FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
---- ----
Commission File Number 1-3492
HALLIBURTON COMPANY
(a Delaware Corporation)
75-2677995
3600 Lincoln Plaza
500 N. Akard
Dallas, Texas 75201
Telephone Number - Area Code (214) 978-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $2.50 per share:
Outstanding at October 31, 2000 - 442,404,000
<PAGE>
<TABLE>
<CAPTION>
HALLIBURTON COMPANY
Index
Page No.
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION 2-22
Item 1. Financial Statements 2-4
Quarterly Condensed Consolidated Financial Statements
- Statements of Income for the three months and nine months ended
September 30, 2000 and 1999 2
- Balance Sheets at September 30, 2000 and December 31, 1999 3
- Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 4
- Notes to Financial Statements 5-13
1. Management representations 5
2. Business segment information 5
3. Acquisitions and dispositions 6
4. Discontinued operations 6
5. Receivables 8
6. Inventories 8
7. Dresser financial information 8
8. Commitments and contingencies 9
9. Income per share 12
10. Comprehensive income 12
11. Special charges 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION 22-24
Item 6. Listing of Exhibits and Reports on Form 8-K 22-24
Signatures 25
Exhibits: - Employment agreement
- Retirement Plan for the Directors as amended and restated effective
May 16, 2000
- Form of Nonstatutory Stock Option Agreement for Non-Employee Directors
- First Amendment to the Elective Deferral Plan
- Financial data schedules for the nine months ended
September 30, 2000 (included only in the copy of this
report filed electronically with the Commission)
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HALLIBURTON COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
(Millions of dollars and shares except per share data)
Three Months Nine Months
Ended September 30 Ended September 30
------------------------- -------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Services $ 2,589 $ 2,621 $ 7,526 $ 8,186
Sales 413 338 1,169 1,027
Equity in earnings of unconsolidated affiliates 22 14 56 74
-------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,024 $ 2,973 $ 8,751 $ 9,287
-------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 2,410 $ 2,494 $ 7,094 $ 7,843
Cost of sales 362 309 1,038 913
General and administrative 92 89 252 256
Gain on sale of marine vessels (88) - (88) -
Special charges and credits - - - (47)
-------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses $ 2,776 $ 2,892 $ 8,296 $ 8,965
-------------------------------------------------------------------------------------------------------------------
Operating income 248 81 455 322
Interest expense (38) (38) (104) (106)
Interest income 6 31 16 68
Foreign currency gains (losses), net 4 (4) (3) (2)
Other, net (1) (1) (1) (25)
-------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes, minority
interest, and change in accounting method 219 69 363 257
Provision for income taxes (84) (27) (140) (98)
Minority interest in net income of subsidiaries (5) (4) (14) (13)
------------------------------------------------------------------------------------------------------- -----------
Income from continuing operations before change in
accounting method 130 38 209 146
-------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income from discontinued operations, net of tax of $16, $13,
$44, and $55 27 20 72 76
Gain on disposal of discontinued operations, net of tax of $141 - - 215 -
-------------------------------------------------------------------------------------------------------------------
Income from discontinued operations 27 20 287 76
Cumulative effect of change in accounting method, net
of tax benefit of $11 - - - (19)
-------------------------------------------------------------------------------------------------------------------
Net income $ 157 $ 58 $ 496 $ 203
===================================================================================================================
Basic income per share:
Income from continuing operations before change in
accounting method $ 0.29 $ 0.09 $ 0.47 $ 0.33
Income from discontinued operations 0.06 0.04 0.16 0.17
Gain on disposal of discontinued operations - - 0.49 -
Change in accounting method - - - (0.04)
-------------------------------------------------------------------------------------------------------------------
Net income $ 0.35 $ 0.13 $ 1.12 $ 0.46
===================================================================================================================
Diluted income per share:
Income from continuing operations before change in
accounting method $ 0.29 $ 0.09 $ 0.47 $ 0.33
Income from discontinued operations 0.06 0.04 0.16 0.17
Gain on disposal of discontinued operations - - 0.48 -
Change in accounting method - - - (0.04)
-------------------------------------------------------------------------------------------------------------------
Net income $ 0.35 $ 0.13 $ 1.11 $ 0.46
===================================================================================================================
Cash dividends per share $ 0.125 $ 0.125 $ 0.375 $ 0.375
Basic average common shares outstanding 445 441 444 440
Diluted average common shares outstanding 451 445 448 443
<FN>
See notes to quarterly financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
HALLIBURTON COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
(Millions of dollars and shares except per share data)
September 30 December 31
--------------- ---------------
2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 310 $ 466
Receivables:
Notes and accounts receivable, net 2,775 2,349
Unbilled work on uncompleted contracts 819 625
---------------------------------------------------------------------------------------------------
Total receivables 3,594 2,974
Inventories 774 723
Current deferred income taxes 177 171
Net current assets of discontinued operations 279 793
Other current assets 243 235
---------------------------------------------------------------------------------------------------
Total current assets 5,377 5,362
Property, plant and equipment after accumulated
depreciation of $3,155 and $3,122 2,327 2,390
Equity in and advances to related companies 364 384
Net goodwill 610 505
Noncurrent deferred income taxes 427 398
Net noncurrent assets of discontinued operations 388 310
Other assets 404 290
---------------------------------------------------------------------------------------------------
Total assets $ 9,897 $ 9,639
===================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 769 $ 939
Current maturities of long-term debt 8 308
Accounts payable 655 665
Accrued employee compensation and benefits 255 137
Advanced billings on uncompleted contracts 283 286
Income taxes payable 236 120
Accrued special charges 6 69
Other current liabilities 591 509
---------------------------------------------------------------------------------------------------
Total current liabilities 2,803 3,033
Long-term debt 1,049 1,056
Employee compensation and benefits 656 672
Other liabilities 669 547
Minority interest in consolidated subsidiaries 45 44
---------------------------------------------------------------------------------------------------
Total liabilities 5,222 5,352
---------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 453 and 448 shares 1,132 1,120
Paid-in capital in excess of par value 249 68
Deferred compensation (57) (51)
Accumulated other comprehensive income (324) (204)
Retained earnings 3,782 3,453
---------------------------------------------------------------------------------------------------
4,782 4,386
Less 6 shares of treasury stock, at cost in both periods 107 99
---------------------------------------------------------------------------------------------------
Total shareholders' equity 4,675 4,287
---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,897 $ 9,639
===================================================================================================
<FN>
See notes to quarterly financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Nine Months
Ended September 30
------------------------------
2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 496 $ 203
Adjustments to reconcile net income to net cash from operations:
Net income from discontinued operations (287) (76)
Depreciation, depletion and amortization 388 379
(Benefit) provision for deferred income taxes (35) 104
Change in accounting method, net - 19
Distributions from (advances to) related companies, net of
equity in (earnings) losses (28) 5
Accrued special charges (63) (266)
Other non-cash items (66) 36
Other changes, net of non-cash items:
Receivables and unbilled work (643) (13)
Inventories (47) 10
Accounts payable 41 (91)
Other working capital, net 151 (504)
Other, net (96) (109)
---------------------------------------------------------------------------------------------------
Total cash flows from operating activities (189) (303)
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (367) (386)
Sales of property, plant and equipment 181 89
Dispositions (acquisitions) of businesses, net 6 284
Other investing activities (27) 4
---------------------------------------------------------------------------------------------------
Total cash flows from investing activities (207) (9)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term borrowings (309) (68)
Net borrowings (repayments) of short-term debt (169) 434
Payments of dividends to shareholders (167) (166)
Proceeds from exercises of stock options 102 44
Payments to re-acquire common stock (24) (4)
Other financing activities (5) (7)
---------------------------------------------------------------------------------------------------
Total cash flows from financing activities (572) 233
---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (14) 9
Net cash flows from discontinued operations * 826 162
---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (156) 92
Cash and cash equivalents at beginning of period 466 203
---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 310 $ 295
===================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 114 $ 114
Income taxes $ 185 $ 185
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 90 $ 90
Liabilities disposed of in dispositions of businesses $ 499 $ 16
<FN>
* Net cash flows from discontinued operations in 2000 includes
proceeds of approximately $914 million from the sales of Dresser-Rand
in 2000 and Ingersoll-Dresser Pump in 1999. See Note 3.
See notes to quarterly financial statements.
