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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
- -------------------------------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____ to _____
Commission File Number 1-3492
HALLIBURTON COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-2677995
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201
(Address of principal executive offices)
Telephone Number - Area code (214) 978-2600
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
------------------------
Title of each class which registered
------------------- ----------------
Common Stock par value $2.50 per share New York Stock Exchange
Baroid Corporation 8% Guaranteed Senior New York Stock Exchange
Notes due 2003
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by nonaffiliates on January 29,
1999, determined using the per share closing price on the New York Stock
Exchange Composite tape of $29.69 on that date was approximately
$13,028,800,000.
As of January 29, 1999, there were 440,201,382 shares of Halliburton Company
Common Stock $2.50 par value per share outstanding.
Portions of the Halliburton Company Proxy Statement dated March 25, 1999, are
incorporated by reference into Part III of this report.
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PART I
Item 1. Business.
General Development of Business. Halliburton Company's predecessor was
established in 1919 and incorporated under the laws of the State of Delaware in
1924. Halliburton Company (the Company) provides energy services, engineering
and construction services and manufactures products for the energy industry.
Information related to acquisitions and dispositions is set forth in Note 14 to
the financial statements of this annual report.
Financial Information About Business Segments. The Company is comprised of
three business segments. See Note 2 to the financial statements of this annual
report for financial information about these three business segments.
Description of Services and Products. The following is a summary which
briefly describes the Company's services and products for each business segment.
The Energy Services Group segment provides a wide range of services and
products to provide both discrete services and products and integrated solutions
to customers in the exploration, development and production of oil and natural
gas. The Energy Services Group operates worldwide, serving major oil companies,
independent operators and national oil companies. The segment includes
Halliburton Energy Services (HES), which offers pressure pumping equipment and
services, logging and perforating products and services, drilling systems and
services, drilling fluid systems, drill bits, specialized completion and
production equipment and services and well control products and services; Brown
& Root Energy Services, which provides upstream oil and gas engineering,
procurement and construction, project management and production services, subsea
construction, fabrication and installation of onshore and offshore pipelines,
offshore and production platforms, marine engineering and other marine related
projects; Landmark Graphics Corporation, which provides integrated exploration
and production information systems and professional services; and Halliburton
Energy Development (HED), which creates business opportunities for the
development, production and operation of oil and gas fields in conjunction with
the Company's customers. In March 1999, HED was combined with HES.
The Engineering and Construction Group segment provides: conceptual design,
process design, detailed engineering, procurement, project and construction
management; construction of chemical and petrochemical plants, refineries,
liquefied natural gas and gas processing facilities, pulp and paper mills, metal
processing plants, airports, water and wastewater systems; technical and
economic feasibility studies; site evaluation; repair and refitting of
submarines and surface ships; operations and maintenance services, and
engineering, logistics and wastewater management services for commercial
industry, utilities and government customers.
The Dresser Equipment Group segment designs, manufactures and markets
highly engineered products and systems for oil and gas producers, transporters,
processors, distributors and users throughout the world. Products and systems
of this segment include compressors, turbines, generators, electric motors,
pumps, engines and power systems, valves and controls, instruments, meters and
pipe couplings, blowers and gasoline dispensing systems.
Markets and Competition. The Company is one of the world's largest
diversified energy services and engineering and construction services companies.
The Company's services and products are sold in highly competitive markets
throughout the world. Competitive factors impacting sales of the Company's
services and products are: price, service (including the ability to deliver
services and products on an "as needed, where needed" basis), product quality,
warranty and technical proficiency. A growing number of customers are now
indicating a preference for integrated services and solutions. These integrated
services and solutions, in the case of the Energy Services Group, relate to all
phases of exploration, development and production of oil and gas, and in the
case of the Engineering and Construction Group, relate to all phases of design,
procurement, construction project management and maintenance of a facility.
Demand for these types of integrated services and solutions is based primarily
upon quality of service, technical proficiency and value created.
