Total Energy Services Group 180 169
-------------------------------------------------------------------------------------
Onshore Operations 16 33
Offshore Operations (57) (16)
Government Operations 18 6
Operations and Maintenance Services (2) (3)
Infrastructure Operations 8 5
Asbestos and Silica Charges (2) (83)
-------------------------------------------------------------------------------------
Total Engineering and Construction Group (19) (58)
-------------------------------------------------------------------------------------
General corporate (19) 12
-------------------------------------------------------------------------------------
Total $ 142 $ 123
=====================================================================================
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, Granherne and Production Services, were better aligned with our
Kellogg Brown & Root subsidiary, or KBR. 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. Major
Projects, which consisted of the Barracuda-Caratinga project in Brazil, is now
reported through the Offshore Operations segment, Granherne is now reported in
the Onshore Operations segment, and Production Services is now reported under
the Operations and Maintenance Services segment.
As part of this reorganization, we had $8 million in accruals for
severance arrangements and approximately $2 million for other items at December
31, 2002. During the first quarter of 2003, we utilized $4 million of these
accruals, leaving $6 million in total accruals at March 31, 2003. We expect the
remaining accruals will be used during 2003.
NOTE 3. DISPOSITIONS
WELLSTREAM. In March 2003, we sold the assets relating to our
Wellstream business, a global provider of flexible pipe products, systems and
solutions within our Energy Services Group, to Candover Partners Ltd for $136
million in cash. The assets sold included manufacturing plants in Newcastle on
the Tyne, United Kingdom, and
7
Panama City, Florida, as well as certain assets and contracts in Brazil. The
transaction resulted in a pretax loss of $15 million ($12 million after-tax, or
$0.03 per diluted share), which is included in our Other Energy Services
segment. Included in the pretax loss is the write-off of the cumulative
translation adjustment related to Wellstream of approximately $9 million. The
cumulative translation adjustment could not be tax benefited and therefore the
effective tax benefit for this loss on disposition was only 20%.
MONO PUMPS. In January 2003, we sold our Mono Pumps business, a
division within our Energy Services Group, to National Oilwell, Inc. (NYSE:
NOI). The purchase price of approximately $88 million was paid with $23 million
in cash and 3.2 million shares of National Oilwell common stock, which was
valued at $64.7 million on January 15, 2003. We recorded a pretax gain of $36
million ($21 million after-tax, or $0.05 per diluted share) on the sale, which
is included in our Drilling and Formation Evaluation segment. Included in the
pretax gain is the write-off of the cumulative translation adjustment related to
Mono Pumps of approximately $5 million. The cumulative translation adjustment
could not be tax benefited and therefore the effective tax rate for this
disposition was 42%. In February, we sold 2.5 million of our 3.2 million shares
of the National Oilwell common stock for $52 million, which resulted in a gain
of $2 million pretax, or $1 million after-tax.
EUROPEAN MARINE CONTRACTORS LTD. In January 2002, we sold our 50%
interest in European Marine Contractors Ltd., an unconsolidated joint venture
reported within our 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 a pretax gain of $108 million
($68 million after-tax, or $0.16 per diluted share).
NOTE 4. DISCONTINUED OPERATIONS
During the first quarter of 2003, we recorded as expense to
discontinued operations $12 million for professional fees associated with due
diligence and other aspects of the proposed global settlement for asbestos and
silica liabilities related to previously disposed businesses.
During the first quarter of 2002, we recorded as expense to
discontinued operations $3 million for asbestos claims and defense costs related
to previously disposed businesses, net of anticipated insurance recoveries for
asbestos claims. We also recorded expense for a $40 million payment associated
with the Harbison-Walker bankruptcy filing. See Note 11.
NOTE 5. INCOME PER SHARE
Three Months
Ended March 31
Millions of dollars and shares -------------------------
except per share data 2003 2002
-------------------------------------------------------------------------------------
Income from continuing operations before
change in accounting principle, net $ 59 $ 50
=====================================================================================
Basic weighted average common shares outstanding 434 432
Effect of common stock equivalents 2 1
-------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 436 433
=====================================================================================
Income per common share from continuing operations
before change in accounting principle, net:
Basic $ 0.14 $ 0.12
=====================================================================================
Diluted $ 0.14 $ 0.12
=====================================================================================
Basic income per share is based on the weighted average number of
common shares outstanding during the period. Diluted income per share includes
additional common shares that would have been outstanding if potential common
shares with a dilutive effect had been issued. Excluded from the computation of
diluted income per share
8
are options to purchase 15 million shares of common stock in 2003 and 17 million
shares in 2002. 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 6. COMPREHENSIVE INCOME
The components of other comprehensive income adjustments to net income
include the cumulative translation adjustment of some of our foreign entities,
minimum pension liability adjustments and unrealized losses on investments and
derivatives.
Three Months
Ended March 31
-------------------------
Millions of dollars 2003 2002
-------------------------------------------------------------------------------------
Net income $ 43 $ 22
Cumulative translation adjustments, net of tax (13) 3
Realization of losses included in net income 14 -
-------------------------------------------------------------------------------------
Net cumulative translation adjustments, net of tax 1 3
Unrealized losses on investments and derivatives (1) -
-------------------------------------------------------------------------------------
Total comprehensive income $ 43 $ 25
=====================================================================================
Accumulated other comprehensive income at March 31, 2003 and December
31, 2002 consisted of the following:
March 31 December 31
---------------------------
Millions of dollars 2003 2002
---------------------------------------------------------------------------------------
Cumulative translation adjustments $ (120) $ (121)
Pension liability adjustments (157) (157)
Unrealized losses on investments and derivatives (4) (3)
-------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (281) $ (281)
=====================================================================================
NOTE 7. RESTRICTED CASH
At March 31, 2003 and 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.
NOTE 8. RECEIVABLES
Included in notes and accounts receivable are notes with varying
interest rates totaling $57 million at March 31, 2003 and $53 million at
December 31, 2002.
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. No
additional amounts have been received from our accounts receivable facility in
the first quarter of 2003. The total amount outstanding under this facility was
$180 million as of March 31, 2003 and December 31, 2002. We continue to service,
administer and collect the receivables on behalf of the purchaser.
NOTE 9. 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 $44 million at March 31, 2003 and $43 million
at December 31, 2002. If the average cost method had been used, total
inventories would have been $17 million higher than reported at March 31, 2003
and December 31, 2002.
Over 90% of remaining inventory is recorded on the average cost method,
with the remainder on the first-in, first-out method.
9
Inventories at March 31, 2003 and December 31, 2002 are composed of the
following:
March 31 December 31
---------------------------
Millions of dollars 2003 2002
---------------------------------------------------------------------------------------
Finished products and parts $ 518 $ 545
Raw materials and supplies 179 141
Work in process 60 48
-------------------------------------------------------------------------------------
Total $ 757 $ 734
=====================================================================================
NOTE 10. 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.
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:
March 31 December 31
---------------------------
Millions of dollars 2003 2002
---------------------------------------------------------------------------------------
Probable unapproved claims (included
in determining contract profit or loss) $ 298 $ 279
Unapproved claims in unbilled work on
uncompleted contracts $ 237 $ 210
=====================================================================================
The claims at March 31, 2003 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 $1 million. The largest claim relates to the Barracuda-Caratinga
contract in our Offshore Operations segment under KBR, which was approximately
67% complete at March 31, 2003. The probable unapproved claims included in
determining this contract's loss were $182 million at March 31, 2003 and
December 31, 2002. As most of the claim elements for this contract will likely
not be settled within one year, related amounts in unbilled work on uncompleted
contracts of
10
$122 million at March 31, 2003 and $115 million at December 31, 2002 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 three months ended
March 31, 2003 is as follows:
Probable Probable Unapproved
Unapproved Claims Accrued
Millions of dollars Claims Revenue
----------------------------------------------------------------------------------
Beginning balance $ 279 $ 210
Additions 20 20
Costs incurred during period - 8
Other (1) (1)
-----------------------------------------------------------------------------
Ending balance $ 298 $ 237
=============================================================================
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 (losses) 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 March
31, 2003 and December 31, 2002.
NOTE 11. COMMITMENTS AND CONTINGENCIES - ASBESTOS AND SILICA
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-
11
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 March 31, 2003, there were approximately 6,000 open and
unresolved pre-spin-off refractory claims against DII Industries. In addition,
there were approximately 152,000 post spin-off claims that name DII Industries
as a defendant.
OTHER DII INDUSTRIES CLAIMS. As of March 31, 2003, there were
approximately 164,000 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.
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
March 31, 2003, there were approximately 67,000 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, Harbison-Walker and others,
including Halliburton, would receive the benefits of an injunction channeling
all present and future asbestos claims to a Section 524(g)/105 trust in a DII
Industries and Kellogg Brown & Root bankruptcy. With respect to DII Industries,
Kellogg Brown & Root and Halliburton, these claims may include 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
12
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 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 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 152,000 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.
13
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.
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
14
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.
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 was 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.
15
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 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 fully accrued in 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 fully
accrued in 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 624,000 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 first quarter of 2003, we received approximately 46,000 new claims
and we closed approximately 4,000 claims. We believe that
16
in many cases single claimants are filing claims against multiple Halliburton
entities, and we believe that the actual number of additional claimants is about
half of the number of new claims. If and when we confirm duplicate claims, we
will adjust our data accordingly. The approximate number of open claims pending
against us is as follows:
Total Open
Period Ending Claims
------------------------------------------------
March 31, 2003 389,000
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
The total open claims include 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. The approximate
number of post spin-off Harbison-Walker claims included in total open claims
pending against us is as follows:
Post Spin-off
Harbison-Walker
Period Ending Claims
----------------------------------------------
March 31, 2003 152,000
December 31, 2002 142,000
September 30, 2002 142,000
June 30, 2002 139,000
March 31, 2002 133,000
December 31, 2001 125,000
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 235,000 claims through
settlements and court proceedings at a total cost of approximately $212 million.
We have received or expect to receive from our insurers all but approximately
$100 million of this cost, resulting in an average net cost per closed claim of
about $426.
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;
17
- 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.
Other important 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;
- 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.
18
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 $1.2 billion using the stock price
at March 31, 2003 of $20.73) 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. The proposed global settlement also includes approximately 21,000
silica claims as a result of current or past exposure that we have agreed to
settle. 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.
In 2003, DII Industries and Kellogg Brown & Root entered into
definitive written agreements with attorneys representing more than 75% of
current asbestos claimants. 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 settlement
agreements also grant the claimants' attorneys the right to terminate the
definitive settlement agreements on ten days' notice. Although there can be no
assurances we do not believe the claimants' attorneys will terminate the
settlement agreements as long as adequate progress is being made toward a
Chapter 11 filing.
We are currently conducting due diligence on the asbestos claims, and
expect this process will be substantially completed by the end of May 2003. We
have received approximately one-third of the files relating to current asbestos
claimants and have reviewed over 80% of those files. While these results are
preliminary and not necessarily indicative of the eventual results of a
completed review of all current asbestos claims, it appears that a substantial
majority of the records for claims reviewed to date provide sufficient evidence
of medical injury. However, a substantial portion of the files reviewed do not
establish exposure to our products and services. We expect that many of these
records could be supplemented by attorneys representing the claimants to provide
additional information on product identification, and we are consulting with
plaintiffs' counsel concerning the lack of documentation. However, no assurance
can be given that the additional product identification documentation will be
timely provided or sufficient for us or the plaintiffs to proceed with the
proposed global settlement. In addition, although the medical information in the
files we preliminarily reviewed appears significantly more complete than the
product identification information, if a material number of claims ultimately do
not meet the medical criteria for alleged injuries, no assurance can be given
that a sufficient number of plaintiffs would vote to approve the plan of
reorganization that would implement the global settlement. In such case, we
would not proceed with a Chapter 11 filing.
