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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, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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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 or organization) Identification No.)
5 Houston Center
1401 McKinney, Suite 2400
Houston, Texas 77020
(Address of principal executive offices)
Telephone Number - Area code (713)759-2600
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
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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The aggregate market value of Common Stock held by nonaffiliates on June 30,
2003, determined using the per share closing price on the New York Stock
Exchange Composite tape of $23.00 on that date was approximately
$10,022,000,000.
As of February 27, 2004, there were 439,713,236 shares of Halliburton Company
Common Stock, $2.50 par value per share, outstanding.
Portions of the Halliburton Company Proxy Statement dated March 23, 2004 (File
No. 1-3492), are incorporated by reference into Part III of this report.
PART I
Item 1. Business.
General description 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, products, maintenance,
engineering and construction to energy, industrial and governmental customers.
Our five business segments are organized around how we manage the
business: Drilling and Formation Evaluation, Fluids, Production Optimization,
Landmark and Other Energy Services and the Engineering and Construction Group.
We sometimes refer to the combination of Drilling and Formation Evaluation,
Fluids, Production Optimization and Landmark and Other Energy Services segments
as our Energy Services Group. See Note 5 to the consolidated financial
statements for financial information about our business segments.
Dresser Equipment Group is presented as discontinued operations through
March 31, 2001 as a result of the sale in April 2001 of this business unit.
Proposed Asbestos and Silica Settlement and Pre-packaged Chapter 11
proceedings. DII Industries, LLC, Kellogg Brown & Root, Inc. and our other
affected subsidiaries filed Chapter 11 proceedings on December 16, 2003. With
the filing of the Chapter 11 proceedings, all asbestos and silica personal
injury claims and related lawsuits against Halliburton and our affected
subsidiaries have been stayed. See Note 11 and Note 12 to the consolidated
financial statements for a more detailed discussion.
The proposed plan of reorganization, which is consistent with the
definitive settlement agreements reached with our asbestos and silica personal
injury claimants in early 2003, provides that, if and when an order confirming
the proposed plan of reorganization becomes final and non-appealable, in
addition to the $311 million paid to claimants in December 2003, the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
- up to approximately $2.5 billion in cash;
- 59.5 million shares of Halliburton common stock;
- notes currently valued at approximately $52 million; and
- insurance proceeds, if any, between $2.3 billion and $3.0
billion received by DII Industries and Kellogg Brown & Root.
Upon confirmation of the plan of reorganization, current and future
asbestos and silica personal injury claims against Halliburton and its
subsidiaries will be channeled into trusts established for the benefit of
claimants, thus releasing Halliburton and its affiliates from those claims. We
have also recently entered into a settlement with Equitas, the largest insurer
of our asbestos and silica claims. The settlement calls for Equitas to pay us
$575 million (representing approximately 60% of applicable limits of liability
that DII Industries had substantial likelihood of recovering from Equitas)
provided that we receive confirmation of our plan of reorganization and the
current United States Congress does not pass national asbestos litigation reform
legislation.
Description of services and products. We offer a broad suite of
products and services through our five business segments. The following
summarizes our services and products for each business segment.
ENERGY SERVICES GROUP
Our Energy Services Group provides a wide range of discrete services
and products, as well as integrated solutions to customers for the exploration,
development and production of oil and gas. The Energy Services Group serves
major, national and independent oil and gas companies throughout the world.
Drilling and Formation Evaluation
Our Drilling and Formation Evaluation segment is primarily involved in
drilling and evaluating the formations related to bore-hole construction and
initial oil and gas formation evaluation. Major products and services offered
include:
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- drilling systems and services;
- drill bits; and
- logging and perforating.
Our Sperry-Sun business line provides drilling systems and services.
These services include directional and horizontal drilling,
measurement-while-drilling, logging-while-drilling, multilateral wells and
related completion systems, and rig site information systems. Our drilling
systems feature bit stability, directional control, borehole quality, low
vibration and high rates of penetration while drilling directional wells.
Drill bits, offered by our Security DBS business line, include roller
cone rock bits, fixed cutter bits, coring equipment and services and other
downhole tools used to drill wells.
Logging and perforating products and services include our Magnetic
Resonance Imaging Logging (MRIL(R)) and high-temperature logging, as well as
traditional open-hole and cased-hole logging tools. MRIL(R) tools apply magnetic
resonance imaging technology to the evaluation of subsurface rock formations in
newly drilled oil and gas wells. 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.
Fluids
Our Fluids segment focuses on fluid management and technologies to
assist in the drilling and construction of oil and gas wells. This segment
offers cementing and drilling fluids systems.
Cementing is the process used to bond the well and well casing while
isolating fluid zones and maximizing wellbore stability. Cement and chemical
additives are pumped to fill the space between the casing and the side of the
wellbore. Our cementing service line also provides casing equipment and
services.
Our Baroid business line provides drilling fluid systems and
performance additives for oil and gas drilling, completion and workover
operations. In addition, Baroid sells products to a wide variety of industrial
customers. Drilling fluids usually contain bentonite or barite in a water or oil
base. Drilling fluids primarily improve wellbore stability and facilitate the
transportation of cuttings from the bottom of a wellbore to the surface.
Drilling fluids also help cool the drill bit, seal porous well formations and
assist in pressure control within a wellbore. Drilling fluids are often
customized by onsite engineers for optimum stability and enhanced oil
production.
Also included in this segment is our equity method investment in
Enventure Global Technology, LLC (Enventure), which is an expandable casing
joint venture. In January 2004, Halliburton and Shell Technology Ventures
(Shell, an unrelated party) agreed to restructure two joint venture companies,
Enventure and WellDynamics B.V. (WellDynamics), in an effort to more closely
align the ventures with near-term priorities in the core businesses of the
venture owners. Enventure was owned equally by Halliburton and Shell. Shell
acquired an additional 33.5% of Enventure, leaving us with 16.5% ownership in
return for enhanced and extended agreements and licenses with Shell for its
Poroflex(TM) expandable sand screens and a distribution agreement for its
Versaflex(TM) expandable liner hangers, in addition to a one percent increase in
our ownership of WellDynamics.
Production Optimization
Our Production Optimization segment primarily tests, measures and
provides means to manage and/or improve well production once a well is drilled
and, in some cases, after it has been producing. This segment consists of:
- production enhancement;
- completion products; and
- tools and testing services.
2
Production enhancement optimizes oil and gas reservoirs through a
variety of pressure pumping services, including fracturing and acidizing, sand
control, coiled tubing, hydraulic workover and pipeline and process services.
These services are used to clean out a formation or to fracture formations to
allow increased oil and gas production.
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.
Tools and testing services include underbalanced applications,
tubing-conveyed perforating products and services, drill stem and other well
testing tools, data acquisition services and production applications.
Also included in this segment are our subsea operations conducted in
our 50% owned company, Subsea 7, Inc.
Landmark and Other Energy Services
Our Landmark and Other Energy Services segment provides integrated
exploration and production software information systems, consulting services,
real-time operations, smartwells and other integrated solutions.
Landmark Graphics is the leading supplier of integrated exploration and
production software information systems as well as professional and data
management services for the upstream oil and gas industry. Landmark Graphics
software transforms vast quantities of seismic, well log and other data into
detailed computer models of petroleum reservoirs. The models are used by our
customers to achieve optimal business and technical decisions in exploration,
development and production activities. Landmark Graphics' broad range of
professional services enables our worldwide customers to optimize technical,
business and decision processes. Data management services provides efficient
storage, browsing and retrieval of large volumes of exploration and petroleum
data. The products and services offered by Landmark Graphics integrate data
workflows and operational processes across disciplines, including geophysics,
geology, drilling, engineering, production, economics, finance and corporate
planning, and key partners and suppliers.
This segment also provides value-added oilfield project management and
integrated solutions to independent, integrated and national oil companies.
Integrated solutions enhance field deliverability and maximize a customer's
return on investment. These services make use of all of our products and
technologies, as well as project management capabilities. Other services provide
installation and servicing of subsea facilities and pipelines.
Also included in this segment is our equity method investment in
WellDynamics, an intelligent well completions joint venture. As discussed above,
in January 2004, Halliburton and Shell agreed to restructure the WellDynamics
joint venture. We acquired an additional one percent of WellDynamics from Shell,
giving us 51% ownership. With our resulting control of day-to-day operations, we
believe we will be able to achieve more natural opportunities to leverage
existing complementary businesses, reduce costs, and ensure global availability.
ENGINEERING AND CONSTRUCTION GROUP
Our Engineering and Construction Group segment, operating as KBR,
provides a wide range of services to energy and industrial customers and
government entities worldwide.
KBR offers the following:
- onshore engineering and construction activities, including
engineering and construction of liquefied natural gas, ammonia
and crude oil refineries and natural gas plants;
- offshore deepwater engineering, marine technology, project
management, and related worldwide fabrication capabilities;
- government operations, construction, maintenance and logistics
activities for government facilities and installations;
3
- plant operations, maintenance and start-up services for both
upstream and downstream oil, gas and petrochemical facilities
as well as operations, maintenance and logistics services for
the power, commercial and industrial markets; and
- civil engineering, consulting and project management services.
Dispositions in 2003. During 2003, we disposed of the following
non-core businesses:
- in January 2003, we sold our Mono Pumps business, which was
reported in our Drilling and Formation Evaluation segment, to
National Oilwell, Inc.;
- in March 2003, we sold the assets relating to our Wellstream
business, a global provider of flexible pipe products, systems
and solutions, which was reported in our Landmark and Other
Energy Services segment, to Candover Partners Ltd.; and
- in May 2003, we sold certain assets of Halliburton Measurement
Systems, which provides flow measurement and sampling systems
and was reported in our Production Optimization segment, to
NuFlo Technologies.
These dispositions will have an immaterial impact on our future
operations. See Note 4 to the consolidated financial statements for additional
information related to 2003 dispositions.
Business strategy. Our business strategy is to maintain global
leadership in providing energy services and products and engineering and
construction services. We provide these services and products to our customers
as discrete services and products and, when combined with project management
services, as integrated solutions. Our ability to be a global leader depends on
meeting four key goals:
- establishing and maintaining technological leadership;
- achieving and continuing operational excellence;
- creating and continuing innovative business relationships; and
- preserving a dynamic workforce.
Markets and competition. We are one of the world's largest diversified
energy services and engineering and construction services companies. We believe
that our future success will depend in large part upon our ability to offer a
wide array of services and products on a global scale. Our services and products
are sold in highly competitive markets throughout the world. Competitive factors
impacting sales of our services and products include:
- price;
- service delivery (including the ability to deliver services
and products on an "as needed, where needed" basis);
- service quality;
- 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, natural gas and natural gas liquids. 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
facilities primarily for energy and government customers.
We conduct business worldwide in over 100 countries. In 2003, based on
the location of services provided and products sold, 27% of our total revenue
was from the United States and 15% of our total revenue was from Iraq, primarily
related to our work for the United States government. In 2002, 33% of our total
revenue was from the United States and 12% of our total revenue was from the
United Kingdom. No other country accounted for more than 10% of our total
revenue during these periods. Since the markets for our services and products
are vast and cross numerous geographic lines, a meaningful estimate of the total
number of competitors cannot be made. The industries we serve are highly
4
competitive and we have many substantial competitors. Substantially all of our
services and products are marketed through our servicing and sales
organizations.
Operations in some countries may be adversely affected by unsettled
political conditions, acts of terrorism, civil unrest, 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. While Venezuela accounted for less than one percent
of our 2003 revenues, the continuing economic and political instability will
continue to negatively impact our business activities in Venezuela until
resolved. The currency devaluation in Venezuela in February 2004 did not
materially impact our operations, but further devaluations could negatively
impact our operations in 2004. Due to continuing levels of civil disturbance and
the social, economic and political climate, a number of our customers have
ceased operations in the Nigerian Delta region and our operations could be
negatively impacted. Energy Services Group operations in Nigeria accounted for
approximately 2% of our revenues in 2003, and these developments could
negatively impact our operations in 2004. Information regarding our exposures to
foreign currency fluctuations, risk concentration and financial instruments used
to minimize risk is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Instrument Market Risk
and in Note 18 to the consolidated financial statements.
Customers and backlog. Our revenues during the past three years were
mainly derived from the sale of services and products to the energy industry,
including 66% in 2003, 86% in 2002 and 85% in 2001. Revenues from the United
States government (which resulted primarily from the work performed in the
Middle East by our Engineering and Construction Group) represented 26% of our
2003 consolidated revenues. Revenues from the United States government during
2002 and 2001 represented less than 10% of total consolidated revenues. No other
customer represented more than 10% of consolidated revenues in any period
presented.
The following schedule summarizes our project backlog at December
31, 2003 and 2002:
Millions of dollars 2003 2002
- -----------------------------------------------------------------------------
Firm orders $ 8,928 $ 8,704
Government orders firm but not yet funded;
letters of intent and contracts awarded
but not signed 1,138 1,330
- -----------------------------------------------------------------------------
Total $ 10,066 $ 10,034
=============================================================================
Of the total backlog at December 31, 2003, $9,745 million relates to
KBR operations with the remainder arising from our Energy Services Group. The
entire Energy Services Group 2003 backlog relates to subsea operations. We
estimate that 73% of the total backlog existing at December 31, 2003 will be
completed during 2004. Approximately 72% of total backlog relates to cost
reimbursable contracts with the remaining 28% relating to fixed-price contracts.
In addition, backlog relating to engineering, procurement, installation and
commissioning contracts for the offshore oil and gas industry totaled $432
million at December 31, 2003. For contracts that are not for a specific amount,
backlog is estimated as follows:
- operations and maintenance contracts that cover multiple years
are included in backlog based upon an estimate of the work to
be provided over the next twelve months; and
- government contracts that cover a broad scope of work up to a
maximum value are included in backlog at the estimated amount
of work to be completed under the contract based upon periodic
consultation with the customer.
For projects where we act as project manager, we only include our scope
of each project in backlog. For projects related to unconsolidated joint
ventures, we only include our percentage ownership of each joint venture's
5
backlog, which totaled $1.9 billion at December 31, 2003. Our backlog excludes
contracts for recurring hardware and software maintenance and support services
offered by Landmark Graphics. Backlog is not indicative of future operating
results 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 and timing. Many
contracts do not provide for a fixed amount of work to be performed and are
subject to modification or termination by the customer. The termination or
modification of any one or more sizeable contracts or the addition of other
contracts may have a substantial and immediate effect on backlog.
Not included in the above backlog numbers for December 31, 2003 are two
new government contracts awarded in January 2004. KBR was awarded the five year
United States Army Corps of Engineers' CENTCOM contract for up to $1.5 billion
and the competitively bid $1.2 billion Restore Iraqi Oil, or RIO, continuation
contract, which will run for up to two years. As KBR receives task orders on
these contracts, the amount of the task order will be included in backlog.
Raw materials. Raw materials essential to our business are normally
readily available. Where we rely 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 supply.
Research and development costs. 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. Our expenditures for
research and development activities totaled $221 million in 2003 and $233
million in both 2002 and 2001.
Patents. 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 to utilize patents owned by others. Included in
"Other assets" is the cost associated with our patents, net of accumulated
amortization, totaling $49 million as of December 31, 2003 and $58 million as of
December 31, 2002. We do not consider any particular patent or group of patents
to be material to our business operations.
Seasonality. On an overall basis, our operations are not generally
affected by seasonality. Weather and natural phenomena can temporarily affect
the performance of our services, but the widespread geographical locations of
our operations serve to mitigate those effects. Examples of how weather can
impact our business include:
- the severity and duration of the winter in North America can
have a significant impact on gas storage levels and drilling
activity for natural gas;
- the timing and duration of the spring thaw in Canada directly
affects activity levels due to road restrictions;
- typhoons and hurricanes can disrupt offshore operations; and
- severe weather during the winter months normally results in
reduced activity levels in the North Sea.
Due to higher spending near the end of the year on capital expenditures
by its customers for software, Landmark Graphics results of operations are
generally stronger in the fourth quarter of the year than at the beginning of
the year.
Employees. At December 31, 2003, we employed approximately 101,000
people worldwide compared to 83,000 at December 31, 2002. The large increase is
primarily due to KBR's expanded operations in the Middle East during 2003. At
December 31, 2003, approximately seven percent of our employees were subject to
collective bargaining agreements. Based upon the geographic diversification of
these employees, we believe any risk of loss from employee strikes or other
collective actions would not be material to the conduct of our operations taken
as a whole.
Environmental regulation. We are subject to numerous environmental,
legal and regulatory requirements related to our operations worldwide. In the
United States, these laws and regulations include, among others:
6
- the Comprehensive Environmental Response, Compensation and
Liability Act;
- the Resources Conservation and Recovery Act;
- the Clean Air Act;
- the Federal Water Pollution Control Act; and
- the Toxic Substances Control Act.
In addition to the federal laws and regulations, states and other
countries where we do business may have numerous environmental, legal and
regulatory requirements by which we must abide.
We evaluate and address the environmental impact of our operations by
assessing and remediating contaminated properties in order to avoid future
liabilities and comply with environmental, legal and regulatory requirements. On
occasion, we are involved in specific environmental litigation and claims,
including the remediation of properties we own or have operated as well as
efforts to meet or correct compliance-related matters. Our Health, Safety and
Environment group has several programs in place to maintain environmental
leadership and to prevent the occurrence of environmental contamination.
We do not expect costs related to these remediation requirements to
have a material adverse effect on our consolidated financial position or our
results of operations. We have subsidiaries that have been named as potentially
responsible parties along with other third parties for nine federal and state
superfund sites for which we have established a liability. As of December 31,
2003, those nine sites accounted for approximately $7 million of our total $31
million liability. See Note 13 to the consolidated financial statements.
Website access. The Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act of 1934 are made available free of charge on the Company's internet website
at www.halliburton.com as soon as reasonably practicable after the Company has
electronically filed the material with, or furnished it to, the Securities and
Exchange Commission. Also posted on our website is our Code of Business Conduct,
which applies to all our employees and also serves as a code of ethics for our
chief executive officer, chief financial officer, chief accounting officer and
persons performing similar functions.
7
Item 2. Properties.
We own or lease numerous properties in domestic and foreign locations.
The following locations represent our major facilities:
Owned/
Location Leased Sq. Footage Description
- ----------------------------------------------------------------------------------------------------------------------
Energy Services Group
North America
Drilling and Formation
Evaluation Segment:
Dallas, Texas Owned 352,000 Manufacturing facility includes office, laboratory
and warehouse space that primarily produces roller
cone drill bits. In December 2003, we moved the
production from this facility to our new facility in
The Woodlands, Texas. The facility is currently
for sale.
The Woodlands, Texas Leased 256,000 Manufacturing facility including warehouses,
engineering and sales, testing, training and
research. The manufacturing plant produces roller
cone and rotary type drill bits.
Production Optimization Segment:
Carrollton, Texas Owned 649,000 Manufacturing facility including warehouses,
engineering and sales, testing, training and
research. The manufacturing plant produces
equipment for the Production Optimization segment,
including surface and subsurface safety valves and
packer assemblies.
Shared Facilities:
Duncan, Oklahoma Owned 1,275,000 Four locations which include manufacturing capacity
totaling 655,000 square feet. The manufacturing
facility is the main manufacturing site for the
cementing, fracturing and acidizing equipment. The
Duncan facilities also include a technology and
research center, training facility, administrative
offices and warehousing. These facilities service
our Drilling and Formation Evaluation, Fluids and
Production Optimization segments.
8
Owned/
Location Leased Sq. Footage Description
- ----------------------------------------------------------------------------------------------------------------------
Shared Facilities (continued):
Houston, Texas Owned 638,000 Two suburban campus locations utilized by our
Drilling and Formation Evaluation and Fluids
segments. One campus is on 89 acres consisting of
office, training, test well, warehouse,
manufacturing and laboratory facilities. The
manufacturing facility, which occupies 115,000
square feet, produces highly specialized downhole
equipment for our Drilling and Formation Evaluation
segment. The other campus is a manufacturing
facility with limited office, laboratory and
warehouse space that primarily produces fixed cutter
drill bits.
Houston, Texas Owned 564,000 A campus facility that is the home office for the
Energy Services Group.
Alvarado, Texas Owned 238,000 Manufacturing facility including some office and
warehouse space. The manufacturing facility
produces perforating products and exploratory and
formation evaluation tools for our Drilling and
Formation Evaluation and Production Optimization
segments.
Europe/Africa
Shared Facilities:
Aberdeen, United Kingdom Owned 1,216,000 A total of 26 sites including 866,000 square feet of
Leased 365,000 manufacturing capacity used by various business
segments.
Tananger, Norway Leased 319,000 Service center with workshops, testing facilities,
warehousing and office facilities supporting the
Norwegian North Sea operations.
Engineering and Construction Group
North America
Houston, Texas Leased 740,000 Engineering and project support center which
occupies 31 full floors in 2 office buildings. One
of these buildings is owned by a joint venture in
which we have a 50% ownership. The remaining 50% of
the joint venture is owned by a subsidiary of Trizec
Properties Inc. (NYSE: TRZ). Trizec is not
affiliated with Halliburton Company or any of its
directors or executive officers.
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Owned/
Location Leased Sq. Footage Description
- ----------------------------------------------------------------------------------------------------------------------
North America (continued)
Houston, Texas Owned 977,000 A campus facility occupying 135 acres utilized
primarily for administrative and support personnel.
Approximately 221,000 square feet is dedicated to
maintenance and warehousing of construction
equipment. This campus also serves as office
facilities for KBR.
Europe/Africa
Leatherhead, United Kingdom Owned 262,000 Engineering and project support center on 55 acres
in suburban London.
Corporate
Houston, Texas Leased 30,000 Corporate executive offices.
In addition, we have 173 international and 106 United States field
camps from which the Energy Services Group delivers its products and services.
We also have numerous small facilities that include sales offices, project
offices and bulk storage facilities throughout the world. We own or lease marine
fabrication facilities covering approximately 761 acres in Texas, England and
Scotland which are used by the Engineering and Construction Group.
We have mineral rights to proven and probable reserves of barite and
bentonite. These rights include leaseholds, mining claims and owned property. We
process barite and bentonite for supply to many industrial markets worldwide in
addition to using it in our Fluids segment. Based on the number of tons of
bentonite consumed in fiscal year 2003, we estimate our 19 million tons of
proven reserves in areas of active mining are sufficient to fulfill our internal
and external needs for the next 15 years. We estimate that our 2.7 million tons
of proven reserves of barite in areas of active mining equate to a 17 year
supply based on current rates of production. These estimates are subject to
change based on periodic updates to reserve estimates and to the extent future
consumption differs from current levels of consumption.
We believe all properties that we currently occupy are suitable for
their intended use.
Item 3. Legal Proceedings.
Information relating to various commitments and contingencies is
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Forward-Looking Information and Risk Factors" and in
Notes 11, 12 and 13 to the consolidated financial statements.
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 2003.
10
Executive Officers of the Registrant.
The following table indicates the names and ages of the executive
officers of the registrant as of February 1, 2004, 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 of Halliburton Company, since July 1996
(Age 59)
* Albert O. Cornelison, Jr. Executive Vice President and General Counsel of Halliburton Company,
(Age 54) since December 2002
Vice President and General Counsel of Halliburton Company, May 2002 to
December 2002
Vice President and Associate General Counsel of Halliburton Company,
October 1998 to May 2002
* C. Christopher Gaut Executive Vice President and Chief Financial Officer of Halliburton
(Age 47) Company, since March 2003
Senior Vice President, Chief Financial Officer and Member - Office of the
President and Chief Operating Officer of ENSCO International
Incorporated, January 2002 to February 2003
Senior Vice President and Chief Financial Officer of ENSCO International
Incorporated, December 1987 to December 2001
* John W. Gibson, Jr. President and Chief Executive Officer of Energy Services Group, since
(Age 46) January 2003
President of Halliburton Energy Services, March 2002 to December 2002
President and Chief Executive Officer of Landmark, May 2000 to
February 2002
Chief Operating Officer of Landmark, July 1999 to April 2000
Executive Vice President of Integrated Products Group, February 1996
to June 1999
* Robert R. Harl Chief Executive Officer of Kellogg Brown & Root, Inc., since March 2001
(Age 53) President of Kellogg Brown & Root, Inc., since October 2000
Vice President of Kellogg Brown & Root, Inc., March 1999 to
October 2000
Chief Executive Officer and President of Brown & Root Energy Services
Division of Kellogg Brown & Root, Inc., April 2000 to February 2001
Chief Executive Officer of Brown & Root Services Division of Kellogg
Brown & Root, Inc., January 1999 to April 2000
Chief Executive Officer and President of Brown & Root Services
Corporation, November 1996 to January 1999
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Executive Officers of the Registrant (continued)
Name and Age Offices Held and Term of Office
- ------------ -------------------------------
* David J. Lesar Chairman of the Board, President and Chief Executive Officer of
(Age 50) Halliburton Company, since August 2000
Director of Halliburton Company, since August 2000
President and Chief Operating Officer of Halliburton Company, May 1997
to August 2000
Executive Vice President and Chief Financial Officer of Halliburton
Company, August 1995 to May 1997
Chairman of the Board of Kellogg Brown & Root, Inc., January 1999 to
August 2000
Mark A. McCollum Senior Vice President and Chief Accounting Officer, since August 2003
(Age 44) Senior Vice President and Chief Financial Officer, Tenneco
Automotive, Inc., November 1999 to August 2003
Vice President, Global Finance of Tenneco Automotive, September 1998 to
November 1999
* Weldon J. Mire Vice President - Human Resources of Halliburton Company, since
(Age 56) May 2002
Division Vice President of Halliburton Energy Services, January 2001 to
May 2002 (Country Vice President Indonesia)
Asia Pacific Sales Manager of Halliburton Energy Services, November
1999 to January 2001
Director of Business Development, September 1999 to November 1999
Global Director of Strategic Business Development, January 1999 to
November 1999
Senior Shared Service Manager Houston, November 1998 to January 1999
David R. Smith Vice President - Tax of Halliburton Company, since May 2002
(Age 57) Vice President - Tax of Halliburton Energy Services, Inc.,
September 1998 to May 2002
* Members of the Policy Committee of the registrant.
There are no family relationships between the executive officers of the
registrant or between any director and any executive officer of the registrant.
12
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 the high and low market
prices of common stock and quarterly dividend payments is included under the
caption "Quarterly Data and Market Price Information" on page 123 of this annual
report. Cash dividends on common stock for 2003 and 2002 in the amount of $0.125
per share 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, future earnings, general
financial condition and liquidity, success in business activities, capital
requirements, and general business conditions.
At December 31, 2003, there were approximately 24,143 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 page 122
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 16 through 61
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 47 and 48 of this annual
report.
13
Item 8. Financial Statements and Supplementary Data.
Page No.
--------
Responsibility for Financial Reporting 62
Independent Auditors' Report 63-64
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 65
Consolidated Balance Sheets at December 31, 2003 and 2002 66
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001 67
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 68
Notes to Consolidated Financial Statements 69-121
Selected Financial Data (Unaudited) 122
Quarterly Data and Market Price Information (Unaudited) 123
The related financial statement schedules are included under Part IV,
Item 15 of this annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9(a). Controls and Procedures.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out
an evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2003 to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
During the fourth quarter of 2003, it became apparent to us that the
existing infrastructure for our logistics contracts to support activities in
Iraq was being strained. Specifically, these projects are being performed in a
war zone with operations spread across 60 different site locations in Kuwait and
Iraq, and we have had to carefully balance the priority of keeping our people
safe against the demand for significant resources in forward areas. Once
deployed in forward areas, our people often have had difficulty communicating
due to very poor telephone or computer infrastructure. Additionally, these
projects have had to ramp up very quickly to respond to customer demands.
Revenues on these projects increased from $320 million in the second quarter of
2003 to over $2 billion in the fourth quarter of 2003. The accelerated and
significant ramp up in services, concerns for the security of our employees and
subcontractors, as well as the complexity and scale of these projects, has
created unique challenges in establishing and maintaining a process and
procedural environment that controls these projects as well as we would normally
expect.
During the fourth quarter several internal control issues were
identified as a result of work done by our auditors and actions were immediately
taken to address the issues. We sent a task force into Kuwait to assist
personnel in the project office in updating and formalizing procurement
documentation which had been delayed due to insufficient resources to do these
activities and respond to customer requirements. The project procurement staff
has been significantly increased. We also brought in additional resources to
assist with identification of and accounting for year-end accruals for goods and
services received but not invoiced.
14
Further, as part of on-going audits by the Defense Contract Audit
Agency (DCAA), several contract compliance issues have been raised (see Note 13
to the consolidated financial statements). Recently, the DCAA has also issued a
deficiency report related to the logistics project's procurement process,
largely due to the procurement documentation issues mentioned above. It is
likely that this will result in a formal audit by the DCAA in this area in the
near future.
In order to strengthen our control environment for these contracts,
we are implementing several improvements, including:
- strengthening the procurement management for government
operations within KBR;
- adding procurement resources on the project;
- mobilizing a task force to assist on procurement processes and
documentation until sufficient resources have been hired and
trained;
- reinforcing requirements and adding resources to materials
management and property control reconciliations;
- reinforcing requirements and adding resources related to
reconciliation of bank and petty cash accounts; and
- revising and reinforcing procedures for identification of and
accounting for accruals for goods and services received but
not invoiced.
There have been no other changes in our internal controls over
financial reporting that occurred during the quarter ended December 31, 2003
that materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
15
HALLIBURTON COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
EXECUTIVE OVERVIEW
During 2003, we made progress toward resolving our asbestos and silica
liabilities. Our revenues grew nearly 30% to $16 billion, largely as a result of
our increased government services work in the Middle East. We reduced our
exposure related to unapproved claims and liquidated damages related to our
challenging Barracuda-Caratinga construction project. We addressed the
substantial expected future demands on our funds by securing financing, managing
working capital and strictly following our reduced capital spending plan. We
achieved all of this while continuing to effectively run our day-to-day business
by delivering quality, on-time services to our customers.
Asbestos and silica. Having reached definitive settlements with almost
all of our asbestos and silica personal injury claimants, certain of our
subsidiaries filed Chapter 11 proceedings on December 16, 2003. A pre-approved
proposed plan of reorganization was filed as part of the Chapter 11 proceedings.
The confirmation hearing is currently scheduled in May 2004. If the plan is
approved by the bankruptcy court, in addition to the $311 million paid to
claimants in December 2003, we will contribute the following to trusts
established for the benefit of the claimants:
- up to approximately $2.5 billion in cash;
- 59.5 million shares of Halliburton common stock;
- notes currently valued at approximately $52 million; and
- insurance proceeds, if any, between $2.3 billion and $3.0
billion received by DII Industries and Kellogg Brown & Root.
Upon confirmation of the plan of reorganization, current and future
asbestos and silica personal injury claims against Halliburton and its
subsidiaries will be channeled into trusts established for the benefit of
claimants, thus releasing Halliburton and its affiliates from those claims. We
have also recently entered into a settlement with Equitas, the largest insurer
of our asbestos and silica claims. The settlement calls for Equitas to pay us
$575 million (representing approximately 60% of applicable limits of liability
that DII Industries had substantial likelihood of recovering from Equitas)
provided that we receive confirmation of our plan of reorganization and the
current United States Congress does not pass national asbestos litigation reform
legislation.
Government services in the Middle East. Our government services revenue
related to Iraq totaled $3.6 billion in 2003. The work we perform includes
providing construction and services (among other things):
- to support deployment, site preparation, operations and
maintenance and transportation for United States troops; and
- to restore the Iraqi petroleum industry, such as extinguishing
oil well fires, environmental assessments and cleanup at oil
sites, oil infrastructure condition assessments, oilfield,
pipeline and refinery maintenance and the procurement and
importation of fuel products.
The accelerated ramp up in services in a war zone brought with it several
challenges, including keeping our people safe, recruiting and retaining
qualified personnel, identifying and retaining appropriate subcontractors,
establishing the necessary internal control procedures associated with this type
of business and funding the increased working capital demands. We have received
and expect to continue to receive heightened media, legislative and regulatory
attention regarding our work in Iraq, including the preliminary results of
various audits by the Defense Contract Audit Agency (DCAA) related to our
invoicing practices and our self-reporting of possible improper conduct by
one or two of our former employees.
16
Barracuda-Caratinga project. In recent years we have faced numerous
problems related to our Barracuda-Caratinga project, a multi-year construction
project to build two converted supertankers, which will be used as floating
production, storage and offloading units (FPSOs), 32 hydrocarbon production
wells, 22 water injection wells and all sub-sea flow lines, umbilicals and
risers necessary to connect the underwater wells to the FPSOs. The project will
be used to develop the Barracuda and Caratinga crude oil fields, which are
located off the coast of Brazil. The project is significantly behind its
original schedule and in a financial loss position. In November 2003, we entered
into an agreement with the project owner which settled a portion of our claims
and also extended the project completion dates.
Financing activities. The anticipated cash contribution into the
asbestos and silica trusts in 2004, the increased work in Iraq and potential
additional delays of certain billings related to work in Iraq have required us
to raise substantial funds and could require us to raise additional funds in
order to meet our current and potential future liabilities and working capital
requirements. As a result, between June 2003 and January 2004, we issued $1.2
billion in convertible notes and $1.6 billion in fixed and floating rate senior
notes. In addition, in anticipation of the pre-packaged Chapter 11 filing, in
the fourth quarter of 2003 we entered into:
- a delayed-draw term facility that would currently provide for
draws of up to $500 million to be available for cash funding
of the trusts for the benefit of asbestos and silica
claimants, if required conditions are met;
- a master letter of credit facility intended to ensure that
existing letters of credit supporting our contracts remain in
place during the Chapter 11 filing; and
- a $700 million three-year revolving credit facility for
general working capital purposes which expires in October
2006.
We have other significant sources of funds available to us in the near-term
should we need them, including, but not limited to, approximately $200 million
in availability under our United States accounts receivable securitization
facility. In addition, as early as January 2005, we may receive $500 million of
the funds that would be provided by the Equitas settlement described above. In
2003, we implemented programs to improve our working capital and to limit our
spending on capital projects to those critical to serving our customers. We
continue to maintain our investment grade credit ratings and have sufficient
cash and financing capacity to fund our asbestos and silica settlement
obligations in 2004 and continue to grow our business.
Business focus. In 2003, we continued to focus on providing quality
service to our customers and developing new technologies to effectively compete
in a challenging market. Early in the year, we realigned our Energy Services
Group into four new segments, allowing us to better align ourselves with how our
customers procure our services and to capture new business and achieve better
integration. Our Energy Services Group business is largely affected by worldwide
drilling activity and oil and gas prices. In 2003 we were negatively impacted by
the decline in the Gulf of Mexico offshore rig count and the reduction in deep
water activity by a number of our key customers in that area. We reacted to this
change in the market and put into place various measures in order to "right
size" our business serving that area. Our continued emphasis on research and
development resulted in growth in new products and services in 2003, such as
rotary steerables and data center technologies. Besides the growth in government
services work at KBR, including the recent awarding of the two-year $1.2 billion
contract for the RIO program and the five-year up to $1.5 billion military
support contract, we continue to differentiate ourselves as a leader in the
liquefied natural gas industry by being a preferred engineer and constructor of
liquification plants and receiving terminals throughout the world. We also
recently completed the construction of the 1,420 kilometer Alice Springs to
Darwin railroad in Australia, one of the largest and most complex infrastructure
projects ever undertaken in that country, five months ahead of schedule.
Following is a more detailed discussion of each of these subjects.
17
Asbestos and Silica Obligations and Insurance Recoveries
Pre-packaged Chapter 11 proceedings. DII Industries, LLC (DII
Industries), Kellogg Brown & Root, Inc. (Kellogg Brown & Root) and our other
affected subsidiaries filed Chapter 11 proceedings on December 16, 2003 in
bankruptcy court in Pittsburgh, Pennsylvania. With the filing of the Chapter 11
proceedings, all asbestos and silica personal injury claims and related lawsuits
against Halliburton and our affected subsidiaries have been stayed.
Our subsidiaries sought Chapter 11 protection because Sections 524(g)
and 105 of the Bankruptcy Code may be used to discharge current and future
asbestos and silica personal injury claims against us and our subsidiaries. Upon
confirmation of the plan of reorganization, current and future asbestos and
silica claims against us and our affiliates will be channeled into trusts
established for the benefit of claimants under Sections 524(g) and 105 of the
Bankruptcy Code, thus releasing Halliburton and its affiliates from those
claims.
A pre-packaged Chapter 11 proceeding is one in which a debtor seeks
approval of a plan of reorganization from affected creditors before filing for
Chapter 11 protection. Prior to proceeding with the Chapter 11 filing, our
affected subsidiaries solicited acceptances from known present asbestos and
silica claimants to a proposed plan of reorganization. In the fourth quarter
of 2003, valid votes were received from approximately 364,000 asbestos claimants
and approximately 21,000 silica claimants, representing substantially all known
claimants. Of the votes validly cast, over 98% of voting asbestos claimants and
over 99% of voting silica claimants voted to accept the proposed plan of
reorganization, meeting the voting requirements of Chapter 11 of the Bankruptcy
Code for approval of the proposed plan. The pre-approved proposed plan of
reorganization was filed as part of the Chapter 11 proceedings.
The proposed plan of reorganization, which is consistent with the
definitive settlement agreements reached with our asbestos and silica personal
injury claimants in early 2003, provides that, if and when an order confirming
the proposed plan of reorganization becomes final and non-appealable, in
addition to the $311 million paid to claimants in December 2003, the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
- up to approximately $2.5 billion in cash;
- 59.5 million shares of Halliburton common stock (valued at
approximately $1.6 billion for accrual purposes using a stock
price of $26.17 per share, which is based on the average
trading price for the five days immediately prior to and
including December 31, 2003);
- a one-year non-interest bearing note of $31 million for the
benefit of asbestos claimants;
- a silica note with an initial payment into a silica trust of
$15 million. Subsequently the note provides that we will
contribute an amount to the silica trust balance at the end of
each year for the next 30 years to bring the silica trust
balance to $15 million, $10 million or $5 million based upon a
formula which uses average yearly disbursements from the trust
to determine that amount. The note also provides for an
extension of the note for 20 additional years under certain
circumstances. We have estimated the amount of this note to be
approximately $21 million. We will periodically reassess our
valuation of this note based upon our projections of the
amounts we believe we will be required to fund into the silica
trust; and
- insurance proceeds, if any, between $2.3 billion and $3.0
billion received by DII Industries and Kellogg Brown & Root.
In connection with reaching an agreement with representatives of
asbestos and silica claimants to limit the cash required to settle pending
claims to $2.775 billion, DII Industries paid $311 million on December 16, 2003.
Halliburton also agreed to guarantee the payment of an additional $156 million
of the remaining approximately $2.5 billion cash amount, which must be paid on
the earlier to occur of June 17, 2004 or the date on which an order confirming
the proposed plan of reorganization becomes final and non-appealable. As a part
of the definitive settlement agreements, we have been accruing cash payments in
18
lieu of interest at a rate of five percent per annum for these amounts. We
recorded approximately $24 million in pretax charges in 2003 related to the cash
in lieu of interest. On December 16, 2003, we paid $22 million to satisfy a
portion of our cash in lieu of interest payment obligations.
As a result of the filing of the Chapter 11 proceedings, we adjusted
the asbestos and silica liability to reflect the full amount of the proposed
settlement and certain related costs, which resulted in a before tax charge of
approximately $1.016 billion to discontinued operations in the fourth quarter
2003. The tax effect on this charge was minimal, as a valuation allowance was
established for the net operating loss carryforward created by the charge. We
also reclassified a portion of our asbestos and silica related liabilities from
long-term to short-term, resulting in an increase of short-term liabilities by
approximately $2.5 billion, because we believe we will be required to fund these
amounts within one year.
In accordance with the definitive settlement agreements entered in
early 2003, we have been reviewing plaintiff files to establish a medical basis
for payment of settlement amounts and to establish that the claimed injuries are
based on exposure to our products. We have reviewed substantially all medical
claims received. During the fourth quarter of 2003, we received significant
numbers of the product identification due diligence files. Based on our review
of these files, we received the necessary information to allow us to proceed
with the pre-packaged Chapter 11 proceedings. As of December 31, 2003,
approximately 63% of the value of claims passing medical due diligence have
submitted satisfactory product identification. We expect the percentage to
increase as we receive additional plaintiff files. Based on these results, we
found that substantially all of the asbestos and silica liability relates to
claims filed against our former operations that have been divested and included
in discontinued operations. Consequently, all 2003 changes in our estimates
related to the asbestos and silica liability were recorded through discontinued
operations.
Our proposed plan of reorganization calls for a portion of our total
asbestos and silica liability to be settled by contributing 59.5 million shares
of Halliburton common stock into the trusts. We will continue to adjust our
asbestos and silica liability related to the shares if the average value of
Halliburton stock for the five days immediately prior to and including the end
of each fiscal quarter has increased by five percent or more from the most
recent valuation of the shares. At December 31, 2003, the value of the shares to
be contributed is classified as a long-term liability on our consolidated
balance sheet, and the shares have not been included in our calculation of basic
or diluted earnings per share. If the shares had been included in the
calculation as of the beginning of the fourth quarter, our diluted earnings per
share from continuing operations for the year ended December 31, 2003 would have
been reduced by $0.03. When and if we receive final and non-appealable
confirmation of our proposed plan of reorganization, we will:
- increase or decrease our asbestos and silica liability to
value the 59.5 million shares of Halliburton common stock
based on the value of Halliburton stock on the date of final
and non-appealable confirmation of our proposed plan of
reorganization;
- reclassify from a long-term liability to shareholders' equity
the final value of the 59.5 million shares of Halliburton
common stock; and
- include the 59.5 million shares in our calculations of
earnings per share on a prospective basis.
We understand that the United States Congress may consider adopting
legislation that would establish a national trust fund as the exclusive means
for recovery for asbestos-related disease. We are uncertain as to what
contributions we would be required to make to a national trust, if any, although
it is possible that they could be substantial and that they could continue for
several years. It is also possible that our level of participation and
contribution to a national trust could be greater than it otherwise would have
been as a result of having subsidiaries that have filed Chapter 11 proceedings
due to asbestos liability.
19
Recent insurance developments. Concurrent with the remeasurement of our
asbestos and silica liability due to the pre-packaged Chapter 11 filing, we
evaluated the appropriateness of the $2.0 billion recorded for asbestos and
silica insurance recoveries. In doing so, we separately evaluated two types of
policies:
- policies held by carriers with which we had either settled or
which were probable of settling and for which we could
reasonably estimate the amount of the settlement; and
- other policies.
In December 2003, we retained Navigant Consulting (formerly Peterson
Consulting), a nationally-recognized consultant in asbestos and silica liability
and insurance, to assist us. In conducting their analysis, Navigant Consulting
performed the following with respect to both types of policies:
- reviewed DII Industries' historical course of dealings with
its insurance companies concerning the payment of
asbestos-related claims, including DII Industries' 15-year
litigation and settlement history;
- reviewed our insurance coverage policy database containing
information on key policy terms as provided by outside
counsel;
- reviewed the terms of DII Industries' prior and current
coverage-in-place settlement agreements;
- reviewed the status of DII Industries' and Kellogg Brown &
Root's current insurance-related lawsuits and the various
legal positions of the parties in those lawsuits in relation
to the developed and developing case law and the historic
positions taken by insurers in the earlier filed and settled
lawsuits;
- engaged in discussions with our counsel; and
- analyzed publicly-available information concerning the ability
of the DII Industries insurers to meet their obligations.
Navigant Consulting's analysis assumed that there will be no recoveries
from insolvent carriers and that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections. Based on its review, analysis and discussions, Navigant
Consulting's analysis assisted us in making our judgments concerning insurance
coverage that we believe are reasonable and consistent with our historical
course of dealings with our insurers and the relevant case law to determine the
probable insurance recoveries for asbestos liabilities. This analysis included
the probable effects of self-insurance features, such as self-insured
retentions, policy exclusions, liability caps and the financial status of
applicable insurers, and various judicial determinations relevant to the
applicable insurance programs. The analysis of Navigant Consulting is based on
information provided by us.
In January 2004, we reached a comprehensive agreement with Equitas to
settle our insurance claims against certain Underwriters at Lloyd's of London,
reinsured by Equitas. The settlement will resolve all asbestos-related claims
made against Lloyd's Underwriters by us and by each of our subsidiary and
affiliated companies, including DII Industries, Kellogg Brown & Root and their
subsidiaries that have filed Chapter 11 proceedings as part of our proposed
settlement. Our claims against our other London Market Company Insurers are not
affected by this settlement. Provided that there is final confirmation of the
plan of reorganization in the Chapter 11 proceedings and the current United
States Congress does not pass national asbestos litigation reform legislation,
Equitas will pay us $575 million, representing approximately 60% of the
applicable limits of liability that DII Industries had substantial likelihood of
recovering from Equitas. The first payment of $500 million will occur within 15
working days of the later of January 5, 2005 or the date on which the order of
the bankruptcy court confirming DII Industries' plan of reorganization becomes
final and non-appealable. A second payment of $75 million will be made eighteen
months after the first payment.