The Company conducts business worldwide in over 120 countries. Since the
markets for the Company's services and products are so large and cross many
geographic lines, a meaningful estimate of the number of competitors cannot be
made. These markets are, however, highly competitive with many substantial
companies operating in each market. Generally, the Company's services and
products are marketed through its own servicing
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and sales organizations. A small percentage of sales of the Energy Service
Group's and Dresser Equipment Group's products is made by supply stores and
third-party representatives.
Operations in some countries may be adversely affected by unsettled
political conditions, expropriation or other governmental actions, and exchange
control and currency problems. The Company believes the geographic
diversification of its business activities reduces the risk that loss of its
operations in any one country would be material to the conduct of its operations
taken as a whole. Information regarding the Company's exposures to foreign
currency fluctuations, risk concentration and financial instruments used to
minimize risk is included in management's discussion and analysis of financial
condition and results of operations under the caption "Financial Instrument
Market Risk" and in Note 15 to the financial statements of this annual report.
Customers and Backlog. In 1998, 1997, and 1996, respectively, 85%, 84% and
81% of the Company's revenues were derived from the sale of products and
services to, including construction for, the energy industry. Approximately 10%
of the total backlog at December 31, 1998 was for equipment manufacturing
contracts. The following schedule summarizes the backlog of engineering and
construction projects and equipment manufacturing contracts at December 31, 1998
and 1997:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------
Firm orders $ 10,472 $ 12,087
Government orders firm but not yet funded,
letters of intent and contracts awarded but
not signed 705 591
- --------------------------------------------------------------------------------
Total $ 11,177 $ 12,678
================================================================================
It is estimated that 65% of the backlog existing at December 31, 1998 will
be completed during 1999. The Company's backlog excludes contracts for
recurring hardware and software maintenance and support services. Backlog is
not necessarily indicative of future operating results because backlog figures
are subject to substantial fluctuations. Arrangements included in backlog are
in many instances extremely complex, nonrepetitive in nature and may fluctuate
in contract value. Many contracts do not provide for a fixed amount of work to
be performed and are subject to modification or termination by the customer.
Due to the size of certain contracts, the termination or modification of any one
or more contracts or the addition of other contracts may have a substantial and
immediate effect on backlog.
Raw Materials. Raw materials essential to the Company's business are
normally readily available. Where the Company is dependent on a single supplier
for any materials essential to its business, the Company is confident that it
could make satisfactory alternative arrangements in the event of an interruption
in the supply of such materials.
Research, Development and Patents. The Company maintains an active
research and development program to assist in the improvement of existing
products and processes, the development of new products and processes and the
improvement of engineering standards and practices that serve the changing needs
of its customers. Information relating to expenditures for research and
development is included in Note 1 and Note 2 to the financial statements of this
annual report.
The Company owns a large number of patents and has pending a substantial
number of patent applications covering various products and processes. The
Company is also licensed under patents owned by others. The Company does not
consider a particular patent or group of patents to be material to the Company's
business.
Seasonality. Weather and natural phenomena can temporarily affect the
performance of the Company's services. Winter months in the Northern Hemisphere
tend to affect operations negatively, but the widespread geographical locations
of the Company's operations serve to mitigate the seasonal nature of the
Company's business.
Employees. At December 31, 1998, the Company employed approximately
107,800 people.
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Regulation. The Company is subject to various environmental laws and
regulations. Compliance with such requirements has not substantially increased
capital expenditures, adversely affected the Company's competitive position or
materially affected the Company's earnings. The Company does not anticipate any
material adverse effects in the foreseeable future as a result of existing
environmental laws and regulations. Note 10 to the financial statements of this
annual report discusses the Company's involvement as a potentially responsible
party in the remedial activities to clean up several "Superfund" sites.
Item 2. Properties.
Information relating to lease payments is included in Note 10 to the financial
statements of this annual report. The Company's owned and leased facilities, as
described below, are suitable for their intended use.