Moreover, one result of our due diligence review may be the preliminary
identification of more claims than contemplated by the proposed global
settlement. However, until the more recently identified claims are subject to a
complete due diligence review, we will not be able to determine if these claims
would be appropriately included under the proposed global settlement. Many of
these recently identified claims may be duplicative of previously submitted
claims or may otherwise not be appropriately included under the proposed global
settlement. In the event that more claims are identified and validated than
contemplated by the proposed global settlement, we would need to reduce the
amounts proposed to be paid per claim to remain within the aggregate parameters
of the proposed global settlement.
In March 2003, we agreed with Harbison-Walker and the asbestos
creditors committee 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
19
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 has reserved 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. While we
are working toward making the Chapter 11 filing on or about July 14, 2003, the
timing of our filing depends upon our receiving satisfactory product
identification information in a timely manner.
At the same time, we continue to track legislative proposals for
asbestos reform pending in Congress. In determining whether to approve the
proposed global settlement and proceed with the Chapter 11 filing of DII
Industries and Kellogg Brown & Root, the Halliburton Board of Directors will
take into account the then current status of these legislative initiatives.
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 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 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 determined that the best
estimate of the probable loss is the $3.5 billion estimate in Dr. Rabinovitz's
study, and accordingly, we 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
20
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:
- 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 2052. 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 ($391 million after-tax), 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. 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 389,000 current
open claims, are approximately one million. A summary of our accrual for all
claims and corresponding insurance recoveries is as follows:
21
Quarter Ended Year Ended
Millions of dollars March 31, 2003 December 31, 2002
------------------------------------------------------------------------------------------
Gross liability - beginning balance $ 3,425 $ 737
Accrued liability - 2,820
Payments on claims (18) (132)
------------------------------------------------------------------------------------------
Gross liability - ending balance $ 3,407 $ 3,425
==========================================================================================
Estimated insurance recoveries:
Highlands Insurance Company - beginning balance $ - $ (45)
Write-off of recoveries - 45
------------------------------------------------------------------------------------------
Highlands Insurance Company - ending balance $ - $ -
==========================================================================================
Other insurance carriers - beginning balance $(2,059) $ (567)
Accrued insurance recoveries - (1,530)
Insurance billings - 38
------------------------------------------------------------------------------------------
Other insurance carriers - ending balance $(2,059) $(2,059)
==========================================================================================
Total estimated insurance recoveries $(2,059) $(2,059)
==========================================================================================
Net liability for asbestos claims $ 1,348 $ 1,366
==========================================================================================
Accounts receivable for billings to insurance companies for payments
made on asbestos claims were $44 million at March 31, 2003 and December 31,
2002. The $44 million at December 31, 2002 excludes $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 $4.1 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, a value of $1.2 billion, using the stock price at
March 31, 2003 of $20.73. 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 $442 million ($365 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.
22
NOTE 12. COMMITMENTS AND CONTINGENCIES - EXCLUDING ASBESTOS AND SILICA
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's 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:
- three 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 $132
million as of March 31, 2003 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 March 31, 2003, the project was approximately 67% complete and
KBR had recorded a loss of $172 million related to the project. The probable
unapproved claims included in determining the loss on the project were $182
million as of March 31, 2003. The claims for the project most likely will not be
settled within one year. Accordingly, probable unapproved claims of $122 million
at March 31, 2003 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 to changes to
the project worth approximately $61 million that are not included in the $182
million in probable unapproved claims. Of the $61 million, formal change orders
for $31 million have already been received, and formal change orders for the
remaining $30 million are expected upon the anticipated approval of the lenders.
KBR expects the project will likely be completed no less than 16 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 March 31, 2003). We
have not accrued any amounts for liquidated damages, since we consider the
imposition of liquidated damages to be unlikely.
Petrobras and we have appointed high-level negotiating teams to discuss
a number of issues on the Barracuda-Caratinga project. Currently, these issues
include: an updated working schedule; extensions to the contract schedule as a
result of force majeure events; the deferral of the imposition of liquidated
damages for delays contemplated by an updated working schedule; the application
of liquidated damages for delays not contemplated by an updated working
schedule; agreement upon financial responsibility and a schedule extension for
some of the unapproved claims and agreeing to employ arbitration as the method
of resolving other claims; the terms upon which Petrobras would defer repayment
of the $300 million of advance payments made by Petrobras at the beginning of
our work under the contract; and an amendment to the Halliburton guarantee.
While we are working towards resolving these issues in the second quarter of
2003, there can be no assurance that we will reach any agreements on these
matters.
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
23
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 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.
Petrobras has informed us that 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.
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 several follow-up sets of comments, and
we are in the process of responding to the last few comments.
24
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 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 filed and
served upon us on or about April 11, 2003. It is our belief that we have
meritorious defenses to the claims and we 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.
On October 11, 2002, a shareholder derivative action against present
and former directors and our former CFO was filed in the District Court of
Harris County, Texas 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 hearings on that
motion have recently been concluded and a decision is expected soon. We believe
the action is without merit and we intend to vigorously defend it.
Finally, on or about March 12, 2003, another shareholder derivative
action arising out of the same events and circumstances was filed in the United
States District Court for the Northern District of Texas against certain of our
present and former officers and directors. Like the case filed in the state
court in Harris County, we believe that this action is without merit and we
intend to vigorously defend it.
We have not accrued a contingent liability as of March 31, 2003 for any
shareholder derivative action or class action lawsuit discussed above.
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
of 2002, 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. 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. Oral argument was scheduled to be heard
on May 7, 2003 before a three judge panel of the United States Court of Appeals
for the Federal Circuit and a decision is expected to be announced before year
end. While we believe we have a valid basis for appeal and
25
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. Since we believe the probability of loss is remote, we have not accrued
a contingent liability for this matter as of March 31, 2003. 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. The trial, which was set for
April 21, 2003 was continued to August 18, 2003 on the District Court's own
motion.
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 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 $5 million, which has been fully accrued. 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
$44 million as of March 31, 2003 and $48 million as of December 31, 2002. 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 March 31, 2003, those ten sites accounted for
approximately $8 million of our total $44 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 $187 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.
26
If our debt ratings fall below investment grade, we would be in
technical breach of a bank agreement covering another $57 million of letters of
credit at March 31, 2003, which might entitle the bank to set-off rights. In
addition, a $151 million letter of credit line, of which $132 million has been
issued, includes provisions that allow the bank to require cash
collateralization for the full line if debt ratings fall below either 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 $376 million at March 31, 2003 and $364 million at December 31, 2002 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 March 31, 2003 and December 31, 2002
relate to unasserted liquidated damages for the Barracuda-Caratinga project. It
is expected that the schedule impact of change orders requested by the customer,
schedule extensions granted as a result of force majeure events related to
permitting and other issues, and claims to the customer for schedule extension
will be sufficient to avoid any exposure for liquidated damages.
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. ACCOUNTING FOR STOCK-BASED COMPENSATION
We have six stock-based employee compensation plans. 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. In addition, no cost for the
Employee Stock Purchase Plan is reflected in net income.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. For the quarters ended March 31, 2003 and
March 31, 2002, 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
---------------------------------------------------------------------------------------------------
2003 2.9% 2.4% 5 62% $ 10.83
2002 4.9% 2.9% 5 60% $ 6.72
===================================================================================================
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.
27
For the three months
ended March 31
---------------------------
Millions of dollars except per share data 2003 2002
------------------------------------------------------------------------------
Net income, as reported $ 43 $ 22
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (6) (6)
------------------------------------------------------------------------------
Net income, pro forma $ 37 $ 16
==============================================================================
Basic earnings per share:
As reported $ 0.10 $ 0.05
Pro forma $ 0.09 $ 0.04
Diluted earnings per share:
As reported $ 0.10 $ 0.05
Pro forma $ 0.08 $ 0.04
==============================================================================
NOTE 14. CHANGE IN ACCOUNTING PRINCIPLE
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated assets' retirement
costs. SFAS No. 143 requires that the fair value of a liability associated with
an asset retirement be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated retirement costs
are capitalized as part of the carrying amount of the long-lived asset and
subsequently depreciated over the life of the asset. The new standard was
effective for us beginning January 1, 2003, and the effects of this standard
required a charge of $8 million after-tax as a cumulative effect of a change in
accounting principle. The asset retirement obligations primarily relate to the
removal of leasehold improvements upon exiting certain lease arrangements and
restoration of land associated with the mining of bentonite. The total liability
recorded at adoption and at March 31, 2003 for asset retirement obligations and
the related accretion and depreciation expense for all periods presented is
immaterial to our consolidated financial position and results of operations.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". The
standard requires companies to recognize costs associated with exit or disposal
activities when the liabilities are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and some employee severance costs that
are associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity. We have adopted SFAS No. 146 as of January 1,
2003 and this adoption only affects the timing of charges associated with any
future exit or disposal activity.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
This statement requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued. The disclosure provisions of FIN
45 were effective for financial statements of interim and annual periods ending
December 15, 2002. We adopted the recognition provisions of FIN 45 as of January
1, 2003. The adoption of FIN 45 did not have a material effect on our
consolidated financial position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). This statement requires specified
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is
28
effective for all new variable interest entities created or acquired after
January 31, 2003 and beginning July 1, 2003 for variable interest entities
created or acquired prior to February 1, 2003. Our exposure to variable interest
entities is limited and, therefore, the adoption of FIN 46 did not have a
material impact on our consolidated financial position and results of
operations.
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In this section, we discuss the operating results and general financial
condition of Halliburton Company and its subsidiaries. We explain:
- factors and risks that impact our business;
- why our earnings and expenses for the first quarter
of 2003 differ from the first quarter of 2002;
- capital expenditures;
- factors that impacted our cash flows; and
- other items that materially affect our financial
condition or earnings.
BUSINESS ENVIRONMENT
We currently operate in over 100 countries throughout the world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry and to other industrial and governmental customers. The
majority of our consolidated revenues are derived from the sale of services and
products, including engineering and construction activities, to major, national
and independent oil and gas companies. These services and products are used
throughout the energy industry, from the earliest phases of exploration,
development and production of oil and gas resources through refining, processing
and marketing. Our eight business segments are: Pressure Pumping, Drilling and
Formation Evaluation, Other Energy Services (collectively, referred to as the
Energy Services Group), Onshore Operations, Offshore Operations, Government
Operations, Operations and Maintenance Services, and Infrastructure Operations
(collectively, referred to as the Engineering and Construction Group, or as
KBR).
The industries we serve are highly competitive with many substantial
competitors for each segment. During the first quarter of 2003, the United
States represented 34% of our total revenue and the United Kingdom represented
11%. No other country accounted for more than 10% of our operations. Unsettled
political conditions, social unrest, acts of terrorism, force majeure, war or
other armed conflict, expropriation or other governmental actions, inflation,
exchange controls or currency devaluation may result in increased business risk
in any one country. We believe the geographic diversification of our business
activities reduces the risk that interruption or loss of business in any one
country would be material to our consolidated results of operations.
