FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 1-3492
HALLIBURTON COMPANY
(a Delaware Corporation)
75-2677995
3600 Lincoln Plaza
500 N. Akard
Dallas, Texas 75201
Telephone Number - Area Code (214) 978-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $2.50 per share:
Outstanding at July 24, 2002 - 436,351,938
HALLIBURTON COMPANY
Index
Page No.
--------
PART I. FINANCIAL INFORMATION 2-28
Item 1. Financial Statements 2-4
- Condensed Consolidated Statements of Income 2
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Cash Flows 4
- Notes to Quarterly Financial Statements 5-28
1. Management Representations 5
2. Business Segment Information 5-6
3. Acquisitions and Dispositions 6-7
4. Restricted Cash 7
5. Discontinued Operations 7-8
6. Receivables and Unapproved Claims 8
7. Inventories 9
8. Commitments and Contingencies 9-19
9. Income (loss) Per Share 19
10. Comprehensive Income (loss) 19-20
11. Goodwill and Other Intangible Assets 20
12. Accounts Receivable Securitization 21
13. Reorganization of Business Operations 21
14. Impairment of Equity Investment 21
15. Long-Term Debt and Financial Instruments 22
16. DII Industries, LLC Financial Information 22-28
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 29-43
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
PART II. OTHER INFORMATION 44-46
Item 4. Submission of Matters to a Vote of Security Holders 44
Item 6. Listing of Exhibits and Reports on Form 8-K 44-46
Signatures 47
Exhibits: - Halliburton Elective Deferral Plan as amended and restated
effective May 1, 2002
- Halliburton Company 2002 Employee Stock Purchase Plan
- Employment Agreement
- Employment Agreement
- Powers of Attorney for Directors
- Powers of Attorney for Executive Officers
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
HALLIBURTON COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
(Millions of dollars and shares except per share data)
Three Months Six Months
Ended June 30 Ended June 30
----------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 2,750 $ 2,812 $ 5,279 $ 5,455
Product sales 457 498 917 981
Equity in earnings of unconsolidated affiliates 28 29 46 47
--------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,235 $ 3,339 $ 6,242 $ 6,483
--------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 3,075 $ 2,512 $ 5,605 $ 4,945
Cost of sales 407 454 816 876
General and administrative 97 101 150 192
Gain on sale of joint venture - - (108) -
Impairment on equity investment 61 - 61 -
--------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses $ 3,640 $ 3,067 $ 6,524 $ 6,013
--------------------------------------------------------------------------------------------------------------------
Operating income (loss) (405) 272 (282) 470
Interest expense (30) (34) (62) (81)
Interest income 12 6 16 10
Foreign currency losses, net (5) (1) (13) (4)
Other, net (2) - 2 -
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes, minority interest, and change in accounting
method, net (430) 243 (339) 395
(Provision) benefit for income taxes 77 (98) 41 (159)
Minority interest in net income of subsidiaries (5) (2) (10) (7)
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before change in
accounting method, net (358) 143 (308) 229
--------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations, net of tax
benefit of $19, $32, $34, and $17 (140) (60) (168) (38)
Gain on disposal of discontinued operations, net of tax
of $0, $199, $0, and $199 - 299 - 299
--------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations (140) 239 (168) 261
--------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method, net - - - 1
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (498) $ 382 $ (476) $ 491
====================================================================================================================
Basic income (loss) per share:
Income (loss) from continuing operations before change in
accounting method, net $ (0.83) $ 0.34 $ (0.71) $ 0.54
Loss from discontinued operations (0.32) (0.14) (0.39) (0.09)
Gain on disposal of discontinued operations - 0.70 - 0.70
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.15) $ 0.90 $ (1.10) $ 1.15
====================================================================================================================
Diluted income (loss) per share:
Income (loss) from continuing operations before change in
accounting method, net $ (0.83) $ 0.33 $ (0.71) $ 0.53
Loss from discontinued operations (0.32) (0.14) (0.39) (0.09)
Gain on disposal of discontinued operations - 0.70 - 0.70
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.15) $ 0.89 $ (1.10) $ 1.14
====================================================================================================================
Cash dividends per share $ 0.125 $ 0.125 $ 0.25 $ 0.25
Basic average common shares outstanding 432 427 432 427
Diluted average common shares outstanding 432 430 432 430
See notes to quarterly financial statements.
2
HALLIBURTON COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
(Millions of dollars and shares except per share data)
June 30 December 31
2002 2001
------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 383 $ 290
Receivables:
Notes and accounts receivable, net 2,606 3,015
Unbilled work on uncompleted contracts 1,000 1,080
------------------------------------------------------------------------------------------------
Total receivables 3,606 4,095
Inventories 808 787
Current deferred income taxes 126 154
Other current assets 253 247
------------------------------------------------------------------------------------------------
Total current assets 5,176 5,573
Property, plant and equipment after accumulated
depreciation of $3,329 and $3,281 2,692 2,669
Equity in and advances to related companies 568 551
Goodwill, net 725 720
Noncurrent deferred income taxes 512 410
Insurance for asbestos litigation claims 1,594 612
Other assets 720 431
------------------------------------------------------------------------------------------------
Total assets $ 11,987 $ 10,966
================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 66 $ 44
Current maturities of long-term debt 215 81
Accounts payable 1,140 917
Accrued employee compensation and benefits 254 357
Advanced billings on uncompleted contracts 492 611
Deferred revenues 88 99
Income taxes payable 78 194
Reserves on uncompleted contracts 193 101
Other current liabilities 461 504
------------------------------------------------------------------------------------------------
Total current liabilities 2,987 2,908
Long-term debt 1,264 1,403
Employee compensation and benefits 562 570
Asbestos litigation claims 2,196 737
Minority interest in consolidated subsidiaries 51 41
Other liabilities 672 555
------------------------------------------------------------------------------------------------
Total liabilities 7,732 6,214
------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 456 and 455 shares 1,141 1,138
Paid-in capital in excess of par value 296 298
Deferred compensation (88) (87)
Accumulated other comprehensive income (201) (236)
Retained earnings 3,742 4,327
------------------------------------------------------------------------------------------------
4,890 5,440
Less 20 and 21 shares of treasury stock, at cost 635 688
------------------------------------------------------------------------------------------------
Total shareholders' equity 4,255 4,752
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,987 $ 10,966
================================================================================================
See notes to quarterly financial statements.
3
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Six Months
Ended June 30
------------------------------
2002 2001
---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (476) $ 491
Adjustments to reconcile net income (loss) to net cash from
operations:
Loss (income) from discontinued operations 168 (261)
Depreciation, depletion and amortization 266 258
Provision (benefit) for deferred income taxes (73) 50
Distributions from (advances to) related companies, net of
equity in (earnings) losses 14 26
Change in accounting method, net - (1)
Gain on sale of joint venture (108) -
Gain on option component of joint venture sale (3) -
Impairment on equity investment 61 -
Asbestos reserve, net 477 95
Accrued special charges - (6)
Other non-cash items 72 20
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts 227 (346)
Sale of receivables 200 -
Inventories (24) (145)
Accounts payable 169 79
Other working capital, net (239) 42
Other operating activities (111) 42
---------------------------------------------------------------------------------------------------
Total cash flows from operating activities 620 344
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (404) (344)
Sales of property, plant and equipment 54 39
(Acquisitions) dispositions of businesses, net 134 (139)
Investments - restricted cash (188) -
Other investing activities (10) (8)
---------------------------------------------------------------------------------------------------
Total cash flows from investing activities (414) (452)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term borrowings (4) (9)
(Repayments) borrowings of short-term debt, net 14 (854)
Payments of dividends to shareholders (109) (107)
Proceeds from exercises of stock options - 24
Payments to reacquire common stock (2) (8)
Other financing activities - (3)
---------------------------------------------------------------------------------------------------
Total cash flows from financing activities (101) (957)
---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (12) (12)
Net cash flows from discontinued operations - 1,174
---------------------------------------------------------------------------------------------------
Increase in cash and equivalents 93 97
Cash and equivalents at beginning of period 290 231
---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 383 $ 328
===================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 53 $ 16
Income taxes $ 98 $ 145
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ - $ 18
Liabilities disposed of in dispositions of businesses $ - $ 430
See notes to quarterly financial statements.
4
HALLIBURTON COMPANY
Notes to Quarterly Financial Statements
(Unaudited)
Note 1. Management Representations
We employ accounting policies that are in accordance with generally
accepted accounting principles in the United States 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 applicable rules of
Regulation S-X. Accordingly, these financial statements do not include all
information or footnotes required by generally accepted accounting principles
for complete financial statements and should be read together with our 2001
Annual Report on Form 10-K. All adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary for a fair
presentation of the interim financial statements have been included. Prior
period amounts have been reclassified to be consistent with the current
presentation.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of June 30, 2002, the results of our operations
for the three and six months ended June 30, 2002 and 2001 and our cash flows for
the six months then ended. The results of operations for the three and six
months ended June 30, 2002 and 2001 may not be indicative of results for the
full year.
Note 2. Business Segment Information
During the first quarter of 2002, we announced plans to restructure our
businesses into two wholly-owned 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 which were
previously shared were moved into the two business groups. We also decided that
the operations of Major Projects, Granherne and Production Services were best
managed by our Kellogg Brown & Root subsidiary, or KBR, in the current business
environment. These businesses were moved for management and reporting purposes
from the Energy Services Group segment to the Engineering and Construction Group
segment during the second quarter. 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 product line, Granherne is now reported in the Onshore product line
and Production Services is now reported under the Operations and Maintenance
product line.
The tables below present information on our continuing operations
business segments on a comparable basis.
Three Months Six Months
Ended June 30 Ended June 30
------------------------- ------------------------
Millions of dollars 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
Revenues:
Energy Services Group $ 1,756 $ 2,008 $ 3,445 $ 3,800
Engineering and Construction Group 1,479 1,331 2,797 2,683
-----------------------------------------------------------------------------------------------
Total $ 3,235 $ 3,339 $ 6,242 $ 6,483
===============================================================================================
Operating income (loss):
Energy Services Group $ 70 $ 268 $ 239 $ 457
Engineering and Construction Group (450) 21 (508) 48
General corporate (25) (17) (13) (35)
-----------------------------------------------------------------------------------------------
Total $ (405) $ 272 $ (282) $ 470
===============================================================================================
5
Energy Services Group. The Energy Services Group provides a wide range
of discrete services and products and integrated solutions to customers for the
exploration, development, and production of oil and gas. The customers for this
segment are major, national and independent oil and gas companies. This segment
consists of:
- Halliburton Energy Services provides oilfield services and
products including discrete products and services and integrated
solutions for oil and gas exploration, development and production
throughout the world. Products and services include pressure
pumping equipment and services, logging and perforating, drilling
systems and services, drilling fluids systems, drill bits,
specialized completion and production equipment and services, well
control, and integrated solutions;
- Landmark Graphics provides integrated exploration and production
software information systems, data management services,
professional services to the petroleum industry and reservoir
description; and
- Other product service lines provide installation and servicing of
subsea facilities and pipelines, manufacture of flexible pipe for
offshore applications, and pipecoating services. In January 2002
we sold our interest in European Marine Contractors Ltd., a
50%-owned joint venture that provided pipeline services for
offshore customers. See Note 3.
Engineering and Construction Group. The Engineering and Construction
Group provides engineering, procurement, construction, project management, and
facilities operation and maintenance for oil and gas and other industrial and
governmental customers. The Engineering and Construction Group, operating as
KBR, includes the following five product lines:
- Onshore operations comprise engineering and construction
activities, including liquefied natural gas, ammonia, crude oil
refineries, and natural gas plants;
- Offshore operations include specialty offshore deepwater
engineering and marine technology and worldwide fabrication
capabilities;
- Government operations provide operations, maintenance and
logistics activities for government facilities and installations;
- Operations and maintenance services include plant operations,
maintenance and start up services for both upstream and downstream
oil, gas and petrochemical facilities as well as operations,
maintenance and logistics services for the power, commercial and
industrial markets; and
- Infrastructure provides civil engineering, consulting and project
management services.
Intersegment revenues included in the revenues of the business segments
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.
Note 3. Acquisitions and Dispositions
Subsea 7. In May 2002, we contributed a portion of our Halliburton
Subsea assets to a newly formed company, Subsea 7, Inc. We contributed assets
with a carrying value of approximately $75 million. We own 50% of Subsea 7 and
account for this investment using the equity method. The remaining 50% is owned
by DSND Subsea ASA.
Magic Earth acquisition. In November 2001, we acquired Magic Earth,
Inc., a leading 3-D visualization and interpretation technology company with
broad applications in the area of data interpretation. Under the agreement,
Halliburton issued 4.2 million shares of common stock from treasury stock valued
at $100 million. Magic Earth became a wholly-owned subsidiary and is reported
within our Energy Services Group. We recorded intangible assets of $19 million
and goodwill of $71 million, all of which is nondeductible for tax purposes. The
intangible assets will be amortized based on a five year life.
PES acquisition. In February 2000, we acquired the remaining 74% of the
shares of PES (International) Limited that we did not already own. PES had
developed technology that complemented Halliburton Energy Services' real-time
reservoir solutions. To acquire the remaining 74% of PES, we issued 1.2 million
shares of Halliburton common stock and rights that resulted in the issuance of
2.1 million additional shares of Halliburton common stock. We recorded $115
million of goodwill in connection with acquiring the remaining 74%.
6
During the second quarter of 2001, we contributed the majority of PES'
assets and technologies, including $130 million of goodwill associated with the
purchase of PES, to a newly formed joint venture with Shell Technology Ventures
B.V., WellDynamics. We received $39 million in cash as an equity equalization
adjustment. The remaining assets and goodwill of PES relating to completions and
well intervention products have been combined with our existing completions
product service line. We own 50% of WellDynamics and account for this investment
using the equity method.
PGS Data Management acquisition. In March 2001, we acquired the PGS
Data Management division of Petroleum Geo-Services ASA (PGS) for $164 million.
The agreement also calls for Landmark to provide, for a fee, strategic data
management and distribution services to PGS for three years. We recorded
intangible assets of $14 million and goodwill of $149 million, $9 million of
which is nondeductible for tax purposes.
European Marine Contractors Ltd. disposition. In January 2002, we sold
our 50% interest in European Marine Contractors Ltd., an unconsolidated joint
venture in the Energy Services Group, 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 the Oil
Service Index performance. 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 income statement as a result of the increase in value of this option. The
total transaction resulted in an after-tax gain of $68 million, or $0.16 per
diluted share.
Dresser Equipment Group divestiture. In April 2001, we disposed of the
remaining businesses in the Dresser Equipment Group. See Note 5.