</FN>
</TABLE>
4
<PAGE>
HALLIBURTON COMPANY
Notes to Quarterly Financial Statements
(Unaudited)
Note 1. Management Representations
We employ accounting policies that are in accordance with generally
accepted accounting principles in the United States. In preparing financial
statements in conformity with generally accepted accounting principles we must
make estimates and assumptions that affect:
- the reported amounts of assets and liabilities,
- the disclosure of contingent assets and liabilities at the date of
the financial statements, and
- the reported amounts of revenues and expenses during the reporting
period.
Ultimate results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and applicable rules of
Regulation S-X. Accordingly, these financial statements do not include all
information or footnotes required by generally accepted accounting principles
for complete financial statements and should be read together with our 1999
Annual Report on Form 10-K. Prior year amounts have been reclassified to conform
to the current year presentation.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of September 30, 2000, the results of our
operations for the three and nine months ended September 30, 2000 and 1999, and
our cash flows for the nine months then ended. The results of operations for the
three and nine months ended September 30, 2000 and 1999 may not be indicative of
results for the full year.
Note 2. Business Segment Information
With the earlier announcement that we intend to sell Dresser Equipment
Group, we now have two business segments. Both segments are organized around the
products and services provided to the customers they serve. See the table below
for financial information on our business segments. Dresser Equipment Group is
presented as discontinued operations and discussed in Note 4.
The Energy Services Group segment provides pressure pumping equipment
and services, logging and perforating, drilling systems and services, drilling
fluids systems, drill bits, specialized completion and production equipment and
services, well control, integrated solutions, and reservoir description. Also
included in the Energy Services Group are upstream oil and gas engineering,
construction and maintenance services, specialty pipe coating, insulation,
underwater engineering services, integrated exploration and production
information systems, and professional services to the petroleum industry. The
Energy Services Group has three business units: Halliburton Energy Services,
Brown & Root Energy Services and Landmark Graphics. These business units provide
products and services designed to help major, national and independent oil and
gas companies discover, develop and produce oil and gas. The long-term
performance of these business units is linked to the long-term demand for oil
and gas.
The Engineering and Construction Group segment provides engineering,
procurement, construction, project management, and facilities operation and
maintenance for hydrocarbon processing and other industrial and governmental
customers. The Engineering and Construction Group has two business units:
Kellogg Brown & Root and Brown & Root Services. Both business units are engaged
in the delivery of engineering and construction services.
Our equity in pretax income or losses for unconsolidated related
companies that are accounted for on the equity method is included in revenues
and operating income of the applicable segment. Intersegment revenues included
in the revenues of the other business segments are immaterial.
Operating income for the Energy Services Group in the third quarter and
nine months ended September 30, 2000 benefited from the sale of three marine
vessels. Brown & Root Energy Services recognized an $88 million gain on sale of
these vessels.
5
<PAGE>
The table below presents revenues and operating income by segment.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------------ ----------------------
Millions of dollars 2000 1999 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Energy Services Group $ 2,021 $ 1,700 $ 5,641 $ 5,134
Engineering and Construction Group 1,003 1,273 3,110 4,153
---------------------------------------------------------------------------------------------
Total $ 3,024 $ 2,973 $ 8,751 $ 9,287
=============================================================================================
Operating income:
Energy Services Group $ 233 $ 56 $ 402 $ 162
Engineering and Construction Group 41 41 113 163
General corporate (26) (16) (60) (50)
Special credits - - - 47
---------------------------------------------------------------------------------------------
Total $ 248 $ 81 $ 455 $ 322
=============================================================================================
</TABLE>
Note 3. Acquisitions and Dispositions
PES acquisition. In February 2000, our offer to acquire the remaining
74% of the shares of PES (International) Limited that we did not already own was
accepted by PES shareholders. PES is based in Aberdeen, Scotland, and has
developed technology that complements Halliburton Energy Services' real-time
reservoir solutions. To acquire the remaining 74% of PES, we issued 1.2 million
shares of Halliburton common stock. We also issued rights that will result in
the issuance of between 850,000 to 2.1 million additional shares of Halliburton
common stock between February 2001 and February 2003. We have preliminarily
recorded, subject to the final valuation of intangible assets and other costs,
$115 million of goodwill which will be amortized over 20 years. PES is part of
the Energy Services Group.
Joint venture divestitures. In October 1999 we announced the sales to
Ingersoll-Rand of our 49% interest in the Ingersoll-Dresser Pump joint venture
and our 51% interest in the Dresser-Rand joint venture. The sales were triggered
by Ingersoll-Rand's exercise of its option under the joint venture agreements to
cause us to either buy their interests or sell ours. Both joint ventures were
part of the Dresser Equipment Group segment. In April 2000 we announced plans to
sell the remaining businesses within the Dresser Equipment Group. See Note 4.
Our Ingersoll-Dresser Pump interest was sold in December 1999 for approximately
$515 million. We recorded a gain on disposition of discontinued operations of
$253 million before tax, or $159 million after-tax, for a net gain of $0.36 per
diluted share in 1999 from the sale of Ingersoll-Dresser Pump. Proceeds from the
sale, after payment of our intercompany balance, were received in the form of a
$377 million promissory note with an annual interest rate of 3.5% which was
collected on January 14, 2000. On February 2, 2000 we completed the sale of our
51% interest in Dresser-Rand for a price of approximately $579 million. Proceeds
from the sale, net of intercompany amounts payable to the joint venture, were
$536 million, resulting in a gain on disposition of discontinued operations of
$356 million before tax, or $215 million after-tax, for a net gain of $0.48 per
diluted share in the first quarter of 2000. The proceeds from these sales were
used to reduce short-term borrowings and for other general corporate purposes.
Note 4. Discontinued Operations
The Dresser Equipment Group in 1999 was comprised of six operating
divisions and two joint ventures that manufacture and market equipment used
primarily in the energy, petrochemical, power and transportation industries. In
late 1999 we announced our intentions to sell, and have subsequently sold, our
interests in the two joint ventures within this segment. These joint ventures
represented nearly half of the group's revenues and operating profit in 1999.
See Note 3. The sale of our interests in the segment's joint ventures prompted a
strategic review of the remaining businesses within the Dresser Equipment Group
segment. As a result of this review, we determined that these businesses do not
closely fit with our core businesses, long-term goals and strategic objectives.
On April 25, 2000, our Board of Directors approved plans to sell all the
remaining businesses within our Dresser Equipment Group segment. We expect to
complete the sales of these businesses by the end of the first quarter of 2001.
6
<PAGE>
The Dresser DMD and Roots Divisions were consolidated into one
operating division during 2000. The businesses which now comprise the Dresser
Equipment Group, all of which were obtained in the 1998 merger with Dresser,
include:
- Dresser Valve Division - manufactures valves, actuators and chemical
injection pumps;
- Dresser DMD-Roots Division - manufactures rotary blowers for
industrial applications as well as rotary gas meters for natural gas
distribution;
- Dresser Instrument Division - manufactures pressure gauges,
thermometers, transducers, transmitters, pressure and temperature
switches, calibration equipment, recorders, and other instruments
for applications in process, petrochemical, power generation, pulp
and paper, water resources, and other industries;
- Dresser Wayne Division - manufactures retail automation and fuel
dispensing systems; and
- Dresser Waukesha Division - manufactures natural gas engines and
engine generator sets.
The financial results of the Dresser Equipment Group segment are
presented as discontinued operations in our financial statements. Prior periods
are restated to reflect this presentation.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
----------------------- ------------------------
Millions of dollars 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 346 $ 560 $ 1,037 $ 1,840
===============================================================================================
Operating income $ 42 $ 33 $ 115 $ 140
Other income and expense 1 1 1 1
Taxes (16) (13) (44) (55)
Minority interest - (1) - (10)
-----------------------------------------------------------------------------------------------
Net income $ 27 $ 20 $ 72 $ 76
===============================================================================================
</TABLE>
Gain on disposal of discontinued operations in the first quarter of
2000 reflects the gain on the sale of Dresser-Rand in February 2000.