HALLIBURTON COMPANY
Activity levels within our business segments are significantly impacted
by the following:
- spending on upstream exploration, development and
production programs by major, national and
independent oil and gas companies;
- capital expenditures for downstream refining,
processing, petrochemical and marketing facilities by
major, national and independent oil and gas
companies; and
- government spending levels.
Also impacting our activity is the status of the global economy, which
indirectly impacts oil and gas consumption, demand for petrochemical products
and investment in infrastructure projects.
Some of the more significant barometers of current and future spending
levels of oil and gas companies are higher sustained oil and gas prices, quality
exploration and production drilling prospects, stable economic fiscal terms, the
world economy and global stability, which together drive worldwide drilling
activity. As measured by rig count, high levels of worldwide drilling activity
during the first half of 2001 began to decline in the latter part of that year.
Drilling levels reached a low, particularly in the United States for gas
drilling, in April 2002. The decline was partially due to general business
conditions caused by global economic uncertainty which was accelerated by the
terrorist attacks on September 11, 2001. An abnormally warm 2001/2002 winter
season in the United States also resulted in increased working gas in storage.
The high level of working gas in storage put downward pressure on gas prices,
which resulted in reduced gas drilling activity particularly in the Western
portion of the United States due to transportation and market constraints.
Working gas in storage is the volume of gas in underground reservoirs above the
level of base gas (or cushion gas) intended as permanent inventory in a storage
reservoir to maintain adequate pressure and deliverability rates throughout the
winter withdrawal season.
30
For the year 2002, natural gas prices at Henry Hub averaged $3.33 per
million cubic feet, commonly referred to as mcf, compared to $4.27 in the fourth
quarter 2002 and $6.90 in the first quarter 2003. Gas prices continued to
decline during the first two months of 2002 due to excess supply and then
steadily increased throughout the year averaging $4.65 per mcf in December 2002
and averaging $8.06 per mcf in March 2003. These higher gas prices have thus far
not translated into significantly increased gas drilling rig activity as of the
end of April 2003. Based upon data from a leading research association, the gas
price at Henry Hub is expected to average $5.80 for 2003.
Natural gas prices have been impacted by an abnormally cold 2002/2003
winter season in the United States, resulting in reduced gas storage levels
depleting below the 5-year historical average of 1,221 billion cubic feet,
commonly referred to as bcf, as reported by the Energy Information
Administration (EIA). While gas prices in the United States have historically
varied somewhat geographically, this past winter we have seen significantly
higher fluctuations in regional gas prices in the United States. For example,
while the price averaged $6.90 per mcf in the first quarter at Henry Hub, Opal
in Wyoming averaged less than $4.00 per mcf and it was less than $6.00 per mcf
in various other parts of the Western United States. This is resulting in
significant variation in gas drilling activity by region in the United States
and much lower drilling and stimulation activity in the gas basins of the
Western United States.
On the supply side, Spears and Associates believes that natural gas
supply is continuing to decline at about a 5% per annum pace and that it will
not be until the second half of 2003 before United States natural gas production
will begin to recover. Spears anticipates that United States natural gas supply
will be down an overall 3% for 2003.
Crude oil prices for West Texas Intermediate, commonly referred to as
WTI, averaged $25.92 per barrel for all of 2002 compared to $26.02 per barrel
for 2001. Oil prices have continued to trend upward since the beginning of 2002.
Quarterly average WTI increased from $20.52 in the 2001 fourth quarter, to
$28.34 in the 2002 fourth quarter and increased to $34.14 during the 2003 first
quarter. We believe that current oil prices reflect the disruption of supplies
from Venezuela due to political unrest related to the national strike which have
still not reached pre-strike production levels, civil unrest and strikes in
Nigeria and a war premium due to the uncertainty of oil supplies as a result of
the armed conflict in Iraq.
With the subsidence of hostilities in Iraq there continues to be
considerable uncertainty for world oil markets in 2003. Oil prices had peaked at
almost $40 per barrel on February 27, 2003 due to the war and supply problems in
Nigeria but have now fallen back to around $25. With the end of armed conflict
in Iraq, there is a concern that prices will move lower due to weak global
economic growth and OPEC over supply.
ENERGY SERVICES GROUP
The yearly average and quarterly average rig counts based on the Baker
Hughes Incorporated rig count information are as follows:
Average Rig Counts 2002 2001
----------------------------------------------------------
United States 831 1,155
Canada 266 342
International (excluding Canada) 732 745
----------------------------------------------------------
Worldwide Total 1,829 2,242
==========================================================
First Fourth Third Second First Fourth
Quarter Quarter Quarter Quarter Quarter Quarter
Average Rig Counts 2003 2002 2002 2002 2002 2001
----------------------------------------------------------------------------------------
United States 901 847 853 806 818 1,004
Canada 493 283 250 147 383 278
International
(excluding Canada) 744 753 718 725 731 748
----------------------------------------------------------------------------------------
Worldwide Total 2,138 1,883 1,821 1,678 1,932 2,030
========================================================================================
31
Worldwide rig activity started to decline in the latter part of the
third quarter 2001 and averaged 1,829 rigs in 2002 as compared to 2,242 in 2001.
The decline in rig activity was most severe in North America, particularly the
United States, where the rig count dropped 28% from an average of 1,155 in 2001
to 831 in 2002, with the majority of this decline due to reduced gas drilling.
In the past, there has generally been a good correlation between the price of
oil and gas in the United States and rig activity. However, this has not been
the case in recent quarters where the rig count has declined as compared to the
fourth quarter 2001, while WTI oil and Henry Hub gas prices have increased. We
believe this is due to the following:
- volatility of oil and gas prices and impact of OPEC
production cutbacks;
- uncertainty as to the timing of return of oil
supplies from Venezuela to pre-strike levels;
- differences in gas prices geographically in the
United States;
- the uncertainty as to the timing of return of Iraqi
oil production;
- budgetary constraints of some of our customers;
- focus on debt reduction and property rationalization
by some of our major customers; and
- lack of quality drilling prospects by exploration and
production companies.
For the first quarter 2003, rig activity increased 6% in the United
States to an average of 901 rigs, the majority of which were rigs drilling for
gas. Rig activity in the United States has increased in each of the last three
months primarily for gas drilling in direct response to the low levels of gas in
storage. The large 74% increase in Canadian rig activity is related to the
longer than normal winter drilling season in Canada, which is historically
followed by a drop in rig activity during the spring thaw season when melting
snow and ice make drilling conditions more difficult. Although the Canadian rig
count increased dramatically in the first quarter, these increases did not occur
in areas in which we have strong market presence. The international rig count
excluding Canada dropped slightly in the first quarter to 744 rigs, primarily in
the North Sea where drilling activity is curtailed during the winter due to high
seas and in Africa, mainly in west Africa, where companies are evaluating recent
drilling results before committing to deepwater development projects and
additional drilling, offset by a slight increase in Latin America mainly in
Argentina and Mexico with Venezuelan activity still not back up to pre-strike
levels.
It is common practice in the United States oilfield services industry
to sell services and products based on a price book and then apply discounts to
the price book based upon a variety of factors. The discounts applied typically
increase to partially or substantially offset price book increases immediately
following a price increase. The discount applied normally decreases over time if
the activity levels remain strong. During periods of reduced activity, discounts
normally increase, reducing the net revenue for our services and conversely
during periods of higher activity, discounts normally decline resulting in net
revenue increasing for our services.
During 2000 and 2001, we implemented several price book increases. In
July 2000, as a result of increased consumable materials costs and a tight labor
market causing higher labor costs, we increased prices in the United States for
most product and service lines on average between 2% and 12%. In January 2001,
as a result of continued labor shortages and increased labor and materials
costs, we increased prices in the United States on average between 5% and 12%.
In July 2001, as a result of continuing personnel and consumable material cost
increases, we increased prices on average between 6% and 15%.
The decreased rig activity in 2002 from 2001 in the United States has
increased pressure on the Energy Services Group to discount prices. The price
increases we implemented in 2000 and 2001 have mostly been eroded by additional
discounts.
Based upon recent data from Spears and Associates, drilling activity in
the United States and Canada in 2003 is expected to increase compared to overall
2002 levels and compared to the first quarter 2003. This reflects the current
level of oil and gas prices and low inventories. International drilling activity
is expected to increase slightly from first quarter 2003 levels.
At the end of 2002, two brokerage firms released exploration and
production expenditure surveys for 2003. Salomon Smith Barney reported that
worldwide exploration and production spending is expected to increase 3.8% in
2003. North America spending was forecasted to rise 1.5%. The report also noted
that a lack of quality drilling prospects and uncertainty over Iraq have also
contributed to a weaker initial spending forecast. Lehman Brothers made similar
predictions. They are projecting a 4.2% increase in worldwide exploration and
production expenditures for 2003, but a slight decrease in United States
spending. Canadian exploration and production
32
spending is estimated to increase 7.2%. International exploration and production
expenditures are estimated to grow 5.5% in 2003, led by national oil companies
and European majors. According to the Lehman report, exploration and production
company budgets were based upon an average oil price estimate of $23.22 per
barrel (WTI) and $3.42 per mcf for natural gas (Henry Hub).
Until economic and political uncertainties impacting customer spending
become clearer, we expect oilfield services activity to increase slightly in the
second quarter 2003 and continue to improve for the balance of the year. The war
in Iraq resulted in slightly lower activity levels late in the quarter in the
Middle East where we operate. We expect operations to return to pre-war levels
in the near term. In the longer-term, we expect increased global demand for oil
and natural gas, additional customer spending to replace depleting reserves and
our continued technological advances to provide growth opportunities.
ENGINEERING AND CONSTRUCTION GROUP
Our engineering and construction projects are longer term in nature
than our energy services projects and are not significantly impacted by
short-term fluctuations in oil and gas prices. We believe that the global
economic recovery is continuing, but its strength and sustainability are not
assured. Based on the uncertain economic recovery and continuing excess capacity
in petrochemical supplies, customers have continued to delay project awards or
reduced the scope of projects involving hydrocarbons and manufacturing. A number
of large-scale gas and liquefied natural gas development, offshore deepwater,
government and infrastructure projects are being awarded or actively considered.
However, in light of terrorist threats, the armed conflict in Iraq and
increasing instability in the Middle East and the modest growth of the global
economy, many customers have been delaying some of their capital commitments and
international investments.
We expect growth opportunities to exist for additional security and
defense support to government agencies in the United States and other countries.
Demand for these services is expected to grow as a result of the armed conflict
in Iraq and subsequent reconstruction period and as governmental agencies seek
to control costs and promote efficiencies by outsourcing these functions. We
also expect growth due to new demands created by increased efforts to combat
terrorism and enhance homeland security.
Engineering and construction contracts can be broadly categorized as
fixed-price, sometimes referred to as lump sum, or cost reimbursable contracts.
Some contracts can involve both fixed-price and cost reimbursable elements.
Fixed-price contracts are for a fixed sum to cover all costs and any
profit element for a defined scope of work. Fixed-price contracts entail more
risk to us as we must pre-determine both the quantities of work to be performed
and the costs associated with executing the work. The risks to us arise, among
other things, from:
- having to judge the technical aspects and effort
involved to accomplish the work within the contract
schedule;
- labor availability and productivity; and
- supplier and subcontractor pricing and performance.
