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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1999
[ ] 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
(Exact name of registrant as specified in its charter)
Delaware 75-2677995
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201
(Address of principal executive offices)
Telephone Number - Area code (214) 978-2600
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each class which registered
------------------- ----------------
Common Stock par value $2.50 per share New York Stock Exchange
Baroid Corporation 8% Guaranteed Senior Notes due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by nonaffiliates on February 29,
2000, determined using the per share closing price on the New York Stock
Exchange Composite tape of $38.1875 on that date was approximately
$16,896,000,000.
As of February 29, 2000, there were 443,582,904 shares of Halliburton Company
Common Stock $2.50 par value per share outstanding.
Portions of the Halliburton Company Proxy Statement dated March 23, 2000, are
incorporated by reference into Part III of this report.
PART I
Item 1. Business.
General development of business. Halliburton Company's predecessor was
established in 1919 and incorporated under the laws of the State of Delaware in
1924. Halliburton Company provides a variety of services, equipment,
maintenance, and engineering and construction to energy, industrial and
governmental customers. Information related to acquisitions and dispositions is
set forth in Note 2 to the financial statements of this annual report.
Financial information about business segments. We operate in three
business segments:
o Energy Services Group;
o Engineering and Construction Group; and
o Dresser Equipment Group.
See Note 3 to the financial statements of this annual report for
financial information about these three business segments.
Description of services and products. Our ability to mix, bundle or
integrate products and services to meet the varied needs of our customers is of
increasing importance in the highly competitive environment in which we operate.
We believe that, based upon our customers' requirements, our future success will
depend, in part, upon our ability to offer total capabilities and solutions on
a global, industry-encompassing scale as well as discrete services and products.
Our business strategy is focused on continuing to maintain global leadership in
providing our customers integrated services, equipment, engineering,
construction and maintenance. This strategy is dependent upon four key goals:
o technological leadership;
o operational excellence;
o innovative business relationships; and
o a dynamic workforce.
We offer a broad suite of products and services through three business
segments operating globally as six business units. The following summary
describes our services and products for each business segment and unit.
ENERGY SERVICES GROUP
The Energy Services Group segment consists of Halliburton Energy
Services, Brown & Root Energy Services, and Landmark Graphics. This segment
provides a wide range of discrete services and products and integrated solutions
to customers in the exploration, development and production of oil and gas. The
segment serves independent, integrated, and national oil companies.
Halliburton Energy Services provides discrete products and services and
integrated solutions for oil and gas exploration, development and production
throughout the world. Products and services range from the initial evaluation of
producing formations to drilling, completion, production and well maintenance
for a single well or an entire field. Major product and service line offerings
include:
o pressure pumping, including:
- zonal isolation (cementing);
- production enhancement (fracturing and acidizing); and
- tools and testing;
o logging and perforating;
o drilling systems;
o drilling fluid systems;
o drill bits; and
o specialized completion and production equipment and services,
and well control products and services.
Zonal isolation is the process used to bond the well and well casing
while isolating fluid zones and maximizing wellbore stability. This is
accomplished by pumping cement and chemical additives to fill the space between
the casing and the side of the wellbore. Our zonal isolation service line
also provides casing equipment and services.
Production enhancement encompasses the technologies and capabilities to
optimize oil and gas reservoirs through a variety of pressure pumping services,
including: fracturing and acidizing, sand control, coiled tubing, well control,
1
nitrogen services, and specialty services. These services are commonly used to
clean out a formation or to fracture formations to allow increased oil and gas
production.
Tools and testing includes tubing-conveyed perforating products and
services, including drill stem and other well testing tools, data acquisition
services and production applications.
Logging products and services include our Magnetic Resonance Imaging
Logging (MRIL(R)), high-temperature logging as well as traditional open-hole and
cased-hole logging tools. MRIL(R) tools apply medical diagnostic magnetic
resonance imaging technology to the evaluation of subsurface rock formations in
newly drilled oil and gas wells. Our high temperature logging tools combine
advanced electronic and mechanical tool designs, quality materials and a
telemetry system to operate in high temperature and high pressure downhole
environments. Open-hole tools provide information on well visualization,
formation evaluation (including resistivity, porosity, lithology and
temperature), rock mechanics and sampling. Cased-hole tools provide cementing
evaluation, reservoir monitoring, pipe evaluation, pipe recovery and
perforating.
Drilling systems and services are marketed under the Sperry-Sun
Drilling Systems name. These services include directional and horizontal
drilling, measurement-while-drilling, logging-while-drilling, multilateral wells
and completion systems, and rig site information systems.
Drilling and completion fluids are marketed under the Baroid Drilling
Fluids name. These services provide fluid systems and performance additives for
oil and gas drilling, completion and workover operations. In addition, Baroid
maintains and markets products for a wide variety of industrial customers.
Drill bits, marketed under the trade name of Security DBS, provide
roller cone rock bits, fixed cutter bits, coring equipment and services, and
other downhole tools used to drill wells.
Completion products include subsurface safety valves and flow control
equipment, surface safety systems, packers and specialty completion equipment,
production automation, well screens, and slickline equipment and services.
Halliburton Energy Services, through its solutions group, also provides
fully integrated oilfield management and technical expertise in the following
areas:
o integrated solutions; and
o reservoir description.
Integrated solutions provides value-added oilfield management and
solutions to independent, integrated, and national oil companies. Integrated
solutions enhance field deliverability and maximize the customer's return on
investment. These services leverage the entire Halliburton Energy Services
product service groups and technologies as well as overall project management.
Reservoir description is composed of two groups - geoscience and
engineering and computed products. The geoscience and engineering group provides
a comprehensive suite of products including opportunity assessment, reservoir
characterization, field development planning, production enhancement, reservoir
surveillance, and reservoir management. The computed products group provides
interpretation for wellbore imaging, waveform sonics, cement evaluation,
production, and a variety of open and cased-hole information evaluation logs. By
combining reservoir description with field service capabilities and technology,
Halliburton Energy Services provides complete reservoir solutions.
Brown & Root Energy Services provides worldwide engineering and
construction services to the upstream oil and gas industry. Projects are
on a cost reimbursable or lump sum, turnkey basis. Many field development
projects also involve services of Halliburton Energy Services and Landmark
Graphics. Brown & Root Energy Services' primary product service lines include:
o deepwater and floating production, including subsea;
o general offshore operations; and
o land operations.
The deepwater and floating production group provides deepwater riser
solutions, floating production technologies and project management systems
tailored to the specific demands of our customers. The group integrates these
capabilities with our subsea group to optimize customer solutions. The subsea
product service group provides construction and installation capabilities,
including a comprehensive fleet of semi-submersibles, remotely-operated vehicles
and support vessels. These vehicles and vessels are used to install subsea
manifolds, templates, spools, fixed risers, dynamic risers, mechanical
connections, pilings and flexible pipelines. The subsea product service group
2
also provides trenching and repair operations and manufactures and supplies
flexible pipe. Flexible pipe is used primarily in the offshore oil and gas
industry for both topside and subsea applications.
The general offshore group integrates capabilities required to plan,
engineer, construct and operate offshore production facilities. The group
includes front-end engineering, detailed engineering, project management,
procurement and construction, fabrication, and production services. Capabilities
include the engineering, procurement and construction of offshore drilling and
production platforms, process skids and modules, subsea components, turret
mooring systems and production manifolds, structural pipe/caissons,
semi-drilling rig components and prefabricated components. Fabrication products
and services are provided by Brown & Root Energy Services at one facility and
Brown & Root Energy Services and a joint venture partner at two additional
facilities. Pipeline services provide full turnkey pipeline services to onshore
and offshore customers through a joint venture.
The land operations group combines the distinctive capabilities
required to plan, engineer, construct and operate onshore plants and pipelines.
Capabilities include front-end engineering, detailed engineering, procurement,
construction, operations and project management.
Landmark Graphics provides integrated exploration and production
software information systems and professional services. Landmark's software
transforms vast quantities of seismic, well log and other data into detailed
computer models of petroleum reservoirs to optimize exploration, development and
production decisions. Landmark's products and services integrate data workflows
and operational processes across disciplines including geophysics, geology,
drilling, engineering, production, economics, finance and corporate planning,
and key partners and suppliers.
ENGINEERING AND CONSTRUCTION GROUP
The Engineering and Construction Group segment, consisting of Kellogg
Brown & Root and Brown & Root Services, provides a wide range of services to
energy and industrial customers and government entities worldwide.
Kellogg Brown & Root is a global provider of technology-based
engineering and construction services using proprietary processes including
project development, technology licensing and development, consulting, project
management, engineering, procurement, construction, operations and maintenance
services. Projects for our customers are often executed on a lump-sum, turnkey
basis, including:
o engineering, procurement and construction services for:
- liquefied natural gas and gas processing facilities;
- ammonia plant design and technology;
- olefins, polymer and phenol plants;
- forest products facilities; and
- mineral processing;
o industrial maintenance services to private sector customers;
and
o planning, process technologies and engineering, procurement
and construction services in the construction of refineries
utilizing proprietary techniques in fluid catalytic cracking,
hydroprocessing, and residuum processing.
Brown & Root Services is a global provider to the private (primarily
non-energy) and government sectors offering planning, design, construction,
operations, maintenance, asset management and decommissioning of infrastructure,
facilities and installations. The following summarizes the business unit's
product service lines and their distinctive capabilities:
o management and engineering - consulting and civil engineering
services providing master planning and consulting, design,
engineering, project and construction management, and facility
start-up;
o construction - management of large projects including prisons,
stadiums and highways. Other services include on-call
construction and facilities modification and repair;
3
o operations, maintenance and logistics - operation of
government facilities and installations, providing food and
housing services for the life-cycle of large scale projects,
weapons demilitarization, aircraft servicing, fuels handling
and management, refuse collection, equipment maintenance and
operations, public works support, and transportation services;
and
o investment management - participation in the design, building,
financing and operation and ownership of toll roads, marine,
and other public sector facilities.
DRESSER EQUIPMENT GROUP
The Dresser Equipment Group segment designs, manufactures and markets
highly engineered products and systems for customers in the energy industry,
although power, chemical and transportation industries are also significant
customers for its products and services. Product service lines in this segment
include:
o compression and pumping;
o measurement;
o flow control; and
o power systems.
The compression and pumping product service line included two joint
ventures: Dresser-Rand and Ingersoll-Dresser Pump. Dresser-Rand manufactures and
services gas turbines; centrifugal, reciprocating and axial compressors; steam
turbines; electric motors and generators. Ingersoll-Dresser Pump provides a wide
range of pumps for use in process and petrochemical industries, power
generation, pulp and paper, water resources, mining, pipeline, marine, general
industry and agriculture. On October 4, 1999, we announced we would sell our
interests in Dresser-Rand and Ingersoll-Dresser Pump to Ingersoll-Rand.
Ingersoll-Dresser Pump was sold on December 30, 1999. Dresser-Rand was sold on
February 2, 2000. See Note 2 and Note 18 to the financial statements of this
annual report for additional information on the sale of our interests in these
joint ventures.
The measurement product service line includes the DMD, Instrument and
Wayne divisions. DMD produces gas meters, electronic products for gas systems,
pipe fittings, couplings and repair devices for gas and water utilities and
other industries. We are in the process of consolidating the DMD and Roots
divisions within the measurement product service line. Instrument products
include gauges, thermometers, switches, transducers, transmitters and instrument
isolators for pressure and temperature measurement and control. Wayne
manufactures and supplies retail automation control and fuel dispensing systems
worldwide.
The flow control product service line includes the Dresser Valve
division which manufactures ball, gate, check, butterfly, plug, safety relief,
automated globe, rotary control and specialty valves; chemical injection pumps;
regulators; surge relievers and actuators.
The power systems product service line includes Roots and Waukesha
Engine divisions. Roots manufactures rotary-lobe and centrifugal air and gas
handling blowers as well as vacuum pumps. Waukesha Engine manufactures spark
ignited gaseous fueled engines and packaged engine-driven generator sets used in
field gas compression.
Markets and competition. We are one of the world's largest diversified
energy services and engineering and construction services companies. Our
services and products are sold in highly competitive markets throughout the
world. Competitive factors impacting sales of our services and products are:
price, service (including the ability to deliver services and products on an "as
needed, where needed" basis), product quality, warranty and technical
proficiency. While we provide a wide range of discrete services and products, a
number of customers have indicated a preference for integrated services and
solutions. In the case of the Energy Services Group, integrated services and
solutions relate to all phases of exploration, development and production of oil
and gas. In the case of the Engineering and Construction Group, integrated
services and solutions relate to all phases of design, procurement, construction
project management and maintenance of a facility. Demand for these types of
integrated services and solutions is based primarily upon quality of service,
technical proficiency and value created.
We conduct business worldwide in over 120 countries. Since the markets
for our services and products are so large and crosses so many geographic lines,
a meaningful estimate of the number of competitors cannot be made. The
industries we serve are highly competitive and we have many substantial
competitors. Generally, our services and products are marketed through our own
servicing and sales organizations. A small percentage of sales of the Energy
Service Group's and Dresser Equipment Group's products is made through supply
stores and third-party representatives.
4
Operations in some countries may be adversely affected by unsettled
political conditions, expropriation or other governmental actions, and exchange
control and currency problems. We believe the geographic diversification of our
business activities reduces the risk that loss of operations in any one country
would be material to the conduct of our operations taken as a whole. Information
regarding our exposures to foreign currency fluctuations, risk concentration,
and financial instruments used to minimize risk is included on page 21 under the
caption "Financial Instrument Market Risk" and in Note 16 to the financial
statements of this annual report.
Customers and backlog. In 1999, 1998, and 1997, respectively, 79%, 85%
and 84% of our revenues were derived from the sale of products and services to
the energy industry. Approximately 10% of the total backlog at December 31, 1999
was for equipment manufacturing contracts. The following schedule summarizes the
backlog of engineering and construction projects and equipment manufacturing
contracts at December 31, 1999 and 1998:
Millions of dollars 1999 1998
----------------------------------------------------------------------------
Firm orders $ 9,851 $ 10,472
Government orders firm but not yet funded,
letters of intent and contracts awarded but
not signed 316 705
----------------------------------------------------------------------------
Total $ 10,167 $ 11,177
----------------------------------------------------------------------------
We estimate that 50% of the backlog existing at December 31, 1999 will
be completed during 2000. Total backlog at December 31, 1999 includes
Dresser-Rand's backlog of $704 million. At December 31, 1998 Dresser-Rand's
backlog was $795 million. Dresser-Rand was sold in February, 2000. See Note 18.
Our backlog excludes contracts for recurring hardware and software maintenance
and support services. Backlog does not indicate what future operating results
will be because backlog figures are subject to substantial fluctuations.
Arrangements included in backlog are in many instances extremely complex,
nonrepetitive in nature and may fluctuate in contract value. Many contracts do
not provide for a fixed amount of work to be performed and are subject to
modification or termination by the customer. Due to the size of specific
contracts, the termination or modification of any one or more contracts or the
addition of other contracts may have a substantial and immediate effect on
backlog.
Raw materials. Raw materials essential to our business are normally
readily available. Where we are dependent on a single supplier for materials
essential to our business, we are confident that we could make satisfactory
alternative arrangements in the event of an interruption in the supply of the
materials.
Research, development and patents. We maintain an active research and
development program. The program improves existing products and processes,
develops new products and processes and improves engineering standards and
practices that serve the changing needs of our customers. Information relating
to our expenditures for research and development is included in Note 1 and Note
3 to the financial statements of this annual report.
We own a large number of patents and have pending a substantial number
of patent applications covering various products and processes. We are also
licensed under patents owned by others. We do not consider a particular patent
or group of patents to be material to our business.
Seasonality. Weather and natural phenomena can temporarily affect the
performance of our services. Winter months in the Northern Hemisphere tend to
affect operations negatively, but the widespread geographical locations of our
operations serve to mitigate the seasonal nature of our business.
Employees. At December 31, 1999, we employed approximately 103,000
people worldwide.
Environmental regulation. We are subject to various environmental laws
and regulations. Compliance with these requirements has not substantially
increased capital expenditures, adversely affected our competitive position or
materially affected our earnings. We do not anticipate any material adverse
effects in the foreseeable future as a result of existing environmental laws and
regulations. Note 9 to the financial statements of this annual report discusses
our involvement as a potentially responsible party in the remedial activities to
clean up several "Superfund" sites.
5
Item 2. Properties.
We own or lease hundreds of properties throughout the world. The
following are the locations of our principal facilities, the facility types and
their square footage for each of our industry segments:
Energy Services Group Floor Area Number of
(Sq. Ft.) Facilities
---------------------------------------------
Location Type of Facility Leased Owned Leased Owned
- ------------------------------------------------------------------------------------------------------------------------
Texas Engineering & Design - 99,000 - 2
Mexico, Canada, Scotland, England and other
foreign locations Engineering & Design 103,000 281,000 6 4
Texas Manufacturing - 1,741,000 - 10
Oklahoma Manufacturing - 1,016,000 - 2
Florida, Colorado, Missouri, Pennsylvania,
Louisiana and other locations
in the U.S. Manufacturing 263,000 103,000 9 2
Colombia, Canada, Mexico, England, Scotland,
Australia and other foreign locations Manufacturing 90,000 1,035,000 6 8
Texas Research & Development 77,000 159,000 3 3
Oklahoma Research & Development - 207,000 - 1
Colorado Research & Development 64,000 - 3 -
Netherlands Research & Development 11,000 - 3 -
Texas and Oklahoma Warehouse & Other 38,000 78,000 2 3
Mexico Warehouse & Other 525,000 - 1 -
Colombia Warehouse & Other 122,000 841,000 1 3
Norway and other foreign locations Warehouse & Other 414,000 59,000 14 3
Texas, Oklahoma and other locations in the U.S. Administrative Center 490,000 796,000 14 7
Algeria Administrative Center 113,000 - 1 -
Norway, Scotland, Germany, England and other
foreign locations Administrative Center 1,231,000 808,000 56 11
- ------------------------------------------------------------------------------------------------------------------------
Total Energy Services Group 3,541,000 7,223,000 119 59
- ------------------------------------------------------------------------------------------------------------------------
Engineering and Construction Group Floor Area Number of
(Sq. Ft.) Facilities
---------------------------------------------
Location Type of Facility Leased Owned Leased Owned
- ------------------------------------------------------------------------------------------------------------------------
Texas and Canada Fabricating - 468,000 - 2
Texas Engineering & Design 801,000 246,000 2 3
California and Alabama Engineering & Design 270,000 - 3 -
Mexico, Canada, England and Australia Engineering & Design 309,000 413,000 17 6
California and other locations in the U.S. Administrative Center 110,000 - 12 -
- ------------------------------------------------------------------------------------------------------------------------
Total Engineering and Construction Group 1,490,000 1,127,000 34 11
- ------------------------------------------------------------------------------------------------------------------------
6
Dresser Equipment Group Floor Area Number of
(Sq. Ft.) Facilities
---------------------------------------------
Location Type of Facility Leased Owned Leased Owned
- ------------------------------------------------------------------------------------------------------------------------
Texas Manufacturing 384,000 465,000 4 4
Louisiana Manufacturing - 1,037,000 - 2
Wisconsin Manufacturing - 765,000 - 4
Massachusetts, Ohio, Oklahoma and other
locations in the U.S. Manufacturing 425,000 1,932,000 29 14
Italy Manufacturing - 1,827,000 - 3
Canada, Brazil, Scotland, England, France,
Germany, Sweden and India Manufacturing 121,000 1,912,000 3 14
England, Brazil, Mexico and other foreign
locations Administrative Center 208,000 63,000 14 4
- ------------------------------------------------------------------------------------------------------------------------
Total Dresser Equipment Group 1,138,000 8,001,000 50 45
- ------------------------------------------------------------------------------------------------------------------------
General corporate Floor Area Number of
(Sq. Ft.) Facilities
---------------------------------------------
Location Type of Facility Leased Owned Leased Owned
- ------------------------------------------------------------------------------------------------------------------------
Texas Administrative Center 266,000 1,109,000 6 10
Washington, D.C., and England Administrative Center 47,000 - 2 -
- ------------------------------------------------------------------------------------------------------------------------
Total general corporate 313,000 1,109,000 8 10
- ------------------------------------------------------------------------------------------------------------------------
In addition to the above listed properties, we own or lease:
o marine fabrication facilities covering approximately 750 acres
in Texas, Louisiana, England, and Scotland;
o mineral grinding facilities in Wyoming and South America
covering approximately 660 acres;
o 160 acre employee recreational facility in Oklahoma;
o outdoor storage and undeveloped land covering 136 acres;
o service centers, sales offices and field warehouses at
approximately 320 locations in the United States, almost all
of which are owned, and at approximately 290 locations outside
the United States in both the Eastern and Western Hemispheres.
We also have mineral rights to proven and prospective reserves of
barite and bentonite. These rights include leaseholds, mining claims and
property owned in fee. Based on the number of tons of each of the above minerals
consumed in fiscal 1999, we estimate our proven reserves are sufficient for
operations for the foreseeable future. All properties that we currently occupy
are deemed suitable for their intended use.
The above properties do not include properties sold in conjunction with
the sale of Dresser-Rand on February 2, 2000. These properties include
manufacturing, administrative and other facilities covering approximately 4.7
million square feet as well as undeveloped land covering approximately 30 acres
and 45 sales offices. See Note 18 to the annual financial statements for
information on the sale of Dresser-Rand.
As a result of the merger with Dresser Industries, Inc. and, due to the
oil and gas industry downturn, we initiated in late 1998 and early 1999 a
program to exit approximately 500 properties throughout the world, including
fabricating, engineering and design, manufacturing, warehouse and administrative
centers. We believe we have appropriately accrued the costs for our obligations
on these facilities.
7
Among the properties listed in the tables above that are currently
vacant:
o 160 acre marine fabrication facility in Nigg, Scotland;
o 151 acre marine fabrication facility in Belle Chasse,
Louisiana;
o 224,000 square foot engineering and design facility in
Alhambra, California;
o 408,000 square foot manufacturing facility in Fort Worth,
Texas;
o 185,000 square foot manufacturing facility in Amarillo, Texas;
o 98,000 square foot manufacturing facility in Reynosa, Mexico;
o 84,000 square foot manufacturing facility in Garland, Texas;
o 54,000 square foot office facility in Arlington, Texas; and
o 204,000 square foot administrative facility in Dallas, Texas.
Item 3. Legal Proceedings.
Information relating to various commitments and contingencies is
described in Note 9 to the financial statements of this annual report.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of 1999.
8
Executive Officers of the Registrant.
The following table indicates the names and ages of the executive
officers of the registrant as of February 1, 2000, along with a listing of all
offices held by each during the past five years:
Name and Age Offices Held and Term of Office
- ------------ -------------------------------
Jerry H. Blurton Vice President and Treasurer, since July 1996
(Age 55) Vice President - Finance & Administration of
Halliburton Energy Services, August 1995 to
July 1996
Vice President - Finance, 1991 to August 1995
* Richard B. Cheney Chairman of the Board, since February 2000
(Age 59) Chief Executive Officer, since October 1995
Director of Registrant, since October 1995
Chairman of the Board, January 1996 to
September 1998
President, October 1995 to May 1997
Senior Fellow, American Enterprise Institute,
1993 to October 1995
Lester L. Coleman Executive Vice President and General Counsel,
(Age 57) since May 1993
* David J. Lesar President and Chief Operating Officer, since
(Age 46) May 1997
Chairman of the Board and Director of Kellogg
Brown & Root, Inc., since January 1999
President and Chief Executive Officer and
Director of Kellogg Brown & Root, Inc.,
September 1996 to January 1999
Executive Vice President and Chief Financial
Officer, August 1995 to May 1997
Executive Vice President of Finance and
Administration of Halliburton Energy
Services, November 1993 to August 1995
Gary V. Morris Executive Vice President and Chief Financial
(Age 46) Officer, since May 1997
Senior Vice President - Finance, February 1997 to
May 1997
Senior Vice President, May 1996 to February 1997
Vice President - Finance of Brown & Root, Inc.,
June 1995 to May 1996
Vice President - Finance of Halliburton Energy
Services, December 1993 to June 1995
R. Charles Muchmore, Jr. Vice President and Controller, since August 1996
(Age 46) Finance & Administration Director - Europe/Africa
of Halliburton Energy Services,
September 1995 to August 1996
Regional Finance & Administration Manager -
Europe/Africa of Halliburton Energy Services,
December 1989 to September 1995
9
Executive Officers of the Registrant (continued).