As of December 31, 2003, we developed our best estimate of the
asbestos and silica insurance receivables as follows:
20
- included $575 million of insurance recoveries from Equitas
based on the January 2004 comprehensive agreement;
- included insurance recoveries from other specific insurers
with whom we had settled;
- estimated insurance recoveries from specific insurers that we
are probable of settling with and for which we could
reasonably estimate the amount of the settlement. When
appropriate, these estimates considered prior settlements with
insurers with similar facts and circumstances; and
- estimated insurance recoveries for all other policies with the
assistance of the Navigant Consulting study.
The estimate we developed as a result of this process was consistent
with the amount of asbestos and silica receivables already recorded as of
December 31, 2003, causing us not to significantly adjust our recorded
insurance asset at that time. Our estimate was based on a comprehensive analysis
of the situation existing at that time which could change significantly in the
both near- and long-term period as a result of:
- additional settlements with insurance companies;
- additional insolvencies of carriers; and
- legal interpretation of the type and amount of coverage
available to us.
Currently, we cannot estimate the time frame for collection of this
insurance receivable, except as described earlier with regard to the Equitas
settlement.
United States Government Contract Work
We provide substantial work under our government contracts business to
the United States Department of Defense and other governmental agencies,
including under world-wide United States Army logistics contracts, known as
LogCAP, and under contracts to rebuild Iraq's petroleum industry, known as RIO.
Our units operating in Iraq and elsewhere under government contracts such as
LogCAP and RIO consistently review the amounts charged and the services
performed under these contracts. Our operations under these contracts are also
regularly reviewed and audited by the Defense Contract Audit Agency, or DCAA,
and other governmental agencies. When issues are found during the governmental
agency audit process, these issues are typically discussed and reviewed with us
in order to reach a resolution.
The results of a preliminary audit by the DCAA in December 2003 alleged
that we may have overcharged the Department of Defense by $61 million in
importing fuel into Iraq. After a review, the Army Corps of Engineers, which is
our client and oversees the project, concluded that we obtained a fair price for
the fuel. However, Department of Defense officials have referred the matter to
the agency's inspector general with a request for additional investigation by
the agency's criminal division. We understand that the agency's inspector
general has commenced an investigation. We have also in the past had inquiries
by the DCAA and the civil fraud division of the United States Department of
Justice into possible overcharges for work under a contract performed in the
Balkans, which is still under review with the Department of Justice.
On January 22, 2004, we announced the identification by our internal
audit function of a potential over billing of approximately $6 million by one of
our subcontractors under the LogCAP contract in Iraq. In accordance with our
policy and government regulation, the potential overcharge was reported to the
Department of Defense Inspector General's office as well as to our customer, the
Army Materiel Command. On January 23, 2004, we issued a check in the amount of
$6 million to the Army Materiel Command to cover that potential over billing
while we conduct our own investigation into the matter. We are also continuing
to review whether third party subcontractors paid, or attempted to pay one or
two former employees in connection with the potential $6 million over billing.
The DCAA has raised issues relating to our invoicing to the Army
Materiel Command for food services for soldiers and supporting civilian
personnel in Iraq and Kuwait. We have taken two actions in response. First, we
have temporarily credited $36 million to the Department of Defense until
21
Halliburton, the DCAA and the Army Materiel Command agree on a process to be
used for invoicing for food services. Second, we are not submitting $141 million
of additional food services invoices until an internal review is completed
regarding the number of meals ordered by the Army Materiel Command and the
number of soldiers actually served at dining facilities for United States troops
and supporting civilian personnel in Iraq and Kuwait. The $141 million amount is
our "order of magnitude" estimate of the remaining amounts (in addition to the
$36 million we already credited) being questioned by the DCAA. The issues relate
to whether invoicing should be based on the number of meals ordered by the Army
Materiel Command or whether invoicing should be based on the number of personnel
served. We have been invoicing based on the number of meals ordered. The DCAA is
contending that the invoicing should be based on the number of personnel served.
We believe our position is correct, but have undertaken a comprehensive review
of its propriety and the views of the DCAA. However, we cannot predict when the
issue will be resolved with the DCAA. In the meantime, we may withhold all or a
portion of the payments to our subcontractors relating to the withheld invoices
pending resolution of the issues. Except for the $36 million in credits and the
$141 million of withheld invoices, all our invoicing in Iraq and Kuwait for
other food services and other matters are being processed and sent to the Army
Materiel Command for payment in the ordinary course.
All of these matters are still under review by the applicable
government agencies. Additional review and allegations are possible, and the
dollar amounts at issue could change significantly. We could also be subject to
future DCAA inquiries for other services we provide in Iraq under the current
LogCAP contract or the RIO contract. For example, as a result of an increase in
the level of work performed in Iraq or the DCAA's review of additional aspects
of our services performed in Iraq, it is possible that we may, or may be
required to, withhold additional invoicing or make refunds to our customer, some
of which could be substantial, until these matters are resolved. This could
materially and adversely affect our liquidity.
Barracuda-Caratinga Project
In June 2000, KBR entered into a contract with Barracuda & Caratinga
Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga
crude oil fields, which are located off the coast of Brazil. The construction
manager and owner's representative is Petroleo Brasilero SA (Petrobras), the
Brazilian national oil company. When completed, the project will consist of two
converted supertankers, Barracuda and Caratinga, which will be used as floating
production, storage and offloading units, commonly referred to as FPSOs, 32
hydrocarbon production wells, 22 water injection wells and all sub-sea flow
lines, umbilicals and risers necessary to connect the underwater wells to the
FPSOs. The project is significantly behind the original schedule due in large
part to change orders from the project owner and is in a financial loss
position. As a result, we have asserted numerous claims against the project
owner and are subject to potential liquidated damages. We continue to engage
in discussions with the project owner in an attempt to settle issues relating to
additional claims, completion dates and liquidated damages.
Our performance under the contract is secured by:
- performance letters of credit, which together have an
available credit of approximately $266 million as of December
31, 2003 and which will continue to be adjusted to represent
approximately 10% of the contract amount, as amended to date
by change orders;
- retainage letters of credit, which together have available
credit of approximately $160 million as of December 31, 2003
and which will increase in order to continue to represent 10%
of the cumulative cash amounts paid to us; and
- a guarantee of Kellogg Brown & Root's performance under the
agreement by Halliburton Company in favor of the project
owner.
In November 2003, we entered into agreements with the project owner in
which the project owner agreed to:
22
- pay $69 million to settle a portion of our claims, thereby
reducing the amount of probable unapproved claims to $114
million; and
- extend the original project completion dates and other
milestone dates, reducing our exposure to liquidated damages.
Accordingly, as of December 31, 2003:
- the project was approximately 83% complete;
- we have recorded an inception to date pretax loss of $355
million related to the project, of which $238 million was
recorded in 2003 and $117 million was recorded in 2002;
- the probable unapproved claims included in determining the
loss were $114 million; and
- we have an exposure to liquidated damages of up to ten percent
of the contract value. Based upon the current schedule
forecast, we would incur $96 million in liquidated damages if
our claim for additional time is not successful.
Unapproved Claims. We have asserted claims for compensation
substantially in excess of the $114 million of probable unapproved claims
recorded as noncurrent assets as of December 31, 2003, as well as claims for
additional time to complete the project before liquidated damages become
applicable. The project owner and Petrobras have asserted claims against us that
are in addition to the project owner's potential claims for liquidated damages.
In the November 2003 agreements, the parties have agreed to arbitrate these
remaining disputed claims. In addition, we have agreed to cap our financial
recovery to a maximum of $375 million, and the project owner and Petrobras have
agreed to cap their recovery to a maximum of $380 million plus liquidated
damages.
Liquidated Damages. The original completion date for the Barracuda
vessel was December 2003, and the original completion date for the Caratinga
vessel was April 2004. We expect that the Barracuda vessel will likely be
completed at least 16 months later than its original contract determination
date, and the Caratinga vessel will likely be completed at least 14 months later
than its original contract determination date. However, there can be no
assurance that further delays will not occur. In the event that any portion of
the delay is determined to be attributable to us and any phase of the project is
completed after the milestone dates specified in the contract, we could be
required to pay liquidated damages. These damages were initially calculated on
an escalating basis rising ultimately to approximately $1 million per day of
delay caused by us, subject to a total cap on liquidated damages of 10% of the
final contract amount (yielding a cap of approximately $272 million as of
December 31, 2003).
Under the November 2003 agreements, the project owner granted an
extension of time to the original completion dates and other milestone dates
that average approximately 12 months. In addition, the project owner agreed to
delay any attempt to assess the original liquidated damages against us for
project delays beyond 12 months and up to 18 months and delay any drawing of
letters of credit with respect to such liquidated damages until the earliest of
December 7, 2004, the completion of any arbitration proceedings or the
resolution of all claims between the project owner and us. Although the November
2003 agreements do not delay the drawing of letters of credit for liquidated
damages for delays beyond 18 months, our master letter of credit facility (See
Note 13 to the consolidated financial statements) will provide funding for any
such draw while it is in effect. The November 2003 agreements also provide for a
separate liquidated damages calculation of $450,000 per day for each of the
Barracuda and the Caratinga vessels if delayed beyond 18 months from the
original schedule. That amount is subject to the total cap on liquidated damages
of 10% of the final contract amount. Based upon the November 2003 agreements and
our most recent estimates of project completion dates, which are April 2005 for
the Barracuda vessel and May 2005 for the Caratinga vessel, we estimate that if
we were to be completely unsuccessful in our claims for additional time, we
would be obligated to pay $96 million in liquidated damages. We have not accrued
for this exposure because we consider the imposition of such liquidated damages
to be unlikely.
Value added taxes. On December 16, 2003, the State of Rio de Janeiro
issued a decree recognizing that Petrobras is entitled to a credit for the value
added taxes paid on the project. The decree also provided that value added taxes
that may have become due on the project, but which had not yet been paid could
23
be paid in January 2004 without penalty or interest. In response to the decree,
we have entered into an agreement with Petrobras whereby Petrobras agreed to:
- directly pay the value added taxes due on all imports on the
project (including Petrobras' January 2004 payment of
approximately $150 million); and
- reimburse us for value added taxes paid on local purchases, of
which approximately $100 million will become due during 2004.
Since the credit to Petrobras for these value added taxes is on a delayed basis,
the issue of whether we must bear the cost of money for the period from payment
by Petrobras until receipt of the credit has not been determined.
The validity of the December 2003 decree has now been challenged in
court in Brazil. Our legal advisers in Brazil believe that the decree will be
upheld. If it is overturned or rescinded, or the Petrobras credits are lost for
any other reason not due to Petrobras, the issue of who must ultimately bear the
cost of the value added taxes will have to be determined based upon the law
prior to the December 2003 decree. We believe that the value added taxes are
reimbursable under the contract and prior law, but, until the December 2003
decree was issued, Petrobras and the project owner had been contesting the
reimbursability of up to $227 million of value added taxes. There can be no
assurance that we will not be required to pay all or a portion of these value
added taxes. In addition, penalties and interest of $40 million to $100 million
could be due if the December 2003 decree is invalidated. We have not accrued any
amounts for these taxes, penalties or interest.
Default provisions. Prior to the filing of the pre-packaged Chapter 11
proceedings in connection with the proposed settlement of our asbestos and
silica claims, we obtained a waiver from the project owner (with the approval of
the lenders financing the project) so that the filing did not constitute an
event of default under the contract. In addition, the project owner also
obtained a waiver from the lenders so that the Chapter 11 filing did not
constitute an event of default under the project owner's loan agreements with
the lenders. The waiver received by the project owner from the lenders is
subject to certain conditions that have thus far been fulfilled. Included as a
condition is that the pre-packaged plan of reorganization be confirmed by the
bankruptcy court within 120 days of the filing of the Chapter 11 proceedings.
The currently scheduled hearing date for confirmation of the plan of
reorganization is not within the 120-day period. We understand that the project
owner is seeking, and expects to receive, an extension of the 120-day period,
but can give no assurance that it will be granted. In the event that the
conditions do not continue to be fulfilled, the lenders, among other things,
could exercise a right to suspend the project owner's use of advances made, and
currently escrowed, to fund the project. We believe it is unlikely that the
lenders will exercise any right to suspend funding the project given the current
status of the project and the fact that a failure to pay may allow us to cease
work on the project without Petrobras having a readily available substitute
contractor. However, there can be no assurance that the lenders will continue to
fund the project.
In the event that we were determined to be in default under the
contract, and if the project was not completed by us as a result of such default
(i.e., our services are terminated as a result of such default), the project
owner may seek direct damages. Those damages could include completion costs in
excess of the contract price and interest on borrowed funds, but would exclude
consequential damages. The total damages could be up to $500 million plus the
return of up to $300 million in advance payments previously received by us to
the extent they have not been repaid. The original contract terms require
repayment of the $300 million in advance payments by crediting the last $350
million of our invoices related to the contract by that amount, but the November
2003 agreements delay the repayment of any of the $300 million in advance
payments until at least December 7, 2004. A termination of the contract by the
project owner could have a material adverse effect on our financial condition
and results of operations.
Cash flow considerations. The project owner has procured project
finance funding obligations from various lenders to finance the payments due to
us under the contract. The project owner currently has no other committed source
of funding on which we can necessarily rely. In addition, the project financing
24
includes borrowing capacity in excess of the original contract amount. However,
only $250 million of this additional borrowing capacity is reserved for
increases in the contract amount payable to us and our subcontractors.
Under the loan documents, the availability date for loan draws expired
December 1, 2003 and therefore, the project owner drew down all remaining
available funds on that date. As a condition to the draw down of the remaining
funds, the project owner was required to escrow the funds for the exclusive use
of paying project costs. The availability of the escrowed funds can be suspended
by the lenders if applicable conditions are not met. With limited exceptions,
these funds may not be paid to Petrobras or its subsidiary (which is funding the
drilling costs of the project) until all amounts due to us, including amounts
due for the claims, are liquidated and paid. While this potentially reduces the
risk that the funds would not be available for payment to us, we are not party
to the arrangement between the lenders and the project owner and can give no
assurance that there will be adequate funding to cover current or future claims
and change orders.
We have now begun to fund operating cash shortfalls on the project and
would be obligated to fund such shortages over the remaining project life in an
amount we currently estimate to be approximately $480 million. That funding
level assumes generally that neither we nor the project owner are successful in
recovering claims against the other and that no liquidated damages are imposed.
Under the same assumptions, except assuming that we recover unapproved claims in
the amounts currently recorded, the cash shortfall would be approximately $360
million. We have already funded approximately $85 million of such shortfall and
expect that our funded shortfall amount will increase to approximately $416
million by December 2004, of which approximately $225 million would be paid to
the project owner in December 2004 as part of the return of the $300 million in
advance payments. The remainder of the advance payments would be returned to the
project owner over the remaining life of the project after December 2004. There
can be no assurance that we will recover the amount of unapproved claims we have
recognized, or any amounts in excess of that amount.
LIQUIDITY AND CAPITAL RESOURCES
We ended 2003 with cash and cash equivalents of $1.8 billion compared
to $1.1 billion at the end of 2002.
Significant uses of cash. Our liquidity and cash balance during 2003
have been significantly affected by our government services work in Iraq, our
asbestos and silica liabilities, $296 million in scheduled debt maturities and
a $180 million reduction of receivables in our securitization program. Our
working capital position (excluding cash and equivalents) increased by
approximately $880 million due to the start-up of our government services work
in Iraq. The activities in Iraq will continue to require this significant amount
of working capital, and therefore the timing of the realization of this working
capital is uncertain. We currently expect the working capital requirements
related to Iraq will increase through the first half of 2004. An increase in the
amount of services we are engaged to perform could place additional demands on
our working capital. It is possible that we may, or may be required to, withhold
additional invoicing or make refunds to our customer related to the DCAA's
review of additional aspects of our services, some of which could be
substantial, until these matters are resolved. This could materially and
adversely affect our liquidity.
On December 16, 2003, a partial payment of $311 million was made
immediately prior to the Chapter 11 filing of our subsidiaries related to
asbestos and silica personal injury claims. We have also agreed to guarantee the
payment of an additional $156 million of the remaining approximately $2.5
billion cash amount, which must be paid on the earlier to occur of June 17, 2004
or the date on which an order confirming the proposed plan of reorganization
becomes final and non-appealable. When and if we receive final and
non-appealable confirmation of our plan of reorganization, we will be required
to fund the remainder of the cash amount to be contributed to the asbestos and
silica trusts.
25
As a result of capital discipline throughout the year, we have reduced
capital expenditures from $764 million in 2002 to $515 million in 2003. We
expect to continue this level of expenditures with capital outlays currently
being estimated at approximately $540 million in 2004. We have not finalized our
capital expenditures budget for 2005 or later periods. We currently have been
paying annual dividends to our shareholders of approximately $219 million.
The following table summarizes our long-term contractual obligations as
of December 31, 2003:
Payments due
------------------------------------------------
Millions of dollars 2004 2005 2006 2007 2008 Thereafter Total
- --------------------------------------------------------------------------------------------------------
Long-term debt (1) $ 22 $ 324 $ 296 $ 10 $ 151 $ 2,625 $ 3,428
Operating leases 143 96 80 58 45 267 689
Capital leases 1 1 - - - - 2
Pension funding
obligations (2) 67 - - - - - 67
Purchase obligations (3) 241 4 4 3 3 1 256
- --------------------------------------------------------------------------------------------------------
Total long-term
contractual obligations $ 474 $ 425 $ 380 $ 71 $ 199 $ 2,893 $ 4,442
========================================================================================================
(1) Long-term debt excludes the effect of an interest rate swap of
approximately $9 million. See Note 10 to the consolidated financial
statements for further discussion.
(2) Congress is expected to consider pension funding relief legislation
when they reconvene in 2004. The actual contributions we make during
2004 may be impacted by the final legislative outcome.
(3) The purchase obligations disclosed above do not include purchase
obligations that KBR enters into with its vendors in the normal course of
business that support existing contracting arrangements with its
customers. The purchase obligations with their vendors can span several
years depending on the duration of the projects. In general, the costs
associated with the purchase obligations are expensed as the revenue is
earned on the related projects.
In addition, we have received adverse judgments on two cases: BJ
Services Company patent litigation and Anglo-Dutch (Tenge). (See Note 13 to the
consolidated financial statements for more information.) We could be required to
pay approximately $107 million during 2004 to BJ Services Company, which has
been escrowed and is included in the restricted cash balance in "Other current
assets". We are currently appealing the Anglo-Dutch (Tenge) judgment but could
be required to pay as much as $106 million (although we have only accrued $77
million) to Anglo-Dutch Petroleum International, Inc. We have posted security in
the amount of $25 million in order to postpone execution of the judgment until
all appeals have been exhausted.
Significant sources of cash. After consideration of the increase in
working capital needs related to work in Iraq, asbestos and silica claims
payments, and the reduction of $180 million under our accounts receivable
securitization facility, our operations provided approximately $600 million in
cash flow in 2003. In addition, our cash flow was supplemented by cash from the
sale of non-core businesses totaling $224 million, which included $136 million
collected from the sale of Wellstream, $33 million collected from the sale of
Halliburton Measurement Systems, $25 million collected on a note receivable that
was received as a portion of the payment for Bredero-Shaw and $23 million
collected from the sale of Mono Pumps.
In contemplation of the anticipated cash contribution into the asbestos
and silica trusts in 2004 and to help fund our working capital needs in Iraq, we
increased our long-term borrowings by approximately $2.2 billion during 2003
through the issuance of convertible bonds and fixed and floating rate senior
notes. Also, in January of 2004, we issued senior notes due 2007 totaling $500
million, which will primarily be used to fund the asbestos and silica settlement
liability. Our combined short-term notes payable and long-term debt was 58% of
total capitalization at the end of 2003, compared to 30% at the end of 2002 and
24% at the end of 2001.
26
Future sources of cash. We have available to us significant sources of
cash in the near-term should we need it.
Asbestos and silica liability financing. In the fourth quarter of
2003, we entered into a delayed-draw term facility for up to $1.0 billion. This
facility was reduced in January 2004 to approximately $500 million by the net
proceeds of our recent issuance of senior notes due 2007. This facility is
subject to further reduction and could be available for cash funding of the
trusts for the benefit of asbestos and silica claimants. There are a number of
conditions that must be met before the delayed-draw term facility will become
available for our use, including final and non-appealable confirmation of our
plan of reorganization and confirmation of the rating of Halliburton's long-term
senior unsecured debt at BBB or higher by Standard & Poor's and Baa2 or higher
by Moody's Investors Service. In addition, we entered into a $700 million
three-year revolving credit facility for general working capital purposes, which
replaced our $350 million revolving credit facility. At the time of its
replacement, no amounts had been drawn against the $350 million revolver. The
$700 million revolving credit facility is now effective and undrawn.
Asbestos and silica settlements with insurers. In January 2004, we
reached a comprehensive agreement with Equitas to settle our insurance claims
against certain Underwriters at Lloyd's of London, reinsured by Equitas. The
settlement will resolve all asbestos-related claims made against Lloyd's
Underwriters by us and by each of our subsidiary and affiliated companies,
including DII Industries, Kellogg Brown & Root and their subsidiaries that have
filed Chapter 11 proceedings as part of our proposed settlement. Our claims
against our other London Market Company Insurers are not affected by this
settlement. Provided that there is final confirmation of the plan of
reorganization in the Chapter 11 proceedings and the current United States
Congress does not pass national asbestos litigation reform legislation, Equitas
will pay us $575 million, representing approximately 60% of the applicable
limits of liability that DII Industries had substantial likelihood of recovering
from Equitas. The first payment of $500 million will occur within 15 working
days of the later of January 5, 2005 or the date on which the order of the
bankruptcy court confirming DII Industries' plan of reorganization becomes
final and non-appealable. A second payment of $75 million will be made eighteen
months after the first payment.
Other Sources of cash. We also have available our accounts
receivable securitization facility. See "Off Balance Sheet Risk" for a further
discussion.
Other factors affecting liquidity
Credit ratings. Late in 2001 and early in 2002, Moody's Investors
Service lowered its ratings of our long-term senior unsecured debt to Baa2 and
our short-term credit and commercial paper ratings to P-2. In addition, Standard
& Poor's lowered its ratings of our long-term senior unsecured debt to A- and
our short-term credit and commercial paper ratings to A-2 in late 2001. In
December 2002, Standard & Poor's lowered these ratings to BBB and A-3. These
ratings were lowered primarily due to our asbestos and silica exposure. In
December 2003, Moody's Investors Service confirmed our ratings with a positive
outlook and Standard & Poor's revised its credit watch listing for us from
"negative" to "developing" in response to our announcement that DII Industries
and Kellogg Brown & Root and other of our subsidiaries filed Chapter 11
proceedings to implement the proposed asbestos and silica settlement.
Although our long-term unsecured debt ratings continue at investment
grade levels, the cost of new borrowing is relatively higher and our access to
the debt markets is more volatile at these new rating levels. Investment grade
ratings are BBB- or higher for Standard & Poor's and Baa3 or higher for Moody's
Investors Service. Our current long-term unsecured debt ratings are one level
above BBB- on Standard & Poor's and one level above Baa3 on Moody's Investors
Service. Several of our credit facilities or other contractual obligations
require us to maintain a certain credit rating as follows:
- our $700 million revolving credit facility would require us to
provide additional collateral if our long-term unsecured debt
rating falls below investment grade;
- our Halliburton Elective Deferral Plan contains a provision
which states that, if the Standard & Poor's rating for our
long-term unsecured debt falls below BBB, the amounts credited
27
to the participants' accounts will be paid to the participants
in a lump-sum within 45 days. At December 31, 2003 this was
approximately $51 million; and
- certain of our letters of credit have ratings triggers that
could require cash collateralization or give the banks set-off
rights. These contingencies would be funded under the senior
secured master letter of credit facility (see below) while it
remains available.
Letters of credit. In the normal course of business, we have agreements
with banks under which approximately $1.2 billion of letters of credit or bank
guarantees were outstanding as of December 31, 2003, including $252 million
which relate to our joint ventures' operations. Certain of these letters of
credits have triggering events (such as the filing of Chapter 11 proceedings by
some of our subsidiaries or reductions in our credit ratings) that would allow
the banks to require cash collateralization or allow the holder to draw upon the
letter of credit.
In the fourth quarter of 2003, we entered into a senior secured master
letter of credit facility (Master LC Facility) with a syndicate of banks which
covers at least 90% of the face amount of our existing letters of credit. Under
the Master LC Facility, each participating bank has permanently waived any right
that it had to demand cash collateral as a result of the filing of Chapter 11
proceedings. In addition, the Master LC Facility provides for the issuance of
new letters of credit, so long as the total facility does not exceed an amount
equal to the amount of the facility at closing plus $250 million, or
approximately $1.5 billion.
The purpose of the Master LC Facility is to provide an advance for
letter of credit draws, if any, as well as to provide collateral for the
reimbursement obligations for the letters of credits. Advances under the Master
LC Facility will remain available until the earlier of June 30, 2004 or when an
order confirming the proposed plan of reorganization becomes final and
non-appealable. At that time, all advances outstanding under the Master LC
Facility, if any, will become term loans payable in full on November 1, 2004,
and all other letters of credit shall cease to be subject to the terms of the
Master LC Facility. As of December 31, 2003, there were no outstanding advances
under the Master LC Facility.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We currently operate in over 100 countries throughout the world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry and to other industrial and governmental customers. The
majority of our consolidated revenues are derived from the sale of services and
products, including engineering and construction activities. We sell services
and products primarily to major, national and independent oil and gas companies
and the United States government. These products and services are used
throughout the energy industry from the earliest phases of exploration,
development and production of oil and gas resources through refining, processing
and marketing. Our five business segments are organized around how we manage the
business: Drilling and Formation Evaluation, Fluids, Production Optimization,
Landmark and Other Energy Services and the Engineering and Construction Group.
We sometimes refer to the combination of Drilling and Formation Evaluation,
Fluids, Production Optimization and Landmark and Other Energy Services segments
as the Energy Services Group.
The industries we serve are highly competitive with many substantial
competitors for each segment. In 2003, based upon the location of the services
provided and products sold, 27% of our total revenue was from the United States
and 15% was from Iraq. In 2002, 33% of our total revenue was from the United
States and 12% of our total revenue was from the United Kingdom. No other
country accounted for more than 10% of our revenues during these periods.
Unsettled political conditions, social unrest, acts of terrorism, force majeure,
war or other armed conflict, expropriation or other governmental actions,
inflation, exchange controls or currency devaluation may result in increased
business risk in any one country. We believe the geographic diversification of
our business activities reduces the risk that loss of business in any
international country would be material to our consolidated results of
operations.
28
Halliburton Company
Activity levels within our business segments are significantly impacted
by the following:
- spending on upstream exploration, development and production
programs by major, national and independent oil and gas
companies;
- capital expenditures for downstream refining, processing,
petrochemical and marketing facilities by major, national
and independent oil and gas companies; and
- government spending levels.
Also impacting our activity is the status of the global economy, which
indirectly impacts oil and gas consumption, demand for petrochemical products
and investment in infrastructure projects.
Energy Services Group
Some of the more significant barometers of current and future spending
levels of oil and gas companies are oil and gas prices, exploration and
production expenditures by international and national oil companies, the world
economy and global stability, which together drive worldwide drilling activity.
Our Energy Services Group financial performance is significantly affected by oil
and gas prices and worldwide rig activity which are summarized in the following
tables.
This table shows the average oil and gas prices for West Texas
Intermediate crude oil and Henry Hub natural gas prices:
Average Oil and Gas Prices 2003 2002 2001
- --------------------------------------------------------------------------------------
West Texas Intermediate (WTI)
oil prices (dollars per barrel) $ 31.14 $ 25.92 $ 26.02
Henry Hub Gas Prices (dollars per
million cubic feet) $ 5.63 $ 3.33 $ 4.07
======================================================================================
Our customers' cash flow, in many instances, depends upon the revenue
they generate from sale of oil and gas. With higher prices, they may have more
cash flow, which usually translates into higher exploration and production
budgets. Higher prices may also mean that oil and gas exploration in marginal
areas can become attractive, so our customers may consider investing in such
properties when prices are high. When this occurs, it means more potential work
for us. The opposite is true for lower oil and gas prices.
The expectation in 2003 was that world oil prices would begin to
somewhat soften, but prices have continued to increase. United States oil prices
continued to increase due to low inventory levels as a result of Iraqi crude oil
production still being below pre-war levels and higher natural gas prices adding
pressure to switch to competing heating fuel oils.
Natural gas demand showed a decline in 2003 largely due to high prices
discouraging demand in the industrial and electric power sectors. However,
expected growth in the economy, along with somewhat lower projected annual
average prices, are expected to increase demand by two percent in 2004. Natural
gas production slightly increased in 2003, but is expected to fall back somewhat
in 2004 as drilling intensity declines. In 2004, the projected supply gap
between demand and production is offset by the expectation that storage
injection requirements will be less than those in 2003, when stocks after the
winter of 2002-2003 were at record lows.
The yearly average rig counts based on the Baker Hughes Incorporated
rig count information are as follows:
29
Average Rig Counts 2003 2002 2001
- --------------------------------------------------------------------------------------
Land vs. Offshore
- --------------------------------------------------------------------------------------
United States:
Land 924 718 1,002
Offshore 108 113 153
- --------------------------------------------------------------------------------------
Total 1,032 831 1,155
- --------------------------------------------------------------------------------------
Canada:
Land 368 260 337
Offshore 4 6 5
- --------------------------------------------------------------------------------------
Total 372 266 342
- --------------------------------------------------------------------------------------
International (excluding Canada):
Land 544 507 525
Offshore 226 225 220
- --------------------------------------------------------------------------------------
Total 770 732 745
- --------------------------------------------------------------------------------------
Worldwide total 2,174 1,829 2,242
- --------------------------------------------------------------------------------------
Land total 1,836 1,485 1,864
- --------------------------------------------------------------------------------------
Offshore total 338 344 378
======================================================================================
Average Rig Counts 2003 2002 2001
- --------------------------------------------------------------------------------------
Oil vs. Gas
- --------------------------------------------------------------------------------------
United States:
Oil 157 137 217
Gas 875 694 938
- --------------------------------------------------------------------------------------
Total 1,032 831 1,155
- --------------------------------------------------------------------------------------
* Canada: 372 266 342
- --------------------------------------------------------------------------------------
International (excluding Canada):
Oil 576 561 571
Gas 194 171 174
- --------------------------------------------------------------------------------------
Total 770 732 745
- --------------------------------------------------------------------------------------
Worldwide total 2,174 1,829 2,242
======================================================================================
* Canadian rig counts by oil and gas were not available.
Most of our work in Energy Services Group closely tracks the number of
active rigs. As rig count increases or decreases, so does the total available
market for our services and products. Further, our margins associated with
services and products for offshore rigs are generally higher than those
associated with land rigs.
It is common practice in the United States oilfield services industry
to sell services and products based on a price book and then apply discounts to
the price book based upon a variety of factors. The discounts applied typically
increase to partially or substantially offset price book increases in the weeks
immediately following a price increase. The discount applied normally decreases
over time if the activity levels remain strong. During periods of reduced
activity, discounts normally increase, reducing the net revenue for our services
and conversely, during periods of higher activity, discounts normally decline
resulting in net revenue increasing for our services.
The United States rig count increase in 2003 was primarily in gas
drilling as gas prices remained high and operators continued to build gas
storage levels before the 2003/2004 winter heating season. The overall increased
North American rig count is being driven by higher oil and gas prices and demand
for natural gas to replace working gas in storage for the 2003/2004 winter
heating season.
30
Overall outlook. For 2003, high commodity prices resulted in improved
activity levels with average global rig counts up 19%. Nonetheless, reduced
reinvestment rates by our customers meant that overall activity growth and
offshore activity in particular failed to meet broader expectations of the
market.
The Energy Services Group experienced strong performance in Canada, the
Middle East and Latin America in 2003. Mexico's performance was particularly
strong as operating income there more than doubled.
The Gulf of Mexico was an overall disappointment. The industry
experienced a five percent year-over-year decline in the offshore Gulf of Mexico
rig count and a reduction in deep water activity with a number of our key
customers. As a result, we have started the process of reducing our cost
structure in the Gulf of Mexico region and are refocusing our efforts towards
more successful new products. Equally important, we have redeployed a number
of people and assets to higher growth regions internationally, including Latin
America and Asia.
Our Drilling and Formation Evaluation segment saw excellent performance
in logging, but our drilling services performance was adversely affected in the
second half of the year by downturns of activity in the Gulf of Mexico and the
United Kingdom sector of the North Sea. As a result, we are currently executing
a plan to remove approximately $50 million of annual operating costs from
drilling services. We expect to see a recovery of margins during 2004.
The Energy Services Group also achieved significant growth in our new
products and services in 2003. Overall, revenues associated with new
technologies were higher than those of 2002 across a wide range of customers and
geographies. We were particularly successful in our rotary steerables products,
where we increased our revenues by 80% with an increase in our tool fleet of
25%.
The signing of contracts for national data centers with the governments
of Nigeria and Indonesia reinforces the successes we have had with national oil
companies and their governments over the last few years, and is something we
wish to build upon in 2004. Together with the data centers in Pakistan, the
United Kingdom, Brazil, Norway, Australia, Canada and Houston, as well as the
recent selection of Landmark as an operator of the Kazakhstan National Data
Bank, we believe Halliburton is emerging as the clear leader for data center
technology.
We have also reexamined various joint ventures and recently announced
an agreement to restructure two significant joint ventures with Shell,
WellDynamics B.V. (an intelligent well completion joint venture), and Enventure
Global Technologies LLC (an expandable casing joint venture). For Enventure, we
elected to reduce our interests and transfer part of our interests to Shell. In
return, we received significantly enhanced marketing and distribution rights for
sand screens and liner hangers, which we believe are central to our business and
offer major opportunities for profitable growth. In a similar strategic vein, we
believe the majority stake we will secure in WellDynamics is better aligned with
the core "Real Time Knowledge" strategy of our company.
As we look forward, we see modest growth in the global market during
2004. Spears and Associates expects the United States rig count to average 1,050
rigs. For Canada, they are predicting an average of 362 rigs in 2004. Growth in
international drilling activity is expected to remain positive over the coming
year. The international rig count is expected by Spears to average 795 rigs in
2004 with 9,874 new wells forecasted to be drilled. We will be focused in 2004
on our operational efficiency and capital discipline, without compromising our
ability to serve new growth markets in the future.
Engineering and Construction Group
Our Engineering and Construction Group, operating as KBR, provides a
wide range of services to energy and industrial customers and government
entities worldwide. Engineering and construction projects are generally longer
term in nature than our Energy Services Group work and are impacted by more
diverse drivers than short term fluctuations in oil and gas prices.
Our government services opportunities are strong in the Middle East,
United States, United Kingdom, and Australia. Spending on defense and security
programs has been increasing in each of the major markets. These include support
to military forces, security assessments and upgrades at military and government
31
facilities and disaster and contingency relief at home and abroad. We believe
governments will continue to look to the private sector to perform work
traditionally done by those government agencies.
The drive to monetize gas reserves in the Middle East, West Africa,
Asia Pacific, Eurasia and Latin America, combined with strong demand for gas and
liquefied natural gas (LNG) in the United States, Japan, Korea, Taiwan, China
and India, has led to numerous gas to liquid, LNG liquefaction and gas
development projects in the exporting regions as well as onshore or floating LNG
terminals, and gas processing plants in the importing countries.
Outsourcing of operations and maintenance work has been increasing
worldwide, and we expect this trend to continue. An increasing number of
independent oil companies are acquiring mature oilfield assets from major oil
companies and are looking to outsource operations and maintenance capabilities.
KBR is investing in technologies to optimize asset performance in both upstream
and downstream oil and gas markets.
We are also seeing significant business opportunities in the United
Kingdom for major public infrastructure projects, which have been dominated for
almost a decade by privately financed projects, and now account for 10% of the
country's infrastructure capital spending. We have been involved with a
significant number of these projects, and we expect to build on that business
using our experience with pulling together complex project financing
arrangements and managing partnerships.
Engineering and construction contracts can be broadly categorized as
either fixed-price (sometimes referred to as lump sum) or cost reimbursable
contracts. Some contracts can involve both fixed-price and cost reimbursable
elements. Fixed-price contracts are for a fixed sum to cover all costs and
any profit element for a defined scope of work. Fixed-price contracts entail
more risk to us as we must pre-determine both the quantities of work to be
performed and the costs associated with executing the work. The risks to us
arise, from among other things:
- uncertainty in estimating the technical aspects and effort
involved to accomplish the work within the contract schedule;
- labor availability and productivity; and
- supplier and subcontractor pricing and performance.
Fixed-price engineering, procurement and construction and fixed-price
engineering, procurement, installation and commissioning contracts involve even
greater risks including:
- bidding a fixed-price and completion date before detailed
engineering work has been performed;
- bidding a fixed-price and completion date before locking in
price and delivery of significant procurement components
(often items which are specifically designed and fabricated
for the project);
- bidding a fixed-price and completion date before finalizing
subcontractors' terms and conditions;
- subcontractor's individual performance and combined
interdependencies of multiple subcontractors (the majority of
all construction and installation work is performed by
subcontractors);
- contracts covering long periods of time;
- contract values generally for large amounts; and
- contracts containing significant liquidated damages
provisions.
Cost reimbursable contracts include contracts where the price is
variable based upon actual costs incurred for time and materials, or for
variable quantities of work priced at defined unit rates. Profit elements on
cost reimbursable contracts may be based upon a percentage of costs incurred
and/or a fixed amount. Cost reimbursable contracts are generally less risky,
since the owner retains many of the risks. While fixed-price contracts involve
greater risk, they also potentially are more profitable for the contractor,
since the owners pay a premium to transfer many risks to the contractor.
32
The approximate percentages of revenues attributable to fixed-price and
cost reimbursable engineering and construction segment contracts are as follows:
Fixed-Price Cost
Reimbursable
- ----------------------------------------------
2003 24% 76%
2002 47% 53%
2001 41% 59%
==============================================
An important aspect of our 2002 reorganization was to look closely at
each of our products and services to ensure that risks can be properly evaluated
and that they are self-sufficient, including their use of capital and liquidity.
In that process, we found that the engineering, procurement, installation and
commissioning, or EPIC, of offshore projects involved a disproportionate risk
and were using a large share of our bonding and letter of credit capacity
relative to profit contribution. Accordingly, we determined to not pursue those
types of projects in the future. We have six fixed-price EPIC offshore projects
underway, and we are fully committed to successful completion of these projects,
several of which are substantially complete.
The reshaping of our offshore business away from lump-sum EPIC
contracts to cost reimbursement services has been marked by some significant new
work. During the first quarter of 2004 we signed a major reimbursable
engineering, procurement, and construction management, or EPCM, contract for a
West African oilfield development. This is a major award under our new EPCM
strategy. We are also pursuing program management opportunities in deep-water
locations around the world. These efforts, implemented under our new strategy,
are allowing us to utilize our global resources to continue to be a leader in
the offshore business.
33
RESULTS OF OPERATIONS IN 2003 COMPARED TO 2002
REVENUES: Increase/ Percentage
Millions of dollars 2003 2002 (Decrease) Change
- -------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 1,643 $ 1,633 $ 10 0.6%
Fluids 2,039 1,815 224 12.3
Production Optimization 2,766 2,554 212 8.3
Landmark and Other Energy Services 547 834 (287) (34.4)
- -------------------------------------------------------------------------------------------------
Total Energy Services Group 6,995 6,836 159 2.3
Engineering and Construction Group 9,276 5,736 3,540 61.7
- -------------------------------------------------------------------------------------------------
Total revenues $ 16,271 $ 12,572 $ 3,699 29.4%
=================================================================================================
Geographic - Energy Services Group segments only:
- -------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation:
North America $ 558 $ 549 $ 9 1.6%
Latin America 261 251 10 4.0
Europe/Africa 312 344 (32) (9.3)
Middle East/Asia 512 489 23 4.7
- -------------------------------------------------------------------------------------------------
Subtotal 1,643 1,633 10 0.6
- -------------------------------------------------------------------------------------------------
Fluids:
North America 990 934 56 6.0
Latin America 258 216 42 19.4
Europe/Africa 452 381 71 18.6
Middle East/Asia 339 284 55 19.4
- -------------------------------------------------------------------------------------------------
Subtotal 2,039 1,815 224 12.3
- -------------------------------------------------------------------------------------------------
Production Optimization:
North America 1,345 1,264 81 6.4
Latin America 317 277 40 14.4
Europe/Africa 562 556 6 1.1
Middle East/Asia 542 457 85 18.6
- -------------------------------------------------------------------------------------------------
Subtotal 2,766 2,554 212 8.3
- -------------------------------------------------------------------------------------------------
Landmark and Other Energy Services:
North America 192 284 (92) (32.4)
Latin America 71 102 (31) (30.4)
Europe/Africa 116 297 (181) (60.9)
Middle East/Asia 168 151 17 11.3
- -------------------------------------------------------------------------------------------------
Subtotal 547 834 (287) (34.4)
- -------------------------------------------------------------------------------------------------
Total Energy Services Group revenues $ 6,995 $ 6,836 $ 159 2.3%
=================================================================================================
34
OPERATING INCOME (LOSS): Increase/ Percentage
Millions of dollars 2003 2002 (Decrease) Change
- -------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 177 $ 160 $ 17 10.6%
Fluids 251 202 49 24.3
Production Optimization 421 384 37 9.6
Landmark and Other Energy Services (23) (108) 85 78.7
- -------------------------------------------------------------------------------------------------
Total Energy Services Group 826 638 188 29.5
Engineering and Construction Group (36) (685) 649 94.7
General corporate (70) (65) (5) (7.7)
- -------------------------------------------------------------------------------------------------
Operating income (loss) $ 720 $ (112) $ 832 NM
=================================================================================================
Geographic - Energy Services Group segments only:
- -------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation:
North America $ 60 $ 70 $ (10) (14.3)%
Latin America 30 29 1 3.4
Europe/Africa 30 (6) 36 NM
Middle East/Asia 57 67 (10) (14.9)
- -------------------------------------------------------------------------------------------------
Subtotal 177 160 17 10.6
- -------------------------------------------------------------------------------------------------
Fluids:
North America 104 119 (15) (12.6)
Latin America 52 33 19 57.6
Europe/Africa 48 20 28 140.0
Middle East/Asia 47 30 17 56.7
- -------------------------------------------------------------------------------------------------
Subtotal 251 202 49 24.3
- -------------------------------------------------------------------------------------------------
Production Optimization:
North America 202 228 (26) (11.4)
Latin America 75 41 34 82.9
Europe/Africa 52 46 6 13.0
Middle East/Asia 92 69 23 33.3
- -------------------------------------------------------------------------------------------------
Subtotal 421 384 37 9.6
- -------------------------------------------------------------------------------------------------
Landmark and Other Energy Services:
North America (60) (218) 158 72.5
Latin America 8 5 3 60.0
Europe/Africa 17 118 (101) (85.6)
Middle East/Asia 12 (13) 25 NM
- -------------------------------------------------------------------------------------------------
Subtotal (23) (108) 85 78.7
- -------------------------------------------------------------------------------------------------
Total Energy Services Group
operating income $ 826 $ 638 $ 188 29.5%
=================================================================================================
NM - Not Meaningful
The increase in consolidated revenues for 2003 compared to 2002 was
largely attributable to activity in our government services projects, primarily
work in the Middle East. International revenues were 73% of total revenues in
2003 and 67% of total revenues in 2002, with the increase attributable to our
government services projects. The United States Government has become a major
customer of ours with total revenues of approximately $4.2 billion, or 26% of
total consolidated revenues, for 2003. Revenues from the United States
Government during 2002 represented less than 10% of total consolidated revenues.
The consolidated operating income increase in 2003 compared to 2002 was again
largely attributable to our government services projects and the absence of the
$644 million in asbestos and silica charges and restructuring charges which
occurred in 2002. During 2003, Iraq related work contributed approximately $3.6
billion in consolidated revenues and $85 million in consolidated operating
35
income, a 2.4% margin before corporate costs and taxes. In addition, we recorded
a loss on the Barracuda-Caratinga project of $238 million in 2003 as compared to
a $117 million loss in 2002. Our Energy Services Group segments accounted for
approximately $188 million of the increase.
Following is a discussion of our results of operations by reportable
segment.
Drilling and Formation Evaluation revenues were essentially flat.
Logging and perforating services revenues increased $25 million, primarily due
to higher average year-over-year rig counts in the United States and Mexico,
partially offset by lower sales in China and reduced activity in Venezuela.
Drill bits revenues increased $21 million, benefiting from the increased rig
counts in the United States and Canada. Drilling services revenue for 2003 was
negatively impacted by $79 million compared to 2002 due to the sale of Mono
Pumps in January 2003. The remainder of drilling services revenue increased $34
million compared to 2002 as contracts that were expiring were more than offset
by new contracts, primarily in West Africa, the Middle East and Ecuador. Also
impacting drilling services were significant price discounts in the fourth
quarter of 2003 on basic drilling services and rotary steerables in the United
Kingdom. International revenues were 72% of total segment revenues in both 2003
and 2002.