Energy Services Group manufacturing facilities owned by the Company cover
approximately 4.9 million square feet. Principal locations of these
manufacturing facilities are Tulsa and Duncan, Oklahoma; Alvarado, Amarillo,
Carrollton, Dallas, Fort Worth, Garland, Longview, and Houston, Texas; Colorado
Springs, Colorado; Arbroath, Scotland; Reynosa, Mexico; Newcastle and
Manchester, England, and Maturin Mongas, Venezuela. An idle facility in Davis,
Oklahoma was sold in 1998. The facility in Amarillo is idle. The manufacturing
facility in Garland, Texas is leased to another company. The Energy Services
Group also leases manufacturing facilities covering approximately 608,000 square
feet. Principal locations of these facilities are Malvern, Pennsylvania;
Houston, Texas; Jurong, Singapore; Panama City, Florida; Basingstoke, England;
and Calgary, Alberta, Canada. The facilities in Basingstoke, England are
subleased to another company. Research, development and engineering activities
are carried out in owned facilities covering approximately 460,000 square feet.
The major sites are in Houston, Austin and Carrollton, Texas; Duncan, Oklahoma;
and Aberdeen, Scotland; and in leased facilities covering approximately 300,000
square feet in Houston, Texas; Englewood and Denver, Colorado; Leatherhead and
Dorking, England; Leiderdrop, Holland; and Singapore. The facility in Dorking,
England was idle at the end of 1998. The Energy Services Group marine
fabrication facilities owned by the Company cover approximately 550 acres in
Belle Chasse, Louisiana; Greens Bayou, Texas; and Nigg and Wick, Scotland. The
Belle Chasse facility is leased to another company and the facility in Nigg,
Scotland is leased to a joint venture of the Company. The Energy Services Group
has 13 grinding facilities owned or leased by the Company. The Energy Services
Group also has mineral rights to proven and prospective reserves of barite and
bentonite. Such rights included leaseholds and mining claims and property owned
in fee. Based on the number of tons of each of the above minerals consumed in
fiscal 1998, the Company estimates its reserves, which it considers to be
proven, to be sufficient for operations for the foreseeable future. In
addition, service centers, sales offices and field warehouses are operated at
approximately 290 locations in the United States, almost all of which are owned,
and at approximately 360 locations outside the United States in both the Eastern
and Western Hemispheres.
Engineering and Construction Group fabricating facilities cover approximately
468,000 square feet in Houston, Texas and Edmonton, Canada, of which 388,000
square feet in Houston is leased to another company. Engineering and design,
project management and procurement services activities are carried out in owned
facilities covering approximately 650,000 square feet. Major sites of these
activities are Houston and Baytown, Texas; Edmonton, Canada; Bundaberg and
Emerald, Australia; Plymouth and Greenford, England. These activities are also
carried out at leased facilities covering approximately 1.4 million square feet.
Major sites are in Mobile, Alabama; Alhambra, California; London, England;
Parkside, Victoria Park, Milton and Melbourne, Australia. The Engineering and
Construction Group operates dockyard facilities owned by a 51% owned subsidiary
of the Company covering approximately 155 acres in Plymouth, England.
Approximately 27 acres of this facility are subleased. In addition, project
offices, field camps, service centers, and sales offices are operated at
approximately 10 locations in the United States, almost all of which are owned,
and at approximately 15 locations outside the United States in both the Eastern
and Western Hemispheres.
Dresser Equipment Group owns approximately 9.9 million square feet of
manufacturing facilities. Major sites are in Austin, Stafford, and Houston,
Texas; Broken Arrow, Oklahoma; Painted Post, Olean and Wellsville, New York;
Minneapolis, Minnesota; Stratford, Connecticut; Berea, Kentucky; Bradford,
Pennsylvania; Salisbury, Maryland; Waukesha, Wisconsin; Avon, Massachusetts;
Connersville, Indiana; Einbeck, Germany; Naples and Voghera, Italy; Malmo,
Sweden; LeHavre and Conde, France; Huddersfield, England; Bonnyrigg and
Petreavie,
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Scotland; and Rio de Janeiro, Brazil. Dresser Equipment Group leases
approximately 1.4 million square feet of manufacturing facilities. The major
sites are in Houston, Texas; Shanghai, China; Kongsberg, Norway; and Salisbury,
Maryland. In addition, service centers, sales offices and field warehouses are
operated at approximately 75 locations in the United States, almost all of which
are owned, and at approximately 65 locations outside the United States in both
the Eastern and Western Hemispheres.