Name and Age Offices Held and Term of Office
- ------------ -------------------------------
Lewis W. Powers Senior Vice President, since May 1996
(Age 53) Vice President - Europe/Africa of Halliburton
Energy Services, April 1993 to May 1996
Louis A. Raspino Shared Services Vice President - Finance, since
(Age 47) March 1999
Senior Vice President - Strategic Planning &
Business Development, Burlington Resources,
Inc. (oil and gas exploration and
production), October 1997 to June 1998
Senior Vice President and Chief Financial
Officer, Louisiana Land & Exploration Company
(oil and gas exploration, production and
refining), September 1995 to October 1997
Treasurer, Louisiana Land & Exploration Company,
1992 to September 1995
* Donald C. Vaughn Vice Chairman, since September 1998
(Age 63) President and Chief Operating Officer of Dresser
Industries, Inc., December 1996 to
September 1998
Executive Vice President, Dresser Industries,
Inc., November 1995 to December 1996
Senior Vice President - Operations, Dresser
Industries, Inc., January 1992 to
November 1995
Chairman, President and Chief Executive Officer
of M. W. Kellogg, Inc., June 1995
to June 1996
Chairman and Chief Executive Officer of The M. W.
Kellogg Company, September 1986 to June 1996
President of The M. W. Kellogg Company,
November 1983 to June 1995
* Members of the Executive Committee of the registrant.
There are no family relationships between the executive officers of the
registrant.
10
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Halliburton Company's common stock is traded on the New York Stock
Exchange and the Swiss Exchange. Information relating to market prices of common
stock and quarterly dividend payment is included under the caption "Quarterly
Data and Market Price Information" on page 64 of this annual report. Cash
dividends on common stock for 1999 and 1998 were paid in March, June, September
and December of each year. Our board of directors intends to consider the
payment of quarterly dividends on the outstanding shares of our common stock in
the future. The declaration and payment of future dividends, however, will be at
the discretion of the board of directors and will depend upon, among other
things, our future earnings, our general financial condition, the success of our
business activities, our capital requirements and general business conditions.
At December 31, 1999, there were approximately 27,300 shareholders of record. In
calculating the number of shareholders, we consider clearing agencies and
security position listings as one shareholder for each agency or listing.
Item 6. Selected Financial Data.
Information relating to selected financial data is included on pages
61 through 63 of this annual report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information relating to management's discussion and analysis of
financial condition and results of operations is included on pages 13
through 26 of this annual report.
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.
Information relating to market risk is included in management's
discussion and analysis of financial condition and results of operations under
the caption "Financial Instrument Market Risk" on pages 21 through 22 of this
annual report.
11
Item 8. Financial Statements and Supplementary Data.
Page No.
Report of Arthur Andersen LLP, Independent Public Accountants 27
Responsibility for Financial Reporting 28
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 29
Consolidated Balance Sheets at December 31, 1999 and 1998 30
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 31
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 32-33
Notes to Financial Statements
1. Significant accounting policies 34
2. Acquisitions and dispositions 36
3. Business segment information 38
4. Inventories 40
5. Property, plant and equipment 40
6. Related companies 40
7. Lines of credit, notes payable and long-term debt 41
8. Dresser financial information 42
9. Commitments and contingencies 43
10. Income per share 45
11. Special charges and credits 46
12. Change in accounting method 51
13. Income taxes 51
14. Common stock 53
15. Series A junior participating preferred stock 55
16. Financial instruments and risk management 56
17. Retirement plans 57
18. Subsequent events 60
Quarterly Data and Market Price Information 64
The related financial statement schedules are included under Part IV,
Item 14 of this annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
12
HALLIBURTON COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
In this section, we discuss the operating results and general financial
condition of Halliburton Company and its subsidiaries. We explain:
o what factors impact our business;
o why our earnings and expenses for the year 1999 differ from
the years 1998 and 1997;
o what our capital expenditures were;
o what factors impacted our cash flows; and
o other items that materially affect our financial condition or
earnings.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking statements. Forward-looking statements
involve risks and uncertainties that may impact our actual results of
operations. Statements in this annual report and elsewhere, which are
forward-looking and which provide other than historical information, involve
those risks and uncertainties. Our forward-looking information reflects our best
judgement based on current information. From time to time we may also provide
oral or written forward-looking statements in other materials we release to the
public. We draw your attention to the fact that any or all of our
forward-looking statements in this report and in any other materials we release
to the public may turn out to be different. Our forward-looking statements
involve a number of risks and uncertainties. In addition, our forward-looking
statements can be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties. There can be no assurance that other factors
will not affect the accuracy of our forward-looking information. As a result, no
forward-looking statement can be guaranteed. Actual results 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
those forward-looking statements including:
Geopolitical and legal.
o trade restrictions and economic embargoes imposed by the
United States and other countries;
o unsettled political conditions, war, civil unrest, currency
controls and governmental actions in the numerous countries in
which we operate;
o operations in countries with significant amounts of political
risk, for example, Nigeria, Angola, Russia, Libya, and
Algeria;
o changes in foreign exchange rates;
o changes in governmental regulations in the numerous countries
in which we operate including, for example, regulations that:
- encourage or mandate the hiring of local contractors; and
- require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction;
o litigation, including, for example, asbestosis litigation and
environmental litigation; and
o environmental laws, including those that require emission
performance standards for new and existing facilities;
Weather related.
o the effects of severe weather conditions, including hurricanes
and tornadoes, on operations and facilities;
o the impact of prolonged mild weather conditions on the demand
for and price of oil and natural gas;
Customers and vendors.
o the magnitude of governmental spending for military and
logistical support of the type that we provide;
o changes in capital spending by customers in the oil and gas
industry for exploration, development, production, processing,
refining, and pipeline delivery networks;
o changes in capital spending by governments for infrastructure
projects of the sort that we perform;
13
o changes in capital spending by customers in the wood pulp and
paper industries for plants and equipment;
o consolidation of customers in the oil and gas industry;
o claim negotiations with engineering and construction customers
on cost variances and change orders on major projects;
o computer software, hardware and other equipment utilizing
computer technology used by governmental entities, service
providers, vendors, customers and Halliburton Company may not
be compatible;
Industry.
o technological and structural changes in the industries that we
serve;
o changes in the price of oil and natural gas, including;
- OPEC's ability to set and maintain production levels and
prices for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration for and
production and development of their oil and natural gas
reserves; and
- the level of demand for oil and natural gas;
o changes in the price of commodity chemicals that we use;
o risks that result from entering into fixed fee engineering,
procurement and construction projects of the types that we
provide where failure to meet schedules, cost estimates or
performance targets could result in non-reimbursable costs
which cause the project not to meet our expected profit
margins;
o the risk inherent in the use of derivative instruments of the
sort that we use which could cause a change in value of the
derivative instruments as a result of adverse movements in
foreign exchange rates, interest rates, or commodity prices,
or the value and time period of the derivative being different
than the exposures or cash flows being hedged;
Personnel and mergers.
o increased competition in the hiring and retention of employees
in specific areas, for example, energy services operations,
accounting and treasury;
o integration of acquired businesses, including Dresser
Industries, Inc. and its subsidiaries, into Halliburton,
including;
- maintaining uniform standards, controls, procedures and
policies; and
- combining operations and personnel of acquired businesses
with ours.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. We do advise you to review any additional
disclosures we make in our 10-Q, 8-K and 10-K reports to the Securities and
Exchange Commission. We also suggest that you listen to our quarterly earings
release conference calls with financial analysts. You may find information on
how to access those calls at our web site www.halliburton.com.
BUSINESS ENVIRONMENT
Our business is organized around three business segments:
o Energy Services Group;
o Engineering and Construction Group; and
o Dresser Equipment Group.
The majority of our revenues are derived from the sale of services and
products, including construction activities, to the oil and gas industry. We
conduct business in over 120 countries to provide a variety of services,
equipment, maintenance, and engineering and construction to energy, industrial
and governmental customers. We offer a comprehensive range of integrated and
discrete services and products as well as project management for oil and natural
gas activities throughout the world. These services and products are used in the
earliest phases of exploration and development of oil and gas reserves and
continue through the refining and distribution process. The industries we serve
are highly competitive and we have many substantial competitors. Unsettled
political conditions, expropriation or other governmental actions, exchange
controls and currency devaluations may result in increased business risk in some
14
countries in which we operate. Those countries include, among others, Nigeria,
Angola, Russia, Libya, and Algeria. However, we believe the geographic
diversification of our business activities helps to reduce the risk that loss of
business in any one country would be material to our consolidated results of
operations.
Energy Services Group
Decrease in demand for the group's oilfield services and products began
in 1998 and continued in 1999. However, the impact on our business from the
decrease in demand was different in North America than it was in the rest of the
world. In the United States and Canada oil and gas activity started 1999 at low
levels. The rotary rig count, which is an indicator of activity, hit record lows
in the United States during the second quarter. Drilling activity in North
America slowly increased during the second half of the year in reaction to
higher oil and gas prices and finished the year higher than at the end of 1998.
However, the percentage increase in activity was substantially less than the
increase in oil prices. Our customers in North America appear to be waiting to
see whether high oil prices are persistent before making decisions on any major
field developments or substantially increasing overall oil drilling activity in
North America.
Drilling for natural gas, however, recovered in North America during
1999 in part due to increased use of gas for the generation of electricity.
Demand for gas was also increased by high oil prices, which makes switching from
oil to gas for power generation economically attractive. Thus, in North America
the demand for our services and products associated with natural gas development
was more robust than demand related to oil drilling. Although we expect to see
improvement in oil exploration and development in 2000, we do not believe the
increase will occur until the second half of the year. We expect natural gas
development activity will continue in North America at current improved levels
as our customers seek to meet increased demand and to replace depleting
reserves.
Outside North America, drilling activity continued to decline
throughout 1999. The international rig count ended the year 14% below the
beginning of the year. This decline occurred in all geographic regions, with
Latin America experiencing the smallest decrease of 6%. The decline in activity
was in response to very low oil prices at the beginning of 1999 that continued
well into the year. Large oil development projects are expensive and have long
lead times before production begins. Thus, our customers have been reluctant to
begin new projects while there is significant uncertainty about future oil
prices. We expect our customers to continue to be slow to respond to increases
in oil prices until they have confidence that future prices will approximate
those used in their investment assumptions. During the last months of 1999 there
was virtually no increase in drilling activity outside of North America even
though the average price of oil was nearly double the price at the beginning of
the year. The decline in international drilling activity reduced our revenues
and put pressure on profit margins as price competition increased. There are
some indications that our customers will increase their spending on oil
development projects as 2000 progresses. However, we do not expect to see any
significant increase in larger capital-intensive projects outside North America
until the second half of 2000.
The merger and consolidation of a number of our large customers during
1999, which continues into 2000, also affected the demand for our products and
services. Combined oil companies are sorting out their oil and gas properties,
refining and distribution facilities, and organizations. The combined companies
have, in general, been less willing to commence new substantial investments in
oil and gas projects or large downstream facilities including refineries or
petrochemical plants. This reluctance to begin new investments has further
aggravated the lower demand for our products and services.
Improvement in demand for our oilfield services and products,
particularly outside the United States, will depend in large part on the
sustained price of oil. Thus, oil production levels of the members of OPEC,
Mexico, Norway and other countries in the coming months will be a significant
factor affecting demand for our products and services during 2000. We believe
that oil prices will remain at levels that will support increased drilling for
oil in many areas of the world during 2000, particularly in deepwater West
Africa and Brazil.
Engineering and Construction Group
Most of the factors that adversely affected the Energy Services Group
during 1999, and which continue into 2000, also affected the Engineering and
Construction Group since about two-thirds of the group's revenues come from
customers in the oil and gas industry. Thus, we expect the sustainability of
higher oil prices to have a significant impact on demand for the group's
services. However, since the group's large projects for customers tend to have
long completion periods, customers seldom stop projects in progress in response
to sudden shifts in oil prices. Customers of the group are also more reluctant
15
to start large capital projects, including refineries and petrochemical plants,
during periods of uncertain oil prices. In 1999 the group's revenues decreased
because there were fewer new projects starting during 1999 than older projects
being completed. The group has seen a number of large potential projects
deferred or cancelled because of uncertain prices for petroleum products. Also,
the consolidation of some of the group's large customers has had a negative
effect on capital spending similar to that experienced by the Energy Services
Group. During 1999, the group bid and won several large liquefied natural gas
projects that will begin construction in 2000. Liquefied natural gas projects do
not rely as directly on the price of oil as do other projects. A great deal of
natural gas is flared or re-injected because there is no local market for the
gas and transportation by pipeline is unavailable. The group is increasing its
focus on technologies to find markets for flared and re-injected gas through
liquefaction or use in power generation.
The Engineering and Construction Group has continued to expand its
services to the United States military. The group sees improving opportunities
to provide similar support services to other United States agencies and to
government agencies of other countries, including the United Kingdom. The demand
for these services is expected to grow as governments at all levels seek to
control costs and improve services by outsourcing various functions.
Dresser Equipment Group
Dresser Equipment Group's business is primarily affected by the demand
from customers in the energy industry - although power, chemical and
transportation industries are also significant customers for its products and
services. The group designs, manufactures and markets equipment including
valves, natural gas fueled engines, generators, instruments, meters, fuel
dispensing systems, blowers and power systems. Equipment manufactured by the
group is used by the energy industry to find, extract, process and deliver
petroleum and its related products. Demand for these products is directly
affected by global economic activities which influence demand for transportation
fuels, petrochemicals, plastics, fertilizers, chemicals, and by-products of oil
and gas. Current conditions for sales of the group's products are highly
competitive. Sales and earnings can be affected by change in competitive prices
and overall general economic conditions. Sales and earnings are also affected by
fluctuations in the level of activity and capital spending by independent,
integrated, national oil companies; gas distribution companies; pipeline
companies; and power generation and processing plants. The group strives to be
the low-cost provider in this competitive environment.
All of these activities are affected by the stability of oil and gas
prices that ultimately produce cash flow for our customers. The downturn in oil
and gas prices in 1998 and early 1999 had a negative effect on customer spending
that, in turn, severely impacted the group. Customer mergers and consolidations
further inhibited the industry as projects were cancelled or postponed.
Some of these issues factored into our decision to sell our interests
in Dresser-Rand and Ingersoll-Dresser Pump - joint ventures between
Ingersoll-Rand and Dresser Industries. The joint ventures manufacture gas and
steam turbine generators; centrifugal, reciprocating and axial compressors;
electric motors; generators; and liquid centrifugal, reciprocating, rotary and
turbine pumps. These joint ventures represented nearly half of the group's
revenues and operating profit in 1999.
Because of the impact of economic and political conditions, and
uncertainty in many parts of the world, during 1999 the group took additional
steps to reduce manufacturing and overhead costs in order to improve operating
performance and remain a low cost provider. The group consolidated a number of
manufacturing, distribution and support facilities and rationalized certain
product lines and channels to our customers. Furthermore, the group is working
to leverage off the products and services offered by the other Halliburton
companies and to create greater awareness of its products and services by other
Halliburton customers.
We believe strong demand still exists for Dresser Equipment Group's
products and services, although its business environment is highly competitive.
An increase in demand in 2000 will depend on many of the same industry factors
affecting our other business segments. Longer term, we believe the demand
for Dresser Equipment Group products and services will increase because of
an expanding global industrial base and rising demand for natural gas.
Halliburton Company
While the results of operations have been negatively impacted by the
lower activity levels in the oil and gas industry, we believe the long-term
fundamentals of the oil and gas industry remain sound. Steadily rising
population and greater industrialization efforts should continue to propel
16
worldwide economic expansion, especially in developing nations. These factors
should cause increasing demand for oil and gas to produce refined products,
petrochemicals, fertilizers and power.
RESULTS OF OPERATIONS IN 1999 COMPARED TO 1998 AND 1997
REVENUES
Millions of dollars 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Energy Services Group $ 6,999 $ 9,009 $ 8,505
Engineering and Construction Group 5,314 5,495 4,993
Dresser Equipment Group 2,585 2,849 2,774
- -----------------------------------------------------------------------------------------------------------------
Total revenues $ 14,898 $ 17,353 $ 16,272
- -----------------------------------------------------------------------------------------------------------------
Revenues for 1999 were $14,898 million, a decrease of 14% from 1998
revenues of $17,353 million and a decrease of 8% from 1997 revenues of $16,272
million. Approximately 68% of our consolidated revenues were derived from
international activities in 1999, compared with 65% in 1998 and 60% in 1997. All
groups had lower revenues in 1999 compared to 1998 as a result of lower activity
in the oil and gas industry due to oil price uncertainty and customer
consolidation.
Energy Services Group revenues were $6,999 million for 1999, a decrease
of 22% from 1998 revenues of $9,009 million and a decrease of 18% from 1997
revenues of $8,505 million. Approximately 71% of the Energy Services Group's
revenues were derived from international activities in 1999, compared with 67%
in 1998 and 1997. Revenues for the group were negatively impacted in 1998 and
1999 by declines in the worldwide average rotary rig count. The yearly average
worldwide rotary rig count declined 21% in 1999 compared to 1998 and 31%
compared to 1997. Comparative declines were most significant in the second half
of 1998 and the first half of 1999 as our customers reacted to reduced prices
for their products. Declines in the United States average rotary rig count
reached record lows in the second quarter of 1999. North American average rig
counts began to recover during the second half of 1999, while international rig
counts have lagged the recovery in North America. Our revenues in all geographic
areas except Asia Pacific declined in 1999 compared to 1998, particularly
Europe/Africa and the Middle East which each declined about 30%, and North
America which declined about 22%. In the third quarter of 1999 activity levels
began to improve in North America, although other areas have been slower to
recover. The revenue declines in 1998 compared to 1997 were more pronounced in
North America, including the Gulf of Mexico shelf, which declined about 6%, and
Venezuela which declined about 25%. Revenues for pressure pumping activities
were about 24% lower in 1999 compared to 1998 and about 28% lower than 1997.
Revenues from logging, drilling systems, drilling fluids and completion product
service lines all declined between 22% to 30% during 1999. Revenues from
upstream oil and gas engineering and construction services declined 18% in 1999
compared to 1998 and were level with 1997. The decrease in 1999 reflects the oil
and gas industry downturn caused by uncertainty in oil prices or decisions by
customers to delay projects while reevaluating their needs following merger and
consolidation activity. Reduced activity levels in the United Kingdom sector of
the North Sea were partially offset by increases in Asia Pacific. Revenues from
upstream oil and gas engineering and construction services continue to shift out
of the North Sea and into Latin America, Africa and Asia Pacific. In 1998
revenues from upstream oil and gas engineering services benefited from
activities in the subsea product lines and from large engineering projects.
Revenues from integrated exploration and production information systems
decreased nearly 11% in 1999 compared to 1998 and about 4% compared to 1997. In
1999 many customers for our information system product lines put off software
purchases due to customers' consolidations, lower activity levels and internal
focus on Year 2000 issues. Revenues for integrated exploration and production
information systems reached record high levels in 1998.
Engineering and Construction Group revenues were $5,314 million for
1999, a decrease of 3% from 1998 revenues of $5,495 million and an increase of
6% over 1997 revenues of $4,993 million. In 1999 the group increased logistics
support services to military peacekeeping efforts in the Balkans and increased
activities at the Devonport Dockyard in the United Kingdom. These increases
partially offset lower revenues from engineering and construction projects,
particularly major projects in Europe and Africa which were winding down. New
awards anticipated in the first half of 1999 were delayed by customers until the
second half of the year due to uncertainty in long-term oil prices and merger
activities. The awards received during the second half of 1999 will primarily
benefit the second half of 2000 as procurement and construction phases begin.
Revenues for the group in 1998 reflect higher liquefied natural gas activities
17
in Asia and Africa, an enhanced oil recovery project in Africa, and a major
ethylene project in Singapore. In 1997 revenues for the group included the
environmental services business, which was sold in December 1997, and revenues
in Asia Pacific from Kinhill Holdings Limited, which was acquired in the third
quarter of 1997. See Note 2.
Dresser Equipment Group revenues were $2,585 million in 1999, a
decrease of 9% from 1998 revenues of $2,849 million, and a decrease of 7% from
1997 revenues of $2,774 million. Revenues declined in all product lines during
1999 reflecting reduced demand. The compression and pumping product line had
approximately 6% lower revenues in 1999 compared to 1998 due to lower complete
unit sales and revenues were about even compared to 1997 revenues. During 1999
the lower volume on complete unit sales was partially offset by increased
product service volume. As discussed in Note 2 and Note 18, we have sold our
interests in two joint ventures that comprised the compression and pumping
product service line. This product line contributed revenues of $1.2 billion to
$1.3 billion each year in 1999, 1998 and 1997 to the Dresser Equipment Group.
Excluding the compression and pumping product line, 1999 revenues were down
between 10% and 11% compared to 1998 and 1997, respectively. The measurement
product line's revenues were about 7% lower in 1999 than the prior year and
about 10% lower than 1997 due to lower spending levels and delayed maintenance
spending by oil companies and other customers. Revenues in 1999 from flow
control products were down about 10% compared to 1998 and about 7% lower than
1997 due to lower activity levels in both the upstream and downstream oil and
gas industry. Power systems' revenues were 13% lower in 1999 than in 1998 and
were 16% lower than in 1997. The decrease in power systems' revenues in 1999 was
due to reductions in original equipment sales related to lower gas production,
higher gas storage levels and decreased equipment utilization.
OPERATING INCOME
Millions of dollars 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Energy Services Group $ 222 $ 971 $ 1,019
Engineering and Construction Group 203 237 219
Dresser Equipment Group 249 248 248
General corporate (71) (79) (71)
Special charges and credits:
Asset related - (509) (32)
Personnel reductions 30 (235) (6)
Facility consolidations 16 (126) (11)
Merger transaction costs 1 (64) (9)
Other costs and credits - (46) 42
- --------------------------------------------------------------------------------------------------------------------
Operating income $ 650 $ 397 $ 1,399
- --------------------------------------------------------------------------------------------------------------------
Operating income was $650 million for 1999 compared to $397 million for
1998 and $1,399 million for 1997. Excluding special credits of $47 million in
1999 and net special charges of $980 million and $16 million during 1998 and
1997, respectively, operating income for 1999 decreased by 56% from 1998 and 57%
from 1997. See Note 11 to our annual financial statements for information about
special charges and credits.
Energy Services Group operating income in 1999 was $222 million, a
decrease of 77% from 1998 operating income of $971 million and a decrease of 78%
from 1997 operating income of $1,019 million. Operating margins were 3.2% in
1999 compared with 10.8% in 1998 and 12.0% in 1997. Approximately 54% of the
Energy Services Group's operating income was derived from international
activities for 1999 and 1998 compared with 59% in 1997. Lower rig counts
resulted in excess capacity in the oilfield services sector which in turn placed
severe pressure on pricing, especially in the United States. As a result of
pricing pressures, average discounts in the United States for energy service
product service lines increased five percentage points in the first half of 1999
compared to the first half of 1998. For the year of 1999 average discounts in
the United States were about four percentage points over 1998. During the third
quarter of 1999, increased activity in some areas of the United States allowed
prices to stabilize and in some instances to increase slightly for the
production enhancement, completion products and drilling fluids product service
lines. Operating income for pressure pumping in 1999 was about 70% lower
18
compared to 1998 and 1997. Other energy service product service lines
experienced similar reductions in operating income. In spite of pricing
pressures and increased discounting in the United States, all product service
lines, except logging and drilling systems, were able to maintain positive
operating income in 1999.
Operating income in 1999 for upstream oil and gas engineering and
construction activities declined about 70% compared to 1998 and 1997. Due to
lower levels of business activity, particularly in the United Kingdom sector of
the North Sea, operating income in 1999 was negatively impacted by lower
utilization of engineering staff and under-utilization of vessels and
manufacturing facilities, which carry large fixed costs. Given the number and
technical complexity of engineering and construction projects we perform, some
project losses are normal occurrences. However, the environment for negotiations
with customers on claims and change orders has become more difficult in the past
few years. This environment combined with performance issues on a few large,
technically complex jobs contributed to unusually high job losses on major
projects of $77 million in 1999 and $99 million in 1998.
Operating income from integrated exploration and production information
systems in 1999 was lower than 1998 and 1997. The reduction of operating income
in 1999 was due to lower software sales volumes and the impact of recent changes
in accounting for software license agreements combined with changes in the
product mix from perpetual license sales to annual access licenses.
Engineering and Construction Group operating income for 1999 of $203
million decreased about 15% from 1998 and about 7% from 1997. Operating margins
were 3.8% in 1999 compared with 4.3% for 1998 and 4.4% for 1997. Operating
income in 1998 includes a favorable settlement of a claim on a Middle Eastern
construction project. Excluding this settlement, operating margins for 1998 were
4.0%. Operating income in 1999 benefited from higher activity levels supporting
United States military peacekeeping efforts in the Balkans, offset by reduced
engineering and construction project profits due to the timing of project awards
and revenue recognition. New project awards in the latter half of 1999 will
primarily benefit operating income in the latter part of 2000. Operating income
in 1998 benefited from several large projects, offset by losses in the fourth
quarter on selected projects which were impacted by the economic downturn in
Asia. Both 1999 and 1998 were negatively impacted by losses in the United States
highway and paving businesses which we are exiting.
Dresser Equipment Group operating income in 1999 was $249 million or
almost unchanged compared to operating income of $248 million in 1998 and 1997.