The increase in operating income for the segment was primarily driven
by logging and perforating services, which increased operating income by $32
million, a result of increased rig counts internationally, lower discounts in
the United States and the absence of start-up costs incurred in 2002. Operating
income for 2003 also included a $36 million gain ($24 million in North America
and $12 million in Europe/Africa) on the sale of Mono Pumps. Operating income
for drilling services decreased by $49 million and $9 million for drill bits
compared to 2002 due to lower activity in Venezuela, pricing pressures in the
United States, severance expense, and facility consolidation expenses. Drilling
services operating income for 2003 was negatively impacted by $5 million
compared to 2002 due to the sale of Mono Pumps.
Fluids increase in revenues was driven by drilling fluids sales
increase of $101 million and cementing activities increase of $121 million
compared to 2002. Cementing benefited from higher land rig counts in the United
States. Both drilling fluids and cementing revenues benefited from increased
activity in Mexico, primarily with PEMEX, which offset lower activity in
Venezuela. Drilling fluids also benefited from price improvements on certain
contracts in Europe/Africa. International revenues were 56% of total revenues in
2003 compared to 52% in 2002.
The Fluids segment operating income increase was a result of drilling
fluids increasing $29 million and cementing services increasing $24 million
compared to 2002, partially offset by lower results of $4 million from
Enventure. Drilling fluids benefited from higher sales of biodegradable drilling
fluids and improved contract terms. Those benefits were partially offset by
contract losses in the Gulf of Mexico and United States pricing pressures in
2003. Cementing operating income primarily increased in Middle East/Asia due to
collections on previously reserved receivables, certain start-up costs in 2002,
and higher margin work. All regions showed improved segment operating income in
2003 compared to 2002, except North America, which was impacted by the decrease
in activity from the higher margin offshore business in the Gulf of Mexico.
Production Optimization increase in revenues was mainly attributable to
production enhancement services, which increased $187 million compared to 2002,
driven by higher activity in the Middle East following the end of the war in
Iraq and increased rig count in Mexico and North America. In addition, sales of
tools and testing services increased $40 million compared to 2002 due primarily
to increased land rig counts in North America, increased activity in Brazil due
to higher activity with national and international oil companies in deepwater
and increased rig activity in Mexico. These increases were partially offset by
lower sales of completion products and services of $5 million, primarily in the
United States due to lower activity in the Gulf of Mexico and the United
Kingdom. The May 2003 sale of Halliburton Measurement Systems had a $24 million
negative impact on segment revenues in 2003 compared to 2002. The improvement in
revenues more than offset the $9 million in equity losses from the Subsea 7,
Inc. joint venture. International revenues were 56% of segment revenues in 2003
compared to 53% in 2002 as activity picked up in the Middle East following the
end of the war in Iraq.
36
The Production Optimization operating income increase included a $24
million gain on the sale of Halliburton Measurement Systems in North America,
offset by inventory write-downs.
Landmark and Other Energy Services decrease in revenues compared to
2002 was primarily due to the contribution of most of the assets of Halliburton
Subsea to Subsea 7, Inc. which, beginning in May 2002, was reported on an equity
basis. This accounted for approximately $200 million of the decrease. The sale
of Wellstream in March 2003 also contributed $49 million to the decrease.
Revenues for Landmark Graphics were down $13 million compared to 2002 due to the
general weakness in information technology spending. International revenues were
68% of segment revenues in 2003 compared to 74% in 2002. The decrease is the
result of the contribution of the Halliburton Subsea assets to Subsea 7, Inc.
which mainly conducts operations in the North Sea.
Segment operating loss was $23 million in 2003 compared to a loss of
$108 million in 2002. Included in 2003 were a $15 million loss on the sale of
Wellstream ($11 million in North America and $4 million in Europe/Africa) and a
$77 million charge related to the October 2003 verdict in the Anglo-Dutch
lawsuit, which impacted North America results. The significant items affecting
operating income in 2002 included:
- $108 million gain on the sale of European Marine Contractors
Ltd in Europe/Africa;
- $98 million charge for BJ Services patent infringement lawsuit
accrual in North America;
- $79 million loss on the impairment of our 50% equity
investment in the Bredero-Shaw joint venture in North America;
and
- $64 million in expense related to restructuring charges ($51
million in North America, $3 million in Latin America, $7
million in Europe/Africa, and $3 million in Middle East/Asia).
During 2003, Landmark Graphics achieved its highest operating income
and highest operating margins since we acquired it as operating income increased
$8 million or 18% over 2002.
Engineering and Construction Group increase in revenues compared to
2002 was due to increased activity in Iraq for the United States government,
and, to a lesser extent, a $264 million increase on other government projects
and a $161 million increase on LNG and oil and gas projects in Africa. Partially
offsetting the revenue increases are lower revenues earned on the
Barracuda-Caratinga project in Brazil and a $111 million decrease on industrial
services projects in the United States and production services projects
globally.
Engineering and Construction Group operating loss improvement in 2003
was due to government related activities, partially related to operations in the
Middle East for Iraq related work and a $14 million increase in income from
other government projects. Also contributing to the improved results were income
from liquefied natural gas projects in Africa and $18 million in favorable
adjustments to insurance reserves as a result of revised actuarial valuations
and other changes in estimates in 2003. Partially offsetting the 2003
improvement are losses recognized on the Barracuda-Caratinga project in Brazil
of $238 million, losses on a hydrocarbon project in Belgium and lower income on
a liquefied natural gas project in Malaysia due to project completion. Included
in the 2002 loss was a charge of $644 million for asbestos and silica
liabilities, $18 million of restructuring charges, and a Barracuda-Caratinga
project loss of $117 million.
General corporate in 2002 included a $29 million pretax gain for the
value of stock received from the demutualization of an insurance provider,
partially offset by 2002 restructuring charges of $25 million. The higher 2003
expenses also relate to preparations for the certifications required under
Section 404 of the Sarbanes-Oxley Act.
NONOPERATING ITEMS
Interest expense increased $26 million in 2003 compared to 2002. The
increase was due primarily to $30 million in interest on the $1.2 billion
convertible notes issued in June 2003 and the $1.05 billion senior floating and
fixed notes issued in October 2003. The increase was partially offset by $5
37
million in pre-judgment interest recorded in 2002 related to the BJ Services
patent infringement judgment and $296 million of scheduled debt repayments in
2003.
Foreign currency losses, net for 2003 included gains in Canada offset
by losses in the United Kingdom and Brazil. Losses in 2002 were due to negative
developments in Brazil, Argentina and Venezuela.
Provision for income taxes of $234 million resulted in an effective tax
rate on continuing operations of 38.2% in 2003. The provision was $80 million in
2002 on a net loss from continuing operations. The inclusion of asbestos
accruals in continuing operations for 2002 was the primary cause of the unusual
2002 effective tax rate on continuing operations. There are no asbestos charges
or related tax accruals included in continuing operations for 2003. Our
impairment loss on Bredero-Shaw during 2002 could not be benefited for tax
purposes due to book and tax basis differences in that investment and the
limited benefit generated by a capital loss carryback. However, due to changes
in circumstances regarding prior years, we are now able to carry back a portion
of the capital loss, which resulted in an $11 million benefit in 2003.
Loss from discontinued operations, net of tax of $1.151 billion in 2003
was due to the following:
- asbestos and silica liability was increased to reflect the
full amount of the proposed settlement as a result of the
Chapter 11 proceeding;
- charges related to our July 2003 funding of $30 million for
the debtor-in-possession financing to Harbison-Walker in
connection with its Chapter 11 proceedings that is expected
to be forgiven by Halliburton on the earlier of the effective
date of a plan of reorganization for DII Industries or the
effective date of a plan of reorganization for Harbison-Walker
acceptable to DII Industries;
- $10 million allowance for an estimated portion of
uncollectible amounts related to the insurance receivables
purchased from Harbison-Walker;
- professional fees associated with the due diligence, printing
and distribution cost of the disclosure statement and other
aspects of the proposed settlement for asbestos and silica
liabilities; and
- a release of environmental and legal reserves related to
indemnities that were part of our disposition of the Dresser
Equipment Group and are no longer needed.
The loss of $652 million in 2002 was due primarily to charges recorded
for asbestos and silica liabilities and a $40 million payment associated with
the Harbison-Walker Chapter 11 filing.
The provision for income taxes on discontinued operations was $6
million in 2003 compared to a tax benefit of $154 million in 2002. We
established a valuation allowance for the net operating loss carryforward
created by the 2003 asbestos and silica charges resulting in a minimal tax
effect. In 2002, we recorded a $119 million valuation allowance in discontinued
operations related to the asbestos and silica accrual.
Cumulative effect of change in accounting principle, net was an $8
million after-tax charge, or $0.02 per diluted share, related to our January 1,
2003 adoption of Financial Accounting Standards Board Statement No. 143,
"Accounting for Asset Retirement Obligations."
38
RESULTS OF OPERATIONS IN 2002 COMPARED TO 2001
REVENUES Increase/ Percentage
Millions of dollars 2002 2001 (Decrease) Change
- -------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 1,633 $ 1,643 $ (10) (0.6)%
Fluids 1,815 2,065 (250) (12.1)
Production Optimization 2,554 2,803 (249) (8.9)
Landmark and Other Energy Services 834 1,300 (466) (35.8)
- -------------------------------------------------------------------------------------------------
Total Energy Services Group 6,836 7,811 (975) (12.5)
Engineering and Construction Group 5,736 5,235 501 9.6
- -------------------------------------------------------------------------------------------------
Total revenues $ 12,572 $ 13,046 $ (474) (3.6)%
=================================================================================================
OPERATING INCOME (LOSS) Increase/ Percentage
Millions of dollars 2002 2001 (Decrease) Change
- -------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 160 $ 171 $ (11) (6.4)%
Fluids 202 308 (106) (34.4)
Production Optimization 384 528 (144) (27.3)
Landmark and Other Energy Services (108) 29 (137) NM
- -------------------------------------------------------------------------------------------------
Total Energy Services Group 638 1,036 (398) (38.4)
Engineering and Construction Group (685) 111 (796) NM
General corporate (65) (63) (2) (3.2)
- -------------------------------------------------------------------------------------------------
Operating income (loss) $ (112) $ 1,084 $ (1,196) NM
=================================================================================================
NM - Not Meaningful
Consolidated revenues for 2002 were $12.6 billion, a decrease of 4%
compared to 2001. International revenues comprised 67% of total revenues in 2002
and 62% in 2001. International revenues increased $298 million in 2002 partially
offsetting a $772 million decline in the United States where oilfield services
drilling activity declined 28%, putting pressure on pricing.
Drilling and Formation Evaluation revenues declined slightly in 2002
compared to 2001. Approximately $62 million of the decrease was in logging and
perforating services primarily due to lower North American activity. An
additional $21 million of the change resulted from decreased drill bit revenue
principally in North America. These decreases were offset by $74 million of
increased drilling systems activity primarily in international locations such as
Saudi Arabia, Thailand, Mexico, Brazil, and the United Arab Emirates. On a
geographic basis, the decline in revenue is attributable to lower levels of rig
activity in North America, putting pressure on pricing of work in the United
States. Latin America revenues decreased 1% as a result of decreases in
Argentina due to currency devaluation and in Venezuela due to lower activity
brought on by uncertain market and political conditions and the national strike.
International revenues were 72% of Drilling and Formation Evaluation's revenues
in 2002 as compared to 66% in 2001.
Operating income for the segment declined 6% in 2002 compared to 2001.
Approximately $37 million of the decrease related to reduced operating income in
logging and perforating and $8 million related to the drill bits business, both
affected by the reduced oil and gas drilling activity in North America.
Offsetting these declines was a $22 million increase in drilling systems
operating income due to improved international activity. On a geographic basis,
the decline in operating income is attributable to lower levels of rig activity
and pricing pressures in North America. The decrease in North America operating
income was partially offset by higher operating income from international
sources in Brazil, Mexico, Algeria, Angola, Egypt, China, and Saudi Arabia.
Fluids revenues decreased 12% in 2002 compared to 2001. Approximately
$89 million related to a decrease in drilling fluids revenues primarily in North
America. An additional $160 million related to decreases in cementing sales
arising primarily from reduced rig counts in North America. On a geographic
39
basis, the decline in revenue is attributable to lower levels of activity in
North America, putting pressure on pricing of work in the United States. Latin
America revenues decreased 13% as a result of decreases in Argentina due to
currency devaluation and in Venezuela due to lower activity brought on by
uncertain market and political conditions and the national strike. International
revenues were 52% of Fluids revenues in 2002 as compared to 45% in 2001.
Operating income for the segment decreased 34% in 2002 compared to
2001. Drilling fluids contributed $35 million of the decrease, primarily due to
the reduced level of oil and gas drilling in North America. In addition, the
cementing business, which was also affected by reduced oil and gas drilling in
North America, represented $70 million of the decline. On a geographic basis,
the decline in operating income is attributable to lower levels of activity and
pricing pressures in North America. The decrease in North America operating
income was partially offset by higher operating income from Mexico, Algeria,
Angola, the United Kingdom, and Saudi Arabia.
Production Optimization revenues decreased 9% in 2002 compared to 2001.
Approximately $197 million of the decrease related to reduced production
enhancement sales primarily due to decreased rig counts in North America.
Further, $56 million of the decrease resulted from lower completion products and
services sales primarily in North America. Production Optimization includes our
50% ownership interest in Subsea 7, Inc., which began operations in May 2002 and
is accounted for on the equity method of accounting. On a geographic basis, the
decline in revenue is attributable to lower levels of activity in North America,
putting pressure on pricing of work in the United States. Latin America revenues
decreased five percent as a result of decreases in Argentina due to currency
devaluation and in Venezuela due to lower activity brought on by uncertain
political conditions and a national strike. International revenues were 53% of
Production Optimization's revenues in 2002 as compared to 44% in 2001.
Operating income for the segment decreased 27% in 2002 compared to
2001. Production enhancement results contributed $149 million of the decrease
and tools and testing services contributed $5 million, both affected primarily
by the reduced oil and gas drilling in North America. Offsetting these decreases
was an $11 million increase in completion products and services operating income
due to higher international activity which more than offset reduced oil and gas
drilling in North America. On a geographic basis, the decline in operating
income is due to reduced rig counts and activity and pricing pressures in North
America, partially offset by higher operating income from international sources
in Brazil, Mexico, Algeria, Angola, Egypt, the United Kingdom, China, Oman, and
Saudi Arabia.
Landmark and Other Energy Services revenues declined 36% in 2002
compared to 2001. Approximately $117 million of the decline is from lower
revenues from integrated solutions projects as a result of the sale of several
properties during 2002. In addition, approximately $353 million of the decline
is due to lower revenues from the remaining subsea operations. Most of the
assets of Halliburton Subsea were contributed to the formation of Subsea 7, Inc.
(which was formed in May 2002 and is accounted for under the equity method in
our Production Optimization segment). Offsetting the decline is a $40 million
increase in software and professional services revenues due to strong 2002 sales
in all geographic areas by Landmark Graphics.
Operating loss for the segment was $108 million in 2002 compared to $29
million in operating income in 2001. Significant factors influencing the results
included:
- $108 million gain on the sale of our 50% interest in European
Marine Contractors in 2002;
- $98 million charge recorded in 2002 related to patent
infringement litigation;
- $79 million loss on the sale of our 50% equity investment in
the Bredero-Shaw joint venture in 2002;
- $66 million of impairments recorded in 2002 on integrated
solutions projects primarily in the United States, Indonesia
and Colombia, partially offset by net gains of $45 million on
2002 disposals of properties in the United States; and
- $64 million in 2002 restructuring charges.
40
In addition, Landmark Graphics experienced $32 million in improved
profitability on sales of software and professional services.
Engineering and Construction Group revenues increased $501 million, or
10%, in 2002 compared to 2001. Year-over-year revenues were $150 million higher
in North America and $351 million higher outside North America. Several major
projects were awarded in 2001 and 2002, which combined with other major ongoing
projects, resulted in approximately $756 million of increased revenue,
including:
- liquefied natural gas and gas projects in Algeria, Nigeria,
Chad, Cameroon and Egypt; and
- the Belenak offshore project in Indonesia.
Activities in the Barracuda-Caratinga project in Brazil were also
increasing in 2002, which generated higher revenue in comparison to 2001.
Partially offsetting the increasing activities in the new projects was a $446
million reduction in revenue due to reduced activity of a major project at our
shipyard in the United Kingdom, a gas project in Algeria, lower volumes of
United States government logistical support in the Balkans and reduced
downstream maintenance work.
Operating loss for the segment of $685 million in 2002 compared to
operating income of $111 million in 2001. Significant factors influencing the
results included:
- $644 million of expenses related to net asbestos and silica
liabilities recorded in 2002 compared to $11 million in
asbestos charges recorded in 2001;
- an increase in our total probable unapproved claims during
2002 which reduced reported losses by approximately $158
million as compared to 2001;
- $18 million in 2002 restructuring costs; and
- goodwill amortization in 2001 of $18 million.
Further, operating income in 2002 was negatively impacted by loss
provisions on offshore engineering, procurement, installation and commissioning
work in Brazil ($117 million on Barracuda-Caratinga) and the Philippines ($36
million). The 2002 operating income was also negatively impacted by the
completion of a gas project in Algeria during 2002 and construction work in
North America. Partially offsetting the declines was increased income levels on
an ongoing liquefied natural gas project in Nigeria, the Alice Springs to Darwin
Rail Line project in Australia, and government projects in the United States,
the United Kingdom and Australia.
In 2002, we recorded no amortization of goodwill due to the adoption of
SFAS No. 142. For 2001, we recorded $42 million in goodwill amortization ($18
million in Engineering and Construction Group, $17 million in Landmark and Other
Energy Services, $5 million in Production Optimization, and $2 million in
Drilling and Formation Evaluation).
General corporate expenses were $65 million for 2002 as compared to $63
million in 2001. Expenses in 2002 include restructuring charges of $25 million
and a gain from the value of stock received from demutualization of an insurance
provider of $29 million.
NONOPERATING ITEMS
Interest expense of $113 million for 2002 decreased $34 million
compared to 2001. The decrease is due to repayment of debt and lower average
borrowings in 2002, partially offset by the $5 million in interest related to
the patent infringement judgment which we are appealing.
Interest income was $32 million in 2002 compared to $27 million in
2001. The increased interest income is for interest on a note receivable from a
customer which had been deferred until collection.
Foreign currency losses, net were $25 million in 2002 compared to $10
million in 2001. The increase is due to negative developments in Brazil,
Argentina and Venezuela.
Other, net was a loss of $10 million in 2002, which includes a $9.1
million loss on the sale of ShawCor Ltd. common stock acquired in the sale of
our 50% interest in Bredero-Shaw.
41
Provision for income taxes was $80 million in 2002 compared to a
provision for income taxes of $384 million in 2001. In 2002, the effective tax
rate was impacted by our asbestos and silica accrual recorded in continuing
operations and losses on our Bredero-Shaw disposition. The asbestos and silica
accrual generates a United States Federal deferred tax asset which was not fully
benefited because we anticipate that a portion of the asbestos and silica
deduction will displace foreign tax credits and those credits will expire
unutilized. As a result, we have recorded a $114 million valuation allowance in
continuing operations and $119 million in discontinued operations associated
with the asbestos and silica accrual, net of insurance recoveries. In addition,
continuing operations has recorded a valuation allowance of $49 million related
to potential excess foreign tax credit carryovers. Further, our impairment loss
on Bredero-Shaw cannot be fully benefited for tax purposes due to book and tax
basis differences in that investment and the limited benefit generated by a
capital loss carryback. Settlement of unrealized prior period tax exposures had
a favorable impact to the overall tax rate.
Minority interest in net income of subsidiaries in 2002 was $38 million
as compared to $19 million in 2001. The increase was primarily due to increased
activity in Devonport Management Limited.
Loss from continuing operations was $346 million in 2002 compared to
income from continuing operations of $551 million in 2001.
Loss from discontinued operations was $806 million pretax, $652 million
after tax, or $1.51 per diluted share in 2002 compared to a loss of $62 million
pretax, $42 million after tax, or $0.10 per diluted share in 2001. The loss in
2002 was due primarily to charges recorded for asbestos and silica liabilities.
The pretax loss for 2001 represents operating income of $37 million from Dresser
Equipment Group through March 31, 2001 offset by a $99 million pretax asbestos
accrual primarily related to Harbison-Walker.
Gain on disposal of discontinued operations of $299 million after tax,
or $0.70 per diluted share, in 2001 resulted from the sale of our remaining
businesses in the Dresser Equipment Group in April 2001.
Cumulative effect of accounting change, net in 2001 of $1 million
reflects the impact of adoption of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and for Hedging Activities."
After recording the cumulative effect of the change our estimated annual expense
under Financial Accounting Standards No. 133 is not expected to be materially
different from amounts expensed under the prior accounting treatment.
Net loss for 2002 was $998 million, or $2.31 per diluted share. Net
income for 2001 was $809 million, or $1.88 per diluted share.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires the use of judgments
and estimates. Our critical accounting policies are described below to provide a
better understanding of how we develop our judgments about future events and
related estimations and how they can impact our financial statements. A critical
accounting estimate is one that requires our most difficult, subjective or
complex estimates and assessments and is fundamental to our results of
operations. We identified our most critical accounting estimates to be:
- percentage-of-completion accounting for our long-term
engineering and construction contracts;
- accounting for government contracts;
- allowance for bad debts;
- forecasting our effective tax rate, including our ability to
utilize foreign tax credits and the realizability of deferred
tax assets;
- asbestos and silica insurance recoveries; and
- litigation matters.
42
We base our estimates on historical experience and on various other
assumptions we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. This
discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes included in this report.
Percentage of completion
We account for our revenues on long-term engineering and construction
contracts on the percentage-of-completion method. This method of accounting
requires us to calculate job profit to be recognized in each reporting period
for each job based upon our predictions of future outcomes which include:
- estimates of the total cost to complete the project;
- estimates of project schedule and completion date;
- estimates of the percentage the project is complete; and
- amounts of any probable unapproved claims and change orders
included in revenues.
At the onset of each contract, we prepare a detailed analysis of our
estimated cost to complete the project. Risks relating to service delivery,
usage, productivity and other factors are considered in the estimation process.
Our project personnel periodically evaluate the estimated costs, claims and
change orders, and percentage of completion at the project level. The recording
of profits and losses on long-term contracts requires an estimate of the total
profit or loss over the life of each contract. This estimate requires
consideration of contract revenue, change orders and claims, less costs incurred
and estimated costs to complete. Anticipated losses on contracts are recorded in
full in the period in which they become evident. Profits are recorded based upon
the total estimated contract profit times the current percentage complete for
the contract.
When calculating the amount of total profit or loss on a long-term
contract, we include unapproved claims as revenue when the collection is deemed
probable based upon the four criteria for recognizing unapproved claims under
the American Institute of Certified Public Accountants Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Including probable unapproved claims in this
calculation increases the operating income (or reduces the operating loss) that
would otherwise be recorded without consideration of the probable unapproved
claims. Probable unapproved claims are recorded to the extent of costs incurred
and include no profit element. In all cases, the probable unapproved claims
included in determining contract profit or loss are less than the actual claim
that will be or has been presented to the customer. We are actively engaged in
claims negotiations with our customers and the success of claims negotiations
have a direct impact on the profit or loss recorded for any related long-term
contract. Unsuccessful claims negotiations could result in decreases in
estimated contract profits or additional contract losses and successful claims
negotiations could result in increases in estimated contract profits or recovery
of previously recorded contract losses.
Significant projects are reviewed in detail by senior engineering and
construction management at least quarterly. Preparing project cost estimates and
percentages of completion is a core competency within our engineering and
construction businesses. We have a long history of dealing with multiple types
of projects and in preparing cost estimates. However, there are many factors
that impact future costs, including but not limited to weather, inflation, labor
disruptions and timely availability of materials, and other factors as outlined
in our "Forward-Looking Information and Risk Factors". These factors can affect
the accuracy of our estimates and materially impact our future reported
earnings.
Accounting for government contracts
Most of the services provided to the United States government are
governed by cost-reimbursable contracts. Generally, these contracts contain both
a base fee (a guaranteed percentage applied to our estimated costs to complete
the work adjusted for general, administrative and overhead costs) and a maximum
award fee (subject to our customer's discretion and tied to the specific
43
performance measures defined in the contract). The general, administrative and
overhead fees are estimated periodically in accordance with government contract
accounting regulations and may change based on actual costs incurred or based
upon the volume of work performed. Award fees are generally evaluated and
granted by our customer periodically. Similar to many cost-reimbursable
contracts, these government contracts are typically subject to audit and
adjustment by our customer. Services under our RIO, LogCAP and Balkans
support contracts are examples of these types of arrangements.
For these contracts, base fee revenues are recorded at the time
services are performed based upon the amounts we expect to realize upon
completion of the contracts. Revenues may be adjusted for our estimate of costs
that may be categorized as disputed or unallowable as a result of cost overruns
or the audit process.
For contracts entered into prior to June 30, 2003, all award fees are
recognized during the term of the contract based on our estimate of amounts to
be awarded. Our estimates are often based on our past award experience for
similar types of work. As a result of our adoption of Emerging Issues Task Force
Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with Multiple Deliverables,"
for contracts entered into subsequent to June 30, 2003, we will not recognize
award fees for the services portion of the contract based on estimates. Instead,
they will be recognized only when awarded by the customer. Award fees on the
construction portion of the contract will still be recognized based on estimates
in accordance with SOP 81-1. There were no government contracts affected by EITF
00-21 in 2003.
Allowance for bad debts
We evaluate our accounts receivable through a continuous process of
assessing our portfolio on an individual customer and overall basis. This
process consists of a thorough review of historical collection experience,
current aging status of the customer accounts, financial condition of our
customers, and other factors such as whether the receivables involve retentions
or billing disputes. We also consider the economic environment of our customers,
both from a marketplace and geographic perspective, in evaluating the need for
an allowance. Based on our review of these factors, we establish or adjust
allowances for specific customers and the accounts receivable portfolio as a
whole. This process involves a high degree of judgment and estimation and
frequently involves significant dollar amounts. Accordingly, our results of
operations can be affected by adjustments to the allowance due to actual
write-offs that differ from estimated amounts.
Tax accounting
We account for our income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the recognition of the amount of taxes payable or refundable for the
current year and an asset and liability approach in recognizing the amount of
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in our financial statements or tax returns. We apply
the following basic principles in accounting for our income taxes:
- a current tax liability or asset is recognized for the
estimated taxes payable or refundable on tax returns for the
current year;
- a deferred tax liability or asset is recognized for the
estimated future tax effects attributable to temporary
differences and carryforwards;
- the measurement of current and deferred tax liabilities and
assets is based on provisions of the enacted tax law and the
effects of potential future changes in tax laws or rates are
not considered; and
- the value of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
We determine deferred taxes separately for each tax-paying component
(an entity or a group of entities that is consolidated for tax purposes) in each
tax jurisdiction. That determination includes the following procedures:
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- identifying the types and amounts of existing temporary
differences;
- measuring the total deferred tax liability for taxable
temporary differences using the applicable tax rate;
- measuring the total deferred tax asset for deductible
temporary differences and operating loss carryforwards using
the applicable tax rate;
- measuring the deferred tax assets for each type of tax credit
carryforward; and
- reducing the deferred tax assets by a valuation allowance if,
based on available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
The valuation allowance recorded on tax benefits arising from asbestos
and silica liabilities attributable to displaced foreign tax credits is
determined quarterly based on an estimate of the future foreign taxes that would
be creditable but for the asbestos and silica liabilities, the tax loss
carryforwards that these deductions will generate in the future and future
estimated taxable income. Any changes to these estimates, which could be
material, are recorded in the quarter they arise, if they relate to future
years, and/or by adjusting the annual effective tax rate, if they relate to the
current year.
Our methodology for recording income taxes requires a significant
amount of judgment regarding assumptions and the use of estimates, including
determining our annual effective tax rate and the valuation of deferred tax
assets, which can create large variances between actual results and estimates.
The process involves making forecasts of current and future years' United States
and foreign taxable income, estimating foreign tax credit utilization and
evaluating the feasibility of implementing certain tax planning strategies.
Unforeseen events, such as the timing of asbestos and silica settlements and
other tax timing issues, may significantly affect these estimates. Those
factors, among others, could have a material impact on our provision or benefit
for income taxes related to both continuing and discontinued operations.
Asbestos and silica insurance recoveries
Concurrent with the remeasurement of our asbestos and silica liability
due to the pre-packaged Chapter 11 filing, we evaluated the appropriateness of
the $2 billion recorded for asbestos and silica insurance recoveries. In doing
so, we separately evaluated two types of policies:
- policies held by carriers with which we had either settled or
which were probable of settling and for which we could
reasonably estimate the amount of the settlement; and
- other policies.
In December 2003 we retained Navigant Consulting (formerly Peterson
Consulting), a nationally-recognized consultant in asbestos and silica liability
and insurance, to assist us. In conducting their analysis, Navigant Consulting
performed the following with respect to both types of policies:
- reviewed DII Industries' historical course of dealings with
its insurance companies concerning the payment of
asbestos-related claims, including DII Industries' 15-year
litigation and settlement history;
- reviewed our insurance coverage policy database containing
information on key policy terms as provided by outside
counsel;
- reviewed the terms of DII Industries' prior and current
coverage-in-place settlement agreements;
- reviewed the status of DII Industries' and Kellogg Brown &
Root's current insurance-related lawsuits and the various
legal positions of the parties in those lawsuits in relation
to the developed and developing case law and the historic
positions taken by insurers in the earlier filed and settled
lawsuits;
- engaged in discussions with our counsel; and
- analyzed publicly-available information concerning the ability
of the DII Industries insurers to meet their obligations.
45
Navigant Consulting's analysis assumed that there will be no recoveries
from insolvent carriers and that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections. Based on its review, analysis and discussions, Navigant
Consulting's analysis assisted us in making our judgments concerning insurance
coverage that we believe are reasonable and consistent with our historical
course of dealings with our insurers and the relevant case law to determine the
probable insurance recoveries for asbestos liabilities. This analysis included
the probable effects of self-insurance features, such as self-insured
retentions, policy exclusions, liability caps and the financial status of
applicable insurers, and various judicial determinations relevant to the
applicable insurance programs. The analysis of Navigant Consulting is based on
information provided by us.
In January 2004, we reached a comprehensive agreement with Equitas to
settle our insurance claims against certain Underwriters at Lloyd's of London,
reinsured by Equitas. The settlement will resolve all asbestos-related claims
made against Lloyd's Underwriters by us and by each of our subsidiary and
affiliated companies, including DII Industries, Kellogg Brown & Root and their
subsidiaries that have filed Chapter 11 proceedings as part of our proposed
settlement. Our claims against our other London Market Company Insurers are not
affected by this settlement. Provided that there is final confirmation of the
plan of reorganization in the Chapter 11 proceedings and the current United
States Congress does not pass national asbestos litigation reform legislation,
Equitas will pay us $575 million, representing approximately 60% of the
applicable limits of liability that DII Industries had substantial likelihood of
recovering from Equitas. The first payment of $500 million will occur within 15
working days of the later of January 5, 2005 or the date on which the order of
the bankruptcy court confirming DII Industries' plan of reorganization becomes
final and non-appealable. A second payment of $75 million will be made eighteen
months after the first payment.
As of December 31, 2003, we developed our best estimate of the
asbestos and silica insurance receivables as follows:
- included $575 million of insurance recoveries from Equitas
based on the January 2004 comprehensive agreement;
- included insurance recoveries from other specific insurers
with whom we had settled;
- estimated insurance recoveries from specific insurers that we
are probable of settling with and for which we could
reasonably estimate the amount of the settlement. When
appropriate, these estimates considered prior settlements with
insurers with similar facts and circumstances; and
- estimated insurance recoveries for all other policies with the
assistance of the Navigant Consulting study.
The estimate we developed as a result of this process was consistent
with the amount of asbestos and silica receivables already recorded as of
December 31, 2003, causing us not to significantly adjust our recorded
insurance asset at that time. Our estimate was based on a comprehensive analysis
of the situation existing at that time which could change significantly in the
both near- and long-term period as a result of:
- additional settlements with insurance companies;
- additional insolvencies of carriers; and
- legal interpretation of the type and amount of coverage
available to us.
Currently, we cannot estimate the time frame for collection of this
insurance receivable, except as described earlier with regard to the Equitas
settlement.
Projecting future events is subject to many uncertainties that could
cause the asbestos and silica insurance recoveries to be higher or lower than
those projected and accrued, such as:
- future settlements with insurance carriers;
- coverage issues among layers of insurers issuing different
policies to different policyholders over extended periods
of time;
46
- the impact on the amount of insurance recoverable in light of
the Harbison-Walker and Federal-Mogul bankruptcies. See Note
11 to our consolidated financial statements; and
- the continuing solvency of various insurance companies.
We could ultimately recover, or may agree in settlement of litigation
to recover, less insurance reimbursement than the insurance receivable recorded
in our consolidated financial statements. In addition, we may enter into
agreements with all or some of our insurance carriers to negotiate an overall
accelerated payment of insurance proceeds. If we agree to any such settlements,
we likely would recover less than the recorded amount of insurance receivables,
which would result in an additional charge to our consolidated statement of
operations.
Litigation. We are currently involved in other legal proceedings not
involving asbestos and silica. As discussed in Note 13 of our consolidated
financial statements, as of December 31, 2003, we have accrued an estimate of
the probable costs for the resolution of these claims. Attorneys in our legal
department specializing in litigation claims monitor and manage all claims filed
against us. The estimate of probable costs related to these claims is developed
in consultation with outside legal counsel representing us in the defense of
these claims. Our estimates are based upon an analysis of potential results,
assuming a combination of litigation and settlement strategies. We attempt to
resolve claims through mediation and arbitration proceedings where possible. If
the actual settlement costs and final judgments, after appeals, differ from our
estimates, our future financial results may be adversely affected.
OFF BALANCE SHEET RISK
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables. Collections reduce previously sold accounts receivable.
This funding subsidiary sells an undivided ownership interest in this pool of
receivables to entities managed by unaffiliated financial institutions under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable bankruptcy laws. While the funding subsidiary is
wholly-owned by us, its assets are not available to pay any creditors of ours or
of our subsidiaries or affiliates, until such time as the agreement with the
unaffiliated companies is terminated following sufficient collections to
liquidate all outstanding undivided ownership interests. The undivided ownership
interest in the pool of receivables sold to the unaffiliated companies,
therefore, is reflected as a reduction of accounts receivable in our
consolidated balance sheets. The funding subsidiary retains the interest in the
pool of receivables that are not sold to the unaffiliated companies and is fully
consolidated and reported in our financial statements.
The amount of undivided interests which can be sold under the program
varies based on the amount of eligible Energy Services Group receivables in the
pool at any given time and other factors. The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated companies, and
could from time to time sell additional undivided ownership interests. In July
2003, however, the balance outstanding under this facility was reduced to zero.
The total amount outstanding under this facility continued to be zero as of
December 31, 2003.
FINANCIAL INSTRUMENT MARKET RISK
We are exposed to financial instrument market risk from changes in
foreign currency exchange rates, interest rates and to a limited extent,
commodity prices. We selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these exposures. The
objective of our risk management program is to protect our cash flows related to
sales or purchases of goods or services from market fluctuations in currency
rates. Our use of derivative instruments includes the following types of market
risk:
47
- volatility of the currency rates;
- time horizon of the derivative instruments;
- market cycles; and
- the type of derivative instruments used.
We do not use derivative instruments for trading purposes. We do not
consider any of these risk management activities to be material. See Note 1 to
the consolidated financial statements for additional information on our
accounting policies on derivative instruments. See Note 18 to the consolidated
financial statements for additional disclosures related to derivative
instruments.
Interest rate risk. We have exposure to interest rate risk from our
long-term debt.
The following table represents principal amounts of our long-term debt
at December 31, 2003 and related weighted average interest rates by year of
maturity for our long-term debt.
Millions of dollars 2004 2005 2006 2007 2008 Thereafter Total
- ------------------------------------------------------------------------------------------------------
Fixed rate debt $ 1 $ 3 $ 284 $ - $ 150 $2,625 $ 3,063
Weighted average
interest rate 9.5% 10.9% 6.0% - 5.6% 5.0% 5.1%
Variable rate debt $ 21 $ 321 $ 21 $ 10 $ 1 $ - $ 374
Weighted average
interest rate 4.8% 2.8% 4.8% 4.8% 5.6% - 3.1%
======================================================================================================
The fair market value of long-term debt was $3.6 billion as of
December 31, 2003.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory
requirements related to our operations worldwide. In the United States, these
laws and regulations include, among others:
- the Comprehensive Environmental Response, Compensation and
Liability Act;
- the Resources Conservation and Recovery Act;
- the Clean Air Act;
- the Federal Water Pollution Control Act; and
- the Toxic Substances Control Act.
In addition to the federal laws and regulations, states and other
countries where we do business may have numerous environmental, legal and
regulatory requirements by which we must abide.
We evaluate and address the environmental impact of our operations by
assessing and remediating contaminated properties in order to avoid future
liabilities and comply with environmental, legal and regulatory requirements. On
occasion, we are involved in specific environmental litigation and claims,
including the remediation of properties we own or have operated as well as
efforts to meet or correct compliance-related matters. Our Health, Safety and
Environment group has several programs in place to maintain environmental
leadership and to prevent the occurrence of environmental contamination.
We do not expect costs related to these remediation requirements to
have a material adverse effect on our consolidated financial position or our
results of operations. We have subsidiaries that have been named as potentially
responsible parties along with other third parties for nine federal and state
superfund sites for which we have established a liability. As of December 31,
2003, those nine sites accounted for approximately $7 million of our total $31
million liability. See Note 13 to the consolidated financial statements.
48
FORWARD-LOOKING INFORMATION AND RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-K are forward-looking and use words like "may," "may
not," "believes," "do not believe," "expects," "do not expect," "anticipates,"
"do not anticipate," and other expressions. We may also provide oral or written
forward-looking information in other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and the results of operations may vary materially.
We do not assume any responsibility to publicly update any of our
forward-looking statements regardless of whether factors change as a result of
new information, future events or for any other reason. You should review any
additional disclosures we make in our press releases and Forms 10-Q and 8-K
filed with the United States Securities and Exchange Commission. We also suggest
that you listen to our quarterly earnings release conference calls with
financial analysts.
While it is not possible to identify all factors, we continue to face
many risks and uncertainties that could cause actual results to differ from our
forward-looking statements and potentially materially and adversely affect our
financial condition and results of operations, including risks relating to:
Asbestos and Silica Liability
Our ability to complete our proposed settlement and plan of
reorganization
As contemplated by our proposed settlement of asbestos and silica
personal injury claims, DII Industries, Kellogg Brown & Root and our other
affected subsidiaries (collectively referred to herein as the "debtors") filed
Chapter 11 proceedings on December 16, 2003 in bankruptcy court in Pittsburgh,
Pennsylvania. Although the debtors have filed Chapter 11 proceedings and we are
proceeding with the proposed settlement, completion of the settlement remains
subject to several conditions, including the requirements that the bankruptcy
court confirm the plan of reorganization and the federal district court affirm
such confirmation, and that the bankruptcy court and federal district court
orders become final and non-appealable. Completion of the proposed settlement is
also conditioned on continued availability of financing on terms acceptable to
us in order to allow us to fund the cash amounts to be paid in the settlement.
There can be no assurance that such conditions will be met.
The requirements for a bankruptcy court to approve a plan of
reorganization include, among other judicial findings, that:
- the plan of reorganization complies with applicable provisions
of the United States Bankruptcy Code;
- the debtors have complied with the applicable provisions
of the United States Bankruptcy Code;
- the trusts will value and pay similar present and future
claims in substantially the same manner; and
- the plan of reorganization has been proposed in good faith and
not by any means forbidden by law.
The bankruptcy court presiding over the Chapter 11 proceedings has
scheduled a hearing on confirmation of the proposed plan of reorganization for
May 10 through 12, 2004. Some of the insurance carriers of DII Industries and
Kellogg Brown & Root have filed various motions in and objections to the Chapter
11 proceedings in an attempt to seek dismissal of the Chapter 11 proceedings or
to delay the proposed plan of reorganization. The motions and objections filed
by the insurance carriers include a request that the court grant the insurers
standing in the Chapter 11 proceedings to be heard on a wide range of matters, a
motion to dismiss the Chapter 11 proceedings and a motion objecting to the
49
proposed legal representative for future asbestos and silica claimants. On
February 11, 2004, the bankruptcy court presiding over the Chapter 11
proceedings issued a ruling holding that the insurance carriers lack standing to
bring motions seeking to dismiss the pre-packaged plan of reorganization and
denying standing to the insurance carriers to object to the appointment of the
proposed legal representative for future asbestos and silica claimants.
Notwithstanding the bankruptcy court ruling, we expect the insurance carriers to
object to confirmation of the pre-packaged plan of reorganization. In addition,
we believe that these insurance carriers will take additional steps to prevent
or delay confirmation of a plan of reorganization, including appealing the
rulings of the bankruptcy court, and there can be no assurance that the
insurance carriers would not be successful or that such efforts would not result
in delays in the reorganization process. There can be no assurance that we will
obtain the required judicial approval of the proposed plan of reorganization or
any revised plan of reorganization acceptable to us.
Effect of inability to complete a plan of reorganization
If the currently proposed plan of reorganization is not confirmed by
the bankruptcy court and the Chapter 11 proceedings are not dismissed, the
debtors could propose an alternative plan of reorganization. Chapter 11 permits
a company to remain in control of its business, protected by a stay of all
creditor action, while that company attempts to negotiate and confirm a plan of
reorganization with its creditors. If the debtors are unsuccessful in obtaining
confirmation of the currently proposed plan of reorganization or an alternative
plan of reorganization, the assets of the debtors could be liquidated in the
Chapter 11 proceedings. In the event of a liquidation of the debtors,
Halliburton could lose its controlling interest in DII Industries and Kellogg
Brown & Root. Moreover, if the plan of reorganization is not confirmed and the
debtors have insufficient assets to pay the creditors, Halliburton's assets
could be drawn into the liquidation proceedings because Halliburton guarantees
certain of the debtors' obligations.
If the Chapter 11 proceedings are dismissed without confirmation of a
plan of reorganization, we could be required to resolve current and future
asbestos claims in the tort system or, in the case of the Harbison-Walker
Refractories Company claims, possibly through the Harbison-Walker Chapter 11
proceedings.
If we were required to resolve asbestos claims in the tort system, we
would be subject to numerous uncertainties, including:
- continuing asbestos and silica litigation against us, which
would include the possibility of substantial adverse
judgments, the timing of which could not be controlled or
predicted, and the obligation to provide appeals bonds pending
any appeal of any such judgment, some or all of which may
require us to post cash collateral;
- current and future asbestos claims settlement and defense
costs, including the inability to completely control the
timing of such costs and the possibility of increased costs to
resolve personal injury claims;
- the possibility of an increase in the number and type of
asbestos and silica claims against us in the future; and
- any adverse changes to the tort system allowing additional
claims or judgments against us.
Substantial adverse judgments or substantial claims settlement and
defense costs could materially and adversely affect our liquidity, especially if
combined with a lowering of our credit ratings or other events. If an adverse
judgment were entered against us, we may be required to post a bond in order to
perfect an appeal of that judgment. If the bonds were not available because of
uncertainties in the bonding market or if, as a result of our financial
condition or credit rating, bonding companies would not provide a bond on our
behalf, we could be required to provide a cash bond in order to perfect any
appeal. As a result, a substantial judgment or judgments could require a
substantial amount of cash to be posted by us in order to appeal, which we may
not be able to provide from cash on hand or borrowings, or which we may only be
able to provide by incurring high borrowing costs. In such event, our ability to
pursue our legal rights to appeal could be materially and adversely affected.
50
There can be no assurance that our financial condition and results of
operations, our stock price or our debt ratings would not be materially and
adversely affected in the absence of a completed plan of reorganization.
Proposed federal legislation may affect our liability and agreements
We understand that the United States Congress may consider adopting
legislation that would set up a national trust fund as the exclusive means for
recovery for asbestos-related disease. We are uncertain as to what contributions
we would be required to make to a national trust, if any, although it is
possible that they could be substantial and that they could continue for several
years. It is also possible that our level of participation and contribution to a
national trust could be greater than it otherwise would have been as a result of
having subsidiaries that have filed Chapter 11 proceedings due to asbestos
liabilities.
It is a condition to the effectiveness of our settlement with Equitas
that no law shall be passed by the United States Congress that relates to,
regulates, limits or controls the prosecution of asbestos claims in United
States state or federal courts or any other forum. If national asbestos
litigation legislation is passed by the United States Congress on or before
January 5, 2005, we would not receive the $575 million in cash provided by the
Equitas settlement, but we would retain the rights we currently have against our
insurance carriers.
Possible remaining asbestos and silica exposure
Our proposed settlement of asbestos and silica claims includes asbestos
and silica personal injury claims against DII Industries, Kellogg Brown & Root
and their current and former subsidiaries, as well as Halliburton and its
subsidiaries and the predecessors and successors of them. However, the proposed
settlement is subject to bankruptcy court approval as well as federal district
court confirmation. No assurance can be given that the court reviewing and
approving the plan of reorganization that is being used to implement the
proposed settlement will grant relief as broad as contemplated by the proposed
settlement.