<TABLE>
<CAPTION>
Nine Months
Ended September 30
-----------------------------
Millions of dollars 2000
-----------------------------------------------------------------------------
<S> <C>
Proceeds from sale, less intercompany
settlement $ 536
Net assets disposed (180)
-----------------------------------------------------------------------------
Gain before taxes 356
Income taxes (141)
-----------------------------------------------------------------------------
Gain on disposal of discontinued operations $ 215
=============================================================================
</TABLE>
7
<PAGE>
Net assets of discontinued operations are comprised of the following
items:
<TABLE>
<CAPTION>
September 30 December 31
---------------- ----------------
Millions of dollars 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Receivables $ 272 $ 904
Inventories 250 515
Other current assets 19 34
Accounts payable (131) (267)
Other current liabilities (131) (393)
------------------------------------------------------------------------------
Net current assets of discontinued
operations $ 279 $ 793
==============================================================================
Net property, plant and equipment $ 216 $ 401
Net goodwill 258 263
Other assets 38 74
Employee compensation and benefits (120) (313)
Other liabilities (4) (5)
Minority interest in consolidated
subsidiaries - (110)
------------------------------------------------------------------------------
Net noncurrent assets of discontinued
operations $ 388 $ 310
==============================================================================
</TABLE>
Revenues, assets, and liabilities declined primarily due to the sales
of Dresser-Rand and Ingersoll-Dresser Pump joint ventures. See Note 3. Improved
operating margins in the remaining businesses more than offset the loss of
earnings from these joint ventures in the third quarter of 2000 when compared to
the prior year. On a year-to-date basis, the improved margins partially offset
the loss of earnings from these two joint ventures.
Note 5. Receivables
Our receivables are generally not collateralized. Unbilled work on
uncompleted contracts generally represents work currently billable, and this
work is usually billed during normal billing processes in the next month.
Unbilled work on uncompleted contracts also includes claims and change orders
that are in the process of being negotiated with customers. These claims and
change orders amounted to $126 million at September 30, 2000 and $98 million at
December 31, 1999 and are generally expected to be collected within one year.
Note 6. Inventories
The cost of most United States manufacturing and field service
inventories is determined using the last-in, first-out (LIFO) method.
Inventories on the last-in, first-out method were $73 million at September 30,
2000 and $66 million at December 31, 1999. If the average cost method had been
used for these inventories, total inventories would have been approximately $33
million higher than reported at September 30, 2000 and $35 million higher than
reported at December 31, 1999.
<TABLE>
<CAPTION>
September 30 December 31
---------------- ------------------------
Millions of dollars 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Finished products and parts $ 523 $ 619
Raw materials and supplies 183 79
Work in process 68 25
-----------------------------------------------------------------------------
Total $ 774 $ 723
=============================================================================
</TABLE>
Note 7. Dresser Financial Information
Since becoming a wholly-owned subsidiary, Dresser Industries, Inc. has
ceased filing periodic reports with the Securities and Exchange Commission.
Dresser's 8% guaranteed senior notes, which were initially issued by Baroid
Corporation, remain outstanding and are fully and unconditionally guaranteed by
Halliburton. We have not presented separate financial statements and other
disclosures concerning Dresser because we determined that the information is not
material to the holders of these notes.
8
<PAGE>
In January 1999, as part of a legal reorganization associated with the
merger, Halliburton Delaware, Inc., a first tier holding company subsidiary, was
merged into Dresser. The majority of our operating assets and activities are now
included within Dresser and its subsidiaries.
<TABLE>
<CAPTION>
Dresser Industries, Inc. September 30 December 31
Financial Position ---------------- -----------------------
Millions of dollars 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 5,133 $ 5,011
Noncurrent assets 7,364 5,106
----------------------------------------------------------------------------------------
Total $ 12,497 $ 10,117
========================================================================================
Current liabilities $ 2,007 $ 2,133
Noncurrent liabilities 1,692 1,633
Minority interest 51 45
Shareholders' equity 8,747 6,306
----------------------------------------------------------------------------------------
Total $ 12,497 $ 10,117
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Dresser Industries, Inc. Ended September 30 Ended September 30
Operating Results ------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,024 $ 2,974 $ 8,751 $ 9,287
==============================================================================================
Operating income $ 266 $ 87 $ 489 $ 291
==============================================================================================
Income from continuing operations
before taxes, minority interest,
and change in accounting
method $ 237 $ 49 $ 387 $ 156
Income taxes (90) (20) (145) (64)
Minority interest (5) (4) (14) (13)
Discontinued operations, net 27 20 287 76
Change in accounting method, net - - - (19)
----------------------------------------------------------------------------------------------
Net income $ 169 $ 45 $ 515 $ 136
==============================================================================================
</TABLE>
Note 8. Commitments and Contingencies
Asbestos litigation. Since 1976, our subsidiary, Dresser Industries,
Inc. and its former divisions or subsidiaries have been involved in litigation
alleging some products they manufactured contained asbestos that injured persons
that inhaled the fibers.
Dresser has entered into agreements with insurance carriers, that
cover, in whole or in part, indemnity payments, legal fees and expenses for
specific categories of claims. Dresser is negotiating with insurance carriers
for coverage for the remaining categories of claims. Because these agreements
are governed by exposure dates, payment type and the product involved, the
covered amount varies by claim. In addition, lawsuits are pending against
several carriers seeking to recover additional amounts related to these claims.
Our Engineering and Construction Group is also involved in asbestos
litigation. Third parties allege they sustained injuries from the inhalation of
asbestos fibers contained in some of the materials used in various construction
and renovation projects involving our Brown & Root subsidiary, now named Kellogg
Brown & Root, Inc. The insurance coverage for Kellogg Brown & Root for the
applicable periods was written by Highlands Insurance Company. Highlands was a
subsidiary of Halliburton prior to its spin-off to our shareholders in early
1996. Our negotiations with Highlands have not produced an agreement on the
amount of insurance coverage for asbestos and defense costs. On April 5, 2000,
Highlands filed suit in Delaware Chancery Court alleging that, as part of the
spin-off in 1996, Halliburton assumed liability for all asbestos claims filed
against Halliburton after the spin-off. Highlands also alleges that, Halliburton
did not adequately disclose to Highlands the existence of Halliburton's
subsidiaries' potential asbestos liability. On August 23, 2000 Highlands issued
9
<PAGE>
a letter denying coverage under the policies based on the claims asserted in the
Delaware action. We believe that Highlands is contractually obligated to provide
insurance coverage for the asbestos claims filed against Kellogg Brown & Root
and that Highlands' lawsuit and its denial of coverage are without merit. We
intend to assert our right to the insurance coverage vigorously. On April 24,
2000, Halliburton filed suit against Highlands in Harris County, Texas, claiming
that Highlands breached its contractual obligation to provide insurance
coverage. We have asked the court to order Highlands to provide coverage for
asbestos claims under the guaranteed cost policies issued by Highlands to
Kellogg Brown & Root. This Texas action is currently set for trial on May 7,
2001.
Since 1976, approximately 269,000 claims have been filed against
various current and former divisions and subsidiaries. About 23,000 of these
claims relate to Kellogg Brown & Root and the balance of these claims relate to
Dresser, its former divisions and subsidiaries. Approximately 160,000 of these
claims have been settled or disposed of at a gross cost of approximately $117
million with insurance carriers paying all but approximately $30 million. Claims
continue to be filed, with about 33,000 claims filed in the first nine months of
2000. We have established an accrual estimating our liability for known asbestos
claims. Our estimate is based on our historical litigation experience,
settlements and expected recoveries from insurance carriers. Our expected
insurance recoveries are based on agreements with carriers or, where agreements
are still under negotiation or litigation, our estimate of recoveries. We
believe that the insurance carriers with which we have signed agreements will be
able to meet their share of future obligations under the agreements. Highlands
has stated in its SEC filings that if it loses the litigation with us and is
required to pay the asbestos claims against Kellogg Brown & Root, there could be
a material adverse impact on Highlands' financial position. Highlands reported
statutory capital surplus of $162 million to the Texas Insurance Commission in
its Annual Statement for the year 1999. We believe that Highlands has the
ability to pay substantially all of these asbestos claims and that the pending
litigation will be resolved in our favor.
At September 30, 2000, there were about 109,000 open claims, including
about 21,000 associated with recoveries we expect from Highlands. Open claims at
September 30, 2000 also include 9,100 for which settlements are pending. This
compares with approximately 107,700 open claims at the end of the prior year.
The accrued liabilities for these claims and corresponding billed and estimated
recoveries from carriers are as follows:
<TABLE>
<CAPTION>
September 30 December 31
---------------- ----------------
Millions of dollars 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Accrued liability $ 82 $ 71
Estimated insurance recoveries:
Highlands Insurance Company 42 28
Other insurance carriers 14 18
---------------------------------------------------------------------------------
Net asbestos liability $ 26 $ 25
=================================================================================
</TABLE>
As of September 30, 2000, we have accounts receivables from Highlands Insurance
Company of $2 million for payments we have made on asbestos claims. Accounts
receivables for billings to other insurance carriers for payments made on claims
were $12 million at September 30, 2000 and $9 million at December 31, 1999.