Operating margins for flow control increased in 1999 over 1998 and 1997 while
operating margins for measurement and power systems decreased in the same
period. Although revenues for the group declined in 1999, cost control
initiatives resulted in reduced cycle times and capacity costs which in turn
maintained operating income at a consistent level with prior years. The
compression and pumping product line will be discontinued in 2000. See Note 2
and Note 18. Operating income from compression and pumping was about $115
million in 1999 compared to $121 million in 1998 and $92 million in 1997.
Excluding compression and pumping, operating income for the group in 1999
increased about 5% over 1998 due in part to restructuring and cost control
initiatives begun in late 1998 and during 1999. In addition, operating income
was negatively impacted in 1998 by $17 million of fourth quarter merger-related
expenses. Compared to 1997, operating income in 1999 for the group, excluding
compression and pumping, declined about 14% due to lower activity levels across
all product lines.
Special credits in 1999 are the result of a change in estimate on some
components of the 1998 special charges. We continuously monitor the actual costs
incurred and reexamine our estimates of future costs. In the second quarter of
1999, we concluded that total costs, particularly for severance and facility
exit costs, were lower than previously estimated. Therefore, we reversed $47
million of the $980 million special charge that was originally recorded. See
Note 11 and the restructuring activities discussion beginning on page 22 for
additional information on special charges and credits.
General corporate expenses for 1999 were $71 million. In 1998 general
corporate expenses of $79 million included expenses for operating Dresser's
corporate offices as well as our corporate offices. As a percent of consolidated
revenues, general corporate expenses were 0.5% in 1999 and 1998 and 0.4% in
1997.
NONOPERATING ITEMS
Interest expense was $144 million for 1999 compared to $137 million in
1998 and $111 million in 1997. The increase in 1999 over 1998 and 1997 is due to
the increased level of total borrowings outstanding during the year. Our net
short-term borrowings of $433 million in 1999 carry a lower interest rate than
19
our long-term debt. We used the proceeds from these borrowings for working
capital, capital expenditures, acquisitions and to repay $61 million of our
long-term debt that matured in 1999.
Interest income increased to $76 million in 1999 compared to $28
million in 1998 and $22 million in 1997. The increase in interest income in 1999
is primarily from the settlement of income tax issues in the United States and
United Kingdom. Also in 1999, we earned imputed interest income on the note
receivable from the sale of our interest in M-I L.L.C.
Foreign currency gains (losses) netted to a loss of $8 million in 1999
compared to losses of $12 million in 1998 and $1 million in 1997. Most of the
losses in 1999 were incurred in the second half of the year from currency
exposures in Russian and Latin American currencies. The losses in 1998 occurred
mainly in Asia Pacific currencies.
Other nonoperating, net in 1999 includes a $26 million charge in the
second quarter relating to an impairment of Kellogg Brown & Root's net
investment in Bufete Industriale, S.A. de C.V., a large specialty engineering,
procurement and construction company in Mexico. This investment is accounted
for using the cost method and reported on the "Equity in and advances to related
companies" line of our consolidated balance sheets. Bufete's financial
condition deteriorated during 1999. On July 13, 1999, Bufete announced it would
default on $100 million in Eurobonds due July 15, 1999. We believe our
investment was impaired and consequently wrote off the entire amount.
Provision for income taxes was $214 million in 1999 for an effective
tax rate of 38.6%. Excluding the reversal of special charges and applicable tax
provision in 1999, the effective tax rate was 39.3%. The provision for income
taxes of $245 million in 1998 includes a benefit of $234 million for special
charge items that are tax deductible. Nondeductible special charge items of $109
million include merger transaction costs and nondeductible goodwill which was
determined to be impaired. Excluding the special charge and applicable tax
benefits in 1998, the effective tax rate was 38.0%. The effective tax rate in
1997, excluding special charges and related tax benefits, was 37.2%.
Minority interest in net income of consolidated subsidiaries was $43
million in 1999 compared to $49 million in 1998 and 1997. The Dresser-Rand joint
venture is the largest component of minority interest expense. Minority interest
in net income of the Dresser-Rand joint venture was $26 million in 1999 compared
to $27 million in 1998 and $19 million in 1997. This joint venture was sold in
the first quarter of 2000. See Note 18.
Extraordinary gain, net resulted from the sale of our 49% interest in
Ingersoll-Dresser Pump. We recorded an extraordinary gain of $253 million before
tax, or $159 million after-tax, for a net gain of $0.36 per diluted share. We
expect to record an extraordinary gain of approximately $215 million after-tax
or $0.48 per diluted share in the first quarter of 2000 from the sale of our 51%
interest in Dresser-Rand. See Note 2 and Note 18 for additional information on
the sales of these joint ventures.
Cumulative effect of change in accounting method of $19 million
after-tax, or 4 cents per diluted share, reflects our adoption of Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities." Estimated annual
expense for 1999 under Statement of Position 98-5 after recording the cumulative
effect of the change is not expected to be materially different from amounts
expensed under the prior accounting treatment. See Note 12 to our annual
financial statements for additional information.
Net income in 1999 was $438 million or $0.99 per diluted share. In
1998, the net loss of $15 million resulted in $0.03 diluted loss per share while
1997 net income of $772 million yielded $1.77 diluted income per share.
LIQUIDITY AND CAPITAL RESOURCES
We ended 1999 with cash and equivalents of $466 million compared with
$203 million in 1998 and $384 million in 1997. Beginning in 1998, we changed
Dresser's fiscal year-end of October 31 to our calendar year-end. Dresser's cash
flows in 1998 are measured from December 31, 1997, rather than from the October
31, 1997 balances included in our 1997 year-end balance sheets.
Cash flows from operating activities were $233 million for 1999
compared to $454 million for 1998 and $833 million for 1997. Working capital
items, which include receivables, inventories, accounts payable and other
working capital, net, used $351 million of cash in 1999 compared to $534 million
in 1998 and $535 million in 1997. Working capital requirements were lower in
1999 than in the prior two years due to lower levels of business activity.
20
Included in the 1999 changes to working capital and other net changes are cash
outflows for special charges for personnel reductions, facility closures and
integration costs which required approximately $217 million during the year. In
1998, we used cash of $112 million for items associated with the 1998 special
charges.
Cash flows used in investing activities were $159 million for 1999,
$846 million for 1998 and $873 million for 1997. Capital expenditures of $593
million in 1999 were about 35% lower than in 1998 and about 33% lower than in
1997. The decrease in capital spending primarily reflects the operating
environment that existed throughout most of 1999. Although reduced, we believe
that our level of capital spending is appropriate and will position us to meet
opportunities as activity levels improve. Capital spending was mostly for
equipment and infrastructure for the Energy Services Group. We also continued
our planned investments in our enterprise-wide information system. Cash flows
from investing activities in 1999 includes $254 million of the $265 million
receivable from the sale of our 36% interest in M-I L.L.C. that was collected in
the second quarter. Imputed interest on this receivable of $11 million is
included in operating cash flows. In 1998, net cash used for investing
activities includes various acquisitions of businesses of approximately $40
million. Cash used in investing activities in 1997 includes the acquisitions of
OGC of approximately $118 million, and Kinhill of approximately $34 million, and
an interest in PES (International) Limited of approximately $34 million. These
uses were offset by the sale of our environmental business for about $32
million.
Cash flows from financing activities provided $184 million in 1999,
$254 million in 1998 and used $21 million in 1997. We repaid $61 million on our
long-term debt and borrowed $433 million, net of repayments, in short-term funds
consisting of commercial paper and bank loans in 1999. Proceeds from exercises
of stock options provided cash flows of $49 million in 1999. We issued $150
million of long-term debt under our medium-term note program in 1998. Also in
1998, we had net borrowings of short-term debt of $370 million and proceeds from
exercise of stock options of $49 million. Dividends to shareholders used $221
million of cash in 1999 compared to $254 million in 1998. During 1997, cash of
$300 million was provided by proceeds from debt issued under our medium-term
note program, $3 million from other long-term borrowings and $71 million of
proceeds from the exercise of stock options. Offsetting these inflows were
payments on long-term debt of $18 million, net repayments on short-term
borrowings of $86 million, payments to reacquire common stock of $44 million,
and dividend payments of $250 million. Our combined short-term notes payable and
long-term debt was 35%, 32% and 24% of total capitalization at the end of 1999,
1998 and 1997, respectively. In the first quarter of 2000, we reduced our
short-term debt with proceeds from the sales of Ingersoll-Dresser Pump and
Dresser-Rand joint ventures.
We have the ability to borrow additional short-term and long-term funds
if necessary. See Note 7 to our annual financial statements regarding our
short-term lines of credit, notes payable and long-term debt.
FINANCIAL INSTRUMENT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices. To mitigate market risk, we
selectively hedged our foreign currency exposure through the use of currency
derivative instruments. The objective of our hedging is to protect our cash
flows related to sales or purchases of goods or services from fluctuations in
currency rates. The use of derivative instruments includes the following types
of market risk:
o volatility of the currency rates;
o time horizon of the derivative instruments;
o market cycles; and
o the type of derivative instruments used.
We do not use derivative instruments for trading purposes. See Note 1
to our annual financial statements for additional information on our accounting
policies on derivative instruments. See Note 16 to our annual financial
statements for additional disclosures related to derivative instruments.
Foreign exchange risk. We operate in over 120 countries. However, we
hedge only foreign currencies that are highly liquid and select derivative
instruments or a combination of instruments whose fluctuation in value is offset
by the fluctuation in value of the underlying exposure. These hedges generally
have expiration dates that do not exceed two years. We manage our foreign
exchange hedging activities through a control system that includes monitoring of
cash balances in traded currencies and uses analytical techniques including
value-at-risk estimations, and other procedures.
21
Value-at-risk. We use a statistical model to estimate the potential
loss related to derivative instruments used to hedge the market risk of our
foreign exchange exposure. The model utilizes historical price and volatility
patterns to estimate the change in value of the derivative instruments. Changes
in value could occur from adverse movements in foreign exchange rates for a
specified time period at a specified confidence interval. The model is a
calculation based on the diversified variance-covariance statistical modeling
technique and includes all foreign exchange derivative instruments outstanding
at December 31, 1999. The resulting value-at-risk of $2 million estimates, with
a 95% confidence interval, the potential loss we could incur in a one-day period
from foreign exchange derivative instruments due to adverse foreign exchange
rate changes.
Interest rate risk. We have exposure to interest rate risk from our
short-term commercial paper debt and our long-term debt in British pound
sterling that was incurred to acquire the Royal Dockyard in Plymouth, England.
The long-term debt interest rate risk is partially offset by a compensating
balance of approximately one-half of the outstanding debt amount which earns
interest at the same rate. Our use of the compensating balance for the Dockyard
Loans is restricted, and the balance is included in other assets on our
consolidated balance sheets. See Note 7 to our annual financial statements for
additional discussion of the Dockyard Loans.
Interest rate exposures. The following table represents principal
amounts at December 31, 1999, and related weighted average interest rates by
year of maturity for our restricted cash and long-term debt obligations.
Expected maturity date
------------------------------------------------------------------ Fair
Millions of dollars 2000 2001 2002 2003 2004 Thereafter Total Value
- -------------------------------------------------------------------------------------------------------------------------
Assets:
Restricted cash - British
pound sterling $ 3 $ 4 $ 3 - - - $ 10 $ 10
Average variable rate 7.46% 7.53% 7.51% - - - 7.49%
Long-term debt:
U.S. dollar $ 300 - $ 75 $ 139 - $ 825 $ 1,339 $ 1,327
Average fixed rate 6.25% - 6.30% 8.0% - 7.58% 7.58%
British pound sterling
(Dockyard Loans) $ 7 $ 8 $ 5 - - - $ 20 $ 20
Average variable rate 7.46% 7.53% 7.51% - - - 7.49%
- -------------------------------------------------------------------------------------------------------------------------
Weighted average variable rates are based on implied forward rates in
the yield curve at December 31, 1999. These implied forward rates should not be
viewed as predictions of actual future interest rates. Restricted cash and the
Dockyard Loans earn interest at LIBOR for British pound sterling plus 0.75%.
Instruments that are denominated in currencies other than the United States
dollar reporting currency are subject to foreign exchange rate risk as well as
interest rate risk.
RESTRUCTURING ACTIVITIES
During the third and fourth quarters of 1998, we incurred special
charges totaling $980 million related to the Dresser merger and industry
downturn. During the second quarter of 1999, we reversed $47 million of our 1998
special charges based on our reassessment of total costs to be incurred to
complete the actions covered in the charges.
The 1998 special charges were incurred for the cost of actions required
to more efficiently meet the needs of our customers, to eliminate duplicate
capabilities and excess capacity and to position us for the future. These
actions were also taken to integrate our operations into three business
segments, supported by a shared services organization across the entire company.
All business segments, shared services and corporate offices have been
impacted since the Dresser merger by the restructuring activities, including:
o integration of two corporate offices;
o integration of operational and shared services officers and
management teams;
o personnel reductions necessary to match the new business
structure and industry environment;
22
o integration of businesses and product service lines,
including:
- Halliburton Energy Services' drilling operations into
Sperry-Sun Drilling Systems;
- Dresser Oil Tools into Halliburton Energy Services
completion products;
- SubSea, Rockwater and Wellstream within Brown & Root
Energy Services; and
- M.W. Kellogg and Brown & Root Engineering and
Construction into Kellogg Brown & Root.
o integration of facilities across business units and the entire
company;
o impairments or write-offs of duplicate intangible assets and
software;
o impairments or write-offs of excess or duplicate machinery,
equipment, and inventory; and
o integration of shared service support functions.
At the time of the merger, our senior management was selected from the
senior officers of Dresser and Halliburton. Operational and shared service
managers were then similarly selected. We believe the management and employees
have remained focused on the needs of our customers during this transitional
period, although transitional demands have required considerable amounts of
time, energy and resources.
Most restructuring activities accrued for in the 1998 special charges
were completed and expended by the end of 1999. The amounts that remain to be
expended relate to severance payments not yet disbursed, sales of facilities to
be disposed of, and any other actions which may require negotiations with
outside parties extending past the end of the year. Cumulative through December
31, 1999, we used $328 million in cash for items associated with the 1998
special charges. The unutilized special charge reserve balance at December 31,
1999 is expected to result in future cash outlays of $69 million during 2000.
The 1998 charges included $509 million of asset related write-offs,
write-downs and charges; $235 million of personnel related charges; $126 million
of facility consolidation charges; $64 million of merger transaction costs; and
$46 million of other related charges. During the second quarter of 1999, we
concluded that the total estimated costs of items included in the special
charges, particularly severance and facility exit costs, were lower than
previously estimated. Therefore, we reversed $47 million of the 1998 special
charges.
The $509 million of asset related charges related to impairments
created by both the merger with Dresser and market conditions. We reviewed
assets by product service line to determine if impairments existed due to these
major events as required by Statements of Financial Accounting Standards No.
121.
The overall market assumptions on which the impairment computations
were made assumed that 1999 calendar year drilling activity as measured by
worldwide rig count would be 1,900 rigs, an increase from the 1,700 level in the
third quarter of 1998. Rig count for calendar year 2000 and beyond was assumed
to increase about 3% per year based upon estimated long-term growth in worldwide
demand for oil and gas. These assumptions represented our best estimates and
were based on market data available at the time of the merger.
Approximately $326 million of the asset related charges related to two
product service lines, drilling and logging.
Our pre-merger drilling business consisted of logging-while-drilling,
measurement-while-drilling and directional drilling services. The majority of
our pre-merger logging-while-drilling business and a portion of the pre-merger
measurement-while-drilling business were required to be sold under a United
States Department of Justice consent decree. We have integrated the remaining
drilling business with the Sperry-Sun operations of Dresser. Our strategy
focuses generally on operating under the Sperry-Sun name and using Sperry-Sun's
superior technology, tools and industry reputation. Our remaining pre-merger
drilling assets and technology are being de-emphasized as they wear out or
become obsolete. These tools will not be replaced, resulting in significant
decreases in future cash flows and an impairment of the excess of cost over net
assets and related long-lived assets.
Significant forecast assumptions included a revenue decline in the
remaining pre-merger drilling business due to the measurement-while-drilling
sale in the first year. Related revenue and operating income over the following
ten years were projected to decline due to reduced business opportunities
resulting from our shift in focus toward Sperry-Sun's tools and technologies. In
addition to the $125 million impairment of excess of cost over net assets
acquired, related long-lived asset impairments consisted of $61 million of
property and equipment and $14 million of related spare parts, the value of
which was estimated using the "held for use" model during the forecast period.
In addition, an impairment of $3 million was recorded related to property and
equipment and $18 million of spare parts sold in the measurement-while-drilling
sale using the "held for sale" model.
23
The merger of Halliburton and Dresser enabled the acceleration of a
formation evaluation strategy. This strategy takes advantage of Sperry-Sun's
logging-while-drilling competitive position and reputation for reliability
combined with our Magnetic Resonance Imaging Logging technology acquired with
the NUMAR acquisition in 1997. Prior to the merger, we were focused on growing
the traditional logging business while working toward development of new systems
to maximize the Magnetic Resonance Imaging Logging (MRIL(R)) technology. The
merger allows us to implement the new strategy and place the traditional logging
business in a sustaining mode. This change in focus and strategy will result in
a shift of operating cash flows away from our traditional logging business,
creating an impairment of the excess of cost over net assets and related
long-lived assets related to our logging business.
Significant forecast assumptions included revenues decreasing slowly
over the ten-year period, reflecting the decline in the traditional logging
business. Operating income initially was forecasted to increase due to cost
cutting activity, and then to decline as revenue decreased due to the
significant fixed costs in this product service line. In addition to the $51
million impairment of the excess of cost over net assets acquired, related
long-lived asset impairments consisted of $22 million of property and equipment
and $32 million of spare parts which management estimated using the "held for
use" model during the forecast period.
Other significant Energy Services Group product service lines included
in asset related charges were Mono Pump of $43 million and Ackerman, Vasquez &
Associates (AVA) of $37 million.
Our 1998 special charges included planned headcount reductions of over
10,000. Excluding personnel added to a significant project during 1999, net
headcount reductions of 13,000 were achieved during 1999, including reductions
related to the 1998 special charge.
We have in process a program to exit approximately 500 properties,
including service, administrative and manufacturing facilities. We accrued
expenses to exit approximately 400 of these properties in the 1998 special
charges. Most of these properties are within the Energy Services Group. Through
December 31, 1999 we have vacated 452 of the approximate 500 total facilities.
We have sold or returned to the owner 343 of the vacated properties.
We feel the benefits of the Dresser merger and other restructuring
activities are evidenced by our ability to profitably operate in spite of
depressed oil and gas industry conditions that have existed since the second
half of 1998. As a result of the initiatives discussed above, we feel we will
ultimately reduce our costs by an estimated $500 million on an annual basis. We
are accomplishing these reductions primarily through reduced personnel and
facility requirements, enhanced technologies and the efficiencies of common
shared services, for example, procurement, treasury, legal, tax, and accounting.
See Note 11 to our annual financial statements for information on
accrued special charges incurred in 1998.
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 specific environmental litigation and claims,
the clean-up of properties we own or have operated, and efforts to meet or
correct compliance-related matters. Except as noted in Note 9 to the annual
financial statements related to one site, none of these expenditures is expected
by our management to have a material adverse effect on our results of
operations.
YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is the risk that systems, products and
equipment utilizing date-sensitive software or computer chips with two-digit
date fields will fail to properly recognize the Year 2000. Such failures by our
software and hardware or that of government entities, service providers,
suppliers and customers could result in interruptions of our business which
could have a material adverse impact on the results of our operations.
We implemented an enterprise-wide Y2K program designed to identify,
assess and address significant Y2K issues.
As of December 31, 1999, we assess our Y2K issue tasks as being
substantially complete. We spent 7% of our 1999 information technology budget
on our Y2K program. All expenditures were funded from operations and expensed
in the year incurred. As of December 31, 1999, the cumulative amount spent
on our Y2K program of $44 million was as follows:
24
Millions of dollars
- ----------------------------------------------------------------
Software and information systems $ 31
Non-software/ IT items 8
Non IT systems 5
- ----------------------------------------------------------------
Total $ 44
- ----------------------------------------------------------------
That amount does not include costs associated with:
o initiatives that are independent of our Y2K program,
including:
- our global implementation of an enterprise-wide business
information system which is replacing many of our key
finance, administrative and marketing software systems;
and
- costs associated with our replacement and standardization
of desktop computing equipment and information technology
infrastructure.
Based on our experience through the filing date of this report, we do
not believe our Y2K liability to third parties to be material to our business,
results of operations or financial condition. We have more than 20,000 suppliers
worldwide. We have not suffered any significant supplier problems related to Y2K
and do not expect any material impact on our business, results of operations or
financial condition. We have more than 7,000 customers in over 120 countries. We
have not identified any customer that has suffered a significant Y2K problem and
do not expect any material impact on our business, results of operations or
financial condition. We conducted global business continuity planning for our
operations. We believed our worst case scenario for Y2K issues was increased
risk of infrastructure failures in less developed areas of Africa, Asia and
Latin America. We have not identified any significant Y2K business continuity
problems or infrastructure failures and do not expect any material impact on our
business, results of operations or financial condition. However, it is possible
that the full impact of the Y2K issue has not been fully recognized. For
example, it is possible that Y2K or similar issues such as leap year-related
problems may occur with billing, payroll, or financial closings at month,
quarterly, or year-end. We believe that these problems are likely to be minor
and correctable. In addition, our business could still be negatively affected if
our customers or suppliers are adversely affected by the Y2K or similar issues.
Forward-looking statements relating to the Year 2000. Our discussion
related to the Y2K issue includes a number of forward-looking statements that
are based on our best assumptions and estimates as of the filing date of this
report. Assumptions and estimates, which are not necessarily all of the
assumptions and estimates, include our statements concerning:
o assessments as to which systems are significant;
o identification of potential failures related to Y2K issues;
o assessments of the risk of our relationships with third
parties; and
o implementation of our business continuity plans.
Year 2000 risk factors. The work that we have done under our Y2K
program is focused on risk identification and mitigation, most likely worst case
analyses, and business continuity plans involving significant systems and
relationships with third parties. There are, however, an almost infinite number
of additional risks which are simply not assessable and for which contingency
plans cannot be established. There are risks of failure, for Y2K reasons, of one
or more systems or third party relationships which we do not judge to be
individually significant. These failures could cause a cascade of other
failures, which could have a material impact on our results of operations.
Actual results of our Y2K effort could differ materially from the estimates
expressed in our forward-looking statements, due to a number of factors.
Factors, which are not necessarily all of the factors that could cause different
results, include:
o our failure to accurately judge which of our systems and
relationships are significant;
o our ability to locate and correct or replace computer code and
systems embedded in equipment that controls or monitors our
operating assets;
o our inability or failure to identify significant Y2K issues
not now contemplated or understood; and
o the failure, including infrastructure failures, of third
parties to achieve Y2K readiness.
25
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." This standard requires entities to
recognize all derivatives on the statement of financial position as assets or
liabilities and to measure the instruments at fair value. Accounting for gains
and losses from changes in those fair values are specified in the standard
depending on the intended use of the derivative and other criteria. Statement of
Financial Accounting Standards No. 133 is effective for us beginning January 1,
2001. We are currently evaluating Statement of Financial Accounting Standards
No. 133 to identify implementation and compliance methods and we have not yet
determined the effect, if any, on our results of operations or financial
position.
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Halliburton Company:
We have audited the accompanying balance sheets of Halliburton Company
(a Delaware corporation) and subsidiary companies as of December 31, 1999 and
1998, and the related consolidated statements of income, cash flows, and
shareholders' equity for each of the three years in the period ended December
31, 1999. We did not audit the related consolidated statements of income, cash
flows and shareholders' equity of Dresser Industries, Inc., a company acquired
during 1998 in a transaction accounted for as a pooling of interests, as of
December 31, 1997, as discussed in Note 2. Such statements are included in the
consolidated financial statements of Halliburton Company and reflect total
revenue of 46% for the year ended December 31, 1997, of the related consolidated
total. These statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to amounts included for
Dresser Industries, Inc. is based solely upon the report of the other auditors.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based upon our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Halliburton Company and subsidiary
companies as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 27, 2000 (Except with respect to the matters discussed in Note 18,
as to which the date is February 16, 2000.)
27
RESPONSIBILITY FOR FINANCIAL REPORTING
We are responsible for the preparation and integrity of our published
financial statements. The financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and,
accordingly, include amounts based on judgments and estimates made by our
management. We also prepared the other information included in the annual report
and are responsible for its accuracy and consistency with the financial
statements.
The financial statements have been audited by the independent
accounting firm, Arthur Andersen LLP. Arthur Andersen was given unrestricted
access to all financial records and related data, including minutes of all
meetings of stockholders, the Board of Directors and committees of the Board.