In addition, a Chapter 11 proceeding and injunctions under Section
524(g) and Section 105 of the Bankruptcy Code may not apply to protect against
all asbestos and silica claims. For example, while we have historically not
received a significant number of claims outside the United States, any such
future claims would be subject to the applicable legal system of the
jurisdiction where the claim was made. In addition, the Section 524(g)
injunction would not apply to some claims under worker's compensation
arrangements. Although we do not believe that we have material exposure to
foreign or worker's compensation claims, there can be no assurance that material
claims would not be made in the future. Further, to our knowledge, the
constitutionality of an injunction under Section 524(g) of the Bankruptcy Code
has not been tested in a court of law. We can provide no assurance that, if the
constitutionality is challenged, the injunction would be upheld. In addition,
although we would have other significant affirmative defenses, the injunctions
issued under the Bankruptcy Code may not cover all silica personal injury claims
arising as a result of future silica exposure. Moreover, the proposed settlement
does not resolve claims for property damage as a result of materials containing
asbestos. Accordingly, although we have historically received no such claims,
claims could still be made as to damage to property or property value as a
result of asbestos-containing products having been used in a particular property
or structure.
Insurance recoveries
We have substantial insurance intended to reimburse us for portions of
the costs incurred in defending asbestos and silica claims and amounts paid to
settle claims and to satisfy court judgments. We had $2 billion in probable
insurance recoveries accrued as of December 31, 2003. We may be unable to
recover, or we may be delayed in recovering, insurance reimbursements in the
amounts accrued to cover a part of the costs incurred in defending asbestos and
silica claims and amounts paid to settle claims or as a result of court
judgments due to, among other things:
- the inability or unwillingness of insurers to timely reimburse
for claims in the future;
- disputes as to documentation requirements for DII Industries,
Kellogg Brown & Root or other subsidiaries in order to recover
claims paid;
- the inability to access insurance policies shared with, or the
dissipation of shared insurance assets by, Harbison-Walker
Refractories Company or others;
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- the possible insolvency or reduced financial viability of our
insurers;
- the cost of litigation to obtain insurance reimbursement; and
- possible adverse court decisions as to our rights to obtain
insurance reimbursement.
If the proposed plan of reorganization is completed, we would be
required to contribute up to an aggregate of approximately $2.5 billion in cash,
but may be delayed in receiving reimbursement from our insurance carriers
because of extended negotiations or litigation with those insurance carriers. If
we were unable to recover from a substantial number of our insurance carriers,
or if we were delayed significantly in our recoveries, it could have a material
adverse effect on our consolidated financial condition.
We could ultimately recover, or may agree in settlement of litigation
to recover, less insurance reimbursement than the insurance receivable recorded
in our consolidated financial statements. In addition, we may enter into
agreements with all or some of our insurance carriers to negotiate an overall
accelerated payment of insurance proceeds. If we agree to any such settlements,
we likely would recover less than the recorded amount of insurance receivables,
which would result in an additional charge to the consolidated statement of
operations.
Effect of Chapter 11 proceedings on our business and operations
Because Halliburton's financial condition and its results of operations
depend on distributions from its subsidiaries, the Chapter 11 filing of some of
them, including DII Industries and Kellogg Brown & Root, may have a negative
impact on Halliburton's cash flow and distributions from those subsidiaries.
These subsidiaries will not be able to make distributions to Halliburton during
the Chapter 11 proceedings without court approval. The Chapter 11 proceedings
may also hinder the subsidiaries' ability to take actions in the ordinary
course. In addition, the Chapter 11 filing could materially and adversely affect
the ability of our subsidiaries in Chapter 11 proceedings to obtain new orders
from current or prospective customers. As a result of the Chapter 11
proceedings, some current and prospective customers, suppliers and other vendors
may assume that our subsidiaries are financially weak and will be unable to
honor obligations, making those customers, suppliers and other vendors reluctant
to do business with our subsidiaries. In particular, some governments may be
unwilling to conduct business with a subsidiary in Chapter 11 or having recently
filed a Chapter 11 proceeding. The Chapter 11 proceedings also could materially
and adversely affect the subsidiaries ability to negotiate favorable terms with
customers, suppliers and other vendors. DII Industries' and Kellogg Brown &
Root's financial condition and results of operations could be materially and
adversely affected if they cannot attract customers, suppliers and other vendors
or obtain favorable terms from customers, suppliers or other vendors.
Consequently, our financial condition and results of operations could be
materially and adversely affected.
Further, prolonged Chapter 11 proceedings could materially and
adversely affect the relationship that DII Industries, Kellogg Brown & Root and
their subsidiaries involved in the Chapter 11 proceedings have with their
customers, suppliers and employees, which in turn could materially and adversely
affect their competitive positions, financial conditions and results of
operations. A weakening of their financial conditions and results of operations
could materially and adversely affect their ability to implement the plan of
reorganization.
Legal Matters
SEC investigation
We are currently the subject of a formal investigation by the SEC,
which we believe is focused on the accuracy, adequacy and timing of our
disclosure of the change in our accounting practice for revenues associated with
estimated cost overruns and unapproved claims for specific long-term engineering
and construction projects. The resolution of this investigation could have a
material adverse effect on us and result in:
- the institution of administrative, civil, or injunctive
proceedings;
- sanctions and the payment of fines and penalties; and
- increased review and scrutiny of us by regulatory authorities,
the media and others.
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Audits and inquiries about government contracts work
We provide substantial work under our government contracts business to
the United States Department of Defense and other governmental agencies,
including under world-wide United States Army logistics contracts, known as
LogCAP, and under contracts to rebuild Iraq's petroleum industry, known as RIO.
Our units operating in Iraq and elsewhere under government contracts such as
LogCAP and RIO consistently review the amounts charged and the services
performed under these contracts. Our operations under these contracts are also
regularly reviewed and audited by the Defense Contract Audit Agency, or DCAA,
and other governmental agencies. When issues are found during the governmental
agency audit process, these issues are typically discussed and reviewed with us
in order to reach a resolution.
The results of a preliminary audit by the DCAA in December 2003 alleged
that we may have overcharged the Department of Defense by $61 million in
importing fuel into Iraq. After a review, the Army Corps of Engineers, which is
our client and oversees the project, concluded that we obtained a fair price for
the fuel. However, Department of Defense officials have referred the matter to
the agency's inspector general with a request for additional investigation by
the agency's criminal division. We understand that the agency's inspector
general has commenced an investigation. We have also in the past had inquiries
by the DCAA and the civil fraud division of the United States Department of
Justice into possible overcharges for work under a contract performed in the
Balkans, which is still under review with the Department of Justice.
On January 22, 2004, we announced the identification by our internal
audit function of a potential over billing of approximately $6 million by one
of our subcontractors under the LogCAP contract in Iraq. In accordance with our
policy and government regulation, the potential overcharge was reported to the
Department of Defense Inspector General's office as well as to our customer, the
Army Materiel Command. On January 23, 2004, we issued a check in the amount of
$6 million to the Army Materiel Command to cover that potential over billing
while we conduct our own investigation into the matter. We are continuing to
review whether third party subcontractors paid or attempted to pay one or two
former employees in connection with the potential $6 million over billing.
The DCAA has raised issues relating to our invoicing to the Army
Materiel Command for food services for soldiers and supporting civilian
personnel in Iraq and Kuwait. We have taken two actions in response. First, we
have temporarily credited $36 million to the Department of Defense until
Halliburton, the DCAA and the Army Materiel Command agree on a process to be
used for invoicing for food services. Second, we are not submitting $141 million
of additional food services invoices until an internal review is completed
regarding the number of meals ordered by the Army Materiel Command and the
number of soldiers actually served at dining facilities for United States troops
and supporting civilian personnel in Iraq and Kuwait. The $141 million amount is
our "order of magnitude" estimate of the remaining amounts (in addition to the
$36 million we already credited) being questioned by the DCAA. The issues relate
to whether invoicing should be based on the number of meals ordered by the Army
Materiel Command or whether invoicing should be based on the number of personnel
served. We have been invoicing based on the number of meals ordered. The DCAA is
contending that the invoicing should be based on the number of personnel served.
We believe our position is correct, but have undertaken a comprehensive review
of its propriety and the views of the DCAA. However, we cannot predict when the
issue will be resolved with the DCAA. In the meantime, we may withhold all or a
portion of the payments to our subcontractors relating to the withheld invoices
pending resolution of the issues. Except for the $36 million in credits and the
$141 million of withheld invoices, all our invoicing in Iraq and Kuwait for
other food services and other matters are being processed and sent to the Army
Materiel Command for payment in the ordinary course.
All of these matters are still under review by the applicable
government agencies. Additional review and allegations are possible, and the
dollar amounts at issue could change significantly. We could also be subject to
future DCAA inquiries for other services we provide in Iraq under the current
LogCAP contract or the RIO contract. For example, as a result of an increase in
53
the level of work performed in Iraq or the DCAA's review of additional aspects
of our services performed in Iraq, it is possible that we may, or may be
required to, withhold additional invoicing or make refunds to our customer, some
of which could be substantial, until these matters are resolved. This could
materially and adversely affect our liquidity.
To the extent we or our subcontractors make mistakes in our government
contracts operations, even if unintentional, insignificant or subsequently
self-reported to the applicable government agency, we will likely be subject to
intense scrutiny. Some of this scrutiny is a result of the Vice President of
the United States being a former chief executive officer of Halliburton. This
scrutiny has recently centered on our government contracts work, especially in
Iraq and the Middle East. In part because of the heightened level of scrutiny
under which we operate, audit issues between us and government auditors like the
DCAA or the inspector general of the Department of Defense may arise and are
more likely to become public. We could be asked to reimburse payments made to us
and that are determined to be in excess of those allowed by the applicable
contract, or we could agree to delay billing for an indefinite period of time
for work we have performed until any billing and cost issues are resolved. Our
ability to secure future government contracts business or renewals of current
government contracts business in the Middle East or elsewhere could be
materially and adversely affected. In addition, we may be required to expend a
significant amount of resources explaining and/or defending actions we have
taken under our government contracts.
Nigerian joint venture investigation
It has been reported that a French magistrate is investigating whether
illegal payments were made in connection with the construction and subsequent
expansion of a multi-billion dollar gas liquefication complex and related
facilities at Bonny Island, in Rivers State, Nigeria. TSKJ and other
similarly-owned entities have entered into various contracts to build and expand
the liquefied natural gas project for Nigeria LNG Limited, which is owned by the
Nigerian National Petroleum Corporation, Shell Gas B.V., Cleag Limited (an
affiliate of Total) and Agip International BV. TSKJ is a private limited
liability company registered in Madeira, Portugal whose members are Technip SA
of France, Snamprogetti Netherlands B.V., which is an affiliate of ENI SpA of
Italy, JGC Corporation of Japan and Kellogg Brown & Root, each of which owns 25%
of the venture. The United States Department of Justice and the SEC have met
with Halliburton to discuss this matter and have asked Halliburton for
cooperation and access to information in reviewing this matter in light of the
requirements of the United States Foreign Corrupt Practices Act. Halliburton has
engaged outside counsel to investigate any allegations and is cooperating with
the government's inquiries.
Office of Foreign Assets Control inquiry
We have a Cayman Islands subsidiary with operations in Iran, and other
European subsidiaries that manufacture goods destined for Iran and/or render
services in Iran, and we own several non-United States subsidiaries and/or
non-United States joint ventures that operate in or manufacture goods destined
for, or render services in Libya. The United States imposes trade restrictions
and economic embargoes that prohibit United States incorporated entities and
United States citizens and residents from engaging in commercial, financial or
trade transactions with some foreign countries, including Iran and Libya, unless
authorized by the Office of Foreign Assets Control, or OFAC, of the United
States Treasury Department or exempted by statute.
We received and responded to an inquiry in mid-2001 from OFAC with
respect to the operations in Iran by a Halliburton subsidiary that is
incorporated in the Cayman Islands. The OFAC inquiry requested information with
respect to compliance with the Iranian Transaction Regulations. Our 2001 written
response to OFAC stated that we believed that we were in full compliance with
applicable sanction regulations. In January 2004, we received a follow-up letter
from OFAC requesting additional information. We are responding to questions
raised in the most recent letter. We have been asked to and could be required to
respond to other questions and inquiries about operations in countries with
trade restrictions and economic embargoes.
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Liquidity
Working capital requirements related to Iraq work
We currently expect the working capital requirements related to Iraq
will increase through the first half of 2004. An increase in the amount of
services we are engaged to perform could place additional demands on our working
capital. As described in "Legal Matters: Audits and inquiries about government
contracts work" above, it is possible that we may, or may be required to,
withhold additional invoicing or make refunds to our customer related to the
DCAA's review of additional aspects of our services, some of which could be
substantial, until these matters are resolved. This could materially and
adversely affect our liquidity.
Credit facilities
The plan of reorganization through which the proposed settlement would
be implemented will require us to contribute up to approximately $2.5 billion in
cash to the trusts established for the benefit of asbestos and silica claimants
pursuant to the Bankruptcy Code. We may need to finance additional amounts in
connection with the settlement.
In connection with the plan of reorganization contemplated by the
proposed asbestos and silica settlement, in the fourth quarter of 2003 we
entered into:
- a delayed-draw term facility that would currently provide for
draws of up to $500 million to be available for cash funding
of the trusts for the benefit of asbestos and silica
claimants if required conditions are met;
- a master letter of credit facility intended to ensure that
existing letters of credit supporting our contracts remain in
place during the Chapter 11 filing; and
- a $700 million three-year revolving credit facility for
general working capital purposes, which expires in October
2006.
Although the master letter of credit facility and the $700 million revolving
credit facility are now effective, there are a number of conditions that must be
met before the delayed-draw term facility will become effective and available
for our use, including bankruptcy court approval and federal district court
confirmation of the plan of reorganization. Moreover, these facilities are only
available for limited periods of time: advances under our master letter of
credit facility are available until the earlier of June 30, 2004 or when an
order confirming the proposed plan of reorganization becomes final and
non-appealable, and our delayed-draw term facility currently expires on June 30,
2004 if not drawn by that time. As a result, if the debtors are delayed in
completing the plan of reorganization, these credit facilities may not provide
us with the necessary financing to complete the proposed settlement.
Additionally, there may be other conditions to funding that we may be unable to
satisfy. In such circumstances, we would be unable to complete the proposed
settlement if replacement financing were not available on acceptable terms.
In addition, we experience increased working capital requirements from
time to time associated with our business. An increased demand for working
capital could affect our liquidity needs and could impair our ability to finance
the proposed settlement on acceptable terms.
Letters of credit
We entered into a master letter of credit facility in the fourth
quarter 2003 that is intended to replace any cash collateralization rights of
issuers of substantially all our existing letters of credit during the pendency
of the Chapter 11 proceedings of DII Industries and Kellogg Brown & Root and our
other filing subsidiaries. The master letter of credit facility is now in effect
and governs at least 90% of the face amount of our existing letters of credit.
Under the master letter of credit facility, if any letters of credit
that are covered by the facility are drawn on or before June 30, 2004, the
facility will provide the cash needed for such draws, as well as for any
collateral or reimbursement obligations in respect thereof, with any such
borrowings being converted into term loans. However, with respect to the letters
of credit that are not subject to the master letter of credit facility, we could
be subject to reimbursement and cash collateral obligations. In addition, if an
order confirming our proposed plan of reorganization has not become final and
non-appealable by June 30, 2004 and we are unable to negotiate a renewal or
extension of the master letter of credit facility, the letters of credit that
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are now governed by that facility will be governed by the arrangements with the
banks that existed prior to the effectiveness of the facility. In many cases,
those pre-existing arrangements impose reimbursement and/or cash collateral
obligations on us and/or our subsidiaries.
Uncertainty may also hinder our ability to access new letters of credit
in the future. This could impede our liquidity and/or our ability to conduct
normal operations.
Credit ratings
Late in 2001 and early in 2002, Moody's Investors Service lowered its
ratings of our long-term senior unsecured debt to Baa2 and our short-term credit
and commercial paper ratings to P-2. In addition, Standard & Poor's lowered its
ratings of our long-term senior unsecured debt to A- and our short-term credit
and commercial paper ratings to A-2 in late 2001. In December 2002, Standard &
Poor's lowered these ratings to BBB and A-3. These ratings were lowered
primarily due to our asbestos exposure. In December 2003, Moody's Investors
Service confirmed our ratings with a positive outlook and Standard & Poor's
revised its credit watch listing for us from "negative" to "developing" in
response to our announcement that DII Industries and Kellogg Brown & Root and
other of our subsidiaries filed Chapter 11 proceedings to implement the proposed
asbestos and silica settlement.
Although our long-term unsecured debt ratings continue at investment
grade levels, the cost of new borrowing is relatively higher and our access to
the debt markets is more volatile at these new rating levels. Investment grade
ratings are BBB- or higher for Standard & Poor's and Baa3 or higher for Moody's
Investors Service. Our current ratings are one level above BBB- on Standard &
Poor's and one level above Baa3 on Moody's Investors Service.
If our debt ratings fall below investment grade, we will be required to
provide additional collateral to secure our new master letter of credit facility
and our new revolving credit facility. With respect to the outstanding letters
of credit that are not subject to the new master letter of credit facility, we
may be in technical breach of the bank agreements governing those letters of
credit and we may be required to reimburse the bank for any draws or provide
cash collateral to secure those letters of credit. In addition, if an order
confirming our proposed plan of reorganization has not become final and
non-appealable by June 30, 2004 and we are unable to negotiate a renewal or
extension of the terms of the master letter of credit facility, advances under
our master letter of credit facility will no longer be available and will no
longer override the reimbursement, cash collateral or other agreements or
arrangements relating to any of the letters of credit that existed prior to the
effectiveness of the master letter of credit facility. In that event, we may be
required to provide reimbursement for any draws or cash collateral to secure our
or our subsidiaries' obligations under arrangements in place prior to our
entering into the master letter of credit facility.
In addition, our elective deferral compensation plan has a provision
which states that if the Standard & Poor's credit rating falls below BBB, the
amounts credited to participants' accounts will be paid to participants in a
lump-sum within 45 days. At December 31, 2003, this amount was approximately $51
million.
In the event our debt ratings are lowered by either agency, we may have
to issue additional debt or equity securities or obtain additional credit
facilities in order to meet our liquidity needs. We anticipate that any such new
financing or credit facilities would not be on terms as attractive as those we
have currently and that we would also be subject to increased costs of capital
and interest rates. We also may be required to provide cash collateral to obtain
surety bonds or letters of credit, which would reduce our available cash or
require additional financing. Further, if we are unable to obtain financing for
our proposed settlement on terms that are acceptable to us, we may be unable to
complete the proposed settlement.
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Geopolitical and International Events
International and Political Events
A significant portion of our revenue is derived from our non-United
States operations, which exposes us to risks inherent in doing business in each
of the more than 100 other countries in which we transact business. The
occurrence of any of the risks described below could have a material adverse
effect on our consolidated results of operations and consolidated financial
condition.
Our operations in more than 100 countries other than the United States
accounted for approximately 73% of our consolidated revenues during 2003, 67% of
our consolidated revenues during 2002 and 62% of our consolidated revenues
during 2001. Operations in countries other than the United States are subject to
various risks peculiar to each country. With respect to any particular country,
these risks may include:
- expropriation and nationalization of our assets in that
country;
- political and economic instability;
- social unrest, acts of terrorism, force majeure, war or other
armed conflict;
- inflation;
- currency fluctuations, devaluations and conversion
restrictions;
- confiscatory taxation or other adverse tax policies;
- governmental activities that limit or disrupt markets,
restrict payments or limit the movement of funds;
- governmental activities that may result in the deprivation of
contract rights; and
- trade restrictions and economic embargoes imposed by the
United States and other countries, including current
restrictions on our ability to provide products and services
to Iran and Libya, both of which are significant producers of
oil and gas.
Due to the unsettled political conditions in many oil producing
countries and countries in which we provide governmental logistical support, our
revenues and profits are subject to the adverse consequences of war, the effects
of terrorism, civil unrest, strikes, currency controls and governmental actions.
Countries where we operate that have significant amounts of political risk
include: Argentina, Afghanistan, Algeria, Indonesia, Iran, Iraq, Libya, Nigeria,
Russia and Venezuela. For example, continued economic unrest in Venezuela, as
well as the social, economic, and political climate in Nigeria, could affect our
business and operations in these countries. In addition, military action or
continued unrest in the Middle East could impact the demand and pricing for oil
and gas, disrupt our operations in the region and elsewhere and increase our
costs for security worldwide.
Military Action, Other Armed Conflicts or Terrorist Attacks
Military action in Iraq, increasing military tension involving North
Korea, as well as the terrorist attacks of September 11, 2001 and subsequent
threats of terrorist attacks and unrest, have caused instability in the world's
financial and commercial markets, have significantly increased political and
economic instability in some of the geographic areas in which we operate. Acts
of terrorism and threats of armed conflicts in or around various areas in which
we operate, such as the Middle East and Indonesia, could limit or disrupt
markets and our operations, including disruptions resulting from the evacuation
of personnel, cancellation of contracts or the loss of personnel or assets.
Such events may cause further disruption to financial and commercial
markets generally and may generate greater political and economic instability in
some of the geographic areas in which we operate. In addition, any possible
reprisals as a consequence of the war with and ongoing military action in Iraq,
such as acts of terrorism in the United States or elsewhere, could materially
and adversely affect us in ways we cannot predict at this time.
Taxation
We have operations in more than 100 countries other than the United
States and as a result are subject to taxation in many jurisdictions. Therefore,
the final determination of our tax liabilities involves the interpretation of
the statutes and requirements of taxing authorities worldwide. Foreign income
tax returns of foreign subsidiaries, unconsolidated affiliates and related
entities are routinely examined by foreign tax authorities. These tax
57
examinations may result in assessments of additional taxes or penalties or both.
Additionally, new taxes, such as the proposed excise tax in the United States
targeted at heavy equipment of the type we own and use in our operations, could
negatively affect our results of operations.
Foreign Exchange and Currency Risks
A sizable portion of our consolidated revenues and consolidated
operating expenses are in foreign currencies. As a result, we are subject to
significant risks, including:
- foreign exchange risks resulting from changes in foreign
exchange rates and the implementation of exchange controls
such as those experienced in Argentina in late 2001 and early
2002; and
- limitations on our ability to reinvest earnings from
operations in one country to fund the capital needs of our
operations in other countries.
We do business in countries that have non-traded or "soft" currencies
which, because of their restricted or limited trading markets, may be more
difficult to exchange for "hard" currency. We may accumulate cash in soft
currencies and we may be limited in our ability to convert our profits into
United States dollars or to repatriate the profits from those countries.
We selectively use hedging transactions to limit our exposure to risks
from doing business in foreign currencies. For those currencies that are not
readily convertible, our ability to hedge our exposure is limited because
financial hedge instruments for those currencies are nonexistent or limited. Our
ability to hedge is also limited because pricing of hedging instruments, where
they exist, is often volatile and not necessarily efficient.
In addition, the value of the derivative instruments could be
impacted by:
- adverse movements in foreign exchange rates;
- interest rates;
- commodity prices; or
- the value and time period of the derivative being different
than the exposures or cash flows being hedged.
Customers and Business
Exploration and Production Activity
Demand for our services and products depends on oil and natural gas
industry activity and expenditure levels that are directly affected by trends in
oil and natural gas prices. A prolonged downturn in oil and gas prices could
have a material adverse effect on our consolidated results of operations and
consolidated financial condition.
Demand for our products and services is particularly sensitive to the
level of development, production and exploration activity of, and the
corresponding capital spending by, oil and natural gas companies, including
national oil companies. Prices for oil and natural gas are subject to large
fluctuations in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of other factors that
are beyond our control. Any prolonged reduction in oil and natural gas prices
will depress the level of exploration, development and production activity,
often reflected as changes in rig counts. Lower levels of activity result in a
corresponding decline in the demand for our oil and natural gas well services
and products that could have a material adverse effect on our revenues and
profitability. Factors affecting the prices of oil and natural gas include:
- governmental regulations;
- global weather conditions;
- worldwide political, military and economic conditions,
including the ability of OPEC to set and maintain production
levels and prices for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding the exploration for and
production and development of their oil and natural gas
reserves;
58
- the cost of producing and delivering oil and gas; and
- the level of demand for oil and natural gas, especially demand
for natural gas in the United States.
Historically, the markets for oil and gas have been volatile and are
likely to continue to be volatile in the future. Spending on exploration and
production activities and capital expenditures for refining and distribution
facilities by large oil and gas companies have a significant impact on the
activity levels of our businesses.
Barracuda-Caratinga Project
See Note 3 to the consolidated financial statements and "Fixed-Price
Engineering and Construction Projects" below for a discussion of the risk
factors associated with this project.
Governmental and Capital Spending
Our business is directly affected by changes in governmental spending
and capital expenditures by our customers. Some of the changes that may
materially and adversely affect us include:
- a decrease in the magnitude of governmental spending and
outsourcing for military and logistical support of the type
that we provide. For example, the current level of government
services being provided in the Middle East may not continue
for an extended period of time;
- an increase in the magnitude of governmental spending and
outsourcing for military and logistical support, which can
materially and adversely affect our liquidity needs as a
result of additional or continued working capital requirements
to support this work;
- a decrease in capital spending by governments for
infrastructure projects of the type that we undertake;
- the consolidation of our customers, which has (1) caused
customers to reduce their capital spending, which has in turn
reduced the demand for our services and products, and (2)
resulted in customer personnel changes, which in turn affects
the timing of contract negotiations and settlements of claims
and claim negotiations with engineering and construction
customers on cost variances and change orders on major
projects;
- adverse developments in the business and operations of our
customers in the oil and gas industry, including write-downs
of reserves and reductions in capital spending for
exploration, development, production, processing, refining,
and pipeline delivery networks; and
- ability of our customers to timely pay the amounts due us.
Acquisitions, Dispositions, Investments and Joint Ventures
We may actively seek opportunities to maximize efficiency and value
through various transactions, including purchases or sales of assets,
businesses, investments or contractual arrangements or joint ventures. These
transactions would be intended to result in the realization of savings, the
creation of efficiencies, the generation of cash or income or the reduction of
risk. Acquisition transactions may be financed by additional borrowings or by
the issuance of our common stock. These transactions may also affect our
consolidated results of operations.
These transactions also involve risks and we cannot assure you that:
- any acquisitions would result in an increase in income;
- any acquisitions would be successfully integrated into our
operations;
- any disposition would not result in decreased earnings,
revenue or cash flow;
- any dispositions, investments, acquisitions or integrations
would not divert management resources; or
- any dispositions, investments, acquisitions or integrations
would not have a material adverse effect on our results
of operations or financial condition.
We conduct some operations through joint ventures, where control may be
shared with unaffiliated third parties. As with any joint venture arrangement,
differences in views among the joint venture participants may result in delayed
decisions or in failures to agree on major issues. We also cannot control the
59
actions of our joint venture partners, including any nonperformance, default or
bankruptcy of our joint venture partners. These factors could potentially
materially and adversely affect the business and operations of the joint venture
and, in turn, our business and operations.
Fixed-Price Engineering and Construction Projects
We contract to provide services either on a time-and-materials basis or
on a fixed-price basis, with fixed-price (or lump sum) contracts accounting for
approximately 24% of KBR's revenues for the year ended December 31, 2003 and 47%
of KBR's revenues for the year ended December 31, 2002. We bear the risk of cost
over-runs, operating cost inflation, labor availability and productivity and
supplier and subcontractor pricing and performance in connection with projects
covered by fixed-price contracts. Our failure to estimate accurately the
resources and time required for a fixed-price project, or our failure to
complete our contractual obligations within the time frame and costs committed,
could have a material adverse effect on our business, results of operations and
financial condition.
Environmental Requirements
Our businesses are subject to a variety of environmental laws, rules
and regulations in the United States and other countries, including those
covering hazardous materials and requiring emission performance standards for
facilities. For example, our well service operations routinely involve the
handling of significant amounts of waste materials, some of which are classified
as hazardous substances. Environmental requirements include, for example, those
concerning:
- the containment and disposal of hazardous substances, oilfield
waste and other waste materials;
- the use of underground storage tanks; and
- the use of underground injection wells.
Environmental requirements generally are becoming increasingly strict.
Sanctions for failure to comply with these requirements, many of which may be
applied retroactively, may include:
- administrative, civil and criminal penalties;
- revocation of permits; and
- corrective action orders, including orders to investigate
and/or clean up contamination.
Failure on our part to comply with applicable environmental
requirements could have a material adverse effect on our consolidated financial
condition. We are also exposed to costs arising from environmental compliance,
including compliance with changes in or expansion of environmental requirements,
such as the potential regulation in the United States of our Energy Services
Group's hydraulic fracturing services and products as underground injection,
which could have a material adverse effect on our business, financial condition,
operating results or cash flows.
We are exposed to claims under environmental requirements and from time
to time such claims have been made against us. In the United States,
environmental requirements and regulations typically impose strict liability.
Strict liability means that in some situations we could be exposed to liability
for cleanup costs, natural resource damages and other damages as a result of our
conduct that was lawful at the time it occurred or the conduct of prior
operators or other third parties. Liability for damages arising as a result of
environmental laws could be substantial and could have a material adverse effect
on our consolidated results of operations.
Changes in environmental requirements may negatively impact demand for
our services. For example, activity by oil and natural gas exploration and
production may decline as a result of environmental requirements (including land
use policies responsive to environmental concerns). Such a decline, in turn,
could have a material adverse effect on us.
Intellectual Property Rights
We rely on a variety of intellectual property rights that we use in our
products and services. We may not be able to successfully preserve these
intellectual property rights in the future and these rights could be
invalidated, circumvented or challenged. In addition, the laws of some foreign
countries in which our products and services may be sold do not protect
intellectual property rights to the same extent as the laws of the United
60
States. Our failure to protect our proprietary information and any successful
intellectual property challenges or infringement proceedings against us could
materially and adversely affect our competitive position.
Technology
The market for our products and services is characterized by continual
technological developments to provide better and more reliable performance and
services. If we are not able to design, develop and produce commercially
competitive products and to implement commercially competitive services in a
timely manner in response to changes in technology, our business and revenues
could be materially and adversely affected and the value of our intellectual
property may be reduced. Likewise, if our proprietary technologies, equipment
and facilities or work processes become obsolete, we may no longer be
competitive and our business and revenues could be materially and adversely
affected.
Systems
Our business could be materially and adversely affected by problems
encountered in the installation of a new financial system to replace the current
systems for our Engineering and Construction Group.
Technical Personnel
Many of the services that we provide and the products that we sell are
complex and highly engineered and often must perform or be performed in harsh
conditions. We believe that our success depends upon our ability to employ and
retain technical personnel with the ability to design, utilize and enhance these
products and services. In addition, our ability to expand our operations depends
in part on our ability to increase our skilled labor force. The demand for
skilled workers is high and the supply is limited. A significant increase in the
wages paid by competing employers could result in a reduction of our skilled
labor force, increases in the wage rates that we must pay or both. If either of
these events were to occur, our cost structure could increase, our margins could
decrease and our growth potential could be impaired.
Weather
Our business could be materially and adversely affected by severe
weather, particularly in the Gulf of Mexico where we have significant
operations. Repercussions of severe weather conditions may include:
- evacuation of personnel and curtailment of services;
- weather related damage to offshore drilling rigs resulting in
suspension of operations;
- weather related damage to our facilities;
- inability to deliver materials to jobsites in accordance with
contract schedules; and
- loss of productivity.
Because demand for natural gas in the United States drives a disproportionate
amount of our Energy Services Group's United States business, warmer than normal
winters in the United States are detrimental to the demand for our services to
gas producers.
61
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 of America
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.
Our 2003 financial statements have been audited by the independent
accounting firm, KPMG LLP. KPMG LLP 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. Halliburton's
Audit Committee of the Board of Directors consists of directors who, in the
business judgment of the Board of Directors, are independent under the New York
Stock Exchange listing standards. The Board of Directors, operating through its
Audit Committee, provides oversight to the financial reporting process. Integral
to this process is the Audit Committee's review and discussion with management
and the external auditors of the quarterly and annual financial statements prior
to their respective filing.
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:
- a documented organizational structure and division of
responsibility;
- established policies and procedures, including a code of
conduct to foster a strong ethical climate which is
communicated throughout the company; and
- 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 Audit Committee.
Corrective actions are taken to address control deficiencies and other
opportunities for improving the system as they are identified. In accordance
with the Securities and Exchange Commission's rules to improve the reliability
of financial statements, our 2003 interim financial statements were reviewed by
KPMG LLP.
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, 2003, our system of internal control over financial
reporting met those criteria.
HALLIBURTON COMPANY
by
/s/ DAVID J. LESAR /s/ C. CHRISTOPHER GAUT
----------------------------- ------------------------------
David J. Lesar C. Christopher Gaut
Chairman of the Board, Executive Vice President and
President, and Chief Financial Officer
Chief Executive Officer
62
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF HALLIBURTON COMPANY:
We have audited the accompanying consolidated balance sheets of Halliburton
Company and subsidiaries as of December 31, 2003 and December 31, 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
accompanying 2001 consolidated financial statements of Halliburton Company and
subsidiaries were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those consolidated financial
statements, before the restatement described in Note 5 to the consolidated
financial statements and before the revision related to goodwill and other
intangibles described in Note 1 to the consolidated financial statements, in
their report dated January 23, 2002 (except with respect to matters discussed in
Note 9 to those financial statements, as to which the date was February 21,
2002).
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Halliburton Company
and subsidiaries as of December 31, 2003 and December 31, 2002, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
As described in Note 5 to the consolidated financial statements, the Company
changed the composition of its reportable segments in 2003. The amounts in the
2002 and 2001 consolidated financial statements related to reportable segments
have been restated to conform to the 2003 composition of reportable segments.
As discussed above, the 2001 consolidated financial statements of Halliburton
Company and subsidiaries were audited by other auditors who have ceased
operations. As described above, the Company changed the composition of its
reportable segments in 2003, and the amounts in the 2001 consolidated financial
statements relating to reportable segments have been restated. We audited the
adjustments that were applied to restate the disclosures for reportable segments
reflected in the 2001 consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. Also, as described
in Note 1, these consolidated financial statements have been revised to include
the transitional disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by
the Company as of January 1, 2002. In our opinion, the disclosures for 2001 in
Note 1 are appropriate. However, we were not engaged to audit, review, or apply
any procedures to the 2001 consolidated financial statements of Halliburton
Company and subsidiaries other than with respect to such adjustments and
revisions and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.
/s/ KPMG LLP
- --------------------
KPMG LLP
Houston, Texas
February 18, 2004
63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
This report is a copy of a previously issued report, the predecessor auditor has
not reissued this report, the previously issued report refers to financial
statements not physically included in this document, and the prior-period
financial statements have been revised or restated.
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF HALLIBURTON COMPANY:
We have audited the accompanying consolidated balance sheets of Halliburton
Company (a Delaware corporation) and subsidiary companies as of December 31,
2001 and 2000, and the related consolidated statements of income, cash flows,
and shareholders' equity for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Halliburton Company and
subsidiary companies as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Arthur Andersen LLP
Dallas, Texas
January 23, 2002 (Except with respect to certain matters discussed in Note 9, as
to which the date is February 21, 2002.)
64
HALLIBURTON COMPANY
Consolidated Statements of Operations
(Millions of dollars and shares except per share data)
Years ended December 31
-------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 14,383 $ 10,658 $ 10,940
Product sales 1,863 1,840 1,999
Equity in earnings of unconsolidated affiliates, net 25 74 107
-----------------------------------------------------------------------------------------------------------------
Total revenues 16,271 12,572 13,046
-----------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services 13,589 10,737 9,831
Cost of sales 1,679 1,642 1,744
General and administrative 330 335 387
Gain on sale of business assets (47) (30) -
-----------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 15,551 12,684 11,962
-----------------------------------------------------------------------------------------------------------------
Operating income (loss) 720 (112) 1,084
Interest expense (139) (113) (147)
Interest income 30 32 27
Foreign currency losses, net - (25) (10)
Other, net 1 (10) -
-----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes,
minority interest, and change in accounting principle 612 (228) 954
Provision for income taxes (234) (80) (384)
Minority interest in net income of subsidiaries (39) (38) (19)
-----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before change in
accounting principle 339 (346) 551
-------------------------------------------------------------------------------- --------------------------------
Discontinued operations:
Loss from discontinued operations, net of tax
(provision) benefit of $(6), $154, and $20 (1,151) (652) (42)
Gain on disposal of discontinued operations, net of tax
provision of $199 - - 299
-----------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations, net (1,151) (652) 257
-----------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle, net of
tax benefit of $5, $0 and $0 (8) - 1
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (820) $ (998) $ 809
=================================================================================================================
Basic income (loss) per share:
Income (loss) from continuing operations before change
in accounting principle $ 0.78 $ (0.80) $ 1.29
Loss from discontinued operations, net (2.65) (1.51) (0.10)
Gain on disposal of discontinued operations, net - - 0.70
Cumulative effect of change in accounting principle, net (0.02) - -
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.89) $ (2.31) $ 1.89
=================================================================================================================
Diluted income (loss) per share:
Income (loss) from continuing operations before change
in accounting principle $ 0.78 $ (0.80) $ 1.28
Loss from discontinued operations, net (2.64) (1.51) (0.10)
Gain on disposal of discontinued operations, net - - 0.70
Cumulative effect of change in accounting principle, net (0.02) - -
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.88) $ (2.31) $ 1.88
=================================================================================================================
Basic weighted average common shares outstanding 434 432 428
Diluted weighted average common shares outstanding 437 432 430
=================================================================================================================
See notes to consolidated financial statements.
65
HALLIBURTON COMPANY
Consolidated Balance Sheets
(Millions of dollars and shares except per share data)
December 31
-------------------------
2003 2002
-----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 1,815 $ 1,107
Receivables:
Notes and accounts receivable (less allowance for bad debts of $175 and $157) 3,005 2,533
Unbilled work on uncompleted contracts 1,760 724
-----------------------------------------------------------------------------------------------------------
Total receivables 4,765 3,257
Inventories 695 734
Current deferred income taxes 188 200
Other current assets 456 262
-----------------------------------------------------------------------------------------------------------
Total current assets 7,919 5,560
Net property, plant and equipment 2,526 2,629
Equity in and advances to related companies 579 413
Goodwill 670 723
Noncurrent deferred income taxes 738 607
Insurance for asbestos and silica related liabilities 2,038 2,059
Other assets 993 853
-----------------------------------------------------------------------------------------------------------
Total assets $ 15,463 $ 12,844
===========================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 18 $ 49
Current maturities of long-term debt 22 295
Accounts payable 1,776 1,077
Current asbestos and silica related liabilities 2,507 -
Accrued employee compensation and benefits 400 370
Advance billings on uncompleted contracts 741 641
Deferred revenues 104 100
Income taxes payable 236 148
Other current liabilities 738 592
-----------------------------------------------------------------------------------------------------------
Total current liabilities 6,542 3,272
Long-term debt 3,415 1,181
Employee compensation and benefits 801 756
Asbestos and silica related liabilities 1,579 3,425
Other liabilities 479 581
-----------------------------------------------------------------------------------------------------------
Total liabilities 12,816 9,215
-----------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 100 71
Shareholders' equity:
Common shares, par value $2.50 per share - authorized 600 shares,
issued 457 and 456 shares 1,142 1,141
Paid-in capital in excess of par value 273 293
Deferred compensation (64) (75)
Accumulated other comprehensive income (298) (281)
Retained earnings 2,071 3,110
-----------------------------------------------------------------------------------------------------------
3,124 4,188
Less 18 and 20 shares of treasury stock, at cost 577 630
-----------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,547 3,558
-----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 15,463 $ 12,844
===========================================================================================================
See notes to consolidated financial statements.
66
HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
(Millions of dollars)
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 3,558 $ 4,752 $ 3,928
Dividends and other transactions with shareholders (174) (151) (37)
Comprehensive income (loss):
Net income (loss) (820) (998) 809
Cumulative translation adjustment 43 69 (32)
Realization of losses included in net income 15 15 102
- --------------------------------------------------------------------------------------------------------------
Net cumulative translation adjustment 58 84 70
Pension liability adjustments (88) (130) (15)
Unrealized gains (losses) on investments and
derivatives 13 1 (3)
- --------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) (837) (1,043) 861
- --------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 2,547 $ 3,558 $ 4,752
==============================================================================================================
See notes to consolidated financial statements.
67
HALLIBURTON COMPANY
Consolidated Statements of Cash Flows
(Millions of dollars)
Years ended December 31
-----------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (820) $ (998) $ 809
Adjustments to reconcile net income (loss) to net cash from operations:
Loss (income) from discontinued operations 1,151 652 (257)
Asbestos and silica charges not included in discontinued - 564 11
operations, net
Depreciation, depletion and amortization 518 505 531
Provision (benefit) for deferred income taxes, including $27,
$(133) and $(35) related to discontinued operations (86) (151) 26
Distributions from related companies, net of equity in (earnings) 13 3 8
losses
Change in accounting principle, net 8 - (1)
Gain on sale of assets (52) (25) -
Asbestos and silica liability payment prior to Chapter 11 filing (311) - -
Other changes:
Receivables and unbilled work on uncompleted contracts (1,442) 675 (199)
Sale (reduction) of receivables in securitization program (180) 180 -
Inventories 7 62 (91)
Accounts payable 676 71 118
Other (257) 24 74
- ----------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities (775) 1,562 1,029
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (515) (764) (797)
Sales of property, plant and equipment 107 266 120
Acquisitions of businesses, net of cash acquired - - (220)
Dispositions of businesses, net of cash disposed 224 170 61
Proceeds from sale of securities 57 62 -
Investments - restricted cash (18) (187) 4
Other investing activities (51) (20) (26)
- ----------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities (196) (473) (858)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings 2,192 66 425
Payments on long-term borrowings (296) (81) (13)
Repayments of short-term debt, net of borrowings (32) (2) (1,528)
Payments of dividends to shareholders (219) (219) (215)
Other financing activities (9) (12) (24)
- ----------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities 1,636 (248) (1,355)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 43 (24) (20)
Net cash flows from discontinued operations, including $1.27 billion
proceeds from the Dresser Equipment Group sale - - 1,263
- ----------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 708 817 59
Cash and equivalents at beginning of year 1,107 290 231
- ----------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 1,815 $ 1,107 $ 290
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash payments during the year for:
Interest $ 114 $ 104 $ 132
Income taxes $ 173 $ 94 $ 382
================================================================================================================
See notes to consolidated financial statements.
68
HALLIBURTON COMPANY
Notes to Consolidated Financial Statements
Note 1. Description of Company and Significant Accounting Policies
Description of Company. Halliburton Company's predecessor was
established in 1919 and incorporated under the laws of the State of Delaware in
1924. We are one of the world's largest oilfield services companies and a
leading provider of engineering and construction services. We have five business
segments that are organized around how we manage our business: Drilling and
Formation Evaluation, Fluids, Production Optimization and Landmark and Other
Energy Services, collectively, the Energy Services Group; and the Engineering
and Construction Group, known as KBR. Through our Energy Services Group, we
provide a comprehensive range of discrete and integrated products and services
for the exploration, development and production of oil and gas. We serve major
national and independent oil and gas companies throughout the world. Our
Engineering and Construction Group provides a wide range of services to energy
and industrial customers and governmental entities worldwide.
Use of estimates. Our financial statements are prepared in conformity
with accounting principles generally accepted in the United States, requiring us
to make estimates and assumptions that affect:
- the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements; and
- the reported amounts of revenues and expenses during the
reporting period.
Ultimate results could differ from those estimates.
Basis of presentation. The consolidated financial statements include
the accounts of our company and all of our subsidiaries in which we own greater
than 50% interest or control. All material intercompany accounts and
transactions are eliminated. Investments in companies in which we own a 50%
interest or less and have a significant influence are accounted for using the
equity method, and if we do not have significant influence we use the cost
method. The consolidated financial statements also include the accounts of all
of our subsidiaries currently in Chapter 11 proceedings.
Prior year amounts have been reclassified to conform to the current
year presentation.
Pre-packaged Chapter 11 proceedings. DII Industries, LLC, Kellogg
Brown & Root, Inc. and our other affected subsidiaries filed Chapter 11
proceedings on December 16, 2003 in bankruptcy court in Pittsburgh,
Pennsylvania. With the filing of the Chapter 11 proceedings, all asbestos and
silica personal injury claims and related lawsuits against Halliburton and our
affected subsidiaries have been stayed. See Note 11 and Note 12 for a more
detailed discussion.
The proposed plan of reorganization, which is consistent with the
definitive settlement agreements reached with our asbestos and silica personal
injury claimants in early 2003, provides that, if and when an order confirming
the proposed plan of reorganization becomes final and non-appealable, in
addition to the $311 million paid to claimants in December 2003, the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
- up to approximately $2.5 billion in cash;
- 59.5 million shares of Halliburton common stock;
- notes currently valued at approximately $52 million; and
- insurance proceeds, if any, between $2.3 billion and $3.0
billion received by DII Industries and Kellogg Brown & Root.
Upon confirmation of the plan of reorganization, current and future
asbestos and silica personal injury claims against Halliburton and its
subsidiaries will be channeled into trusts established for the benefit of
claimants, thus releasing Halliburton and its affiliates from those claims.