We recognize the uncertainties of litigation and the possibility that a
series of adverse court rulings or new legislation affecting the claims
settlement process could materially impact the expected resolution of asbestos
related claims. However, based upon:
- our historical experience with similar claims;
- the time elapsed since Dresser and its former divisions or
subsidiaries discontinued sale of products containing asbestos;
- the time elapsed since Kellogg Brown & Root used asbestos in any
construction process; and
- our understanding of the facts and circumstances that gave rise to
asbestos claims,
we believe that the pending asbestos claims will be resolved without material
effect on our financial position or results of operations.
Resolution of dispute with Global Industrial Technologies, Inc. We
previously reported that under an agreement entered into at the time of the
spin-off of Global Industrial Technologies, Inc., formerly INDRESCO, Inc., from
Dresser Industries, Inc., Global assumed liability for all asbestos related
10
<PAGE>
claims filed against Dresser after July 31, 1992 relating to refractory products
manufactured or marketed by the former Harbison-Walker Refractories division of
Dresser. Those business operations were transferred to Global in the spin-off.
These asbestos claims are subject to agreements with Dresser's insurance
carriers that cover expense and indemnity payments. However, the insurance
coverage is incomplete and Global has to-date paid the uncovered portion of
asbestos claims with its own funds.
We also reported that a dispute arose with Global concerning those
agreements, which led to arbitration and litigation proceedings. We have now
resolved the dispute and agreed with Global that:
- the arbitration, and all related litigation, is dismissed;
- Global acknowledges its obligation to assume responsibility for new
asbestos claims filed after the date of the spin-off;
- Global agrees to continue to cooperate with Dresser on Dresser's
remaining refractory claims; and,
- Dresser continues to make available its direct insurance program for
the Global assumed asbestos liabilities.
Fort Ord litigation. One of our business units, Brown & Root Services,
is a defendant in civil litigation pending in federal court in Sacramento,
California. The lawsuit alleges that Brown & Root Services violated provisions
of the False Claims Act while performing work for the U.S. Army at Fort Ord in
California. This lawsuit was filed by a former employee in 1997. Brown & Root
Services has denied the allegations and is preparing to defend itself at trial,
which is expected to occur in late 2001. We believe that the outcome of this
civil litigation will not have a material adverse impact on us.
Although in 1998, the U.S. Department of Justice declined to join this
litigation, it has advised Brown & Root Services that Brown & Root Services is
the target of a federal grand jury investigation regarding the contract issues
raised in the litigation. In addition, Brown & Root Services has been served
with grand jury subpoenas, which require the production of documents relating to
the Fort Ord contract. Brown & Root Services is cooperating in the investigation
and believes that it has acted in accordance with the law and the Fort Ord
contract. The U.S. Department of Justice has not made any specific allegations
against Brown & Root Services.
Environmental. We are subject to numerous environmental legal and
regulatory requirements related to our operations worldwide. As a result of
those obligations, we are involved in environmental litigation and claims, the
clean-up of properties we own or have operated, and efforts to meet or correct
compliance-related matters.
Some of our subsidiaries and former operating entities are involved as
a potentially responsible party or PRP in remedial activities to clean-up
several "Superfund" sites under United States federal law and comparable state
laws. Kellogg Brown & Root, Inc. is one of nine PRPs named at the Tri-State
Mining District Superfund Site, also known as the Jasper County Superfund Site.
The site contains lead and zinc mine tailings produced from mining activities
that occurred from the 1800s through the mid-1950s in southwestern Missouri. The
PRPs have agreed to perform a Remedial Investigation/Feasibility Study at this
site. Kellogg Brown & Root's share of the cost of this study is not expected to
be material. In addition to the Superfund issues, the State of Missouri has
indicated that it may pursue natural resource damage claims against the PRPs. At
present, Kellogg Brown & Root cannot determine the extent of its liability, if
any, for remediation costs or natural resource damages.
We take a proactive approach in evaluating and addressing the
environmental impact of sites where we are operating or have maintained
operations. As a result we incur costs each year assessing and remediating
contaminated properties to avoid future liabilities, complying with legal and
regulatory requirements, and responding to claims by third parties.
Finally, we incur costs related to compliance with ever-changing
environmental legal and regulatory requirements in the jurisdictions where we
operate. It is very difficult to quantify the potential liabilities. Except for
our potential liability at the Jasper County Superfund Site, we do not expect
these expenditures to have a material adverse effect on our consolidated
financial position or our results of operations.
Our accrued liabilities for environmental matters were $30 million as
of both September 30, 2000 and December 31, 1999.
Other. We are a party to various other legal proceedings. We believe
any liabilities which may arise from these proceedings will not be material to
our consolidated financial position and results of operations.
11
<PAGE>
Note 9. Income Per Share
Basic income per share amounts are based on the weighted average number
of common shares outstanding during the period. Diluted income per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. Excluded from the
computation of diluted income per share are options to purchase 1 million shares
in 2000 and 2 million shares in 1999 that were outstanding during the nine
months ended September 30, 2000 and September 30, 1999, respectively. These
options were excluded because the option exercise price was greater than the
average market price of the common shares. Also excluded from the computation
are rights we issued in connection with the PES acquisition for between 850,000
to 2.1 million shares of Halliburton common stock. These rights will result in
additional shares of common stock to be issued between February 2001 and 2003.
See Note 3.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
Millions of dollars and shares except ---------------------------- ---------------------------
per share data 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations before
change in accounting method $ 130 $ 38 $ 209 $ 146
================================================================================================================
Basic weighted average shares 445 441 444 440
Effect of common stock equivalents 6 4 4 3
----------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 451 445 448 443
================================================================================================================
Income per common share from continuing
operations before change in accounting
method:
Basic $ 0.29 $ 0.09 $ 0.47 $ 0.33
================================================================================================================
Diluted $ 0.29 $ 0.09 $ 0.47 $ 0.33
================================================================================================================
Income from discontinued operations:
Basic $ 0.06 $ 0.04 $ 0.16 $ 0.17
================================================================================================================
Diluted $ 0.06 $ 0.04 $ 0.16 $ 0.17
================================================================================================================
</TABLE>
Note 10. Comprehensive Income
The cumulative translation adjustment of some of our foreign entities,
minimum pension liability adjustments and unrealized gain on investments are the
only components of other comprehensive income adjustments to net income.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
---------------------------- ---------------------------
Millions of dollars 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 157 $ 58 $ 496 $ 203
Cumulative translation adjustment, net of tax (79) 13 (140) (26)
Adjustment to minimum pension liability - - - (7)
Unrealized gain on investments 2 - 2 -
----------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 80 $ 71 $ 358 $ 170
================================================================================================================
</TABLE>
Accumulated other comprehensive income at September 30, 2000 and
December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
September 30 December 31
--------------- ----------------
Millions of dollars 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
Cumulative translation adjustment $ (314) $ (185)
Minimum pension liability (12) (19)
Unrealized gain on investments 2 -
-----------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (324) $ (204)
=========================================================================================
</TABLE>
12
<PAGE>
The increase for the first nine months of 2000 in cumulative
translation adjustment is due mainly to changes in exchange rates of the British
pound sterling experienced primarily by foreign entities engaged in engineering
and construction activities.
Note 11. Special Charges
During the third and fourth quarters of 1998, we incurred special
charges totaling $980 million to provide for costs associated with the merger
with Dresser and with the industry downturn resulting from declining oil and gas
prices. During the second quarter of 1999, we reversed $47 million of the 1998
charges based on an assessment at that time of total costs to be incurred to
complete the actions covered in our special charges. Special charges were
reflected in the following captions of the condensed consolidated statements of
income (special charges related to Dresser Equipment Group are presented in the
captions for discontinued operations):
<TABLE>
<CAPTION>
Twelve Months
Ended December 31
----------------------
Millions of dollars 1998
------------------------------------------------------
<S> <C>
Cost of services $ 68
Cost of sales 16
Special charges and credits 875
Discontinued operations 21
------------------------------------------------------
Total $ 980
======================================================
</TABLE>
The table below includes the components of the pretax special charges
and the amounts utilized and adjusted through September 30, 2000.