Note 4. Restricted Cash
At June 30, 2002, we had restricted cash of $188 million included in
Other assets. Restricted cash in Other assets mainly consists of a $106 million
deposit that collateralizes an appeal bond for a patent infringement judgement
on appeal and $56 million as collateral for potential future insurance claim
reimbursements. Also included in restricted cash is $26 million primarily
related to cash collateral agreements for outstanding letters of credit for
various construction projects. In the 2002 first quarter, the $26 million was
included as Other current assets on the balance sheet. As the projects are
considered long-term in nature, we have reclassified this amount to Other
assets on the balance sheet in the second quarter of 2002.
Note 5. Discontinued Operations
In late 1999 and early 2000 we sold our interest in two joint ventures
which were a significant portion of our Dresser Equipment Group. These sales
prompted a strategic review of the remaining businesses within the Dresser
Equipment Group. As a result of this review, we determined that these remaining
businesses did not closely fit with our core businesses, long-term goals and
strategic objectives. In April 2000, our Board of Directors approved plans to
sell all the remaining businesses within the Dresser Equipment Group. We sold
these businesses on April 10, 2001. As part of the terms of the transaction, we
retained a 5.1% equity interest in the Dresser Equipment Group, which has been
renamed Dresser, Inc. In the second quarter of 2001, we recognized a pretax gain
on this sale of $498 million ($299 million after-tax). The financial results of
the Dresser Equipment Group through March 31, 2001 are presented as discontinued
operations in our financial statements.
During the second quarter of 2002, in connection with our asbestos
econometric study, we recorded a pretax expense of $153 million, $123 million
after-tax, to discontinued operations for existing and future asbestos claims
and defense costs related to previously disposed businesses, net of anticipated
insurance recoveries. See Note 8. We also recorded pretax expense of $6 million
associated with the Harbison-Walker bankruptcy filing. In addition, based upon
the impact of certain second quarter items, we adjusted our 2002 estimated
effective tax rate for discontinued operations by recording an $11 million tax
provision in the second quarter of 2002.
7
Three Months Six Months
Ended June 30 Ended June 30
Loss from Discontinued ------------------------- ------------------------
Operations
Millions of dollars 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
Revenues $ - $ - $ - $ 359
===============================================================================================
Operating income $ - $ - $ - $ 37
Asbestos litigation claims, net of
insurance recoveries (159) (92) (202) (92)
Tax benefit 19 32 34 17
-----------------------------------------------------------------------------------------------
Net loss $ (140) $ (60) $ (168) $ (38)
===============================================================================================
Note 6. Receivables and Unapproved Claims
Our receivables are generally not collateralized. See Note 12.
With the exception of claims and change orders that are in the process of being
negotiated with customers, unbilled work on uncompleted contracts generally
represents work currently billable or billable upon achievement of specific
contractual milestones.
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;
less costs incurred and estimated costs to complete. Losses on contracts are
recorded in full in the period they are identified. Profits are recorded based
upon the total estimated contract profit times 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
Statement of Position 81-1 "Accounting for Performance of Construction-Type
and Certan Production-Type Contracts". In most 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
unapproved claims recorded in unbilled work on uncompleted contracts relates to
forecasted costs which have not been incurred. The amounts included in
determining the profit or loss on contracts, and the amount booked to unbilled
work on uncompleted contracts for each period is as follows:
June 30 December 31
--------- --------------
Millions of dollars 2002 2001
--------------------------------------------------------------------------------
Probable unapproved claims (included
in determining contract profit or loss) $ 193 $ 137
Unapproved claims in unbilled work on
uncompleted contracts $ 135 $ 102
================================================================================
The claims at June 30, 2002 listed in the above table relate to eight
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 are initiating the arbitration process. The probable unapproved claim
related to the arbitration process is $5 million. The largest claim included
relates to an offshore field development contract in Brazil which is
approximately 43% complete as of the end of the second quarter of 2002. The
probable unapproved claims included in determining this contract's loss was
$101 million at June 30, 2002 and $43 million at December 31, 2001. As the
claim for this contract most likely will not be settled withn one year, amounts
in unbilled work on uncompleted contracts of $44 million at June 30, 2002 and
$10 million at December 31, 2001 included in the table above have been recorded
to long-term unbilled work on uncompleted contracts which is included in Other
assets on the balance sheet. All other claims included in the tabel above have
been recorded to Unbilled work on uncompleted contracts included in the Total
receivables amount on the balance sheet.
In addition, our unconsolidated related companies include probable
unapproved claims as revenue to determine the amount of profit or loss for their
contracts. As we account for these as equity investments, we only record our
equity percentage of the net income from the unapproved claims. Amounts for
8
unapproved claims from our related companies are included in equity in and
advances to related companies and totaled $7 million at June 30, 2002 and $0.3
million at December 31, 2001.
Note 7. Inventories
Inventories at June 30, 2002 and December 31, 2001 are composed of the
following:
June 30 December 31
--------- ---------------
Millions of dollars 2002 2001
--------------------------------------------------------------------
Finished products and parts $ 552 $ 520
Raw materials and supplies 184 192
Work in process 72 75
--------------------------------------------------------------------
Total $ 808 $ 787
====================================================================
Included in the table above are inventories on the last-in, first-out
method of $50 million at June 30, 2002 and $54 million at December 31, 2001. If
the average cost method had been used, total inventories would have been about
$20 million higher than reported at June 30, 2002 and December 31, 2001.
Note 8. Commitments and Contingencies
Asbestos litigation. Several of our subsidiaries, particularly DII
Industries, LLC (See Note 13) and Kellogg Brown & Root, Inc., 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, LLC or in materials used in construction or
maintenance projects of Kellogg Brown & Root, Inc. These claims are in three
general categories:
- refractory claims;
- other DII Industries, LLC 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, LLC acquired in 1967. Harbison-Walker was spun-off by DII
Industries, LLC 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, LLC from liability for those claims. DII Industries,
LLC retained responsibility for all asbestos claims pending as of the date of
the spin-off. After the spin-off, DII Industries, LLC and Harbison-Walker
jointly negotiated and entered into coverage-in-place agreements with a number
of insurance companies. Those agreements provide DII Industries, LLC and
Harbison-Walker access to the same insurance coverage to reimburse them for
defense costs, settlements and court judgments they pay to resolve refractory
asbestos claims.
As of June 30, 2002, there were approximately 7,000 open and unresolved
pre-spin-off refractory claims against DII Industries, LLC. In addition, there
were approximately 139,000 post spin-off claims that name DII Industries, LLC as
a defendant. DII Industries, LLC has taken up the defense of unsettled post
spin-off refractory claims that name it as a defendant in order to prevent
Harbison-Walker from unnecessarily eroding the insurance coverage both companies
access for these claims. These claims are now stayed in the Harbison-Walker
bankruptcy proceeding.
Other DII Industries, LLC claims. As of June 30, 2002, there were
approximately 128,000 open and unresolved claims alleging injuries from asbestos
used in other products formerly manufactured by DII Industries, LLC. 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, Inc. As of
June 30, 2002, there were approximately 38,000 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 1,000 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.
9
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 have confirmed a plan of reorganization that would provide for distributions
for all legitimate, pending and future asbestos claims asserted directly against
it or asserted against DII Industries, LLC for which Harbison-Walker is required
to indemnify and defend DII Industries, LLC. If such a plan of reorganization is
confirmed, all pending and future refractory asbestos claims against
Harbison-Walker or DII Industries, LLC would be channeled to a Section
524(g)/105 trust for resolution and payment. In order for a trust to be
confirmed, at least a majority of the equity ownership of Harbison-Walker would
have to be contributed to the trust. We also anticipate a significant financial
contribution will also be required to obtain the necessary approvals for the
trust. Creation of a trust would also require the approval of 75% of the
asbestos claimant creditors of Harbison-Walker.
In connection with the Chapter 11 filing by Harbison-Walker, the
Bankruptcy Court issued a temporary restraining order staying all further
litigation of more than 200,000 asbestos claims currently pending against DII
Industries, LLC in numerous courts throughout the United States. A number of
claimants oppose that stay, and filed motions seeking to have the stay
terminated. On April 4, 2002, the Bankruptcy Court heard argument on these
motions and kept the stay in effect until at least 11 days after the Bankruptcy
Court rules on the claimants' motions. When the Bankruptcy Court rules, it may
issue a preliminary injunction continuing the stay or it may modify or dissolve
the stay as it applies to DII Industries, LLC. It is also possible that the
Bankruptcy Court will schedule future hearings while continuing or modifying the
stay. At present, there is no assurance that a stay will remain in effect, that
a plan of reorganization will be proposed or confirmed, or that any plan that is
confirmed will provide relief to DII Industries, LLC. DII Industries, LLC may
make a contribution to a trust in order to achieve a confirmed plan. If a plan
is not confirmed that provides relief to DII Industries, LLC, it will be
required to defend all open claims in the courts in which they have been filed,
possibly with reduced access to the insurance shared with Harbison-Walker.
The stayed asbestos claims are those covered by insurance that DII
Industries, LLC 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 139,000 post-1992
spin-off refractory claims, 7,000 pre-spin-off refractory claims and
approximately 110,000 other types of asbestos claims pending against DII
Industries, LLC. Approximately 51,000 of the claims in the third category are
claims made against DII Industries, LLC 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, LLC time to develop and
propose a plan of reorganization.
DII Industries, LLC 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, DII Industries, LLC also paid $40 million to
Harbison-Walker's United States parent holding company, RHI Refractories Holding
Company. This payment was made when Harbison-Walker filed its bankruptcy
petition and was charged to discontinued operations in our financial statements
in the first quarter of 2002. Harbison-Walker's failure to fulfill its indemnity
obligations, and its excessive erosion of the insurance coverage, required DII
Industries, LLC to assist Harbison-Walker in its bankruptcy proceeding in order
to protect the shared insurance from dissipation. This insurance will be needed
if a trust is to be worked out with the asbestos claimants. The payment to RHI
Refractories led RHI Refractories to forgive intercompany debt owed to it by
Harbison-Walker, thus increasing the assets of Harbison-Walker. DII Industries,
LLC will pay another $35 million to RHI Refractories if a plan of reorganization
acceptable to DII Industries, LLC is proposed in the bankruptcy proceedings. A
further $85 million will be paid to RHI Refractories if a plan acceptable to DII
Industries, LLC is approved by 75% of the Harbison-Walker asbestos claimant
creditors and confirmed by the Bankruptcy Court.
As a result of DII Industries, LLC's continuing settlement negotiations
with the Asbestos Claimants Committee, or ACC, which was formed as part of the
Harbison-Walker bankruptcy, and certain law firms that represent a substantial
percentage of the plaintiffs that have asserted Harbison-Walker-related claims
against DII Industries, LLC, the temporary restraining order originally entered
by the Bankruptcy Court on February 14, 2002 has been consensually extended
until at least September 18, 2002. On September 18, 2002, DII Industries, LLC
10
and the ACC will present a status report to the Bankruptcy Court. To the extent
that the settlement negotiations continue to make progress, DII Industries, LLC
anticipates that the ACC will consent to have the temporary restraining order
extended for an additional period of time.
DII Industries, LLC's settlement negotiations with the law firms that
represent a substantial majority of plaintiffs that have asserted
Harbison-Walker-related claims against DII Industries, LLC have not been limited
to Harbison-Walker-related claims. Rather, DII Industries, LLC is exploring with
these law firms the possibility of resolving, on a global basis, all of the
refractory asbestos claims, all of the other DII Industries, LLC asbestos claims
(including claims related to historic DII Industries, LLC manufacturing
operations and Worthington Corporation) and all of the construction
asbestos-related claims, including all future asbestos-related claims. These
broader negotiations involve difficult and complex issues. At this time there is
no assurance that DII Industries, LLC will be able to reach an acceptable
agreement. We expect that these negotiations will continue for some time before
we will even be able to make a judgment as to whether a global settlement is
reasonably likely.
Asbestos insurance coverage. DII Industries, LLC has substantial
insurance that reimburses it for portions of the costs incurred defending
asbestos 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, LLC, 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, LLC
and its subsidiaries depends on the nature and time of the alleged exposure to
asbestos, the specific subsidiary against which an asbestos claim is asserted
and other factors.
Refractory claims insurance. DII Industries, LLC has approximately $2.1
billion in aggregate limits of insurance coverage for refractory asbestos
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. Recently, however, Equitas and other
London-based companies have attempted to impose new restrictive documentation
requirements on DII Industries, LLC 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,
LLC's lawsuit filed in Texas State Court in 2001 and seeks, among other relief,
a determination as to the rights of DII Industries, LLC and Harbison-Walker to
the shared general liability insurance. The lawsuit also seeks damages against
certain insurers for breach of contract and bad faith, and a declaratory
judgment concerning the insurers' obligations under the shared insurance.
Although DII Industries, LLC 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 are scheduled to take place, provided the Bankruptcy Court's
mediation order remains in effect, in September, October and November 2002.
Given the early stages of these negotiations, DII Industries, LLC 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, LLC filed a lawsuit in Dallas County, Texas, against a number of
these insurance companies asserting DII Industries, LLC 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, LLC to enter into settlements for small amounts without requiring
claimants to produce detailed documentation to support their claims, when DII
Industries, LLC believes the settlements are an effective claims management
strategy. DII Industries, LLC believes that the new documentation requirements
are inconsistent with the current coverage-in-place agreements and are
unenforceable. The insurance companies that DII Industries, LLC has sued have
not refused to pay larger claim settlements where documentation is obtained or
where court judgments are entered. Also, they continue to pay previously agreed
to amounts of defense costs that DII Industries, LLC incurs defending refractory
asbestos claims. All of the asbestos claims to which this insurance covers are
11
currently stayed by the Harbison-Walker bankruptcy, and consequently the breach
of the coverage-in-place agreements is currently having no impact upon DII
Industries, LLC.
On May 10, 2002, the London-based insuring entities and companies
removed DII Industries, LLC's 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, LLC 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, LLC 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, LLC's case will proceed
independently of the bankruptcy.
Other DII Industries, LLC claims insurance. DII Industries, LLC has
substantial insurance to cover other non-refractory asbestos claims. Two
coverage-in-place agreements cover DII Industries, LLC for companies or
operations that DII Industries, Inc., either acquired or operated prior to
November 1, 1957. Asbestos claims that are covered by these agreements are
currently stayed by the Harbison-Walker bankruptcy because the majority of this
coverage also applies to refractory claims and is shared with Harbison-Walker.
Other insurance coverage is provided by a number of different policies that DII
Industries, LLC 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, LLC 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, LLC filed a lawsuit in the 192nd
Judicial District of the District Court for Dallas County, Texas against certain
London-based insuring entities that issued insurance policies that provide
coverage to DII Industries, LLC 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 court denied the appeal and the case should now
proceed to resolution in the trial 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, LLC 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, LLC and Federal-Mogul, if any, to this
insurance coverage. DII Industries, LLC recently filed a second amended
complaint in that lawsuit and the parties are now beginning the discovery
process.
At the same time, DII Industries, LLC filed its insurance coverage
action in the Federal-Mogul bankruptcy, DII Industries, LLC 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, LLC that
are scheduled for trial within the six months following the filing of the
motion. The stay that DII Industries, LLC seeks, if granted, would remain in
place until the competing rights of DII Industries, LLC and Federal-Mogul to the
allegedly shared insurance are resolved. The Court has yet to schedule a hearing
on DII Industries, LLC motion for preliminary injunction.