Revenue recognition. We generally recognize revenues as services are
rendered or products are shipped. Usually the date of shipment corresponds to
the date upon which the customer takes title to the product and assumes all
risks and rewards of ownership. The distinction between services and product
sales is based upon the overall activity of the particular business operation.
Training and consulting service revenues are recognized as the services are
69
performed. As a result of our adoption of Emerging Issues Task Force Issue No.
00-21 (EITF No. 00-21), "Revenue Arrangements with Multiple Deliverables," for
contracts entered into after June 30, 2003 that contain performance awards, such
award fees are recognized when they are awarded by our customer. For contracts
entered into prior to June 30, 2003, these award fees are recognized as services
are performed based on our estimate of the amount to be awarded. Revenue
recognition for specialized products and services is as follows:
Engineering and construction contracts. Revenues from engineering and
construction contracts are reported on the percentage-of-completion method of
accounting. Progress is generally based upon physical progress, man-hours or
costs incurred, depending on the type of job. All known or anticipated losses on
contracts are provided for when they become evident. 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.
Accounting for government contracts. Most of the services provided to
the United States government are governed by cost-reimbursable contracts.
Generally, these contracts contain both a base fee (a guaranteed percentage
applied to our estimated costs to complete the work adjusted for general,
administrative and overhead costs) and a maximum award fee (subject to our
customer's discretion and tied to the specific performance measures defined in
the contract). The general, administrative and overhead fees are estimated
periodically in accordance with government contract accounting regulations and
may change based on actual costs incurred or based upon the volume of work
performed. Award fees are generally evaluated and granted by our customer
periodically. Similar to many cost-reimbursable contracts, these government
contracts are typically subject to audit and adjustment by our customer.
Services under our RIO, LogCAP and Balkans support contracts are examples of
these types of arrangements.
For these contracts, base fee revenues are recorded at the time
services are performed based upon the amounts we expect to realize upon
completion of the contracts. Revenues may be adjusted for our estimate of costs
that may be categorized as disputed or unallowable as a result of cost overruns
or the audit process.
For contracts entered into prior to June 30, 2003, all award fees are
recognized during the term of the contract based on our estimate of amounts to
be awarded. Our estimates are often based on our past award experience for
similar types of work. As a result of our adoption of EITF 00-21 for contracts
entered into subsequent to June 30, 2003, we will not recognize award fees for
the services portion of the contract based on estimates. Instead, they will be
recognized only when awarded by the customer. Award fees on the construction
portion of the contract will still be recognized based on estimates in
accordance with SOP 81-1. There were no government contracts affected by EITF
00-21 in 2003.
Software sales. Software sales of perpetual software licenses, net of
deferred maintenance fees, are recorded as revenue upon shipment. Sales of use
licenses are recognized as revenue over the license period. Post-contract
customer support agreements are recorded as deferred revenues and recognized as
revenue ratably over the contract period of generally one year's duration.
Research and development. Research and development expenses are charged
to income as incurred. Research and development expenses were $221 million in
2003 and $233 million in 2002 and 2001.
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 $17 million in
2003, $11 million in 2002 and $19 million in 2001. Amortization expense of
software development costs was $17 million for 2003, $19 million for 2002 and
$16 million for 2001. Once the software is ready for release, amortization of
the software development costs begins. Capitalized software development costs
are amortized over periods which do not exceed five years.
70
Cash equivalents. We consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market.
Cost represents invoice or production cost for new items and original cost less
allowance for condition for used material returned to stock. Production cost
includes material, labor and manufacturing overhead. Some domestic manufacturing
and field service finished products and parts inventories for drill bits,
completion products and bulk materials are recorded using the last-in, first-out
method. The cost of over 90% of the remaining inventory is recorded on the
average cost method, with the remainder on the first-in, first-out method.
Property, plant and equipment. Other than those assets that have been
written down to their fair values due to impairment, property, plant and
equipment are reported at cost less accumulated depreciation, which is generally
provided on the straight-line method over the estimated useful lives of the
assets. Some assets are depreciated on accelerated methods. Accelerated
depreciation methods are also used for tax purposes, wherever permitted. Upon
sale or retirement of an asset, the related costs and accumulated depreciation
are removed from the accounts and any gain or loss is recognized. We follow the
successful efforts method of accounting for oil and gas properties.
Maintenance and repairs. Expenditures for maintenance and repairs are
expensed; expenditures for renewals and improvements are generally capitalized.
We use the accrue-in-advance method of accounting for major maintenance and
repair costs of marine vessel dry docking expense and major aircraft overhauls
and repairs. Under this method we anticipate the need for major maintenance and
repairs and charge the estimated expense to operations before the actual work is
performed. At the time the work is performed, the actual cost incurred is
charged against the amounts that were previously accrued with any deficiency or
excess charged or credited to operating expense.
Goodwill and other intangibles. Prior to 2002, for acquisitions that
occurred before July 1, 2001, goodwill was amortized on a straight-line basis
over periods not exceeding 40 years. Effective January 1, 2002, we ceased the
amortization of goodwill. The reported amounts of goodwill for each reporting
unit (segment) and intangible assets are reviewed for impairment on an annual
basis and more frequently when negative conditions such as significant current
or projected operating losses exist. The annual impairment test for goodwill is
a two-step process and involves comparing the estimated fair value of each
reporting unit to the reporting unit's carrying value, including goodwill. If
the fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered impaired, and the second step of the impairment
test is unnecessary. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test would be performed to
measure the amount of impairment loss to be recorded, if any. Our annual
impairment tests resulted in no goodwill or intangible asset impairment.
In 2001, we recorded $42 million pretax ($38 million after-tax), or
$0.09 per basic and diluted earnings per share, in goodwill amortization. If we
had not amortized goodwill during 2001, our net income would have been $847
million, our basic earnings per share would have been $1.98 and our diluted
earnings per share would have been $1.97.
Evaluating impairment of long-lived assets. When events or changes in
circumstances indicate that long-lived assets other than goodwill may be
impaired, an evaluation is performed. For an asset classified as held for use,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to fair
value is required. When an asset is classified as held for sale, the asset's
book value is evaluated and adjusted to the lower of its carrying amount or fair
value less cost to sell. In addition, depreciation (amortization) is ceased
while it is classified as held for sale.
Income taxes. Deferred tax assets and liabilities are recognized for
the expected future tax consequences of events that have been recognized in the
financial statements or tax returns. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these items will not be
realized.
71
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that we will realize the benefits of these
deductible differences, net of the existing valuation allowances.
Derivative instruments. At times, we enter into derivative financial
transactions to hedge existing or projected exposures to changing foreign
currency exchange rates, interest rates and commodity prices. We do not enter
into derivative transactions for speculative or trading purposes. We recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value and reflected immediately through the
results of operations. If the derivative is designated as a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives are either
offset against:
- the change in fair value of the hedged assets, liabilities or
firm commitments through earnings; or
- recognized in other comprehensive income until the hedged
item is recognized in earnings.
The ineffective portion of a derivative's change in fair value is
immediately recognized in earnings. Recognized gains or losses on derivatives
entered into to manage foreign exchange risk are included in foreign currency
gains and losses in the consolidated statements of income. Gains or losses on
interest rate derivatives are included in interest expense and gains or losses
on commodity derivatives are included in operating income.
Foreign currency translation. Foreign entities whose functional
currency is the United States dollar translate monetary assets and liabilities
at year-end exchange rates, and non-monetary items are translated at historical
rates. Income and expense accounts are translated at the average rates in effect
during the year, except for depreciation, cost of product sales and revenues,
and expenses associated with non-monetary balance sheet accounts which are
translated at historical rates. Gains or losses from changes in exchange rates
are recognized in consolidated income in the year of occurrence. Foreign
entities whose functional currency is not the United States dollar 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 as cumulative translation
adjustments.
Loss contingencies. We accrue for loss contingencies based upon our
best estimates in accordance with Statement of Financial Accounting Standards
(SFAS) No. 5, "Accounting for Contingencies". See Note 13 for discussion of our
significant loss contingencies.
Stock-based compensation. At December 31, 2003, we have six stock-based
employee compensation plans. We account for these plans under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No cost
for stock options granted is reflected in net income, as all options granted
under our plans have an exercise price equal to the market value of the
underlying common stock on the date of grant. In addition, no cost for the
Employee Stock Purchase Plan is reflected in net income because it is not
considered a compensatory plan.
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:
72
Assumptions
--------------------------------------------------------------------- Weighted Average
Risk-Free Expected Expected Expected Fair Value of
Interest Rate Dividend Yield Life (in years) Volatility Options Granted
- ------------------------------------------------------------------------------------------------------
2003 3.2% 1.9% 5 59% $ 12.37
2002 2.9% 2.7% 5 63% $ 6.89
2001 4.5% 2.3% 5 58% $ 19.11
======================================================================================================
The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
Years ended December 31
-----------------------------------------------
Millions of dollars except per share data 2003 2002 2001
- --------------------------------------------------------------------------------------------
Net income (loss), as reported $ (820) $ (998) $ 809
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (30) (26) (42)
- --------------------------------------------------------------------------------------------
Net income (loss), pro forma $ (850) $ (1,024) $ 767
============================================================================================
Basic income (loss) per share:
As reported $ (1.89) $ (2.31) $ 1.89
Pro forma $ (1.96) $ (2.37) $ 1.79
Diluted income (loss) per share:
As reported $ (1.88) $ (2.31) $ 1.88
Pro forma $ (1.95) $ (2.37) $ 1.77
============================================================================================
Note 2. Long-Term Construction Contracts
Revenues from engineering and construction contracts are reported on
the percentage-of-completion method of accounting using measurements of progress
toward completion appropriate for the work performed. Commonly used measurements
are physical progress, man-hours and costs incurred.
Billing practices for engineering and construction projects are
governed by the contract terms of each project based upon costs incurred,
achievement of milestones or pre-agreed schedules. Billings do not necessarily
correlate with revenues recognized under the percentage-of-completion method of
accounting. Billings in excess of recognized revenues are recorded in "Advance
billings on uncompleted contracts". When billings are less than recognized
revenues, the difference is recorded in "Unbilled work on uncompleted
contracts". With the exception of claims and change orders which are in the
process of being negotiated with customers, unbilled work is usually billed
during normal billing processes following achievement of the contractual
requirements.
Recording of profits and losses on long-term contracts requires an
estimate of the total profit or loss over the life of each contract. This
estimate requires consideration of contract revenue, change orders and claims
reduced by costs incurred and estimated costs to complete. Anticipated losses on
contracts are recorded in full in the period they become evident. Except where
we, because of uncertainties in the estimation of costs on a limited number of
projects, deem it prudent to defer income recognition, we do not delay income
recognition until projects have reached a specified percentage of completion.
Profits are recorded from the commencement date of the contract based upon the
total estimated contract profit multiplied by the current percentage complete
for the contract.
73
When calculating the amount of total profit or loss on a long-term
contract, we include unapproved claims as revenue when the collection is deemed
probable based upon the four criteria for recognizing unapproved claims under
the American Institute of Certified Public Accountants Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Including unapproved claims in this calculation
increases the operating income (or reduces the operating loss) that would
otherwise be recorded without consideration of the probable unapproved claims.
Probable unapproved claims are recorded to the extent of costs incurred and
include no profit element. In all cases, the probable unapproved claims included
in determining contract profit or loss are less than the actual claim that will
be or has been presented to the customer.
When recording the revenue and the associated unbilled receivable for
unapproved claims, we only accrue an amount equal to the costs incurred related
to probable unapproved claims. Therefore, the difference between the probable
unapproved claims included in determining contract profit or loss and the
probable unapproved claims recorded in unbilled work on uncompleted contracts
relates to forecasted costs which have not yet been incurred. The amounts
included in determining the profit or loss on contracts and the amounts booked
to "Unbilled work on uncompleted contracts" for each period are as follows:
Probable
Total Probable Unapproved Claims
Unapproved Claims Accrued Revenue
(included in determining (unbilled work on
contract profit or loss) uncompleted contracts)
--------------------------------------- --------------------------------------
Millions of dollars 2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Beginning balance $ 279 $ 137 $ 93 $ 210 $ 102 $ 92
Additions 63 158 92 61 105 58
Costs incurred during
period - - - 63 19 -
Settled/Other (109) (16) (48) (109) (16) (48)
- ------------------------------------------------------------------------------------------------------------
Ending balance $ 233 $ 279 $ 137 $ 225 $ 210 $ 102
============================================================================================================
The probable unapproved claims recorded in 2003 relate to seven
contracts, most of which are complete or substantially complete. We are actively
engaged in claims negotiation with our customers. The largest claim relates to
the Barracuda-Caratinga contract which was approximately 83% complete at
December 31, 2003. There are probable unapproved claims that will likely not be
settled within one year totaling $204 million at December 31, 2003 included in
the table above that are reflected as "Other assets" on the consolidated balance
sheet. All other probable unapproved claims included in the table above have
been recorded to "Unbilled work on uncompleted contracts" included in the "Total
receivables" amount on the consolidated balance sheet. In addition, we are
negotiating change orders to the contract scope where we have agreed upon the
scope of work but not the price. These have a total value of $97 million at
December 31, 2003 of which $78 million is unlikely to be settled within one
year.
Our unconsolidated related companies include probable unapproved
claims as revenue to determine the amount of profit or loss for their contracts.
Amounts for unapproved claims are included in "Equity in and advances to related
companies" and totaled $10 million at December 31, 2003 and $9 million at
December 31, 2002. In addition, our unconsolidated related companies are
negotiating change orders to the contract scope where we have agreed upon the
scope of work but not the price. Our share is valued at $59 million at December
31, 2003 of which $36 million is unlikely to be settled within one year.
Note 3. Barracuda-Caratinga Project
In June 2000, KBR entered into a contract with Barracuda & Caratinga
Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga
crude oil fields, which are located off the coast of Brazil. The construction
manager and owner's representative is Petroleo Brasilero SA (Petrobras), the
74
Brazilian national oil company. When completed, the project will consist of two
converted supertankers, Barracuda and Caratinga, which will be used as floating
production, storage and offloading units, commonly referred to as FPSOs, 32
hydrocarbon production wells, 22 water injection wells and all sub-sea flow
lines, umbilicals and risers necessary to connect the underwater wells to the
FPSOs. The project is significantly behind the original schedule due in large
part to change orders from the project owner and is in a financial loss
position. As a result, we have asserted numerous claims against the project
owner and are subject to potential liquidated damages. We continue to engage in
discussions with the project owner in an attempt to settle issues relating to
additional claims, completion dates and liquidated damages.
Our performance under the contract is secured by:
- performance letters of credit, which together have an
available credit of approximately $266 million as of December
31, 2003 and which will continue to be adjusted to represent
approximately 10% of the contract amount, as amended to date
by change orders;
- retainage letters of credit, which together have available
credit of approximately $160 million as of December 31, 2003
and which will increase in order to continue to represent 10%
of the cumulative cash amounts paid to us; and
- a guarantee of Kellogg Brown & Root's performance under the
agreement by Halliburton Company in favor of the project
owner.
In November 2003 we entered into agreements with the project owner in
which the project owner agreed to:
- pay $69 million to settle a portion of our claims, thereby
reducing the amount of probable unapproved claims to $114
million; and
- extend the original project completion dates and other
milestone dates, reducing our exposure to liquidated damages.
Accordingly, as of December 31, 2003:
- the project was approximately 83% complete;
- we have recorded an inception to date pretax loss of $355
million related to the project, of which $238 million was
recorded in 2003 and $117 million was recorded in 2002;
- the probable unapproved claims included in determining the
loss were $114 million; and
- we have an exposure to liquidated damages of up to ten percent
of the contract value. Based upon the current schedule
forecast, we would incur $96 million in liquidated damages if
our claim for additional time is not successful.
Unapproved Claims. We have asserted claims for compensation
substantially in excess of the $114 million of probable unapproved claims
recorded as noncurrent assets as of December 31, 2003, as well as claims for
additional time to complete the project before liquidated damages become
applicable. The project owner and Petrobras have asserted claims against us that
are in addition to the project owner's potential claims for liquidated damages.
In the November 2003 agreements, the parties have agreed to arbitrate these
remaining disputed claims. In addition, we have agreed to cap our financial
recovery to a maximum of $375 million, and the project owner and Petrobras have
agreed to cap their recovery to a maximum of $380 million plus liquidated
damages.
Liquidated Damages. The original completion date for the Barracuda
vessel was December 2003, and the original completion date for the Caratinga
vessel was April 2004. We expect that the Barracuda vessel will likely be
completed at least 16 months later than its original contract determination
date, and the Caratinga vessel will likely be completed at least 14 months later
than its original contract determination date. However, there can be no
assurance that further delays will not occur. In the event that any portion of
the delay is determined to be attributable to us and any phase of the project is
completed after the milestone dates specified in the contract, we could be
required to pay liquidated damages. These damages were initially calculated on
75
an escalating basis rising ultimately to approximately $1 million per day of
delay caused by us, subject to a total cap on liquidated damages of 10% of the
final contract amount (yielding a cap of approximately $272 million as of
December 31, 2003).
Under the November 2003 agreements, the project owner granted an
extension of time to the original completion dates and other milestone dates
that average approximately 12 months. In addition, the project owner agreed to
delay any attempt to assess the original liquidated damages against us for
project delays beyond 12 months and up to 18 months and delay any drawing of
letters of credit with respect to such liquidated damages until the earliest of
December 7, 2004, the completion of any arbitration proceedings or the
resolution of all claims between the project owner and us. Although the November
2003 agreements do not delay the drawing of letters of credit for liquidated
damages for delays beyond 18 months, our master letter of credit facility
(See Note 13) will provide funding for any such draw while it is in effect. The
November 2003 agreements also provide for a separate liquidated damages
calculation of $450,000 per day for each of the Barracuda and the Caratinga
vessels if delayed beyond 18 months from the original schedule. That amount is
subject to the total cap on liquidated damages of 10% of the final contract
amount. Based upon the November 2003 agreements and our most recent estimates of
project completion dates, which are April 2005 for the Barracuda vessel and May
2005 for the Caratinga vessel, we estimate that if we were to be completely
unsuccessful in our claims for additional time, we would be obligated to pay $96
million in liquidated damages. We have not accrued for this exposure because we
consider the imposition of such liquidated damages to be unlikely.
Value added taxes. On December 16, 2003, the State of Rio de Janeiro
issued a decree recognizing that Petrobras is entitled to a credit for the value
added taxes paid on the project. The decree also provided that value added taxes
that may have become due on the project but which had not yet been paid could be
paid in January 2004 without penalty or interest. In response to the decree, we
have entered into an agreement with Petrobras whereby Petrobras agreed to:
- directly pay the value added taxes due on all imports on the
project (including Petrobras' January 2004 payment of
approximately $150 million); and
- reimburse us for value added taxes paid on local purchases, of
which approximately $100 million will become due during 2004.
Since the credit to Petrobras for these value added taxes is on a delayed basis,
the issue of whether we must bear the cost of money for the period from payment
by Petrobras until receipt of the credit has not been determined.
The validity of the December 2003 decree has now been challenged in
court in Brazil. Our legal advisers in Brazil believe that the decree will be
upheld. If it is overturned or rescinded, or the Petrobras credits are lost for
any other reason not due to Petrobras, the issue of who must ultimately bear the
cost of the value added taxes will have to be determined based upon the law
prior to the December 2003 decree. We believe that the value added taxes are
reimbursable under the contract and prior law, but, until the December 2003
decree was issued, Petrobras and the project owner had been contesting the
reimbursability of up to $227 million of value added taxes. There can be no
assurance that we will not be required to pay all or a portion of these value
added taxes. In addition, penalties and interest of $40 million to $100 million
could be due if the December 2003 decree is invalidated. We have not accrued any
amounts for these taxes, penalties or interest.
Default provisions. Prior to the filing of the pre-packaged Chapter 11
proceedings in connection with the proposed settlement of our asbestos and
silica claims, we obtained a waiver from the project owner (with the approval of
the lenders financing the project) so that the filing did not constitute an
event of default under the contract. In addition, the project owner also
obtained a waiver from the lenders so that the Chapter 11 filing did not
constitute an event of default under the project owner's loan agreements with
the lenders. The waiver received by the project owner from the lender is subject
to certain conditions which have thus far been fulfilled. Included as a
condition is that the pre-packaged plan of reorganization be confirmed by the
bankruptcy court within 120 days of the filing of the Chapter 11 proceedings.
The currently scheduled hearing date for confirmation of the plan of
76
reorganization is not within the 120-day period. We understand that the project
owner is seeking and expects to receive, an extension of the 120-day period, but
can give no assurance that it will be granted. In the event that the conditions
do not continue to be fulfilled the lenders, among other things, could exercise
a right to suspend the project owner's use of advances made, and currently
escrowed, to fund the project. We believe it is unlikely that the lenders will
exercise any right to stop funding the project given the current status of the
project and the fact that a failure to pay may allow us to cease work on the
project without Petrobras having a readily available substitute contractor.
However, there can be no assurance that the lenders will continue to fund the
project.
In the event that we were determined to be in default under the
contract, and if the project was not completed by us as a result of such default
(i.e., our services are terminated as a result of such default), the project
owner may seek direct damages. Those damages could include completion costs in
excess of the contract price and interest on borrowed funds, but would exclude
consequential damages. The total damages could be up to $500 million plus the
return of up to $300 million in advance payments previously received by us to
the extent they have not been repaid. The original contract terms require
repayment of the $300 million in advance payments by crediting the last $350
million of our invoices related to the contract by that amount, but the November
2003 agreements delay the repayment of any of the $300 million in advance
payments until at least December 7, 2004. A termination of the contract by the
project owner could have a material adverse effect on our financial condition
and results of operations.
Cash flow considerations. The project owner has procured project
finance funding obligations from various lenders to finance the payments due to
us under the contract. The project owner currently has no other committed source
of funding on which we can necessarily rely. In addition, the project financing
includes borrowing capacity in excess of the original contract amount. However,
only $250 million of this additional borrowing capacity is reserved for
increases in the contract amount payable to us and our subcontractors.
Under the loan documents, the availability date for loan draws expired
December 1, 2003 and therefore, the project owner drew down all remaining
available funds on that date. As a condition to the draw down of the remaining
funds, the project owner was required to escrow the funds for the exclusive use
of paying project costs. The availability of the escrowed funds can be suspended
by the lenders if applicable conditions are not met. With limited exceptions,
these funds may not be paid to Petrobras or its subsidiary (which is funding the
drilling costs of the project) until all amounts due to us, including amounts
due for the claims, are liquidated and paid. While this potentially reduces the
risk that the funds would not be available for payment to us, we are not party
to the arrangement between the lenders and the project owner and can give no
assurance that there will be adequate funding to cover current or future claims
and change orders.
We have now begun to fund operating cash shortfalls on the project and
would be obligated to fund such shortages over the remaining project life in an
amount we currently estimate to be approximately $480 million. That funding
level assumes generally that neither we nor the project owner are successful in
recovering claims against the other and that no liquidated damages are imposed.
Under the same assumptions, except assuming that we recover unapproved claims in
the amounts currently recorded, the cash shortfall would be approximately $360
million. We have already funded approximately $85 million of such shortfall and
expect that our funded shortfall amount will increase to approximately $416
million by December 2004, of which approximately $225 million would be paid to
the project owner in December 2004 as part of the return of the $300 million in
advance payments. The remainder of the advance payments would be returned to the
project owner over the remaining life of the project after December 2004. There
can be no assurance that we will recover the amount of unapproved claims we have
recognized, or any amounts in excess of that amount.
77
Note 4. Acquisitions and Dispositions
Enventure and WellDynamics. In January 2004, Halliburton and Shell
Technology Ventures (Shell, an unrelated party) agreed to restructure two joint
venture companies, Enventure Global Technologies LLC (Enventure) and
WellDynamics B.V. (WellDynamics), in an effort to more closely align the
ventures with near-term priorities in the core businesses of the venture owners.
Enventure and WellDynamics were owned equally by Halliburton and Shell. Shell
acquired an additional 33.5% of Enventure, leaving us with 16.5% ownership in
return for enhanced and extended agreements and licenses with Shell for its
Poroflex(TM) expandable sand screens and a distribution agreement for its
Versaflex(TM) expandable liner hangers. Halliburton acquired an additional one
percent of WellDynamics from Shell, giving Halliburton 51% ownership and control
of day-to-day operations. In addition, Shell received an option to obtain
Halliburton's remaining interest in Enventure by giving Halliburton an
additional 14% interest in WellDynamics. The transaction required no cash,
except for the cash necessary to adjust and re-balance the current and projected
working capital positions.
Halliburton Measurement Systems. In May 2003, we sold certain assets of
Halliburton Measurement Systems, which provides flow measurement and sampling
systems, to NuFlo Technologies, Inc. for approximately $33 million in cash,
subject to post-closing adjustments. The pretax gain on the sale of Halliburton
Measurement Systems assets was $24 million ($14 million after tax, or $0.03 per
diluted share) and is included in our Production Optimization segment.
Wellstream. In March 2003, we sold the assets relating to our
Wellstream business, a global provider of flexible pipe products, systems and
solutions, to Candover Partners Ltd. for $136 million in cash. The assets sold
included manufacturing plants in Newcastle on the Tyne, United Kingdom, and
Panama City, Florida, as well as certain assets and contracts in Brazil. In
addition, Wellstream had $34 million in goodwill recorded at the disposition
date. The transaction resulted in a pretax loss of $15 million ($12 million
after tax, or $0.03 per diluted share), which is included in our Landmark and
Other Energy Services segment. Included in the pretax loss is the write-off of
the cumulative translation adjustment related to Wellstream of approximately $9
million. The cumulative translation adjustment could not be tax benefited and
therefore the effective tax benefit for the loss on disposition of Wellstream
was only 20%.
Mono Pumps. In January 2003, we sold our Mono Pumps business to
National Oilwell, Inc. The sale price of approximately $88 million was paid with
$23 million in cash and 3.2 million shares of National Oilwell common stock,
which were valued at $65 million on January 15, 2003. We recorded a pretax gain
of $36 million ($21 million after tax, or $0.05 per diluted share) on the sale,
which is included in our Drilling and Formation Evaluation segment. Included in
the pretax gain is the write-off of the cumulative translation adjustment
related to Mono Pumps of approximately $5 million. The cumulative translation
adjustment could not be tax benefited and therefore the effective tax rate for
this disposition was 42%. In February 2003, we sold 2.5 million of our 3.2
million shares of the National Oilwell common stock for $52 million, which
resulted in a gain of $2 million pretax, or $1 million after tax, which was
recorded in "Other, net." In February 2004, we sold the remaining shares for $20
million, resulting in a gain of $6 million.
Subsea 7 formation. In May 2002, we contributed substantially all of
our Halliburton Subsea assets, with a book value of approximately $82 million,
to a newly formed company, Subsea 7, Inc. The contributed assets were recorded
by the new company at a fair value of approximately $94 million. The $12 million
difference is being amortized over ten years representing the average remaining
useful life of the assets contributed. We own 50% of Subsea 7, Inc. and account
for this investment using the equity method in our Production Optimization
segment. The remaining 50% is owned by DSND Subsea ASA.
Bredero-Shaw. In the second quarter of 2002, we incurred an impairment
charge of $61 million ($0.14 per diluted share) related to our then-pending sale
of Bredero-Shaw. On September 30, 2002, we sold our 50% interest in the
Bredero-Shaw joint venture to our partner ShawCor Ltd. The sale price of $149
million was comprised of $53 million in cash, a short-term note of $25 million
and 7.7 million of ShawCor Class A Subordinate shares. Consequently, we recorded
78
a 2002 third quarter pretax loss on the sale of $18 million, or $0.04 per
diluted share, which is reflected in our Landmark and Other Energy Services
segment. Included in this loss was $15 million of cumulative translation
adjustment loss which was realized upon the disposition of our investment in
Bredero-Shaw. During the 2002 fourth quarter, we recorded in "Other, net" a $9
million pretax loss on the sale of ShawCor shares.
European Marine Contractors Ltd. In January 2002, we sold our 50%
interest in European Marine Contractors Ltd., an unconsolidated joint venture
reported within our Landmark and Other Energy Services segment, to our joint
venture partner, Saipem. At the date of sale, we received $115 million in cash
and a contingent payment option valued at $16 million, resulting in a pretax
gain of $108 million, or $0.15 per diluted share after tax. The contingent
payment option was based on a formula linked to performance of the Oil Service
Index. In February 2002, we exercised our option and received an additional $19
million and recorded a pretax gain of $3 million, or $0.01 per diluted share
after tax, in "Other, net" in the statement of operations as a result of the
increase in value of this option.
Magic Earth acquisition. We acquired Magic Earth, Inc., a 3-D
visualization and interpretation technology company with broad applications in
the area of data interpretation in November 2001 for common shares with a value
of $100 million. At the consummation of the transaction, we issued 4.2 million
shares, valued at $23.93 per share, to complete the purchase. Magic Earth became
a wholly-owned subsidiary and is reported within our Landmark and Other Energy
Services segment. We recorded goodwill of $71 million, all of which is
nondeductible for tax purposes. In addition, we recorded intangible assets of
$19 million, which are being amortized based on a five-year life.
PGS Data Management acquisition. In March 2001, we acquired the PGS
Data Management division of Petroleum Geo-Services ASA (PGS) for $164 million in
cash. The acquisition agreement also calls for Landmark to provide, for a fee,
strategic data management and distribution services to PGS for three years from
the date of acquisition. We recorded intangible assets of $14 million and
goodwill of $149 million in our Landmark and Other Energy Services segment, $9
million of which is non-deductible for tax purposes. The intangible assets are
being amortized based on a three-year life.
Dresser Equipment Group disposition. In April 2001, we disposed of the
remaining businesses in the Dresser Equipment Group, which is reflected in
discontinued operations. See Note 21.
Note 5. Business Segment Information
During the second quarter of 2003, we restructured our Energy Services
Group into four divisions and our Engineering and Construction Group into one,
which is the basis for the five segments we now report. We grouped product lines
in order to better align ourselves with how our customers procure our services,
and to capture new business and achieve better integration, including joint
research and development of new products and technologies and other synergies.
The new segments mirror the way our chief executive officer (our chief operating
decision maker) now regularly reviews the operating results, assesses
performance and allocates resources.
Our five business segments are now organized around how we manage the
business: Drilling and Formation Evaluation, Fluids, Production Optimization,
Landmark and Other Energy Services and the Engineering and Construction Group.
We sometimes refer to the combination of Drilling and Formation Evaluation,
Fluids, Production Optimization and Landmark and Other Energy Services segments
as the Energy Services Group.
The amounts in the 2002 and 2001 notes to the consolidated financial
statements related to segments have been restated to conform to the 2003
composition of reportable segments.
During the first quarter of 2002, we announced plans to restructure our
businesses into two operating subsidiary groups. One group is focused on energy
services and the other is focused on engineering and construction. As part of
this restructuring, many support functions that were previously shared were
moved into the two business groups. We also decided that the operations of Major
Projects (which currently consists of the Barracuda-Caratinga project in
Brazil), Granherne and Production Services better aligned with KBR in the
79
current business environment. These businesses were moved for management and
reporting purposes from the Energy Services Group to the Engineering and
Construction Group during the second quarter of 2002.
Following is a summary of our new segments.
Drilling and Formation Evaluation. The Drilling and Formation
Evaluation segment is primarily involved in drilling and evaluating the
formations related to bore-hole construction and initial oil and gas formation
evaluation. The products and services in this segment incorporate integrated
technologies, which offer synergies related to drilling activities and data
gathering. The segment consists of drilling services, including directional
drilling and measurement-while-drilling/logging-while-drilling; logging
services; and drill bits. Included in this business segment are Sperry-Sun,
logging and perforating and Security DBS. Also included is our Mono Pumps
business, which we disposed of in the first quarter of 2003.
Fluids. The Fluids segment focuses on fluid management and technologies
to assist in the drilling and construction of oil and gas wells. Drilling fluids
are used to provide for well control, drilling efficiency, and as a means of
removing wellbore cuttings. Cementing services provide zonal isolation to
prevent fluid movement between formations, ensure a bond to provide support for
the casing, and provide wellbore reliability. Our Baroid and cementing product
lines, along with our equity method investment in Enventure, an expandable
casing joint venture, are included in this segment.
Production Optimization. The Production Optimization segment primarily
tests, measures and provides means to manage and/or improve well production once
a well is drilled and, in some cases, after it has been producing. This segment
consists of:
- production enhancement services (including fracturing,
acidizing, coiled tubing, hydraulic workover, sand control,
and pipeline and process services);
- completion products and services (including well completion
equipment, slickline and safety systems);
- tools and testing services (including underbalanced
applications, tubular conveyed perforating and testing
services); and
- subsea operations conducted in our 50% owned company, Subsea
7, Inc.
Landmark and Other Energy Services. This segment represents integrated
exploration and production software information systems, consulting services,
real-time operations, smartwells, and other integrated solutions. Included in
this business segment are Landmark Graphics, integrated solutions, Real Time
Operations and our equity method investment in WellDynamics, an
intelligent well completions joint venture. Also included are Wellstream,
Bredero-Shaw and European Marine Contractors Ltd., all of which have been sold.
Engineering and Construction Group. The Engineering and Construction
Group provides engineering, procurement, construction, project management, and
facilities operation and maintenance for oil and gas and other industrial and
governmental customers. Our Engineering and Construction Group offers:
- onshore engineering and construction activities, including
engineering and construction of liquefied natural gas, ammonia
and crude oil refineries and natural gas plants;
- offshore deepwater engineering, marine technology, project
management, and worldwide construction capabilities;
- government operations, construction, maintenance and logistics
activities for government facilities and installations;
- plant operations, maintenance and start-up services for both
upstream and downstream oil, gas and petrochemical facilities
as well as operations, maintenance and logistics services for
the power, commercial and industrial markets; and
- civil engineering, consulting and project management services.
80
General corporate. General corporate represents assets not included in
a business segment and is primarily composed of cash and cash equivalents,
deferred tax assets and insurance for asbestos and silica litigation claims.
Intersegment revenues and revenues between geographic areas are
immaterial. Our equity in pretax earnings and losses of unconsolidated
affiliates that are accounted for on the equity method is included in revenues
and operating income of the applicable segment.
Total revenues for 2003 include $4.2 billion, or 26% of total
consolidated revenues, from the United States Government, which are derived
almost entirely from our Engineering and Construction Group. Revenues from the
United States Government during 2002 and 2001 represented less than 10% of total
consolidated revenues. No other customer represented more than 10% of
consolidated revenues in any period presented.
The tables below present information on our continuing operations
business segments.
Operations by Business Segment
Years ended December 31
------------------------------------------
Millions of dollars 2003 2002 2001
- -------------------------------------------------------------------------------------------
Revenues:
Drilling and Formation Evaluation $ 1,643 $ 1,633 $ 1,643
Fluids 2,039 1,815 2,065
Production Optimization 2,766 2,554 2,803
Landmark and Other Energy Services 547 834 1,300
- -------------------------------------------------------------------------------------------
Total Energy Services Group 6,995 6,836 7,811
Engineering and Construction Group 9,276 5,736 5,235
- -------------------------------------------------------------------------------------------
Total $ 16,271 $ 12,572 $ 13,046
===========================================================================================
Operating income (loss):
Drilling and Formation Evaluation $ 177 $ 160 $ 171
Fluids 251 202 308
Production Optimization 421 384 528
Landmark and Other Energy Services (23) (108) 29
- -------------------------------------------------------------------------------------------
Total Energy Services Group 826 638 1,036
Engineering and Construction Group (36) (685) 111
General corporate (70) (65) (63)
- -------------------------------------------------------------------------------------------
Total $ 720 $ (112) $ 1,084
===========================================================================================
Capital expenditures:
Drilling and Formation Evaluation $ 145 $ 190 $ 225
Fluids 54 55 92
Production Optimization 124 118 209
Landmark and Other Energy Services Group 27 149 105
Shared energy services 103 91 112
- -------------------------------------------------------------------------------------------
Total Energy Services Group 453 603 743
Engineering and Construction Group 62 161 54
- -------------------------------------------------------------------------------------------
Total $ 515 $ 764 $ 797
===========================================================================================
Within the Energy Services Group, not all assets are associated with
specific segments. Those assets specific to segments include receivables,
inventories, certain identified property, plant and equipment (including field
service equipment), equity in and advances to related companies and goodwill.
The remaining assets, such as cash and the remaining property, plant and
equipment (including shared facilities) are considered to be shared among the
81
segments within the Energy Services Group. For segment operating income
presentation the depreciation expense associated with these shared Energy
Services Group assets is allocated to the Energy Services Group segments and
general corporate.
Operations by Business Segment (continued)
Years ended December 31
---------------------------------------------
Millions of dollars 2003 2002 2001
- ----------------------------------------------------------------------------------------------
Depreciation, depletion and amortization:
Drilling and Formation Evaluation $ 144 $ 137 $ 126
Fluids 50 48 50
Production Optimization 104 99 95
Landmark and Other Energy Services 77 112 137
Shared energy services 92 79 66
- ----------------------------------------------------------------------------------------------
Total Energy Services Group 467 475 474
Engineering and Construction Group 50 29 56
General corporate 1 1 1
- ----------------------------------------------------------------------------------------------
Total $ 518 $ 505 $ 531
==============================================================================================
Total assets:
Drilling and Formation Evaluation $ 1,074 $ 1,163 $ 1,253
Fluids 1,030 830 1,071
Production Optimization 1,558 1,365 1,402
Landmark and Other Energy Services 895 1,399 1,766
Shared energy services 1,240 1,187 1,072
- ----------------------------------------------------------------------------------------------
Total Energy Services Group 5,797 5,944 6,564
Engineering and Construction Group 5,082 3,104 3,187
General corporate 4,584 3,796 1,215
- ----------------------------------------------------------------------------------------------
Total $ 15,463 $ 12,844 $ 10,966
==============================================================================================
Operations by Geographic Area
Years ended December 31
--------------------------------------------
Millions of dollars 2003 2002 2001
- ---------------------------------------------------------------------------------------------
Revenues:
United States $ 4,415 $ 4,139 $ 4,911
Iraq 2,399 1 2
United Kingdom 1,473 1,521 1,800
Other areas (numerous countries) 7,984 6,911 6,333
- ---------------------------------------------------------------------------------------------
Total $ 16,271 $ 12,572 $ 13,046
=============================================================================================
Long-lived assets:
United States $ 4,461 $ 4,617 $ 3,030
United Kingdom 630 691 617
Other areas (numerous countries) 917 711 744
- ---------------------------------------------------------------------------------------------
Total $ 6,008 $ 6,019 $ 4,391
=============================================================================================
Note 6. Receivables
Our receivables are generally not collateralized. Included in notes and
accounts receivable are notes with varying interest rates totaling $11 million
at December 31, 2003 and $53 million at December 31, 2002. At December 31, 2003,
41% of our total receivables related to our United States government contracts,
82
primarily for projects in the Middle East. Receivables from the United States
government at December 31, 2002 were less than 10% of consolidated receivables.
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables. Collections reduce previously sold accounts receivable.
This funding subsidiary sells an undivided ownership interest in this pool of
receivables to entities managed by unaffiliated financial institutions under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable bankruptcy laws. While the funding subsidiary is
wholly-owned by us, its assets are not available to pay any creditors of ours or
of our subsidiaries or affiliates, until such time as the agreement with the
unaffiliated companies is terminated following sufficient collections to
liquidate all outstanding undivided ownership interests. The undivided ownership
interest in the pool of receivables sold to the unaffiliated companies,
therefore, is reflected as a reduction of accounts receivable in our
consolidated balance sheets. The funding subsidiary retains the interest in the
pool of receivables that are not sold to the unaffiliated companies and is fully
consolidated and reported in our financial statements.
The amount of undivided interests which can be sold under the program
varies based on the amount of eligible Energy Services Group receivables in the
pool at any given time and other factors. The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated companies, and
could from time to time sell additional undivided ownership interests. In July
2003, however, the balance outstanding under this facility was reduced to zero.
The total amount outstanding under this facility continued to be zero as of
December 31, 2003.
Note 7. Inventories
Inventories are stated at the lower of cost or market. We manufacture
in the United States certain finished products and parts inventories for drill
bits, completion products, bulk materials, and other tools that are recorded
using the last-in, first-out method totaling $38 million at December 31, 2003
and $43 million at December 31, 2002. If the average cost method had been used,
total inventories would have been $17 million higher than reported at December
31, 2003 and December 31, 2002.
Inventories at December 31, 2003 and December 31, 2002 are composed of
the following:
December 31
------------------------------
Millions of dollars 2003 2002
- --------------------------------------------------------------------------
Finished products and parts $ 503 $ 545
Raw materials and supplies 159 141
Work in process 33 48
- --------------------------------------------------------------------------
Total $ 695 $ 734
==========================================================================
Finished products and parts are reported net of obsolescence reserves
of $117 million at December 31, 2003 and $140 million at December 31, 2002.
Note 8. Restricted Cash
At December 31, 2003, we had restricted cash of $259 million.
Restricted cash consists of:
- $107 million deposit that collateralizes a bond for a patent
infringement judgment on appeal, included in "Other current
assets" (See Note 13);
- $78 million as collateral for potential future insurance claim
reimbursements, included in "Other assets";
- $37 million ordered by the bankruptcy court to be set aside as
part of the reorganization proceedings, included in "Other
current assets"; and
83
- $37 million ($22 million in "Other assets" and $15 million in
"Other current assets") primarily related to cash collateral
agreements for outstanding letters of credit for various
construction projects.
At December 31, 2002, we had $190 million in restricted cash in "Other
assets".
Note 9. Property, Plant and Equipment
Property, plant and equipment at December 31, 2003 and 2002 are
composed of the following:
Millions of dollars 2003 2002
- ---------------------------------------------------------------------
Land $ 80 $ 86
Buildings and property improvements 1,065 1,024
Machinery, equipment and other 4,921 4,842
- ---------------------------------------------------------------------
Total 6,066 5,952
Less accumulated depreciation 3,540 3,323
- ---------------------------------------------------------------------
Net property, plant and equipment $ 2,526 $ 2,629
=====================================================================
Buildings and property improvements are depreciated over 5-40 years;
machinery, equipment and other are depreciated over 3-25 years.
Machinery, equipment and other includes oil and gas investments of $359
million at December 31, 2003 and $356 million at December 31, 2002.
Note 10. Debt
Short-term notes payable consist primarily of overdraft facilities and
other facilities with varying rates of interest. Long-term debt at the end of
2003 and 2002 consists of the following:
Millions of dollars 2003 2002
- ---------------------------------------------------------------------------------------------
3.125% convertible senior notes due July 2023 $ 1,200 $ -
5.5% senior notes due October 2010 748 -
1.5% plus LIBOR senior notes due October 2005 300 -
Medium-term notes due 2006 through 2027 600 750
7.6% debentures of Halliburton due August 2096 294 -
8.75% debentures due February 2021 200 200
7.6% debentures of DII Industries, LLC due August 2096 6 300
Variable interest credit facility maturing September 2009 69 66
8% senior notes which matured April 2003 - 139
Effect of interest rate swaps 9 13
Other notes with varying interest rates 11 8
- ---------------------------------------------------------------------------------------------
Total long-term debt 3,437 1,476
Less current portion 22 295
- ---------------------------------------------------------------------------------------------
Noncurrent portion of long-term debt $ 3,415 $ 1,181
=============================================================================================
Convertible notes. In June 2003, we issued $1.2 billion of 3.125%
convertible senior notes due July 15, 2023, with interest payable semi-annually.
The notes are our senior unsecured obligations ranking equally with all of our
existing and future senior unsecured indebtedness.
The notes are convertible into our common stock under any of the
following circumstances:
- during any calendar quarter (and only during such calendar
quarter) if the last reported sale price of our common stock
for at least 20 trading days during the period of 30
84
consecutive trading days ending on the last trading day of the
previous quarter is greater than or equal to 120% of the
conversion price per share of our common stock on such last
trading day;
- if the notes have been called for redemption;
- upon the occurrence of specified corporate transactions that
are described in the indenture relating to the offering; or
- during any period in which the credit ratings assigned to the
notes by both Moody's Investors Service and Standard & Poor's
are lower than Ba1 and BB+, respectively, or the notes are no
longer rated by at least one of these rating services or their
successors.
The initial conversion price is $37.65 per share and is subject to
adjustment. Upon conversion, we will have the right to deliver, in lieu of
shares of our common stock, cash or a combination of cash and common stock.
The notes are redeemable for cash at our option on or after July 15,
2008. Holders may require us to repurchase the notes for cash on July 15 of
2008, 2013 or 2018 or, prior to July 15, 2008, in the event of a fundamental
change as defined in the underlying indenture. In each case, we will pay a
purchase price equal to 100% of the principal amount plus accrued and unpaid
interest and additional amounts owed, if any.
Floating and fixed rate senior notes. In October 2003, we completed an
offering of $1.05 billion of floating and fixed rate unsecured senior notes. The
fixed rate notes, with an aggregate principal amount of $750 million, will
mature on October 15, 2010 and bear interest at a rate equal to 5.5%, payable
semi-annually. The fixed rate notes were initially offered on a discounted basis
at 99.679% of their face value. The discount is being amortized to interest
expense over the life of the bond. The floating rate notes, with an aggregate
principal amount of $300 million, will mature on October 17, 2005 and bear
interest at a rate equal to three-month LIBOR (London interbank offered rates)
plus 1.5%, payable quarterly.