<TABLE>
<CAPTION>
Asset Facility Merger
Related Personnel Consolidation Transaction Other
Millions of dollars Charges Charges Charges Charges Charges Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 Charges to Expense by
Business Segment:
Energy Services Group $ 453 $ 157 $ 93 $ - $ 18 $ 721
Engineering & Construction Group 8 19 8 - 5 40
Discontinued operations 18 1 2 - - 21
General corporate 30 58 23 64 23 198
------------------------------------------------------------------------------------------------------------------
Total 509 235 126 64 46 980
Utilized and adjusted (509) (226) (93) (64) (19) (911)
------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 - 9 33 - 27 69
Utilized in 2000 - (9) (28) - (26) (63)
------------------------------------------------------------------------------------------------------------------
Balance September 30, 2000 $ - $ - $ 5 $ - $ 1 $ 6
==================================================================================================================
</TABLE>
Personnel charges include severance and related costs incurred for
announced employee reductions of 10,850 affecting all business segments,
corporate and shared service functions. Personnel charges also include personnel
costs related to change of control. In June 1999, management revised the planned
employee reductions to 10,100, due in large part to higher than anticipated
voluntary employee resignations. By March 31, 2000, terminations of employees,
consultants and contract personnel related to the 1998 special charge were
substantially completed.
Through September 30, 2000, we have vacated 97%, and sold or returned
to the owner 90%, of the service and administrative facilities related to the
1998 special charge. The majority of the sold, returned or vacated properties
are located in North America and were in the Energy Services Group. The
remaining $5 million balance will be utilized in connection with ongoing
facility disposals.
Other charges include the estimated contract exit costs associated with
the elimination of duplicate agents and suppliers in various countries
throughout the world. Through September 30, 2000, we have utilized $45 million
other special charge costs.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
In this section, we discuss the operating results and general financial
condition of Halliburton Company and its subsidiaries. We explain:
- factors and risks that impact our business;
- why our earnings and expenses for the third quarter of 2000 differ
from the third quarter of 1999;
- why our earnings and expenses for the first nine months of 2000
differ from the first nine months of 1999;
- capital expenditures we made;
- factors that impacted our cash flows; and
- other items that materially affect our financial condition or
earnings.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking. 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. Forward-looking
information we provide reflects our best judgement based on current information.
Our results of operations can be affected by inaccurate assumptions we make or
by known or unknown risks and uncertainties. In addition, other factors may
affect the accuracy of our forward-looking information. As a result, no
forward-looking information can be guaranteed. Actual events and the results of
operations may vary materially.
While it is not possible to identify all factors, we continue to face
many risks and uncertainties that could cause actual results to differ from our
forward-looking statements including:
Geopolitical and legal.
- trade restrictions and economic embargoes imposed by the United
States and other countries;
- unsettled political conditions, war, civil unrest, currency
controls and governmental actions in the numerous countries in
which we operate;
- operations in countries with significant amounts of political
risk, including, for example, Nigeria, Angola, Russia, Libya, and
Algeria;
- changes in foreign exchange rates;
- changes in governmental regulations in the numerous countries in
which we operate including, for example, regulations that:
- encourage or mandate the hiring of local contractors; and
- require foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction;
- litigation, including, for example, asbestos litigation and
environmental litigation; and
- environmental laws, including, for example, those that require
emission performance standards for facilities;
Weather related.
- the effects of severe weather conditions, including, for example,
hurricanes and tornadoes, on operations and facilities; and
- the impact of prolonged severe or mild weather conditions on the
demand for and price of oil and natural gas;
Customers and vendors.
- the magnitude of governmental spending for military and logistical
support of the type that we provide;
- changes in capital spending by customers in the oil and gas industry
for exploration, development, production, processing, refining, and
pipeline delivery networks;
- changes in capital spending by governments for infrastructure
projects of the sort that we perform;
- consolidation of customers in the oil and gas industry;
- claim negotiations with engineering and construction customers on
cost variances and change orders on major projects;
14
<PAGE>
Industry.
- technological and structural changes in the industries that we
serve;
- changes in the price of oil and natural gas, including:
- OPEC's ability to set and maintain production levels and prices
for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration for and
production and development of their oil and natural gas
reserves; and
- the level of demand for oil and natural gas;
- changes in the price of commodity chemicals that we use;
- risks that result from entering into fixed fee engineering,
procurement and construction projects of the types that we provide
where failure to meet schedules, cost estimates or performance
targets could result in non-reimbursable costs which cause the
project not to meet our expected profit margins;
- risks that result from entering into complex business arrangements
for technically demanding projects where failure by one or more
parties could result in monetary penalties; and
- the risk inherent in the use of derivative instruments of the sort
that we use which could cause a change in value of the derivative
instruments as a result of:
- adverse movements in foreign exchange rates, interest rates, or
commodity prices, or
- the value and time period of the derivative being different than
the exposures or cash flows being hedged;
Personnel and mergers/reorganizations/dispositions.
- increased competition in the hiring and retention of employees in
specific areas, including, for example, energy services operations,
accounting and treasury;
- integration of acquired businesses into Halliburton, including:
- standardizing information systems or integrating data from
multiple systems;
- maintaining uniform standards, controls, procedures and
policies; and
- combining operations and personnel of acquired businesses with
ours;
- effectively reorganizing operations and personnel within
Halliburton;
- disposition of the remaining businesses of discontinued
operations; and
- replacing discontinued lines of businesses with acquisitions that
add value and complement our core businesses.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. We do advise you to review any additional
disclosures we make in our 10-Q, 8-K and 10-K reports to the Securities and
Exchange Commission. We also suggest that you listen to our quarterly earnings
release conference calls with financial analysts. You can find information on
how to access those calls at our web site www.halliburton.com.
BUSINESS ENVIRONMENT
With the announcement that we intend to sell the Dresser Equipment
Group, our business is organized around two business segments:
- Energy Services Group and
- Engineering and Construction Group.
The majority of our revenues come from the sale of services and
products, including construction activities, to the oil and gas industry. We
conduct business in over 120 countries providing a variety of services,
equipment, maintenance, and engineering and construction to energy, industrial
and governmental customers. We offer a comprehensive range of integrated and
discrete services and products as well as project management for oil and natural
gas activities throughout the world. These services and products are used in the
earliest phases of exploration and development of oil and gas reserves and
continue through the refining, processing and distribution process. The
industries we serve are highly competitive and we have many substantial
competitors. Unsettled political conditions, expropriation or other governmental
actions, exchange controls and currency devaluation may result in increased
business risk in some countries in which we operate. Those countries include,
among others, Nigeria, Angola, Russia, Libya, and Algeria. However, we believe
the geographic diversification of our business activities helps to reduce the
risk that loss of business in any one country would be material to our
consolidated results of operations.
15
<PAGE>
Energy Services Group.
As oil and gas prices rebounded during 1999 and continued to increase
throughout 2000, increased capital spending in the energy industry has been
focused on upstream exploration and production. Geographically, our North
American oilfield services product service lines have been first to benefit from
this increased spending. Increased oil and gas prices have provided the economic
incentives to produce new reserves and refurbish existing fields. Combined with
higher prices for natural gas, increased demand for gas-powered electricity for
industrial and commercial use has increased the level of natural gas exploration
and production within the United States and Canada. Average oil and gas rig
counts for the United States and Canada have increased by 400 rigs compared to a
year ago, with gas rigs comprising the majority of the increase. We expect
activity in North America to continue to increase, but at a slower pace than we
have experienced year-to-date. Internationally, major and national oil companies
have taken a more cautious approach to increased capital spending. Many
significant new international discoveries of oil have been located in complex
deepwater environments that require larger capital investments. We believe oil
prices will remain at levels that will encourage our customers to further
increase capital spending, especially in deepwater areas.
Engineering and Construction Group.
Delays in capital spending that adversely affected the Energy Services
Group during 1999 and into 2000 affected the Engineering and Construction Group
to a greater extent. Additional investments in downstream capital projects,
including refineries and petrochemical plants, have been slower to materialize
than previously expected and awards of major projects continue to be delayed. In
addition, many customers continue to rationalize their requirements following
mergers within the industry. The comparative declines in the group's revenues
reflect the delays in customers awarding new projects while we complete projects
already in backlog, particularly within the Kellogg Brown & Root business unit.
The lack of new projects will result in reduced margins in this business, which
will negatively impact operating results into 2001. We believe that continued
strengthening of the general global economy, growth in worldwide demand for oil
and gas, and refining capacity constraints will provide long-term growth
opportunities for the Engineering and Construction Group. The group also sees
improving opportunities to provide support services to the United States
military, other United States agencies, and government agencies of other
countries, including the United Kingdom. The demand for these services is
expected to grow as governments at all levels seek to control costs and improve
services by outsourcing various functions.
Discontinued Operations.