A number of insurers who have agreed to coverage-in-place agreements
with DII Industries, LLC 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,
LLC's rights to access this shared insurance is uncertain.
12
Construction claims insurance. Nearly all of our construction asbestos
claims relate to Brown & Root, Inc. operations before the 1980s. Our primary
insurance coverage for these claims was written by Highlands Insurance Company
during the time it was one of our subsidiaries. Highlands was spun-off to our
shareholders in 1996. On April 5, 2000, Highlands filed a lawsuit against us in
the Delaware Chancery Court. Highlands asserted that the insurance it wrote for
Brown & Root, Inc. that covered construction asbestos claims was terminated by
agreements between Halliburton and Highlands at the time of the 1996 spin-off.
In March 2001, the Chancery Court ruled that a termination did occur and that
Highlands was not obligated to provide coverage for Brown & Root, Inc.'s
asbestos claims. This decision was affirmed by the Delaware Supreme Court on
March 13, 2002. As a result of this ruling, we wrote-off approximately $35
million in accounts receivable for amounts paid for claims and defense costs and
$45 million of accrued receivables in relation to estimated insurance recoveries
claims settlements from Highlands in the first quarter 2002. In addition, we
dismissed the April 24, 2000 lawsuit we filed against Highlands in Harris
County, Texas.
As 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. 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 DII Industries, LLC 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, LLC and
another defendant. DII Industries, LLC 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. We believe that during the trial the court committed numerous
errors, including prohibiting DII Industries, LLC from presenting evidence that
the alleged illness of the plaintiffs was caused by products of other companies
that had previously settled with the plaintiffs. We intend to appeal this
judgment and believe that the Texas appellate courts will ultimately reverse
this judgment.
On November 29, 2001, the same District Court in Orange, Texas, entered
three additional judgments against DII Industries, LLC 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, LLC pursuant to the agreement by which Harbison-Walker was
spun-off by DII Industries, LLC in July 1992. These settlement agreements
expressly bind Harbison-Walker Refractories Company as the obligated party, not
DII Industries, LLC. DII Industries, LLC intends to appeal these three judgments
on the grounds that it was not a party to the settlement agreements and it did
not authorize anyone to settle on its behalf. We believe that these judgments
are contrary to applicable law and will be reversed.
On December 5, 2001, a jury in the Circuit Court for Baltimore City,
Maryland, returned verdicts against DII Industries, LLC and other defendants
following a trial involving refractory asbestos claims. Each of the five
plaintiffs alleges exposure to Harbison-Walker products. DII Industries, LLC
portion of the verdicts was approximately $30 million. DII Industries, LLC
believes that the trial court committed numerous errors and that the trial
evidence did not support the verdicts. The trial court has entered judgment on
these verdicts. DII Industries, LLC intends to appeal the judgment to the
Maryland Supreme Court where we expect the judgment will be significantly
reduced, if not totally reversed.
13
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 DII Industries, LLC and two other companies. DII Industries,
LLC share of the verdict was $21.3 million. The award was for compensatory
damages. The jury did not award any punitive damages. The trial court has
entered judgment on the verdict. We believe there were serious errors during the
trial and we intend to appeal this judgment to the Mississippi Supreme Court. We
believe the judgment will ultimately be reversed because there was a total lack
of evidence that the plaintiffs were exposed to a Harbison-Walker product or
that they suffered compensatory damages. Also, there were procedural errors in
the selection of the jury.
Asbestos claims history. Since 1976, approximately 525,000 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 second quarter of 2002, we received approximately 26,000 new claims
and we closed approximately 7,000 claims. The number of open claims pending
against us at the end of the second quarter of 2002, at the end of the first
quarter of 2002, at the end of each quarter of 2001 and at the end of 2000 is as
follows:
Total Open
Period Ending Claims
-----------------------------------------
June 30, 2002 312,000
March 31, 2002 292,000
December 31, 2001 274,000
September 30, 2001 146,000
June 30, 2001 145,000
March 31, 2001 129,000
December 31, 2000 117,000
=========================================
The claims include approximately 139,000 at June 30, 2002, 133,000 at
March 31, 2002 and 125,000 at December 31, 2001 of post spin-off Harbison-Walker
refractory related claims that name DII Industries, LLC as a defendant.
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 214,000 claims through
settlements and court proceedings at a total cost of approximately $173 million.
We have received or expect to receive from our insurers all but approximately
$72 million of this cost, resulting in an average net cost per closed claim of
about $336.
Asbestos study and the valuation of unresolved current and future
asbestos claims, and related insurance receivables. DII Industries, LLC 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-related bodily injury claims asserted against DII
Industries, LLC 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 two 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-related bodily injury claims asserted
against DII Industries, LLC and its subsidiaries over a 50 year period;
provided, Dr. Rabinovitz indicated, that the basis for estimation in the later
years were less certain.
In the past, we have only provided for known outstanding claims as we
did not have sufficient information to make a reasonable estimate of future
asbestos claims liability. However, as a result of Dr. Rabinovitz's analysis,
we are now in a position to accrue not only for known open claims, but also for
the projected costs to resolve asbestos claims through 2017. In light of the
uncertainties inherent in making long-term projections and as indicated in Dr.
Rabinovitz's analysis, although Dr. Rabinovitz's analysis covers 50 years, we
do not believe that we have a reasonable basis for estimating under Statement of
Financial Accounting Standard No. 5 "Accounting for Contingencies", or SFAS No.
5, asbestos claims, defense costs or probable insurance recoveries past 2017.
14
The methodology utilized by Dr. Rabinovitz to project DII Industries,
LLC's and its subsidiaries' asbestos-related liabilities and defense costs
relied upon and included:
- an analysis of DII Industries, LLC's, Kellogg, Brown & Root,
Inc.'s and Harbison-Walker Refractories Company's historical
asbestos settlements and defense costs to develop average
settlement values and average defense costs for specific
asbestos-related diseases and for the specific business operation
or entity allegedly responsible for the asbestos-related diseases;
- an analysis of DII Industries, LLC's, Kellogg, Brown & Root,
Inc.'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, LLC, Kellogg, Brown & Root, Inc.
and Harbison-Walker Refractories Company since January 1, 2000
(and alternatively since January 1997) 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, LLC, 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 LLC,
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 projections are based on historical data supplied by
DII Industries, LLC, Kellogg, Brown & Root, Inc. and Harbison-Walker and
publicly available studies, including annual surveys by the National Institutes
of Health concerning the incidence of mesothelioma deaths. In her analysis, Dr.
Rabinovitz projected that the elevated and historically unprecedented rate of
claim filings of the last several years, especially as expressed by the ratio of
nonmalignant claim filings to malignant claim filings, would continue into the
future for 5 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 alternately 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, but we
used the two-year period in establishing reserves for our probable and
reasonably estimable liabilities and defense costs as we determined it to be
more appropriate and was also the more conservative approach.
Other important assumptions utilized in Dr. Rabinovitz's estimates,
which we relied upon in making our accrual are:
- an assumption that there will be no legislative or other systemic
changes to the tort system;
- that the Company will continue to aggressively defend against
asbestos claims made against the Company; and
- an inflation rate of 3% annually for settlement payments and an
inflation rate of 4% annually for defense costs.
Based upon her analysis, Dr. Rabinovitz estimated DII Industries, LLC's
total, undiscounted asbestos liabilities, including defense costs. Through 2017,
the period during which we believe we have a reasonable basis for estimating
under SFAS No. 5, Dr. Rabinovitz estimated the current and future total
undiscounted liability for asbestos claims, including defense costs would be
$2.2 billion (which includes payments related to the approximately 312,000
claims currently pending).
Using Dr. Rabinovitz's projections, we then conducted 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 through 2017. In
conducting this analysis, we:
- reviewed DII Industries, LLC's historical course of dealings with
its insurance companies concerning the payment of asbestos-related
claims, including DII Industries, LLC's over 15 year litigation
and settlement history;
- reviewed the terms of DII Industries, LLC's prior and current
coverage-in-place settlement agreements;
15
- reviewed the status of DII Industries, LLC's and Kellogg, Brown &
Root, Inc.'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, LLC's insurers to meet their obligations
through 2017.
Based on that review, analyses and discussions, we made judgements
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 DII Industries, LLC's asbestos
liabilities through 2017. This analysis factored in the probable effects of
self-insurance features, such as self-insured retentions, policy exclusions,
liability caps, current and anticipated insolvencies of DII Industries, LLC's
insurers, and various judicial determinations relevant to DII Industries, LLC's
insurance programs.
Based on Dr. Rabinovitz's projections and our analysis of the probable
insurance recoveries, we established reserves for the probable and reasonably
estimable liabilities and defense costs we believe we will pay through 2017 of
$2.2 billion, and we have also recorded receivables for the insurance recoveries
that are deemed probable through that same date of $1.6 billion. These reserves
and 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. Of this pretax charge, $330
million, $268 million after-tax, was recorded for claims related to Brown & Root
construction and renovation projects and was recorded under the Engineering and
Construction Group segment. The balance of $153 million, $123 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 2017, including the 312,000 current
open claims, are approximately one million. A summary of our reserves for these
claims and corresponding insurance recoveries is as follows:
June 30 December 31
------------------------------
Millions of dollars 2002 2001
-----------------------------------------------------------------------------------
Asbestos litigation claims $ 2,196 $ 737
-----------------------------------------------------------------------------------
Estimated insurance recoveries:
Highlands Insurance Company - (45)
Other insurance carriers (1,594) (567)
-----------------------------------------------------------------------------------
Insurance for asbestos litigation claims (1,594) (612)
-----------------------------------------------------------------------------------
Net liability for open and future (through 2017)
asbestos claims $ 602 $ 125
===================================================================================
Accounts receivable for billings to insurance companies for payments
made on asbestos claims were $30 million at June 30, 2002, and $18 million at
December 31, 200l, excluding accounts receivable written off at the conclusion
of the Highlands litigation.
The insurance recoveries we have recorded do not assume any recovery
from insolvent insurers or from any state insurance guaranty association and
assume that all but one of our insurance companies that are currently solvent
will remain solvent through 2017. However, there can be no assurances that these
assumptions will be correct. The insurance receivables do not exhaust DII
Industries, LLC's insurance coverage for asbestos-related liabilities and we
believe that DII Industries, LLC has significant insurance coverage available to
it for asbestos-related liabilities that it may incur after 2017.
16
Projecting future events, such as the number of future asbestos-related
lawsuits to be filed against DII Industries, LLC and Kellogg, Brown & Root,
Inc., 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 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.
Given the inherent uncertainty in making future projections, we plan to
have the projections periodically reexamined, and update them based on our
experience and other relevant factors such as changes in the tort system and the
resolution of the bankruptcies of various asbestos defendants. 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, LLC's and Kellogg, Brown & Root, Inc.'s various lawsuits against its
insurance companies and other developments that may impact the probable
insurance recoveries.
Securities and Exchange Commission ("SEC") Preliminary Inquiry 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 certain of our accounting practices. On
June 11, 2002, we received an additional letter requesting information regarding
our accounting for cost overruns on construction projects and requesting our
voluntary assistance. We responded to that request promptly and met with members
of the SEC staff to discuss our response. We received a further request for
voluntary assistance on July 11, 2002, which requested additional explanations
and supporting documentation. We are in the process of collecting the requested
documents and preparing responses to specific inquiries. We are fully
cooperating and actively engaged in assisting in the SEC's review.
The SEC's preliminary inquiry largely relates to our accruals of
revenue from unapproved claims on engineering and construction contracts and
whether we timely disclosed 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
unapproved claims in 1998, we first disclosed 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. 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. Accordingly, our 2001 Annual Report on
Form 10-K is subject to special review by the SEC staff and we may receive
comments from the SEC staff in addition to the matters described above. If so,
we will promptly respond and attempt to resolve any questions raised by the
Division of Corporation Finance.
Securities 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, in excess of fifteen 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 unapproved claims on engineering and
construction contracts, and that we overstated revenue by accruing the
unapproved claims. One such action has since been dismissed voluntarily, without
prejudice, upon motion by the filing plaintiff.
In addition to those class actions, two additional class actions have
been filed against us and several of our present or former officers and
directors alleging different causes of action based upon essentially the same
facts and circumstances alleged in the federal securities fraud class actions.
One such action, filed in the United States District Court for the Northern
District of Texas, alleges violations of ERISA based on the purchase of our
securities for our 401(k) retirement plan when we allegedly knew, or should have
known, that our financial statements understated losses on certain construction
contracts because of our accrual of revenues for as yet unresolved contract
claims. The other, which joins Arthur Andersen as an additional defendant,
alleges violations of Texas statutory and common law based on the same facts and
circumstances as the other cases.
17
The damages in all of these cases are unspecified. We believe that our
actions in accruing revenue for unresolved construction contract claims and
related disclosures were appropriate, and that the various class actions
described above should be resolved in our favor. Therefore, we intend to deny
any wrongdoing and to vigorously defend against these lawsuits. However, at this
point all of these lawsuits are in a very preliminary stage, we have not been
called upon to file responsive pleadings or dispositive motions, and discovery
has not commenced. Although we believe that our position ultimately will be
vindicated, it is not possible to estimate the amount of loss or range of
possible loss that might result from adverse judgments or settlements of these
matters.
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 the patent infringement lawsuit brought by BJ Services
Company, or BJ. The lawsuit alleged that a well fracturing fluid system used by
Halliburton Energy Services 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, less than
one-quarter of BJ's claim at the beginning of the trial. 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 $106 million to cover the damage award,
pre-judgment and post-judgment interest, and awardable costs. We have timely
appealed this verdict to the Court of Appeals for the Federal Circuit, which
hears all appeals of patent cases. We believe that BJ's patent is invalid and
unenforceable on a number of grounds, and intend to pursue vigorously our
appeal. 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.
Improper payments reported to the Securities and Exchange Commission.
We have reported to the Securities and Exchange Commission that one of our
foreign subsidiaries operating in Nigeria made improper payments of
approximately $2.4 million to 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 Securities and Exchange Commission in
its review of the matter. We plan to take further action to ensure that our
foreign subsidiary pays all taxes owed in Nigeria, which may be as much as an
additional $3 million and this amount was fully accrued as of March 31, 2002.
The integrity of our Code of Business Conduct and our internal control
procedures are essential to the way we conduct business.
Environmental. We are subject to numerous environmental legal and
regulatory requirements related to our operations worldwide. We take a proactive
approach to evaluating and addressing the environmental impact of our
operations. Each year we assess and remediate contaminated properties in order
to avoid future liabilities and comply with legal and regulatory requirements.
On occasion we are involved in specific environmental litigation and claims,
including the clean-up of properties we own or have operated as well as efforts
to meet or correct compliance-related matters.