General Corporate operates from leased facilities in Dallas, Texas covering
approximately 25,000 square feet. The Company also leases approximately 5,500
square feet of space in Washington, D.C. The Company owns approximately 1
million square feet of office and campus space in Houston, Texas which is
occupied by multiple business units and shared services groups who conduct
administrative, procurement, and engineering design activities. These
activities are carried on in leased facilities covering approximately 100,000
square feet in Surrey and Eastleigh, England. The Company also owns
approximately 203,000 square feet of office and campus space in Leatherhead,
England where multiple business units and shared services groups conduct
administrative, procurement and engineering design activities.
Due to the acquisition (the Merger) of Dresser Industries, Inc. (Dresser), and
in response to the industry downturn due to declining oil and gas prices, the
Company has certain manufacturing, administrative and service support facilities
that are no longer fully utilized. The Company has enacted plans to vacate
facilities that are now considered excess. In 1998, the Company recorded
facility consolidation charges of $126.2 million to provide for the costs to
dispose of owned properties or exit leased facilities. See Note 7 to the annual
consolidated financial statements for additional information on the facility
consolidations.
Item 3. Legal Proceedings.
Information relating to various commitments and contingencies is
described in Note 10 to the financial statements of this annual report.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
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Executive Officers of the Registrant.
The following table indicates the names and ages at December 31, 1998
of the executive officers of the registrant along with a listing of all offices
held by each during the past five years:
<TABLE>
<CAPTION>
Name and Age Offices Held and Term of Office
- ------------ -------------------------------
<S> <C>
* William E. Bradford Chairman of the Board, since September 1998
(Age 63) Director of Registrant, since September 1998
Chairman of the Board of Dresser Industries, Inc., December 1996 to September 1998
Chief Executive Officer of Dresser Industries, Inc., November 1995 to September 1998
President of Dresser Industries, Inc., March 1992 to December 1996
Chief Operating Officer of Dresser Industries, Inc., March 1992 to November 1995
Jerry H. Blurton Vice President and Treasurer, since July 1996
(Age 54) Vice President - Finance & Administration of Halliburton Energy Services, August 1995 to
July 1996
Vice President - Finance, 1991 to August 1995
* Richard B. Cheney Chief Executive Officer, since October 1995
(Age 57) Director of Registrant, since October 1995
Chairman of the Board, January 1996 to September 1998
President, October 1995 to May 1997
Senior Fellow, American Enterprise Institute, 1993 to October 1995
Secretary, U.S. Department of Defense, 1989 to 1993
Lester L. Coleman Executive Vice President and General Counsel, since May 1993
(Age 56) President of Energy Services Group, September 1991 to May 1993
* David J. Lesar President and Chief Operating Officer, since May 1997
(Age 45) President and Chief Executive Officer of Kellogg Brown & Root, Inc. since September 1996
Executive Vice President and Chief Financial Officer, August 1995 to May 1997
Executive Vice President of Finance and Administration of Halliburton Energy
Services, November 1993 to August 1995
Partner, Arthur Andersen LLP, 1988 to November 1993
Gary V. Morris Executive Vice President and Chief Financial Officer, since May 1997
(Age 45) Senior Vice President - Finance, February 1997 to May 1997
Senior Vice President, May 1996 to February 1997
Vice President - Finance of Brown & Root, Inc., June 1995 to May 1996
Vice President - Finance of Halliburton Energy Services, December 1993 to June 1995
Controller, December 1991 to December 1993
R. Charles Muchmore, Jr. Vice President and Controller, since August 1996
(Age 45) Finance & Administration Director - Europe/Africa of Halliburton Energy Services, September
1995 to August 1996
Regional Finance & Administration Manager - Europe/Africa of Halliburton Energy
Services, December 1989 to September 1995
</TABLE>
5
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Executive Officers of the Registrant (continued).