Our financial statements now reflect Dresser Equipment Group as
discontinued operations, and we have restated prior periods for this
presentation. See Note 4. Dresser Equipment Group's business is primarily
affected by the demand from customers in the energy, power, chemical, and
transportation industries for its products and services. Sales and earnings are
also affected by changes in competitive prices and overall general economic
conditions, fluctuations in capital spending by our customers, and the stability
of oil and gas prices that ultimately produce cash flow for our customers.
Continuing mergers and consolidations by our customers and declines in capital
spending contributed to a reduction in revenues for the group, as orders and
projects were delayed during 1999 and into 2000. Because of the impact of these
economic conditions, during 1999 we took steps to reduce manufacturing and
overhead costs to improve operating performance and remain a low-cost provider.
The benefits of these efforts began to materialize during the fourth quarter of
1999 and throughout 2000, as the group was able to improve operating margins on
lower revenues, particularly within the Valve division. Although its business
environment is highly competitive, strong demand exists for Dresser Equipment
Group's products and services. We expect demand growth into 2001 to be driven by
the same factors that affect our other segments. While we believe Dresser
Equipment Group's businesses have significant potential to strategic or
financial buyers, the businesses do not fit with our current strategic
objectives. We intend to utilize the proceeds from the sales of these businesses
to invest in our core energy services business, where we feel we can have the
greatest effect on our returns, and to repurchase our common stock.
Halliburton Company.
Recent announcements by our customers to increase spending in
exploration and production, particularly spending by major and national oil and
gas companies, provide optimism for the continued expansion of revenues and
profitability within our upstream energy services product service lines. With
the exception of deepwater projects, near term prospects for increased
engineering and construction activity in either the upstream or downstream
business are doubtful. Continued delays in such projects will negatively impact
16
<PAGE>
the financial results of our engineering and construction product service lines.
While we are beginning to see indications of our customers proceeding with
engineering and construction projects previously placed on hold, it is unlikely
that these projects would positively impact our financial results until the
second half of 2001. Considering the anticipated low levels of activity within
the engineering and construction businesses, we are working to reduce overhead
costs, delay internal projects and evaluate how we operate our engineering and
construction businesses. This includes the development of plans to combine all
our engineering and construction companies during the first quarter of 2001. We
remain confident in the long-term prospects for our company. Steadily rising
population and greater industrialization efforts should continue to propel
worldwide economic expansion, especially in developing nations. These factors
should cause increasing demand for oil and gas to produce refined products,
petrochemicals, fertilizers, and power.
RESULTS OF OPERATIONS IN 2000 COMPARED TO 1999
Third Quarter of 2000 Compared with the Third Quarter of 1999
<TABLE>
<CAPTION>
Third Quarter
REVENUES --------------------------------- Increase
Millions of dollars 2000 1999 (decrease)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy Services Group $ 2,021 $ 1,700 $ 321
Engineering and Construction Group 1,003 1,273 (270)
----------------------------------------------------------------------------------------------
Total revenues $ 3,024 $ 2,973 $ 51
==============================================================================================
</TABLE>
Consolidated revenues in the third quarter of 2000 of $3.0 billion
increased $51 million compared to the third quarter of 1999. Increased oilfield
services activity in the United States resulting from higher rig counts more
than offset lower levels of international engineering and construction activity.
International revenues were 64% of total revenues for the third quarter of 2000
and 70% in the third quarter of 1999.
Energy Services Group revenues increased $321 million, or 19% compared
to the third quarter of 1999. International revenues were 63% of total revenues
in the third quarter of 2000 compared to 71% in the same quarter of the prior
year. Rig counts and business activity have continued to grow significantly in
North America. The continued strength in North American drilling activity
positively benefited our oilfield services product service lines. The pressure
pumping product service line, which represents about 45% of our oilfield
services business unit revenues, achieved revenue growth of 40%, while logging
experienced growth of 44% and drilling fluids, drilling systems, and completion
products each experienced growth in excess of 20%. Geographically, North
American oilfield services revenues increased 56%, while Middle East and Latin
American revenues increased 19% and 15%, respectively. Europe/Africa and Asia
Pacific revenues increased 9% and 1%, respectively. Revenues declined 1% in our
upstream oil and gas engineering and construction businesses. Recently awarded
deepwater projects are in the start-up phase and have not yet replaced revenues
from existing projects that are nearing completion. Increased revenues from
projects in Mexico continue to help minimize the slow recovery in other
geographic areas. Integrated exploration and production information systems
revenues increased 10% compared to the prior year third quarter due to increased
software sales.
Engineering and Construction Group revenues were 21% lower in the third
quarter of 2000 compared to the third quarter of 1999. About 67% of the group's
revenues were from international activities compared to 68% in the prior year
quarter. Our downstream engineering and construction businesses have not yet
benefited from higher oil and gas prices, as additional capital spending by our
customers has focused primarily on upstream exploration and production and
merger integration activities. Continued merger activity among the major oil
companies may further delay spending on major downstream projects. All major
product service lines decreased with the exception of maintenance, which had a
17% increase year-over-year, and our ship refitting business in the United
Kingdom which increased 15%. Revenues from a logistical support contract in the
Balkans region decreased $60 million compared to the third quarter of 1999 due
to a shift from the construction phase to the sustaining phase earlier this
year.
17
<PAGE>
<TABLE>
<CAPTION>
Third Quarter
OPERATING INCOME --------------------------------- Increase
Millions of dollars 2000 1999 (decrease)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy Services Group $ 233 $ 56 $ 177
Engineering and Construction Group 41 41 -
General corporate (26) (16) (10)
----------------------------------------------------------------------------------------------
Total operating income $ 248 $ 81 $ 167
==============================================================================================
</TABLE>
Consolidated operating income of $248 million was 206% higher in the
third quarter of 2000 compared to the third quarter of 1999. The quarter
included several nonrecurring items, including $88 million gain on the sale of
marine vessels and $9 million of costs related to the previous chairman's early
retirement. Excluding these two items, operating income increased 109% compared
to the prior year.
Energy Services Group operating income for the third quarter of 2000
increased four-fold compared to the third quarter of 1999. Operating income in
our oilfield services product service lines also more than quadrupled over the
same period due to a combination of increased activity and improved margins,
especially in the pressure pumping and logging product service lines.
Profitability growth was greatest in North America due to a combination of
pricing improvements and increased equipment and resource utilization. Overall,
other regions improved slightly compared to the prior year. Operating income
from upstream engineering and construction projects for the quarter increased
$77 million compared to the third quarter of 1999. The increase is due to a
pretax gain of approximately $88 million on the sale of two semi-submersible
vessels to a 50% owned joint venture and the sale of a multi-purpose support
vessel. Excluding the gain on sale of marine vessels, operating income for the
upstream engineering and construction product service lines declined $11
million. The decline was due to the continued delay of new projects and lower
utilization of manufacturing and fabrication capacity. Operating income from
integrated exploration and production information systems increased 67%
year-over-year due to increased software sales.
Engineering and Construction Group operating income for the third
quarter of 2000 was flat compared to the third quarter of 1999 on lower
revenues. Operating income in 2000 benefited from improved margins on gas
projects and ship refitting activities. Changes in operating income on other
major product service lines in 2000 were consistent with the corresponding
changes in the levels of revenue.
General corporate expense for the quarter increased $10 million
including $9 million expense recorded for the early retirement of the previous
chairman.
NONOPERATING ITEMS
Interest expense of $38 million for the third quarter of 2000 was
unchanged compared to the third quarter of 1999. Higher interest rates on higher
average short-term debt offset lower levels of long-term debt.
Interest income was $6 million in the third quarter of 2000, a decrease
from the prior year's interest income of $31 million, which included $20 million
related to the settlement of income tax issues in the United States.
Foreign exchange gains (losses), net was $4 million gain in the current
year quarter compared to $4 million loss in the prior year third quarter.
Provision for income taxes of $84 million resulted in an effective tax
rate of 38.4%, comparable with the third quarter of 1999 rate of 39.1%.
Income from continuing operations was $130 million in the third quarter
of 2000 compared to $38 million in the prior year quarter.
Income from discontinued operations of $27 million in 2000 and $20
million in 1999 reflects the operations of Dresser Equipment Group. See Note 4.
The 1999 results include Dresser-Rand, which was sold in early February 2000,
and our equity in earnings from Ingersoll-Dresser Pump, which was sold in late
December 1999. See Note 3. These joint ventures represented nearly half of the
group's revenues and operating profit in 1999. Excluding the results of
Dresser-Rand and Ingersoll-Dresser Pump, revenues from discontinued operations
were flat compared to the prior year third quarter while operating income
increased $13 million. All product service lines improved from the prior year.