We also incur costs related to compliance with ever-changing
environmental, legal and regulatory requirements in the jurisdictions where we
operate. It is very difficult to quantify the potential liabilities. We do not
expect these expenditures to have a material adverse effect on our consolidated
financial position or our results of operations. Our accrued liabilities for
environmental matters were $48 million as of June 30, 2002 and $49 million as of
December 31, 2001.
Letters of credit. In the normal course of business, we have agreements
with banks under which approximately $1.3 billion of letters of credit or bank
guarantees were issued, including $220 million which relate to our joint
ventures' operations. Of these financial instruments, $260 million include
provisions that allow the banks to require cash collateralization if our debt
ratings fall below the investment grade ratings of BBB- by Standard & Poor's or
Baa3 by Moody's Investors' Services. If our debt ratings fall below investment
grade, we would also be in technical breach of a bank agreement covering
another $127 million of letters of credit at June 30, 2002, which might entitle
the bank to set-off rights. In addition, a $151 million letter of credit line,
of which $85 million has been issued, includes provisions that allow the bank to
require cash collateralization for the full line if debt ratings of either
rating agency fall below the rating of BBB by Standard & Poor's or Baa2 by
Moody's Investors' Services. These letters of credit and bank guarantees
18
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 these financial instruments. We do not anticipate material
losses to occur as a result of these financial instruments.
Liquidated damages. We have not accrued $280 million at June 30, 2002
and $97 million at December 31, 2001 of contractual obligations for
schedule-related liquidated damages as we do not believe payment is probable. We
believe we have valid claims for schedule extensions against the customers which
would counter these liquidated damages. Of the total liquidated damages, $260
million at June 30, 2002 and $77 million at December 31, 2001 relate to
unasserted liquidated damages for one project in Brazil. The estimated schedule
impact of change orders requested by the customer is expected to cover
approximately one-half of the $260 million exposure at June 30, 2002 and claims
for schedule extension are expected to cover the remaining exposure.
Other. We are a party to various other legal proceedings. We expense
the cost of legal fees related to these proceedings. 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 9. Income (loss) Per Share
Three Months Six Months
Ended June 30 Ended June 30
Millions of dollars and shares except ---------------------------- ----------------------------
per share data 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
change in accounting method, net $ (358) $ 143 $ (308) $ 229
==================================================================================================================
Basic weighted average shares 432 427 432 427
Effect of common stock equivalents - 3 - 3
------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 432 430 432 430
==================================================================================================================
Income (loss) per common share from continuing
operations before change in accounting
method, net:
Basic $ (0.83) $ 0.34 $ (0.71) $ 0.54
==================================================================================================================
Diluted $ (0.83) $ 0.33 $ (0.71) $ 0.53
==================================================================================================================
Basic income (loss) per share is based on the weighted average number
of common shares outstanding during the period. Diluted income (loss) per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. For the second quarter
2002 and the six months ended June 30, 2002, we have used the basic weighted
average shares in the calculation as the effect of the common stock equivalents
would be anti-dilutive based upon the net loss from continuing operations.
Included in the computation of diluted income per share at June 30, 2001 are
rights we issued in connection with the PES acquisition for 0.7 million shares
of Halliburton common stock. Excluded from the computation of diluted income per
share are options to purchase 1.9 million shares of common stock which were
outstanding during the three months ended June 30, 2001 and options to purchase
2.1 million shares of common stock which were outstanding during the six months
ended June 30, 2001. These options were outstanding during the applicable
period, but were excluded because the option exercise price was greater than the
average market price of the common shares.
Note 10. Comprehensive Income (loss)
The components of other comprehensive income adjustments to net income
(loss) include the cumulative translation adjustment of some of our foreign
entities, minimum pension liability adjustments and unrealized gains on
investments and derivatives.
19
Three Months Six Months
Ended June 30 Ended June 30
---------------------------- ----------------------------
Millions of dollars 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (498) $ 382 $ (476) $ 491
Cumulative translation adjustment, net of tax 32 (4) 35 (46)
Less reclassification adjustment for gains
included in net income - 102 - 102
Net cumulative translation adjustment, net of tax 32 98 35 56
Adjustment to minimum pension liability - 12 - 12
Unrealized gains on investments and derivatives - 4 - 2
------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ (466) $ 496 $ (441) $ 561
==================================================================================================================
Accumulated other comprehensive income at June 30, 2002 and December
31, 2001 consisted of the following:
June 30 December 31
--------- --------------
Millions of dollars 2002 2001
-------------------------------------------------------------------------------------------
Cumulative translation adjustment $ (170) $ (205)
Pension liability adjustments (27) (27)
Unrealized losses on investments and derivatives (4) (4)
-------------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (201) $ (236)
===========================================================================================
Note 11. Goodwill and Other Intangible Assets
Effective January 1, 2002, we adopted the Financial Accounting
Standards Board SFAS No. 142 "Goodwill and Other Intangible Assets", and in
accordance with the statement, amortization of goodwill has been discontinued.
We have reviewed this new statement and determined that our reporting units as
defined under SFAS No. 142 will be the same as our reportable operating
segments: Energy Services Group and Engineering and Construction Group. We have
completed the impairment tests of goodwill as of January 1, 2002 and determined
that our goodwill for each reporting unit is not impaired. We also reevaluated
our intangible assets and determined that their remaining useful life is
appropriate.
Had we been accounting for our goodwill under SFAS No. 142 for all
periods presented, our net income (loss) and earnings (loss) per share would
have been as follows.
Three Months Six Months
Ended June 30 Ended June 30
------------------------- ------------------------
Millions of dollars 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
Reported net income (loss) $ (498) $ 382 $ (476) $ 491
Goodwill amortization, net of tax - 10 - 19
-----------------------------------------------------------------------------------------------
Adjusted net income (loss) $ (498) $ 392 $ (476) $ 510
===============================================================================================
Basic earnings (loss) per share:
Reported net income (loss) $ (1.15) $ 0.90 $ (1.10) $ 1.15
Goodwill amortization, net of tax - 0.02 - 0.04
-----------------------------------------------------------------------------------------------
Adjusted net income (loss) $ (1.15) $ 0.92 $ (1.10) $ 1.19
===============================================================================================
Diluted earnings (loss) per share:
Reported net income (loss) $ (1.15) $ 0.89 $ (1.10) $ 1.14
Goodwill amortization, net of tax - 0.02 - 0.04
-----------------------------------------------------------------------------------------------
Adjusted net income (loss) $ (1.15) $ 0.91 $ (1.10) $ 1.18
===============================================================================================
20
Note 12. Accounts Receivable Securitization
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding subsidiary sells an undivided ownership interest in this pool of
receivables to entities managed by unaffiliated financial institutions under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable bankruptcy laws, and the assets of the funding
subsidiary are not available to pay any creditors of Halliburton or of its
subsidiaries or affiliates, until such time as the agreement with the
unaffiliated companies is terminated following sufficient collections to
liquidate all outstanding undivided ownership interests. The funding subsidiary
retains the interest in the pool of receivables that are not sold to the
unaffiliated companies, and is fully consolidated and reported in our financial
statements.
The amount of undivided interests, which can be sold under the program,
varies based on the amount of eligible receivables in the pool at any given time
and other factors. As of June 30, 2002, the funding subsidiary sold a $200
million undivided ownership interest to the unaffiliated companies, and may from
time to time sell additional undivided ownership interests. We continue to
service, administer and collect the receivables on behalf of the purchaser. The
amount of undivided ownership interest in the pool of receivables sold to the
unaffiliated companies is reflected as a reduction of accounts receivable in our
consolidated balance sheet and as an increase in cash flows from operating
activities in our consolidated statement of cash flows.
Note 13. Reorganization of Business Operations
On March 18, 2002 we announced plans to restructure our businesses into
two wholly owned operating subsidiary groups, the Energy Services Group and the
Engineering and Construction Group. As part of this reorganization, we are
separating and consolidating the entities in our Energy Services Group together
as direct and indirect subsidiaries of Halliburton Energy Services, Inc. We are
also separating and consolidating the entities in our Engineering and
Construction Group together as direct and indirect subsidiaries of the former
Dresser Industries Inc., which became a limited liability company during the
quarter and was renamed DII Industries, LLC. The reorganization of business
operations will facilitate the separation, organizationally, financially, and
operationally, of our two business segments, which we believe will significantly
improve operating efficiencies in both, while streamlining management and easing
manpower requirements. In addition, many support functions which were previously
shared were moved into the two business groups. As a result, we took actions in
the first and second quarter of 2002 to reduce our cost structure by reducing
personnel, moving previously shared support functions into the two business
groups and realigning ownership of international subsidiaries by group. In the
2002 second quarter, we incurred approximately $56 million, for a total of $67
million for the year, of personnel reduction costs and asset related write-offs.
Of this amount, $15 million remains in accruals for severance arrangements. We
expect these remaining payments will be made during the second half of 2002.
Reorganization charges for the year consisted of $44 million in personnel
related expense, $13 million of asset related write-downs, $7 million in
professional fees related to the restructuring, and $3 million related to
contract terminations. Although we have no specific plans currently, the
reorganization would facilitate separation of the ownership of the two
businesses in the future if we identify an opportunity that produces greater
value for our shareholders than continuing to own both businesses.
Note 14. Impairment of Equity Investment
On July 22, 2002, we signed a letter of intent to sell our 50% interest
in the Bredero-Shaw joint venture to our partner, ShawCor Ltd. (SCL.A/TSE). The
purchase price of $150 million will be paid $50 million in cash and $100 million
in stock and notes. The transaction is subject to approval by each of our Boards
of Directors, execution of definitive agreements, and regulatory approvals.
During the second quarter of 2002 we recorded a pretax charge of $61 million, or
$0.14 per diluted share after-tax in our Energy Services Group, to reflect the
impairment of our investment in Bredero-Shaw as a result of the pending
transaction.
21
Note 15. Long-Term Debt and Financial Instruments
On June 26, 2002 we terminated our interest rate swap agreement on our
8% senior note. The notional amount of the swap agreement was $139 million. This
interest rate swap was designated as a fair value hedge under SFAS No. 133. Upon
termination, the fair value of the interest rate swap was $0.5 million, and
had previously been classified in Other assets on the balance sheet. The fair
value adjustment to the debt instrument that was hedged will remain and be
amortized as a reduction in interest expense using the "Effective Yield Method"
over the remaining life of the note.
Note 16. DII Industries, LLC Financial Information
Dresser Industries, Inc. was converted into a Delaware limited
liability company during the second quarter of 2002 and its name was changed
to DII Industries, LLC. Since becoming a wholly owned subsidiary, DII
Industries, LLC has ceased filing periodic reports with the Securities and
Exchange Commission. DII Industries, LLC's 8% guaranteed senior notes, which
were initially issued by Baroid Corporation, remain outstanding and are fully
and unconditionally guaranteed by Halliburton. In January 1999, as part of a
legal reorganization associated with the merger, Halliburton Delaware, Inc.,
our first tier holding company subsidiary, was merged into DII Industries, LLC.
The majority of our operating assets and activities are now included in DII
Industries, LLC and its subsidiaries. In August 2000, the Securities and
Exchange Commission released revised rules governing the financial statements of
guarantors and issuers of guaranteed registered securities. The following
condensed consolidating financial information presents Halliburton and our
subsidiaries on a stand-alone basis using the equity method of accounting
for our interest in our subsidiaries.