Fixed-price engineering, procurement and construction and fixed-price
engineering, procurement, installation and commissioning contracts involve even
greater risks including:
- bidding a fixed-price and completion date before
detailed engineering work has been performed;
- bidding a fixed-price and completion date before
locking in price and delivery of significant
procurement components (often items which are
specifically designed and fabricated for the
project);
- bidding a fixed-price and completion date before
finalizing subcontractors' terms and conditions;
- subcontractors' individual performance and combined
interdependencies of multiple subcontractors (the
majority of all construction and installation work is
performed by subcontractors);
- contracts covering long periods of time;
- contract values generally for large amounts; and
- contracts containing significant liquidated damages
provisions.
Cost reimbursable contracts include contracts where the price is
variable based upon actual costs incurred for time and materials, or for
variable quantities of work priced at defined unit rates. Profit elements on
cost
33
reimbursable contracts may be based upon a percentage of costs incurred and/or a
fixed amount. Cost reimbursable contracts are generally less risky, since the
owner retains many of the risks. While fixed-price contracts involve greater
risk, they also potentially are more profitable for the contractor, since the
owners pay a premium to transfer many risks to the contractor.
After careful consideration, we have decided no longer to pursue
riskier fixed-price engineering, procurement, installation and commissioning
contracts for the offshore oil and gas industry. An important aspect of our 2002
reorganization was to look closely at each of our businesses to ensure that they
are self-sufficient, including their use of capital and liquidity. In that
process, we found that the engineering, procurement, installation and
commissioning offshore business was using a disproportionate share of our
bonding and letter of credit capacity relative to its profit contribution. The
risk/reward relationship in that segment is no longer attractive to us. We
provide a range of engineering, fabrication and project management services to
the offshore industry, which we will continue to service through a variety of
other contracting forms. We have seven fixed-price engineering, procurement,
installation and commissioning offshore projects underway and we are fully
committed to successful completion of these projects, all but two of which are
substantially complete. The two ongoing projects are in excess of 50% complete.
We plan to retain our offshore engineering and services capabilities.
The approximate percentages of revenues attributable to fixed-price and
cost reimbursable Engineering and Construction Group contracts are as follows:
Fixed-Price Cost Reimbursable
-------------------------------------------------------------------------
First Quarter ended March 31, 2003 45% 55%
Year ended December 31, 2002 47% 53%
=========================================================================
BACKLOG
Our backlog at March 31, 2003, was $9.8 billion, comprised of $9.5
billion for the Engineering and Construction Group and $300 million for the
Energy Services Group. Our total backlog at December 31, 2002, was $10 billion.
REORGANIZATION OF BUSINESS OPERATIONS
As a part of the reorganization, we decided that the operations of
Major Projects, Granherne and Production Services were better aligned with KBR
and these businesses were moved from the Energy Services Group to the
Engineering and Construction Group during the second quarter of 2002. All prior
period segment results have been restated to reflect this change. Major
Projects, which currently consists of the Barracuda-Caratinga project in Brazil,
is now reported through the Offshore Operations segment, Granherne is now
reported in the Onshore Operations segment and Production Services is now
reported under the Operations and Maintenance Services segment.
ASBESTOS AND SILICA
On December 18, 2002, we announced that we had reached an agreement in
principle that, if and when consummated, would result in a global settlement of
all asbestos and silica personal injury claims. In 2003, DII Industries and
Kellogg Brown & Root entered into definitive written agreements with attorneys
representing more than 75% of the current claimants. The agreements cover all
current and future personal injury asbestos claims against DII Industries,
Kellogg Brown & Root and their current and former subsidiaries, as well as all
current silica claims asserted presently or in the future. We revised our best
estimate of our asbestos and silica liability based on information obtained
while negotiating the agreement in principle, and adjusted our asbestos and
silica liability to $3.425 billion, recorded additional probable insurance
recoveries resulting in a total of $2.1 billion as of December 31, 2002 and
recorded a net pretax charge of $799 million ($675 million after-tax) in the
fourth quarter of 2002.
Should the proposed global settlement become probable under Statement
of Financial Accounting Standards No. 5, we would adjust our accrual for
probable and reasonably estimable liabilities for current and future asbestos
and silica claims. The settlement amount initially would be up to $4.1 billion,
consisting of up to $2.775 billion in cash, the value of 59.5 million
Halliburton shares of common stock and notes with a net present value expected
to be less than $100 million. Assuming the revised liability would be $4.1
billion, we would also increase our probable insurance recoveries to $2.3
billion. The impact on our income statement would be an additional
34
pretax charge of $442 million ($365 million after-tax). This accrual (which
values our stock to be contributed at $1.2 billion using our stock price at
March 31, 2003 of $20.73) would then be adjusted periodically based on changes
in the market price of our common stock until the common stock is contributed to
a trust for the benefit of the claimants.
RESULTS OF OPERATIONS IN 2003 COMPARED TO 2002
FIRST QUARTER OF 2003 COMPARED WITH THE FIRST QUARTER OF 2002
First Quarter
REVENUES ------------------ Increase
Millions of dollars 2003 2002 (decrease)
-------------------------------------------------------------------------------------
Pressure Pumping $ 706 $ 668 $ 38
Drilling and Formation Evaluation 379 399 (20)
Other Energy Services 526 622 (96)
-----------------------------------------------------------------------------------
Total Energy Services Group 1,611 1,689 (78)
-----------------------------------------------------------------------------------
Onshore Operations 430 375 55
Offshore Operations 291 312 (21)
Government Operations 440 330 110
Operations and Maintenance Services 210 224 (14)
Infrastructure Operations 78 77 1
-----------------------------------------------------------------------------------
Total Engineering and Construction Group 1,449 1,318 131
-----------------------------------------------------------------------------------
Total revenues $ 3,060 $ 3,007 $ 53
===================================================================================
Consolidated revenues of $3.1 billion in the first quarter of 2003
increased $53 million compared to the first quarter of 2002. International
revenues were 66% of total revenues for the first quarter of 2003 and 67% in the
first quarter of 2002.
PRESSURE PUMPING revenues increased $38 million in the first quarter of
2003 compared to the first quarter of 2002. Production enhancement activities
contributed $22 million of the improvement, with cementing services and tools
and testing services each contributing $8 million. These increases are largely
attributable to increased drilling activity internationally.
On a geographic basis, $26 million of the revenue increase occurred in
Middle East/Asia, primarily due to increased activity in Russia and Oman. In
addition, Latin America revenues increased $8 million due to increased work in
Mexico and Brazil, which was partially offset by lower activity in Venezuela due
to operations still not being back to pre-strike levels. Europe/Africa also
contributed to improved segment revenues, while North America revenues declined
due to higher pricing discounts. International revenues were 52% of total
revenues for the segment in the first quarter of 2003 compared to 49% in the
first quarter of 2002.
DRILLING AND FORMATION EVALUATION revenues for the first quarter of
2003 decreased $20 million, or 5%, compared to the first quarter of 2002.
Drilling services accounted for $11 million of the decrease due to the sale of
Mono Pumps and logging and perforating activities accounted for $8 million of
the decrease due to higher pricing discounts.
On a geographic basis, Europe/Africa revenues decreased $14 million
compared to the first quarter of 2002, predominantly due to decreased activity
in the United Kingdom. Latin America revenues declined $4 million as a result of
the labor strikes in Venezuela, which were partially offset by increased work in
Mexico. Segment revenues were also down in North America, partly due to the sale
of Mono Pumps and higher discounts in the first quarter of 2003. International
revenues were 72% of total revenues for the segment in the first quarter of 2003
compared to 73% in the first quarter of 2002.
OTHER ENERGY SERVICES revenues for the first quarter of 2003 decreased
$96 million, or 15%, compared to the first quarter of 2002. The decline is
primarily the result of the contribution of most of Halliburton Subsea's assets
to the formation of Subsea 7, Inc. in May 2002. Subsea 7, Inc. has been
accounted for under the equity method since that time. Due to this, subsea
operations contributed $104 million less revenue in the first quarter of 2003
than in the first quarter of 2002. Additionally, the sale of integrated
solutions properties in the third quarter of
35
2002 resulted in $15 million less revenue in this segment in the first quarter
of 2003. Partially offsetting these decreases was a $22 million increase in
drilling fluids sales primarily in North America. Revenues from Landmark
Graphics declined 1%, primarily due to reduced customer spending on computer
hardware, while completion products remained flat.
ONSHORE OPERATIONS revenues increased $55 million, or 15%, in the first
quarter of 2003 compared to the first quarter of 2002. The increase was
primarily due to progress on new liquefied natural gas projects in Nigeria and
Egypt and new oil and gas projects in Algeria and China that all began in 2002,
as well as progress on projects in Chad, Cameroon, and Belgium.
OFFSHORE OPERATIONS revenues decreased $21 million, or 7%, in the first
quarter of 2003 compared to the first quarter of 2002. The decrease was
primarily due to less progress on the Barracuda-Caratinga project in Brazil and
projects nearing completion in Nigeria and the Philippines. Partially offsetting
the decrease was increased revenue on a new project in Indonesia.
GOVERNMENT OPERATIONS revenues increased $110 million, or 33%, in the
first quarter of 2003 compared to the first quarter of 2002. The increase was
primarily due to increased activities in the Middle East, partially offset by
lower revenues in the Balkans.
OPERATIONS AND MAINTENANCE SERVICES revenues decreased $14 million, or
6%, in the first quarter of 2003 compared to the first quarter of 2002. The
decrease in revenue was primarily due to reduced volume on upstream projects in
the North Sea. Downstream projects in the United States remained fairly stable
for the comparable period.
First Quarter
OPERATING INCOME ----------------- Increase
Millions of dollars 2003 2002 (decrease)
----------------------------------------------------------------------------------
Pressure Pumping $ 96 $ 102 $ (6)
Drilling and Formation Evaluation 66 38 28
Other Energy Services 18 29 (11)
-------------------------------------------------------------------------------
Total Energy Services Group 180 169 11
-------------------------------------------------------------------------------
Onshore Operations 16 33 (17)
Offshore Operations (57) (16) (41)
Government Operations 18 6 12
Operations and Maintenance Services (2) (3) 1
Infrastructure Operations 8 5 3
Asbestos and Silica Charges (2) (83) 81
-------------------------------------------------------------------------------
Total Engineering and Construction Group (19) (58) 39
-------------------------------------------------------------------------------
General corporate (19) 12 (31)
-------------------------------------------------------------------------------
Total operating income $ 142 $ 123 $ 19
===============================================================================
Consolidated operating income of $142 million was 16% higher in the
first quarter of 2003 compared to the first quarter of 2002. This change is
attributable to several significant items incurred during the first quarters of
2002 and 2003. The significant items for the first quarter of 2002 included:
- $108 million gain in Other Energy Services on the
sale of our 50% interest in European Marine
Contractors;
- $98 million expense in Other Energy Services related
to the judgment in the BJ Services patent
infringement case;
- $80 million expense resulting from the write-off of
billed and accrued receivables related to the
Highlands Insurance Company litigation in the
asbestos and silica charges, formerly reported in
general corporate;
- $11 million for severance related actions as part of
our planned reorganization, of which $5 million
related to Other Energy Services, $4 million related
to the Engineering and Construction segments and $2
million related to general corporate; and
- $28 million gain for the value of stock received from
the demutualization of an insurance provider in
general corporate.