<TABLE>
<CAPTION>
Name and Age Offices Held and Term of Office
- ------------ -------------------------------
<S> <C>
Lewis W. Powers Senior Vice President, since May 1996
(Age 52) Vice President - Europe/Africa of Halliburton Energy Services, April 1993 to May 1996
Senior Vice President of Operations of Otis Engineering, June 1989 to April 1993
Louis A. Raspino Shared Services Vice President - Finance, effective March 1999
(Age 46) Senior Vice President - Strategic Planning & Business Development, Burlington Resources,
Inc. (oil and gas exploration and production), October 1997 to June 1998
Senior Vice President and Chief Financial Officer, Louisiana Land & Exploration Company
(oil and gas exploration, production and refining), September 1995 to October 1997
Treasurer, Louisiana Land & Exploration Company, 1992 to September 1995
* Donald C. Vaughn Vice Chairman, since September 1998
(Age 62) President and Chief Operating Officer of Dresser Industries, Inc., December 1996 to
September 1998
Executive Vice President, Dresser Industries, Inc., November 1995 to December 1996
Senior Vice President - Operations, Dresser Industries, Inc., January 1992 to November 1995
Chairman, President and Chief Executive Officer of M. W. Kellogg, Inc., June 1995 to
June 1996
Chairman and Chief Executive Officer of The M. W. Kellogg Company, September 1986 to June 1996
President of The M. W. Kellogg Company, November 1983 to June 1995
</TABLE>
* Members of the Executive Committee of the registrant.
There are no family relationships between the executive officers of the
registrant.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is traded on the New York Stock Exchange and
the Swiss Exchange. Information relating to market prices of common stock and
quarterly dividend payment is included under the caption "Quarterly Data and
Market Price Information" on page 61 of this annual report. Cash dividends on
common stock for 1997 and 1998 were paid in March, June, September and December
of each such year. The board of directors of Halliburton (the Board) intends to
consider the payment of quarterly dividends on the outstanding shares of
Halliburton common stock. The declaration and payment of future dividends,
however, will be at the discretion of the Board and will depend upon, among
other things, future earnings of Halliburton, its general financial condition,
the success of its business activities, its capital requirements and general
business conditions. At December 31, 1998, there were approximately 27,665
shareholders of record. In calculating the number of shareholders, the Company
considers clearing agencies and security position listings as one shareholder
for each agency or listing.
Item 6. Selected Financial Data.
Information relating to selected financial data is included on pages 58
through 60 of this annual report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information relating to management's discussion and analysis of
financial condition and results of operations is included on pages 9 through 20
of this annual report
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.
Information relating to market risk is included in management's
discussion and analysis of financial condition and results of operations under
the caption "Financial Instrument Market Risk" on pages 14 through 15 of this
annual report.
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Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Page No.
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants 21
Responsibility for Financial Reporting 22
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 23
Consolidated Balance Sheets at December 31, 1998 and 1997 24
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 26
Notes to Financial Statements
1. Significant accounting policies 28
2. Business segment information 30
3. Inventories 32
4. Property, plant and equipment 32
5. Related companies 32
6. Income taxes 34
7. Special charges and credits 36
8. Lines of credit, notes payable and long-term debt 44
9. Dresser financial information 45
10. Commitments and contingencies 46
11. Income per share 48
12. Common stock 48
13. Series A junior participating preferred stock 51
14. Acquisitions and dispositions 51
15. Financial instruments and risk management 53
16. Retirement plans 55
17. Sale of Joint Ventues (unaudited) subsequent to the
date of the Independent Public Accountant's Report 58
Quarterly Data and Market Price Information 63
</TABLE>
The related financial statement schedules are included under Part IV,
item 14 of this annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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HALLIBURTON COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
HALLIBURTON / DRESSER MERGER
On September 29, 1998, we completed our acquisition of Dresser Industries,
Inc. The merger was accounted for using the pooling of interests method of
accounting for business combinations. Our financial statements have been
restated to include the results of Dresser for all periods presented. See Note
14 to the annual consolidated financial statements. Prior to the merger,
Dresser was a diversified company with operations in three business segments:
Petroleum Products and Services; Engineering Services; and Energy Equipment.