22
Condensed Consolidating Statements of Income
Quarter ended June 30, 2002
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,235 $(483) $ (487) $ 970 $ 3,235
Cost of revenues (3,543) - - (3,543)
General and administrative (97) - - - (97)
Interest expense (10) (8) (12) (30)
Interest income 11 4 15 (18) 12
Other, net (4) (3) - - (7)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest (408) (490) (484) 952 (430)
Provision for income taxes 70 3 4 - 77
Minority interest in net income of
subsidiaries (5) - - - (5)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations (343) (487) (480) 952 (358)
Income from discontinued operations (140) - - - (140)
-----------------------------------------------------------------------------------------------------------------------
Net income $ (483) $(487) $ (480) $ 952 $ (498)
=======================================================================================================================
Condensed Consolidating Statements of Income
Quarter ended June 30, 2001
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,339 $ 170 $ 525 $ (695) $ 3,339
Cost of revenues (2,966) - - - (2,966)
General and administrative (101) - - - (101)
Interest expense (16) (8) (10) - (34)
Interest income 5 3 29 (31) 6
Other, net 10 125 (17) (119) (1)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 271 290 527 (845) 243
Provision for income taxes (99) (4) 5 - (98)
Minority interest in net income of
subsidiaries (2) - - - (2)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 170 286 532 (845) 143
Income from discontinued operations - 239 - - 239
-----------------------------------------------------------------------------------------------------------------------
Net income $ 170 $ 525 $ 532 $ (845) $ 382
=======================================================================================================================
23
Condensed Consolidating Statements of Income
Six Months ended June 30, 2002
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 6,242 $ (447) $ (457) $ 904 $ 6,242
Cost of revenues (6,374) - - - (6,374)
General and administrative (150) - - - (150)
Interest expense (22) (16) (24) - (62)
Interest income 15 4 28 (31) 16
Other, net (8) (3) - - (11)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes, minority interest and
accounting change (297) (462) (453) 873 (339)
Provision for income taxes 28 5 8 - 41
Minority interest in net income of
subsidiaries (10) - - - (10)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before accounting change (279) (457) (445) 873 (308)
Income from discontinued operations (168) - - - (168)
Cumulative effect of accounting change, - - - - -
net
-------------------------------------------------------------------------------------------------------------------------
Net income $ (447) $ (457) $ (445) $ 873 $ (476)
=========================================================================================================================
Condensed Consolidating Statements of Income
Six Months ended June 30, 2001
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 6,483 $ 306 $ 673 $ (979) $ 6,483
Cost of revenues (5,821) - - - (5,821)
General and administrative (192) - - - (192)
Interest expense (21) (17) (44) 1 (81)
Interest income 9 6 29 (34) 10
Other, net (1) 146 (4) (145) (4)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority interest 457 441 654 (1,157) 395
Provision for income taxes (167) (7) 15 - (159)
Minority interest in net income of
subsidiaries (7) - - - (7)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before accounting change 283 434 669 (1,157) 229
Income from discontinued operations 22 239 - - 261
Cumulative effect of accounting change, 1 - - - 1
net
-------------------------------------------------------------------------------------------------------------------------
Net income $ 306 $ 673 $ 669 $(1,157) $ 491
=========================================================================================================================
24
Condensed Consolidating Balance Sheets
June 30, 2002
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 232 $ - $ 151 $ - $ 383
Receivables:
Notes and accounts receivable, net 2,604 2 - - 2,606
Unbilled work on uncompleted contracts 999 - 1 - 1,000
-----------------------------------------------------------------------------------------------------------------------
Total receivables 3,603 2 1 - 3,606
Inventories 808 - - - 808
Other current assets 366 1 12 - 379
-----------------------------------------------------------------------------------------------------------------------
Total current assets 5,009 3 164 - 5,176
Property, plant and equipment, net 2,692 - - - 2,692
Equity in and advances to
unconsolidated affiliates 568 - - - 568
Intercompany receivable from
consolidated affiliates - - 1,983 (1,983) -
Equity in and advances to
consolidated affiliates - 5,657 3,614 (9,271) -
Goodwill, net 641 84 - - 725
Insurance for asbestos litigation claims 1,594 - - - 1,594
Other assets 1,178 29 25 - 1,232
-----------------------------------------------------------------------------------------------------------------------
Total assets $ 11,682 $ 5,773 $ 5,786 $(11,254) $11,987
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 1,192 $ 154 $ 75 $ - $ 1,421
Other current liabilities 1,511 13 42 - 1,566
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,703 167 117 - 2,987
Long-term debt 206 300 758 - 1,264
Intercompany payable to
consolidated affiliates 31 1,682 - (1,713) -
Asbestos litigation claims 2,196 - - - 2,196
Other liabilities 1,127 10 97 - 1,234
Minority interest in consolidated
subsidiaries 51 - - - 51
-----------------------------------------------------------------------------------------------------------------------
Total liabilities 6,314 2,159 972 (1,713) 7,732
Shareholders' equity:
Common shares 175 - 1,141 (175) 1,141
Other shareholders' equity 5,193 3,614 3,673 (9,366) 3,114
-----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,368 3,614 4,814 (9,541) 4,255
-----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,682 $ 5,773 $ 5,786 $(11,254) $11,987
=======================================================================================================================
25
Condensed Consolidating Balance Sheets
December 31, 2001
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 213 $ - $ 77 $ - $ 290
Receivables:
Notes and accounts receivable, net 3,002 13 - - 3,015
Unbilled work on uncompleted contracts 1,080 - - - 1,080
-----------------------------------------------------------------------------------------------------------------------
Total receivables 4,082 13 - - 4,095
Inventories 787 - - - 787
Other current assets 323 71 7 - 401
-----------------------------------------------------------------------------------------------------------------------
Total current assets 5,405 84 84 - 5,573
Property, plant and equipment, net 2,669 - - - 2,669
Equity in and advances to
unconsolidated affiliates 551 - - - 551
Intercompany receivable from
consolidated affiliates 198 - 1,805 (2,003) -
Equity in and advances to
consolidated affiliates - 6,583 4,409 (10,992) -
Goodwill, net 636 84 - - 720
Insurance for asbestos litigation claims 612 - - - 612
Other assets 793 27 21 - 841
-----------------------------------------------------------------------------------------------------------------------
Total assets $ 10,864 $ 6,778 $ 6,319 $(12,995) $10,966
=======================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable $ 808 $ 129 $ 105 $ - $ 1,042
Other current liabilities 1,791 20 55 - 1,866
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,599 149 160 - 2,908
Long-term debt 211 439 753 - 1,403
Intercompany payable to
consolidated affiliates - 1,765 - (1,765) -
Asbestos litigation claims 737 - - - 737
Other liabilities 1,016 16 93 - 1,125
Minority interest in consolidated
subsidiaries 41 - - - 41
-----------------------------------------------------------------------------------------------------------------------
Total liabilities 4,604 2,369 1,006 (1,765) 6,214
Shareholders' equity:
Common shares 175 - 1,138 (175) 1,138
Other shareholders' equity 6,085 4,409 4,175 (11,055) 3,614
-----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,260 4,409 5,313 (11,230) 4,752
-----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,864 $ 6,778 $ 6,319 $(12,995) $10,966
=======================================================================================================================
26
Condensed Consolidating Statements of Cash Flows
Six Months ended June 30, 2002
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 607 $ (15) $ 28 $ - $ 620
Capital expenditures (404) - - - (404)
Sales of property, plant and equipment 54 - - - 54
Other investing activities (64) - 192 (192) (64)
Payments on long-term borrowings (4) - - - (4)
Borrowings (repayments) of
short-term debt, net 39 - (25) - 14
Payments of dividends to shareholders - - (109) - (109)
Proceeds from exercises of stock options - - - - -
Payments to reacquire common stock - - (2) - (2)
Other financing activities (197) 15 (10) 192 -
Effect of exchange rate on cash (12) - - - (12)
Net cash flows from discontinued
operations - - - - -
------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents $ 19 $ - $ 74 $ - $ 93
========================================================================================================================
Condensed Consolidating Statements of Cash Flows
Six Months ended June 30, 2001
DII
Non-issuer/ Industries, Halliburton Consolidated
Non-guarantor LLC Company Consolidating Halliburton
Millions of dollars Subsidiaries (Issuer) (Guarantor) Adjustments Company
-----------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 251 $ 46 $ 47 $ - $ 344
Capital expenditures (344) - - - (344)
Sales of property, plant and equipment 39 - - - 39
Other investing activities (147) - 1,032 (1,032) (147)
Payments on long-term borrowings (4) (5) - - (9)
Borrowings (repayments) of
short-term debt, net (18) - (836) - (854)
Payments of dividends to shareholders - - (107) - (107)
Proceeds from exercises of stock options - - 24 - 24
Payments to reacquire common stock - - (8) - (8)
Other financing activities 185 (1,220) - 1,032 (3)
Effect of exchange rate on cash (12) - - - (12)
Net cash flows from discontinued
operations - 1,174 - - 1,174
-----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents $ (50) $ (5) $ 152 $ - $ 97
=======================================================================================================================
27
During the second quarter 2002, we identified an error contained in the
information set forth in the December 31, 2001 Condensed Consolidating Balance
Sheets which were previously disclosed in our periodic reports filed with the
SEC. The error has been corrected in the December 31, 2001 Condensed
Consolidating Balance Sheets presented in this footnote. The line items and
amounts as originally reported and as corrected are as follows:
Non-issuer/ Halliburton
Asset (Liability) Non-guarantor DII Industries, LLC Company
Subsidiaries (Issuer) (Guarantor)
-------------------------------------------------------------------------------------------------------
Originally Corrected Originally Corrected Originally Corrected
Reported Amounts Reported Amounts Reported Amounts
-------------------------------------------------------------------------------------------------------
Intercompany receivable
from consolidated affiliates $ 0 $ 198 $ 0 $ 0 $2,854 $ 1,805
-------------------------------------------------------------------------------------------------------
Intercompany payable to
consolidated affiliates (1,089) 0 (1,765) (1,765) 0 0
-------------------------------------------------------------------------------------------------------
Equity in and advances to
consolidated affiliates 0 0 5,296 6,583 3,122 4,409
-------------------------------------------------------------------------------------------------------
Other shareholders' equity (4,798) (6,085) (3,122) (4,409) (3,937) (4,175)
-------------------------------------------------------------------------------------------------------
Net (5,887) (5,887) 409 409 2,039 2,039
-------------------------------------------------------------------------------------------------------
The error had no impact on the information in the Condensed
Consolidating Statements of Income or the Condensed Consolidating Statements of
Cash Flow for the year ending December 31, 2001. The error also had no impact on
the Condensed Consolidated Financial Statements of Halliburton Company or any
other footnote disclosures.
28
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;
- results of our quarterly and year-to-date operating results;
- factors that impacted our cash flows and our liquidity; and
- other items that materially affect our financial condition or
earnings.
BUSINESS ENVIRONMENT
Our business is organized around two business segments:
- Energy Services Group; and
- Engineering and Construction Group.
The results of Dresser Equipment Group are reported as discontinued
operations through March 31, 2001.
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 large integrated
oil and gas companies as well as national oil 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 and processing.
The industries we serve are highly competitive with many substantial
competitors within each segment. No country other than the United States or the
United Kingdom accounts for more than 10% of our operations. Unsettled political
conditions, acts of terrorism, expropriation or other governmental actions,
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 loss of business in any one country would be
material to our consolidated results of operations.
Halliburton Company
Activity levels within our two business segments are significantly
impacted by the spending of large integrated oil and gas companies and national
oil companies on exploration, development, and production programs, capital
expenditures for refining and processing facilities and the level of government
spending. Also impacting our activity is the status of the global economy, which
indirectly impacts oil and gas consumption, demand for petrochemical and
investment in infrastructure projects. High levels of worldwide drilling
activity, particularly in the United States for gas drilling, occurred in the
first half of 2001, but began to decline in the latter part of that year. The
decline was partially due to general business conditions caused by global
economic unrest and uncertainty which was accelerated by the terrorist attacks
on September 11, 2001. The energy industry in the United States was further
impacted by consecutive unseasonably warm winters in 2000 and 2001 which caused
higher than normal gas storage levels and resultant excess supply as previously
reported by the American Gas Association and currently by the Energy Information
Administration. The increased gas storage levels contributed to the declining
natural gas prices during the second half of 2001 and reduced spending on gas
drilling activities. Quarterly average natural gas prices (Henry Hub - expressed
in United States dollars per MCF) decreased from $4.48 in the 2001 second
quarter, to $2.47 in the 2002 first quarter, then increased to $3.40 during the
2002 second quarter. We expect that the current surplus of gas in storage will
keep downward pressure on natural gas prices until well into the winter heating
season. We expect natural gas prices to decline during the third quarter and
then to firm up as we move into the peak winter demand season in the 2002 fourth
quarter and 2003 first quarter assuming an average or colder than average
winter.
During the 2002 second quarter and despite weak demand, crude oil
prices (West Texas Intermediate - expressed in U.S. dollars per barrel) remained
above anticipated levels of less than $20.00 per barrel, due to actions to
control production by OPEC. Quarterly average oil prices decreased from $27.93
in the 2001 second quarter, to $21.36 in the 2002 first quarter, and increased
to $25.75 during the 2002 second quarter. For the remainder of 2002, oil prices
are expected to remain at current levels, but may be volatile due to the
political tension in the Middle East, the ability of OPEC to manage member OPEC
country production quota levels, and increased production by non-OPEC countries,
namely, Norway, Russia and the former Soviet Union countries of the Commonwealth
of Independent States.
29
Energy Services Group
Lower natural gas and crude oil drilling activity since the 2001 third
quarter resulted in decreased demand for the services and products provided by
the Energy Services Group. The quarterly average worldwide rig count based on
published rig count information, decreased from 2,240 in the 2001 second
quarter, to 1,932 in the 2002 first quarter, and further decreased to 1,678
during the 2002 second quarter. These rig count decreases were attributable
primarily to North America due to lower gas prices brought on by decreased gas
drilling demand resulting from a weaker United States economy and higher than
normal levels of gas in storage due to an unseasonably warmer winter. The
Canadian rig count averaged 147 during the 2002 second quarter compared to 252
in the 2001 second quarter and 383 in the 2002 first quarter. The decrease was a
result of a longer than normal spring thaw season preventing drilling activity.
The international rig count was relatively flat for the comparable periods. The
rig count for the remainder of this year will be predicated on oil and gas
prices and demand which will be driven by the United States and world economies
and in particular gas demand and gas available in underground storage in the
United States to meet winter seasonal requirements.
In addition, the decreased rig activity in the United States has
increased pressure on the oilfield services product service lines to discount
prices. The price increases we implemented last year and our efforts to manage
costs in particular through our 2002 restructuring efforts should partially
offset the impacts of lower activity levels and additional discounting. As
predicted, our pressure pumping product service line has been significantly
impacted by the current economic slowdown due to its dependence on United States
gas drilling. Deepwater activity has not been as adversely impacted as land
activity by the downturn in the industry, due to the level of investment and the
long term nature of contracts. Our drilling systems product service line, which
has a large percentage of its business outside the United States and is heavily
involved in deepwater oil and gas exploration and development drilling and
longer term contracts, has remained strong despite the overall decline in the
energy industry.
Drilling activity in the United States and Canada is expected to
gradually improve in the second half of the year as compared to the first half
of the year. International drilling activity during the second half of 2002 is
expected to be flat to down slightly. In the longer term, we expect increased
global demand for oil and natural gas products, additional customer spending to
replace depleting reserves and our continued technological advances to provide
growth opportunities for us.
Engineering and Construction Group
Our engineering and construction projects are longer term in nature and
are not as impacted by short-term fluctuations in oil and gas prices. The global
economic slowdown continued through the first half of 2002, however, we may see
a turnaround during the second half of 2002. Manufacturing activity has recently
improved and has led to increased demand for ethylene and for other
petrochemical products. However, project awards will continue to be delayed or
their scope reduced due to excess capacity in petrochemical supplies. A number
of large-scale gas and liquefied natural gas, gas-to-liquids, government and
infrastructure projects are being awarded or actively considered. Growth
opportunities also exist to provide additional security and defense support to
government agencies in the United States and other countries. Demands for these
services are expected to grow as governmental agencies seek to control costs and
efficiencies by outsourcing these functions and due to new demands created by
increased efforts to combat terrorism.
After careful consideration, we have decided to no longer pursue lump
sum engineering, procurement, installation and commissioning (EPIC) contracts
for the offshore oil and gas industry. An important aspect of our reorganization
process was to look closely at each of our businesses to insure that they are
self-sufficient including their use of capital and liquidity. In that process,
we found that the EPIC 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 EPIC offshore projects
underway and we are fully committed to successful completion of these projects,
most of which are substantially complete. We plan to retain our excellent
offshore engineering and services capabilities.
30
Backlog
Our total backlog at June 30, 2002, was $9.8 billion, comprised of $9.4
billion for the Engineering and Construction Group and $0.4 billion for the
Energy Services Group. As a result of the 2002 corporate reorganization and
movement of our Major Projects, Production Services and Granherne businesses to
the Engineering and Construction Group from the Energy Services Group,
approximately $1.7 billion of backlog is now reported under the Engineering and
Construction Group that was previously reported under the Energy Services Group.
Reorganization of Business Operations
Based on our review, we announced plans to restructure our businesses
into two wholly owned operating subsidiary groups, the Energy Services Group and
the Engineering and Construction Group. As part of this reorganization, we are
separating and consolidating the entities in our Energy Services Group together
as direct and indirect subsidiaries of Halliburton Energy Services, Inc. We are
also separating and consolidating the entities in our Engineering and
Construction Group together as direct and indirect subsidiaries of the former
Dresser Industries Inc., which became a limited liability company during the
quarter and was renamed DII Industries, LLC. The reorganization of business
operations will facilitate the separation, organizationally, financially, and
operationally, of our two business segments, which we believe will significantly
improve operating efficiencies in both, while streamlining management and easing
manpower requirements. In addition, many support functions which were previously
shared were moved into the two business groups. Although we have no specific
plans currently, the reorganization would facilitate separation of the ownership
of the two businesses in the future if we identify an opportunity that produces
greater value for our shareholders than continuing to own both businesses.
The corporate reorganization is largely complete and is expected to be
concluded by the end of the year. In the second quarter of 2002 we have incurred
pretax restructuring charges of $56 million, which brings the year-to-date
restructuring cost to $67 million. The year-to-date charges include $44 million
in personnel related costs, $13 million in asset write-downs, $7 million in
professional fees related to the restructuring and $3 million in contract
terminations. We expect to incur additional charges in the second half of this
year totaling approximately $20 million. We anticipate that the cost savings
will increase so that in 2003 they will result in annualized cost savings of
$200 million compared to costs prior to the corporate reorganization.