Medium-term notes. At December 31, 2003, we had outstanding notes under
our medium-term note program as follows:
Amount Due Rate
- -------------------------------------------------------
$ 275 million 08/2006 6.00%
$ 150 million 12/2008 5.63%
$ 50 million 05/2017 7.53%
$ 125 million 02/2027 6.75%
=======================================================
Each holder of the 6.75% medium-term notes has the right to require us
to repay their notes in whole or in part on February 1, 2007. We may redeem the
5.63% and 6.00% medium-term notes in whole or in part at any time. The 7.53%
notes may not be redeemed prior to maturity. The medium-term notes do not have
sinking fund requirements.
Exchange of DII Industries debentures. In October 2003, DII Industries
commenced a consent solicitation in which it requested consents to amend the
indenture governing its $300 million aggregate principal amount of 7.6%
debentures due 2096 to, among other things, eliminate the bankruptcy-related
events of default. Halliburton commenced an exchange offer in which it offered
to issue its new 7.6% debentures due 2096 in exchange for a like amount of
outstanding 7.6% debentures due 2096 of DII Industries held by holders qualified
to participate in the exchange offer. On December 15, 2003, the consents to
amend the DII Industries indenture became effective and the exchange offer in
which Halliburton issued its new 7.6% debentures due 2096 in exchange for a like
amount of outstanding 7.6% debentures due 2096 of DII Industries was completed.
Following the exchange offer, approximately $6 million of the 7.6% debentures
due 2096 of DII Industries remained outstanding and, prior to the completion of
the exchange offer, Halliburton became a co-obligor on the remaining DII
Industries debentures.
85
Variable interest credit facility. In the fourth quarter 2002, our 51%
owned consolidated subsidiary, Devonport Management Limited (DML), signed an
agreement for a credit facility of (pound)80 million maturing in September 2009.
This credit facility has a variable interest rate that was equal to 4.73% on
December 31, 2003. There are various financial covenants which must be
maintained by DML. DML has drawn down $69 million as of December 31, 2003. Under
this agreement, annual payments of approximately $20 million are due in
quarterly installments. As of December 31, 2003, the available credit under this
facility was approximately $57 million.
Interest rate swaps. In the second quarter of 2002, we terminated our
interest rate swap agreement on our 8% senior notes. The notional amount of the
swap agreement was $139 million. This interest rate swap was designated as a
fair value hedge. Upon termination, the fair value of the interest rate swap was
not material. In the fourth quarter 2002, we terminated the interest rate swap
agreement on our 6.00% medium-term note. The notional amount of the swap
agreement was $150 million. This interest rate swap was designated as a fair
value hedge. Upon termination, the fair value of the interest rate swap was $13
million. These swaps had previously been classified in "Other assets" on the
balance sheet. The fair value adjustments to the hedged 6.00% medium-term note
are being amortized as a reduction in interest expense using the "effective
yield method" over the remaining life of the medium-term note.
Maturities. Our debt, excluding the effects of our interest rate swaps,
matures as follows: $22 million in 2004; $324 million in 2005; $296 million in
2006; $10 million in 2007; $151 million in 2008; and $2,625 million thereafter.
Senior notes due 2007. On January 26, 2004, we issued $500 million
aggregate principal amount of senior notes due 2007 bearing interest at a
floating rate equal to three-month LIBOR plus 0.75%, payable quarterly. On
January 26, 2005, or on any interest payment date thereafter, we have the option
to redeem all or a portion of the outstanding notes.
Chapter 11-related financing activities. In anticipation of the
pre-packaged Chapter 11 filing, in the fourth quarter of 2003 we entered into:
- a delayed-draw term facility (Senior Unsecured Credit
Facility) that would currently provide for draws of up to $500
million to be available for cash funding of the trusts for the
benefit of asbestos and silica claimants, if required
conditions are met; and
- a $700 million three-year revolving credit facility
(Revolving Credit Facility) for general working capital
purposes, which expires in October 2006.
At December 31, 2003, there were no borrowings outstanding under these
facilities.
Drawings under the Senior Unsecured Credit Facility are subject to
satisfaction of certain conditions, including confirmation of the proposed plan
of reorganization, maintenance of certain financial covenants and the long-term
senior unsecured debt of Halliburton shall have been confirmed at BBB or higher
(stable outlook) by Standard & Poor's and Baa2 or higher (stable outlook) by
Moody's Investors Service. Proceeds received by Halliburton from the issuance
of debt securities, asset sales and from the settlement of asbestos and silica
insurance claims reduce commitments under the Senior Unsecured Credit Facility.
Borrowings under the Revolving Credit Facility will be secured by
certain of our assets until:
- final and non-appealable confirmation of our proposed plan
of reorganization;
- our long-term senior unsecured debt is rated BBB or higher
(stable outlook) by Standard & Poor's and Baa2 or higher
(stable outlook) by Moody's Investors Service;
- there is no material adverse change in our business condition;
- we are not in default under the Revolving Credit Facility; and
- there are no court proceedings pending or threatened which
could have a material adverse affect on our business.
To the extent that the aggregate principal amount of all secured
indebtedness exceeds five percent of the consolidated net tangible assets of
Halliburton and its subsidiaries, all collateral will be shared pro rata with
holders of Halliburton's 8.75% notes due 2021, 3.125% convertible senior notes
due 2023, senior notes due 2005, 5.5% senior notes due 2010, medium-term
86
notes, 7.6% debentures due 2096, senior notes issued in January 2004 due 2007
and any other new issuance to the extent that the issuance contains a
requirement that the holders thereof be equally and ratably secured with
Halliburton's other secured creditors. Security to be provided includes:
- 100% of the stock of Halliburton Energy Services, Inc. (a
wholly-owned subsidiary of Halliburton);
- 100% of the stock or other equity interests held by
Halliburton and Halliburton Energy Services, Inc. in certain
of their first-tier domestic subsidiaries;
- 66% of the stock or other equity interests of Halliburton
Affiliates LLC (a wholly-owned subsidiary of Halliburton); and
- 66% of the stock or other equity interests of certain foreign
subsidiaries of Halliburton or Halliburton Energy Services,
Inc.
Note 11. Asbestos and Silica Obligations and Insurance Recoveries
Summary
Several of our subsidiaries, particularly DII Industries and Kellogg
Brown & Root, have been named as defendants in a large number of asbestos- and
silica-related lawsuits. The plaintiffs allege injury primarily as a result of
exposure to:
- asbestos used in products manufactured or sold by former
divisions of DII Industries (primarily refractory materials,
gaskets and packing materials used in pumps and other
industrial products);
- asbestos in materials used in our construction and maintenance
projects of Kellogg Brown & Root or its subsidiaries; and
- silica related to sandblasting and drilling fluids operations.
We have substantial insurance to reimburse us for portions of the costs
of judgments, settlements and defense costs for these asbestos and silica
claims. Since 1976, approximately 683,000 asbestos claims have been filed
against us and approximately 238,000 asbestos claims have been closed through
settlements in court proceedings at a total cost of approximately $227 million.
Almost all of these claims have been made in separate lawsuits in which we are
named as a defendant along with a number of other defendants, often exceeding
100 unaffiliated defendant companies in total. In 2001, we were subject to
several large adverse judgments in trial court proceedings. At December 31,
2003, approximately 445,000 asbestos claims were open, and we anticipate
resolving all open and future claims in the pre-packaged Chapter 11 proceedings
of DII Industries, Kellogg Brown & Root and other of our subsidiaries, which
were filed on December 16, 2003. The following tables summarize the various
charges we have incurred over the past three years and a rollforward of our
asbestos- and silica-related liabilities and insurance receivables.
87
2003 2002 2001
------------------------------------------------------------------------------
Continuing Discontinued Continuing Discontinued Continuing Discontinued
Millions of dollars Operations Operations Operations Operations Operations Operations
- ------------------------------------------------------------------------------------------------------------
Asbestos and silica charges:
Pre-packaged Chapter 11
proceedings $ - $ 1,016 $ - $ - $ - $ -
2002 Rabinovitz Study - - 564 2,256 - -
Liabilities for Harbison-
Walker claims - - - - - 632
- ------------------------------------------------------------------------------------------------------------
Subtotal - 1,016 564 2,256 - 632
- ------------------------------------------------------------------------------------------------------------
Asbestos and silica
insurance write-off/
(receivables):
Navigant Study - 6 - (1,530) - -
Write-off of Highlands
accounts receivable - - 80 - - -
Insurance recoveries for
Harbison-Walker claims - - - - - (537)
- ------------------------------------------------------------------------------------------------------------
Subtotal - 6 80 (1,530) - (537)
- ------------------------------------------------------------------------------------------------------------
Other Costs:
Harbison-Walker matters - 51 - 45 - -
Professional fees - 58 - 35 - 4
Cash in lieu of interest - 24 - - - -
Other costs 5 - - - 11 -
- ------------------------------------------------------------------------------------------------------------
Subtotal 5 133 - 80 11 4
- ------------------------------------------------------------------------------------------------------------
Pretax asbestos & silica
charges 5 1,155 644 806 11 99
Tax (provision) benefit (2) 5 (114) (154) (4) (35)
- ------------------------------------------------------- ----------------------------------------------------
Total asbestos & silica
charges, net of tax $ 3 $ 1,160 $ 530 $ 652 $ 7 $ 64
============================================================================================================
December 31
-----------------------------------------
Millions of dollars 2003 2002
- --------------------------------------------------------------------------------------------------------
Asbestos and silica related liabilities:
Beginning balance $ 3,425 $ 737
Accrued liability 1,016 2,820
Payments on claims (355) (132)
- --------------------------------------------------------------------------------------------------------
Asbestos and silica related liabilities - ending balance
(of which $2,507 and $0 is current) $ 4,086 $ 3,425
========================================================================================================
Insurance for asbestos and silica related liabilities:
Beginning balance $ (2,059) $ (612)
(Accrual)/write-off of insurance recoveries 6 (1,530)
Write off of Highlands receivable - 45
Insurance billings 15 38
- --------------------------------------------------------------------------------------------------------
Insurance for asbestos and silica related liabilities -
ending balance $ (2,038) $ (2,059)
========================================================================================================
Accounts receivable for billings to insurance companies:
Beginning balance $ (44) $ (53)
Billed insurance recoveries (15) (38)
Purchase of Harbison-Walker receivable,
net of allowance (40) -
Write-off of Highlands receivable - 35
Payments received 3 12
- --------------------------------------------------------------------------------------------------------
Accounts receivable for billings to insurance companies -
ending balance $ (96) $ (44)
========================================================================================================
Pre-packaged Chapter 11 proceedings and recent insurance developments
Pre-packaged Chapter 11 proceedings. DII Industries, Kellogg Brown &
Root and our other affected subsidiaries filed Chapter 11 proceedings on
December 16, 2003 in bankruptcy court in Pittsburgh, Pennsylvania. With the
88
filing of the Chapter 11 proceedings, all asbestos and silica personal injury
claims and related lawsuits against Halliburton and our affected subsidiaries
have been stayed. See Note 12.
Our subsidiaries sought Chapter 11 protection because Sections 524(g)
and 105 of the Bankruptcy Code may be used to discharge current and future
asbestos and silica personal injury claims against us and our subsidiaries. Upon
confirmation of the plan of reorganization, current and future asbestos and
silica personal injury claims against us and our affiliates will be channeled
into trusts established for the benefit of claimants under Section 524(g) and
105 of the Bankruptcy Code, thus releasing Halliburton and its affiliates from
those claims.
A pre-packaged Chapter 11 proceeding is one in which a debtor seeks
approval of a plan of reorganization from affected creditors before filing for
Chapter 11 protection. Prior to proceeding with the Chapter 11 filing, our
affected subsidiaries solicited acceptances from known present asbestos and
silica claimants to a proposed plan of reorganization. In the fourth quarter
of 2003, valid votes were received from approximately 364,000 asbestos claimants
and approximately 21,000 silica claimants, representing substantially all known
claimants. Of the votes validly cast, over 98% of voting asbestos claimants and
over 99% of voting silica claimants voted to accept the proposed plan of
reorganization, meeting the voting requirements of Chapter 11 of the Bankruptcy
Code for approval of the proposed plan. The pre-approved proposed plan of
reorganization was filed as part of the Chapter 11 proceedings.
The proposed plan of reorganization, which is consistent with the
definitive settlement agreements reached with our asbestos and silica personal
injury claimants in early 2003, provides that, if and when an order confirming
the proposed plan of reorganization becomes final and non-appealable, in
addition to the $311 million paid to claimants in December 2003, the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
- up to approximately $2.5 billion in cash;
- 59.5 million shares of Halliburton common stock (valued at
approximately $1.6 billion for accrual purposes using a stock
price of $26.17 per share, which is based on the average
trading price for the five days immediately prior to and
including December 31, 2003);
- a one-year non-interest bearing note of $31 million for the
benefit of asbestos claimants;
- a silica note with an initial payment into a silica trust of
$15 million. Subsequently the note provides that we will
contribute an amount to the silica trust balance at the end of
each year for the next 30 years to bring the silica trust
balance to $15 million, $10 million or $5 million based upon a
formula which uses average yearly disbursements from the trust
to determine that amount. The note also provides for an
extension of the note for 20 additional years under certain
circumstances. We have estimated the amount of this note to be
approximately $21 million. We will periodically reassess our
valuation of this note based upon our projections of the
amounts we believe we will be required to fund into the silica
trust; and
- insurance proceeds, if any, between $2.3 billion and $3.0
billion received by DII Industries and Kellogg Brown & Root.
In connection with reaching an agreement with representatives of
asbestos and silica claimants to limit the cash required to settle pending
claims to $2.775 billion, DII Industries paid $311 million on December 16, 2003.
Halliburton also agreed to guarantee the payment of an additional $156 million
of the remaining approximately $2.5 billion cash amount, which must be paid on
the earlier to occur of June 17, 2004 or the date on which an order confirming
the proposed plan of reorganization becomes final and non-appealable. As a part
of the definitive settlement agreements, we have been accruing cash payments in
lieu of interest at a rate of five percent per annum for these amounts. We
recorded approximately $24 million in pretax charges in 2003 related to the cash
in lieu of interest. On December 16, 2003, we paid $22 million to satisfy a
portion of our cash in lieu of interest payment obligations.
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As a result of the filing of the Chapter 11 proceedings, we adjusted
the asbestos and silica liability to reflect the full amount of the proposed
settlement and certain related costs, which resulted in a before tax charge of
approximately $1.016 billion to discontinued operations in the fourth quarter
2003. The tax effect on this charge was minimal, as a valuation allowance was
established for the net operating loss carryforward created by the charge. We
also reclassified a portion of our asbestos and silica related liabilities from
long-term to short-term, resulting in an increase of short-term liabilities by
approximately $2.5 billion, because we believe we will be required to fund these
amounts within one year.
In accordance with the definitive settlement agreements entered in
early 2003, we have been reviewing plaintiff files to establish a medical basis
for payment of settlement amounts and to establish that the claimed injuries are
based on exposure to our products. We have reviewed substantially all medical
claims received. During the fourth quarter of 2003, we received significant
numbers of the product identification due diligence files. Based on our review
of these files, we received the necessary information to allow us to proceed
with the pre-packaged Chapter 11 proceedings. As of December 31, 2003,
approximately 63% of the value of claims passing medical due diligence have
submitted satisfactory product identification. We expect the percentage to
increase as we receive additional plaintiff files. Based on these results, we
found that substantially all of the asbestos and silica liability relates to
claims filed against our former operations that have been divested and included
in discontinued operations. Consequently, all 2003 changes in our estimates
related to the asbestos and silica liability were recorded through discontinued
operations.
Our proposed plan of reorganization calls for a portion of our total
asbestos and silica liability to be settled by contributing 59.5 million shares
of Halliburton common stock into the trusts. We will continue to adjust our
asbestos and silica liability related to the shares if the average value of
Halliburton stock for the five days immediately prior to and including the end
of each fiscal quarter has increased by five percent or more from the most
recent valuation of the shares. At December 31, 2003, the value of the shares to
be contributed is classified as a long-term liability on our consolidated
balance sheet, and the shares have not been included in our calculation of basic
or diluted earnings per share. If the shares had been included in the
calculation as of the beginning of the fourth quarter, our diluted earnings per
share from continuing operations for the year ended December 31, 2003 would have
been reduced by $0.03. When and if we receive final and non-appealable
confirmation of our proposed plan of reorganization, we will:
- increase or decrease our asbestos and silica liability to
value the 59.5 million shares of Halliburton common stock
based on the value of Halliburton stock on the date of final
and non-appealable confirmation of our proposed plan of
reorganization;
- reclassify from a long-term liability to shareholders' equity
the final value of the 59.5 million shares of Halliburton
common stock; and
- include the 59.5 million shares in our calculations of
earnings per share on a prospective basis.
We understand that the United States Congress may consider adopting
legislation that would establish a national trust fund as the exclusive means
for recovery for asbestos-related disease. We are uncertain as to what
contributions we would be required to make to a national trust, if any, although
it is possible that they could be substantial and that they could continue for
several years. It is also possible that our level of participation and
contribution to a national trust could be greater than it otherwise would have
been as a result of having subsidiaries that have filed Chapter 11 proceedings
due to asbestos liability.
Recent insurance developments. Concurrent with the remeasurement of our
asbestos and silica liability due to the pre-packaged Chapter 11 filing, we
evaluated the appropriateness of the $2.0 billion recorded for asbestos and
silica insurance recoveries. In doing so, we separately evaluated two types of
policies:
90
- policies held by carriers with which we had either settled or
which were probable of settling and for which we could
reasonably estimate the amount of the settlement; and
- other policies.
In December 2003, we retained Navigant Consulting (formerly Peterson
Consulting), a nationally-recognized consultant in asbestos and silica liability
and insurance, to assist us. In conducting their analysis, Navigant Consulting
performed the following with respect to both types of policies:
- reviewed DII Industries' historical course of dealings with
its insurance companies concerning the payment of
asbestos-related claims, including DII Industries' 15-year
litigation and settlement history;
- reviewed our insurance coverage policy database containing
information on key policy terms as provided by outside
counsel;
- reviewed the terms of DII Industries' prior and current
coverage-in-place settlement agreements;
- reviewed the status of DII Industries' and Kellogg Brown &
Root's current insurance-related lawsuits and the various
legal positions of the parties in those lawsuits in relation
to the developed and developing case law and the historic
positions taken by insurers in the earlier filed and settled
lawsuits;
- engaged in discussions with our counsel; and
- analyzed publicly-available information concerning the ability
of the DII Industries insurers to meet their obligations.
Navigant Consulting's analysis assumed that there will be no recoveries
from insolvent carriers and that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections. Based on its review, analysis and discussions, Navigant
Consulting's analysis assisted us in making our judgments concerning insurance
coverage that we believe are reasonable and consistent with our historical
course of dealings with our insurers and the relevant case law to determine the
probable insurance recoveries for asbestos liabilities. This analysis included
the probable effects of self-insurance features, such as self-insured
retentions, policy exclusions, liability caps and the financial status of
applicable insurers, and various judicial determinations relevant to the
applicable insurance programs. The analysis of Navigant Consulting is based on
information provided by us.
In January 2004, we reached a comprehensive agreement with Equitas to
settle our insurance claims against certain Underwriters at Lloyd's of London,
reinsured by Equitas. The settlement will resolve all asbestos-related claims
made against Lloyd's Underwriters by us and by each of our subsidiary and
affiliated companies, including DII Industries, Kellogg Brown & Root and their
subsidiaries that have filed Chapter 11 proceedings as part of our proposed
settlement. Our claims against our other London Market Company Insurers are not
affected by this settlement. Provided that there is final confirmation of the
plan of reorganization in the Chapter 11 proceedings and the current United
States Congress does not pass national asbestos litigation reform legislation,
Equitas will pay us $575 million, representing approximately 60% of the
applicable limits of liability that DII Industries had substantial likelihood of
recovering from Equitas. The first payment of $500 million will occur within 15
working days of the later of January 5, 2005 or the date on which the order of
the bankruptcy court confirming DII Industries' plan of reorganization becomes
final and non-appealable. A second payment of $75 million will be made eighteen
months after the first payment.
As of December 31, 2003, we developed our best estimate of the
asbestos and silica insurance receivables as follows:
- included $575 million of insurance recoveries from Equitas
based on the January 2004 comprehensive agreement;
- included insurance recoveries from other specific insurers
with whom we had settled;
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- estimated insurance recoveries from specific insurers that we
are probable of settling with and for which we could
reasonably estimate the amount of the settlement. When
appropriate, these estimates considered prior settlements with
insurers with similar facts and circumstances; and
- estimated insurance recoveries for all other policies with the
assistance of the Navigant Consulting study.
The estimate we developed as a result of this process was consistent
with the amount of asbestos and silica receivables recorded as of December 31,
2003, causing us not to significantly adjust our recorded insurance asset at
that time. Our estimate was based on a comprehensive analysis of the situation
existing at that time which could change significantly in the both near- and
long-term period as a result of:
- additional settlements with insurance companies;
- additional insolvencies of carriers; and
- legal interpretation of the type and amount of coverage
available to us.
Currently, we cannot estimate the time frame for collection of this
insurance receivable, except as described earlier with regard to the Equitas
settlement.
Asbestos and silica obligations and receivables based upon 2002 outside
studies
Rabinovitz study. In late 2001, DII Industries retained Dr. Francine F.
Rabinovitz of Hamilton, Rabinovitz & Alschuler, Inc. to estimate the probable
number and value, including defense costs, of unresolved current and future
asbestos and silica-related bodily injury claims asserted against DII Industries
and its subsidiaries. Dr. Rabinovitz's estimates are based on historical data
supplied by us and publicly available studies, including annual surveys by the
National Institutes of Health concerning the incidence of mesothelioma deaths.
In addition, Dr. Rabinovitz used the following assumptions in her estimates:
- there will be no legislative or other systemic changes to the
tort system;
- we will continue to aggressively defend against asbestos
claims made against us;
- an inflation rate of 3% annually for settlement payments and
an inflation rate of 4% annually for defense costs; and
- we would receive no relief from our asbestos obligation due to
actions taken in the Harbison-Walker Chapter 11 proceedings
(see below).
In her estimates, Dr. Rabinovitz relied on the source data provided by our
management; she did not independently verify the accuracy of the source data.
The report took approximately seven months to complete.
Dr. Rabinovitz estimated the current and future total undiscounted
liability for personal injury asbestos and silica claims through 2052, including
defense costs, would be a range between $2.2 billion and $3.5 billion. The lower
end of the range was calculated by using an average of the last five years of
asbestos claims experience and the upper end of the range was calculated using
the more recent two-year elevated rate of asbestos claim filings in projecting
the rate of future claims. As a result of reaching an agreement in principle in
December of 2002 (which was the basis of the definitive settlement agreements
entered in early 2003) for the settlement of all of our asbestos and silica
claims, we believed it was appropriate to adjust our accrual to use the upper
end of the range contained in Dr. Rabinovitz's study. Therefore in 2002 we
recorded a pretax charge of $2.820 billion to increase our asbestos and silica
liability to the upper end of the range.
Navigant study. In 2002, we retained Navigant Consulting (formerly
Peterson Consulting) to work with us to project the amount of insurance
recoveries probable at that time. In conducting this analysis, Navigant
Consulting used the Rabinovitz Study to project liabilities through 2052 using
the two-year elevated rate of asbestos claim filings. The methodology used by
Navigant Consulting for that study was consistent with the methodology employed
in December 2003. Based on our analysis of the probable insurance recoveries, we
recorded a receivable of $1.530 billion.
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Other insurance matters
Harbison-Walker Chapter 11 proceedings. A large portion of our asbestos
claims relate to alleged injuries from asbestos used in a small number of
products manufactured or sold by Harbison-Walker Refractories Company, whose
operations DII Industries acquired in 1967 and spun off in 1992. At the time of
the spin-off, Harbison-Walker assumed liability for asbestos claims filed after
the spin-off, and it agreed to defend and indemnify DII Industries from
liability for those claims, although DII Industries continues to have direct
liability to tort claimants for all post spin-off refractory asbestos claims.
DII Industries retained responsibility for all asbestos claims pending as of the
date of the spin-off. The agreement governing the spin-off provided that
Harbison-Walker would have the right to access DII Industries' historic
insurance coverage for the asbestos-related liabilities that Harbison-Walker
assumed in the spin-off.
In July 2001, DII Industries determined that the demands that
Harbison-Walker was making on the shared insurance policies were not acceptable
to DII Industries and that Harbison-Walker probably would not be able to fulfill
its indemnification obligations to DII Industries. Accordingly, DII Industries
took up the defense of unsettled post spin-off refractory claims that name it as
a defendant in order to prevent Harbison-Walker from unnecessarily eroding the
insurance coverage both companies access for these claims. As a result, in 2001
we recorded a charge of $632 million to increase our asbestos and silica
liability to cover the Harbison-Walker asbestos and silica claims and $537
million in anticipated insurance recoveries.
On February 14, 2002, Harbison-Walker filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code. In its initial Chapter
11 filings, Harbison-Walker stated it would seek to utilize Sections 524(g) and
105 of the Bankruptcy Code to propose and seek confirmation of a plan of
reorganization that would provide for distributions for all legitimate, pending
and future asbestos and silica claims asserted directly against Harbison-Walker
or asserted against DII Industries. In order to protect the shared insurance
from dissipation, DII Industries began to assist Harbison-Walker in its Chapter
11 proceedings as follows:
- on February 14, 2002, DII Industries paid $40 million to
Harbison-Walker's United States parent holding company, RHI
Refractories Holding Company (RHI Refractories);
- DII Industries agreed to provide up to $35 million in debtor-
in-possession financing to Harbison-Walker ($5 million was
paid in 2002 and the remaining $30 million was paid in
2003); and
- during 2003, DII Industries purchased $50 million of
Harbison-Walker's outstanding insurance receivables, of which
$10 million were estimated to be uncollectible.
In 2003, DII Industries entered into a definitive agreement with
Harbison-Walker. This agreement is subject to court approval in
Harbison-Walker's Chapter 11 proceedings and would channel all asbestos and
silica personal injury claims against Harbison-Walker and certain of its
affiliates to the trusts created in DII Industries' and Kellogg Brown & Root's
Chapter 11 proceedings. Our asbestos and silica obligations and related
insurance recoveries recorded as of December 31, 2003 reflect the terms of this
definitive agreement.
DII Industries also agreed to pay RHI Refractories an additional $35
million if a plan of reorganization were proposed in the Harbison-Walker Chapter
11 proceedings and an additional $85 million if a plan is confirmed in the
Harbison-Walker Chapter 11 proceedings, in each case acceptable to DII
Industries in its sole discretion. This plan must include an injunction
channeling to Section 524(g)/105 trusts all present and future asbestos and
silica claims against DII Industries arising out of the Harbison-Walker business
or other DII Industries' businesses that share insurance with Harbison-Walker.
The proposed plan of reorganization filed by Harbison-Walker on July 31, 2003
did not provide for a Section 524(g)/105 injunction. We do not believe it is
likely that Harbison-Walker will propose or will be able to confirm a plan of
reorganization in its Chapter 11 proceedings that is acceptable to DII
Industries. In early 2004, we entered into an agreement with RHI Refractories to
settle the $35 million and $85 million potential payments. The agreement calls
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for a $10 million payment to RHI and a $1 million payment to our asbestos and
silica trusts on behalf of RHI Refractories. These amounts were expensed during
2003.
London-based insurers. Equitas and other London-based companies have
attempted to impose more restrictive documentation requirements on DII
Industries and its affiliates than are currently required under existing
covering-in-place agreements related to certain asbestos claims.
Coverage-in-place agreements are settlement agreements between policyholders and
the insurers specifying the terms and conditions under which coverage will be
applied as claims are presented for payment. These agreements in an asbestos
claims context govern such things as what events will be deemed to trigger
coverage, how liability for a claim will be allocated among insurers and what
procedures the policyholder must follow in order to obligate the insurer to pay
claims. These insurance carriers stated that the new restrictive requirements
are part of an effort to limit payment of settlements to claimants who are truly
impaired by exposure to asbestos and can identify the product or premises that
caused their exposure.
DII Industries is a plaintiff in two lawsuits against a number of
London-based insurance companies asserting DII Industries' rights under an
existing coverage-in-place agreement and under insurance policies not yet
subject to coverage-in-place agreements. DII Industries believes that the more
restrictive documentation requirements are inconsistent with the current
coverage-in-place agreements and are unenforceable. The insurance companies that
DII Industries has sued continue to pay larger claim settlements where the more
restrictive documentation is obtained or where court judgments are entered.
Likewise, they continue to pay previously agreed amounts of defense costs that
DII Industries incurs defending claims.
If the bankruptcy court approves our settlement agreement with Equitas,
we will seek to dismiss Equitas from the litigation we currently have with the
London-based insurers.
Federal-Mogul. A significant portion of the insurance coverage
applicable to Worthington Pump (a former division of DII Industries) is alleged
by Federal-Mogul Products, Inc. (Federal-Mogul) to be shared with it. In 2001,
Federal-Mogul and a large number of its affiliated companies filed a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy Code in the
bankruptcy court in Wilmington, Delaware. In response to Federal-Mogul's
allegations, DII Industries filed a lawsuit on December 7, 2001 in
Federal-Mogul's Chapter 11 proceedings asserting DII Industries' rights to
asbestos insurance coverage under historic general liability policies issued to
Studebaker-Worthington, Inc. and its successor. The parties to this litigation
have agreed to mediate this dispute. A number of insurers who have agreed to
coverage-in-place agreements with DII Industries have suspended payment under
the shared Worthington Pump policies until the Federal-Mogul bankruptcy court
resolves the insurance issues. Consequently, the effect of the Federal-Mogul
Chapter 11 proceedings on DII Industries' rights to access this shared insurance
is uncertain.
Highlands litigation. Highlands Insurance Company (Highlands) was our
wholly-owned insurance company until it was spun off to our shareholders in
1996. Highlands wrote the primary insurance coverage for the construction claims
related to Brown & Root, Inc. prior to 1980. On April 5, 2000, Highlands filed a
lawsuit against Halliburton in the Delaware Chancery Court asserting that the
construction claims insurance it wrote for Brown & Root, Inc. was terminated by
agreements between Halliburton and Highlands at the time of the 1996 spin-off.
In March 2001, the Chancery Court ruled that a termination did occur and that
Highlands was not obligated to provide coverage for Brown & Root, Inc.'s
construction claims. This decision was affirmed by the Delaware Supreme Court on
March 13, 2002. As a result of this ruling in the first quarter 2002, we wrote
off approximately $35 million in accounts receivable for amounts paid for claims
and defense costs and $45 million of accrued receivables in relation to
estimated insurance recoveries claims settlements from Highlands.
Excess insurance on construction claims. As a result of the Highlands
litigation, Kellogg Brown & Root no longer has primary insurance coverage
related to construction claims. However, excess insurance coverage policies with
other insurers were in place during those periods. On March 20, 2002, Kellogg
Brown & Root filed a lawsuit against the insurers that issued these excess
94
insurance policies, seeking to establish the specific terms under which it can
obtain reimbursement for costs incurred in settling and defending construction
claims. Until this lawsuit is resolved, the scope of the excess insurance
coverage will remain uncertain, and as such we have not recorded any recoveries
related to excess insurance coverage.
Note 12. Chapter 11 Reorganization Proceedings
On December 16, 2003, the following wholly-owned subsidiaries of
Halliburton (collectively, the Debtors or Debtors-in-Possession) filed Chapter
11 proceedings in bankruptcy court in Pittsburgh, Pennsylvania:
- DII Industries, LLC;
- Kellogg Brown & Root, Inc.;
- Mid-Valley, Inc.;
- KBR Technical Services, Inc.;
- Kellogg Brown & Root Engineering Corporation;
- Kellogg Brown & Root International, Inc. (a Delaware
corporation);
- Kellogg Brown & Root International, Inc. (a Panamanian
corporation); and
- BPM Minerals, LLC.
The bankruptcy court has scheduled a hearing on confirmation of the
proposed plan of reorganization for May 10 through 12, 2004. The affected
subsidiaries will continue to be wholly-owned by Halliburton Company under the
proposed plan. Halliburton Company (the registrant), Halliburton's Energy
Services Group or Kellogg Brown & Root's government services businesses are not
included in the Chapter 11 filing. Upon confirmation of the plan of
reorganization, current and future asbestos and silica personal injury claims
filed against us and our subsidiaries will be channeled into trusts established
under Sections 524(g) and 105 of the Bankruptcy Code for the benefit of
claimants, thus releasing Halliburton and its affiliates from such claims.
A pre-packaged Chapter 11 proceeding such as that of the Debtors is one
in which approval of a plan of reorganization is sought from affected creditors
before filing for Chapter 11 protection. Prior to proceeding with the Chapter 11
filing, the Debtors solicited acceptances from known present asbestos and silica
claimants to a proposed plan of reorganization. In the fourth quarter of 2003,
valid votes were received from approximately 364,000 asbestos claimants and
approximately 21,000 silica claimants, representing substantially all known
claimants. Of the votes validly cast, over 98% of voting asbestos claimants and
over 99% of voting silica claimants voted to accept the proposed plan of
reorganization, meeting the voting requirements of Chapter 11 of the Bankruptcy
Code for approval of the proposed plan. The pre-approved proposed plan of
reorganization was filed as part of the Chapter 11 proceedings.
Debtors-in-Possession financial statements. Under the Bankruptcy Code,
we are required to file periodically with the bankruptcy court various
documents, including financial statements of the Debtors-in-Possession. These
financial statements are prepared according to requirements of the Bankruptcy
Code. While these financial statements accurately provide information required
by the Bankruptcy Code, they are unconsolidated, unaudited, and prepared in a
format different from that used in our consolidated financial statements filed
under the securities laws and from that used in the condensed combined financial
statements that follow. Accordingly, we believe the substance and format do not
allow meaningful comparison with the following condensed combined financial
statements.
Basis of presentation. We continue to consolidate the Debtors in
our consolidated financial statements. While generally it is appropriate to
de-consolidate a subsidiary during its Chapter 11 proceedings on the basis that
control no longer rests with the parent, the facts and circumstances particular
to our situation support the continued consolidation of these subsidiaries.
Specifically:
- substantially all affected creditors have approved the terms
of the plan of reorganization and related transactions;
95
- the duration of the Chapter 11 proceedings are likely to be
very short (anticipated to be approximately six months);
- the Debtors were solvent and filed Chapter 11 proceedings to
resolve asbestos and silica claims rather than as a result of
insolvency; and
- the plan of reorganization provides that we will continue to
own 100% of the equity of the Debtors upon completion of the
plan of reorganization. As such, the plan of reorganization
will not impact our equity ownership of the Debtors.
All reorganization items, including but not limited to all professional
fees, realized gains and losses and provisions for losses, are included in both
our consolidated financial statements and the condensed combined financial
statements of the Debtors-in-Possession as discontinued operations. During 2003,
we recorded a total of $27 million as reorganization items, all of which
consisted of professional fees, including $16 million which was paid in 2003,
with the balance expected to be paid in 2004.
Furthermore, certain claims against the Debtors existing before the
Chapter 11 filing are considered liabilities subject to compromise. The
principal categories of claims subject to compromise at December 31, 2003
included the following:
- $2,507 million current asbestos and silica related
liabilities; and
- $1,579 million long-term asbestos and silica related
liabilities.
Prior to the filing of the Chapter 11 proceedings, DII Industries was
the parent for all of Energy Services Group and KBR operations. As part of a
pre-filing corporate restructuring, immediately prior to Chapter 11 filing, DII
Industries distributed the Energy Services Group operations to Halliburton
Company, while the operations of KBR continued to be conducted through
subsidiaries of DII Industries. The condensed combined financial statements of
the Debtors-in-Possession were prepared as if this distribution had taken place
as of the January 1, 2003.
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Debtors-in-Possession
Condensed Combined Statement of Operations
(Millions of dollars)
(Unaudited)
Year Ended
December 31, 2003
- --------------------------------------------------------------------------------------
Revenues $ 2,040
Equity in earnings of majority owned subsidiaries 70
- --------------------------------------------------------------------------------------
Total revenues 2,110
Operating costs and expenses 2,328
- --------------------------------------------------------------------------------------
Operating loss (218)
Nonoperating expenses, net (26)
- --------------------------------------------------------------------------------------
Loss from continuing operations before income
taxes (244)
Income tax benefit 88
- --------------------------------------------------------------------------------------
Loss from continuing operations (156)
Loss from discontinued operations, net of tax
benefit of $5 (1,160)
- --------------------------------------------------------------------------------------
Net loss $ (1,316)
======================================================================================
The subsidiaries of DII Industries that are not included in the Chapter
11 filing are presented in the condensed combined financial statements using the
equity method of accounting. These subsidiaries had revenues of $7,053 million
and operating income of $233 million for the year ended December 31, 2003. These
subsidiaries had assets of $2,283 million and liabilities of $2,303 million as
of December 31, 2003.
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Debtors-in-Possession
Condensed Combined Balance Sheet
(Millions of dollars)
(Unaudited)
December 31,
2003
------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 108
Receivables:
Trade, net 191
Intercompany, net 50
Unbilled work on uncompleted contracts 60
Other, net 75
------------------------------------------------------------------------------------------------------
Total receivables, net 376
Inventories 23
Right to Halliburton shares (1) 1,547
Other current assets 80
------------------------------------------------------------------------------------------------------
Total current assets 2,134
Property, plant and equipment, net 91
Goodwill, net 188
Investments in majority owned subsidiaries 1,567
Insurance for asbestos and silica related liabilities 2,038
Noncurrent deferred income taxes 436
Other assets 257
------------------------------------------------------------------------------------------------------
Total assets $ 6,711
======================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 13
Accrued employee compensation and benefits 30
Advance billings on uncompleted contracts 23
Prepetition liabilities not subject to compromise 834
Current prepetition asbestos and silica related liabilities subject to compromise 2,507
Other current liabilities 14
------------------------------------------------------------------------------------------------------
Total current liabilities 3,421
Prepetition liabilities not subject to compromise 137
Noncurrent prepetition asbestos and silica related liabilities subject to 1,579
compromise
Other liabilities 2
------------------------------------------------------------------------------------------------------
Total liabilities 5,139
------------------------------------------------------------------------------------------------------
Shareholders' equity 1,572
------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 6,711
======================================================================================================
(1) This line item represents an option for DII Industries to acquire 59.5
million shares of Halliburton common stock at no cost and was valued at $26
based upon the closing price on December 31, 2003.
98
Debtors-in-Possession
Condensed Combined Statement of Cash Flows
(Millions of dollars)
(Unaudited)
Year Ended
December 31, 2003
- -----------------------------------------------------------------------------
Total cash flows from operating activities $ (1,226)
- -----------------------------------------------------------------------------
Total cash flows from investing activities 2
- -----------------------------------------------------------------------------
Total cash flows from activities with Halliburton 1,306
- -----------------------------------------------------------------------------
Effect of exchange rate changes on cash (5)
- -----------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 77
Cash and equivalents at beginning of year 31
- -----------------------------------------------------------------------------
Cash and equivalents at end of year $ 108
=============================================================================
Some of the insurers of DII Industries and Kellogg Brown & Root have
filed various motions in and objections to the Chapter 11 proceedings in an
attempt to seek dismissal of the Chapter 11 proceedings or to delay the proposed
plan of reorganization. The motions and objections filed by the insurers include
a request that the court grant the insurers standing in the Chapter 11
proceedings to be heard on a wide range of matters, a motion to dismiss the
Chapter 11 proceedings and a motion objecting to the proposed legal
representative for future asbestos and silica claimants. On February 11, 2004,
the bankruptcy court presiding over the Chapter 11 proceedings issued a ruling
holding that the insurers lack standing to bring motions seeking to dismiss the
pre-packaged plan of reorganization and denying standing to insurers to object
to the appointment of the proposed legal representative for future asbestos and
silica claimants. Notwithstanding the bankruptcy court ruling, we expect the
insurers to object to confirmation of the pre-packaged plan of reorganization.
In addition, we believe that these insurers will take additional steps to
prevent or delay confirmation of a plan of reorganization, including appealing
the rulings of the bankruptcy court, and there can be no assurance that the
insurers would not be successful or that such efforts would not result in delays
in the reorganization process.
There can be no assurance that we will obtain the required judicial
approval of the proposed plan of reorganization or any revised plan of
reorganization acceptable to us. In such event, a prolonged Chapter 11
proceeding could adversely effect the Debtors' relationships with customers,
suppliers and employees, which in turn could adversely affect the Debtors'
competitive position, financial condition and results of operations. In
addition, if the Debtors are unsuccessful in obtaining confirmation of a plan of
reorganization, the assets of the Debtors could be liquidated in the Chapter 11
proceedings, which could have a material adverse affect on Halliburton.
Note 13. Other Commitments and Contingencies
United States government contract work. We provide substantial work
under our government contracts business to the United States Department of
Defense and other governmental agencies, including under world-wide United
States Army logistics contracts, known as LogCAP, and under contracts to rebuild
Iraq's petroleum industry, known as RIO. Our units operating in Iraq and
elsewhere under government contracts such as LogCAP and RIO consistently review
the amounts charged and the services performed under these contracts. Our
operations under these contracts are also regularly reviewed and audited by the
Defense Contract Audit Agency, or DCAA, and other governmental agencies. When
issues are found during the governmental agency audit process, these issues are
typically discussed and reviewed with us in order to reach a resolution.
The results of a preliminary audit by the DCAA in December 2003 alleged
that we may have overcharged the Department of Defense by $61 million in
importing fuel into Iraq. After a review, the Army Corps of Engineers, which is
our client and oversees the project, concluded that we obtained a fair price for
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the fuel. However, Department of Defense officials have referred the matter to
the agency's inspector general with a request for additional investigation by
the agency's criminal division. We understand that the agency's inspector
general has commenced an investigation. We have also in the past had inquiries
by the DCAA and the civil fraud division of the United States Department of
Justice into possible overcharges for work under a contract performed in the
Balkans, which is still under review with the Department of Justice.
On January 22, 2004, we announced the identification by our internal
audit function of a potential over billing of approximately $6 million by one of
our subcontractors under the LogCAP contract in Iraq. In accordance with our
policy and government regulation, the potential overcharge was reported to the
Department of Defense Inspector General's office as well as to our customer, the
Army Materiel Command. On January 23, 2004, we issued a check in the amount of
$6 million to the Army Materiel Command to cover that potential over billing
while we conduct our own investigation into the matter. We are also continuing
to review whether third party subcontractors paid, or attempted to pay, one or
two former employees in connection with the potential $6 million over billing.
The DCAA has raised issues relating to our invoicing to the Army
Materiel Command for food services for soldiers and supporting civilian
personnel in Iraq and Kuwait. We have taken two actions in response. First, we
have temporarily credited $36 million to the Department of Defense until
Halliburton, the DCAA and the Army Materiel Command agree on a process to be
used for invoicing for food services. Second, we are not submitting $141 million
of additional food services invoices until an internal review is completed
regarding the number of meals ordered by the Army Materiel Command and the
number of soldiers actually served at dining facilities for United States troops
and supporting civilian personnel in Iraq and Kuwait. The $141 million amount is
our "order of magnitude" estimate of the remaining amounts (in addition to the
$36 million we already credited) being questioned by the DCAA. The issues relate
to whether invoicing should be based on the number of meals ordered by the Army
Materiel Command or whether invoicing should be based on the number of personnel
served. We have been invoicing based on the number of meals ordered. The DCAA is
contending that the invoicing should be based on the number of personnel served.
We believe our position is correct, but have undertaken a comprehensive review
of its propriety and the views of the DCAA. However, we cannot predict when the
issue will be resolved with the DCAA. In the meantime, we may withhold all or a
portion of the payments to our subcontractors relating to the withheld invoices
pending resolution of the issues. Except for the $36 million in credits and the
$141 million of withheld invoices, all our invoicing in Iraq and Kuwait for
other food services and other matters are being processed and sent to the Army
Materiel Command for payment in the ordinary course.
All of these matters are still under review by the applicable
government agencies. Additional review and allegations are possible, and the
dollar amounts at issue could change significantly. We could also be subject to
future DCAA inquiries for other services we provide in Iraq under the current
LogCAP contract or the RIO contract. For example, as a result of an increase in
the level of work performed in Iraq or the DCAA's review of additional aspects
of our services performed in Iraq, it is possible that we may, or may be
required to, withhold additional invoicing or make refunds to our customer, some
of which could be substantial, until these matters are resolved. This could
materially and adversely affect our liquidity.
Securities and Exchange Commission (SEC) investigation. The SEC
investigation into our recognition of revenue from unapproved claims and change
orders on long-term construction projects, which began in late May 2002 as an
informal inquiry, was converted to a formal investigation in December 2002.
Since that time, the SEC has issued subpoenas calling for the production of
documents and requiring the appearance of a number of witnesses to testify
regarding those accounting practices. To our knowledge, the SEC is now focused
on the accuracy, adequacy and timing of our disclosure of the change in our
accounting practice for revenues associated with estimated cost overruns and
unapproved claims for specific long-term engineering and construction projects.