Prior to the merger, we operated in two business segments, the Energy Group and
the Engineering and Construction Group. Following the merger, we are organized
around three business segments: Energy Services Group; Engineering and
Construction Group; and Dresser Equipment Group.
Management believes the merger provides us with the opportunity to better
meet customer needs, to improve our technology, to strengthen our product
service lines, to cut our costs, and to position us for the future.
BUSINESS ENVIRONMENT
We operate in over 120 countries around the world to provide a variety of
energy services, energy equipment and engineering and construction services to
energy, industrial and governmental customers. The industries we serve are
highly competitive. Unsettled political conditions, expropriation or other
governmental actions, exchange controls and currency devaluations may affect
operations in some countries. We believe the geographic diversification of our
business activities reduces the risk that loss of our operations in any one
country would be material to our consolidated results of operations.
The majority of our revenues are derived from the sale of services and
products, including construction activities, to the energy industry. 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.
The decline in oil and gas prices in 1998 caused a decrease in the
worldwide average rotary drilling rig count and sharply reduced demand for some
of our products and services. In response to weakening demand in some areas of
the world, we have implemented plans to
. reduce the number of employees in geographic areas where activity
levels have declined;
. scale back discretionary spending on capital expenditures; and
. curtail discretionary travel and other expenses.
We have also taken steps to reduce our workforce and rationalize assets to
eliminate duplicate resources in connection with the merger with Dresser.
Declines in energy industry activities that started in 1998 continued into
1999, particularly in the areas of exploration and development of hydrocarbons.
These declines in activity and reduced capital spending by our customers could
negatively impact our results for the first half of 1999, particularly within
the Energy Services Group segment. Other major changes in the energy industry
include the announced mergers of several major oil companies that have further
delayed capital spending programs by these companies. We have seen some effects
of these mergers in early 1999 resulting in delayed projects and reduced use of
software products. Longer-term effects will depend on the spending patterns of
our customers.
We still believe:
. the long-term fundamentals of the energy industry are positive;
. steadily rising population and greater industrialization efforts will
continue to propel global growth, particularly in developing nations;
and
. these factors will cause increasing demand for oil and natural gas to
produce refined products, petrochemicals, fertilizers and power.
Energy Services Group. During 1998, particularly in the second half of the
year, the energy industry experienced a downturn brought about by a combination
of factors that began in late 1997. Decreased demand in
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Asia for crude oil, increases in production from OPEC producers, added
production increases from Iraq and unseasonably warm winters in North America
during 1997 and 1998 all contributed to the industry downturn experienced during
1998. Throughout 1998, crude oil prices varied from $4 to $8 per barrel lower
than 1997. Equally important, oil prices were less than $15 per barrel for most
of 1998, particularly during the second half of the year, making many drilling
programs economically infeasible. Natural gas prices within the U.S., although
significantly lower than 1997 levels, remained above $2 per million BTU until
the third quarter of 1998. During the third quarter of 1998, natural gas prices
began a decline which, combined with additional declines in crude oil prices,
resulted in further reductions in demand for hydrocarbon exploration and
development. These factors negatively impacted the industry and our company.
Overall, the industry fundamentals in 1998 were significantly weaker than 1997.
Integrated business solutions, long term overseas contracts and engineering
and construction backlog benefited our revenues throughout 1998 when compared to
the industry fundamentals and worldwide rig counts. Continued interest in
deepwater drilling in the Gulf of Mexico and projects in the North Sea, combined
with U.S. natural gas prices above $2 per million BTU benefited the industry
during the first and second quarters of 1998. As industry indicators began to
significantly weaken in the third quarter of 1998, we started implementing
actions to properly align our resources to projected industry conditions.