As a part of the reorganization, we decided that the operations of
Major Projects, Granherne and Production Services were best managed by KBR in
the current business environment and these businesses were moved from the Energy
Services Group to the Engineering and Construction Group during the second
quarter. 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 product line,
Granherne is now reported in the Onshore product line and Production Services is
now reported under the Operations and Maintenance product line.
Asbestos
During the quarter, we received an asbestos econometric report from
Hamilton, Rabinovitz & Alschuler, Inc. Based upon this report we accrued an
additional asbestos pretax charge of $483 million and increased our net asbestos
liability to $602 million. Of this pretax charge, $330 million was recorded
under the Engineering and Construction Group segment and $153 million was
recorded as discontinued operations. At June 30, 2002 our gross liability for
asbestos litigation claims increased by $1.5 billion to $2.2 billion, and
estimated insurance recoveries increased by $1 billion to a total of $1.6
billion. These amounts include a reserve for estimated incurred but not reported
claims to be filed through 2017, as well as all existing claims. See Note 8.
RESULTS OF OPERATIONS IN 2002 COMPARED TO 2001
Second Quarter of 2002 Compared with the Second Quarter of 2001
Second Quarter
REVENUES ----------------------- Increase
Millions of dollars 2002 2001 (decrease)
----------------------------------------------------------------------------------
Energy Services Group $ 1,756 $ 2,008 $ (252)
Engineering and Construction Group 1,479 1,331 148
----------------------------------------------------------------------------------
Total revenues $ 3,235 $ 3,339 $ (104)
==================================================================================
31
Consolidated revenues in the 2002 second quarter of $3.2 billion
decreased $104 million compared to the 2001 second quarter. International
revenues were 67% of total revenues for the 2002 second quarter and 60% in the
2001 second quarter, highlighting the reduction in business levels in the United
States.
Energy Services Group revenues were $1.8 billion for the 2002 second
quarter, a decrease of 13% from the 2001 second quarter. International revenues
were 60% of total revenues in the 2002 second quarter compared to 52% in the
2001 second quarter due to decreased United States drilling activity. Our
oilfield services product service line revenues of over $1.5 billion in the 2002
second quarter declined 13% from the 2001 second quarter, primarily due to
reduced rig activity, particularly in the United States, and increased
discounts. Revenues from logging, completion products, drilling fluids and drill
bit product service lines declined between 10% and 13% in the 2002 second
quarter from the 2001 second quarter. Pressure pumping revenues were down about
18% from the same period. Drilling systems revenues increased 2% in the 2002
second quarter as compared to the 2001 second quarter due to introduction of new
technologies and increased capacity. International revenues were slightly higher
in the 2002 second quarter, with a 3% increase over the 2001 second quarter.
Geographically, oilfield services North America revenues decreased 29%,
reflecting market conditions and weak rig activity in the United States and
Canada. Europe/Africa revenues increased 8%. Asia Pacific revenues increased
almost 21%. Middle East revenues were up over 12%. Revenues were 4% lower in
Latin America due to political instability and an oil workers strike in
Venezuela, and the impact of the Argentina economic crisis.
Revenues for the balance of the segment decreased $26 million for the
2002 second quarter as compared to the 2001 second quarter, primarily due to the
formation of Subsea 7 on May 23, 2002. We are accounting for our 50% ownership
interest in Subsea 7 on the equity method of accounting versus full
consolidation of the Halliburton Subsea revenue in the 2001 second quarter. Had
it not been for the change in accounting method in connection with the
transaction, revenues for the balance of the segment would have increased
slightly for the 2002 second quarter. Integrated exploration and production
information systems revenues experienced growth of 7%, primarily due to
increased professional services as a result of the Magic Earth acquisition.
Engineering and Construction Group revenues of $1.5 billion in the 2002
second quarter were 11% higher than the 2001 second quarter. Revenue in our
offshore operations increased 49% in the 2002 second quarter versus the 2001
second quarter, primarily due to progress on a major project in Latin America
during 2002. In addition, we had a 10% increase in onshore operations due to the
progress on several large projects. Infrastructure revenue increased 8%
primarily due to additional revenue from an Australian rail line project which
started during second quarter of 2001. Government operations revenue declined 9%
in the 2002 second quarter as compared to the 2001 second quarter, as the
logistical support contract in the Balkans experienced lower task order volumes.
Operations and maintenance revenue declined 5% due to decreased domestic
maintenance revenues. International revenues were 76% for the second quarter of
2002 and 73% for the second quarter of 2001. Revenue increased in all geographic
regions with the largest increase in Latin America due to progress on a major
project.
Second Quarter
OPERATING INCOME -------------------------- Increase
Millions of dollars 2002 2001 (decrease)
-------------------------------------------------------------------------------------
Energy Services Group $ 70 $ 268 $ (198)
Engineering and Construction Group (450) 21 (471)
General corporate (25) (17) (8)
-------------------------------------------------------------------------------------
Total operating income $ (405) $ 272 $ (677)
=====================================================================================
We had a consolidated operating loss of $405 million in the 2002 second
quarter compared to $272 million of operating income in the 2001 second quarter.
In the 2002 second quarter, we incurred certain charges, which included:
- $56 million in pretax expense related to restructuring charges, of
which $37 million related to the Energy Services Group, $10
million related to the Engineering and Construction Group and $9
million related to General corporate;
- $119 million pretax loss in the Engineering and Construction Group
on a lump sum fixed price offshore EPIC project in Brazil;
32
- $330 million pretax loss in the Engineering and Construction Group
related to asbestos exposures; and
- $61 million pretax loss in the Energy Services Group on the
impairment of our 50% equity investment in the Bredero-Shaw joint
venture.
In the 2001 second quarter, we incurred $12 million in goodwill
amortization of which $7 million related to the Energy Services Group and $5
million related to the Engineering and Construction Group.
Energy Services Group operating income for the 2002 second quarter
decreased $198 million, or 74%, from the 2001 second quarter. Excluding the
impairment of our 50% investment in Bredero-Shaw, restructuring charges, and
goodwill amortized in the second quarter of 2001, operating income decreased by
39%. The results were significantly impacted by the slower United States
economy, lower gas drilling activity primarily in the United States onshore
operations and increased discount rates for our services in the United States.
Operating income for our oilfield services product service line decreased 52%
for the 2002 second quarter as compared to the 2001 second quarter. Excluding
the noted items, the decline was approximately 41%. Operating income for the
pressure pumping product service line declined by approximately 37%, logging by
50%, and drilling fluids decreased by just under 41% in the 2002 second quarter,
as compared to the 2001 second quarter. Our drilling systems product line
continue to do well with a 10% increase in operating income due mainly to the
new SlickBore (TM) and Geo-Pilot (TM) tools. Geographically, all international
regions experienced significant improvements except for Asia Pacific, with the
largest increase in the Middle East. Increased activity in the Middle East
contributed to higher operating income for the pressure pumping, drilling
systems, logging and drilling bit product service lines for that region. Middle
East pressure pumping operating income nearly tripled due to this increased
activity while drilling systems was up 50%. Operating income in Latin America
benefited from retroactive price adjustments in Brazil and Argentina totaling
$10 million. Asia Pacific operating income declined primarily related to a $27
million loss on an integrated solutions project in Indonesia and the impact of
mobilization of equipment and start-up costs on a project on Sakhalin Island.
Excluding the impairment of our 50% interest in the Bredero-Shaw joint
venture, 2002 restructuring charges and goodwill amortization in the 2001 second
quarter, operating income for the remainder of the segment increased about $4
million. Increased income at integrated exploration and product information
systems and Bredero-Shaw offset lower results within Subsea and the impact of
selling EMC earlier this year.
Engineering and Construction Group operating income decreased $471
million, from the 2001 second quarter to the 2002 second quarter. Operating
income declined $17 million, excluding the impact of the 2002 restructuring
costs, the loss on a major Brazilian project, accrued liabilities associated
with asbestos exposure, and goodwill amortization in the 2001 second quarter.
This decline occurred primarily in offshore operations where operating income
decreased due to a loss on a project in the Philippines of $17 million. As we
noted above, we have recorded a $119 million job loss related to a major
Brazilian project. In calculating the loss to accrue on this job, we used $101
million in unapproved claims as we believe collection of those claims is
probable. This compares to $66 million in unapproved claims used in the 2002
first quarter calculation for this project. In addition, we used $92 million in
unapproved claims in calculating the accrued loss on other jobs in the second
quarter 2002 and $134 million in unapproved claims used for the accrued loss
calculation for several projects in the second quarter 2001. Operating income
in onshore operations declined due to several jobs being at or near their
completion stages. These decreases were partially offset by higher operating
income in government operations, infrastructure and operations and maintenance.
General corporate expenses for the 2002 second quarter were $25 million
compared to $17 million for the 2001 second quarter. Excluding 2002
restructuring costs, general corporate expenses were $16 million or a decrease
of 6% compared to the 2001 second quarter.
NONOPERATING ITEMS
Interest expense of $30 million for the 2002 second quarter, decreased
$4 million compared to the 2001 second quarter. The decrease is due to lower
average borrowings in 2002.
Interest income was $12 million in the second quarter of 2002 and $6
million in the second quarter of 2001. The increased interest income is for
interest on a note receivable from a customer which had been deferred until
collection.
33
Foreign exchange losses, net were $5 million in the current year
quarter compared to $1 million in the second quarter of last year. The increase
is due to the continuing economic and financial crisis in Argentina.
Other, net had a $2 million loss in the 2002 second quarter related to
financing activities.
Benefit for income taxes of $77 million in the 2002 second quarter
resulted in an effective tax benefit of 18%, versus a provision for income
taxes in the 2001 second quarter rate of 40%. Excluding the impact of the
impairment loss on Bredero-Shaw and charges associated with our asbestos
exposure, our effective tax benefit was 39%. The asbestos accrual generates a
United States Federal deferred tax asset which may not be fully realizable based
upon future taxable income projections and thus we have recorded a partial
valuation allowance. The Bredero-Shaw loss created a capital loss for which we
have no capital gains to offset and therefore no tax benefit was booked for the
loss as future realization of the benefit was questionable.
Loss from continuing operations was $358 million in the 2002 second
quarter, compared to income from continuing operations of $143 million in the
2001 second quarter.
Income (loss) from discontinued operations was a $159 million pretax
loss, $140 million after-tax or $0.32 per diluted share, for the 2002 second
quarter compared to a pretax loss of $92 million, $60 million after-tax or $0.14
per diluted share, for the 2001 second quarter. The loss in 2002 was due
primarily to charges of $153 million pretax, $123 million after-tax booked on
asbestos exposures. We also recorded pretax expense of $6 million associated
with the Harbison-Walker bankruptcy filing. In addition, based upon the impact
of certain second quarter items, we adjusted our 2002 estimated effective tax
rate for discontinued operations by recording an $11 million tax provision in
the second quarter of 2002. The loss in 2001 was due to asbestos exposures
primarily from Harbison-Walker.
Net loss for the 2002 second quarter was $498 million, or $1.15 per
diluted share. Net income was $382 million, or $0.89 per diluted share for the
2001 second quarter.
First Six Months of 2002 Compared with the First Six Months of 2001
First Six Months
REVENUES -------------------------- Increase
Millions of dollars 2002 2001 (decrease)
----------------------------------------------------------------------------------------------
Energy Services Group $ 3,445 $ 3,800 $ (355)
Engineering and Construction Group 2,797 2,683 114
----------------------------------------------------------------------------------------------
Total revenues $ 6,242 $ 6,483 $ (241)
==============================================================================================
Consolidated revenues in the first six months of 2002 of $6.2 billion
decreased 4% compared to the first six months of 2001. International revenues
were 67% of total revenues for the first half of 2002 and 61% in the first half
of 2001 as activity levels remained more stable internationally versus in the
United States where rig activity declined putting pressure on pricing and
discounting.
Energy Services Group revenues were lower by $355 million in the first
half of 2002, a decrease of 9% from the first half of 2001. International
revenues were 60% of total revenues for the first six months of 2002 as compared
to 52% for the first six months of 2001. Revenues decreased primarily in North
America as well as a slight decrease in Latin America, while Europe/Africa,
Middle East and Asia Pacific had increases between 8% and 14% as compared to the
first six months of 2001. Revenues from our oilfield services product service
lines were $3.0 billion for the first six months of 2002 compared to $3.4
billion for the first six months of 2001. Our pressure pumping business
experienced a year-over-year decline of 13% while other businesses within the
oilfield services product service lines had decreased revenues of 8% to 10%
except for drilling systems which increased by 8%. The decline in revenue is
attributable to lower levels of activity primarily in North America, which also
put pressure on pricing and discounting of work in the United States.
Geographically, our oilfield services product service lines declined 25% in
North America due to lower rig activity and 3% in Latin America primarily in
Argentina due to currency devaluation and in Venezuela due to lower activity
brought on by uncertain market conditions. Offsetting these declines were
increased revenues in Europe/Africa, Middle East and Asia Pacific primarily in
Russia, the Commonwealth of Independent States, West Africa, Saudi Arabia,
Egypt, Indonesia and China. Revenues for the remainder of the segment decreased
$48 million year-over-year primarily in our Surface/Subsea business reflecting
lower vessel utilization and a change in accounting for an unconsolidated
investment. On May 23, 2002 Halliburton Subsea and DSND Subsea ASA concluded the
formation of Subsea 7 with Halliburton accounting for their 50% ownership
interest prospectively on the equity method of accounting versus full
consolidation of the results of operations in the first half of 2001. This was
34
partially offset by a 10% increase in revenues in integrated exploration and
production information systems compared to the first half of 2001.
Engineering and Construction Group revenues increased $114 million, or
4%, in the first six months of 2002 compared to the first six months of 2001.
Year-over-year revenues were 5% lower in North America while increasing 7%
outside North America. The increase in all other regions is mainly attributable
to a large offshore project in Brazil attaining 43% completion and increased
offshore engineering activity. Infrastructure revenues were higher by 11% due to
increased progress on the Alice Springs to Darwin Rail Line project in
Australia. Government operations product line revenues were 5% lower due to the
contract in the Balkans experiencing lower task order volumes. Operations and
maintenance revenue declined 9% primarily due to reduced downstream maintenance
activity.