100
Securities and related litigation. On June 3, 2002, a class action
lawsuit was filed against us in federal court on behalf of purchasers of our
common stock alleging violations of the federal securities laws. After that
date, approximately twenty similar class actions were filed against us. Several
of those lawsuits also named as defendants Arthur Andersen, LLP, our independent
accountants for the period covered by the lawsuits, and several of our present
or former officers and directors. Those lawsuits allege that we violated federal
securities laws in failing to disclose a change in the manner in which we
accounted for revenues associated with unapproved claims on long-term
engineering and construction contracts, and that we overstated revenue by
accruing the unapproved claims. On March 12, 2003, another shareholder
derivative action arising out of the same events and circumstances was filed in
federal court against certain of our present and former officers and directors.
The class action cases were later consolidated and the amended consolidated
class action complaint, styled Richard Moore v. Halliburton, was filed and
served upon us on or about April 11, 2003. In early May 2003, we announced that
we had entered into a written memorandum of understanding setting forth the
terms upon which the consolidated cases would be settled. The memorandum of
understanding called for Halliburton to pay $6 million, which is to be funded by
insurance proceeds. After that announcement, one of the lead plaintiffs
announced that it was dissatisfied with the lead plaintiffs' counsel's handling
of settlement negotiations and what the dissident plaintiff regarded as
inadequate communications by the lead plaintiffs' counsel. It is unclear whether
this dispute within the ranks of the lead plaintiffs will have any impact upon
the process of approval of the settlement and whether the dissident plaintiff
will object to the settlement at the time of the fairness hearing or opt out of
the class action for settlement purposes. The process by which the parties will
seek approval of the settlement is ongoing. The attorneys representing the
dissident plaintiff filed yet another class action case in August 2003 raising,
in addition to allegations similar to those raised in the earlier filed actions,
claims growing out of the September 1998 Dresser merger. We believe that the
allegations in that action, styled Kimble v. Halliburton Company, et al., are
without merit and we intend to vigorously defend against them. We also believe
that those new allegations fall within the scope of the memorandum of
understanding and that the settlement, if approved and consummated, will dispose
of those claims in their entirety. The parties are awaiting an order from the
court consolidating that action with the others.
As of the date of this filing, the $6 million settlement amount for the
consolidated actions and the federal court derivative action was fully covered
by our directors' and officers' insurance carrier. As such, we have accrued a
contingent liability for the $6 million settlement and a $6 million insurance
receivable from the insurance carrier.
BJ Services Company patent litigation. On April 12, 2002, a federal
court jury in Houston, Texas, returned a verdict against Halliburton Energy
Services, Inc. in a patent infringement lawsuit brought by BJ Services Company,
or BJ. The lawsuit alleged that our Phoenix fracturing fluid infringed a patent
issued to BJ in January 2000 for a method of well fracturing using a specific
fracturing fluid. The jury awarded BJ approximately $98 million in damages, plus
pre-judgment interest, and the court enjoined us from further use of our Phoenix
fracturing fluid. BJ Services' judgment against us was affirmed by the federal
appellate court in August 2003. Thereafter, we filed a petition for rehearing
before the full federal circuit court. That petition was denied by order dated
October 17, 2003. In mid-January 2004 we filed a petition for writ of certiorari
requesting that the United States Supreme Court review and reverse the judgment.
In light of the trial court's decision in April 2002, a total of $102 million
was accrued in the first quarter of 2002, which was comprised of the $98 million
judgment and $4 million in pre-judgment interest costs. We do not expect the
loss of the use of the Phoenix fracturing fluid to have a material adverse
impact on our overall energy services business. We have alternative products to
use in our fracturing operations and have not been using the Phoenix fracturing
fluid since April 2002.
Anglo-Dutch (Tenge). On October 24, 2003, a Texas district court jury
returned a verdict finding a subsidiary of Halliburton liable to Anglo-Dutch
(Tenge) L.L.C. and Anglo-Dutch Petroleum International, Inc. for breaching a
confidentiality agreement related to an investment opportunity we considered in
the late 1990s in an oil field in the former Soviet Republic of Kazakhstan. On
January 20, 2004, the judge in that case entered judgment against us and our
101
co-defendants, Ramco Oil & Gas, Ltd. and Ramco Energy, PLC (collectively,
"Ramco"), jointly and severally, for the total sum of $106 million. That sum
includes approximately $25 million in prejudgment interest on future lost
profits damages which we believe was awarded countrary to law. A charge in the
amount of $77 million was recorded in the third quarter of 2003 related to this
matter. In February 2004, the court ordered the parties to appear on March 8,
2004 at which time the court will rehear our motions. We have posted cash in
lieu of a bond in the amount of $25 million and intend to vigorously prosecute
our appeal in the event that the court upholds the jury verdict at the
conclusion of the March 8, 2004 hearing.
Newmont Gold. In July 1998, Newmont Gold, a gold mining and extraction
company, filed a lawsuit over the failure of a blower manufactured and supplied
to Newmont by Roots, a former division of Dresser Equipment Group. The plaintiff
alleges that during the manufacturing process, Roots had reversed the blades on
a component of the blower known as the inlet guide vane assembly, resulting in
the blower's failure and the shutdown of the gold extraction mill for a period
of approximately a month during 1996. In January 2002, a Nevada trial court
granted summary judgment to Roots on all counts and Newmont appealed. In
February 2004, the Nevada Supreme Court reversed the summary judgment and
remanded the case to the trial court, holding that fact issues existed which
would require trial. We believe our exposure is no more than $40 million;
however, we believe that we have valid defenses to Newmont's claims and intend
to vigorously defend the matter. As of December 31, 2003, we had not accrued any
amounts related to this matter.
Improper payments reported to the Securities and Exchange Commission.
During the second quarter 2002, we reported to the SEC that one of our foreign
subsidiaries operating in Nigeria made improper payments of approximately $2.4
million to entities owned by a Nigerian national who held himself out as a tax
consultant when in fact he was an employee of a local tax authority. The
payments were made to obtain favorable tax treatment and clearly violated our
Code of Business Conduct and our internal control procedures. The payments were
discovered during an audit of the foreign subsidiary. We conducted an
investigation assisted by outside legal counsel and, based on the findings of
the investigation, we terminated several employees. None of our senior officers
were involved. We are cooperating with the SEC in its review of the matter. We
took further action to ensure that our foreign subsidiary paid all taxes owed in
Nigeria. A preliminary assessment was issued by the Nigerian Tax Authorities in
the second quarter of 2003 of approximately $4 million. We are cooperating with
the Nigerian Tax Authorities to determine the total amount due as quickly as
possible.
Nigerian joint venture. It has been reported that a French magistrate
is investigating whether illegal payments were made in connection with the
construction and subsequent expansion of a multi-billion dollar gas
liquefication complex and related facilities at Bonny Island, in Rivers State,
Nigeria. TSKJ and other similarly-owned entities have entered into various
contracts to build and expand the liquefied natural gas project for Nigeria LNG
Limited, which is owned by the Nigerian National Petroleum Corporation, Shell
Gas B.V., Cleag Limited (an affiliate of Total) and Agip International B.V. TSKJ
is a private limited liability company registered in Madeira, Portugal whose
members are Technip SA of France, Snamprogetti Netherlands B.V., which is an
affiliate of ENI SpA of Italy, JGC Corporation of Japan and Kellogg Brown &
Root, each of which owns 25% of the venture. The United States Department of
Justice and the SEC have met with Halliburton to discuss this matter and have
asked Halliburton for cooperation and access to information in reviewing this
matter in light of the requirements of the United States Foreign Corrupt
Practices Act. Halliburton has engaged outside counsel to investigate any
allegations and is cooperating with the government's inquiries. As of December
31, 2003, we had not accrued any amounts related to this investigation.
Operations in Iran. We received and responded to an inquiry in mid-2001
from the Office of Foreign Assets Control, or OFAC, of the United States
Treasury Department with respect to operations in Iran by a Halliburton
subsidiary that is incorporated in the Cayman Islands. The OFAC inquiry
requested information with respect to compliance with the Iranian Transaction
Regulations. These regulations prohibit United States persons from engaging in
102
commercial, financial or trade transactions with Iran, unless authorized by OFAC
or exempted by statute. Our 2001 written response to OFAC stated that we
believed that we were in full compliance with applicable sanction regulations.
In January 2004, we received a follow-up letter from OFAC requesting additional
information. We are responding to questions raised in the most recent letter. As
of December 31, 2003, we had not accrued any amounts related to this
investigation.
Environmental. We are subject to numerous environmental, legal and
regulatory requirements related to our operations worldwide. In the United
States, these laws and regulations include, among others:
- the Comprehensive Environmental Response, Compensation and
Liability Act;
- the Resources Conservation and Recovery Act;
- the Clean Air Act;
- the Federal Water Pollution Control Act; and
- the Toxic Substances Control Act.
In addition to the federal laws and regulations, states and other
countries where we do business may have numerous environmental, legal and
regulatory requirements by which we must abide. We evaluate and address the
environmental impact of our operations by assessing and remediating contaminated
properties in order to avoid future liabilities and comply with environmental,
legal and regulatory requirements. On occasion, we are involved in specific
environmental litigation and claims, including the remediation of properties we
own or have operated as well as efforts to meet or correct compliance-related
matters. Our Health, Safety and Environment group has several programs in place
to maintain environmental leadership and to prevent the occurrence of
environmental contamination.
We do not expect costs related to these remediation requirements to
have a material adverse effect on our consolidated financial position or our
results of operations. Our accrued liabilities for environmental matters were
$31 million as of December 31, 2003 and $48 million as of December 31, 2002. The
liability covers numerous properties, and no individual property accounts for
more than $5 million of the liability balance. In some instances, we have been
named a potentially responsible party by a regulatory agency, but in each of
those cases, we do not believe we have any material liability. We have
subsidiaries that have been named as potentially responsible parties along with
other third parties for nine federal and state superfund sites for which we have
established a liability. As of December 31, 2003, those nine sites accounted for
approximately $7 million of our total $31 million liability.
Letters of credit. In the normal course of business, we have agreements
with banks under which approximately $1.2 billion of letters of credit or bank
guarantees were outstanding as of December 31, 2003, including $252 million
which relate to our joint ventures' operations.
In the fourth quarter of 2003, we entered into a senior secured master
letter of credit facility (Master LC Facility) with a syndicate of banks which
covers at least 90% of the face amount of our existing letters of credit. The
Master LC Facility became effective in December 2003. Each bank has permanently
waived any right that it had to demand cash collateral as a result of the filing
of Chapter 11 proceedings. In addition, the Master LC Facility provides for the
issuance of new letters of credit, so long as the total facility does not exceed
an amount equal to the amount of the facility at closing plus $250 million, or
approximately $1.5 billion.
The purpose of the Master LC Facility is to provide an advance for
letter of credit draws, if any, as well as to provide collateral for the
reimbursement obligations for the letters of credits. Advances under the Master
LC Facility will remain available until the earlier of June 30, 2004 or when an
order confirming the proposed plan of reorganization becomes final and
non-appealable. At that time, all advances outstanding under the Master LC
Facility, if any, will become term loans payable in full on November 1, 2004 and
all other letters of credit shall cease to be subject to the terms of the Master
LC Facility. As of December 31, 2003, there were no outstanding advances under
the Master LC Facility.
103
The Master LC Facility requires the same asset collateralization and is
subject to similar terms and conditions as our Revolving Credit Facility. See
Note 10.
Liquidated damages. Many of our engineering and construction contracts
have milestone due dates that must be met or we may be subject to penalties for
liquidated damages if claims are asserted and we were responsible for the
delays. These generally relate to specified activities within a project by a set
contractual date or achievement of a specified level of output or throughput of
a plant we construct. Each contract defines the conditions under which a
customer may make a claim for liquidated damages. In most instances, liquidated
damages are not asserted by the customer but the potential to do so is used in
negotiating claims and closing out the contract. We had not accrued liabilities
for $243 million at December 31, 2003 and $364 million at December 31, 2002 of
liquidated damages we could incur based upon completing the projects as
forecasted as we consider the imposition of liquidated damages to be unlikely.
We believe we have valid claims for schedule extensions against the customers
which would eliminate our liability for liquidated damages.
Leases. We are obligated under noncancelable operating leases,
principally for the use of land, offices, equipment, field facilities, and
warehouses. Total rentals, net of sublease rentals, for noncancelable leases
were as follows:
Millions of dollars 2003 2002 2001
- ----------------------------------------------------------------
Rental expense $ 193 $ 149 $ 172
================================================================
Future total rentals on noncancelable operating leases are as follows:
$143 million in 2004; $96 million in 2005; $80 million in 2006; $58 million in
2007; $45 million in 2008; and $267 million thereafter.
Note 14. Income Taxes
The components of the (provision)/benefit for income taxes on
continuing operations are:
Years ended December 31
-------------------------------------------
Millions of dollars 2003 2002 2001
-----------------------------------------------------------------------------
Current income taxes:
Federal $ (167) $ 71 $ (146)
Foreign (181) (173) (157)
State 1 4 (20)
-----------------------------------------------------------------------------
Total Current (347) (98) (323)
-----------------------------------------------------------------------------
Deferred income taxes:
Federal 80 (11) (58)
Foreign 25 11 (8)
State 8 18 5
-----------------------------------------------------------------------------
Total Deferred 113 18 (61)
-----------------------------------------------------------------------------
Provision for Income Taxes $ (234) $ (80) $ (384)
=============================================================================
The United States and foreign components of income (loss) from
continuing operations before income taxes, minority interest and change in
accounting principle are as follows:
Years ended December 31
---------------------------------------
Millions of dollars 2003 2002 2001
- ---------------------------------------------------------------
United States $ 254 $ (537) $ 565
Foreign 358 309 389
- ---------------------------------------------------------------
Total $ 612 $ (228) $ 954
===============================================================
104
The reconciliations between the actual provision for income taxes on
continuing operations and that computed by applying the United States statutory
rate to income from continuing operations before income taxes, minority interest
and change in accounting principle are as follows:
Years ended December 31
--------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------
United States Statutory rate 35.0% 35.0% 35.0%
Rate differentials on foreign earnings 0.8 (1.8) 3.4
State income taxes, net of federal income tax benefit 0.9 0.9 1.4
Prior years 1.6 14.5 -
Dispositions (1.6) (12.3) -
Valuation allowance - (71.5) -
Other items, net 1.5 - 0.5
- ---------------------------------------------------------------------------------------------------
Total effective tax rate on continuing operations 38.2% (35.2)% 40.3%
===================================================================================================
The asbestos accruals, the losses on the Bredero-Shaw disposition and
the associated tax benefits net of valuation allowances in continuing operations
during 2002 are the primary causes of the unusual 2002 effective tax rate on
continuing operations. There were no significant asbestos charges or related tax
accruals included in continuing operations for 2001 or 2003.
Our impairment loss on Bredero-Shaw during 2002 could not be benefited
for tax purposes due to book and tax basis differences in that investment and
the limited benefit generated by a capital loss carryback. However, due to
changes in circumstances regarding prior years, we are now able to carry back a
portion of the capital loss, which resulted in an $11 million benefit in 2003.
The primary components of our deferred tax assets and liabilities and
the related valuation allowances, including deferred tax accounts associated
with discontinued operations are as follows:
105
December 31
------------------------------
Millions of dollars 2003 2002
- -------------------------------------------------------------------------------------
Gross deferred tax assets:
Asbestos and silica related liabilities $ 1,463 $ 1,201
Employee compensation and benefits 275 282
Foreign tax credit carryforward 113 49
Capitalized research and experimentation 100 75
Accrued liabilities 100 102
Construction contract accounting 94 114
Net operating loss carryforwards 83 81
Insurance accruals 77 78
Alternative minimum tax credit carryforward 30 5
Other 191 147
- -------------------------------------------------------------------------------------
Total $ 2,526 $ 2,134
- -------------------------------------------------------------------------------------
Gross deferred tax liabilities:
Insurance for asbestos and silica related
liabilities $ 631 $ 724
Depreciation and amortization 129 188
Nonrepatriated foreign earnings 36 36
Other 11 13
- -------------------------------------------------------------------------------------
Total $ 807 $ 961
- -------------------------------------------------------------------------------------
Valuation allowances:
Future tax attributes related to asbestos
and silica litigation $ 624 $ 233
Foreign tax credit limitation 113 49
Net operating loss carryforwards 56 77
Other - 7
- -------------------------------------------------------------------------------------
Total $ 793 $ 366
- -------------------------------------------------------------------------------------
Net deferred income tax asset $ 926 $ 807
=====================================================================================
We have $190 million of net operating loss carryforwards that expire
from 2004 through 2012 and net operating loss carryforwards of $62 million with
indefinite expiration dates. The federal alternative minimum tax credits are
available to reduce future United States federal income taxes on an indefinite
basis.
We have accrued for the potential repatriation of undistributed
earnings of our foreign subsidiaries and consider earnings above the amounts on
which tax has been provided to be permanently reinvested. While these additional
earnings could become subject to additional tax if repatriated, repatriation is
not anticipated. Any additional amount of tax is not practicable to estimate.
We have established a valuation allowance against foreign tax credit
carryovers and certain foreign operating loss carryforwards on the basis that we
believe these assets will not be utilized in the statutory carryover period. We
also have recorded a valuation allowance on the asbestos and silica liabilities
based on the anticipated impact of the future asbestos and silica deductions on
our ability to utilize future foreign tax credits. We anticipate that a portion
of the asbestos and silica deductions will displace future foreign tax credits
and those credits will expire unutilized.
106
Note 15. Shareholders' Equity and Stock Incentive Plans
The following tables summarize our common stock and other shareholders'
equity activity:
Capital
in Accumulated
Excess Other
Common of Par Treasury Deferred Retained Comprehensive
(Millions of dollars) Stock Value Stock Compensation Earnings Income
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $1,132 $259 $(845) $ (63) $3,733 $ (288)
============================================================================================================
Cash dividends paid - - - - (215) -
Reissuance of treasury stock for:
Stock purchase, compensation and
incentive plans, net 2 30 51 - - -
Acquisition 4 11 140 - - -
Treasury stock purchased - - (34) - - -
Current year awards, net of tax - - - (24) - -
Tax benefit from exercise of options - (2) - - - -
- ------------------------------------------------------------------------------------------------------------
Total dividends and other
transactions with shareholders 6 39 157 (24) (215) -
- ------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - 809 -
Other comprehensive income,
net of tax:
Cumulative translation
adjustments - - - - - (32)
Realization of losses included in
net income - - - - - 102
Minimum pension liability
adjustment, net of income
taxes of $13 - - - - - (15)
Unrealized (loss) on
investments and derivatives - - - - - (3)
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - - 809 52
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1,138 $298 $(688) $ (87) $4,327 $ (236)
============================================================================================================
Cash dividends paid - - - - (219) -
Reissuance of treasury stock for:
Stock purchase, compensation and
incentive plans, net 1 (24) 62 - - -
Stock issued for acquisition 2 24 - - - -
Treasury stock purchased - - (4) - - -
Current year awards, net of tax - - - 12 - -
Tax benefit from exercise of options - (5) - - - -
- ------------------------------------------------------------------------------------------------------------
Total dividends and other transactions
with shareholders 3 (5) 58 12 (219) -
- ------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net loss - - - - (998) -
Other comprehensive income,
net of tax:
Cumulative translation
adjustments - - - - - 69
Realization of losses included in
net income - - - - - 15
Minimum pension liability
adjustment, net of income
taxes of $70 - - - - - (130)
Unrealized gain on
investments and derivatives - - - - - 1
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - - (998) (45)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $1,141 $293 $(630) $ (75) $3,110 $ (281)
============================================================================================================
107
Capital
in Accumulated
Excess Other
Common of Par Treasury Deferred Retained Comprehensive
(Millions of dollars) Stock Value Stock Compensation Earnings Income
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $1,141 $293 $(630) $ (75) $3,110 $ (281)
============================================================================================================
Cash dividends paid - - - - (219) -
Reissuance of treasury stock for:
Stock purchase, compensation and
incentive plans, net 1 (19) 60 - - -
Treasury stock purchased - - (7) - - -
Current year awards, net of tax - - - 11 - -
Tax benefit from exercise of options - (1) - - - -
- ------------------------------------------------------------------------------------------------------------
Total dividends and other transactions
with shareholders 1 (20) 53 11 (219) -
- ------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net loss - - - - (820) -
Other comprehensive income,
net of tax:
Cumulative translation
adjustments - - - - - 43
Realization of losses included in
net income - - - - - 15
Minimum pension liability
adjustment, net of income
taxes of $25 - - - - - (88)
Unrealized gain on
investments and derivatives - - - - - 13
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - - (820) (17)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,142 $273 $(577) $ (64) $ 2,071 $ (298)
============================================================================================================
December 31
Accumulated other comprehensive income ----------------------------------------------------
Millions of dollars 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Cumulative translation adjustments $ (63) $ (121) $ (205)
Pension liability adjustments (245) (157) (27)
Unrealized gains (losses) on investments
and derivatives 10 (3) (4)
- ----------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (298) $ (281) $ (236)
==========================================================================================================
December 31
Shares of common stock ----------------------------------------------------
Millions of shares 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Issued 457 456 455
In treasury (18) (20) (21)
- ----------------------------------------------------------------------------------------------------------
Total shares of common stock outstanding 439 436 434
==========================================================================================================
Our 1993 Stock and Incentive Plan provides for the grant of any or all
of the following types of awards:
- stock options, including incentive stock options and
non-qualified stock options;
- stock appreciation rights, in tandem with stock options or
freestanding;
- restricted stock;
- performance share awards; and
- stock value equivalent awards.
Under the terms of the 1993 Stock and Incentive Plan, as amended, 49 million
shares of common stock have been reserved for issuance to key employees. The
plan specifies that no more than 16 million shares can be awarded as restricted
108
stock. At December 31, 2003, 17 million shares were available for future grants
under the 1993 Stock and Incentive Plan of which nine million shares remain
available for restricted stock awards.
In connection with the acquisition of Dresser Industries, Inc. in 1998,
we assumed the outstanding stock options under the stock option plans maintained
by Dresser Industries, Inc. Stock option transactions summarized below include
amounts for the 1993 Stock and Incentive Plan and stock plans of Dresser
Industries, Inc. and other acquired companies. No further awards are being made
under the stock plans of acquired companies.
The following table represents our stock options granted, exercised and
forfeited during the past three years:
Number of Exercise Weighted Average
Shares Price per Exercise Price
Stock Options (in millions) Share per Share
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 14.7 $ 8.28 - 61.50 $ 34.54
- ---------------------------------------------------------------------------------------------
Granted 3.6 12.93 - 45.35 35.56
Exercised (0.7) 8.93 - 40.81 25.34
Forfeited (0.5) 12.32 - 54.50 36.83
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 17.1 $ 8.28 - 61.50 $ 35.10
- ---------------------------------------------------------------------------------------------
Granted 2.6 9.10 - 19.75 12.57
Exercised - * 8.93 - 17.21 11.39
Forfeited (1.2) 8.28 - 54.50 31.94
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 18.5 $ 9.10 - 61.50 $ 32.10
- ---------------------------------------------------------------------------------------------
Granted 2.4 18.60 - 24.76 23.45
Exercised (0.4) 8.28 - 23.52 14.75
Forfeited (1.0) 9.10 - 54.50 32.07
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 19.5 $ 9.10 - 61.50 $ 31.34
=============================================================================================
*Actual exercises for 2002 were approximately 30,000 shares.
Options outstanding at December 31, 2003 are composed of the following:
Outstanding Exercisable
---------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices (in millions) Life Price (in millions) Price
- ------------------------------------------------------------------------------------------------------------
$ 9.10 - 23.79 5.6 7.2 $ 18.30 1.8 $ 17.57
$ 23.80 - 32.40 5.4 5.0 28.82 4.3 28.85
$ 32.41 - 39.54 4.9 5.4 38.44 4.8 38.44
$ 39.55 - 61.50 3.6 5.7 45.57 2.9 46.90
- ------------------------------------------------------------------------------------------------------------
$ 9.10 - 61.50 19.5 5.9 $ 31.34 13.8 $ 34.59
============================================================================================================
There were 12.5 million options exercisable with a weighted average
exercise price of $34.98 at December 31, 2002, and 10.7 million options
exercisable with a weighted average exercise price of $34.08 at December 31,
2001.
All stock options under the 1993 Stock and Incentive Plan, including
options granted to employees of Dresser Industries, Inc. (now DII Industries)
since its acquisition, are granted at the fair market value of the common stock
at the grant date.
109
Stock options generally expire 10 years from the grant date. Stock
options under the 1993 Stock and Incentive Plan vest ratably over a three or
four year period. Other plans have vesting periods ranging from three to 10
years. Options under the Non-Employee Directors' Plan vest after six months.
Restricted shares awarded under the 1993 Stock and Incentive Plan were
431,865 in 2003, 1,706,643 in 2002, and 1,484,034 in 2001. The shares awarded
are net of forfeitures of 248,620 in 2003, 46,894 in 2002, and 170,050 in 2001.
The weighted average fair market value per share at the date of grant of shares
granted was $22.94 in 2003, $14.95 in 2002, and $30.90 in 2001.
Our Restricted Stock Plan for Non-Employee Directors allows for each
non-employee director to receive an annual award of 400 restricted shares of
common stock as a part of compensation. We reserved 100,000 shares of common
stock for issuance to non-employee directors. Under this plan we issued 4,000
restricted shares in 2003, 4,400 restricted shares in 2002, and 4,800 restricted
shares in 2001. At December 31, 2003, 42,000 shares have been issued to
non-employee directors under this plan. The weighted average fair market value
per share at the date of grant of shares granted was $22.24 in 2003, $12.56 in
2002, and $34.35 in 2001.
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, 2003, 151,850 shares (net of 43,550 shares forfeited) have been
issued. Forfeitures were 800 in 2003, 400 in 2002, and 800 in 2001. No further
grants are being made under this plan.
Under the terms of our Career Executive Incentive Stock Plan, 15
million shares of our common stock were reserved for issuance to officers and
key employees at a purchase price not to exceed par value of $2.50 per share. At
December 31, 2003, 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 Incentive Plan,
Restricted Stock Plan for Non-Employee Directors, Employees' Restricted Stock
Plan and the Career Executive Incentive Stock Plan are limited as to sale or
disposition. These restrictions lapse periodically over an extended period of
time not exceeding 10 years. Restrictions may also lapse for early retirement
and other conditions in accordance with our established policies. Upon
termination of employment, shares in which restrictions have not lapsed must be
returned to us, resulting in restricted stock forfeitures. The fair market value
of the stock, on the date of issuance, is being amortized and charged to income
(with similar credits to paid-in capital in excess of par value) generally over
the average period during which the restrictions lapse. At December 31, 2003,
the unamortized amount is $64 million. We recognized compensation costs of $20
million in 2003, $38 million in 2002, and $23 million in 2001.
During 2002, our Board of Directors approved the 2002 Employee Stock
Purchase Plan (ESPP) and reserved 12 million shares for issuance. Under the
ESPP, eligible employees may have up to 10% of their earnings withheld, subject
to some limitations, to be used to purchase shares of our common stock. Unless
the Board of Directors shall determine otherwise, each 6-month offering period
commences on January 1 and July 1 of each year. The price at which common stock
may be purchased under the ESPP is equal to 85% of the lower of the fair market
value of the common stock on the commencement date or last trading day of each
offering period. Through the ESPP, there were approximately 1.3 million shares
sold in 2003 and approximately 541,000 shares sold in 2002.
We account for these plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and related Interpretations. No cost for stock options granted is reflected in
net income, as all options granted under our plans have an exercise price equal
to the market value of the underlying common stock on the date of grant. In
addition, no cost for the Employee Stock Purchase Plan is reflected in net
income because it is not considered a compensatory plan.
On April 25, 2000, our Board of Directors approved plans to implement a
share repurchase program for up to 44 million shares. No shares were repurchased
in 2003 or 2002. We repurchased 1.2 million shares at a cost of $25 million in
2001.
110
Note 16. Series A Junior Participating Preferred Stock
We previously declared a dividend of one preferred stock purchase right
on each outstanding share of common stock. The dividend is also applicable to
each share of our common stock that was issued subsequent to adoption of the
Rights Agreement entered into with Mellon Investor Services LLC. Each preferred
stock purchase right entitles its holder to buy one two-hundredth of a share of
our Series A Junior Participating Preferred Stock, without par value, at an
exercise price of $75. These preferred stock purchase rights are subject to
anti-dilution adjustments, which are described in the Rights Agreement entered
into with Mellon. The preferred stock purchase rights do not have any voting
rights and are not entitled to dividends.
The preferred stock purchase rights become exercisable in limited
circumstances involving a potential business combination. After the preferred
stock purchase rights become exercisable, each preferred stock purchase right
will entitle its holder to an amount of our common stock, or in some
circumstances, securities of the acquirer, having a total market value equal to
two times the exercise price of the preferred stock purchase right. The
preferred stock purchase rights are redeemable at our option at any time before
they become exercisable. The preferred stock purchase rights expire on December
15, 2005. No event during 2003 made the preferred stock purchase rights
exercisable.
Note 17. Income (Loss) Per Share
Basic income (loss) per share is based on the weighted average number
of common shares outstanding during the period. Diluted income (loss) per share
includes additional common shares that would have been outstanding if potential
common shares (consisting primarily of stock options) with a dilutive effect had
been issued. The effect of common stock equivalents on basic weighted average
shares outstanding was an additional three million shares in 2003 and an
additional two million shares in 2001. Excluded from the computation of diluted
income (loss) per share are options to purchase 16 million shares of common
stock in 2003 and 10 million shares in 2001. These options were outstanding
during these years, but were excluded because the option exercise price was
greater than the average market price of the common shares. The shares issuable
upon conversion of the 3.125% convertible senior notes due 2023 (see Note 10)
were not included in the computation of diluted income (loss) per share since
the conditions for conversion had not been met as of December 31, 2003. Loss per
share for discontinued operations and net loss for the year ended December 31,
2003 were antidilutive, as the control number used to determine whether to
include any common stock equivalents in the weighted shares outstanding for the
period is income from continuing operations.
For 2002, we used the basic weighted average shares in the calculation
of diluted loss per share as the effect of the common stock equivalents (which
totaled two million shares for this period) would be antidilutive based upon the
net loss from continuing operations.
Included in the computation of diluted income per common share in 2001
are rights we issued in connection with the PES (International) Limited
acquisition in 2000 for between 850,000 and 2.1 million shares of Halliburton
common stock.
Note 18. 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 manage significant
exposures to potential foreign exchange losses considering current market
conditions, future operating activities and the associated cost in relation to
the perceived risk of loss. The purpose of our foreign currency risk management
activities is to protect us from the risk that the eventual dollar cash flows
resulting from the sale and purchase of products and services in foreign
currencies will be adversely affected by changes in exchange rates.
111
We manage our currency exposure through the use of currency derivative
instruments as it relates to the major currencies, which are generally the
currencies of the countries for which we do the majority of our international
business. These contracts generally have an expiration date of two years or
less. Forward exchange contracts, which are commitments to buy or sell a
specified amount of a foreign currency at a specified price and time, are
generally used to manage identifiable foreign currency commitments. Forward
exchange contracts and foreign exchange option contracts, which convey the
right, but not the obligation, to sell or buy a specified amount of foreign
currency at a specified price, are generally used to manage exposures related to
assets and liabilities denominated in a foreign currency. None of the forward or
option contracts are exchange traded. While derivative instruments are subject
to fluctuations in value, the fluctuations are generally offset by the value of
the underlying exposures being managed. The use of some contracts may limit our
ability to benefit from favorable fluctuations in foreign exchange rates.
Foreign currency contracts are not utilized to manage exposures in some
currencies due primarily to the lack of available markets or cost considerations
(non-traded currencies). We attempt to manage our working capital position to
minimize foreign currency commitments in non-traded currencies and recognize
that pricing for the services and products offered in these countries should
cover the cost of exchange rate devaluations. We have historically incurred
transaction losses in non-traded currencies.
Assets, liabilities and forecasted cash flows denominated in foreign
currencies. We utilize the derivative instruments described above to manage the
foreign currency exposures related to specific assets and liabilities, which are
denominated in foreign currencies; however, we have not elected to account for
these instruments as hedges for accounting purposes. Additionally, we utilize
the derivative instruments described above to manage forecasted cash flows
denominated in foreign currencies generally related to long-term engineering and
construction projects. Beginning in 2003, we designated these contracts related
to engineering and construction projects as cash flow hedges. The ineffective
portion of these hedges are included in operating income in the accompanying
consolidated statement of operations and was not material in the year ended
2003. The unrealized net gains on these cash flow hedges were approximately $10
million as of December 31, 2003 and are included in other comprehensive income
in the accompanying consolidated balance sheet. We expect approximately $10
million of the unrealized net gain on these cash flow hedges to be reclassified
into earnings within a year as most of these cash flow hedges settle in the next
12 months. Changes in the timing or amount of the future cash flows being hedged
could result in hedges becoming ineffective and, as a result, the amount of
unrealized gain or loss associated with that hedge would be reclassified from
other comprehensive income into earnings. At December 31, 2003, the maximum
length of time over which we are hedging our exposure to the variability in
future cash flows associated with foreign currency forecasted transactions is
two years. In 2002, we did not designate these derivate contracts related to
engineering and construction projects as cash flow hedges. The fair value of
these contracts was immaterial as of the end of 2003 and 2002.
Notional amounts and fair market values. The notional amounts of open
forward contracts and options contracts for operations were $1.1 billion at
December 31, 2003 and $609 million at December 31, 2002. The notional amounts of
our foreign exchange contracts do not generally represent amounts exchanged by
the parties, and thus, are not a measure of our exposure or of the cash
requirements relating to these contracts. The amounts exchanged are calculated
by reference to the notional amounts and by other terms of the derivatives, such
as exchange rates.
Credit risk. Financial instruments that potentially subject us to
concentrations of credit risk are primarily cash equivalents, investments and
trade receivables. It is our practice to place our cash equivalents and
investments in high-quality securities with various investment institutions. We
derive the majority of our revenues from sales and services, including
engineering and construction, to the energy industry. Within the energy
industry, trade receivables are generated from a broad and diverse group of
customers. There are concentrations of receivables in the United States and the
United Kingdom. We maintain an allowance for losses based upon the expected
collectibility of all trade accounts receivable. In addition, see Note 6 for
further discussion of United States government receivables.
112
There are no significant concentrations of credit risk with any
individual counterparty related to our derivative contracts. We select
counterparties based on their profitability, balance sheet and a capacity for
timely payment of financial commitments which is unlikely to be adversely
affected by foreseeable events.
Interest rate risk. We have several debt instruments outstanding which
have both fixed and variable interest rates. We manage our ratio of fixed to
variable-rate debt through the use of different types of debt instruments and
derivative instruments. As of December 31, 2003, we held no interest rate
derivative instruments.
Fair market value of financial instruments. The estimated fair market
value of long-term debt was $3.6 billion at December 31, 2003 and $1.3 billion
at December 31, 2002, as compared to the carrying amount of $3.4 billion at
December 31, 2003 and $1.5 billion at December 31, 2002. The fair market value
of fixed rate long-term debt is based on quoted market prices for those or
similar instruments. The carrying amount of variable rate long-term debt
approximates fair market value because these instruments reflect market changes
to interest rates. The carrying amount of short-term financial instruments, cash
and equivalents, receivables, short-term notes payable and accounts payable, as
reflected in the consolidated balance sheets, approximates fair market value due
to the short maturities of these instruments. The currency derivative
instruments are carried on the balance sheet at fair value and are based upon
third-party quotes. The fair market values of derivative instruments used for
fair value hedging and cash flow hedging were immaterial.
Note 19. Retirement Plans
Our company and subsidiaries have various plans which cover a
significant number of their employees. These plans include defined contribution
plans, defined benefit plans and other postretirement plans.
- our defined contribution plans provide retirement
contributions in return for services rendered. These plans
provide an individual account for each participant and have
terms that specify how contributions to the participant's
account are to be determined rather than the amount of pension
benefits the participant is to receive. Contributions to these
plans are based on pretax income and/or discretionary amounts
determined on an annual basis. Our expense for the defined
contribution plans for both continuing and discontinued
operations totaled $87 million, $80 million and $129 million
in 2003, 2002 and 2001, respectively;
- our defined benefit plans include both funded and unfunded
pension plans, which define an amount of pension benefit to be
provided, usually as a function of age, years of service or
compensation; and
- our postretirement medical plans are offered to specific
eligible employees. These plans are contributory. 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. 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. For another postretirement
medical plan we have generally absorbed the majority of the
costs; however, an amendment was made to this plan in 2003 to
limit the company's share of costs. Total amendments made in
2003 decreased the accumulated benefit obligation by $93
million.
On December 8, 2003, the President signed into law the Medicare
Prescription Drug Improvement and Modernization Act of 2003. Because the Act was
passed after the measurement date used for our retirement plans, its impact has
not been reflected in any amounts disclosed in the financial statements or
113
accompanying notes. We are currently reviewing the effects the Act will have on
our plans and expect to complete that review during 2004. In addition, we are
waiting for guidance from the United States Department of Health and Human
Services on how the employer subsidy provision will be administered and from the
Financial Accounting Standards Board on how the impact of the Act should be
recognized in our financial statements.
Plan assets, expenses and obligation for retirement plans in the
following tables include both continuing and discontinued operations. We use a
September 30 measurement date for our international plans and an October 31
measurement date for our domestic plans.
Pension Benefits
------------------------------------------- Other
United United Postretirement
Benefit obligations States Int'l States Int'l Benefits
- ------------------------------------------------------------------------------------------------------------
Millions of dollars 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 144 $2,239 $ 140 $1,968 $ 186 $ 157
Service cost 1 72 1 72 1 1
Interest cost 10 120 9 102 12 11
Plan participants' contributions - 17 - 14 13 11
Effect of business combinations and new plans - 12 - 70 - -
Amendments - - 1 (4) (93) -
Divestitures - (56) - (5) - -
Settlements/curtailments - 4 (1) (1) - -
Currency fluctuations - 54 - 102 - -
Actuarial gain/(loss) 18 107 5 (27) 4 33
Benefits paid (13) (68) (11) (52) (26) (27)
- ------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 160 $2,501 $ 144 $2,239 $ 97 $ 186
============================================================================================================
Accumulated benefit obligation
at end of year $ 158 $2,230 $ 142 $2,032 $ - $ -
============================================================================================================
Pension Benefits
--------------------------------------- Other
United United Postretirement
Plan assets States Int'l States Int'l Benefits
- --------------------------------------------------------------------------------------------------------
Millions of dollars 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning
of year $ 113 $ 1,886 $ 130 $1,827 $ - $ -
Actual return on plan assets 8 152 (6) (69) - -
Employer contributions 2 53 1 36 13 16
Settlements and transfers - (33) (1) - - -
Plan participants' contributions 3 17 - 14 13 11
Effect of business combinations and new plans - - - 45 - -
Divestitures - (47) - (5) - -
Currency fluctuations - 43 - 89 - -
Benefits paid (13) (68) (11) (51) (26) (27)
- --------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 113 $ 2,003 $ 113 $1,886 $ - $ -
========================================================================================================
114
Our pension plan weighted-average asset allocations at December 31,
2003 and 2002 and the target allocations for 2004, by asset category are as
follows:
Percentage of Plan Assets at Year End
---------------------------------------------------------
Target United States Int'l United States Int'l
Allocation ---------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Asset category
Equity securities 45% - 70% 45% 63% 44% 61%
Debt securities 30% - 55% 23% 34% 26% 37%
Real estate 0% 0% 0% 0% 0%
Other - STIF 0% - 5% 32% 3% 30% 2%
- ----------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100%
====================================================================================================
Our investment strategy varies by country depending on the
circumstances of the underlying plan. Typically less mature plan benefit
obligations are funded by using more equity securities as they are expected to
achieve long-term growth while exceeding inflation. More mature plan benefit
obligations are funded using more fixed income securities as they are expected
to produce current income with limited volatility. Risk management practices
include the use of multiple asset classes and investment managers within each
asset class for diversification purposes. Specific guidelines for each asset
class and investment manager are implemented and monitored.
Funded status
The funded status of the plans, reconciled to the amount reported on
the statement of financial position, is as follows:
Pension Benefits
------------------------------------------- Other
United United Postretirement
States Int'l States Int'l Benefits
- ----------------------------------------------------------------------------------------------------------
End of year (in millions of dollars) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 113 $2,003 $ 113 $1,886 $ - $ -
Benefit obligation at end of year 160 2,501 144 2,239 97 186
Funded status $ (47) $ (498) $ (31) $ (353) $ (97) $(186)
Employer contribution - 5 - - 2 2
Unrecognized transition (1) (1) - (2) - -
obligation/(asset)
Unrecognized actuarial (gain)/loss 76 594 56 477 23 20
Unrecognized prior service cost/(benefit) 1 (1) 1 - (90) 2
Purchase accounting adjustment - (77) - (70) - -
- ----------------------------------------------------------------------------------------------------------
Net amount recognized $ 29 $ 22 $ 26 $ 52 $(162) $(162)
==========================================================================================================
115
Amounts recognized in the statement of financial position are as
follows:
Pension Benefits
------------------------------------ Other
United United Postretirement
States Int'l States Int'l Benefits
- ------------------------------------------------------------------------------------------------------
End of year (in millions of dollars) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets
Prepaid benefit cost $ 31 $ 95 $ 30 $ 102 $ - $ -
Accrued benefit liability including
additional minimum liability (76) (361) (59) (250) 162 162
Intangible asset - 8 2 12 - -
Accumulated other comprehensive income,
net of tax 48 197 35 122 - -
Deferred tax asset 26 83 18 66 - -
- ------------------------------------------------------------------------------------------------------
Net amount recognized $ 29 $ 22 $ 26 $ 52 $ 162 $ 162
======================================================================================================
We recognized an additional minimum pension liability for the
underfunded defined benefit plans of $107 million in 2003 and $212 million in
2002, of which $88 million was recorded as "Other comprehensive income" in 2003
and $130 million was recorded as "Other comprehensive income" in 2002. 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.
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets as of December 31, 2003 and 2002 are as
follows:
Pension Benefits
------------------------------
Millions of dollars 2003 2002
- -------------------------------------------------------------------
Projected benefit obligation $ 2,630 $ 2,319
Accumulated benefit obligation $ 2,363 $ 2,121
Fair value of plan assets $ 2,087 $ 1,942
===================================================================
Expected cash flows
Funding requirements for each plan are determined based on the local
laws of the country where such plan resides. In certain countries the funding
requirements are mandatory while in other countries they are discretionary. We
currently expect to contribute $64 million to our international pension plans in
2004. For our domestic plans we expect our contributions to be in the range of
$1 million to $3 million in 2004. We may make additional discretionary
contributions, which will be determined after the actuarial valuations are
complete. The United States Congress is expected to consider pension funding
relief legislation when they reconvene for 2004. The actual contributions we
make during 2004 may be impacted by the final legislative outcome, but the
impact cannot be reasonably estimated at this time.
116
Net periodic cost
Pension Benefits
--------------------------------------------------- Other
United United United Postretirement
States Int'l States Int'l States Int'l Benefits
End of year --------------------------------------------------------------------------------
(millions of dollars) 2003 2002 2001 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Components of net
periodic benefit
cost
Service cost $ 1 $ 72 $ 1 $ 72 $ 2 $ 60 $ 1 $ 1 $ 2
Interest cost 10 120 9 102 13 89 12 11 15
Expected return on
plan assets (12) (136) (13) (106) (18) (95) - - -
Transition amount - (1) - (2) - (2) - - -
Amortization of prior
service cost - - (2) (6) (2) (6) - - (3)
Settlements/curtailments 2 - - (2) 16 - - - (221)
Recognized actuarial
(gain)/loss 1 18 1 3 (1) (9) 1 (1) (1)
- ----------------------------------------------------------------------------------------------------------
Net periodic benefit
(income)/cost $ 2 $ 73 $ (4) $ 61 $ 10 $ 37 $ 14 $ 11 $(208)
==========================================================================================================
Assumptions
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:
Pension Benefits
Weighted-average ------------------------------------------------------------ Other
assumptions used to United United United Postretirement
determine benefit States Int'l States Int'l States Int'l Benefits
obligations at --------------------------------------------------------------------------------------
December 31 2003 2002 2001 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 2.5-18.0% 7.0% 5.25-20.0% 7.25% 5.0-8.0% 6.25% 7.0% 7.25%
Rate of compensation
increase 4.5% 2.0-15.5% 4.5% 3.0-21.0% 4.5% 3.0-7.0% N/A N/A N/A
==============================================================================================================
Weighted-average Pension Benefits
assumptions used to ------------------------------------------------------------ Other
determine net United United United Postretirement
periodic benefit cost States Int'l States Int'l States Int'l Benefits
for years ended ------------------------------------------------------------------------------------
December 31 2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Discount rate 7.0% 2.5-20.0% 7.25% 5.0-20.0% 7.5% 5.0-8.0% 7.0% 7.25% 7.50%
Expected return on
plan assets 8.75% 5.5-8.0% 9.0% 5.5-9.0% 9.0% 5.5-9.0% N/A N/A N/A
Rate of compensation
increase 4.5% 2.0-21.0% 4.5% 3.0-21.0% 4.5% 3.0-7.0% N/A N/A N/A
=============================================================================================================
117
The overall expected long-term rate of return on assets is determined
based upon an evaluation of our plan assets, historical trends and experience
taking into account current and expected market conditions.