We maintain a system of internal control over financial reporting,
which is intended to provide reasonable assurance to our management and Board of
Directors regarding the reliability of our financial statements. The system
includes:
o a documented organizational structure and division of
responsibility;
o established policies and procedures, including a code of
conduct to foster a strong ethical climate which is
communicated throughout the company; and
o the careful selection, training and development of our people.
Internal auditors monitor the operation of the internal control system and
report findings and recommendations to management and the Board of Directors.
Corrective actions are taken to address control deficiencies and other
opportunities for improving the system as they are identified. The Board,
operating through its Audit Committee, which is composed entirely of Directors
who are not current or former officers or employees of the company, provides
oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to the reliability of
our financial statements. Also, the effectiveness of an internal control system
may change over time.
We have assessed our internal control system in relation to criteria
for effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon that assessment, we believe
that, as of December 31, 1999, our system of internal control over financial
reporting met those criteria.
Halliburton Company
by
/s/ RICHARD B. CHENEY /s/ GARY V. MORRIS
------------------------ -------------------------
Richard B. Cheney Gary V. Morris
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
28
Halliburton Company
Consolidated Statements of Income
(Millions of dollars and shares except per share data)
Years ended December 31
----------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 10,826 $ 12,089 $ 11,256
Sales 3,939 5,070 4,857
Equity in earnings of unconsolidated affiliates 133 194 159
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 14,898 $ 17,353 $ 16,272
- ---------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 10,367 $ 11,127 $ 10,164
Cost of sales 3,414 4,342 4,038
General and administrative 514 600 665
Special charges (credits) (47) 887 6
- ---------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 14,248 16,956 14,873
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 650 397 1,399
Interest expense (144) (137) (111)
Interest income 76 28 22
Foreign currency losses, net (8) (12) (1)
Other nonoperating income (loss), net (19) 3 4
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, minority interest, extraordinary
item, and change in accounting method 555 279 1,313
Provision for income taxes (214) (245) (492)
Minority interest in net income of consolidated subsidiaries (43) (49) (49)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item and change in
accounting method 298 (15) 772
Extraordinary gain, net of $94 tax provision 159 - -
Cumulative effect of change in accounting method, net of $11 tax benefit (19) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 438 $ (15) $ 772
- ---------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share:
Before extraordinary item and change in accounting method $ 0.68 $ (0.03) $ 1.79
Extraordinary item, net 0.36 - -
Change in accounting method, net (0.04) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.00 $ (0.03) $ 1.79
- ---------------------------------------------------------------------------------------------------------------------------
Diluted income (loss) per common share:
Before extraordinary item and change in accounting method $ 0.67 $ (0.03) $ 1.77
Extraordinary item, net 0.36 - -
Change in accounting method, net (0.04) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.99 $ (0.03) $ 1.77
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 440 439 431
Diluted 443 439 436
See notes to annual financial statements.
29
Halliburton Company
Consolidated Balance Sheets
(Millions of dollars and shares except per share data)
December 31
--------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 466 $ 203
Receivables:
Notes and accounts receivable (less allowance for bad debts of $107 and $77) 3,254 3,345
Unbilled work on uncompleted contracts 625 515
- --------------------------------------------------------------------------------------------------------------------
Total receivables 3,879 3,860
Inventories 1,238 1,285
Deferred income taxes, current 187 432
Other current assets 252 286
- --------------------------------------------------------------------------------------------------------------------
Total current assets 6,022 6,066
Property, plant and equipment:
At cost 6,785 6,825
Less accumulated depreciation 3,994 3,929
- --------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,791 2,896
Equity in and net advances to related companies 409 587
Excess of cost over net assets acquired (net of accumulated amortization
of $237 and $240) 768 765
Deferred income taxes, noncurrent 394 337
Other assets 344 415
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 10,728 $ 11,066
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 949 $ 515
Current maturities of long-term debt 308 59
Accounts payable 932 1,009
Accrued employee compensation and benefits 229 402
Advance billings on uncompleted contracts 336 513
Income taxes payable 183 246
Accrued special charges 69 359
Other current liabilities 687 834
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,693 3,937
Long-term debt 1,056 1,370
Employee compensation and benefits 987 1,007
Other liabilities 552 521
Minority interest in consolidated subsidiaries 153 170
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 6,441 7,005
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized 600 shares,
issued 448 and 446 shares 1,120 1,115
Paid-in capital in excess of par value 68 8
Deferred compensation (51) (51)
Accumulated other comprehensive income (204) (149)
Retained earnings 3,453 3,236
- --------------------------------------------------------------------------------------------------------------------
4,386 4,159
Less 6 shares of treasury stock, at cost in both periods 99 98
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,287 4,061
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,728 $ 11,066
- --------------------------------------------------------------------------------------------------------------------
See notes to annual financial statements.
30
Halliburton Company
Consolidated Statements of Cash Flows
(Millions of dollars)
Years ended December 31
-----------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 438 $ (15) $ 772
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 599 587 564
Provision (benefit) for deferred income taxes 188 (293) 3
Extraordinary gain, net (159) - -
Change in accounting method, net 19 - -
Distributions from (advances to) related companies, net of equity in
(earnings) or losses 1 (23) (85)
Accrued special charges (290) 330 (52)
Other non-cash items 62 356 66
Other changes, net of non-cash items:
Receivables 143 (280) (409)
Inventories 65 (66) (117)
Accounts payable (97) (45) (49)
Other working capital, net (462) (143) 40
Other, net (274) 46 100
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities 233 454 833
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (593) (914) (880)
Sales of property, plant and equipment 146 100 181
Acquisitions of businesses, net of cash acquired (13) (40) (162)
Dispositions of businesses, net of cash disposed 291 7 38
Other investing activities 10 1 (50)
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities (159) (846) (873)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings of long-term debt - 150 303
Payments on long-term debt (61) (27) (18)
Net borrowings (payments) of short-term debt 433 370 (86)
Payments of dividends to shareholders (221) (254) (250)
Proceeds from exercises of stock options 49 49 71
Payments to reacquire common stock (10) (20) (44)
Other financing activities (6) (14) 3
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities 184 254 (21)
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 5 (5) (1)
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 263 (143) (62)
Cash and equivalents at beginning of year * 203 346 446
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 466 $ 203 $ 384
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 145 $ 137 $ 106
Income taxes 98 535 307
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 90 $ 5 $ 337
Liabilities disposed of in dispositions of businesses 111 24 206
- ----------------------------------------------------------------------------------------------------------------------------
* Cash balance at the beginning of 1998 does not agree to the prior year
ending cash balance in order to conform Dresser's fiscal year to
Halliburton's calendar year.
See notes to annual financial statements.
31
Halliburton Company
Consolidated Statements of Shareholders' Equity
(Millions of dollars and shares)
Years ended December 31
-----------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Common stock (number of shares)
Balance at beginning of year 446 454 222
Shares issued under compensation and incentive stock plans,
net of forfeitures 2 1 1
Cancellation of treasury stock - (9) -
Shares issued in connection with acquisition - - 8
Two-for-one common stock split - - 223
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 448 446 454
- -----------------------------------------------------------------------------------------------------------------------
Common stock (dollars)
Balance at beginning of year $ 1,115 $ 1,134 $ 554
Shares issued under compensation and incentive stock plans,
net of forfeitures 5 3 3
Cancellation of treasury stock - (22) -
Shares issued in connection with acquisition - - 21
Two-for-one common stock split - - 556
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,120 $ 1,115 $ 1,134
- -----------------------------------------------------------------------------------------------------------------------
Paid-in capital in excess of par value
Balance at beginning of year $ 8 $ 168 $ 615
Shares issued under compensation and incentive stock plans,
net of forfeitures 60 49 72
Cancellation of treasury stock - (209) -
Shares issued in connection with acquisition - - 37
Two-for-one common stock split - - (556)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 68 $ 8 $ 168
- -----------------------------------------------------------------------------------------------------------------------
Deferred compensation
Balance at beginning of year $ (51) $ (45) $ (23)
Current year awards, net - (6) (22)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (51) $ (51) $ (45)
- -----------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Cumulative translation adjustment $ (185) $ (142) $ (127)
Pension liability adjustment (19) (7) (4)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (204) $ (149) $ (131)
- -----------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment
Balance at beginning of year $ (142) $ (127) $ (94)
Conforming fiscal years - (15) -
Sales of subsidiaries (17) 9 -
Current year changes, net of tax (26) (9) (33)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (185) $ (142) $ (127)
- -----------------------------------------------------------------------------------------------------------------------
See notes to annual financial statements.
32
Halliburton Company
Consolidated Statements of Shareholders' Equity
(continued)
(Millions of dollars and shares)
Years ended December 31
-----------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Pension liability adjustment
Balance at beginning of year $ (7) $ (4) $ (7)
Current year adjustment (12) (3) 3
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (19) $ (7) $ (4)
- -----------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance at beginning of year $ 3,236 $ 3,563 $ 3,077
Net income (loss) 438 (15) 772
Cash dividends paid (221) (254) (250)
Cancellation of treasury stock - (61) -
Pooling of interests acquisition - - (36)
Conforming fiscal years - 3 -
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 3,453 $ 3,236 $ 3,563
- -----------------------------------------------------------------------------------------------------------------------
Treasury stock (number of shares)
Beginning of year 6 16 9
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net - (1) (2)
Shares purchased - - 1
Cancellation of treasury stock - (9) -
Two-for-one common stock split - - 8
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 6 6 16
- -----------------------------------------------------------------------------------------------------------------------
Treasury stock (dollars)
Beginning of year $ 98 $ 374 $ 382
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (9) (9) (52)
Shares purchased 10 3 44
Cancellation of treasury stock - (270) -
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 99 $ 98 $ 374
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income (loss) $ 438 $ (15) $ 772
Translation rate changes, net of tax (26) (9) (33)
Current year adjustment to minimum pension liability (12) (3) 3
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 400 $ (27) $ 742
- -----------------------------------------------------------------------------------------------------------------------
See notes to annual financial statements.
33
HALLIBURTON COMPANY
Notes to Annual Financial Statements
Note 1. Significant Accounting Policies
We employ accounting policies that are in accordance with generally
accepted accounting principles in the United States. The preparation of
financial statements in conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect:
o the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements; and
o the reported amounts of revenues and expenses during the
reporting period.
Ultimate results could differ from those estimates.
Principles of consolidation. The consolidated financial statements
include the accounts of our company and all majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
other companies in which we own between a 20% to 50% interest are accounted for
using the equity method. Specific prior year amounts have been reclassified to
conform with the current year presentation.
Revenues and income recognition. We recognize revenues as services are
rendered or products are shipped. The distinction between services and product
sales is based upon the overall activity of the particular business operation.
Revenues from engineering and construction contracts are reported on the
percentage of completion method of accounting using measurements of progress
towards completion appropriate for the work performed. All known or anticipated
losses on contracts are provided for currently. Claims and change orders which
are in the process of being negotiated with customers, for extra work or changes
in the scope of work are included in revenue when collection is deemed
probable. Post-contract customer support agreements are recorded as deferred
revenues and recognized as revenue ratably over the contract period of generally
one year's duration. Training and consulting service revenues are recognized as
the services are performed.
Research and development. Research and development expenses are charged
to income as incurred. See Note 3 for research and development expense by
business segment.
Software development costs. Costs of developing software for sale are
charged to expense when incurred, as research and development, until
technological feasibility has been established for the product. Once
technological feasibility is established, software development costs are
capitalized until the software is ready for general release to customers. We
capitalized costs related to software developed for resale of $12 million in
1999, $13 million in 1998 and $15 million in 1997. Amortization expense of
software development costs was $15 million for 1999, $18 million for 1998 and
$15 million for 1997. Once the software is ready for release, amortization of
the software development costs begins. Capitalized software development costs
are amortized over periods which do not exceed three years.
Income per share. Basic income per share amounts are based on the
weighted average number of common shares outstanding during the year. Diluted
income per share includes additional common shares that would have been
outstanding if potential common shares with a dilutive effect had been issued.
See Note 10 for a reconciliation of basic and diluted income per share from
continuing operations.
Cash equivalents. We consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Receivables. Our receivables are generally not collateralized. With the
exception of claims and change orders which are in the process of being
negotiated with customers, unbilled work on uncompleted contracts generally
represents work currently billable and this work is usually billed during normal
billing processes in the next month. These claims and change orders, included
in unbilled receivables, amounted to $98 million and $89 million at December 31,
1999 and 1998, respectively and are generally expected to be collected in the
following year.
Included in notes and accounts receivable are notes with varying
interest rates. At December 31, 1999 notes receivable totaled $424 million
including a note receivable of $377 million generated by the sale of
Ingersoll-Dresser Pump. See Note 2. At December 31, 1998 notes receivable
totaled $296 million including a note receivable generated by the sale of M-I.
See Note 2.
Inventories. Inventories are stated at the lower of cost or market.
Cost represents invoice or production cost for new items and original cost less
allowance for condition for used material returned to stock. Production cost
includes material, labor and manufacturing overhead. The cost of most
inventories is determined using either the first-in, first-out method or the
34
average cost method, although the cost of most United States manufacturing and
field service inventories is determined using the last-in, first-out method.
Inventories of sales items owned by foreign subsidiaries and inventories of
operating supplies and parts are generally valued at average cost.
Property, plant and equipment. Property, plant and equipment is
reported at cost less accumulated depreciation, which is generally provided on
the straight-line method over the estimated useful lives of the assets. Some
assets are depreciated on accelerated methods. Accelerated depreciation methods
are also used for tax purposes, wherever permitted. Expenditures for maintenance
and repairs are expensed; expenditures for renewals and improvements are
generally capitalized. Upon sale or retirement of an asset, the related costs
and accumulated depreciation are removed from the accounts and any gain or loss
is recognized. When events or changes in circumstances indicate that assets may
be impaired, an evaluation is performed. The estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
required. We follow the successful efforts method of accounting for oil and gas
properties. We are implementing an enterprise-wide information system. External
direct costs of materials and services and payroll-related costs of employees
working solely on development of the software system portion of the project are
capitalized. Capitalized costs of the project are amortized over periods of
three to ten years beginning when the system is placed in service. Training
costs and costs to reengineer business processes are expensed as incurred.
Excess of cost over net assets acquired. The excess of cost over net
assets acquired is amortized on a straight-line basis over periods not exceeding
40 years. The excess of cost over net assets acquired is continually monitored
for potential impairment. When negative conditions such as significant current
or projected operating losses exist, a review is performed to determine if the
projected undiscounted future cash flows indicate that an impairment exists. If
an impairment exists, the excess of cost over net assets acquired, and, if
appropriate, the associated assets are reduced to reflect the estimated
discounted cash flows to be generated by the underlying business, consistent
with methodologies in Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of."
Income taxes. A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before we are able
to realize their benefit, or that future deductibility is uncertain. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been realized in the financial statements or
tax returns.
Derivative instruments. We primarily enter into derivative financial
transactions to hedge existing or projected exposures to changing foreign
exchange rates. From time to time we enter into derivatives to hedge exposures
to interest rates or commodity prices. We do not enter into derivative
transactions for speculative or trading purposes. Derivative financial
instruments to hedge exposure with an indeterminable maturity date are generally
carried at fair value with the resulting gains and losses reflected in the
results of operations. Gains or losses on hedges of identifiable commitments are
deferred and recognized when the offsetting gains or losses on the related
hedged items are recognized. Deferred gains or losses for hedges which are
terminated prior to the transaction date are recognized when the underlying
hedged transactions are recognized. In the event an identifiable commitment is
no longer expected to be realized, any deferred gains or losses on hedges
associated with the commitment are recognized currently. Costs associated with
entering into these contracts are presented in other assets, while deferred
gains or losses are included in other liabilities or other assets, respectively,
on the consolidated balance sheets. Recognized gains or losses on derivatives
entered into to manage foreign exchange risk are included in foreign currency
gains and losses on the consolidated statements of income. Gains or losses on
interest rate derivatives and commodity derivatives are included in interest
expense and operating income, respectively. During the years ended December 31,
1999, 1998 and 1997, we did not enter into any significant transactions to hedge
interest rates or commodity prices.
Foreign currency translation. Foreign entities whose functional
currency is the United States dollar translate monetary assets and liabilities
at year-end exchange rates and non-monetary items are translated at historical
rates. Income and expense accounts are translated at the average rates in effect
during the year, except for depreciation and cost of product sales which are
translated at historical rates. Gains or losses from changes in exchange rates
are recognized in consolidated income in the year of occurrence. Foreign
entities whose functional currency is the local currency translate net assets at
year-end rates and income and expense accounts at average exchange rates.
Adjustments resulting from these translations are reflected in the consolidated
statements of shareholders' equity titled "cumulative translation adjustment."
35
Note 2. Acquisitions and Dispositions
Joint venture divestitures. In October 1999, we announced the sales of
our 49% interest in the Ingersoll-Dresser Pump joint venture and our 51%
interest in the Dresser-Rand joint venture to Ingersoll-Rand. See Note 18. The
sales were triggered by Ingersoll-Rand's exercise of its option under the joint
venture agreements to cause us to either buy their interests or sell ours. Our
Ingersoll-Dresser Pump interest was sold in December 1999 for approximately $515
million. We recorded an extraordinary gain of $253 million before tax, or $159
million after-tax, for a net gain of $0.36 per diluted share in 1999. Proceeds
from the sale, after payment of our intercompany balance, were received in the
form of a $377 million promissory note with an annual interest rate of 3.5% due
January 14, 2000. The note was collected on the due date and the cash from the
sale was used to repay short-term debt and for other general corporate purposes.
Our interest in Ingersoll-Dresser Pump was previously a part of the Dresser
Equipment Group.
Dresser merger. On September 29, 1998 we completed the acquisition of
Dresser Industries, Inc. by converting the outstanding Dresser common stock into
approximately 176 million shares of our common stock. We also reserved
approximately 7 million shares of common stock for outstanding Dresser stock
options and other employee and directors plans. The merger qualified as a
tax-free exchange to Dresser's shareholders for United States federal income tax
purposes and was accounted for using the pooling of interests method of
accounting for business combinations. Our financial statements have been
restated to include the results of Dresser for all periods presented. Beginning
in 1998, Dresser's year-end of October 31 has been conformed to our calendar
year-end. Periods through December 1997 contain Dresser information on a fiscal
year-end basis combined with our information on a calendar year-end basis.
For the two months ended December 31, 1997, Dresser had revenues of
$1,110 million, operating income of $53 million and net income of $36 million.
Operating income for the two-month period includes a pretax special charge of
$30 million ($12 million after-tax and minority interest) related to Dresser's
share of profit improvement initiatives at the Dresser-Rand and
Ingersoll-Dresser Pump joint ventures. The $30 million pretax special charge is
comprised of $23 million for Dresser-Rand and $7 million for Ingersoll-Dresser
Pump. Results for the two-month period have been included in retained earnings,
and dividends of $33 million paid in December 1997 have been deducted from
retained earnings in the consolidated statements of shareholders' equity at
December 31, 1998 as conforming fiscal years. The change to Dresser's cumulative
translation adjustment account for the period between October 31, 1997 and
December 31, 1997 of $15 million is also included in the consolidated statements
of shareholders' equity as conforming fiscal years. There were no material
transactions between us and Dresser prior to the merger.
Combined and separate company results of Halliburton Company and
Dresser Industries, Inc. for the periods preceding the merger are as follows:
36
Nine Months
Ended Year Ended
September 30 December 31
-----------------------------------
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------------------------
Revenues:
Halliburton Company $ 7,045 $ 8,819
Dresser Industries, Inc. 6,019 7,453
- ------------------------------------------------------------------------------------------------
Combined $ 13,064 $ 16,272
- ------------------------------------------------------------------------------------------------
Net income (loss):
Halliburton Company $ 359 $ 454
Dresser Industries, Inc. 282 318
1998 Special charge, net of tax (722) -
- ------------------------------------------------------------------------------------------------
Combined $ (81) $ 772
- ------------------------------------------------------------------------------------------------
LWD divestiture. In March 1999, in connection with the Dresser merger,
we sold the majority of our pre-merger worldwide logging-while-drilling and a
portion of the pre-merger measurement-while-drilling business. The sale was in
accordance with a consent decree with the United States Department of Justice.
The financial impact of the sale was reflected in the third quarter 1998 special
charge. See Note 11. This business was previously part of the Energy Services
Group. We continue to provide separate logging-while-drilling services through
our Sperry-Sun Drilling Systems business line, which was acquired as part of the
merger with Dresser and is now part of the Energy Services Group. In addition,
we will continue to provide sonic logging-while-drilling services using
technologies we had before the merger with Dresser.
M-I L.L.C. drilling divestiture. In August 1998, we sold our 36%
interest in M-I L.L.C. to Smith International, Inc., for $265 million. Payment
was made in the form of a non-interest bearing promissory note which was
collected in April 1999. The sale completed our commitment to the United States
Department of Justice to sell our M-I interest in connection with our merger
with Dresser. M-I was previously part of the Energy Services Group. We continue
to offer drilling fluid products and services through our Baroid Drilling Fluids
business line which was acquired as part of the merger with Dresser and is now
part of the Energy Services Group.
Acquisition of Devonport Royal Dockyard plc. During March 1997,
Devonport Management Limited completed the acquisition of Devonport Royal
Dockyard plc, which owns and operates the Government of the United Kingdom's
Royal Dockyard in Plymouth, England, for approximately $65 million. Concurrent
with the acquisition of the Royal Dockyard, our ownership interest in Devonport
Management Limited, a management consortium, increased from about 30% to 51% and
Devonport Management Limited borrowed $56 million under term loans. The dockyard
principally provides repair and refitting services for the British Royal Navy's
fleet of submarines and surface ships. Devonport Management Limited is a part of
the Engineering and Construction Group.
Acquisition of OGC International plc and Kinhill Holdings Limited.
During April 1997, we acquired the outstanding common stock of OGC International
plc for approximately $118 million. OGC is engaged in providing a variety of
engineering, operations and maintenance services, primarily to the North Sea oil
and gas production industry and is part of the Energy Services Group.
During July 1997, we acquired the outstanding common stock and
convertible debentures of Kinhill Holdings Limited for approximately $34
million. Kinhill, headquartered in Australia, provides engineering in mining and
minerals processing, petroleum and chemicals, water and wastewater,
transportation, and commercial and civil infrastructure. Kinhill markets its
services primarily in Australia, Indonesia, Thailand, Singapore, India and the
Philippines. Kinhill is part of the Engineering and Construction Group.
In 1997, we recorded approximately $99 million excess of cost over net
assets acquired primarily related to the purchase acquisitions of OGC and
Kinhill.
Acquisition of NUMAR. On September 30, 1997, we completed the
acquisition of NUMAR Corporation by converting the outstanding NUMAR common
stock into approximately eight million shares of our common stock. We also
reserved approximately one million shares of common stock for the exercise of
outstanding NUMAR stock options. The merger qualified as a tax-free exchange and
37
was accounted for using the pooling of interests method of accounting for
business combinations. Our financial statements were not restated to include
historical NUMAR operating results because they had no material impact.
NUMAR's assets and liabilities on September 30, 1997 were included in
the Company's accounts of the same date, resulting in an increase in net assets
of $21 million. Headquartered in Malvern, Pennsylvania, NUMAR designs,
manufactures and markets the Magnetic Resonance Imaging Logging (MRIL(R)) tool
which utilizes magnetic resonance imaging technology to evaluate subsurface rock
formations in newly drilled oil and gas wells. NUMAR is part of the Energy
Services Group.
SubSea asset sale. In 1997, we sold a portion of our SubSea operation's
assets to Global Industries, Ltd. for $102 million and recognized a loss of $9
million (net of tax of $4 million) on the sale. SubSea is part of the Energy
Services Group.
Environmental services divestiture. On December 31, 1997, we sold our
environmental services business to Tetra Tech, Inc. for approximately $32
million. The sale was prompted by our desire to divest non-core businesses and
had no significant effect on net income for the year. The environmental services
business was previously part of the Engineering and Construction Group.
We acquired other businesses in 1999, 1998 and 1997 for $13 million,
$42 million and $4 million, respectively. These businesses did not have a
significant effect on revenues or earnings.
Note 3. Business Segment Information
We have three business segments. These segments are organized around
the products and services provided to the customers they serve. See the table
below for information on our business segments.
The Energy Services Group segment provides pressure pumping equipment
and services, logging and perforating, drilling systems and services, drilling
fluids systems, drill bits, specialized completion and production equipment and
services, well control, integrated solutions, and reservoir description. Also
included in the Energy Services Group are upstream oil and gas engineering,
construction and maintenance services, specialty pipe coating, insulation,
underwater engineering services, integrated exploration and production
information systems, and professional services to the petroleum industry. The
Energy Services Group has three business units: Halliburton Energy Services,
Brown & Root Energy Services and Landmark Graphics. The long-term performance
for these business units is linked to the long-term demand for oil and gas. The
products and services the group provides are designed to help discover, develop
and produce oil and gas. The customers for this segment are major oil companies,
national oil companies and independent oil and gas companies.