The 2000 results reflect the impact of a recent acquisition of a joint venture
partner in Japan. Excluding the effects of the acquisition, revenues decreased
5%. Operating income benefited from cost reductions initiated in 1999 by all
product lines and a positive litigation settlement.
18
<PAGE>
Net income for the third quarter of 2000 was $157 million or $0.35 per
diluted share. The prior year's net income for the quarter was $58 million or
$0.13 per diluted share.
First Nine Months of 2000 Compared with the First Nine Months of 1999
<TABLE>
<CAPTION>
First Nine Months
REVENUES --------------------------------- Increase
Millions of dollars 2000 1999 (decrease)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy Services Group $ 5,641 $ 5,134 $ 507
Engineering and Construction Group 3,110 4,153 (1,043)
----------------------------------------------------------------------------------------------
Total revenues $ 8,751 $ 9,287 $ (536)
==============================================================================================
</TABLE>
Consolidated revenues in the first nine months of 2000 of $8.8 billion
decreased 6% compared to the first nine months of 1999. International revenues
were 66% of total revenues, down from 71% in the first nine months of 1999.
Growth in our domestic oilfield services business, combined with declining
international revenue due to the completion of several large engineering and
construction projects, contributed to the percentage decrease.
Energy Services Group revenues increased 10% compared to the first nine
months of 1999. International revenues were 66% of total revenues in the first
nine months of 2000 compared to 72% in the same period of the prior year.
Oilfield services product service lines continued their strong growth with
increases of 18%. The highest increases were noted in the pressure pumping
product service line, which increased 27%, and logging services, which increased
21%. The remaining oilfield product service lines increased from 4% to 14%.
Strong growth continued in North America oilfield services, where revenues
increased 47% compared to the first nine months of 1999. Outside North America,
oilfield services and products revenues decreased 2% compared to the first nine
months of the prior year as the international rig count has been slow to
recover. Increases in international rig counts and activity are expected if oil
and gas prices remain strong. Revenues from our upstream oil and gas engineering
and construction services decreased 5% from the same period of the prior year.
The decrease in revenues reflects the continued effects of decreased capital
expenditures by our customers, particularly in the United Kingdom sector of the
North Sea. Activity in Latin America has more than doubled due to the continuing
progress on several large engineering, procurement and construction projects,
partially offsetting the reductions in activity elsewhere. Integrated
exploration and production information systems revenues increased 13% compared
to the first nine months of 1999 primarily due to higher software sales and
professional services.
Engineering and Construction Group revenues were 25% lower in the first
nine months of 2000 compared to the first nine months of 1999. International
revenues were the primary cause as they decreased 29% and accounted for 65% of
the group's revenues compared to 69% in the prior year period. The decrease was
primarily due to the completion of several large projects in late 1999 and 2000.
Activity levels continued to be lower during the first nine months of 2000 as
major oil and gas companies continued to defer capital expenditures for major
gas, liquefied natural gas and chemical projects. Decreases in downstream
engineering and construction projects were partially offset by higher levels of
logistics support services to military peacekeeping efforts in the Balkans. This
increase, which occurred in the first half of 2000, was due to an expansion in
scope in the contract.
<TABLE>
<CAPTION>
First Nine Months
OPERATING INCOME --------------------------------- Increase
Millions of dollars 2000 1999 (decrease)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy Services Group $ 402 $ 162 $ 240
Engineering and Construction Group 113 163 (50)
General corporate (60) (50) (10)
Special credits - 47 (47)
----------------------------------------------------------------------------------------------
Total operating income $ 455 $ 322 $ 133
==============================================================================================
</TABLE>
Consolidated operating income of $455 million was 41% higher in the
first nine months of 2000 compared to the first nine months of 1999.
19
<PAGE>
Energy Services Group operating income for the first nine months of
2000 increased 148% over the first nine months of 1999. During the first nine
months of 2000, strong activity in North America contributed to increasing
profitability in our pressure pumping and logging product service lines. Strong
oil and gas prices throughout most of 2000 have continued to keep the industry's
focus on deepwater and onshore gas drilling within North America. Activity
increases in the Gulf of Mexico, South Texas and Rocky Mountain regions were
greater than other areas. Operating income in other oilfield services product
service lines were down compared to the nine months ended September 30, 1999.
This decrease is generally due to lower international profits offsetting
increased profitability in the United States. Operating income from upstream oil
and gas engineering and construction projects for the first nine months of 2000
increased as compared to the prior year. This increase was primarily due to the
sale of three marine vessels in the third quarter of 2000, which resulted in a
pretax gain of approximately $88 million. Excluding this gain, operating income
decreased due to lower utilization of manufacturing and fabrication capacity.
Operating income from integrated exploration and production information systems
increased more than ten-fold even after excluding the effect of the $4 million
of income from the resolution of disputed royalty issues in the second quarter
of 2000.
Engineering and Construction Group operating income for the first nine
months of 2000 was 31% lower than the first nine months of 1999. This decrease
is in line with lower activity levels and delayed timing of major gas, liquefied
natural gas and chemical projects. Operating income from the logistics support
contract in the Balkans, which peaked in the fourth quarter of 1999, was higher
in the first nine months of 2000 as compared to 1999, due to increased activity.
Due to the continued consolidation of our customers in the energy industry,
which has resulted in delays by our customers in starting new projects, we do
not expect significant operating income growth for this segment for the
remainder of the year and possibly most of 2001.
General corporate expense for the quarter increased $10 million,
including $9 million of expense recorded for the retirement of the previous
chairman.
NONOPERATING ITEMS
Interest expense of $104 million for the first nine months of 2000
decreased $2 million compared to the first nine months of 1999. Higher interest
rates have offset the effects of lower levels of debt.
Interest income was $16 million in the first nine months of 2000, a
decrease from the prior year's interest income of $68 million. The 1999 amounts
included interest income from tax refunds and imputed interest on the note
receivable from the sale of M-I L.L.C.
Foreign exchange gains (losses), net were $3 million loss in the
current first nine months compared to $2 million loss in the same period in the
prior year.
Provision for income taxes of $140 million resulted in an effective tax
rate of 38.6%, down slightly from the rate of 39.5% in the prior year period,
excluding special charge credits.
Income from continuing operations was $209 million in the first nine
months of 2000 compared to $146 million in the prior year period.
Income from discontinued operations of $72 million in 2000 and $76
million in 1999 reflects the operations of Dresser Equipment Group. See Note 4.
The 1999 results include Dresser-Rand, which was sold in early February 2000,
and our equity in earnings from Ingersoll-Dresser Pump, which was sold in late
December 1999. See Note 3. These joint ventures represented nearly half of the
group's revenues and operating profit in 1999. Excluding the results of
Dresser-Rand and Ingersoll-Dresser Pump, revenues from discontinued operations
decreased about 1% while operating income increased $22 million. The 2000
results reflect the impact of a recent acquisition of a joint venture partner in
Japan. Excluding the effects of the acquisition, revenues decreased 4%.
Operating income benefited from cost reductions initiated in 1999 by all product
lines and a positive litigation settlement.
Gain on disposal of discontinued operations of $215 million after-tax
or $0.48 per diluted share in 2000 resulted from the sale of our 51% interest in
Dresser-Rand to Ingersoll-Rand. See Note 4.
Cumulative effect of change in accounting method, net of $19 million
after-tax, or $0.04 per diluted share, in 1999 reflects our adoption of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
Subsequent annual expense under Statement of Position 98-5 after recording the
cumulative effect of the change has not been materially different from amounts
expensed under the prior accounting treatment.
Net income for the first nine months of 2000 was $496 million or $1.11
per diluted share. The prior year's net income was $203 million or $0.46 per
diluted share.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We ended the third quarter of 2000 with cash and equivalents of $310
million, a decrease of $156 million from the end of 1999.
Operating activities. Cash flows used for operating activities of
continuing operations were $189 million in the first nine months of 2000
compared to $303 million in the first nine months of the prior year. Special
charges for personnel reductions, facility closures and integration costs used
$51 million of cash in the first nine months of 2000 and $190 million of cash in
the first nine months of the prior year. Working capital items, which include
receivables, inventories, accounts payable and other working capital, net, used
$498 million of cash in the first nine months of 2000 compared to $598 million
in the same period of the prior year.