The net effect of these first quarter 2002 items was a loss of $53 million.
36
The significant items for the first quarter of 2003 included:
- $55 million loss in the Offshore Operations segment
related to the Barracuda-Caratinga project due to
recently identified higher cost trends and some
actual and committed costs exceeding estimated costs.
In addition, schedule delays have added to the costs
of the project during the quarter;
- $36 million gain in Drilling and Formation Evaluation
on the sale of Mono Pumps;
- $15 million loss in Other Energy Services on the sale
of the Wellstream business; and
- $2 million expense in the Engineering and
Construction Group related to costs associated with
the proposed global settlement in the asbestos and
silica charges.
The net effect of these first quarter 2003 items was a loss of $36 million.
PRESSURE PUMPING operating income in the first quarter of 2003
decreased $6 million, or 6%, compared to the first quarter of 2002. Operating
income from cementing services in the first quarter of 2003 decreased $5 million
compared to the first quarter of 2002, while tools and testing services
decreased $2 million. Segment results were negatively impacted by increased
pricing pressures during the period. Partially offsetting these declines was a
$4 million increase in production enhancement income in the first quarter of
2003 over the first quarter of 2002.
On a geographic basis, Middle East/Asia operating income decreased $3
million compared to the first quarter of 2002, with declines in Indonesia and
Saudi Arabia offset by increases in Oman and Russia. North America results
decreased, with a decline in United States operating income primarily due to
increased pricing pressures partially offset by substantial improvement in
Canada. Latin America segment results improved $12 million compared to the first
quarter of 2002, largely due to growth in Mexico and Brazil. Europe/Africa
operating income increased $8 million, with Algeria and Nigeria yielding the
greatest increases.
DRILLING AND FORMATION EVALUATION operating income in the first quarter
of 2003 increased $28 million, or 74%, compared to the first quarter of 2002.
The increase is primarily the result of a $36 million gain on the disposition of
Mono Pumps. Partially offsetting this gain was an $8 million decrease in
drilling services income and a $4 million decline from lower drill bits income
compared to the first quarter of 2002. Segment results were impacted by pricing
pressure in the United States and lower deepwater drilling activity in the Gulf
of Mexico and the North Sea.
On a geographic basis, North America segment operating income increased
$19 million compared to the first quarter of 2002. This was the effect of the
gain on disposition of Mono Pumps, offset by decreased activity in the Gulf of
Mexico. Europe/Africa results also improved, partly due to the gain on sale of
Mono Pumps and improved results in Norway, partially offset by decreased results
in Algeria and Nigeria. Latin America segment operating income was slightly down
compared to the first quarter of 2002, primarily due to Venezuela operations
still not being back to pre-strike levels, offset by improved results in Mexico.
Middle East/Asia operating income also declined slightly, primarily due to lower
product sales in Russia, offset by substantial improvement in results from Saudi
Arabia.
OTHER ENERGY SERVICE operating income in the first quarter of 2003
decreased $11 million, or 38%, compared to the first quarter of 2002.
Significant factors influencing the segment results include:
- $108 million gain on the sale of European Marine
Contractors in the first quarter of 2002;
- $98 million expense related to the judgment in the BJ
Services patent infringement case in the first
quarter of 2002;
- declining results in our remaining subsea operations
due to lower activity levels in the North Sea, delay
in work in Brazil and significant increases in
dry-docking costs in 2003;
- $15 million loss on the sale of Wellstream in the
first quarter of 2003;
- improved results from drilling fluids in all regions
except Europe/Africa, positively impacting segment
operating income by $11 million in 2003.
ONSHORE OPERATIONS operating income decreased $17 million, or 52%, in
the first quarter of 2003 compared to the first quarter of 2002. The decrease
was due to the completion of an oil and gas project in Algeria in 2002 and
slower progress on a liquefied natural gas project in Malaysia in 2003.
Partially offsetting the decrease were increases on liquefied natural gas
projects in Nigeria and Egypt in 2003 and a loss recorded on an oil and gas
project in Nigeria in 2002.
37
OFFSHORE OPERATIONS operating income decreased $41 million in the first
quarter of 2003 compared to the first quarter of 2002. In the first quarter of
2003, a $55 million loss related to the Barracuda-Caratinga project was recorded
due to higher cost trends and some actual and committed costs exceeding
estimated costs. In addition, schedule delays have added to the costs of the
project during the current quarter. Partially offsetting the decrease is the
loss recorded on a project in the Philippines in 2002 and progress on projects
in Azerbaijan in 2003.
GOVERNMENT OPERATIONS operating income increased $12 million in the
first quarter of 2003 compared to the first quarter of 2002. The increase in
operating income is primarily due to increased activity on projects in the
Middle East and progress on projects at our shipyard in the United Kingdom.
Partially offsetting the increase are lower volumes of logistical support in the
Balkans in 2003 compared to 2002.
INFRASTRUCTURE OPERATIONS operating income increased $3 million, or 60%
in the first quarter of 2003 compared to the first quarter of 2002. The increase
was primarily due to progress on the Alice Springs to Darwin Rail Line in
Australia.
ASBESTOS AND SILICA CHARGES decreased significantly in the first
quarter of 2003 as compared to the first quarter of 2002. In 2002, an $80
million write-off of billed and accrued receivables related to the Highlands
Insurance Company litigation occurred.
GENERAL CORPORATE expenses for the first quarter of 2003 were $19
million compared to income of $12 million for the first quarter of 2002,
resulting in an increase in costs of $31 million. The net effect of the pretax
gain for the value of stock received from the demutualization of an insurance
provider and restructuring charges was an increase in costs of $26 million.
NONOPERATING ITEMS
INTEREST EXPENSE of $27 million for the first quarter of 2003 decreased
$5 million compared to the first quarter of 2002. The decrease is due to $4
million in interest recorded in the first quarter of 2002 related to the BJ
Services litigation and lower average borrowings in the first quarter of 2003.
INTEREST INCOME was $8 million in the first quarter of 2003 and $4
million in the first quarter of 2002, with the increase primarily due to
interest income received on a tax settlement in Europe.
FOREIGN EXCHANGE LOSSES, NET were $6 million in the current year
quarter compared to $8 million in the first quarter of last year. The decreased
loss was due to lower foreign exchange losses primarily in Argentina.
OTHER, NET of $4 million in the first quarter of 2002 includes a $3
million pretax gain associated with the increase on the option component of the
European Marine Contractors Ltd. sale.
PROVISION FOR INCOME TAXES of $50 million resulted in an effective tax
rate of 42.7% in the first quarter of 2003, up from the first quarter of 2002
rate of 39.6%. The increase in the effective tax rate is mostly the result of
the tax effects on the gain on the sale of our Mono Pumps business and loss on
the sale of Wellstream in the first quarter. These gains and losses included $14
million of realized cumulative translation loss which is not tax deductible.
INCOME FROM CONTINUING OPERATIONS was $59 million in the first quarter
of 2003, compared to $50 million in the first quarter of 2002.
LOSS FROM DISCONTINUED OPERATIONS, NET was an $8 million loss, or $0.02
per diluted share, for the first quarter of 2003 compared to $28 million, or
$0.07 per diluted share, for the first quarter of 2002. The loss in the first
quarter of 2003 was for professional fees associated with due diligence and
other aspects of the proposed global settlement. The loss in the first quarter
of 2002 includes a $26 million after-tax payment in connection with
Harbison-Walker's bankruptcy filing.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET was an $8
million after-tax charge, or $0.02 per diluted share, related to the Company's
January 1, 2003 adoption of Financial Accounting Standards Board Statement No.
143, Asset Retirement Obligations.
NET INCOME for the first quarter of 2003 was $43 million, or $0.10 per
diluted share. Net income was $22 million, or $0.05 per diluted share for the
first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2003 with cash and equivalents of $928
million, a decrease of $179 million from the end of 2002.
38
CASH FLOWS FROM OPERATING ACTIVITIES used $211 million in the first
quarter of 2003 compared to providing $155 million in the first quarter of 2002.
Working capital items, which include receivables, inventories, accounts payable
and other working capital, net, used $291 million of cash in the first quarter
of 2003 compared to $46 million in the same period of 2002. The major uses of
working capital during the first quarter of 2003 included:
- the commencement of the Los Alamos contract by KBR;
- increased activity in KBR's LOGCAP III project due to
new work related to Iraq; and
- increased inventory levels in the Energy Services
Group during the first quarter of 2003, partially due
to building up drill bit inventories in preparation
for a scheduled plant relocation later this year.
Included in changes to other operating activities for the first quarter
of 2002 is a $40 million payment related to the Harbison-Walker bankruptcy
filing.
CASH FLOWS FROM INVESTING ACTIVITIES provided $133 million in the first
quarter of 2003 and used $77 million in the same period of 2002. Capital
expenditures of $101 million in the first quarter of 2003 were about 57% lower
than in the first quarter of 2002. Capital spending in the first quarter of 2003
continued to be primarily for fracturing equipment and directional and
logging-while-drilling tools. In addition, in the first quarter of 2002, we also
invested $60 million in integrated solutions projects. Cash from dispositions of
businesses in the first quarter of 2003 includes $136 million collected from the
sale of Wellstream and $23 million collected from the sale of Mono Pumps.
Proceeds from the sale of securities in the first quarter of 2003 of $52 million
relate to the sale of 2.5 million of National Oilwell common shares that were
received in the disposition of Mono Pumps. Dispositions of businesses in the
first quarter of 2002 include $134 million collected from the sale of our
European Marine Contractors Ltd. joint venture.
CASH FLOWS FROM FINANCING ACTIVITIES used $94 million in the first
quarter of 2003. In the first quarter of 2002, financing activities used $93
million. Dividends to shareholders used $55 million of cash in the first quarter
of 2003 and $54 million in the first quarter of 2002.
CAPITAL RESOURCES from internally generated funds and access to capital
markets are sufficient to fund our working capital requirements and investing
activities. Our combined short-term notes payable and long-term debt was 29% of
total capitalization at March 31, 2003 and 30% at December 31, 2002. At March
31, 2003, we had $190 million in restricted cash included in "Other assets". See
Note 7 to the financial statements. In addition on April 15, 2002, we entered
into an agreement to sell accounts receivable to provide additional liquidity.
No amounts were received under this facility during the first quarter of 2003.
See Note 8 to the financial statements. Currently, we expect capital
expenditures in 2003 to be about $700 million. We have not finalized our capital
expenditures budget for 2004 or later periods. Subsequent to quarter end, we
repaid the $139 million 8% senior notes that were due in April.
PROPOSED GLOBAL SETTLEMENT. On December 18, 2002, we announced that we
had reached an agreement in principle that, if and when consummated, would
result in a global settlement of all asbestos and silica personal injury claims
against DII Industries, Kellogg Brown & Root and their current and former
subsidiaries.
The agreement in principle provides that:
- up to $2.775 billion in cash, 59.5 million
Halliburton shares (valued at $1.2 billion using the
stock price at March 31, 2003 of $20.73) and notes
with a net present value expected to be less than
$100 million will be paid to a trust for the benefit
of current and future asbestos personal injury
claimants and current silica personal injury
claimants upon receiving final and non-appealable
court confirmation of a plan of reorganization;
- DII Industries and Kellogg Brown & Root will retain
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 agreement is to be implemented through a
pre-packaged Chapter 11 filing for DII Industries and
Kellogg Brown & Root, and some of their subsidiaries;
and
- 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.