The Engineering and Construction Group segment provides engineering,
procurement, construction, project management, and facilities operation and
maintenance for hydrocarbon processing and other industrial and governmental
customers. The Engineering and Construction Group has two business units:
Kellogg Brown & Root and Brown & Root Services. Both business units are engaged
in the delivery of engineering and construction services.
The Dresser Equipment Group segment designs, manufactures and markets
highly engineered products and systems for oil and gas producers, transporters,
processors, distributors and petroleum users throughout the world. The group's
products are also used in industries serving various other sectors of the
economy. Dresser Equipment Group operates as one business unit. See Note 2 and
Note 18 for information on the sales of two joint ventures within the Dresser
Equipment Group.
Our equity in pretax income or losses of related companies is included
in revenues and operating income of the applicable segment. Intersegment
revenues included in the revenues of the other business segments and sales
between geographic areas are immaterial. General corporate assets not included
in a business segment are primarily comprised of receivables, deferred tax
assets and other investments including the investment in our enterprise-wide
information system which we are implementing.
38
The tables below present information on our business segments.
Operations by Business Segment
Years ended December 31
-----------------------------------------
Millions of dollars 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Revenues:
Energy Services Group $ 6,999 $ 9,009 $ 8,505
Engineering and Construction Group 5,314 5,495 4,993
Dresser Equipment Group 2,585 2,849 2,774
- -----------------------------------------------------------------------------------------------------
Total $ 14,898 $ 17,353 $ 16,272
- -----------------------------------------------------------------------------------------------------
Operating income:
Energy Services Group $ 222 $ 971 $ 1,019
Engineering and Construction Group 203 237 219
Dresser Equipment Group 249 248 248
Special charges and credits 47 (980) (16)
General corporate (71) (79) (71)
- -----------------------------------------------------------------------------------------------------
Total $ 650 $ 397 $ 1,399
- -----------------------------------------------------------------------------------------------------
Capital expenditures:
Energy Services Group $ 414 $ 707 $ 683
Engineering and Construction Group 34 34 62
Dresser Equipment Group 73 73 76
General corporate 72 100 59
- -----------------------------------------------------------------------------------------------------
Total $ 593 $ 914 $ 880
- -----------------------------------------------------------------------------------------------------
Depreciation and amortization:
Energy Services Group $ 421 $ 405 $ 395
Engineering and Construction Group 43 49 63
Dresser Equipment Group 88 87 99
General corporate 47 46 7
- -----------------------------------------------------------------------------------------------------
Total $ 599 $ 587 $ 564
- -----------------------------------------------------------------------------------------------------
Total assets:
Energy Services Group $ 6,167 $ 6,618 $ 6,050
Engineering and Construction Group 1,282 1,405 1,646
Dresser Equipment Group 1,880 1,944 2,115
General corporate 1,399 1,099 893
- -----------------------------------------------------------------------------------------------------
Total $ 10,728 $ 11,066 $ 10,704
- -----------------------------------------------------------------------------------------------------
Research and development:
Energy Services Group $ 207 $ 220 $ 174
Engineering and Construction Group 4 4 2
Dresser Equipment Group 36 84 83
- -----------------------------------------------------------------------------------------------------
Total $ 247 $ 308 $ 259
- -----------------------------------------------------------------------------------------------------
Special charges and credits:
Energy Services Group $ (45) $ 721 $ (14)
Engineering and Construction Group - 40 3
Dresser Equipment Group - 21 27
General corporate (2) 198 -
- -----------------------------------------------------------------------------------------------------
Total $ (47) $ 980 $ 16
- -----------------------------------------------------------------------------------------------------
39
Operations by Geographic Area
Years ended December 31
------------------------------------------
Millions of dollars 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Revenues:
United States $ 4,781 $ 6,132 $ 6,507
United Kingdom 1,740 2,247 2,315
Other areas (over 120 countries) 8,377 8,974 7,450
- ------------------------------------------------------------------------------------------------------
Total $ 14,898 $ 17,353 $ 16,272
- ------------------------------------------------------------------------------------------------------
Long-lived assets:
United States $ 2,125 $ 2,400 $ 2,519
United Kingdom 798 595 775
Other areas (numerous countries) 924 1,053 981
- ------------------------------------------------------------------------------------------------------
Total $ 3,847 $ 4,048 $ 4,275
- ------------------------------------------------------------------------------------------------------
Note 4. Inventories
Inventories at December 31, 1999 and 1998 are comprised of the
following:
Millions of dollars 1999 1998
- -----------------------------------------------------------------------------------------
Finished products and parts $ 709 $ 621
Raw materials and supplies 230 250
Work in process 407 562
Progress payments (108) (148)
- -----------------------------------------------------------------------------------------
Total $ 1,238 $ 1,285
- -----------------------------------------------------------------------------------------
The cost of most United States manufacturing and field service
inventories is determined using the last-in, first-out method. Inventories on
the last-in, first-out method were $136 million and $168 million at December 31,
1999 and December 31, 1998, respectively. If the last-in, first-out method had
not been used, the cost of total inventories would have been about $108 million
higher than reported at December 31, 1999, and $111 million higher than reported
at December 31, 1998.
Note 5. Property, Plant and Equipment
Property, plant and equipment at December 31, 1999 and 1998 is
comprised of the following:
Millions of dollars 1999 1998
- -----------------------------------------------------------------------------------------
Land $ 126 $ 142
Buildings and property improvements 1,196 1,132
Machinery, equipment and other 5,463 5,551
- -----------------------------------------------------------------------------------------
Total $ 6,785 $ 6,825
- -----------------------------------------------------------------------------------------
At December 31, 1999 and 1998, machinery, equipment and other property
includes oil and gas investments of approximately $309 million and $224 million,
respectively, and software developed for our enterprise-wide information system
of $197 million and $133 million, respectively.
Note 6. Related Companies
We conduct some of our operations through various joint ventures which
are in partnership, corporate and other business forms, and are principally
accounted for using the equity method.
The larger unconsolidated entities include European Marine Contractors,
Limited; Bredero-Shaw and Ingersoll-Dresser Pump. European Marine Contractors,
Limited which is 50% owned and part of the Energy Services Group, specializes in
engineering, procurement and construction of marine pipelines. Bredero-Shaw,
40
which is 50% owned and part of the Energy Services Group, specializes in pipe
coating. From the formation of the Bredero-Shaw joint venture in 1996 until the
fourth quarter of 1997, we fully consolidated Bredero-Shaw as our ownership
interest in this joint venture exceeded 50%. During the fourth quarter of 1997,
we signed an agreement for a long-term extension of the joint venture with Shaw
Industries Ltd. and decreased our interest to 50%. In connection with the new
agreement, Shaw agreed to pay us $50 million over a four-year period. This
transaction resulted in a fourth quarter 1997 pretax gain of $42 million which
is reported in the consolidated statements of income in the caption "special
charges and credits." For balance sheet purposes, at year-end 1997 we
deconsolidated Bredero-Shaw and accounted for our 50% interest in the joint
venture as an equity investment. We include our share of equity in earnings in
the results of operations beginning January 1, 1998 using the equity method.
Ingersoll-Dresser Pump, 49%-owned and part of the Dresser Equipment Group,
manufactures a broad range of pump products and services. We sold our interest
in Ingersoll-Dresser Pump on December 30, 1999. See Note 2 to the annual
financial statements for further information on the sale of Ingersoll-Dresser
Pump.
We sold our 36% ownership interest in M-I to Smith International, Inc.
on August 31, 1998. This transaction completed our commitment to the
United States Department of Justice to sell our M-I interest in connection with
our merger with Dresser Industries, Inc. See Note 2 to the annual financial
statements for further information on the sale of M-I. Prior to the sale of our
interest, we accounted for our interest in Ingersoll-Dresser Pump and M-I on the
equity method.
Summarized financial statements for all combined jointly-owned
operations which are not consolidated are as follows:
Combined Operating Results
Millions of dollars 1999 1998 1997
- ----------------------------------------------------------------------------------------------
Revenues $ 4,130 $ 5,244 $ 3,959
- ----------------------------------------------------------------------------------------------
Operating income $ 271 $ 478 $ 407
- ----------------------------------------------------------------------------------------------
Net income $ 181 $ 341 $ 316
- ----------------------------------------------------------------------------------------------
Combined Financial Position
Millions of dollars 1999 1998
- ---------------------------------------------------------------------------
Current assets $ 1,744 $ 1,854
Noncurrent assets 464 322
- ---------------------------------------------------------------------------
Total $ 2,208 $ 2,176
- ---------------------------------------------------------------------------
Current liabilities $ 1,324 $ 1,074
Noncurrent liabilities 192 118
Minority interests 4 4
Shareholders' equity 688 980
- ---------------------------------------------------------------------------
Total $ 2,208 $ 2,176
- ---------------------------------------------------------------------------
Note 7. Lines of Credit, Notes Payable and Long-Term Debt
At December 31, 1999, we had committed short-term lines of credit
totaling $650 million available and unused, and other short-term lines of credit
totaling $215 million. There were no borrowings outstanding under these
facilities. Short-term debt consists primarily of $926 million in commercial
paper with an effective interest rate of 6.61% and $23 million in foreign bank
loans and overdraft facilities with varying rates of interest.
41
Long-term debt at the end of 1999 and 1998 consists of the following:
Millions of dollars 1999 1998
- ------------------------------------------------------------------------------------
6.25% notes due June 2000 $ 300 $ 300
7.6% debentures due August 2096 300 300
8.75% debentures due February 2021 200 200
8% senior notes due April 2003 139 139
Medium-term notes due 1999 through 2027 400 450
Term loans at LIBOR (GBP) plus 0.75% payable in
semi-annual installments through March 2002 20 30
Other notes with varying interest rates 5 10
- ------------------------------------------------------------------------------------
1,364 1,429
Less current portion 308 59
- ------------------------------------------------------------------------------------
Total long-term debt $ 1,056 $ 1,370
- ------------------------------------------------------------------------------------
At December 31, 1999, we have outstanding notes under our medium-term
note program as follows:
Amount Issue Date Due Rate Issue Price Yield
---------------------------------------------------------------------------------------------------------------
$125 million 02/1997 02/2027 6.75% 99.78% 6.78%
$ 50 million 05/1997 05/2017 7.53% Par 7.53%
$ 75 million 08/1997 08/2002 6.30% Par 6.30%
$150 million 11/1998 12/2008 5.63% 99.97% 5.63%
---------------------------------------------------------------------------------------------------------------
The 6.25% notes due 2000, 7.6% debentures due 2096, 8.75% debentures
due 2021, and 8% senior notes due 2003 may not be redeemed prior to maturity and
do not have sinking fund requirements. Each holder of the 6.75% medium-term
notes has the right to require us to repay such holder's notes in whole or in
part, on February 1, 2007. We may redeem the 5.63% medium-term notes in whole or
in part at any time. Other notes issued under the medium-term note program may
not be redeemed prior to maturity. The medium-term notes do not have sinking
fund requirements. In 1999, we redeemed $50 million 6.27% medium-term notes that
matured.
The term loans at LIBOR (GBP) plus 0.75% are denominated in British
pound sterling and are payable in semi-annual installments through March, 2002.
In connection with the term loans, we are required to maintain a compensating
balance which decreases in proportion to the outstanding loans. At December 31,
1999, the compensating balance was $10 million and was included in other assets
in our consolidated balance sheets.
Our long-term debt matures as follows:
Millions of dollars Amount
- --------------------------------------------
2000 $ 308
2001 8
2002 84
2003 139
2004 -
2005-2096 825
- --------------------------------------------
$ 1,364
- --------------------------------------------
Note 8. Dresser Financial Information
Since becoming a wholly-owned subsidiary, Dresser Industries, Inc. has
ceased filing periodic reports with the Securities and Exchange Commission.
Dresser's 8% guaranteed senior notes, which were initially issued by Baroid
Corporation, remain outstanding and are fully and unconditionally guaranteed by
Halliburton. As long as these notes remain outstanding, summarized financial
information of Dresser will be presented in our periodic reports filed on Form
10-K and Form 10-Q. We have not presented separate financial statements and
42
other disclosures concerning Dresser because we determined such information is
not material to the holders of these notes.
In January 1999, as part of a legal reorganization associated with the
merger, Halliburton Delaware, Inc., a first tier holding company subsidiary, was
merged into Dresser. The majority of our operating assets and activities are now
included within Dresser and its subsidiaries.
Dresser Industries, Inc.
Financial Position
December 31
--------------------------------------
Millions of dollars 1999 1998
- --------------------------------------------------------------------------------------------------
Current assets $ 5,671 $ 2,417
Noncurrent assets 5,535 2,614
- --------------------------------------------------------------------------------------------------
Total $ 11,206 $ 5,031
- --------------------------------------------------------------------------------------------------
Current liabilities $ 2,793 $ 1,389
Noncurrent liabilities 1,953 1,544
Minority interest 154 154
Shareholders' equity 6,306 1,944
- --------------------------------------------------------------------------------------------------
Total $ 11,206 $ 5,031
- --------------------------------------------------------------------------------------------------
Dresser Industries, Inc. Twelve months ended
Operating Results ----------------------------------------------------------
December 31 December 31 October 31
----------------------------------------------------------
Millions of dollars 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 14,898 $ 8,136 $ 7,453
- ----------------------------------------------------------------------------------------------------------------------
Operating income $ 626 $ 677 $ 601
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes, minority interest, extraordinary
gain and change in accounting method $ 437 $ 611 $ 547
Income taxes (174) (231) (191)
Minority interest (43) (36) (38)
Extraordinary gain, net 159 - -
Change in accounting method, net (19) - -
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 360 $ 344 $ 318
- ----------------------------------------------------------------------------------------------------------------------
Note 9. Commitments and Contingencies
Leases. At year end 1999, we were obligated under noncancelable
operating leases, expiring on various dates through 2021, principally for the
use of land, offices, equipment, field facilities, and warehouses. Total rentals
charged to operations for such leases totaled $150 million in 1999, $207 million
in 1998, and $203 million in 1997. Future total rentals on noncancelable
operating leases are as follows: 2000, $133 million; 2001, $114 million; 2002,
$94 million; 2003, $66 million; 2004, $39 million and thereafter, $114 million.
Asbestosis litigation. Since 1976, Dresser Industries, Inc. and its
former divisions or subsidiaries have been involved in litigation resulting from
allegations that third parties sustained injuries and damage from the inhalation
of asbestos fibers contained in some products manufactured by Dresser, its
former divisions or subsidiaries or by companies acquired by Dresser. In
addition, the Engineering and Construction Group is involved in litigation
resulting from allegations that third parties sustained injuries and damage from
the inhalation of asbestos fibers contained in some of the materials which were
used in various construction and renovation projects in the past.
Dresser and its former divisions or subsidiaries have entered into
agreements with insurance carriers which cover, in whole or in part, indemnity
payments, legal fees and expenses for specific categories of claims. Dresser and
its former divisions or subsidiaries are in negotiation with insurance carriers
over coverage for the remaining categories of claims. Because these agreements
are governed by exposure dates, payment type and the product involved, the
covered amount varies by individual claim. In addition, lawsuits are pending
43
against several carriers seeking to recover additional amounts related to these
claims. The Engineering and Construction Group is also involved in negotiations
with their insurance carriers concerning the scope of coverage for asbestos
claims.
Since 1976, approximately 237,300 claims have been filed against
various current and former divisions and subsidiaries. Most of these claims
relate to Dresser and its former divisions or subsidiaries. Approximately
129,650 of these claims have been settled or disposed of at a gross cost of
approximately $99 million with insurance carriers responsible for all but
approximately $23 million. Claims continue to be filed with about 46,400 new
claims filed in 1999. We have established a reserve estimating our liability for
asbestos claims. Our estimate is based on our historical litigation experience,
settlements and expected recoveries from insurance carriers. Our expected
insurance recoveries are based on agreements with insurance carriers or, where
agreements are still under negotiation, estimated recoveries. We believe that
the insurance carriers will be able to meet their share of future obligations
under the agreements. At the end of 1999, there were about 107,650 open claims,
including 19,000 for which settlements are pending. This compares with 70,500
open claims at the end of 1998. The accrued liabilities for these claims and
corresponding receivables from carriers were as follows:
Millions of dollars 1999 1998
- ----------------------------------------------------------------------------------------
Accrued liability $ 52 $ 53
Receivables from insurance companies (27) (34)
- ----------------------------------------------------------------------------------------
Net asbestos liability $ 25 $ 19
- ----------------------------------------------------------------------------------------
We recognize the uncertainties of litigation and the possibility that a
series of adverse court rulings could materially impact the expected resolution
of asbestos related claims. However, based upon our historical experience with
similar claims, the time elapsed since Dresser and its former divisions or
subsidiaries discontinued sale of products containing asbestos, and our
understanding of the facts and circumstances that gave rise to such claims, we
believe that the pending asbestos claims will be resolved without material
effect on our financial position or results of operations.
Dispute with Global Industrial Technologies, Inc. Under an agreement
entered into at the time of the spin-off of Global Industrial Technologies,
Inc., formerly INDRESCO, Inc., from Dresser Industries, Inc., Global assumed
liability for all asbestos related claims filed against Dresser after July 31,
1992 relating to refractory products manufactured or marketed by the former
Harbison-Walker Refractories division of Dresser. Those business operations were
transferred to Global in the spin-off. These asbestos claims are subject to
agreements with Dresser insurance carriers that cover expense and indemnity
payments. However, the insurance coverage is incomplete and Global has to date
paid the uncovered portion of those asbestos claims with its own funds.
Global now disputes that it assumed liability for any of these asbestos
claims which were based upon Dresser's negligence, the acts of Harbison-Walker
prior to its merger with Dresser in 1967, or punitive damages.
In order to resolve this dispute, Global invoked the dispute resolution
provisions of the 1992 agreement, which require binding arbitration. Global has
not claimed a specific amount of damages. We expect that Global's claim for
reimbursement will be in excess of $40 million. In addition, Global is seeking
relief from responsibility for pending claims based upon Dresser's negligence,
the pre-1967 acts of Harbison-Walker, punitive damages, and for all similar
future claims. On February 25, 2000, the arbitrator ruled that Global did assume
responsibility for claims based on Dresser's negligence and for punitive
damages. The arbitrator did not decide whether Global also assumed
responsibility for the pre-1967 acts of Harbison-Walker, but reserved his
decision pending further proceedings, although no timetable was set for those
proceedings.
In 1999 Dresser brought suit against Global to enjoin it from suing
Dresser's insurance carrier, Continental Insurance Company, for specific
asbestos claims. Although a Texas court in Dallas entered a temporary
injunction, a Texas appellate court reversed that decision and the matter
remains pending before the trial court. Since then, in late 1999, Global sued
Continental in federal court in Pennsylvania seeking coverage under Dresser
insurance policies for claims we believe are covered by the pending arbitration.
Dresser was not named in the lawsuit, and Continental has responded to Global by
moving to dismiss that lawsuit because Dresser was not included. We believe that
the issues involving Continental should be resolved in the pending arbitration.
We believe that all of Global's claims and assertions are without merit and we
intend to vigorously defend against them.
44
Environmental. 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 specific environmental litigation and
claims, the clean-up of properties we own or have operated and efforts to meet
or correct compliance-related matters.
Some of our subsidiaries and former operating entities are involved as
a potentially responsible party or PRP in remedial activities to clean-up
several "Superfund" sites under federal law and comparable state laws. Kellogg
Brown & Root, Inc., one of our subsidiaries, is one of nine PRPs named at the
Tri-State Mining District "Superfund" Site, which is also known as the Jasper
County "Superfund" Site. The site contains lead and zinc mine tailings produced
from mining activities that occurred from the 1800s through the mid-1950s in the
southwestern portion of Missouri. The PRPs have agreed to perform a Remedial
Investigation/Feasibility study at this site. Kellogg Brown & Root's share of
the cost of this study is not expected to be material. In addition to the
"Superfund" issues, the State of Missouri has indicated that it may pursue
natural resource damage claims against the PRPs. At present, Kellogg Brown &
Root cannot determine the extent of its liability, if any, for remediation costs
or natural resource damages.
We take a proactive approach in evaluating and addressing the
environmental impact of sites where we are operating or have maintained
operations. As a result we spend money each year assessing and remediating
contaminated properties to avoid future liabilities, to comply with legal and
regulatory requirements or to respond to claims by third parties.
Finally, we 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. Except for
our potential liability at the site described above, 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 $30 million as
of December 31, 1999 and $29 million as of December 31, 1998. Amounts accrued in
1999 were $6 million and amounts paid out were $5 million.
Other. We are a party to various other legal proceedings. However, we
believe any liabilities we may have arising from these proceedings will not be
material to our consolidated financial position and results of operations.
Note 10. Income Per Share
Millions of dollars and shares
except per share data 1999 1998 1997
- ----------------------------------------------------------------------------------------
Income (loss) before extraordinary item
and change in accounting method $ 298 $ (15) $ 772
- -----------------------------------------------------------------------------------------
Basic weighted average shares 440 439 431
Effect of common stock equivalents 3 - 5
- -----------------------------------------------------------------------------------------
Diluted weighted average shares 443 439 436
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Income (loss) per common share before
extraordinary item and change in
accounting method:
Basic $ 0.68 $ (0.03) $ 1.79
- -----------------------------------------------------------------------------------------
Diluted $ 0.67 $ (0.03) $ 1.77
- -----------------------------------------------------------------------------------------
Basic income per share amounts are based on the weighted average number
of common shares outstanding during the period. Diluted income per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. Excluded from the
computation of diluted earnings per share are options to purchase 2 million
shares of common stock in 1999; 1 million shares in 1998; and 1 million shares
in 1997. These options were outstanding during these respective years, but were
45
excluded because the option exercise price was greater than the average market
price of the common shares. Also, diluted earnings per share for 1998 excludes 3
million potential common shares which were antidilutive for earnings per share
purposes.
Note 11. Special Charges and Credits
Our special charges and credits consist of various non-recurring
transactions resulting from acquisitions, profit initiatives, and industry
downturns as set forth below.
1998 SPECIAL CHARGES AND 1999 CREDITS
The table below summarizes the 1998 pretax expenses for special charges
and the accrued amounts utilized and adjusted through December 31, 1999.
Asset Facility Merger
Related Personnel Consolidation Transaction Other
Millions of dollars Charges Charges Charges Charges Charges Total
- -----------------------------------------------------------------------------------------------------------------------
1998 Charges to Expense by
Business Segment
Energy Services Group $ 453 $ 157 $ 93 $ - $ 18 $ 721
Engineering & Construction Group 8 19 8 - 5 40
Dresser Equipment Group 18 1 2 - - 21
General corporate 30 58 23 64 23 198
- -----------------------------------------------------------------------------------------------------------------------
Total 509 235 126 64 46 980
Utilized in 1998 (509) (45) (3) (60) (4) (621)
- -----------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 - 190 123 4 42 359
Utilized in 1999 - (151) (74) (3) (15) (243)
Adjustments to 1998 charges - (30) (16) (1) - (47)
- -----------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 $ - $ 9 $ 33 $ - $ 27 $ 69
- -----------------------------------------------------------------------------------------------------------------------
Our 1998 results of operations reflect special charges totaling $980
million to provide for costs associated with the Dresser Industries, Inc. merger
and industry downturn due to declining oil and gas prices. These charges were
reflected in the following captions of the consolidated statements of income:
Twelve Months
Ended December 31
------------------------
Millions of dollars 1998
- -----------------------------------------------------------------
Cost of services $ 68
Cost of sales 25
Special charges 887
- -----------------------------------------------------------------
Total $ 980
- -----------------------------------------------------------------
Most restructuring activities accrued for in the 1998 special charges
were completed and expended by the end of 1999. The amounts that remain to be
expended relate to severance payments not yet disbursed, sales of facilities to
be disposed of, and other actions which may require negotiations with
outside parties extending into 2000. From inception through December 31, 1999,
we used $328 million in cash for items associated with the 1998 special charges.
The unutilized special charge reserve balance at December 31, 1999 is expected
to result in future cash outlays of $69 million during 2000. At December 31,
1999, no adjustments or reversals to the remaining accrued special charges are
planned.
During the second quarter of 1999, we reversed $47 million of the 1998
special charge based on our reassessment of total costs to be incurred to
complete the actions covered in our special charges. The components of the
reversal are as follows:
o $30 million in personnel charges primarily due to a reduction
in estimated legal costs associated with employee layoffs,
lower than anticipated average severance per person and fewer
than expected terminations due to voluntary employee
resignations;
46
o $16 million in facility consolidation charges due to fewer
than initially estimated facility exits, resulting in an
estimated $7 million reduction in facilities consolidation
costs, combined with other factors including more favorable
exit costs than anticipated; and
o $1 million of the estimated merger transaction costs primarily
as a result of lower than previously estimated legal and other
professional costs.