Investing activities. Cash flows used for investing activities of
continuing operations were $207 million in the first nine months of 2000 and $9
million in 1999. Cash flows from investing activities in 1999 includes $254
million collected on the receivable from the sale of our 36% interest in M-I
L.L.C. Capital expenditures in the first nine months of 2000 were approximately
$19 million lower than in the same period of the prior year. Although reduced on
a year-to-date basis, we have increased our level of capital expenditures in the
second half of 2000 due to increased needs for capital equipment at Halliburton
Energy Services. We expect our capital expenditures for the entire year of 2000
to be slightly higher than in 1999.
Financing activities. Cash flows used for financing activities of
continuing operations were $572 million in the first nine months of 2000. In the
same period of the prior year, financing activities provided $233 million. In
2000, we repaid $309 million of long-term debt and had net repayments of $169
million of our short-term notes primarily due to proceeds received from the
sales of Dresser-Rand and Ingersoll-Dresser Pump. We paid dividends of $167
million to our shareholders in the first nine months of 2000 and $166 million in
the same period in 1999.
Discontinued operations. Net cash flows from discontinued operations
provided $826 million in the first nine months of 2000 and $162 million in the
first nine months of 1999. Cash flows for the first nine months of 2000 include
proceeds from the sales of Dresser-Rand and Ingersoll-Dresser Pump of
approximately $914 million.
Capital resources. We believe we have sufficient resources from
internally generated funds and access to capital markets to fund our working
capital requirements, share repurchases and investing activities. Our combined
short-term notes payable and long-term debt was 28% of total capitalization at
September 30, 2000 compared to 35% at December 31, 1999.
RESTRUCTURING ACTIVITIES
During the third and fourth quarters of 1998, we incurred special
charges totaling $980 million related to the Dresser merger and industry
downturn. During the second quarter of 1999, we reversed $47 million of our 1998
special charges based on our reassessment of total costs to be incurred to
complete the actions covered in the charges. As of September 30, 2000, we have
substantially completed all activities relating to the 1998 special charges.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory
requirements related to our operations worldwide. As a result, we are involved
in environmental litigation and claims, the clean-up of properties we own or
have operated, and efforts to meet or correct compliance-related matters. Except
as noted in Note 8 to the condensed consolidated financial statements related to
one site, none of these expenditures is expected by our management to have a
material adverse effect on our results of operations.
DISCONTINUED OPERATIONS AND SHARE REPURCHASE PROGRAM
On April 25, 2000 our Board of Directors approved plans to sell our
Dresser Equipment Group segment and implement a share repurchase program for up
to 44 million shares, or about 10% of our outstanding common stock.
The sale of Dresser Equipment Group's remaining businesses are not
expected to close until the first quarter of 2001. Proceeds from the planned
sales of these businesses will be used for a combination of acquisitions
supporting our oilfield services business and for internal investment
opportunities. Because we cannot predict the timing of future acquisitions to
replace the earnings from Dresser Equipment Group, we think our implementation
of a share repurchase program is timely and is an appropriate means of using our
21
<PAGE>
strong and liquid balance sheet in the interim. Share repurchases have been and
will be made from time-to-time through open market purchases or privately
negotiated transactions. The repurchase program gives management discretion for
its implementation and has no expiration date. We began executing purchases
under this program in the third quarter of 2000.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." This standard requires entities to
recognize all derivatives on the statement of financial position as assets or
liabilities and to measure the instruments at fair value. Accounting for gains
and losses from changes in those fair values are specified in the standard
depending on the intended use of the derivative and other criteria. Statement of
Financial Accounting Standards No. 133 is effective for us beginning January 1,
2001. We are currently completing (1) our review of contracts for embedded
derivatives and (2) our evaluation of the effects of the pronouncement on our
current accounting for derivatives and hedging activities. Based on the initial
results of our reviews we do not anticipate that our adoption of Statement No.
133 will have a significant impact on our results of operations or financial
position.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------
We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and, to a limited extent, commodity prices. We currently
use derivative instruments only in hedging these exposures. We do not use
derivative instruments for trading purposes. None of these hedging activities
are considered material.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
* 10.1 Employment agreement.
* 10.2 Retirement Plan for the Directors as amended and restated
effective May 16, 2000.
* 10.3 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors.
* 10.4 First Amendment to the Elective Deferral Plan.
* 27 Financial data schedules for the nine months ended September 30,
2000 (included only in the copy of this report filed
electronically with the Commission).
* Filed with this Form 10-Q.
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
Date Filed Date of Earliest Event Description of Event
--------------------------- ------------------------ ----------------------------------------------------------
<S> <C> <C>
During the third quarter of 2000:
July 5, 2000 July 5, 2000 Item 5. Other Events for a press release announcing the
signing of contracts to proceed with the development of
both the Barracuda and Caratinga offshore oil fields in
Brazil between Halliburton and Petrobras. The contracts
are valued at more than $2.5 billion and will be
performed by Brown & Root Energy Services and
Halliburton Energy Services business units, together
with Petrobras' exploration and production unit.
22
<PAGE>
Date Filed Date of Earliest Event Description of Event
--------------------------- ------------------------ ----------------------------------------------------------
July 25, 2000 July 20, 2000 Item 5. Other Events for a press release announcing that
the board of directors has declared a 2000 third quarter
dividend of 12.5 cents a share on common stock payable
September 27, 2000 to shareholders of record at the
close of business on September 6, 2000.
July 26, 2000 July 25, 2000 Item 5. Other Events for a press release announcing that
Dick Cheney, chairman of the board and chief executive
officer, has accepted George W. Bush's invitation to be
Bush's Republican Party vice presidential running mate.
At a special meeting held July 25, 2000, the board of
directors accepted Mr. Cheney's resignation effective at
the close of business on August 16, 2000 and then
elected Mr. David J. Lesar to the board of directors and
named him chairman of the board, president and chief
executive officer, also to become effective at the close
of business on August 16, 2000.
July 28, 2000 July 26, 2000 Item 5. Other Events for a press release announcing 2000
second quarter earnings.
August 7, 2000 August 3, 2000 Item 5. Other Events for a press release announcing
that Halliburton Energy Services, Inc., has signed a
definitive agreement, pending final approval from
Petroleum Place shareholders, to acquire a 15% equity
position in Petroleum Place, Inc.
August 11, 2000 August 9, 2000 Item 5. Other Events for a press release announcing that
twelve major oilfield services firms have stated their
intention to work together to form a joint venture
company, OFS Portal.
August 22, 2000 August 16, 2000 Item 5. Other Events for a press release announcing the
terms relating to the departure of Dick Cheney, chairman
of the board and chief executive officer.
August 24, 2000 August 23, 2000 Item 5. Other Events for a press release announcing
Brown & Root Services has been awarded a contract by the
Defense Threat Reduction Agency to provide services for
a $283 million project to eliminate Russian
Inter-Continental Ballistic Missiles and their silos.
23
<PAGE>
Date Filed Date of Earliest Event Description of Event
--------------------------- ------------------------ ----------------------------------------------------------
During the fourth quarter of 2000:
October 24, 2000 October 23, 2000 Item 5. Other Events for a press release announcing
Brown & Root Services is a defendant in litigation
alleging that Brown & Root Services violated provisions
of the False Claims Act while performing work for the
U.S. Army at Fort Ord, California. The U.S. Department
of Justice has now advised Brown & Root Services that
Brown & Root Services is the target of a federal grand
jury investigation regarding the contract issues raised
in the litigation.
October 27, 2000 October 24, 2000 Item 5. Other Events for a press release announcing 2000
third quarter earnings.
October 27, 2000 October 26, 2000 Item 5. Other Events for a press release announcing that
the board of directors has declared fourth quarter
dividend of 12.5 cents a share on common stock payable
December 21, 2000 to shareholders of record at the close
of business on November 30, 2000.
</TABLE>
24
<PAGE>
SIGNATURES
As required by the Securities Exchange Act of 1934, the registrant has
authorized this report to be signed on behalf of the registrant by the
undersigned authorized individuals.
HALLIBURTON COMPANY
Date: November 9, 2000 By: /s/ Gary V. Morris
--------------------------------
Gary V. Morris
Executive Vice President and
Chief Financial Officer
/s/ R. Charles Muchmore, Jr.
------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller and
Principal Accounting Officer
25
<PAGE>
Index to exhibits filed with this quarterly report.
Exhibit
Number Description
------- -----------------------------------
10.1 Employment agreement.
10.2 Retirement Plan for the Directors as amended and restated
effective May 16, 2000.
10.3 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors.
10.4 First Amendment to the Elective Deferral Plan.
27 Financial data schedules for the nine months ended September 30,
2000 (included only n the copy of this report filed
electronically with the Commission).