First Six Months
OPERATING INCOME --------------------------- Increase
Millions of dollars 2002 2001 (decrease)
----------------------------------------------------------------------------------------------
Energy Services Group $ 239 $ 457 $ (218)
Engineering and Construction Group (508) 48 (556)
General corporate (13) (35) 22
----------------------------------------------------------------------------------------------
Total operating income $ (282) $ 470 $ (752)
==============================================================================================
The first half of 2002 resulted in a consolidated operating loss of
$282 million compared to $470 million of operating income in the first half of
2001. In the 2002 first half, we incurred gains and losses, which included:
- $67 million in pretax expense related to restructuring, charges of
which $42 million related to the Energy Services Group, $14
million related to the Engineering and Construction Group and $11
million related to General corporate;
- $119 million pretax loss in the Engineering and Construction Group
on a lump sum fixed price Brazil project;
- $330 million pretax loss in the Engineering and Construction Group
related to asbestos exposures;
- $61 million pretax loss in the Energy Services Group on the
impairment of our 50% equity investment in the Bredero-Shaw joint
venture;
- $108 million pretax gain in the Energy Services Group on the sale
of our 50% interest in European Marine Contractors;
- $98 million pretax expense in the Energy Services Group related to
the judgment in a patent infringement case;
- $80 million pretax write-off of billed and accrued receivables
related to the Highlands Insurance Company litigation in the
Engineering and Construction Group, formerly reported in General
corporate; and
- $28 million pretax gain for the value of stock received from the
demutualization of an insurance provider in General corporate.
In the first half of 2001 we incurred $23 million in goodwill
amortization of which $13 million related to the Energy Services Group and $10
million related to the Engineering and Construction Group.
Energy Services Group operating income for the first half of 2002
declined $218 million, or 48%, as compared to the first half of 2001. Excluding
$61 million impairment of our 50% interest in the Bredero-Shaw joint venture,
$108 million gain on the sale of our interest in European Marine Contractors,
$98 million related to the BJ Services judgment, $42 million in restructuring
charges, and 2001 goodwill amortization, operating income declined 29%.
Operating income in our oilfield services product service line declined $278
million or 60% reflecting lower rig activity primarily in North America.
Pressure pumping operating income decreased 33%, being adversely impacted by
reduced gas drilling in North America. Our logging and drilling fluids product
services lines were also affected by the rig count decline with operating income
declining 61% in logging and 37% in drilling fluids. Offsetting the declines
were significantly improved results in the drilling systems product services
line with operating income increasing 61% in the first half of 2002 compared to
the first half of 2001 benefiting from improved international market activity
and the introduction of our new SlickBore (TM) and Geo-Pilot (TM) tools. Our
completion products and services product service line had a 37% increase in
operating income in the first half of 2002 compared to the first half of 2001.
International oilfield services operating income remained strong despite lower
35
international rig activity. All international regions registered over 40%
increase in operating income except for Asia Pacific. Operating income for the
remainder of the segment increased $60 million. Excluding the impairment of our
50% interest in the Bredero-Shaw joint venture, $108 million gain on the sale of
our interest in European Marine Contractors, $7 million in restructuring
charges, and 2001 second quarter goodwill amortization, operating income for the
remainder of the segment increased $12 million in the first half of 2002
compared to the first half of 2001.
Engineering and Construction Group operating income declined by $556
million compared to the first half of 2001. Excluding the $119 million loss on
unapproved claims for a major project in Latin America, $410 million accrued
expenses related to net asbestos liability, $14 million in restructuring costs,
and goodwill amortization in the 2001 second quarter, operating income declined
$23 million. This decline occurred primarily in Offshore operations where
operating income decreased $33 million due to a loss on a project in the
Philippines. This was partially offset by higher margin technology sales in our
Onshore operations. As we noted above, we have recorded a $119 million job loss
related to a major Brazilian project. In calculating the loss to accrue for
this project, we used $101 million in unapproved claims as we believe collection
of those claims is probable. In addition, we used $92 million in unapproved
claims in calculating the accrued loss on other jobs in 2002 and $134 million
in unapproved claims used for the accrued loss calculation for several projects
in the second quarter of 2001.
General corporate expenses for the first half of 2002 were $13 million
compared to $35 million in the first half of 2001. Excluding restructuring
charges and gain from the value of stock received from demutualization of an
insurance provider, expenses would have been $30 million.
NONOPERATING ITEMS
Interest expense of $62 million for the first six months of 2002
decreased $19 million compared to the first six months of 2001. The decrease is
due to lower average borrowings in 2002, partially offset by the $4 million in
interest related to the patent infringement litigation.
Interest income was $16 million in the first six months of 2002
compared to $10 million in the first six months of 2001. The increased interest
income is for interest on a note receivable from a customer which had been
deferred until collection.
Foreign exchange losses, net were $13 million in the first six months
of 2002 compared to $4 million in the first six months of 2001. The increase is
due to the continuing economic and financial crisis in Argentina.
Other, net of $2 million in the first six months of 2002, includes $3
million pretax gain associated with the increase on the option component of the
European Marine Contractors Ltd. sale.
Benefit for income taxes was $41 million in the first half of 2002
compared to a provision for income taxes of $159 million in the first half of
2001 reflecting an effective tax rate of 12% for the first six months of 2002
compared to 40% for the first six months of 2001. Excluding the impact of
impairment loss on Bredero-Shaw and charges associated with our asbestos
exposure, our effective tax rate was 39%. The asbestos accrual generates a
United States Federal deferred tax asset which may not be fully realizable based
upon future taxable income projections. As a result we have recorded a partial
valuation allowance. The Bredero-Shaw loss created a capital loss for which we
have no capital gains to offset and therefore no tax benefit was booked for the
loss.
Loss from continuing operations was $308 million in the first six
months of 2002 compared to income from continuing operations of $229 million in
the first six months of 2001.
Loss from discontinued operations was $202 million pretax, $168 million
after-tax or $0.39 per diluted share in the first six months of 2002 compared
to a loss of $55 million pretax, $38 million after-tax or $0.09 per diluted
share. The loss in 2002 was due primarily to charges recorded for asbestos
exposures. We also recorded pretax expense of $6 million associated with the
Harbison-Walker bankruptcy filing. In addition, based upon the impact of certain
second quarter items, we adjusted our 2002 estimated effective tax rate for
discontinued operations by recording an $11 million tax provision in the second
quarter of 2002. The net loss for 2001 represents the results of Dresser
Equipment Group through March 31, 2001 and an asbestos accrual primarily related
to Harbison-Walker.
Gain on disposal of discontinued operations of $299 million after-tax,
or $0.70 per diluted share, in 2001 resulted from the sale of our remaining
businesses in the Dresser Equipment Group in April 2001.
36
Cumulative effect of accounting change, net in 2001 of $1 million
reflects the impact of adoption of Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and for Hedging Activities."
After recording the cumulative effect of the change our estimated annual expense
under Financial Accounting Standards No. 133 is not expected to be materially
different from amounts expensed under the prior accounting treatment.
Net loss for the first six months of 2002 was $476 million, or $1.10
per diluted share. Net income for the first six months of 2001 was $491 million,
or $1.14 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
We ended the second quarter of 2002 with cash and equivalents of $383
million, an increase of $93 million from the end of 2001.
Cash flows from operating activities provided $620 million in the first
six months of 2002 compared to $344 million in the first half of 2001. Working
capital items, which include receivables, sales of receivables, inventories,
accounts payable and other working capital, net, provided $333 million of cash
in the first six months of 2002 compared to using $370 million in the same
period of 2001. Included in changes to other operating activities for the first
half of 2002 is a $40 million payment related to the Harbison-Walker bankruptcy
filing. The 2002 change in sales of receivables relates to the sales of $200
million of undivided ownership interest to unaffiliated companies by the funding
subsidiary under the account receivable securitization agreement. See Note 12
for further discussion.
Cash flows from investing activities were $414 million in the first six
months of 2002 and $452 million in the first half of 2001. Capital expenditures
in the first six months of 2002 were $404 million as compared to $344 million
for the first six months of 2001. Capital spending in the first half of 2002
continued to be primarily directed to Halliburton Energy Services, for
fracturing equipment and directional and logging-while-drilling tools. We
invested $60 million in an integrated solutions project. Dispositions of
businesses in the first half of 2002 include $134 million collected from the
sale of our European Marine Contractors Ltd. joint venture. Included in the
change in restricted cash for the first half of 2002 is a $106 million deposit
that collateralizes an appeal bond for a patent infringement judgment on appeal
and $56 million as collateral for potential future insurance claim
reimbursements. Also included in changes in restricted cash is $26 million
primarily related to cash collateral agreements for letters of credit we
currently have outstanding for various construction projects. In the first
quarter the $26 million was included as Other current assets on the balance
sheet and as an operating cash outflow. As the projects are considered long term
in nature and we receive the interest on this cash, we have reclassified this
amount to Other assets on the balance sheet and investing activities on the cash
flow. In March 2001, we acquired PGS Data Management division of Petroleum
Geo-Services ASA for $164 million cash.
Cash flows from financing activities used $101 million in the first six
months of 2002 as compared to $957 million for the first six months of 2001. We
paid dividends of $109 million to our shareholders in the first six months of
2002 compared to $107 million in the first six months of 2001. Proceeds from
exercises of stock options provided cash flows of $24 million in the first
quarter of 2001. With the proceeds from the sale of the Dresser Equipment Group
in April 2001 we repaid our short-term debt in 2001.
Cash flows from discontinued operations provided $1.2 billion in the
first six months of 2001. Discontinued operations cash flows for 2001 include
the proceeds from the sale of the Dresser Equipment Group.
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 27% of
total capitalization at June 30, 2002 and 24% at December 31, 2001. At June 30,
2002, we have $188 million in restricted cash included in Other assets. See Note
5. In addition, on April 15, 2002, we entered into an agreement to sell accounts
receivable to provide additional liquidity. See Note 12.
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. The ratings were lowered due to the
agencies' concerns about asbestos litigation and the general weakening in the
oilfield services sector. 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. Reduced ratings and concerns
about asbestos litigation, along with recent changes in the banking and
37
insurance markets, will also result in higher cost and more limited access to
markets for other credit products including letters of credit and surety bonds.
Investment grade ratings are BBB- or higher for Standard & Poor's and Baa3 or
higher for Moody's Investors' Services. Our current ratings are three levels
above BBB- on Standard & Poor's and one level above Baa3 on Moody's Investors'
Services.
We have $700 million of committed lines of credit from banks that are
available if we maintain an investment grade rating. In August 2002 $350 million
of our $700 million in unused and undrawn bank lines will expire. We do not
expect to replace the expiring bank lines at this time. The remaining $350
million facility expires on August 16, 2006. As of June 30, 2002, no amounts
have been borrowed under these lines.
In the normal course of business, we have agreements with banks under
which approximately $1.3 billion of letters of credit or bank guarantees were
issued, including $220 million which relate to our joint ventures' operations.
Of these financial instruments, $260 million include provisions that allow the
banks to require cash collateralization if our debt ratings fall below the
investment grade ratings of BBB- by Standard & Poor's or Baa3 by Moody's
Investors' Services. If our debt ratings fall below investment grade, we
would also be in technical breach of a bank agreement covering another $127
million of letters of credit at June 30, 2002, which might entitle the bank to
set-off rights. In addition, a $151 million letter of credit line, of which $85
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, three downgrades from our
current rating or Baa2 by Moody's Investors' Services, one downgrade from our
current rating. In the event the ratings of our debt by either agency falls,
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. These letters of credit and bank guarantees 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
these financial instruments. We do not anticipate material losses to occur as a
result of these financial instruments.
Our Halliburton Elective Deferral Plan has a provision 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 June 30, 2002 this was approximately $50 million.
On July 12, 2001 we issued $425 million of two and five year
medium-term notes under our medium-term note program. The notes consist of $275
million of 6% fixed rate notes due August 1, 2006 and $150 million of floating
rate notes due July 16, 2003. Net proceeds from the two medium-term note
offerings were used to reduce short-term debt in 2001. In addition, we have a
$75 million medium-term note due August 2002. Currently we do not expect to
issue new debt to replace the medium-term note.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the use of judgments
and estimates. During the quarter, we reevaluated our critical accounting
policies and related disclosures. Based upon this review and certain changes in
our business, the following critical accounting policies have been updated or
added:
- forecasting our effective tax rate including, our ability to
utilize foreign tax credits and the realizability of deferred tax
assets; and
- loss contingencies, related to asbestos litigation.
This discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and related notes included elsewhere
in this report and our Form 10-K for the year ended December 31, 2001 filed with
the SEC.
Tax Accounting
We account for our income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes", which
requires the recognition of the amount of taxes payable or refundable for the
current year; and an asset and liability approach in recognizing the amount of
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in our financial statements or tax returns. We apply
the following basic principles in accounting for our income taxes at the date of
the financial statements:
- a current tax liability or asset is recognized for the estimated
taxes payable or refundable on tax returns for the current year;
- a deferred tax liability or asset is recognized for the estimated
future tax effects attributable to temporary differences and
carryforwards;
38
- the measurement of current and deferred tax liabilities and assets
is based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated; and
- the value of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are
not expected to be realized.
We determine deferred taxes separately for each tax-paying component
(an entity or a group of entities that is consolidated for tax purposes) in each
tax jurisdiction. That determination includes the following procedures:
- identify the types and amounts of existing temporary differences;
- measure the total deferred tax liability for taxable temporary
differences using the applicable tax rate;
- measure the total deferred tax asset for deductible temporary
differences and operating loss carryforwards using the applicable
tax rate;
- measure the deferred tax assets for each type of tax credit
carryforward; and
- reduce the deferred tax assets by a valuation allowance if, based
on the weight of available evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be
realized due to expiration before we are able to realize their
benefit, or that future deductibility is uncertain.
This methodology requires a significant amount of judgment regarding
assumptions and the use of estimates, which can create significant variances
between actual results and estimates. Examples include the forecasting of our
effective tax rate and the potential realization of deferred tax assets in the
future, such as utilization of foreign tax credits. This process involves making
forecasts of current and future years' United States taxable income, foreign
taxable income and related taxes in order to estimate the foreign tax credits.
Unforeseen events, such as the timing of asbestos settlements, and other tax
timing issues may significantly affect these estimates. These factors can affect
the accuracy of our tax account balances and impact our future reported
earnings.
Loss Contingencies
Asbestos. In the past, we have only provided for known outstanding
claims as we did not have sufficient information to make a reasonable estimate
of future asbestos claims liability. DII Industries, LLC 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-related bodily injury claims asserted against DII Industries, LLC and
its subsidiaries. As a result of Dr. Rabinovitz's analysis, we were able to
accrue not only for known open claims, but also for the projected costs to
resolve asbestos claims through 2017 during the second quarter of 2002. In light
of the uncertainties inherent in making long-term projections, however, although
Dr. Rabinovitz's analysis covers 50 years, we do not believe that we have a
reasonable basis for estimating, under Statement of Financial Accounting
Standard No. 5 "Accounting for Contingencies", or SFAS No. 5, asbestos claims,
defense costs or probable insurance recoveries past 2017.
The methodology utilized by Dr. Rabinovitz to project DII Industries,
LLC's and its subsidiaries' asbestos-related liabilities and defense costs
relied upon and included:
- an analysis of historical asbestos settlements and defense costs;
- an analysis of the pending inventory of asbestos-related;
- an analysis of the claims filing history for asbestos-related
claims since January 1, 2000 (and alternatively since January
1997);
- an analysis of the population likely to have been exposed or claim
exposure to certain products or construction and renovation
projects; and
- epidemiological studies to estimate the number of people who might
allege exposure to products.