Assumed health care cost trend
rates at December 31 2003 2002 2001
- ---------------------------------------------------------------------------
Health care cost trend rate
assumed for next year 13.0% 13.0% 11.0%
Rate to which the cost trend
rate is assumed to decline
(the ultimate trend rate) 5.0% 5.0% 5.0%
Year that the rate reached the
ultimate trend rate 2008 2007 2005
===========================================================================
Assumed health care cost trend rates are not expected to have a
significant impact 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:
One-Percentage-Point
Millions of dollars Increase (Decrease)
- --------------------------------------------------------------
Effect on total of service and
interest cost components $ - $ -
Effect on the postretirement
benefit obligation $ 1 $ (1)
==============================================================
Note 20. Related Companies
We conduct some of our operations through joint ventures which are in
partnership, corporate and other business forms and are principally accounted
for using the equity method. Financial information pertaining to related
companies for our continuing operations is set out below. This information
includes the total related company balances and not our proportional interest in
those balances.
Our larger unconsolidated entities include Subsea 7, Inc., a 50% owned
subsidiary, formed in May 2002 (whose results are reported in our Production
Optimization segment) and the partnerships created to construct the Alice
Springs to Darwin rail line in Australia (whose results are reported in our
Engineering and Construction segment).
Combined summarized financial information for all jointly owned
operations that are accounted for under the equity method is as follows:
Years ended December 31
Combined Operating Results ---------------------------------------
Millions of dollars 2003 2002 2001
- -------------------------------------------------------------------------
Revenues $ 2,576 $ 1,948 $ 1,987
=========================================================================
Operating income $ 124 $ 200 $ 231
=========================================================================
Net income $ 74 $ 159 $ 169
=========================================================================
118
December 31
Combined Financial Position -----------------------------
Millions of dollars 2003 2002
- ---------------------------------------------------------------
Current assets $ 1,355 $ 1,404
Noncurrent assets 3,044 1,876
- ---------------------------------------------------------------
Total $ 4,399 $ 3,280
===============================================================
Current liabilities $ 1,332 $ 1,155
Noncurrent liabilities 2,277 1,367
Minority interests 3 -
Shareholders' equity 787 758
- ---------------------------------------------------------------
Total $ 4,399 $ 3,280
===============================================================
Note 21. Other Discontinued Operations
In addition to the asbestos and silica items recorded in discontinued
operations for 2003, 2002 and 2001 (see Note 11), discontinued operations for
2003 also includes a $10 million pretax release of environmental and legal
accruals. The accruals are no longer required as they related to indemnities
associated with the 2001 disposition of Dresser Equipment Group. The tax effect
of the release is $1 million.
In late 1999 and early 2000, we sold our interest in two joint ventures
that were a significant portion of our Dresser Equipment Group. In April 2001,
we sold the remaining Dresser Equipment Group businesses. We recorded $37
million of income (or $22 million, net of tax effect of $15 million) for the
financial results of Dresser Equipment Group through March 31, 2001 as
discontinued operations.
Gain on disposal of discontinued operations. As a result of the sale of
Dresser Equipment Group, we recognized a pretax gain of $498 million ($299
million after tax). As part of the terms of the transaction, we retained a 5.1%
equity interest of Class A common stock in the Dresser Equipment Group, which
has been renamed Dresser, Inc. In July 2002, Dresser, Inc. announced a
reorganization, and we have exchanged our shares for shares of Dresser Ltd. Our
equity interest is accounted for under the cost method.
Gain on disposal of discontinued operations reflects the gain on the
sale of the remaining businesses within the Dresser Equipment Group in the
second quarter of 2001.
Gain on Disposal of Discontinued Operations
Millions of dollars 2001
- -----------------------------------------------------------------
Proceeds from sale, less intercompany settlement $ 1,267
Net assets disposed (769)
- -----------------------------------------------------------------
Gain before taxes 498
Income taxes (199)
- -----------------------------------------------------------------
Gain on disposal of discontinued operations $ 299
=================================================================
Note 22. Reorganization of Business Operations in 2002
On March 18, 2002 we announced plans to restructure our businesses into
two operating subsidiary groups, the Energy Services Group and the Engineering
and Construction Group. As part of this reorganization, we separated and
consolidated the entities in our Energy Services Group together as direct and
indirect subsidiaries of Halliburton Energy Services, Inc. We also separated and
consolidated the entities in our Engineering and Construction Group together as
direct and indirect subsidiaries of the former Dresser Industries, Inc., which
became a limited liability company during the second quarter of 2002 and was
renamed DII Industries, LLC. The reorganization of subsidiaries facilitated the
separation, organizationally and financially of our business groups, which we
believe will significantly improve operating efficiencies in both, while
streamlining management and easing manpower requirements. In addition, many
119
support functions, which were previously shared, were moved into the two
business groups. As a result, we took actions during 2002 to reduce our cost
structure by reducing personnel, moving previously shared support functions into
the two business groups and realigning ownership of international subsidiaries
by group.
In 2002, we incurred costs related to the restructuring of
approximately $107 million which consisted of the following:
- $64 million in personnel related expense;
- $17 million of asset related write-downs;
- $20 million in professional fees related to the
restructuring; and
- $6 million related to contract terminations.
Of this amount, $8 million remained in accruals for severance
arrangements and approximately $2 million for other items at December 31, 2002.
During 2003, we charged $9 million of severance and other reorganization costs
against the restructuring reserve, leaving a balance in the reserve as of
December 31, 2003 of approximately $1 million.
Although we have no specific plans currently, the reorganization would
facilitate separation of the ownership of the two business groups in the future
if we identify an opportunity that produces greater value for our shareholders
than continuing to own both business groups.
Note 23. New Accounting Pronouncements
On January 1, 2003 we adopted the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting
for Asset Retirement Obligations" which addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated assets' retirement costs. SFAS No. 143 requires that
the fair value of a liability associated with an asset retirement be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated retirement costs are capitalized as part of the carrying
amount of the long-lived asset and subsequently depreciated over the life of the
asset. The adoption of this standard resulted in a charge of $8 million after
tax as a cumulative effect of a change in accounting principle. The asset
retirement obligations primarily relate to the removal of leasehold improvements
upon exiting certain lease arrangements and restoration of land associated with
the mining of bentonite. The total liability recorded at adoption and at
December 31, 2003 for asset retirement obligations and the related accretion and
depreciation expense for all periods presented is immaterial to our consolidated
financial position and results of operations.
The FASB issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" (FIN 46), in January 2003.
In December 2003, the FASB issued FIN 46R, a revision which supersedes the
original interpretation and includes:
- the deferral of the effective date for certain variable
interests until the first quarter of 2004;
- additional scope exceptions for certain other variable
interests; and
- additional guidance on what constitutes a variable interest
entity.
FIN 46 requires the consolidation of entities in which a company
absorbs a majority of another entity's expected losses, receives a majority of
the other entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the other entity. Currently,
entities are generally consolidated based upon a controlling financial interest
through ownership of a majority voting interest in the entity.
We have identified the following variable interest entities:
- during 2001, we formed a joint venture in which we own a 50%
equity interest with two other unrelated partners, each owning
a 25% equity interest. This variable interest entity was
formed to construct, operate and service certain assets for a
third party and was funded with third party debt. The
construction of the assets is expected to be completed in
120
2004, and the operating and service contract related to the
assets extends through 2023. The proceeds from the debt
financing are being used to construct the assets and will be
paid down with cash flows generated during the operation and
service phase of the contract with the third party. As of
December 31, 2003, the joint venture had total assets of $157
million and total liabilities of $155 million. Our aggregate
exposure to loss as a result of our involvement with this
joint venture is limited to our equity investment and
subordinated debt of $11 million and any future losses related
to the construction and operation of the assets. We are not
the primary beneficiary. The joint venture is accounted for
under the equity method of accounting in our Engineering and
Construction Group segment; and
- our Engineering and Construction Group is involved in three
projects executed through joint ventures to design, build,
operate and maintain roadways for certain government agencies.
We have a 25% ownership interest in these joint ventures and
account for them under the equity method. These joint ventures
are considered variable interest entities as they were
initially formed with little equity contributed by the
partners. The joint ventures have obtained financing through
third parties which is not guaranteed by us. We are not the
primary beneficiary of these joint ventures and will,
therefore, continue to account for them using the equity
method. As of December 31, 2003, these joint ventures had
total assets of $1.3 billion and total liabilities of $1.3
billion. Our maximum exposure to loss is limited to our equity
investments in and loans to the joint ventures (totaling $40
million at December 31, 2003) and our share of any future
losses to the construction of these roadways.
121
HALLIBURTON COMPANY
Selected Financial Data
(Unaudited)
Years ended December 31
Millions of dollars and shares ----------------------------------------------------------------------
except per share and employee data 2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------- ----------------------------
Total revenues $ 16,271 $ 12,572 $ 13,046 $ 11,944 $ 12,313
=====================================================================================================================
Total operating income (loss) 720 (112) 1,084 462 401
Nonoperating expense, net (108) (116) (130) (127) (94)
---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and minority interest 612 (228) 954 335 307
Provision for income taxes (234) (80) (384) (129) (116)
Minority interest in net income of
consolidated subsidiaries (39) (38) (19) (18) (17)
---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 339 $ (346) $ 551 $ 188 $ 174
=====================================================================================================================
Income (loss) from discontinued operations $ (1,151) $ (652) $ 257 $ 313 $ 283
=====================================================================================================================
Net income (loss) $ (820) $ (998) $ 809 $ 501 $ 438
=====================================================================================================================
Basic income (loss) per share
Continuing operations $ 0.78 $ (0.80) $ 1.29 $ 0.42 $ 0.40
Net income (loss) (1.89) (2.31) 1.89 1.13 1.00
Diluted income (loss) per share
Continuing operations 0.78 (0.80) 1.28 0.42 0.39
Net income (loss) (1.88) (2.31) 1.88 1.12 0.99
Cash dividends per share 0.50 0.50 0.50 0.50 0.50
Return on average shareholders' equity (26.86)% (24.02)% 18.64% 12.20% 10.49%
---------------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 1,377 $ 2,288 $ 2,665 $ 1,742 $ 2,329
Total assets 15,463 12,844 10,966 10,192 9,639
Property, plant and equipment, net 2,526 2,629 2,669 2,410 2,390
Long-term debt (including current maturities) 3,437 1,476 1,484 1,057 1,364
Shareholders' equity 2,547 3,558 4,752 3,928 4,287
Total capitalization 6,002 5,083 6,280 6,555 6,590
Shareholders' equity per share 5.80 8.16 10.95 9.20 9.69
Average common shares outstanding (basic) 434 432 428 442 440
Average common shares outstanding (diluted) 437 432 430 446 443
---------------------------------------------------------------------------------------------------------------------
Other financial data
Capital expenditures $ (515) $ (764) $ (797) $ (578) $ (520)
Long-term borrowings (repayments), net 1,896 (15) 412 (308) (59)
Depreciation, depletion and amortization
expense 518 505 531 503 511
Goodwill amortization included in depreciation,
depletion and amortization expense - - 42 44 33
Payroll and employee benefits (5,154) (4,875) (4,818) (5,260) (5,647)
Number of employees 101,381 83,000 85,000 93,000 103,000
=====================================================================================================================
122
HALLIBURTON COMPANY
Quarterly Data and Market Price Information
(Unaudited)
Quarter
--------------------------------------------------------
Millions of dollars except per share data First Second Third Fourth Year
- ----------------------------------------------------------------------------------------------------------------------------
2003
Revenues $ 3,060 $ 3,599 $ 4,148 $ 5,464 $16,271
Operating income 142 71 204 303 720
Income from continuing operations 59 42 92 146 339
Loss from discontinued operations (8) (16) (34) (1,093) (1,151)
Cumulative effect of change in accounting
principal, net of tax benefit of $5 (8) - - - (8)
Net income (loss) 43 26 58 (947) (820)
Earnings per share:
Basic income (loss) per share:
Income (loss) from continuing operations 0.14 0.09 0.21 0.34 0.78
Loss from discontinued operations (0.02) (0.03) (0.08) (2.52) (2.65)
Cumulative effect of change in accounting
principal, net of tax benefit (0.02) - - - (0.02)
Net income (loss) 0.10 0.06 0.13 (2.18) (1.89)
Diluted income (loss) per share:
Income (loss) from continuing operations 0.14 0.09 0.21 0.34 0.78
Loss from discontinued operations (0.02) (0.03) (0.08) (2.51) (2.64)
Cumulative effect of change in accounting
principal, net of tax benefit (0.02) - - - (0.02)
Net income (loss) 0.10 0.06 0.13 (2.17) (1.88)
Cash dividends paid per share 0.125 0.125 0.125 0.125 0.50
Common stock prices (1)
High 21.79 24.97 25.90 27.20 27.20
Low 17.20 19.98 20.50 22.80 17.20
============================================================================================================================
2002
Revenues $ 3,007 $ 3,235 $ 2,982 $ 3,348 $12,572
Operating income (loss) 123 (405) 191 (21) (112)
Income (loss) from continuing operations 50 (358) 94 (132) (346)
Loss from discontinued operations (28) (140) - (484) (652)
Net income (loss) 22 (498) 94 (616) (998)
Earnings per share:
Basic income (loss) per share:
Income (loss) from continuing operations 0.12 (0.83) 0.22 (0.30) (0.80)
Loss from discontinued operations (0.07) (0.32) - (1.12) (1.51)
Net income (loss) 0.05 (1.15) 0.22 (1.42) (2.31)
Diluted income (loss) per share:
Income (loss) from continuing operations 0.12 (0.83) 0.22 (0.30) (0.80)
Loss from discontinued operations (0.07) (0.32) - (1.12) (1.51)
Net income (loss) 0.05 (1.15) 0.22 (1.42) (2.31)
Cash dividends paid per share 0.125 0.125 0.125 0.125 0.50
Common stock prices (1)
High 18.00 19.63 16.00 21.65 21.65
Low 8.60 14.60 8.97 12.45 8.60
============================================================================================================================
(1) New York Stock Exchange - composite transactions high and low intraday
price.
123
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, 2004 (File No. 1-3492), under the caption "Election of Directors." The
information required for the executive officers of the Registrant is included
under Part I on pages 11 and 12 of this annual report.
Audit Committee Financial Expert
In the business judgment of the Board of Directors, all five members of
the Audit Committee, Robert L. Crandall, Kenneth T. Derr, W. R. Howell, Ray L.
Hunt and C. J. Silas, are independent and have accounting or related financial
management experience required under the listing standards and have been
designated by the Board of Directors as "audit committee financial experts".
Item 11. Executive Compensation.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2004 (File No. 1-3492), under the
captions "Compensation Committee Report on Executive Compensation," "Comparison
of Cumulative Total Return," "Summary Compensation Table," "Option Grants for
Fiscal 2003," "Aggregated Option Exercises in Fiscal 2003 and December 31, 2003
Option Values," "Long-term Incentive Plans - Awards in Fiscal 2003," "Employment
Contracts and Change-in-Control Arrangements," and "Directors' Compensation."
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, 2004 (File No. 1-3492), 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, 2004 (File No. 1-3492), under the
caption "Stock Ownership of Certain Beneficial Owners and Management."
Item 12(c). Changes in Control.
Not applicable.
Item 12(d). Securities Authorized for Issuance Under Equity Compensation Plans.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2004 (File No. 1-3492), under the
caption "Equity Compensation Plan Information."
Item 13. Certain Relationships and Related Transactions.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2004 (File No. 1-3492), under the
caption "Certain Relationships and Related Transactions."
Item 14. Principal Accounting Fees and Services.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 23, 2004 (File No. 1-3492), under the
caption "Fees Paid to KPMG LLP."
124
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements:
The reports of Independent Public Accountants and the financial
statements of the Company as required by Part II, Item 8, are
included on pages 63 and 64 and pages 65 through 121 of this annual
report. See index on page 14.
2. Financial Statement Schedules: Page No.
Report on supplemental schedule of KPMG LLP 139
Schedule II - Valuation and qualifying accounts
for the three years ended December 31, 2003 140
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
2.1 Disclosure Statement for the Proposed Joint Pre-packaged
Plan of Reorganization for Mid-Valley, Inc., DII
Industries, LLC, Kellogg Brown & Root, Inc., KBR Technical
Services, Inc., Kellogg Brown & Root Engineering
Corporation, Kellogg Brown & Root International, Inc. (a
Delaware corporation), Kellogg Brown & Root International,
Inc. (a Panamanian corporation), and BPM Minerals, LLC
under Chapter 11 of the United States Bankruptcy Code
dated September 18, 2003 (incorporated by reference to
Exhibit 99 to Halliburton's Form 8-K dated as of September
22, 2003, File No. 1-3492).
2.2 Supplemental Disclosure Statement for First Amended Joint
Pre-packaged Plan of Reorganization for Mid-Valley, Inc.,
DII Industries, LLC, Kellogg Brown & Root, Inc., KBR
Technical Services, Inc., Kellogg Brown & Root Engineering
Corporation, Kellogg Brown & Root International, Inc. (a
Delaware corporation), Kellogg Brown & Root International,
Inc. (a Panamanian corporation), and BPM Minerals, LLC
under Chapter 11 of the United States Bankruptcy Code
dated November 14, 2003 (incorporated by reference to
Exhibit 99 to Halliburton's Form 8-K dated as of November
19, 2003, File No. 1-3492).
3.1 Restated Certificate of Incorporation of Halliburton
Company filed with the Secretary of State of Delaware on
July 23, 1998 (incorporated by reference to Exhibit 3(a)
to Halliburton's Form 10-Q for the quarter ended June 30,
1998, File No. 1-3492).
125
3.2 By-laws of Halliburton revised effective February 12, 2003
(incorporated by reference to Exhibit 3.2 to Halliburton's
Form 10-K for the year ended December 31, 2002, File No.
1-3492).
4.1 Form of debt security of 8.75% Debentures due February 12,
2021 (incorporated by reference to Exhibit 4(a) to the
Form 8-K of Halliburton Company, now known as Halliburton
Energy Services, Inc. (the Predecessor) dated as of
February 20, 1991, File No. 1-3492).
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
(Registration 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, Halliburton and the Trustee (incorporated by
reference to Exhibit 4.1 of Halliburton's Registration
Statement on Form 8-B dated December 12, 1996, File No.
1-3492).
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, File No. 1-3492).
4.4 Form of debt security of 6.75% Notes due February 1, 2027
(incorporated by reference to Exhibit 4.1 to Halliburton's
Form 8-K dated as of February 11, 1997, File No. 1-3492).
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, Halliburton and the Trustee
(incorporated by reference to Exhibit 4.2 of Halliburton's
Registration Statement on Form 8-B dated December 12,
1996, File No. 1-3492).
4.6 Third Supplemental Indenture dated as of August 1, 1997
between Halliburton 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 Halliburton's Form 10-K for the year
ended December 31, 1998, File No. 1-3492).
4.7 Fourth Supplemental Indenture dated as of September 29,
1998 between Halliburton 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 Halliburton's Form 10-K for the year ended
December 31, 1998, File No. 1-3492).
126
4.8 Resolutions of Halliburton's Board of Directors adopted by
unanimous consent dated December 5, 1996 (incorporated by
reference to Exhibit 4(g) of Halliburton's Form 10-K for
the year ended December 31, 1996, File No. 1-3492).
4.9 Resolutions of Halliburton's Board of Directors adopted at
a special meeting held on September 28, 1998 (incorporated
by reference to Exhibit 4.10 to Halliburton's Form 10-K
for the year ended December 31, 1998, File No. 1-3492).
4.10 Restated Rights Agreement dated as of December 1, 1996
between Halliburton and Mellon Investor Services LLC
(formerly ChaseMellon Shareholder Services, L.L.C.)
(incorporated by reference to Exhibit 4.4 of Halliburton's
Registration Statement on Form 8-B dated December 12,
1996, File No. 1-3492).
4.11 Copies of instruments that define the rights of holders of
miscellaneous long-term notes of Halliburton and its
subsidiaries, totaling $11 million in the aggregate at
December 31, 2003, have not been filed with the
Commission. Halliburton agrees to furnish copies of these
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 Halliburton's
Form 10-Q for the quarter ended March 31, 1997, File No.
1-3492).
4.13 Form of debt security of 5.63% Notes due December 1, 2008
(incorporated by reference to Exhibit 4.1 to Halliburton's
Form 8-K dated as of November 24, 1998, File No. 1-3492).
4.14 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 filed by Dresser 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,
File No. 1-4003).
* 4.15 Second Supplemental Indenture dated as of October 27, 2003
between DII Industries, LLC and JPMorgan Chase Bank, as
Trustee, to the Indenture dated as of April 18, 1996, as
supplemented by the First Supplemental Indenture dated as
of August 6, 1996.
* 4.16 Third Supplemental Indenture dated as of December 12, 2003
among DII Industries, LLC, Halliburton and JPMorgan Chase
Bank, as Trustee, to the Indenture dated as of April 18,
1996, as supplemented by the First Supplemental Indenture
dated as of August 6, 1996 and the Second Supplemental
Indenture dated as of October 27, 2003.
4.17 Form of debt security of 6% Notes due August 1, 2006
(incorporated by reference to Exhibit 4.2 to Halliburton's
Form 8-K dated January 8, 2002, File No. 1-3492).
127
4.18 Credit Facility in the amount of (pound)80 million dated
November 29, 2002 between Devonport Royal Dockyard Limited
and Devonport Management Limited and The Governor and
Company of the Bank of Scotland, HSBC Bank Plc and The
Royal Bank of Scotland Plc (incorporated by reference to
Exhibit 4.22 to Halliburton's Form 10-K for the year ended
December 31, 2002, File No. 1-3492).
4.19 Senior Indenture dated as of June 30, 2003 between
Halliburton and JPMorgan Chase Bank, as Trustee
(incorporated by reference to Exhibit 4.1 to Halliburton's
Form 10-Q for the quarter ended June 30, 2003, File
No. 1-3492).
4.20 Form of note of 3.125% Convertible Senior Notes due July
15, 2023 (included as Exhibit A to Exhibit 4.19 above).
4.21 Registration Rights Agreement dated as of June 30, 2003
among Halliburton and Citigroup Global Markets, Inc.,
Goldman, Sachs & Co. and J.P. Morgan Securities Inc., as
representatives of the several Purchasers named in
Schedule I of the Purchase Agreement dated as of June 24,
2003 (incorporated by reference to Exhibit 4.3 to
Halliburton's Registration Statement on Form S-3,
Registration No. 333-110035).
4.22 Senior Indenture dated as of October 17, 2003 between
Halliburton and JPMorgan Chase Bank, as Trustee
(incorporated by reference to Exhibit 4.1 to Halliburton's
Form 10-Q for the quarter ended September 30, 2003, File
No. 1-3492).
4.23 First Supplemental Indenture dated as of October 17, 2003
between Halliburton and JPMorgan Chase Bank, as Trustee,
to the Senior Indenture dated as of October 17, 2003
(incorporated by reference to Exhibit 4.2 to Halliburton's
Form 10-Q for the quarter ended September 30, 2003, File
No. 1-3492).
4.24 Form of note of floating rate senior notes due October 17,
2005 (included as Exhibit A to Exhibit 4.23 above).
4.25 Form of note of 5.5% senior notes due October 15, 2010
(included as Exhibit B to Exhibit 4.23 above).
4.26 Registration Rights Agreement dated as of October 17, 2003
among Halliburton and J.P. Morgan Securities Inc.,
Citigroup Global Markets, Inc. and Goldman, Sachs & Co.,
as representatives of the several Purchasers named in
Schedule I of the Purchase Agreement dated as of October
14, 2003 (incorporated by reference to Exhibit 4.5 to
Halliburton's Registration Statement on Form S-4,
Registration No. 333-110420).
* 4.27 Second Supplemental Indenture dated as of December 15,
2003 between Halliburton and JPMorgan Chase Bank, as
Trustee, to the Senior Indenture dated as of October 17,
2003, as supplemented by the First Supplemental Indenture
dated as of October 17, 2003.
* 4.28 Form of note of 7.6% debentures due 2096 (included as
Exhibit A to Exhibit 4.27 above).
128
4.29 Third Supplemental Indenture dated as of January 26, 2004
between Halliburton and JPMorgan Chase Bank, as Trustee,
to the Senior Indenture dated as of October 17, 2003, as
supplemented by the First Supplemental Indenture dated as
of October 17, 2003 and the Second Supplemental Indenture
dated as of December 15, 2003 (incorporated by reference
to Exhibit 4.2 to Halliburton's Registration Statement on
Form S-4, Registration No. 333-112977).
4.30 Form of Senior Notes due 2007 (included as Exhibit A to
Exhibit 4.29 above).
4.31 Registration Rights Agreement dated as of January 26, 2004
among Halliburton and J.P. Morgan Securities Inc.,
Citigroup Global Markets, Inc. and Goldman, Sachs & Co.,
as representatives of the several Purchasers named in
Schedule I of the Purchase Agreement dated as of January
21, 2004 (incorporated by reference to Exhibit 4.4 to
Halliburton's Registration Statement on Form S-4,
Registration No. 333-112977).
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 Form 10-K for the year
ended December 31, 1992, File No. 1-3492).
10.2 Retirement Plan for the Directors of Halliburton Company,
as amended and restated effective May 16, 2000
(incorporated by reference to Exhibit 10.2 to
Halliburton's Form 10-Q for the quarter ended September
30, 2000, File No. 1-3492).
10.3 Halliburton Company Directors' Deferred Compensation Plan
as amended and restated effective February 1, 2001
(incorporated by reference to Exhibit 10.3 to
Halliburton's Form 10-K for the year ended December 31,
2000, File No. 1-3492).
10.4 Halliburton Company 1993 Stock and Incentive Plan, as
amended and restated effective May 21, 2003 (incorporated
by reference to Exhibit 10.1 to Halliburton's Form 10-Q
for the quarter ended June 30, 2003, File No. 1-3492).
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, File
No. 1-3492).
10.6 Dresser Industries, Inc. Deferred Compensation Plan, as
amended and restated effective January 1, 2000
(incorporated by reference to Exhibit 10.16 to
Halliburton's Form 10-K for the year ended December 31,
2000, File No. 1-3492).
10.7 Dresser Industries, Inc. 1982 Stock Option Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 12, 1982, File No. 1-4003).
10.8 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, File No. 1-4003).
10.9 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,
File No. 1-4003).
129
10.10 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 year ended October 31,
1997, File No. 1-4003).
10.11 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).
10.12 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).
10.13 Long-Term Performance Plan for Selected Employees of The
M. W. Kellogg Company, as amended and restated effective
September 1, 1999 (incorporated by reference to Exhibit
10.23 to Halliburton's Form 10-K for the year ended
December 31, 2000, File No. 1-3492).
10.14 Dresser Industries, Inc. 1992 Stock Compensation Plan
(incorporated by reference to Exhibit A to Dresser's
Proxy Statement dated February 7, 1992, File No. 1-4003).
10.15 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, File No. 1-4003).
10.16 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 year ended October
31, 1997, File No. 1-4003).
10.17 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
quarter ended April 30, 1998, File No. 1-4003).
10.18 Employment Agreement (David J. Lesar) (incorporated by
reference to Exhibit 10(n) to the Predecessor's Form
10-K for the year ended December 31, 1995, File No.
1-3492).
10.19 Employment Agreement (R. Randall Harl) (incorporated by
reference to Exhibit 10.32 to Halliburton's Form 10-K
for the year ended December 31, 2002, File No. 1-3492).
10.20 Employment Agreement (Mark A. McCollum) (incorporated by
reference to Exhibit 10.1 to Halliburton's Form 10-Q
for the quarter ended September 30, 2003, File No.
1-3492).
10.21 Halliburton Company Supplemental Executive Retirement Plan
(formerly part of Halliburton Company Senior Executives'
Deferred Compensation Plan), as amended and restated
effective January 1, 2001 (incorporated by reference to
Exhibit 10.1 to Halliburton's Form 10-Q for the quarter
ended June 30, 2001, File No. 1-3492).
130
10.22 Halliburton Company Benefit Restoration Plan (formerly
part of Halliburton Company Senior Executives' Deferred
Compensation Plan), as amended and restated effective
January 1, 2001 (incorporated by reference to Exhibit 10.2
to Halliburton's Form 10-Q for the quarter ended June 30,
2001, File No. 1-3492).
10.23 Halliburton Annual Performance Pay Plan, as amended and
restated effective January 1, 2001 (incorporated by
reference to Exhibit 10.1 to Halliburton's Form 10-Q for
the quarter ended September 30, 2001, File No. 1-3492).
10.24 Halliburton Company Performance Unit Program (incorporated
by reference to Exhibit 10.2 to Halliburton's Form 10-Q
for the quarter ended September 30, 2001, File No.
1-3492).
10.25 Form of Nonstatutory Stock Option Agreement for
Non-Employee Directors (incorporated by reference to
Exhibit 10.3 to Halliburton's Form 10-Q for the quarter
ended September 30, 2000, File No. 1-3492).
10.26 Halliburton Elective Deferral Plan as amended and restated
effective May 1, 2002 (incorporated by reference to
Exhibit 10.1 to Halliburton's Form 10-Q for the quarter
ended June 30, 2002, File No. 1-3492).
10.27 Halliburton Company 2002 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.2 to
Halliburton's Form 10-Q for the quarter ended June 30,
2002, File No. 1-3492).
10.28 Halliburton Company Directors' Deferred Compensation Plan
as amended and restated effective as of October 22, 2002
(incorporated by reference to Exhibit 10.1 to
Halliburton's Form 10-Q for the quarter ended September
30, 2002, File No. 1-3492).
10.29 Employment Agreement (Albert O. Cornelison) (incorporated
by reference to Exhibit 10.3 to Halliburton's Form 10-Q
for the quarter ended June 30, 2002, File No. 1-3492).
10.30 Employment Agreement (Weldon J. Mire) (incorporated by
reference to Exhibit 10.4 to Halliburton's Form 10-Q for
the quarter ended June 30, 2002, File No. 1-3492).
10.31 Employment Agreement (David R. Smith) (incorporated by
reference to Exhibit 10.39 to Halliburton's Form 10-K
for the year ended December 31, 2002, File No. 1-3492).
10.32 Employment Agreement (John W. Gibson) (incorporated by
reference to Exhibit 10.40 to Halliburton's Form 10-K
for the year ended December 31, 2002, File No. 1-3492).
10.33 Employment Agreement (C. Christopher Gaut) (incorporated
by reference to Exhibit 10.1 to Halliburton's Form 10-Q
for the quarter ended March 31, 2003, File No. 1-3492).
131
10.34 3-Year Revolving Credit Agreement, dated as of October 31,
2003, among Halliburton, the Banks party thereto, Citicorp
North America, Inc., as Administrative Agent, JPMorgan
Chase Bank, as Syndication Agent, and ABN AMRO Bank N.V.,
as Documentation Agent (incorporated by reference to
Exhibit 10.2 to Halliburton's Form 10-Q for the quarter
ended September 30, 2003, File No. 1-3492).
10.35 Master Letter of Credit Facility Agreement, dated as of
October 31, 2003, among Halliburton, Kellogg Brown & Root,
Inc., and DII Industries, LLC, as Account Parties, the
Banks party thereto, Citicorp North America, Inc., as
Administrative Agent, JPMorgan Chase Bank, as Syndication
Agent, and ABN AMRO Bank N.V., as Documentation Agent
(incorporated by reference to Exhibit 10.3 to
Halliburton's Form 10-Q for the quarter ended September
30, 2003, File No. 1-3492).
10.36 Senior Unsecured Credit Facility Agreement, dated as of
November 4, 2003, among Halliburton, the Banks party
thereto, Citicorp North America, Inc., as Administrative
Agent, JPMorgan Chase Bank, as Syndication Agent, and ABN
AMRO Bank N.V., as Documentation Agent (incorporated by
reference to Exhibit 10.4 to Halliburton's Form 10-Q for
the quarter ended September 30, 2003, File No. 1-3492).
* 12 Statement of Computation of Ratio of Earnings to Fixed
Charges.
* 21 Subsidiaries of the Registrant.
* 23.1 Consent of KPMG LLP.
* 23.2 Notice Regarding Consent of Arthur Andersen LLP.
* 24.1 Powers of attorney for the following directors signed in
January 2004:
Robert L. Crandall
Kenneth T. Derr
Charles J. DiBona
W. R. Howell
Ray L. Hunt
Aylwin B. Lewis
J. Landis Martin
Jay A. Precourt
Debra L. Reed
C. J. Silas
* 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
* 31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
** 32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
132
** 32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed with this Form 10-K.
** Furnished with this Form 10-K.
(b) Reports on Form 8-K:
Date of
Date Filed Earliest Event Description of Event
- ------------------------------------------------------------------------------------------------------------
During the fourth quarter of 2003:
October 1, 2003 September 29, 2003 Item 9. Regulation FD Disclosure for a press release
announcing Halliburton will not request a stay extension
of Harbison-Walker bankruptcy court's temporary
restraining order which expires on September 30, 2003.
October 10, 2003 October 9, 2003 Item 12. Disclosure of Results of Operations and Financial
Condition for a press release revising 2003 third quarter
earning estimate.
October 10, 2003 October 10, 2003 Item 9. Regulation FD Disclosure for a press release
announcing exchange offer and consent solicitation for
debentures issued by DII Industries, LLC.
October 15, 2003 October 14, 2003 Item 9. Regulation FD Disclosure for a press release
announcing pricing of a private offering of $1.05 billion
of senior notes.
October 23, 2003 October 22, 2003 Item 9. Regulation FD Disclosure for a press release
announcing a 2003 fourth quarter dividend.
October 28, 2003 October 27, 2003 Item 5. Other Events and Item 7. Financial Statements, Pro
Forma Financial Information and Exhibits informing of
adjustments made to certain items from the December 31,
2002 Annual Report on Form 10-K in order to update all
segment information to reflect the new segment structure
as disclosed in the June 30, 2003 Form 10-Q.
October 29, 2003 October 27, 2003 Item 9. Regulation FD Disclosure for a press release
announcing DII Industries, LLC has received consents,
subsequent to an exchange offer, from holders of more than
95% of the principal amount of outstanding debentures to
amend the indenture.
133
Date of
Date Filed Earliest Event Description of Event
- ------------------------------------------------------------------------------------------------------------
During the fourth quarter of 2003 (continued):
October 30, 2003 October 28, 2003 Item 9. Regulation FD Disclosure for press release
announcing filing of a shelf registration for previously
issued $1.2 billion convertible senior notes.
October 31, 2003 October 29, 2003 Item 12. Disclosure of Results of Operations and Financial
Condition for a press release announcing 2003 third
quarter results.
November 6, 2003 November 6, 2003 Item 9. Regulation FD Disclosure for a press release
announcing that DII Industries and Kellogg Brown & Root
extended the voting deadline on the plan of reorganization
until November 19, 2003.
November 7, 2003 November 6, 2003 Item 9. Regulation FD Disclosure for a press release
announcing that an agreement has been reached in principle
to limit cash required for asbestos settlement to $2.775
billion.
November 7, 2003 November 7, 2003 Item 12. Disclosure of Results of Operations and Financial
Condition for a press release announcing an amendment to
correct the classification of certain items on the balance
sheet as of September 30, 2003.
November 10, 2003 November 7, 2003 Item 9. Regulation FD Disclosure for a press release
announcing the extension of the expiration date of the
debt exchange offer relating to DII Industries debentures
to November 19, 2003.
November 18, 2003 November 18, 2003 Item 9. Regulation FD Disclosure for a press release
announcing DII Industries, LLC, Kellogg Brown & Root, and
other affected subsidiaries have completed amendments to
documents implementing the companies' planned asbestos and
silica settlement and are mailing supplemental
solicitation materials to asbestos and silica creditors in
connection with voting on the amended plan of
reorganization.
November 26, 2003 November 19, 2003 Item 9. Regulation FD Disclosure to furnish the
Supplemental Disclosure Statement dated November 14, 2003
to the Disclosure Statement dated September 18, 2003 of
DII Industries, LLC, Kellogg Brown & Root and other
affected subsidiaries with United States operations.
134
Date of
Date Filed Earliest Event Description of Event
- ------------------------------------------------------------------------------------------------------------
During the fourth quarter of 2003 (continued):
December 15, 2003 December 12, 2003 Item 9. Regulation FD Disclosure for a press release
announcing the preliminary results of the voting on the
proposed plan of reorganization of DII Industries, LLC,
Kellogg Brown & Root, and other affected subsidiaries.
December 15, 2003 December 11, 2003 Item 9. Regulation FD Disclosure for a press release
defending the company's work for United States troops and
the Iraqi people.
December 16, 2003 December 16, 2003 Item 9. Regulation FD Disclosure for a press release
announcing the plan to move ahead with the previously
announced plan to resolve asbestos and silica liabilities
through a pre-packaged bankruptcy. The affected
subsidiaries filed Chapter 11 proceedings today in
bankruptcy court in Pittsburgh, Pennsylvania.
December 17, 2003 December 15, 2003 Item 9. Regulation FD Disclosure for a press release
announcing an analyst and investor conference will be held
in Houston, Texas on May 5, 2004.
December 17, 2003 December 15, 2003 Item 9. Regulation FD Disclosure for a press release
announcing a conference call to discuss 2003 fourth
quarter results.
December 17, 2003 December 15, 2003 Item 9. Regulation FD Disclosure for a press release
announcing the completion of the company's offer to issue
its new 7.6% debentures due 2096 in exchange for a like
amount of 7.60% due 2096 of its subsidiary, DII
Industries, LLC.
During the first quarter of 2004
January 22, 2004 January 21, 2004 Item 9. Regulation FD Disclosure for a press release
announcing the pricing of $500 million of senior notes in
a private offering.
January 23, 2004 January 21, 2004 Item 9. Regulation FD Disclosure to provide information
relating to the January 21, 2004 offering of $500 million
of senior notes.
135
Date of
Date Filed Earliest Event Description of Event
- -------------------------------------------------------------------------------------------------------------------
During the first quarter of 2004 (continued):
January 26, 2004 January 23, 2004 Item 9. Regulation FD Disclosure for a press release
announcing a credit to the United States government of
$6.3 million for potential over billing until an
investigation is complete.
January 26, 2004 January 23, 2004 Item 9. Regulation FD Disclosure for a press release
announcing the restructuring of two joint venture
companies, Enventure Global Technologies LLC and
WellDynamics BV, between Halliburton Energy Services and
Shell Technology Ventures.
January 26, 2004 January 22, 2004 Item 9. Regulation FD Disclosure for a press release
announcing the award of two contracts from the United
States government through a full and fair competitive
bidding process. The terms and conditions of the
contracts are reviewed.
January 29, 2004 January 28, 2004 Item 9. Regulation FD Disclosure for a press release
announcing the comprehensive agreement reached to settle
asbestos insurance claims with Equitas.
January 30, 2004 January 29, 2004 Item 12. Disclosure of Results of Operations and Financial
Condition for a press release announcing the 2003 fourth
quarter results.
February 2, 2004 February 2, 2004 Item 9. Regulation FD Disclosure for a press release
announcing the company is working with the Government to
improve estimates on meal preparations for troops.
February 11, 2004 February 6, 2004 Item 9. Regulation FD Disclosure to provide information
disclosed in Amendment No. 1 to Halliburton's Registration
Statement on Form S-3.
February 12, 2004 February 11, 2004 Item 5. Other Events for a press release announcing a
Bankruptcy Court ruling that insurers lack standing to
bring motions seeking to dismiss the pre-packaged Chapter
11 reorganization cases filed by DII Industries, Kellogg
Brown & Root and other affected subsidiaries of
Halliburton.
136
Date of
Date Filed Earliest Event Description of Event
- -------------------------------------------------------------------------------------------------------------------
During the first quarter of 2004 (continued):
February 19, 2004 February 16, 2004 Item 5. Other Events to report suspension by Kellogg Brown
& Root of $140.8 million of subcontractor invoices to the
Army Materiel Command relating to food services provided
in Iraq and Kuwait, until an internal review is completed.
Item 9. Regulation FD Disclosure for a press release reporting
voluntary suspension of certain invoicing of subcontractor
services for meal planning, food purchase and meal preparation
for United States troops in Iraq and Kuwait.
February 19, 2004 February 18, 2004 Item 9. Regulation FD Disclosure for a press release
announcing a 2004 first quarter dividend and scheduling of
the annual shareholders' meeting on May 19, 2004.
February 25, 2004 February 24, 2004 Item 9. Regulation FD Disclosure for a press release
reporting that Kellogg Brown & Root delivered fuel to Iraq
at the best value, price, and terms.
March 1, 2004 February 27, 2004 Item 9. Regulation FD Disclosure for a press release responding to
news reports on an internal document related to contracts with the
United States government.
137
This report is a copy of a previously issued report, the predecessor auditor has
not reissued this report, and the previously issued report refers to financial
statements not physically included in this document.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
To the Shareholders and
Board of Directors of Halliburton Company:
We have audited in accordance with auditing standards generally accepted in the
United States of America, the consolidated financial statements included in this
Form 10-K, and have issued our report thereon dated January 23, 2002. 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, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
January 23, 2002 (Except with respect to certain matters discussed in Note 9, as
to which the date is February 21, 2002.)
138
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
The Board of Directors and Stockholders
Halliburton Company:
Under date of February 18, 2004, we reported on the consolidated balance sheets
of Halliburton Company and subsidiaries as of December 31, 2003 and December 31,
2002, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended, which are included in the Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule (Schedule II) included in Form 10-K. The financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statement schedule based on our
audits. The accompanying 2001 consolidated financial statement schedule of
Halliburton Company and subsidiaries was audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on the
consolidated financial statements and schedule, before the restatement described
in Note 5 to the consolidated financial statements and before the revision
related to goodwill and other intangibles described in Note 1 to the
consolidated financial statements, in their report dated January 23, 2002
(except with respect to certain matters discussed in Note 9 to those financial
statements, as to which the date was February 21, 2002).
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
- ----------------------
KPMG LLP
Houston, Texas
February 18, 2004
139
HALLIBURTON COMPANY
Schedule II - Valuation and Qualifying Accounts
(Millions of Dollars)
The table below presents valuation and qualifying accounts for continuing
operations.
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, 2001:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 125 $ 70 $ - $ (64) (a) $ 131
- -----------------------------------------------------------------------------------------------------------------
Liability for major repairs and
maintenance $ 14 $ 4 $ - $ (5) $ 13
- -----------------------------------------------------------------------------------------------------------------
Accrued special charges $ 6 $ - $ - $ (6) $ -
- -----------------------------------------------------------------------------------------------------------------
Accrued reorganization charges $ 16 $ - $ - $ (15) (b) $ 1
=================================================================================================================
Year ended December 31, 2002:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 131 $ 82 $ - $ (56) (a) $ 157
- -----------------------------------------------------------------------------------------------------------------
Liability for major repairs and
maintenance $ 13 $ 4 $ - $ (10) $ 7
- -----------------------------------------------------------------------------------------------------------------
Accrued reorganization charges $ 1 $ 29 $ - $ (20) $ 10
=================================================================================================================
Year ended December 31, 2003:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 157 $ 44 $ 4 $ (30) (a) $ 175
- -----------------------------------------------------------------------------------------------------------------
Liability for major repairs and
maintenance $ 7 $ 1 $ - $ - $ 8
- -----------------------------------------------------------------------------------------------------------------
Accrued reorganization charges $ 10 $ - $ - $ (9) $ 1
=================================================================================================================
(a) Receivable write-offs and reclassifications, net of recoveries.
(b) Includes $4 million estimate to actual adjustment.
140
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 8th day of March, 2004.
HALLIBURTON COMPANY
By /s/ David J. Lesar
---------------------------------------
David J. Lesar
Chairman of the Board,
President 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 8th day of
March, 2004.
Signature Title
- --------- -----
/s/ David J. Lesar Chairman of the Board, President,
- ------------------------------------- Chief Executive Officer and Director
David J. Lesar
/s/ C. Christopher Gaut Executive Vice President and
- ------------------------------------- Chief Financial Officer
C. Christopher Gaut
/s/ Mark A. McCollum Senior Vice President and
- ------------------------------------- Chief Accounting Officer
Mark A. McCollum
141
Signature Title
- --------- -----
*ROBERT L. CRANDALL Director
- -------------------------------------
Robert L. Crandall
* KENNETH T. DERR Director
- -------------------------------------
Kenneth T. Derr
* CHARLES J. DIBONA Director
- -------------------------------------
Charles J. DiBona
* W. R. HOWELL Director
- -------------------------------------
W. R. Howell
* RAY L. HUNT Director
- -------------------------------------
Ray L. Hunt
* AYLWIN B. LEWIS Director
- -------------------------------------
Aylwin B. Lewis
* J. LANDIS MARTIN Director
- -------------------------------------
J. Landis Martin
* JAY A. PRECOURT Director
- -------------------------------------
Jay A. Precourt
* DEBRA L. REED Director
- -------------------------------------
Debra L. Reed
* C. J. SILAS Director
- -------------------------------------
C. J. Silas
* /s/ MARGARET E. CARRIERE
- ------------------------------------
Margaret E. Carriere, Attorney-in-fact
142