Asset Related Charges
Asset related charges include impairments and write-offs of intangible
assets and excess and/or duplicate machinery, equipment, inventory, and
capitalized software. Charges also include write-offs and lease cancellation
costs related to acquired information technology equipment replaced with our
standard common office equipment and exit costs on other leased assets.
As a result of the merger, Halliburton Company's and Dresser
Industries, Inc.'s completion products operations and formation evaluation
businesses have been combined. Excluded is Halliburton's logging-while-drilling
business and a portion of our measurement-while-drilling business which were
required to be disposed of in connection with the United States Department of
Justice consent decree. See Note 2. We recorded impairments based upon
anticipated future cash flows in accordance with Statement of Financial
Accounting Standards No. 121. This was based on the change in strategic
direction, the outlook for the industry, the decision to standardize equipment
product offerings and the expected loss on the disposition of the
logging-while-drilling business. The resulting write-downs of excess of cost
over net assets acquired and long-lived assets associated with:
o the directional drilling and formation evaluation businesses
acquired in 1993 from Smith International, Inc.;
o the formation evaluation business acquired in the 1988
acquisition of Gearhart Industries, Inc.; and
o Mono Pumps and AVA acquired in 1990 and 1992, are as follows:
Excess of Related
Cost Over Long-Lived
Millions of dollars Net Assets Assets Total
- ------------------------------------------------------------------------------------------------------------
Drilling operations of pre-merger Halliburton Energy Services $ 125 $ 96 $ 221
Logging operations of pre-merger Halliburton Energy Services 51 54 105
Mono Pump industrial and oilfield pump operations of Dresser 43 - 43
AVA completion products business of Dresser Oil Tools 34 3 37
Abandonment of a trademark 1 - 1
- ------------------------------------------------------------------------------------------------------------
Total $ 254 $ 153 $ 407
- ------------------------------------------------------------------------------------------------------------
As discussed below, the merger caused management to reevaluate the
realizability of excess cost over net assets acquired and related long-lived
assets of these product service lines. Each business was considered to be
impaired under SFAS No. 121 guidance.
The overall market assumptions on which the impairment computations
were made assumed that 1999 calendar year drilling activity as measured by
worldwide rig count would be 1,900 rigs which was up from the 1,700 level in the
third quarter of 1998. Rig count for calendar year 2000 and beyond was assumed
to increase about 3% per year based upon estimated long-term growth in worldwide
demand for oil and gas. These assumptions were based on market data available at
the time of the merger.
In addition to these assumptions, management utilized a 10 year
timeframe for future projected cash flows, a discount rate that approximates its
average cost of capital, and specific assumptions for the future performance of
each product service line. The most significant assumptions are discussed below.
In each case, these analyses represented management's best estimate of future
results for these product service lines.
Drilling operations of pre-merger Halliburton Energy Services. Our
pre-merger drilling business consisted of logging-while-drilling,
measurement-while-drilling and directional drilling services. The majority of
the pre-merger logging-while-drilling business and a portion of the pre-merger
measurement-while-drilling business were required to be sold under the United
States Department of Justice consent decree. We have integrated the remaining
47
drilling business with the Sperry-Sun operations of Dresser. Our strategy
focuses generally on operating under the Sperry-Sun name and using Sperry-Sun's
superior technology, tools and industry reputation. Our remaining pre-merger
drilling assets and technology are being de-emphasized as they wear out or
become obsolete. These tools will not be replaced resulting in significant
decreases in future cash flows and an impairment of the excess of cost over net
assets and related long-lived assets.
Significant forecast assumptions included a revenue decline in the
remaining pre-merger drilling business due to the measurement-while-drilling
sale in the first year. Related revenue and operating income over the following
ten years were projected to decline due to reduced business opportunities
resulting from our shift in focus toward Sperry-Sun's tools and technologies. We
determined that there was a $125 million impairment of excess of cost over net
assets acquired. In addition, related long-lived asset impairments consisted of
$61 million of property and equipment and $14 million of related spare parts,
the value of which was estimated using the "held for use" model during the
forecast period. An impairment of $3 million was recorded related to property
and equipment and $18 million of spare parts using the "held for sale" model
sold in accordance with the consent decree with the United States Department of
Justice. See Note 2.
Logging operations of pre-merger Halliburton Energy Services. The
merger of Halliburton Company and Dresser Industries, Inc. enabled the
acceleration of a formation evaluation strategy. This strategy takes advantage
of Sperry-Sun's logging-while-drilling competitive position and reputation for
reliability combined with our Magnetic Resonance Imaging Logging technology
acquired with the NUMAR acquisition in 1997. Prior to the merger, we were
focused on growing the traditional logging business while working toward
development of new systems to maximize the Magnetic Resonance Imaging Logging
technology. The merger allows us to implement the new strategy and place the
traditional logging business in a sustaining mode. This change in focus and
strategy will result in a shift of operating cash flows away from our
traditional logging business. This creates an impairment of the excess of cost
over net assets and related long-lived assets related to our logging business.
Significant forecast assumptions included revenues decreasing slowly
over the ten-year period, reflecting the decline in the traditional logging
markets. Operating income initially was forecasted to increase due to cost
cutting activity, and then decline as revenue decreased due to the significant
fixed costs in this product service line. We calculated $51 million impairment
of the excess of cost over net assets acquired. In addition, related long-lived
asset impairments consisted of $22 million of property and equipment and $32
million of spare parts which management estimated using the "held for use" model
during the forecast period.
Mono Pump operations of pre-merger Dresser. The amount of the
impairment is $43 million, all of which represents excess of cost over net
assets acquired associated with the business.
Our strategy for Mono Pump is to focus primarily on the oilfield
business including manufacturing power sections for drilling motors. The prior
strategy included emphasis on non-oilfield related applications of their pumping
technology and the majority of Mono Pump revenues were related to non-oilfield
sales. The change in strategy will result in reduced future cash flows resulting
in an impairment of the excess of costs over net assets acquired.
Significant forecast assumptions included stable revenue for several
years and then slowly declining due to decreasing emphasis of industrial market
applications. Operating income was forecasted to initially be even with current
levels but then decline over the period as revenues declined and fixed costs per
unit increased.
AVA operations of Dresser Oil Tools. The amount of the impairment is
$37 million of which $34 million relates to excess of costs over net assets
acquired.
The plan for Dresser's AVA business line (which supplies subsurface
safety valves and other completion equipment) is to rationalize product lines
which overlap with our pre-existing completion equipment business line. The vast
majority of the AVA product lines will be de-emphasized except for supporting
the installed base of AVA equipment and specific special order requests from
customers. AVA products are generally aimed at the high-end custom completion
products market. Our strategy will be to focus on standardized high-end products
based upon pre-merger Halliburton designs thus reducing future AVA cash flows
and impairing its assets and related excess of costs over net assets acquired.
Additional asset related charges. Additional asset related charges
include:
o $37 million for various excess fixed assets as a result of
merging similar product lines. We have no future use for these
assets and they have been scrapped;
48
o $33 million for other assets related to capitalized software,
which became redundant with the merger. Major components
included redundant computer aided design systems and
capitalized costs related to a portion of our enterprise-wide
information system abandoned due to changed requirements of
the post merger company. The redundant computer aided design
systems were in both the Energy Services Group and the
Engineering and Construction Group and were immediately
abandoned and replaced by superior systems required to meet
the needs of the merged company;
o $26 million for the inventory charge relates to excess
inventory as a result of merging similar product lines and/or
industry downturn. This included approximately $17 million
related to overlapping product lines and excess inventory in
the completion products business and $9 million related to
various Dresser Equipment Group divisions due to excess
inventory related to industry downturn. Inventory that was
overlapping due to the merger was segregated and has been
scrapped. Inventory reserves were increased to cover the
estimated write-down to market for inventory determined to be
excess as a result of the industry downturn. The inventory
will be used in the future. Any future sales are expected to
approximate the new lower carrying value of the inventory;
o $5 million for the impairment of excess of cost over net
assets acquired related to well construction technology that
became redundant once the merger was complete due to similar
but superior technology offered by Sperry-Sun. This technology
will no longer be used as part of our integrated service
offerings, thus reducing future cash flows. We will, however,
continue to market this technology individually to third
parties. An impairment based on a "held for use" model was
calculated using a ten-year discounted cash flow model with a
discount rate which approximates our average cost of capital;
and
o $1 million write-off of excess of cost over net assets
acquired related to the Steamford product line in the Dresser
Equipment Group valve and control division. Management made
the strategic decision to exit this product line.
Asset related charges have been reflected as direct reductions of the
associated asset balances.
Personnel Charges
Personnel charges include severance and related costs incurred for
announced employee reductions of 10,850 affecting all business segments,
corporate and shared service functions. Personnel charges also include personnel
costs related to change of control. In June 1999, management revised the planned
employee reductions to 10,100 due in large part to higher than anticipated
voluntary employee resignations. As of December 31, 1999, terminations of
employees, consultants and contract personnel related to the 1998 special charge
have been substantially completed. The remaining severance payments will occur
as affected projects are completed and facilities are closed.
Facility Consolidation Charges
Facility consolidation charges include costs to dispose of owned
properties or exit leased facilities. As a result of the merger with Dresser and
the industry downturn, we recorded a charge for costs to vacate, sell or close
excess and redundant service, manufacturing and administrative facilities
throughout the world. The majority of these facilities are within the Energy
Services Group. Expenses of $126 million included:
o $85 million write-down of owned facilities for anticipated
losses on planned disposals based upon the difference between
the assets' net book values and anticipated future net
realizable value based upon the "to be disposed of" method;
o $37 million lease buyout costs or early lease termination cost
including:
- estimated costs to buy out leases;
- facility refurbishment/restoration expenses as required by
the lease in order to exit property;
- sublease differentials, as applicable; and
- related broker/agent fees to negotiate and close buyouts;
49
o $4 million facility maintenance costs to maintain vacated
facilities between the abandonment date and the expected
disposition date. Maintenance costs include lease expense,
depreciation, maintenance, utilities, and third party
administrative costs.
Through December 31, 1999, we have vacated 88%, and sold or returned to
the owner 63% of the service, manufacturing and administrative facilities
related to the 1998 special charge. The majority of the sold, returned or
vacated properties are located in North America and have been eliminated from
the Energy Services Group. The remaining expenditures will be made as the
remaining properties are vacated and sold.
Merger Transaction Charges
Merger transaction costs include investment banking, filing fees, legal
and professional fees and other merger related costs. We estimated our merger
transaction costs to be $64 million.
Other Charges
Other charges of $46 million include the estimated contract exit costs
associated with the elimination of duplicate agents and suppliers in various
countries throughout the world. During 1999, we utilized $15 million in other
special charge costs. The balance will be utilized during 2000, in connection
with our renegotiations of agency agreements, supplier and other contracts and
elimination of other duplicate capabilities.
1997 SPECIAL CHARGES AND CREDITS
During 1997 our results of operations reflect various non-recurring
transactions resulting from acquisitions and restructuring activities incurred
by Dresser Industries, Inc., NUMAR Corporation, Landmark Graphics Corporation,
and us as follows:
1997 Merger
Special Asset Personnel Facility Transaction
Charges Charges Charges Charges Costs Other Total
-----------------------------------------------------------------------------------------------
Charges $ 32 $ 6 $ 11 $ 9 $ (42) $ 16
Utilized (32) (6) (5) (9) 42 (10)
-----------------------------------------------------------------------------------------------
12/31/97 $ - $ - $ 6 $ - $ - $ 6
Utilized - - (6) - - (6)
-----------------------------------------------------------------------------------------------
12/31/98 $ - $ - $ - $ - $ - $ -
-----------------------------------------------------------------------------------------------
The above charges were reflected in the following captions of the consolidated
statements of income:
Twelve months ended
Millions of dollars December 31, 1997
- ------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates $ 5
Cost of sales 5
Special charges and credits 6
- ------------------------------------------------------------------------
Total $ 16
- ------------------------------------------------------------------------
Net special charges for 1997 of $16 million related to various
acquisition and restructuring activities consisted of the following:
o other credits include a $42 million pretax gain paid to
Dresser by Shaw Industries as consideration to terminate a
call option provision held by Dresser under the Bredero-Shaw
pipe-coating joint venture agreement;
o $13 million for restructuring activities at Dresser-Rand to
close a European manufacturing facility and discontinue a
product line along with associated support locations. The
total includes $7 million of asset related charges and $6
million in facility related charges;
o facility charges include $5 million for our 49% share of a
facility restructuring at Ingersoll-Dresser Pump, a joint
venture accounted for on the equity basis;
50
o asset charges, including:
- $6 million write-off of an investment in an oil and gas
field in the former Soviet Union which was deemed
worthless;
- $6 million write-off of excess of cost over net assets
acquired associated with a United Kingdom manufacturing
operation which was substantially reduced in scope; and
- $13 million loss on the sale of specific assets of
Dresser's SubSea operation to Global Industries, Ltd.
o merger transaction costs include $9 million of professional
fees associated with the acquisition of NUMAR; and
o personnel charges include a $6 million charge for negotiated
early retirement incentives for two Dresser executives.
Additionally, we recorded our share of personnel reduction charges of $30
million during the two-month period ended December 31, 1997 to reduce employment
levels by approximately 1,000 at Dresser-Rand and Ingersoll-Dresser Pump. The
$30 million of personnel reduction charges is comprised of $23 million for
Dresser-Rand and $7 million for Ingersoll-Dresser Pump. These costs have been
recorded in the consolidated statements of shareholders' equity as part of
conforming the fiscal year of Dresser to our calendar year. See Note 2.
Note 12. Change in Accounting Method
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities." This Statement requires costs of start-up activities and
organization costs to be expensed as incurred. We adopted Statement of Position
98-5 effective January 1, 1999 and recorded expense of $30 million pretax or $19
million after-tax or $0.04 per diluted share. The components of the $30 million
pretax cost, all contained within the Energy Services Group, that were
previously deferred include:
o $23 million for mobilization costs associated with specific
contracts and for installation of offshore cementing equipment
onto third party marine drilling rigs or vessels; and
o $7 million for costs incurred opening a new manufacturing
facility in the United Kingdom.
Note 13. Income Taxes
The components of the (provision) benefit for income taxes are:
Millions of dollars 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Current income taxes
Federal $ 85 $ (302) $ (167)
Foreign (110) (228) (306)
State (1) (8) (16)
- ------------------------------------------------------------------------------------------------
Total (26) (538) (489)
- ------------------------------------------------------------------------------------------------
Deferred income taxes
Federal (174) 292 5
Foreign and state (14) 1 (8)
- ------------------------------------------------------------------------------------------------
Total (188) 293 (3)
- ------------------------------------------------------------------------------------------------
Subtotal $ (214) $ (245) $ (492)
- ------------------------------------------------------------------------------------------------
Provision for extraordinary gain (94) - -
Benefit for change in accounting method 11 - -
- ------------------------------------------------------------------------------------------------
Total $ (297) $ (245) $ (492)
- ------------------------------------------------------------------------------------------------
Included in federal income taxes are foreign tax credits of $80 million
in 1999, $182 million in 1998 and $154 million in 1997. The United States and
foreign components of income (loss) before income taxes and minority interests
are as follows:
51
Millions of dollars 1999 1998 1997
- ------------------------------------------------------------------------------------------------
United States $ 257 $ (306) $ 737
Foreign 298 585 576
- ------------------------------------------------------------------------------------------------
Total $ 555 $ 279 $ 1,313
- ------------------------------------------------------------------------------------------------
The primary components of our deferred tax assets and liabilities and
the related valuation allowances are as follows:
Millions of dollars 1999 1998
- ----------------------------------------------------------------------------------
Gross deferred tax assets
Employee benefit plans $ 250 $ 315
Special charges 25 135
Accrued liabilities 116 113
Insurance accruals 98 77
Construction contract accounting methods 98 93
Inventory 31 42
Intercompany profit 26 39
Net operating loss carryforwards 34 38
Intangibles 28 27
Basis in joint ventures 92 66
Alternative minimum tax carryforward 7 15
All other 81 60
- ----------------------------------------------------------------------------------
Total 886 1,020
- ----------------------------------------------------------------------------------
Gross deferred tax liabilities
Depreciation and amortization 135 85
Unrepatriated foreign earnings 29 26
Safe harbor leases 10 10
All other 99 100
- ----------------------------------------------------------------------------------
Total 273 221
- ----------------------------------------------------------------------------------
Valuation allowances
Net operating loss carryforwards 31 26
All other 1 4
- ----------------------------------------------------------------------------------
Total 32 30
- ----------------------------------------------------------------------------------
Net deferred income tax asset $ 581 $ 769
- ----------------------------------------------------------------------------------
We have accrued for the potential repatriation of undistributed
earnings of our foreign subsidiaries and consider earnings above the amounts on
which tax has been provided to be permanently reinvested. While these additional
earnings could become subject to additional tax if repatriated, repatriation is
not anticipated. Any additional amount of tax is not practicable to estimate.
We have net operating loss carryforwards which expire as follows: 2000
through 2004, $34 million; 2004 through 2009, $4 million. We also have net
operating loss carryforwards of $54 million with indefinite expiration dates.
Reconciliations between the actual provision for income taxes and that computed
by applying the United States statutory rate to income from continuing
operations before income taxes and minority interest are as follows:
52
Millions of dollars 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Provision computed at statutory rate $ (194) $ (98) $ (460)
Reductions (increases) in taxes resulting from:
Tax differentials on foreign earnings (16) (20) (4)
State income taxes, net of federal income tax benefit (1) (8) (12)
Special charges - (109) (3)
Nondeductible goodwill (10) (12) (12)
Other items, net 7 2 (1)
- ------------------------------------------------------------------------------------------------
Subtotal $ (214) $ (245) $ (492)
Provision for extraordinary gain (94) - -
Benefit for change in accounting method 11 - -
- ------------------------------------------------------------------------------------------------
Total $ (297) $ (245) $ (492)
- ------------------------------------------------------------------------------------------------
Note 14. Common Stock
On June 25, 1998, our shareholders voted to increase the number of
authorized shares from 400.0 million to 600.0 million.
On May 20, 1997, our shareholders voted to increase the number of
authorized shares from 200.0 million shares to 400.0 million shares. On June 9,
1997, our Board of Directors approved a two-for-one stock split effected in the
form of a stock dividend distributed on July 21, 1997 to shareholders of record
on June 26, 1997. The par value of the common stock of $2.50 per share remained
unchanged. As a result of the stock split, $556 million was transferred from
paid-in capital in excess of par value to common stock. Historical share and
per share amounts prior to 1997 presented in our annual report have been
restated to reflect the stock split.
Our 1993 Stock and Long-Term Incentive Plan provides for the grant of
any or all of the following types of awards:
o stock options, including incentive stock options and
non-qualified stock options;
o stock appreciation rights, in tandem with stock options or
freestanding;
o restricted stock;
o performance share awards; and
o stock value equivalent awards.
Under the terms of the 1993 Stock and Long-Term Incentive Plan as amended, 27.0
million shares of common stock have been reserved for issuance to key employees.
At December 31, 1999, 6.9 million shares were available for future grants under
the 1993 Stock and Long-Term Incentive Plan.
In connection with the acquisitions of Dresser in 1998 and NUMAR in
1997 (see Note 2), we assumed the outstanding stock options under the stock
option plans maintained by Dresser and NUMAR. Stock option transactions
summarized below include amounts for:
o the 1993 Stock and Long-Term Incentive Plan;
o the Dresser plans using the acquisition exchange rate of 1
share for each Dresser share; and
o the NUMAR plans using the acquisition exchange rate of 0.9664
shares for each NUMAR share.
The period from December 1997 to December 1998 includes Dresser activities from
its fiscal year-end of October 1997 to December 1997 in order to conform
Dresser's fiscal year-end to our calendar year-end.
53
Number of Exercise Weighted Average
Shares Price per Exercise Price
Stock Options (in millions) Share per Share
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 13.4 $ 3.49 - 29.73 $ 21.77
- ---------------------------------------------------------------------------------------------------
Options assumed in acquisition 0.9 3.10 - 22.12 12.22
Granted 2.2 30.69 - 61.50 46.18
Exercised (3.7) 3.10 - 29.56 17.95
Forfeited (0.4) 9.15 - 39.88 22.69
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 12.4 $ 3.10 - 61.50 $ 26.55
- ---------------------------------------------------------------------------------------------------
Granted 4.2 26.19 - 46.50 33.07
Exercised (2.4) 3.10 - 37.88 20.84
Forfeited (0.4) 5.40 - 54.50 33.64
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 13.8 $ 3.10 - 61.50 $ 29.37
- ---------------------------------------------------------------------------------------------------
Granted 5.6 28.50 - 48.31 36.46
Exercised (1.7) 3.10 - 54.50 24.51
Forfeited (0.6) 8.28 - 54.50 35.61
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 17.1 $ 3.10 - 61.50 $ 32.03
- ---------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 are composed of the following:
Outstanding Exercisable
----------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices (in millions) Life Price (in millions) Price
- ------------------------------------------------------------------------------------------------------------
$ 3.10 - 28.13 6.2 6.3 $ 22.82 4.9 $ 21.49
28.50 - 36.81 4.4 7.6 30.39 2.6 30.84
37.06 - 39.50 4.9 9.3 39.32 1.0 38.74
39.63 - 61.50 1.6 7.6 49.93 1.0 50.21
- ------------------------------------------------------------------------------------------------------------
$ 3.10 - 61.50 17.1 7.6 $ 32.03 9.5 $ 28.96
- ------------------------------------------------------------------------------------------------------------
There were 7.8 million options exercisable with a weighted average
exercise price of $25.72 at December 31, 1998, and 6.9 million options
exercisable with a weighted average exercise price of $21.17 at December 31,
1997.
All stock options under the 1993 Stock and Long-Term Incentive Plan,
including options granted to employees of Dresser and NUMAR since the
acquisition of these companies, are granted at the fair market value of the
common stock at the grant date.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. The weighted average assumptions and
resulting fair values of options granted are as follows:
Assumptions Weighted Average
---------------------------------------------------------------------
Risk-Free Expected Expected Expected Fair Value of
Interest Rate Dividend Yield Life (in years) Volatility Options Granted
- ------------------------------------------------------------------------------------------------------------------
1999 5.8% 1.3% 5 56.0% $ 19.77
1998 4.3 - 5.3% 1.2 - 2.7% 5 - 6.5 20.1 - 38.0% $ 11.63
1997 6.0 - 6.4% 1.0 - 2.7% 5 - 6.5 22.8 - 43.3% $ 17.29
- ------------------------------------------------------------------------------------------------------------------
54
Stock options generally expire ten years from the grant date. Stock
options vest over a three-year period, with one-third of the shares becoming
exercisable on each of the first, second and third anniversaries of the grant
date.
We account for the option plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Compensation cost for the stock option
programs calculated consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," is set forth on a pro forma
basis below:
Millions of dollars,
except per share data 1999 1998 1997
- -----------------------------------------------------------------------
Net income:
As reported $ 438 $ (15) $ 772
Pro forma 406 (43) 750
- -----------------------------------------------------------------------
Diluted earnings per share:
As reported $ 0.99 $(0.03) $ 1.77
Pro forma 0.92 (0.10) 1.72
- -----------------------------------------------------------------------
Restricted shares awarded under the 1993 Stock and Long-Term Incentive
Plan for 1999, 1998 and 1997 were 352,267 and 414,510 and 515,650, respectively.
The shares awarded are net of forfeitures of 72,483; 136,540; and 34,900 shares
in 1999, 1998 and 1997, respectively. The weighted average fair market value per
share at the date of grant of shares granted in 1999, 1998 and 1997 was $43.41,
$34.77 and $45.29, respectively.
Our Restricted Stock Plan for Non-Employee Directors allows for each
non-employee director to receive an annual award of 400 restricted shares of
common stock as a part of compensation. We reserved 100,000 shares of common
stock for issuance to non-employee directors. We issued 4,800; 3,200; and 3,200
restricted shares in 1999, 1998 and 1997, respectively, under this plan. At
December 31, 1999, 25,200 shares have been issued to non-employee directors
under this plan. The weighted average fair market value per share at the date of
grant of shares granted in 1999, 1998 and 1997 was $43.33, $36.31 and $46.06,
respectively.
Our Employees' Restricted Stock Plan was established for employees who
are not officers, for which 200,000 shares of common stock have been reserved.
At December 31, 1999, 160,300 shares (net of 36,700 shares forfeited) have been
issued. Forfeitures were 8,400; 1,900; and 14,600 in 1999, 1998 and 1997,
respectively, and no further grants are being made under this plan.
Under the terms of our Career Executive Incentive Stock Plan, 15.0
million shares of our common stock were reserved for issuance to officers and
key employees at a purchase price not to exceed par value of $2.50 per share. At
December 31, 1999, 11.7 million shares (net of 2.2 million shares forfeited)
have been issued under the plan. No further grants will be made under the Career
Executive Incentive Stock Plan.