Dr. Rabinovitz's projections are based on historical data supplied by
DII Industries, LLC, Kellogg, Brown & Root, Inc. and Harbison-Walker and
publicly available studies, including annual surveys by the National Institutes
of Health concerning the incidence of mesothelioma deaths. In her analysis, Dr.
Rabinovitz projected that the elevated and historically unprecedented rate of
claim filings of the last several years, especially as expressed by the ratio of
nonmalignant claim filings to malignant claim filings, would continue into the
future for 5 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 alternately 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, but we
39
used the more conservative two-year period in establishing reserves for our
probable and reasonably estimable liabilities and defense costs.
Other important assumptions utilized in Dr. Rabinovitz's estimates,
which we relied upon in making our accrual are:
- an assumption that there will be no legislative or other systemic
changes to the tort system;
- that the Company will continue to aggressively defend against
asbestos claims made against the Company; and
- an inflation rate of 3% annually for settlement payments and an
inflation rate of 4% annually for defense costs.
Based upon her analysis, Dr. Rabinovitz estimated DII Industries, LLC's
total, undiscounted asbestos liabilities, including defense costs. Through 2017,
the period during which we believe we have a reasonable basis for estimating
under SFAS No. 5, Dr. Rabinovitz estimated the current and future total
undiscounted liability for asbestos claims, including defense costs would be
$2.2 billion (which includes payments related to the approximately 312,000
claims currently pending).
Using Dr. Rabinovitz's projections, we then conducted 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 through 2017. In
conducting this analysis, we:
- reviewed DII Industries, LLC's historical course of dealings with
its insurance companies concerning the payment of asbestos-related
claims, including DII Industries, LLC's over 15 year litigation
and settlement history;
- reviewed the terms of DII Industries, LLC's prior and current
coverage-in-place settlement agreements;
- reviewed the status of DII Industries, LLC's and Kellogg, Brown &
Root, Inc.'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, LLC's insurers to meet their obligations
through 2017.
Based on that review, analyses and discussions, we made 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 DII Industries, LLC's asbestos
liabilities through 2017. This analysis factored in the probable effects of
self-insurance features, such as self-insured retentions, policy exclusions,
liability caps, current and anticipated insolvencies of DII Industries, LLC's
insurers, and various judicial determinations relevant to DII Industries, LLC's
insurance programs.
Based on Dr. Rabinovitz's projections and our analysis of the probable
insurance recoveries, we established reserves for the probable and reasonably
estimable liabilities and defense costs we believe we will pay through 2017 of
$2.2 billion, and we have also recorded receivables for the insurance recoveries
that are deemed probable through that same date of $1.6 billion.
The insurance receivables we have recorded do not assume any recovery
from insolvent insurers or from any state insurance guaranty association and
assume that all but one of our insurance companies that are currently solvent
will remain solvent through 2017. However, there can be no assurances that these
assumptions will be correct. The insurance receivables do not exhaust DII
Industries, LLC's insurance coverage for asbestos-related liabilities and we
believe that DII Industries, LLC has significant insurance coverage available to
it for asbestos-related liabilities that it may incur after 2017.
Projecting future events, such as the number of future asbestos-related
lawsuits to be filed against DII Industries, LLC and Kellogg, Brown & Root,
Inc., 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 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.
40
Given the inherent uncertainty in making future projections, we plan to
have the projections periodically reexamined, and update them based on our
experience and other relevant factors such as changes in the tort system and the
resolution of the bankruptcies of various asbestos defendants. 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, LLC's and Kellogg, Brown & Root, Inc.'s various lawsuits against its
insurance companies and other developments that may impact the probable
insurance recoveries.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory
requirements related to our operations worldwide. As a result of those
obligations, we are involved in environmental litigation and claims, the
clean-up of properties we own or have operated, and efforts to meet or correct
compliance-related matters.
ACCOUNTING CHANGES
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. The new standard will be effective for us beginning January 1, 2003, and
we are currently reviewing and evaluating the effects this standard will have on
our future financial condition, results of operations, and accounting policies
and practices.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt", the amendment to
SFAS No. 4, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". SFAS No. 145 also amends paragraph 14(a) of SFAS
No. 13, "Accounting for Leases", to eliminate an inconsistency between the
accounting for sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. We do
not believe the effects of this new standard will have a material effect on our
future financial condition or operations.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like "may," "may
not," "believes," "do not believe," "expects," "do not expect," "do not
anticipate," and similar expressions. We may also provide oral or written
forward-looking information in other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best 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 including:
Legal
- asbestos litigation including the judgments against us in
late 2001 and their related appeals;
- the ability of our insurers for our asbestos exposures to pay
claims in the future;
- future asbestos claims settlement and defense costs;
- number of future asbestos claims;
- other litigation, including, for example, class action
shareholder lawsuits, contract disputes, patent infringements
and environmental matters;
- trade restrictions and economic embargoes imposed by the
United States and other countries;
- changes in governmental regulations in the numerous countries
in which we operate including, for example, regulations that:
- encourage or mandate the hiring of local
contractors; and
- require foreign contractors to employ citizens of,
or purchase supplies from, a particular
jurisdiction;
41
- potentially adverse customer reaction, and time and expense
responding to the increased scrutiny of Halliburton by the
media and others;
- environmental laws and regulations, including, for example,
those that:
- require emission performance standards for
facilities; and
- the potential regulation of hydraulic fracturing as
underground injection;
- any unexpected adverse outcome of the SEC's current inquiries
into Halliburton's accounting policies, practices and
procedures; and
- adverse results of increased review and scrutiny of
Halliburton by regulatory authorities, media and others;
Geopolitical
- unsettled political conditions, war, the effects of
terrorism, civil unrest, currency controls and governmental
actions in the numerous countries in which we operate;
- operations in countries with significant amounts of political
risk, including, for example, Algeria, Angola, Argentina,
Colombia, Indonesia, Libya, Nigeria, Russia, and Venezuela;
and
- changes in foreign exchange rates and exchange controls as
were experienced in Argentina in late 2001 and early 2002;
Liquidity
- reductions in debt ratings by rating agencies including, for
example, our recent reductions by Standard & Poor's and
Moody's Investors' Services in late 2001 and early 2002;
- access to lines of credit, credit markets and credit from
suppliers under acceptable terms;
- availability of financing from the United States
Export/Import Bank;
- borrowing costs in the future;
- ability to issue letters of credit and surety bonds; and
- ability to raise capital via the sale of stock;
Weather related
- the effects of severe weather conditions, including, for
example, hurricanes and typhoons, on offshore operations and
facilities; and
- the impact of prolonged severe or mild weather conditions on
the demand for and price of oil and natural gas;
Customers
- the magnitude of governmental spending and outsourcing for
military and logistical support of the type that we provide,
including, for example, support services in Bosnia;
- changes in capital spending by customers in the oil and gas
industry for exploration, development, production,
processing, refining, and pipeline delivery networks;
- changes in capital spending by governments for infrastructure
projects of the sort that we perform;
- consolidation of customers in the oil and gas industry
including, for example, the proposed merger of Conoco and
Phillips Petroleum; and
- claim negotiations with engineering and construction
customers on cost variances and change orders on major
projects, including, for example, the Barracuda-Caratinga
project in Brazil;
- ability of our customers to timely pay the amounts due us;
Industry
- technological and structural changes in the industries that
we serve;
- changes that impact the demand for oil and gas including, for
example, the slowdown in the global economy following the
terrorist attacks on the United States on September 11, 2001;
- changes in the price of oil and natural gas, resulting from:
- OPEC's ability to set and maintain production
levels and prices for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration
for and production and development of their oil and
natural gas reserves; and
- the level of demand for oil and natural gas,
especially natural gas in the United States where
demand is currently below last years' usage; and
- changes in the price or the availability of commodities that
we use or of key insurance coverages;
42
- risks that result from entering into fixed fee projects,
where failure to meet schedules, cost estimates or
performance targets could result in non-reimbursable costs
which cause the project not to meet our expected profit
margins or incur a loss;
- risks that result from entering into complex business
arrangements for technically demanding projects where failure
by one or more parties could result in monetary
penalties; and
- the risk inherent in the use of derivative instruments of the
sort that we use which could cause a change in value of the
derivative instruments as a result of:
- adverse movements in foreign exchange rates,
interest rates, or commodity prices; or
- the value and time period of the derivative being
different than the exposures or cash flows being
hedged;
Systems
- the successful deployment of SAP throughout our remaining
Energy Services Group businesses, principally Baroid and
Sperry Sun; and
- 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
- increased competition in the hiring and retention of
employees in specific areas, including, for example, energy
services operations, accounting and finance;
- integration of acquired businesses into Halliburton,
including, for example, our 2001 acquisitions of Magic Earth,
Inc. and PGS Data Management, including:
- standardizing information systems or integrating
data from multiple systems;
- maintaining uniform standards, controls, procedures
and policies; and
- combining operations and personnel of acquired
businesses with ours;
- effectively restructuring operations and personnel within
Halliburton including, for example, the reorganization of our
engineering and construction business in early 2001 and the
recent segregation of our business into two separate entities
under Halliburton;
- 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, 8-K and 10-K to the
United States Securities and Exchange Commission. We also suggest that you
listen to our quarterly earnings release conference calls with financial
analysts.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------
We are exposed to financial instrument market risk from changes in
foreign currency exchange rates, interest rates and to a limited extent,
commodity prices. We selectively 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 and commodity prices;
- 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.
43
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
At our Annual Meeting of Stockholders held on May 15, 2002,
stockholders were asked to consider and act upon:
(1) the election of Directors for the ensuing year,
(2) a proposal to approve the Halliburton Company 2002 Employee
Stock Purchase Plan; and
(3) a stockholder proposal on auditor services.
The following table sets out, for each matter where applicable, the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes.
(1) Election of Directors:
Name of Nominee Votes For Votes Withheld
Robert L. Crandall 357,240,074 9,002,829
Kenneth T. Derr 357,667,297 8,575,606
Charles J. DiBona 359,038,088 7,204,815
Lawrence S. Eagleburger 312,919,052 53,323,851
William R. Howell 357,412,938 8,829,965
Ray L. Hunt 357,694,176 8,548,727
David J. Lesar 359,140,702 7,102,201
Aylwin B. Lewis 359,290,693 6,952,210
J. Landis Martin 358,721,972 7,520,931
Jay A. Precourt 359,435,705 6,807,098
Debra L. Reed 359,355,282 6,887,621
C. J. Silas 357,542,983 8,699,920
(2) Proposal to approve the 2002 Employee Stock Purchase Plan:
Number of Votes For 334,839,586
Number of Votes Against 28,255,615
Number of Votes Abstain 3,147,702
Number of Broker Non-Votes 0
(3) Shareholder proposal on auditor services:
Number of Votes For 31,871,260
Number of Votes Against 227,511,245
Number of Votes Abstain 5,204,576
Number of Broker Non-Votes 101,655,822
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
* 10.1 Halliburton Elective Deferral Plan as amended and restated
effective May 1, 2002.
* 10.2 Halliburton Company 2002 Employee Stock Purchase Plan.
44
* 10.3 Employment Agreement (Albert O. Cornelison).
* 10.4 Employment Agreement (Weldon J. Mire).
* 24.1 Powers of attorney for the following directors:
Robert L. Crandall
Kenneth T. Derr
Charles J. DiBona
Lawrence S. Eagleburger
W. R. Howell
Ray L. Hunt
David J. Lesar
Aylwin B. Lewis
J. Landis Martin
Jay A. Precourt
Debra L. Reed
C. J. Silas
* 24.2 Powers of attorney for the following executive officers:
Jerry H. Blurton
Lester L. Coleman
Albert O. Cornelison
Douglas L. Foshee
Robert R. Harl
Arthur D. Huffman
Weldon J. Mire
R. Charles Muchmore, Jr.
Edgar Ortiz
David R. Smith
* Filed with this Form 10-Q.
(b) Reports on Form 8-K
Date Filed Date of Earliest Event Description of Event
--------------------------- ------------------------ ----------------------------------------------------------
During the second quarter of 2002:
April 15, 2002 April 12, 2002 Item 5. Other Events for a press release announcing a
Federal court has rendered a verdict in a patent
infringement case.
April 18, 2002 April 17, 2002 Item 4. Changes in Registrant's Certifying Accountant
for a press release announcing the dismissal of Arthur
Andersen LLP as independent auditors and the appointment
of KPMG LLP.
May 8, 2002 May 7, 2002 Item 5. Other Events for a press release announcing 2002
first quarter earnings.
45
Date Filed Date of Earliest Event Description of Event
--------------------------- ------------------------ ----------------------------------------------------------
During the second quarter of 2002 (cont'd):
May 13, 2002 May 9, 2002 Item 5. Other Events for a press release announcing the
annual meeting of shareholders.
May 15, 2002 May 15, 2002 Item 5. Other Events for a press release announcing 2002
second quarter dividend.
May 21, 2002 May 20, 2002 Item 5. Other Events for a press release announcing
asbestos plaintiffs agree to extend current stay on
asbestos claims until June 4, 2002.
May 29, 2002 May 28, 2002 Item 5. Other Events for a press release announcing the
settlement of thirty asbestos claims.
May 29, 2002 May 28, 2002 Item 5. Other Events for a press release announcing that
the Securities and Exchange Commission has initiated a
preliminary investigation of accounting treatment of
cost overruns on construction jobs.
June 4, 2002 June 4, 2002 Item 5. Other Events for a press release announcing
asbestos plaintiffs agree to extend current stay on
asbestos claims until July 16, 2002.
During the third quarter of 2002:
July 11, 2002 July 10, 2002 Item 5. Other Events for a press release announcing the
response to the news of Judicial Watch Lawsuit.
July 24, 2002 July 16, 2002 Item 5. Other Events for a press release announcing that
an agreement has been reached with Harbison-Walker
Refractories Company and the Official Committee of
Asbestos Creditors to consensually extend the period of
the stay contained in the Bankruptcy Court's temporary
restraining order until September 18, 2002.
July 24, 2002 July 22, 2002 Item 5. Other Events for a press release announcing
second quarter asbestos charges.
July 29, 2002 July 22, 2002 Item 5. Other Events for a press release announcing that
a letter of intent has been signed to sell 50% interest
in Bredero-Shaw to ShawCor Ltd.
July 30, 2002 July 24, 2002 Item 5. Other Events for a press release announcing
second quarter results.
August 7, 2002 August 1, 2002 Item 5. Other Events for a press release announcing
response to a false statement by Citizensworks.
46
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: By: /s/ Douglas L. Foshee
------------------ ----------------------------------
Douglas L. Foshee
Executive Vice President and
Chief Financial Officer
/s/ R. Charles Muchmore, Jr.
---------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller and
Principal Accounting Officer
47