39
In 2003, DII Industries and Kellogg Brown & Root entered into
definitive written agreements with attorneys representing more than 75% of
current asbestos claimants. The proposed global settlement also includes
approximately 21,000 silica claims as a result of current or past exposure that
we have agreed to settle.
Among the prerequisites for 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 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 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.
Many of these prerequisites are subject to matters and uncertainties
beyond our control. There can be no assurance that we will be able to satisfy
the prerequisites for completion of the settlement. If we were unable to
complete the proposed settlement, we would be required to resolve current and
future asbestos claims in the tort system or, in the case of Harbison-Walker
claims (see Note 11 to the financial statements), possibly through the
Harbison-Walker bankruptcy proceedings.
The settlement agreement with attorneys representing current claimants
grants the attorneys a right to terminate the definitive settlement agreement on
ten days' notice. Although there can be no assurance, we do not believe the
claimants' attorneys will terminate the settlement agreements as long as
adequate progress is being made toward a Chapter 11 filing.
We are currently conducting due diligence on the asbestos claims, and
expect this process will be substantially completed by the end of May 2003. We
have received approximately one-third of the files relating to current asbestos
claims and have reviewed over 80% of those files. While these results are
preliminary and not necessarily indicative of the eventual results of a
completed review of all current asbestos claims, it appears that a substantial
majority of the records for claims reviewed to date provide sufficient evidence
of medical injury. However, a substantial portion of the files reviewed do not
establish exposure to our products and services. We expect that many of these
records could be supplemented by attorneys representing the claimants to provide
additional information on product identification, and we are consulting with
plaintiffs' counsel concerning the lack of documentation. However, no assurance
can be given that the additional product identification documentation will be
timely provided or sufficient for us or the plaintiffs to proceed with the
proposed global settlement. In addition, although the medical information in the
files we preliminarily reviewed appears significantly more complete than the
product identification information, if a material number of claims ultimately do
not meet the medical criteria for alleged injuries, no assurance can be given
that a sufficient number of plaintiffs would vote to approve the plan of
reorganization that would implement the global settlement. In such case, we
would not proceed with a Chapter 11 filing.
40
Moreover, one result of our due diligence review may be the preliminary
identification of more claims than contemplated by the proposed global
settlement. However, until the more recently identified claims are subject to a
complete due diligence review, we will not be able to determine if these claims
would be appropriately included under the proposed global settlement. Many of
these recently identified claims may be duplicative of previously submitted
claims or may otherwise not be appropriately included under the proposed global
settlement. In the event that more claims are identified and validated than
contemplated by the proposed global settlement, we would need to reduce the
amounts proposed to be paid per claim to remain within the aggregate parameters
of the proposed global settlement.
In March 2003, we agreed with Harbison-Walker and the asbestos
creditors committee 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. While we are working toward
making the Chapter 11 filing on or about July 14, 2003, the timing of our filing
depends upon our receiving satisfactory product identification information in a
timely manner.
At the same time, we continue to track legislative proposals for
asbestos reform pending in Congress. In determining whether to approve the
proposed global settlement and proceed with the Chapter 11 filing of DII
Industries and Kellogg Brown & Root, the Halliburton Board of Directors will
take into account the then current status of these legislative initiatives.
Of the up to $2.775 billion cash amount included as part of the
proposed global settlement, approximately $450 million primarily relates to
claims previously settled but unpaid by Harbison-Walker (see Note 11 to the
financial statements), but not previously agreed to by us. As part of the
proposed settlement, we have agreed that, if a Chapter 11 filing by DII
Industries, Kellogg Brown & Root and their subsidiaries were to occur, we would
pay this amount within four years if not paid sooner pursuant to a final
bankruptcy court approved plan of reorganization for DII Industries, Kellogg
Brown & Root and their subsidiaries. Effective November 30, 2002, we are making
cash payments in lieu of interest at a rate of 5% per annum to the holders of
these claims. These cash payments in lieu of interest will be made in arrears at
the end of February, May, August and November, beginning after certain
conditions are met, until the earlier of the date that the $450 million is paid
or the date the proposed settlement is abandoned.
PROPOSED BANKRUPTCY OF DII INDUSTRIES, KELLOGG BROWN & ROOT AND
SUBSIDIARIES. Under the terms of the proposed global settlement, the settlement
would be implemented through a pre-packaged Chapter 11 filing for DII
Industries, Kellogg Brown & Root and some of their subsidiaries. Other than
those debtors, none of the subsidiaries of Halliburton (including Halliburton
Energy Services) or Halliburton itself will be a debtor in the Chapter 11
proceedings. We anticipate that Halliburton, Halliburton Energy Services and
each of the debtors' non-debtor affiliates will continue normal operations and
continue to fulfill all of their respective obligations in the ordinary course
as they become due.
As part of any proposed plan of reorganization, the debtors intend to
seek approval of the bankruptcy court for debtor-in-possession financing to
provide for operating needs and to provide additional liquidity during the
pendency of the Chapter 11 proceeding. We currently are negotiating with several
banks and non-bank lenders over the arrangements for such facility. Halliburton
may, with the understanding of its lenders, provide the debtor-in-possession
financing to DII Industries and Kellogg Brown & Root. See - " Financing the
proposed settlement". Arranging for debtor-in-possession financing is a
condition precedent to filing of any Chapter 11 proceeding.
Any plan of reorganization will provide that all of the debtors'
obligations under letters of credit, surety bonds, corporate guaranties and
indemnity agreements (except for agreements relating to asbestos claims or
silica claims) will be unimpaired. In addition, the Bankruptcy Code allows a
debtor to assume most executory contracts without regard to bankruptcy default
provisions, and it is the intention of DII Industries, Kellogg Brown & Root and
the other filing entities to assume and continue to perform all such executory
contracts. Representatives of DII Industries, Kellogg Brown & Root and their
subsidiaries have advised their customers of this intention.
41
After filing any Chapter 11 proceeding, the debtors would seek an order
of the bankruptcy court scheduling a hearing to consider confirmation of the
plan of reorganization. In order to be confirmed, the Bankruptcy Code requires
that an impaired class of creditors vote to accept the plan of reorganization
submitted by the debtors. In order to carry a class, approval of over one-half
in number and at least two-thirds in amount are required. In addition, to obtain
an injunction under Section 524(g) of the Bankruptcy Code, at least 75% of
current asbestos claimants must vote to accept the plan of reorganization. In
addition to obtaining the required votes, the requirements for a bankruptcy
court to approve a plan of reorganization include, among other judicial
findings, that:
- the plan of reorganization complies with applicable
provisions of the Bankruptcy Code;
- the debtors have complied with the applicable
provisions of the Bankruptcy Code;
- the trust will value and pay similar present and
future claims in substantially the same manner;
- the plan of reorganization has been proposed in good
faith and not by any means forbidden by law; and
- any payment made or promised by the debtors to any
person for services, costs or expenses in or in
connection with the Chapter 11 proceeding or the plan
of reorganization has been or is reasonable.
Section 524(g) of the Bankruptcy Code authorizes the bankruptcy court
to enjoin entities from taking action to collect, recover or receive payment or
recovery with respect to any asbestos claim or demand that is to be paid in
whole or in part by a trust created by a plan of reorganization that satisfies
the requirements of the Bankruptcy Code. Section 105 of the Bankruptcy Code
authorizes a similar injunction for silica claims. The injunction also may bar
any action based on such claims or demands against the debtors that are directed
at third parties. The order confirming the plan must be issued or affirmed by
the federal district court that has jurisdiction over the case. After the
expiration of the time for appeal of the order, the injunction becomes valid and
enforceable.
The debtors believe that, if they proceed with a Chapter 11 filing,
they will be able to satisfy all the requirements of Section 524(g), so long as
the requisite number of holders of asbestos claims vote in favor of the plan of
reorganization. If the 524(g) and 105 injunctions are issued, all unsettled
current asbestos claims, all future asbestos claims and all silica claims based
on exposure that has already occurred will be channeled to a trust for payment,
and the debtors and related parties (including Halliburton, Halliburton Energy
Services and other subsidiaries and affiliates of Halliburton and the debtors)
will be released from any further liability under the plan of reorganization.
A prolonged Chapter 11 proceeding could adversely affect the debtors'
relationships with customers, suppliers and employees, which in turn could
adversely affect the debtors' competitive position, financial condition and
results of operations. A weakening of the debtors' financial condition and
results of operations could adversely affect the debtors' ability to implement
the plan of reorganization.
FINANCING THE PROPOSED SETTLEMENT. The plan of reorganization through
which the proposed settlement will be implemented will require us to contribute
up to $2.775 billion in cash to the Section 524(g)/105 trust established for the
benefit of claimants, which we will need to finance on terms acceptable to us.
We are pursuing a number of financing alternatives for the cash amount to be
contributed to the trust. The availability of these alternatives depends in
large part on market conditions. We are currently negotiating with several banks
and non-bank lenders over the terms of multiple credit facilities. A proposed
banking syndicate is currently performing due diligence in an effort to make a
funding commitment before the bankruptcy filing. We will not proceed with the
Chapter 11 filing for DII Industries, Kellogg Brown & Root and some of their
subsidiaries until financing commitments are in place.
The anticipated credit facilities include:
- a revolving line of credit for general working
capital purposes;
- a master letter of credit facility intended to ensure
that existing letters of credit supporting our
contracts remain in place during the filing; and
- a delayed-draw term facility to be available for
funding of up to $2.775 billion to the trust for the
benefit of claimants.
The delayed-draw term facility is intended to eliminate uncertainty the
capital markets might have concerning our ability to meet our funding
requirement once final and non-appealable court confirmation of a plan of
reorganization has been obtained.
42
None of these credit facilities are currently in place, and there can
be no assurances that we will complete these facilities. We are not obligated to
enter into these facilities if the terms are not acceptable to us. Moreover,
these facilities would only be available for limited periods of time. As a
result, if we were delayed in filing the Chapter 11 proceeding or delayed in
completing the plan of reorganization after a Chapter 11 filing, the credit
facilities may expire and no longer be available. In such circumstances, we
would have to terminate the proposed settlement if replacement financing were
not available on acceptable terms.
We have sufficient authorized and unrestricted shares to issue 59.5
million shares to the trust. No shareholder approval is required for issuance of
the shares.
CREDIT RATINGS. Late in 2001 and early in 2002, Moody's Investors'
Services lowered its ratings of our long-term senior unsecured debt to Baa2 and
our short-term credit and commercial paper ratings to P-2. In addition, Standard
& Poor's lowered its ratings of our long-term senior unsecured debt to A- and
our short-term credit and commercial paper ratings to A-2 in late 2001. In
December 2002, Standard & Poor's lowered these ratings to BBB and A-3. These
ratings were lowered primarily due to our asbestos exposure, and both agencies
have indicated that the ratings continue under consideration for possible
downgrade pending the results of the proposed global settlement. Although our
long-term ratings continue at investment grade levels, the cost of new borrowing
is higher and our access to the debt markets is more volatile at the new rating
levels. Investment grade ratings are BBB- or higher for Standard & Poor's and
Baa3 or higher for Moody's Investors' Services. Our current ratings are one
level above BBB- on Standard & Poor's and one level above Baa3 on Moody's
Investors' Services.