Restricted shares issued under the 1993 Stock and Long-Term Incentive
Plan, Restricted Stock Plan for Non-Employee Directors, Employees' Restricted
Stock Plan and the Career Executive Incentive Stock Plan are limited as to sale
or disposition. These restrictions lapse periodically over an extended period of
time not exceeding ten years. The fair market value of the stock, on the date of
issuance, is being amortized and charged to income (with similar credits to
paid-in capital in excess of par value) generally over the average period during
which the restrictions lapse. At December 31, 1999, the unamortized amount is
$51 million. Compensation costs recognized in income for 1999, 1998 and 1997
were $11 million, $8 million and $7 million, respectively.
Note 15. Series A Junior Participating Preferred Stock
We previously declared a dividend of one preferred stock purchase right
on each outstanding share of common stock. The dividend is also applicable to
each share of our common stock that was issued subsequent to adoption of the
Rights Agreement entered into with ChaseMellon Shareholder Services, L.L.C. Each
preferred stock purchase right entitles its holder to buy one two-hundredth of a
share of our Series A Junior Participating Preferred Stock, without par value,
at an exercise price of $75. These preferred stock purchase rights are subject
to antidilution adjustments, which are described in the Rights Agreement entered
into with ChaseMellon. The preferred stock purchase rights do not have any
voting rights and are not entitled to dividends.
55
The preferred stock purchase rights become exercisable in limited
circumstances involving a potential business combination. After the preferred
stock purchase rights become exercisable, each preferred stock purchase right
will entitle its holder to an amount of our common stock, or in some
circumstances, securities of the acquirer, having a total market value equal to
two times the exercise price of the preferred stock purchase right. The
preferred stock purchase rights are redeemable at our option at any time before
they become exercisable. The preferred stock purchase rights expire on December
15, 2005. No event during 1999 made the preferred stock purchase rights
exercisable.
Note 16. Financial Instruments and Risk Management
Foreign exchange risk. Techniques in managing foreign exchange risk
include, but are not limited to, foreign currency borrowing and investing and
the use of currency derivative instruments. We selectively hedge significant
exposures to potential foreign exchange losses considering current market
conditions, future operating activities and the cost of hedging the exposure in
relation to the perceived risk of loss. The purpose of our foreign currency
hedging activities is to protect us from the risk that the eventual dollar cash
flows resulting from the sale and purchase of products and services in foreign
currencies will be adversely affected by changes in exchange rates. We do not
hold or issue derivative financial instruments for trading or speculative
purposes.
We hedge our currency exposure through the use of currency derivative
instruments. These contracts generally have an expiration date of two years or
less. Forward exchange contracts, which are commitments to buy or sell a
specified amount of a foreign currency at a specified price and time, are
generally used to hedge identifiable foreign currency commitments. Losses of $6
million for identifiable foreign currency commitments were deferred at December
31, 1999. Forward exchange contracts and foreign exchange option contracts,
which convey the right, but not the obligation, to sell or buy a specified
amount of foreign currency at a specified price, are generally used to hedge
foreign currency commitments with an indeterminable maturity date. None of the
forward or option contracts are exchange traded.
While hedging instruments are subject to fluctuations in value, the
fluctuations are generally offset by the value of the underlying exposures being
hedged. The use of some contracts may limit our ability to benefit from
favorable fluctuations in foreign exchange rates. The notional amounts of open
forward contracts and options were $393 million and $596 million at year-end
1999 and 1998, respectively. The notional amounts of our foreign exchange
contracts do not generally represent amounts exchanged by the parties, and thus,
are not a measure of our exposure or of the cash requirements relating to these
contracts. The amounts exchanged are calculated by reference to the notional
amounts and by other terms of the derivatives, such as exchange rates. We
actively monitor our foreign currency exposure and adjust the amounts hedged as
appropriate.
Exposures to some currencies are generally not hedged due primarily to
the lack of available markets or cost considerations (non-traded currencies). We
attempt to manage our working capital position to minimize foreign currency
commitments in non-traded currencies and recognize that pricing for the services
and products offered in these countries should cover the cost of exchange rate
devaluations. We have historically incurred transaction losses in non-traded
currencies.
Credit risk. Financial instruments that potentially subject us to
concentrations of credit risk are primarily cash equivalents, investments and
trade receivables. It is our practice to place our cash equivalents and
investments in high quality securities with various investment institutions. We
derive the majority of our revenues from sales and services to, including
engineering and construction for, the energy industry. Within the energy
industry, trade receivables are generated from a broad and diverse group of
customers. There are concentrations of receivables in the United States and the
United Kingdom. We maintain an allowance for losses based upon the expected
collectibility of all trade accounts receivable.
There are no significant concentrations of credit risk with any
individual counterparty or groups of counterparties related to our derivative
contracts. We select counterparties based on creditworthiness, which we
continually monitor, and on the counterparties' ability to perform their
obligations under the terms of the transactions. We do not expect any
counterparties to fail to meet their obligations under these contracts given
their high credit ratings. Therefore, we consider the credit risk associated
with our derivative contracts to be minimal.
Fair value of financial instruments. The estimated fair value of
long-term debt at year-end 1999 and 1998 was $1,352 million and $1,578 million,
respectively, as compared to the carrying amount of $1,364 million at year-end
1999 and $1,429 million at year-end 1998. The fair value of fixed rate long-term
debt is based on quoted market prices for those or similar instruments. The
56
carrying amount of variable rate long-term debt and restricted cash (see Note 7)
approximates fair value because these instruments reflect market changes to
interest rates. The carrying amount of short-term financial instruments, cash
and equivalents, receivables, short-term notes payable and accounts payable, as
reflected in the consolidated balance sheets approximates fair value due to the
short maturities of these instruments. The fair value of currency derivative
instruments, which generally approximates their carrying amount based upon third
party quotes, was $6 million receivable and $5 million payable at December 31,
1999.
Note 17. Retirement Plans
Our company and subsidiaries have various plans which cover a
significant number of their employees. These plans include defined contribution
plans, which provide retirement contributions in return for services rendered,
provide an individual account for each participant and have terms that specify
how contributions to the participant's account are to be determined rather than
the amount of pension benefits the participant is to receive. Contributions to
these plans are based on pre-tax income and/or discretionary amounts determined
on an annual basis. Our expense for the defined contribution plans totaled $146
million, $152 million, and $213 million in 1999, 1998 and 1997, respectively.
Other retirement plans include defined benefit plans, which define an amount of
pension benefit to be provided, usually as a function of age, years of service
or compensation. These plans are funded to operate on an actuarially sound
basis. Plan assets are primarily invested in cash, short-term investments, real
estate, equity and fixed income securities of entities domiciled in the country
of the plan's operation.
1999 1998
----------------------------------- ----------------------------------
Millions of dollars United States International United States International
- ----------------------------------------------------------------------------------- ----------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 430 $ 1,716 $ 377 $ 1,570
Service cost 7 66 5 57
Interest cost 30 96 27 111
Plan participants' contributions - 15 - 14
Effect of business combinations - - - 21
Amendments 5 11 14 -
Settlements/curtailments (3) - (2) (9)
Currency fluctuations - (44) - (2)
Actuarial gain/(loss) (3) (60) 38 (5)
Benefits paid (53) (53) (29) (41)
- ----------------------------------------------------------------------------------- ----------------------------------
Benefit obligation at end of year $ 413 $ 1,747 $ 430 $ 1,716
- ----------------------------------------------------------------------------------- ----------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 445 $ 1,817 $ 421 $ 1,775
Actual return on plan assets 65 376 39 28
Employer contribution 22 26 17 25
Settlements (13) - (3) -
Plan participants' contributions - 15 - 14
Effect of business combinations - - - 21
Currency fluctuations - (47) - (5)
Benefits paid (53) (53) (29) (41)
- ----------------------------------------------------------------------------------- ----------------------------------
Fair value of plan assets at end of year $ 466 $ 2,134 $ 445 $ 1,817
- ----------------------------------------------------------------------------------- ----------------------------------
Funded status $ 53 $ 387 $ 15 $ 101
Unrecognized transition obligation - (6) 3 (8)
Unrecognized actuarial (gain)/loss (31) (275) 5 10
Unrecognized prior service cost 7 (41) 1 (68)
- ----------------------------------------------------------------------------------- ----------------------------------
Net amount recognized $ 29 $ 65 $ 24 $ 35
- ----------------------------------------------------------------------------------- ----------------------------------
We recognized an additional minimum pension liability for the
underfunded defined benefit plans. The additional minimum liability is equal to
the excess of the accumulated benefit obligation over plan assets and accrued
liabilities. A corresponding amount is recognized as either an intangible asset
or a reduction of shareholders' equity.
57
1999 1998
----------------------------------- ----------------------------------
Millions of dollars United States International United States International
- ----------------------------------------------------------------------------------- ----------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 43 $ 98 $ 31 $ 68
Accrued benefit liability (38) (40) (34) (33)
Intangible asset 11 1 17 -
Deferred tax asset - - 4 -
Accumulated other comprehensive income 13 6 6 1
- ---------------------------------------------------------------------------------- ----------------------------------
Net amount recognized $ 29 $ 65 $ 24 $ 36
- ---------------------------------------------------------------------------------- ----------------------------------
Assumed long-term rates of return on plan assets, discount rates for
estimating benefit obligations and rates of compensation increases vary for the
different plans according to the local economic conditions. The rates used are
as follows:
Weighted-average assumptions as of December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Expected return on plan assets:
United States plans 9.0% 8.5% to 9.0% 8.5% to 9.0%
International plans 7.25% to 8.0% 7.0% to 11.0% 7.0% to 13.5%
Discount rate:
United States plans 7.5% 7.25% to 8.0% 7.25% to 8.0%
International plans 2.5% to 7.5% 2.0% to 12.5% 7.0% to 12.5%
Rate of compensation increase:
United States plans 4.5% to 5.0% 4.5% to 5.0% 4.0% to 5.5%
International plans 1.0% to 10.5% 2.0% to 11.0% 4.0% to 11.0%
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ ------------------------
United United United
Millions of dollars States International States International States International
- ----------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost
Service cost $ 7 $ 66 $ 5 $ 57 $ 8 $ 45
Interest cost 30 96 27 111 29 103
Expected return on plan assets (33) (145) (30) (123) (31) (128)
Transition amount 1 (2) 1 (2) (1) (2)
Amortization of prior service cost (2) (7) (4) (7) (1) (7)
Settlements/curtailments loss/(gain) 14 - (4) (2) - -
Recognized actuarial (gain)/loss (1) (11) - - - (2)
- ----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 16 $ (3) $ (5) $ 34 $ 4 $ 9
- ----------------------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $205 million, $199 million, and $183
million, respectively, as of December 31, 1999. They were $201 million, $193
million, and $123 million, respectively, as of December 31, 1998.
Postretirement medical plan. We offer postretirement medical plans to
specific eligible employees. For some plans, our liability is limited to a fixed
contribution amount for each participant or dependent. The plan participants
share the total cost for all benefits provided above our fixed contribution and
participants' contributions are adjusted as required to cover benefit payments.
We have made no commitment to adjust the amount of our contributions; therefore,
the computed accumulated postretirement benefit obligation amount is not
affected by the expected future health care cost inflation rate.
58
Other postretirement medical plans are contributory but we generally
absorb the majority of the costs. We may elect to adjust the amount of our
contributions for these plans. As a result, the expected future health care cost
inflation rate affects the accumulated postretirement benefit obligation amount.
These plans have assumed health care trend rates (weighted based on the current
year benefit obligation) for 1999 of 7.0% which are expected to decline to 5.5%
by 2002.
During 1997, we adopted amendments to eliminate some of the
postretirement medical benefit programs. These amendments resulted in a
curtailment gain of $11 million.
Millions of dollars 1999 1998
- -----------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 403 $ 373
Service cost 5 4
Interest cost 28 28
Plan participants' contributions 8 12
Amendments 1 (5)
Settlements/curtailments (1) (6)
Actuarial gain/(loss) (15) 37
Benefits paid (37) (40)
- -----------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 392 $ 403
- -----------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ - $ -
Employer contribution 29 28
Plan participants' contributions 8 12
Benefits paid (37) (40)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ -
- -----------------------------------------------------------------------------------------------------
Funded status $ (392) $ (403)
Employer contribution 1 -
Unrecognized actuarial (gain)/loss (72) (66)
Unrecognized prior service cost (98) (146)
- -----------------------------------------------------------------------------------------------------
Net amount recognized $ (561) $ (615)
- -----------------------------------------------------------------------------------------------------
Millions of dollars 1999 1998
- -----------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Accrued benefit liability $ (561) $ (615)
- -----------------------------------------------------------------------------------------------------
Net amount recognized $ (561) $ (615)
- -----------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Discount rate 7.50% 7.0% to 8.0% 7.25% to 8.0%
Expected return on plan assets N/A N/A N/A
Rate of compensation increase 5.0% 5.0% 5.0%
- --------------------------------------------------------------------------------------------------------------------------
59
Millions of dollars 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 5 $ 4 $ 5
Interest cost 28 28 29
Amortization of prior service cost (9) (10) (10)
Settlements/curtailments loss/(gain) (2) - (11)
Recognized actuarial (gain)/loss (5) (8) (9)
- --------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 17 $ 14 $ 4
- --------------------------------------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the
amounts reported for the total of the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
1-Percentage-Point
---------------------------------------------
Millions of dollars Increase (Decrease)
- -------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 3 $ (3)
Effect on the postretirement benefit obligation 28 (26)
- -------------------------------------------------------------------------------------------------------
Note 18. Subsequent Events
On February 2, 2000 we completed the sale of our 51% interest in
Dresser-Rand to our joint venture partner, Ingersoll-Rand Company, for a price
of approximately $579 million. The sale was made based upon elections triggered
by Ingersoll-Rand. Proceeds from the sale, net of intercompany amounts payable
to the joint venture, were $536 million, resulting in an estimated after-tax
extraordinary gain of $215 million or $0.48 per diluted share in the first
quarter of 2000. The proceeds from this sale, along with $378 million collected
on January 14, 2000 for the note related to the December 30, 1999 sale of
Ingersoll-Dresser Pump, were used to reduce short-term borrowings and for other
general corporate purposes. See Note 2.
In February 2000, our offer to acquire the approximately 74% shares of
PES (International) Ltd. that we did not already own was accepted by PES
shareholders. PES is based in Aberdeen, Scotland, and has developed technology
that complements Halliburton Energy Services' real-time reservoir solutions. To
buy the remaining 74% shares of PES, we will issue 1.2 million shares of
Halliburton common stock and rights for additional consideration between 850,000
to 2.1 million shares of Halliburton common stock over the next 30 to 36 months.
We expect to record an estimated $120 million of goodwill which will be
amortized over 20 years. PES is part of the Energy Services Group.
60
Halliburton Company
Selected Financial Data
We have restated our prior year information for the merger of Dresser
Industries, Inc. Beginning in 1998, we changed Dresser's year-end of October 31
to our calendar year-end. Periods through December 1997 contain Dresser's
information on a fiscal year-end basis combined with our information on a
calendar year-end basis.
Years ended December 31
Millions of dollars and shares ------------------------------------------------------------------------------------
except per share and employee data 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Operating results
Net revenues
Energy Services Group $ 6,999 $ 9,009 $ 8,505 $ 6,515 $ 5,308
Engineering and Construction Group 5,314 5,495 4,993 4,721 3,737
Dresser Equipment Group 2,585 2,849 2,774 2,711 2,467
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 14,898 $ 17,353 $ 16,272 $ 13,947 $ 11,512
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income
Energy Services Group $ 222 $ 971 $ 1,019 $ 698 $ 544
Engineering and Construction Group 203 237 219 134 97
Dresser Equipment Group 249 248 248 229 201
Special charges and credits (a) 47 (980) (16) (86) (8)
General corporate (71) (79) (71) (72) (71)
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating income (a) 650 397 1,399 903 763
Nonoperating income (expense), net (b) (95) (118) (86) (72) (33)
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and minority interest 555 279 1,313 831 730
Provision for income taxes (c) (214) (245) (492) (248) (247)
Minority interest in net income of
consolidated subsidiaries (43) (49) (49) (25) (21)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 298 $ (15) $ 772 $ 558 $ 462
- -----------------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share
Continuing operations $ 0.68 $ (0.03) $ 1.79 $ 1.30 $ 1.07
Net income (loss) 1.00 (0.03) 1.79 1.30 0.88
Diluted income (loss) per common share
Continuing operations 0.67 (0.03) 1.77 1.29 1.07
Net income (loss) 0.99 (0.03) 1.77 1.29 0.88
Cash dividends per share (d), (e) 0.50 0.50 0.50 0.50 0.50
Return on average shareholders' equity 10.49% (0.35%) 19.17% 15.25% 10.43%
- -----------------------------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 2,329 $ 2,129 $ 1,985 $ 1,501 $ 1,477
Total assets 10,728 11,066 10,704 9,587 8,569
Property, plant and equipment, net 2,791 2,896 2,766 2,554 2,285
Long-term debt (including current maturities) 1,364 1,429 1,304 958 667
Shareholders' equity 4,287 4,061 4,317 3,741 3,577
Total capitalization 6,600 6,005 5,672 4,830 4,378
Shareholders' equity per share (d) 9.69 9.23 9.86 8.78 8.29
Average common shares outstanding (basic) (d) 440 439 431 429 431
Average common shares outstanding (diluted) (d) 443 439 436 432 432
- -----------------------------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 233 $ 454 $ 833 $ 864 $ 1,095
Cash flows from investing activities (159) (846) (873) (759) (837)
Cash flows from financing activities 184 254 (21) (148) (721)
Capital expenditures (593) (914) (880) (731) (592)
Long-term borrowings (repayments), net (61) 123 285 287 (482)
Depreciation and amortization expense 599 587 564 498 466
Payroll and employee benefits (5,647) (5,880) (5,479) (4,674) (4,188)
Number of employees (f) 103,000 107,800 102,000 93,000 89,800
- -----------------------------------------------------------------------------------------------------------------------------------
61
Halliburton Company
Selected Financial Data
We have restated our prior year information for the merger of Dresser
Industries, Inc. Beginning in 1998, we changed Dresser's year-end of October 31
to our calendar year-end. Periods through December 1997 contain Dresser's
information on a fiscal year-end basis combined with our information on a
calendar year-end basis.
Years ended December 31
Millions of dollars and shares -----------------------------------------------------------------------------
except per share and employee data 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
Operating results
Net revenues
Energy Services Group $ 4,978 $ 5,470 $ 5,038 $ 5,156 $ 4,895
Engineering and Construction Group 3,562 3,675 4,410 4,721 4,597
Dresser Equipment Group 2,452 2,282 1,660 1,760 1,622
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 10,992 $ 11,427 $ 11,108 $ 11,637 $ 11,114
- ---------------------------------------------------------------------------------------------------------------------------
Operating income
Energy Services Group $ 406 $ 414 $ 303 $ 378 $ 473
Engineering and Construction Group 71 76 32 48 51
Dresser Equipment Group 198 208 169 164 155
Special charges and credits (a) (25) (427) (343) (145) -
General corporate (56) (63) (58) (56) (49)
- ---------------------------------------------------------------------------------------------------------------------------
Total operating income (a) 594 208 103 389 630
Nonoperating income (expense), net (b) 323 (64) (61) (21) 12
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and minority 917 144 42 368 642
interest
Provision for income taxes (347) (96) (78) (182) (269)
Minority interest in net income of
consolidated subsidiaries (33) (42) (9) (19) (17)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 537 $ 6 $ (45) $ 167 $ 356
- ---------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share
Continuing operations $ 1.25 $ 0.01 $ (0.11) $ 0.41 $ 0.89
Net income (loss) 1.26 (0.04) (1.18) 0.45 1.11
Diluted income (loss) per common share
Continuing operations 1.24 0.01 (0.11) 0.41 0.89
Net income (loss) 1.26 (0.04) (1.18) 0.45 1.11
Cash dividends per share (d), (e) 0.50 0.50 0.50 0.50 0.50
Return on average shareholders' equity 15.47% (0.45%) (12.75%) 4.15% 10.29%
- ---------------------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 2,197 $ 1,563 $ 1,423 $ 1,775 $ 1,906
Total assets 8,521 8,764 8,087 8,266 7,813
Property, plant and equipment, net 2,047 2,155 2,128 1,892 1,767
Long-term debt (including current maturities) 1,120 1,131 873 928 612
Shareholders' equity 3,723 3,296 3,277 4,315 4,426
Total capitalization 4,906 4,748 4,180 5,267 5,063
Shareholders' equity per share (d), (e) 8.63 7.70 7.99 10.61 11.03
Average common shares outstanding (basic) (d) 431 422 408 405 398
Average common shares outstanding (diluted) (d) 432 422 409 406 398
- ---------------------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 793 $ 468 $ 625 $ 595 $ 438
Cash flows from investing activities 529 (818) (313) (910) (729)
Cash flows from financing activities (645) 331 (398) 244 36
Capital expenditures (432) (464) (458) (634) (495)
Long-term borrowings (repayments), net (121) 192 (187) 460 83
Depreciation and amortization expense 488 672 516 441 376
Payroll and employee benefits (4,222) (4,429) (4,590) (4,661) (4,415)
Number of employees (f) 86,500 90,500 96,400 104,500 109,700
- ---------------------------------------------------------------------------------------------------------------------------
62
(a) Operating income includes the following special charges and credits:
1999 - $47 million: reversal of a portion of the 1998 special charges.
1998 - $980 million: asset related charges ($509 million), personnel
reductions ($235 million), facility consolidations ($126 million), merger
transaction costs ($64 million), and other related costs ($46 million).
1997 - $16 million: merger costs ($9 million), restructuring of joint
ventures ($18 million), write-downs on impaired assets and early retirement
incentives ($19 million), losses from the sale of assets ($12 million), and
gain on extension of joint venture ($42 million).
1996 - $86 million: merger costs ($13 million), restructuring, merger and
severance costs ($62 million), and write-off of acquired in-process
research and development costs ($11 million).
1995 - $8 million: restructuring costs ($5 million) and write-off of
acquired in-process research and development costs ($3 million).
1994 - $25 million: merger costs ($27 million), restructuring costs ($6
million), litigation ($10 million), and litigation and insurance recoveries
($18 million).
1993 - $427 million: loss on sale of business ($322 million), merger costs
($31 million), restructuring ($13 million), litigation ($65 million), and
gain on curtailment of medical plan ($4 million).
1992 - $343 million: merger costs ($273 million) and restructuring and
severance ($70 million).
1991 - $145 million: restructuring ($124 million) and loss on sale of
business ($21 million).
(b) Nonoperating income in 1994 includes a gain of $276 million from the sale
of an interest in Western Atlas International, Inc. and a gain of $102 million
from the sale of our natural gas compression business.
(c) Provision for income taxes in 1996 includes tax benefits of $44 million due
to the recognition of net operating loss carryforwards and the settlement of
various issues with the Internal Revenue Service.
(d) Weighted average shares, cash dividends paid per share and shareholders'
equity per share have been restated to reflect the two-for-one common stock
split declared on June 9, 1997, and effected in the form of a stock dividend
paid on July 21, 1997.
(e) Represents Halliburton Company amounts prior to the merger with Dresser.
(f) Does not include employees of 50% or less owned affiliated companies.
63
HALLIBURTON COMPANY
Quarterly Data and Market Price Information
(Unaudited)
Quarter
--------------------------------------------------------
Millions of dollars except per share data First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------------
1999
Revenues $ 3,924 $ 3,670 $ 3,533 $ 3,771 $ 14,898
Operating income (1) 152 196 114 188 650
Income before extraordinary gain and
accounting change 81 83 58 76 298
Extraordinary gain, net
(See Note 2) - - - 159 159
Effect of accounting change, net
(See Note 12) (19) - - - (19)
Net income 62 83 58 235 438
Earnings per share:
Basic net income (loss) per common share:
Before extraordinary gain and
accounting change 0.18 0.19 0.13 0.17 0.68
Extraordinary gain, net - - - 0.36 0.36
Effect of accounting change, net (0.04) - - - (0.04)
Net income 0.14 0.19 0.13 0.53 1.00
Diluted net income (loss) per common share:
Before extraordinary gain and
accounting change 0.18 0.19 0.13 0.17 0.67
Extraordinary gain, net - - - 0.36 0.36
Effect of accounting change, net (0.04) - - - (0.04)
Net income 0.14 0.19 0.13 0.53 0.99
Cash dividends paid per share 0.125 0.125 0.125 0.125 0.50
Common stock prices (2)
High 41.19 47.94 51.44 44.13 51.44
Low 28.25 35.00 39.06 33.88 28.25
- ------------------------------------------------------------------------------------------------------------------------------
1998 (3)
Revenues $ 4,255 $ 4,585 $ 4,224 $ 4,289 $ 17,353
Operating income (loss) 361 436 (577) 177 397
Net income (loss) (4), (5) 203 243 (527) 66 (15)
Earnings per share:
Basic net income (loss) per common share (4), (5) 0.46 0.55 (1.20) 0.15 (0.03)
Diluted net income (loss) per common share (4), (5) 0.46 0.55 (1.20) 0.15 (0.03)
Cash dividends paid per share (6) 0.125 0.125 0.125 0.125 0.50
Common stock prices (2), (6)
High 52.44 56.63 45.00 38.56 56.63
Low 42.38 42.06 26.25 26.19 26.19
- ------------------------------------------------------------------------------------------------------------------------------
64
(1) Includes pretax special charge credit of $47 million ($32 million after tax
or $0.07 per diluted share) in the second quarter of 1999.
(2) New York Stock Exchange - composite transactions high and low closing
price.
(3) Amounts for revenues, operating income, net income, and earnings per share
have been restated to reflect the merger with Dresser which was accounted
for using the pooling of interests method of accounting for business
combinations.
(4) Includes pretax special charges of $945 million ($722 million after tax or
$1.64 per diluted share) in the third quarter of 1998.
(5) Includes pretax special charges of $35 million ($24 million after tax or
$0.05 per diluted share) in the fourth quarter of 1998.
(6) Represents Halliburton Company amounts prior to the merger with Dresser.
65
PART III
Item 10. Directors and Executive Officers of Registrant.
The information required for the directors of the Registrant is
incorporated by reference to the Halliburton Company Proxy Statement dated
March 23, 2000, under the caption "Election of Directors." The information
required for the executive officers of the Registrant is included under Part I
on pages 9 and 10 of this annual report.
Item 11. Executive Compensation.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2000, under the captions "Compensation
Committee Report on Executive Compensation," "Comparison of Five-Year Cumulative
Total Return," "Summary Compensation Table," "Option Grants in Last Fiscal
Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values," "Retirement Plans," "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" and "Directors' Compensation,
Restricted Stock Plan and Retirement Plan."
Item 12(a). Security Ownership of Certain Beneficial Owners and Management.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2000, under the caption "Stock Ownership
of Certain Beneficial Owners and Management."
Item 12(b). Security Ownership of Management.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2000, under the caption "Stock Ownership
of Certain Beneficial Owners and Management."
Item 12(c). Changes in Control.
Not applicable.
Item 13. Certain Relationships and Related Transactions.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2000, under the caption "Certain
Relationships and Related Transactions."
66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements:
The report of Arthur Andersen LLP, Independent Public Accountants,
and the financial statements of the Company as required by Part II,
Item 8, are included on pages 27 through 64 of this annual report.
See index on page 12.
2. Financial Statement Schedules: Page No.
Report on supplemental schedule of Arthur Andersen LLP 76
Schedule II - Valuation and qualifying accounts for the
three years ended December 31, 1999 77
Note: All schedules not filed with this report required by
Regulation S-X have been omitted as not applicable or not required
or the information required has been included in the notes to
financial statements.
3. Exhibits:
Exhibit
Number Exhibits
3.1 Restated Certificate of Incorporation of the Company filed
with the Secretary of State of Delaware on July 23, 1998
(incorporated by reference to Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998).
3.2 By-laws of the Company, as amended and restated effective
September 29, 1998 (incorporated by reference to Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998).
4.1 Form of debt security of 8.75% Debentures due February 12,
2021 (incorporated by reference to Exhibit 4(a) to the
Predecessor's Form 8-K dated as of February 20, 1991).
4.2 Senior Indenture dated as of January 2, 1991 between the
Predecessor and Texas Commerce Bank National Association,
as trustee (incorporated by reference to Exhibit 4(b) to
the Predecessor's Registration Statement on Form S-3 (File
No. 33-38394) originally filed with the Securities and
Exchange Commission on December 21, 1990), as supplemented
and amended by the First Supplemental Indenture dated as
of December 12, 1996 among the Predecessor, the Company
and the Trustee (incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form 8-B dated
December 12, 1996, File No. 1-03492).
4.3 Resolutions of the Predecessor's Board of Directors
adopted at a meeting held on February 11, 1991 and of the
special pricing committee of the Board of Directors of the
predecessor adopted at a meeting held on February 11, 1991
and the special pricing committee's consent in lieu of
meeting dated February 12, 1991 (incorporated by reference
to Exhibit 4(c) to the Predecessor's Form 8-K dated as of
February 20, 1991).
67
4.4 Form of debt security of 6.75% Notes due February 1, 2027
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of February 11, 1997).
4.5 Second Senior Indenture dated as of December 1, 1996
between the Predecessor and Texas Commerce Bank National
Association, as Trustee, as supplemented and amended by
the First Supplemental Indenture dated as of December 5,
1996 between the Predecessor and the Trustee and the
Second Supplemental Indenture dated as of December 12,
1996 among the Predecessor, the Company and the Trustee
(incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form 8-B dated December 12,
1996, File No. 1-03492).
4.6 Third Supplemental Indenture dated as of August 1, 1997
between the Company and Texas Commerce Bank National
Association, as Trustee, to the Second Senior Indenture
dated as of December 1, 1996 (incorporated by reference to
Exhibit 4.7 to the Company's Form 10-K for the year ended
December 31, 1998).
4.7 Fourth Supplemental Indenture dated as of September 29,
1998 between the Company and Chase Bank of Texas,
National Association (formerly Texas Commerce Bank
National Association), as Trustee, to the Second Senior
Indenture dated as of December 1, 1996 (incorporated by
reference to Exhibit 4.8 to the Company's Form 10-K for
the year ended December 31, 1998).
4.8 Resolutions of the Company's Board of Directors adopted by
unanimous consent dated December 5, 1996 (incorporated by
reference to Exhibit 4(g) of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
4.9 Resolutions of the Company's Board of Directors adopted at
a special meeting held on September 28, 1998 (incorporated
by reference to Exhibit 4.10 to the Company's Form 10-K
for the year ended December 31, 1998).
4.10 Restated Rights Agreement dated as of December 1, 1996
between the Company and ChaseMellon Shareholder Services,
L.L.C. (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form 8-B dated
December 12, 1996, File No. 1-03492).
4.11 Copies of instruments that define the rights of holders of
miscellaneous long-term notes of the Company and its
subsidiaries, totaling $25 million in the aggregate at
December 31, 1999, have not been filed with the
Commission. The Company agrees herewith to furnish copies
of such instruments upon request.
4.12 Form of debt security of 7.53% Notes due May 12, 2017
(incorporated by reference to Exhibit 4.4 to the Company's
Form 10-Q for the quarterly period ended March 31, 1997).
4.13 Form of debt security of 6.27% Notes due July 8, 1999
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of July 8, 1997).
4.14 Form of debt security of 6.30% Notes due August 5, 2002
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of August 5, 1997).
4.15 Form of debt security of 5.63% Notes due December 1, 2008
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of November 24, 1998).
68
4.16 Form of Indenture, between Dresser Industries, Inc.
("Dresser") and NationsBank of Texas, N.A., as Trustee,
for unsecured debentures, notes and other evidences of
indebtedness (incorporated by reference to Exhibit 4.1 to
Dresser's Registration Statement on Form S-3, Registration
No. 33-59562).
4.17 Form of Indenture, between Baroid Corporation and Texas
Commerce Bank National Association, as trustee, for 8%
Senior Notes due 2003 (incorporated by reference to
Exhibit 4.01 to the Registration Statement on Form S-3,
Registration No. 33-60174), as supplemented and amended by
Form of Supplemental Indenture, between Dresser, Baroid
Corporation and Texas Commerce Bank N.A. as Trustee, for
8% Guaranteed Senior Notes due 2003 (incorporated by
reference to Exhibit 4.3 to Registration Statement on Form
S-4 filed by Baroid Corporation, Registration No.
33-53077).
4.18 Second Supplemental Indenture dated October 30, 1997
between Dresser and Texas Commerce Bank National
Association, as Trustee, for 8% Senior Notes due 2003
(incorporated by reference to Exhibit 4.19 to the
Company's Form 10-K for the year ended December 31, 1998).
4.19 Third Supplemental Indenture dated September 29, 1998
between Dresser, the Company, as Guarantor, and Chase Bank
of Texas, National Association, as Trustee, for 8% Senior
Notes due 2003 (incorporated by reference to Exhibit 4.20
to the Company's Form 10-K for the year ended December 31,
1998).
4.20 Form of Indenture, between Dresser and Texas Commerce Bank
National Association, as Trustee, for 7.60% Debentures due
2096 (incorporated by reference to Exhibit 4 to the
Registration Statement on Form S-3 as amended,
Registration No. 333-01303), as supplemented and amended
by Form of Supplemental Indenture, between Dresser and
Texas Commerce Bank National Association, Trustee, for
7.60% Debentures due 2096 (incorporated by reference to
Exhibit 4.1 to Dresser's Form 8-K filed on August 9,
1996).
10.1 Halliburton Company Career Executive Incentive Stock Plan
as amended November 15, 1990 (incorporated by reference to
Exhibit 10(a) to the Predecessor's Annual Report on Form
10-K for the year ended December 31, 1992).
10.2 Retirement Plan for the Directors of Halliburton Company
adopted and effective January 1, 1990 (incorporated by
reference to Exhibit 10(c) to the Predecessor's Annual
Report on Form 10-K for the year ended December 31, 1992).
10.3 Halliburton Company Directors' Deferred Compensation Plan
as amended and restated effective May 1, 1994
(incorporated by reference to Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.4 Halliburton Company 1993 Stock and Long-Term Incentive
Plan, as amended and restated February 19, 1998
(incorporated by reference to Exhibit 10.4 to the
Company's Form 10-K for the year ended December 31, 1998).
10.5 Halliburton Company Restricted Stock Plan for Non-Employee
Directors (incorporated by reference to Appendix B of the
Predecessor's proxy statement dated March 23, 1993).
10.6 Halliburton Company Elective Deferral Plan, as amended and
restated effective June 1, 1999 (incorporated by reference
to Exhibit 10 to the Company's Form 10-Q for the quarterly
period ended June 30, 1999).
69
10.7 Employment agreement (incorporated by reference to Exhibit
10 to the Predecessor's Form 10-Q for the quarterly period
ended September 30, 1995).
10.8 Halliburton Company Senior Executives' Deferred
Compensation Plan, as amended and restated effective
January 1, 1999 (incorporated by reference to Exhibit 10.8
to the Company's Form 10-K for the year ended December 31,
1998).
10.9 Halliburton Company Annual Performance Pay Plan, as
amended and restated effective January 1, 1997
(incorporated by reference to Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.10 Employment agreement (incorporated by reference to Exhibit
10(n) to the Predecessor's Form 10-K for the year ended
December 31, 1995).
10.11 Employment agreement and amendment thereto (incorporated
by reference to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998).
* 10.12 Supplement to executive employment agreement.
10.13 Employment agreement and amendment thereto (incorporated
by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998).
10.14 Employment agreement (incorporated by reference to Exhibit
10.16 to the Company's Form 10-K for the year ended
December 31, 1998).
10.15 Employment agreement (incorporated by reference to Exhibit
10.19 to the Company's Form 10-K for the year ended
December 31, 1998).
10.16 Dresser Industries, Inc. Deferred Compensation Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 11, 1966, filed pursuant to
Regulation 14A, File No. 1-4003).
10.17 Dresser Industries, Inc. 1982 Stock Option Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 12, 1982, filed pursuant to
Regulation 14A, File No. 1-4003).
10.18 ERISA Excess Benefit Plan for Dresser Industries, Inc. as
amended and restated effective June 1, 1995 (incorporated
by reference to Exhibit 10.7 to Dresser's Form 10-K for
the year ended October 31, 1995).
10.19 ERISA Compensation Limit Benefit Plan for Dresser
Industries, Inc., as amended and restated effective June
1, 1995 (incorporated by reference to Exhibit 10.8 to
Dresser's Form 10-K for the year ended October 31, 1995).
10.20 Supplemental Executive Retirement Plan of Dresser
Industries, Inc., as amended and restated effective
January 1, 1998 (incorporated by reference to Exhibit 10.9
to Dresser's Form 10-K for the period ended October 31,
1997).
70
10.21 Stock Based Compensation Arrangement of Non-Employee
Directors (incorporated by reference to Exhibit 4.4 to
Dresser's Registration Statement on Form S-8, Registration
No. 333-40829).
10.22 Dresser Industries, Inc. Deferred Compensation Plan for
Non-employee Directors, as restated and amended
effective November 1, 1997 (incorporated by reference to
Exhibit 4.5 to Dresser's Registration Statement on
Form S-8, Registration No. 333-40829).
10.23 Dresser Industries, Inc. 1989 Restricted Incentive Stock
Plan (incorporated by reference to Exhibit A to Dresser's
Proxy Statement dated February 10, 1989, filed pursuant to
Regulation 14A, File No. 1-4003).
10.24 Long-Term Performance Plan for Selected Employees of The
M. W. Kellogg Company (incorporated by reference to
Exhibit 10(r) to Dresser's Form 10-K for the year ended
October 31, 1991).
10.25 Dresser Industries, Inc. 1992 Stock Compensation Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 7, 1992, filed pursuant to
Regulation 14A, File No. 1-4003).
10.26 Amendments No. 1 and 2 to Dresser Industries, Inc. 1992
Stock Compensation Plan (incorporated by reference to
Exhibit A to Dresser's Proxy Statement dated February 6,
1995, filed pursuant to Regulation 14A, File No.
1-4003).
10.27 Dresser Industries, Inc. 1995 Executive Incentive
Compensation Plan (incorporated by reference to Exhibit B
to Dresser's Proxy Statement dated February 6, 1995, filed
pursuant to Regulation 14A, File No. 1-4003).
10.28 Special 1997 Restricted Incentive Stock Grant
(incorporated by reference to Exhibit 10.26 to Dresser's
Form 10-K for the year ended October 31, 1996).
10.29 Form of Executive Life Insurance Agreement (individual as
beneficiary) (incorporated by reference to Exhibit 10.22
to Dresser's Form 10-K for the period ended October 31,
1997).
10.30 Form of Executive Life Insurance Agreement (trust as
beneficiary) (incorporated by reference to Exhibit 10.23
to Dresser's Form 10-K for the period ended October 31,
1997).
10.31 Amendment No. 3 to the Dresser Industries, Inc. 1992 Stock
Compensation Plan (incorporated by reference to Exhibit
10.25 to Dresser's Form 10-K for the period ended October
31, 1997).
10.32 The Dresser Industries, Inc. 1998 Executive Incentive
Compensation Plan (incorporated by reference to Exhibit B
to Dresser's Proxy Statement dated February 10, 1998,
filed pursuant to Regulation 14A, File No. 1-4003).
10.33 Form of Waiver of Rights Under the Dresser Industries,
Inc. Long-Term Incentive and Retention Plan (incorporated
by reference to Exhibit 10.5 to Dresser's Form 10-Q for
the period ended January 31, 1998).
10.34 Amendment No. 1 to the Supplemental Executive Retirement
Plan of Dresser Industries, Inc. (incorporated by
reference to Exhibit 10.1 to Dresser's Form 10-Q for the
period ended April 30, 1998).
71
* 21 Subsidiaries of the Registrant.
* 23.1 Consent of Arthur Andersen LLP.
* 23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of attorney for the following directors signed in
February, 1997 (incorporated by reference to Exhibit 24 to
our annual report on Form 10-K for the year ended December
31, 1996):
Anne L. Armstrong
Richard B. Cheney
Lord Clitheroe
Robert L. Crandall
W. R. Howell
C. J. Silas
Richard J. Stegemeier
24.2 Power of attorney signed in December, 1997 for Charles J.
DiBona (incorporated by reference to Exhibit 24(b) to our
annual report on Form 10-K for the year ended December 31,
1997).
24.3 Powers of attorney for the following directors signed in
October, 1998 (incorporated by reference to Exhibit 24.3
to our annual report on Form 10-K for the year ended
December 31, 1998):
Lawrence S. Eagleburger
Ray L. Hunt
J. Landis Martin
Jay A. Precourt
* 27 Financial data schedule for the Registrant (filed
electronically) for the twelve months ended December 31,
1999.
* 99.1 Report of independent accountants, PricewaterhouseCoopers
LLP.
72
(b) Reports on Form 8-K:
Date of
Date Filed Earliest Event Description of Event
- ------------------------------------------------------------------------------------------------------------------
During the fourth quarter of 1999:
October 1, 1999 September 29, 1999 Item 5. Other Events for a press release announcing that Brown &
Root Condor has been awarded a contract by Sonatrach and Anadarko
Algeria Corporation for the expansion of the oil production
facility at Hassi Berkine North South.
October 1, 1999 September 30, 1999 Item 5. Other Events for a press release announcing that Dresser
Kellogg Energy Services has been awarded a contract by Shell
Petroleum Development Company of Nigeria for grassroots gas
compression facilities for the Obigbo Node Associated Gas
Gathering Project near Port Harcourt, Nigeria.
October 6, 1999 October 4, 1999 Item 5. Other Events for a press release announcing the selling
of two joint ventures and also earnings outlook. Dresser
Industries, Inc. has elected to sell its interests in two joint
ventures to Ingersoll-Rand Company for total cash consideration
of approximately $1.1 billion. The sales will result in an
after-tax gain of approximately $380 million or $0.84 per diluted
share and the gain will be recognized in the 1999 fourth quarter.
October 25, 1999 October 21, 1999 Item 5. Other Events for a press release announcing 1999 third
quarter earnings.
October 28, 1999 October 26, 1999 Item 5. Other Events for a press release announcing that business
units Brown & Root Energy Services and Halliburton Energy
Services have been selected by Barracuda & Caratinga Development
Corporation as the preferred bidder for the development of both
the Barracuda and the Caratinga offshore fields in Brazil.
November 2, 1999 October 27, 1999 Item 5. Other Events for a press release announcing a Kellogg
Brown & Root joint venture has signed a contract with BP Amoco to
provide pre-sanction engineering services for Sonatrach and BP
Amoco's In Salah gas venture in Algeria.
November 2, 1999 October 28, 1999 Item 5. Other Events for a press release announcing a fourth
quarter dividend of 12.5 cents a share.
73
Date of
Date Filed Earliest Event Description of Event
- ------------------------------------------------------------------------------------------------------------------
During the first quarter of 2000 to date:
January 4, 2000 December 30, 1999 Item 5. Other Events for a press release announcing subsidiary
Dresser Industries, Inc. has completed the sale of its 49% joint
venture interest in Ingersoll-Dresser Pump Company to a
subsidiary of its joint venture partner, Ingersoll-Rand Company.
Also the sale of Dresser Industries, Inc.'s 51% joint venture
interest in Dresser-Rand to Ingersoll-Rand is ready pending a
remaining clearance from competition regulatory authorities in
Argentina.
January 6, 2000 January 4, 2000 Item 5. Other Events for a press release announcing that Brown &
Root Energy Services has been selected by TM Power Ventures
L.L.C., a joint venture between TECO Power Services Corporation
and Mosbacher Power Partners. Brown & Root Energy Services will
provide engineering, construction and procurement services for a
312-megawatt electric generating facility on the Delmarva
Peninsula in Accomack County, Virginia.
January 28, 2000 January 23, 2000 Item 5. Other Events for a press release announcing that a
Kellogg Brown & Root consortium has been awarded a U.S. $1.5
billion lump sum contract by Malaysia LNG TIGA Sdn. Bhd. Kellogg
Brown & Root will execute a major expansion of the liquefied
natural gas (LNG) complex in Bintulu, Sarawak.
February 1, 2000 January 27, 2000 Item 5. Other Events for a press release announcing 1999 fourth
quarter earnings.
February 8, 2000 January 25, 2000 Item 5. Other Events for a press release announcing that
Halliburton SubSea, a division of Brown & Root Energy Services,
has entered into an agreement with Chevron USA Production
Company's Gulf of Mexico Deepwater Business Unit. SubSea will
provide remotely operated vehicle (ROV) services in support of
deepwater drilling operations involving the drillship Transocean
"Discoverer Deep Seas", at a contract value of approximately $10
million.
74
Date of
Date Filed Earliest Event Description of Event
- ----------------------- ---------------------- -------------------------------------------------------------------
February 8, 2000 January 27, 2000 Item 5. Other Events for a press release announcing that an
advanced stage conclusion has been reached with Barracuda and
Caratinga Development Corporation (BCDC) for the development of
both the Barracuda and the Caratinga offshore fields in Brazil.
The agreement has resulted in a satisfactory price for BCDC and
an agreed execution plan and delivery schedule. Subject to the
completion of financing for the project, final negotiations are
scheduled to be complete in late February. The contract, valued
at more than $2.5 billion, is anticipated to be signed in late
March with both Brown & Root Energy Services and Halliburton
Energy Services business units carrying out the performance of
the contract.
February 8, 2000 February 1, 2000 Item 5. Other Events for a press release announcing that Chief
Executive Officer, Richard B. Cheney, will succeed retiring
Chairman William "Bill" Bradford, and will continue in his
current position as Chief Executive Officer.
February 8, 2000 February 2, 2000 Item 5. Other Events for a press release announcing that
subsidiary Dresser Industries, Inc. has completed the sale of its
51% joint venture interest in Dresser-Rand Company (DR) to a
subsidiary of its joint venture partner, Ingersoll-Rand Company,
for a price of $579 million.
February 18, 2000 February 16, 2000 Item 5. Other Events for a press release announcing our offer to
acquire the approximately 74% of PES (International) Ltd. shares
that we did not already own was accepted by PES shareholders.
February 18, 2000 February 17, 2000 Item 5. Other Events for a press release announcing the first
quarter 2000 dividend.
75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To Halliburton Company:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in this Form 10-K, and
have issued our report thereon dated January 27, 2000 (except with respect to
the matters discussed in Note 18, as to which the date is February 16, 2000).
Our audits were made for the purpose of forming an opinion on those statements
taken as a whole. The supplemental schedule (Schedule II) is the responsibility
of Halliburton Company's management and is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 27, 2000 (Except with respect to the matters discussed in Note 18,
as to which the date is February 16, 2000.)
76
HALLIBURTON COMPANY
Schedule II - Valuation and Qualifying Accounts
(Millions of Dollars)
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Descriptions of Period Expenses Accounts Deductions Period
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 77 $ 53 $ - $ (23) (A) $ 107
- -------------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 359 $ - $ - $ (290) (B) $ 69
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 59 $ 27 $ - $ (9) (A) $ 77
- -------------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 6 $ 910 (C) $ - $ (557) $ 359
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 65 $ 14 $ - $ (20) (A) $ 59
- -------------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 58 $ 6 $ - $ (58) (D) $ 6
- -------------------------------------------------------------------------------------------------------------------------------
(A) Receivable write-offs and reclassifications, net of recoveries.
(B) Includes $47 million reversal of special charges taken in 1998 and $14 million for items of a long-term nature reclassified
to employee compensation and benefits in 1999.
(C) Includes $887 million during the calendar year ended December 31, 1998 and $23 million during Dresser's two-month period ended
December 31, 1997. See Note 11.
(D) Includes $25 million for items of a long-term nature reclassified to other liabilities at the end of 1997. See Note 11.
77
SIGNATURES
As required by Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has authorized this report to be signed on its behalf by the
undersigned authorized individuals, on this 13th day of March, 2000.
HALLIBURTON COMPANY
By /s/ Richard B. Cheney
--------------------------
Richard B. Cheney
Chairman of the Board and
Chief Executive Officer
As required by the Securities Exchange Act of 1934, this report has been signed
below by the following persons in the capacities indicated on this 13th day of
March, 2000.
Signature Title
- --------- -----
/s/ Richard B. Cheney Chairman of the Board and
- -------------------------------- Chief Executive Officer
Richard B. Cheney
/s/ Gary V. Morris Executive Vice President and
- -------------------------------- Chief Financial Officer
Gary V. Morris
/s/ R. Charles Muchmore, Jr. Vice President and Controller and
- -------------------------------- Principal Accounting officer
R. Charles Muchmore, Jr.
78
Signature Title
- --------- -----
* ANNE L. ARMSTRONG Director
- ---------------------------------------
Anne L. Armstrong
* LORD CLITHEROE Director
- ---------------------------------------
Lord Clitheroe
*ROBERT L. CRANDALL Director
- ---------------------------------------
Robert L. Crandall
* CHARLES J. DIBONA Director
- ---------------------------------------
Charles J. DiBona
* LAWRENCE S. EAGLEBURGER Director
- ---------------------------------------
Lawrence S. Eagleburger
* W. R. HOWELL Director
- ---------------------------------------
W. R. Howell
* RAY L. HUNT Director
- ---------------------------------------
Ray L. Hunt
* J. LANDIS MARTIN Director
- ---------------------------------------
J. Landis Martin
* JAY A. PRECOURT Director
- ---------------------------------------
Jay A. Precourt
* C. J. SILAS Director
- ---------------------------------------
C. J. Silas
* RICHARD J. STEGEMEIER Director
- ---------------------------------------
Richard J. Stegemeier
* /s/ SUSAN S. KEITH
- ---------------------------------------
Susan S. Keith, Attorney-in-fact
79