We have $350 million of committed lines of credit from banks that are
available if we maintain an investment grade rating. This facility expires on
August 16, 2006. As of March 31, 2003, no amounts have been borrowed under these
lines.
If our debt ratings fall below investment grade, we would also be in
technical breach of a bank agreement covering $57 million of letters of credit
at March 31, 2003, which might entitle the bank to set-off rights. In addition,
a $151 million letter of credit line, of which $132 million has been issued,
includes provisions that allow the banks 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, one downgrade
from our current ratings. 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 event the ratings of our debt by either agency fall, we may have
to issue additional debt or equity securities or obtain additional credit
facilities in order to satisfy the cash collateralization requirements under the
instruments referred to above and meet our other liquidity needs. We anticipate
that any such new financing would not be on terms as attractive as those we have
currently and that we would also be subject to increased borrowing costs and
interest rates. Our Halliburton Elective Deferral Plan has a provision which
states that if the Standard & Poor's rating falls below BBB the amounts credited
to the participants' accounts will be paid to the participants in a lump-sum
within 45 days. At March 31, 2003 this was approximately $46 million.
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 at least $187 million which relate to our
joint ventures' operations. The agreements with these banks contain terms and
conditions that define when the banks can require cash collateralization of the
entire line. Agreements with banks covering at least $150 million of letters of
credit allow the bank to require cash collateralization for the full line for
any reason, and agreements covering another at least $890 million of letters of
credit allow the bank to require cash collateralization for the entire line in
the event of a bankruptcy or insolvency event involving one of our subsidiaries.
Our letters of credit also contain terms and conditions that define
when they may be drawn. At least $230 million of letters of credit permit the
beneficiary of such letters of credit to draw against the line for any reason
and another at least $560 million of letters of credit permit the beneficiary of
such letters of credit to draw against the line in the event of a bankruptcy or
insolvency event involving one of our subsidiaries who will be party to the
proposed reorganization.
Our anticipated credit facilities described above would include a
master letter of credit facility intended to replace any cash collateralization
rights of issuers of substantially all our existing letters of credit during the
pendency of the anticipated Chapter 11 proceedings by DII Industries and Kellogg
Brown & Root. The master letter
43
of credit facility is also intended to provide reasonably sufficient credit
lines for us to be able to fund any such cash requirements. If any of such
existing letters of credit are drawn during the bankruptcy and we are required
to provide cash to collateralize or reimburse for such draws, it is anticipated
that the letter of credit facility would provide the cash needed for such draws,
with any borrowings being converted into term loans. However, this letter of
credit facility is not currently in place, and, if we were required to cash
collateralize letters of credit prior to obtaining the facility, we would be
required to use cash on hand or existing credit facilities. We will not enter
into the pre-packaged Chapter 11 filing without having this credit facility in
place. In addition, representatives of DII Industries, Kellogg Brown & Root and
their subsidiaries are having continuing discussions with their customers in
order to reduce the possibility that any material draw on the existing letters
of credit will occur due to the anticipated Chapter 11 proceedings.
Effective October 9, 2002, we amended an agreement with banks under
which $261 million of letters of credit have been issued on the
Barracuda-Caratinga project. 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 agreement
includes 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
settlement through December 31, 2003.
In the past, no significant claims have been made against letters of
credit issued on our behalf.
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's representative is Petrobras, the
Brazilian national oil company. See Note 12 to the financial statements.
KBR's performance under the contract is secured by:
- three 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
$132 million as of March 31, 2003 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.
As of March 31, 2003, the project was approximately 67% complete and
KBR had recorded a loss of $172 million related to the project. The probable
unapproved claims included in determining the loss on the project were $182
million as of March 31, 2003.
Petrobras and we have appointed high-level negotiating teams to discuss
a number of issues on the Barracuda-Caratinga project. Currently, these issues
include: an updated working schedule; extensions to the contract schedule as a
result of force majeure events; the deferral of the imposition of liquidated
damages for delays contemplated by an updated working schedule; the application
of liquidated damages for delays not contemplated by an updated working
schedule; agreement upon financial responsibility and a schedule extension for
some of the unapproved claims and agreeing to employ arbitration as the method
of resolving other claims; the terms upon which Petrobras would defer repayment
of the $300 million of advance payments made by Petrobras at the beginning of
our work under the contract; and an amendment to the Halliburton guarantee.
While we are working toward resolving these issues in the second quarter of
2003, there can be no assurance that we will reach any agreements on these
matters.
The project owner has procured project finance funding obligations from
various banks to finance the payments due to KBR under the contract. 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. 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.
44
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 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.
Petrobras has informed us that 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.
CURRENT MATURITIES. We have approximately $299 million of current
maturities of long-term debt as of March 31, 2003. In addition, subsequent to
first quarter 2003, we repaid a $139 million senior note and have a $150 million
medium-term note due July 2003.
CASH AND CASH EQUIVALENTS. We ended March 31, 2003 with cash and
equivalents of $928 million.
OFF BALANCE SHEET RISK
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. No
additional amounts have been received from our accounts receivable facility
since the second quarter of 2002. The total amount outstanding under this
facility was $180 million as of March 31, 2003. We continue to service,
administer and collect the receivables on behalf of the purchaser.
ENVIRONMENTAL MATTERS
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. 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 a liability. As of March 31, 2003,
those ten sites accounted for approximately $8 million of our total $44 million
liability. See Note 12 to the financial statements.
45
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like "may", "may
not", "believes", "do not believe", "expects", "do not expect", "do not
anticipate", and other expressions. We may also provide oral or written
forward-looking information in other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and the results of operations may vary materially.
While it is not possible to identify all factors, we continue to face
many risks and uncertainties that could cause actual results to differ from our
forward-looking statements and potentially adversely affect our financial
condition and results of operations, including risks relating to:
ASBESTOS
- completion of the proposed global settlement,
prerequisites to which include:
- agreement on the total number of
current asbestos and silica
personal injury claims and the
aggregate compensation for such
claims within the parameters of the
proposed global settlement;
- agreement on the amounts to be
contributed to the trust for the
benefit of current silica
claimants;
- our due diligence review for
product exposure and medical basis
for claims;
- agreement on procedures for
distribution of settlement funds to
individuals claiming personal
injury;
- definitive agreement on a plan of
reorganization and disclosure
statement relating to the proposed
settlement;
- arrangement of acceptable financing
to fund the proposed settlement;
- Board of Directors approval;
- obtaining approval from 75% of
current asbestos claimants to the
plan of reorganization implementing
the proposed global settlement; and
- obtaining final and non-appealable
bankruptcy court approval and
federal district court confirmation
of the plan of reorganization;
- the results of being unable to complete the proposed
global settlement, including:
- continuing asbestos and silica
litigation against us, which would
include the possibility of
substantial adverse judgments, the
timing of which could not be
controlled or predicted, and the
obligation to provide appeals bonds
pending any appeal of any such
judgment, some or all of which may
require us to post cash collateral;
- current and future asbestos claims
settlement and defense costs,
including the inability to
completely control the timing of
such costs and the possibility of
increased costs to resolve personal
injury claims;
- the possibility of an increase in
the number and type of asbestos and
silica claims against us in the
future;
- future events in the
Harbison-Walker bankruptcy
proceeding, including the
possibility of discontinuation of
the temporary restraining order
entered by the Harbison-Walker
bankruptcy court that applies to
over 200,000 pending claims against
DII Industries; and
- any adverse changes to the tort
system allowing additional claims
or judgments against us;
- the results of being unable to recover, or being
delayed in recovering, insurance reimbursement in the
amounts anticipated to cover a part of the costs
incurred defending asbestos and silica claims, and
amounts paid to settle claims or as a result of court
judgments, due to:
- the inability or unwillingness of
insurers to timely reimburse for
claims in the future;
46
- disputes as to documentation
requirements for DII Industries in
order to recover claims paid;
- the inability to access insurance
policies shared with, or the
dissipation of shared insurance
assets by, Harbison-Walker
Refractories Company or
Federal-Mogul Products, Inc.;
- the insolvency or reduced financial
viability of insurers;
- the cost of litigation to obtain
insurance reimbursement; and
- adverse court decisions as to our
rights to obtain insurance
reimbursement;
- the results of recovering, or agreeing in settlement
of litigation to recover, less insurance
reimbursement than the insurance receivable recorded
in our financial statements;
- continuing exposure to liability even after the
proposed settlement is completed, including exposure
to:
- any claims by claimants exposed
outside of the United States;
- possibly any claims based on future
exposure to silica;
- property damage claims as a result
of asbestos and silica use; or
- any claims against any other
subsidiaries or business units of
Halliburton that would not be
released in the Chapter 11
proceeding through the 524(g)
injunction;
- liquidity risks resulting from being unable to
complete a global settlement or timely recovery of
insurance reimbursement for amounts paid, each as
discussed further below; and
- an adverse effect on our financial condition or
results of operations as a result of any of the
foregoing;
LIQUIDITY
- adverse financial developments that could affect our
available cash or lines of credit, including:
- the effects described above of not
completing the proposed global
settlement or not being able to
timely recover insurance
reimbursement relating to amounts
paid as part of a global settlement
or as a result of judgments against
us or settlements paid in the
absence of a global settlement;
- our inability to provide cash
collateral for letters of credit or
any bonding requirements from
customers or as a result of adverse
judgments that we are appealing;
and
- a reduction in our credit ratings
as a result of the above or due to
other adverse developments;
- requirements to cash collateralize letters of credit
and surety bonds by issuers and beneficiaries of
these instruments in reaction to:
- our plans to place DII Industries,
Kellogg Brown & Root and some of
their subsidiaries into a
pre-packaged Chapter 11 bankruptcy
as part of the proposed global
settlement;
- in the absence of a global
settlement, one or more substantial
adverse judgments;
- not being able to timely recover
insurance reimbursement; or
- a reduction in credit ratings;
- our ability to secure financing on acceptable terms
to fund our proposed global settlement;
- defaults that could occur under our and our
subsidiaries' debt documents as a result of a Chapter
11 filing unless we are able to obtain consents or
waivers to those events of default, which events of
default could cause defaults under other of our
credit facilities and possibly result in an
obligation to immediately pay amounts due thereunder;
- actions by issuers and beneficiaries of current
letters of credit to draw under such letters of
credit prior to our completion of a new letter of
credit facility that is intended to provide
reasonably sufficient credit lines for us to be able
to fund any such cash requirements;
- reductions in our credit ratings by rating agencies,
which could result in:
- the unavailability of borrowing
capacity under our existing $350
million line of credit facility,
which is only available to us if we
maintain an investment grade credit
rating;
47
- reduced access to lines of credit,
credit markets and credit from
suppliers under acceptable terms;
- borrowing costs in the future; and
- inability to issue letters of
credit and surety bonds with or
without cash collateral;
- working capital requirements from time to time;
- debt and letter of credit covenants;
- volatility in the surety bond market;
- availability of financing from the United States
Export/Import Bank;
- ability to raise capital via the sale of stock; and
- an adverse effect on our financial condition or
results of operations as a result of any of the
foregoing;
LEGAL
- litigation, including, for example, class action
shareholder and derivative lawsuits, contract
disputes, patent infringements, and environmental
matters;
- any adverse outcome of the SEC's current
investigation into Halliburton's accounting policies,
practices and procedures that could result in
sanctions and the payment of fines or penalties,
restatement of financials for years under review or
additional shareholder lawsuits;
- trade restrictions and economic embargoes imposed by
the United States and other countries;
- restrictions on our ability to provide products and
services to Iran, Iraq and Libya, all of which are
significant producers of oil and gas;
- protective government regulation in many of the
countries where we operate, including, for example,
regulations that:
- encourage or mandate the hiring of
local contractors; and
- require foreign contractors to
employ citizens of, or purchase
supplies from, a particular
jurisdiction;
- potentially adverse reaction, and time and expense
responding to, the increased scrutiny of Halliburton
by regulatory authorities, the media and others;
- potential liability and adverse regulatory reaction
in Nigeria to the theft from us of radioactive
material used in wireline logging operations;
- environmental laws and regulations, including, for
example, those that:
- require emission performance
standards for facilities; and
- the potential regulation in the
United States of our Pressure
Pumping segment's hydraulic
fracturing services and products as
underground injection; and
- the proposed excise tax in the United States targeted
at heavy equipment of the type we own and use in our
operations would negatively impact our Energy
Services Group operating income;
EFFECT OF CHAPTER 11 PROCEEDINGS
- the adverse effect on the ability of the subsidiaries
that are proposed to file a Chapter 11 proceeding to
obtain new orders from current or prospective
customers;
- the potential reluctance of current and prospective
customers and suppliers to honor obligations or
continue to transact business with the Chapter 11
filing entities;
- the potential adverse effect of the Chapter 11 filing
of negotiating favorable terms with customers,
suppliers and other vendors;
- a prolonged Chapter 11 proceeding that could
adversely affect relationships with customers,
suppliers and employees, which in turn could
adversely affect our competitive position, financial
condition and results of operations and our ability
to implement the proposed plan of reorganization; and
- the adverse affect on our financial condition or
results of operations as a result of the foregoing;
GEOPOLITICAL
- unrest in the Middle East that could:
- impact the demand and pricing for
oil and gas;
- disrupt our operations in the
region and elsewhere; and
48
- increase our costs for security
worldwide;
- unsettled political conditions, consequences of war
or other armed conflict, the effects of terrorism,
civil unrest, strikes, currency controls and
governmental actions in many oil producing countries
and countries in which we provide governmental
logistical support that could adversely affect our
revenues and profit. Countries where we operate which
have significant amounts of political risk include
Afghanistan, Algeria, Angola, Colombia, Indonesia,
Libya, Nigeria, Russia, and Venezuela. For example,
the national strike in Venezuela as well as seizures
of offshore oil rigs by protestors and cessation of
operations by some of our customers in Nigeria
disrupted our Energy Services Group's ability to
provide services and products to our customers in
these countries during first quarter 2003 and likely
will continue to do so throughout the remainder of
2003; and
- changes in foreign exchange rates and exchange
controls as were experienced in Argentina in late
2001 and early 2002 and in Venezuela in fourth
quarter 2002;
WEATHER RELATED
- severe weather that impacts our business,
particularly in the Gulf of Mexico where we have
significant operations. Impacts may include:
- evacuation of personnel and
curtailment of services;
- weather related damage to offshore
drilling rigs resulting in
suspension of operations;
- weather related damage to our
facilities;
- inability to deliver materials to
jobsites in accordance with
contract schedules; and
- loss of productivity; and
- demand for natural gas in the United States drives a
disproportionate amount of our Energy Services
Group's United States business. As a result, warmer
than normal winters in the United States are
detrimental to the demand for our services to gas
producers. Conversely, colder than normal winters in
the United States result in increased demand for our
services to gas producers;
CUSTOMERS
- the magnitude of governmental spending and
outsourcing for military and logistical support of
the type that we provide, including, for example,
support services in the Balkans;
- changes in capital spending by customers in the oil
and gas industry for exploration, development,
production, processing, refining, and pipeline
delivery networks;
- changes in capital spending by governments for
infrastructure projects of the sort that we perform;
- consolidation of customers including, for example,
the merger of Conoco and Phillips Petroleum, has
caused customers to reduce their capital spending
which has negatively impacted the demand for our
services and products;
- potential adverse customer reaction, including
potential draws upon letters of credit, due to their
concerns about our plans to place DII Industries,
Kellogg Brown & Root and some of their subsidiaries
into a pre-packaged bankruptcy as part of the global
settlement;
- customer personnel changes due to mergers and
consolidation which impacts the timing of contract
negotiations and settlements of claims;
- claim negotiations with engineering and construction
customers on cost and schedule variances and change
orders on Major Projects, including, for example, the
Barracuda-Caratinga project in Brazil;
- delay in customer spending due to consolidation and
strategic changes such as sales of the shallow water
properties in the Gulf of Mexico and recent sale of
properties in the North Sea. Spending is typically
delayed when new operators take over; and
- ability of our customers to timely pay the amounts
due us;
INDUSTRY
- changes in oil and gas prices, among other things,
result from:
- the uncertainty as to the timing of
return of Iraqi oil production;
- OPEC's ability to set and maintain
production levels and prices for
oil;
49
- the level of oil production by
non-OPEC countries;
- the policies of governments
regarding exploration for and
production and development of their
oil and natural gas reserves;
- the level of demand for oil and
natural gas, especially natural gas
in the United States; and
- the level of gas storage in the
Northeast United States;
- obsolescence of our proprietary technologies,
equipment and facilities, or work processes;
- changes in the price or the availability of
commodities that we use;
- our ability to obtain key insurance coverage on
acceptable terms;
- non-performance, default or bankruptcy of joint
venture partners, key suppliers or subcontractors;
- performing fixed-price projects, where failure to
meet schedules, cost estimates or performance targets
could result in reduced profit margins or losses;
- entering into complex business arrangements for
technically demanding projects where failure by one
or more parties could result in monetary penalties;
and
- the use of derivative instruments of the sort that we
use which could cause a change in value of the
derivative instruments as a result of:
- adverse movements in foreign
exchange rates, interest rates, or
commodity prices; or
- the value and time period of the
derivative being different than the
exposures or cash flows being
hedged;
SYSTEMS
- the successful identification, procurement and
installation of a new financial system to replace the
current system for the Engineering and Construction
Group;
PERSONNEL AND MERGERS/REORGANIZATIONS/DISPOSITIONS
- ensuring acquisitions and new products and services
add value and complement our core businesses; and
- successful completion of planned dispositions.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. You should review any additional
disclosures we make in our press releases and Forms 10-Q and 8-K filed with the
United States Securities and Exchange Commission. We also suggest that you
listen to our quarterly earnings release conference calls with financial
analysts.
No assurance can be given that our financial condition or results of
operations would not be materially and adversely affected by some of the events
described above, including:
- the inability to complete a global settlement;
- in the absence of a global settlement, adverse
developments in the tort system, including adverse
judgments and increased defense and settlement costs
relating to claims against us;
- liquidity issues resulting from failure to complete a
global settlement, adverse developments in the tort
system, including adverse judgments and increased
defense and settlement costs, and resulting or
concurrent credit ratings downgrades and/or demand
for cash collateralization of letters of credit or
surety bonds;
- the filing of Chapter 11 proceedings by some of our
subsidiaries or a prolonged Chapter 11 proceeding;
and
- adverse geopolitical developments, including armed
conflict, civil disturbance and unsettled political
conditions in foreign countries in which we operate.
50
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial instrument market risk from changes in
foreign currency exchange rates, interest rates and to a limited extent,
commodity prices. We selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these exposures. The
objective of our risk management is to protect our cash flows related to sales
or purchases of goods or services from market fluctuations in currency rates.
Our use of derivative instruments includes the following types of market risk:
- volatility of the currency rates;
- time horizon of the derivative instruments;
- market cycles; and
- the type of derivative instruments used.
We do not use derivative instruments for trading purposes. We do not
consider any of these risk management activities to be material.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
51
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement (C. Christopher Gaut) (incorporated by
reference to Exhibit 10.1 to Halliburton's Form 10-Q for the
quarter ended March 31, 2003, File No. 1-3492).
* 31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
* 31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
* 32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* 32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Filed with this Form 10-Q
(b) Reports on Form 8-K
Date of
Date Filed Earliest Event Description of Event
-------------------------------------------------------------------------------------------------------------------
During the first quarter of 2003:
January 3, 2003 January 2, 2003 Item 9. Regulation FD Disclosure for a press release announcing
an analyst and investor meeting in New York City on Monday,
January 13, 2003.
January 7, 2003 January 7, 2003 Item 9. Regulation FD Disclosure for a press release announcing a
conference call to discuss 2002 fourth quarter financial results.
January 13, 2003 January 13, 2003 Item 9. Regulation FD Disclosure for submission of presentation
content at analyst and investor meeting on January 13, 2003.
January 21, 2003 January 17, 2003 Item 9. Regulation FD Disclosure for a press release announcing
asbestos plaintiffs agree to extend stay until February 18,
2003.
February 14, 2003 February 12, 2003 Item 9. Regulation FD Disclosure for a press release announcing a
first quarter dividend of twelve and one-half cents ($.125) a
share.
February 14, 2003 February 12, 2003 Item 9. Regulation FD Disclosure for a press release announcing
Christopher Gaut as new Chief Financial Officer and Doug Foshee
promoted to Chief Operating Officer.
February 21, 2003 February 18, 2003 Item 9. Regulation FD Disclosure for a press release announcing
the temporary restraining order has been continued until March
21, 2003.
52
Date of
Date Filed Earliest Event Description of Event
-------------------------------------------------------------------------------------------------------------------
During the first quarter of 2003 (continued):
February 21, 2003 February 20, 2003 Item 9. Regulation FD Disclosure for a press release announcing
fourth quarter results.
March 12, 2003 March 11, 2003 Item 9. Regulation FD Disclosure for a press release announcing
the sale of Wellstream.
March 17, 2003 March 14, 2003 Item 9. Regulation FD Disclosure for a press release announcing
the filing of an affidavit on the global asbestos settlement.
March 24, 2003 March 21, 2003 Item 9. Regulation FD Disclosure for a press release announcing
asbestos plaintiffs agree to extend stay until July 21, 2003.
March 26, 2003 March 21, 2003 Item 9. Regulation FD Disclosure for a press release announcing a
conference call to discuss 2003 first quarter financial results.
March 28, 2003 March 28, 2003 Item 9. Regulation FD Disclosure furnishing Certifications to the
SEC, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, signed by David J.
Lesar and Douglas L. Foshee.
March 28, 2003 March 27, 2003 Item 9. Regulation FD Disclosure for a press release announcing
2002 fourth quarter adjustments.
During the second quarter of 2003:
April 29, 2003 April 28, 2003 Items 9. and 12. Regulation FD Disclosure and Disclosure of
Results of Operations and Financial Condition for a press
release announcing 2003 first quarter results.
53
SIGNATURES
As required by the Securities Exchange Act of 1934, the registrant has
authorized this report to be signed on behalf of the registrant by the
undersigned authorized individuals.
HALLIBURTON COMPANY
Date: January 15, 2004 By: /s/ C. Christopher Gaut
-----------------------------
C. Christopher Gaut
Executive Vice President and
Chief Financial Officer
54
EXHIBIT INDEX
10.1 Employment Agreement (C. Christopher Gaut) (incorporated by
reference to Exhibit 10.1 to Halliburton's Form 10-Q for the
quarter ended March 31, 2003, File No. 1-3492).
* 31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
* 31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
* 32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* 32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Filed with this Form 10-Q