Although 1998 was a difficult year and 1999 will also be difficult, we
believe that long-term industry fundamentals will prevail. Demand for oil and
natural gas worldwide should recover and grow. Over time, the accelerating
depletion of existing production and the need for technologies that make
exploration and production economically feasible in the presence of low oil and
gas prices will provide growth opportunities. We believe that our customers
will continue to seek opportunities to lower the overall cost of exploring,
developing and enhancing the recovery of hydrocarbons through increased
utilization of integrated solutions, application of new technology and
partnering and alliance arrangements. We believe that we have good
opportunities to expand our revenues and profits through greater participation
in larger projects that utilize our project management and integrated services
capabilities. However, uncertainty exists within the industry into the
foreseeable future.
Engineering and Construction Group. While we have seen projects delayed
and cancelled in many of the areas that we serve, we expect to see demand for
our engineering and construction services continue to increase over the long
term. We believe the key to increasing our revenues and improving our profit
margins in the current environment will be our ability to provide total customer
satisfaction. Today's competitive environment demands flexibility and
innovation. To bring more value to our customers, we must:
. demonstrate our ability to effectively cooperate with other service
and equipment suppliers and customers on larger projects;
. accept more project success risk through total project responsibility
or fixed price contracts;
. broaden our core competencies;
. acquire and fully utilize proprietary technology; and
. manage costs.
The Engineering and Construction Group has determined it will focus on
demand in the liquefied natural gas, fertilizer, petroleum, chemical and forest
products industries worldwide. We also see an expanding demand for our
government services capabilities in the United States and the United Kingdom as
governmental agencies, including local government units, continue to expand
their use of outsourcing to improve service levels and manage costs.
Dresser Equipment Group. Dresser Equipment Group's business activity is
primarily determined by activity levels within the energy industry. Products
and systems of Dresser Equipment Group include compressors, turbines,
generators, electric motors, pumps, engines and power systems, valves,
instruments, meters and pipe couplings, blowers and fuel dispensing systems.
Demand for these products is directly affected by global economic activity,
which influences demand for transportation fuels, petrochemicals, plastics,
fertilizers, chemicals and by-products of oil and gas. The environment for
sales of Dresser Equipment Group products is highly competitive and its sales
and earnings can be affected by changes in competitive prices, fluctuations in
the level of activity in major industry areas, and general economic conditions.
The group strives to be the low cost provider in this competitive environment.
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Because of the impact of economic and political conditions, and uncertainty
in many parts of the world, several initiatives are in place to reduce capacity
costs and improve operating performance. We believe strong demand still exists
for products and services of Dresser Equipment Group. The key to achieving
favorable operating results over the course of the year, particularly in light
of industry conditions, will be to rely to a great extent on the ability of the
group to:
. increase business with the customers currently served; and
. provide integrated solutions together with other segments of our
company.
In the near term, activity levels remain uncertain. In the long term we
believe the demand for the products and systems of Dresser Equipment Group will
increase due to rising population and an expanding industrial base.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997 AND 1996
REVENUES
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy Services Group $ 9,009.5 $ 8,504.7 $ 6,515.4
Engineering and Construction Group 5,494.8 4,992.8 4,720.7
Dresser Equipment Group 2,848.8 2,774.1 2,710.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 17,353.1 $ 16,271.6 $ 13,946.6
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for 1998 were $17,353.1 million, an increase of 7% over 1997
revenues of $16,271.6 million and an increase of 24% over 1996 revenues of
$13,946.6 million. Approximately 65% of our consolidated revenues were derived
from international activities in 1998 compared with 60% in 1997 and 59% in 1996.
Energy Services Group revenues were $9,009.5 million for 1998, an increase
of 6% over 1997 revenues of $8,504.7 million and an increase of 38% over 1996
revenues of $6,515.4 million. Revenues in the first half of 1998 were higher
than comparable periods of the prior two years. Revenues in the second half of
1998 were impacted by the steep decline in activity as measured by the worldwide
average rotary rig count. The yearly average worldwide rotary rig count fell
13% in 1998 compared to 1997, including a third quarter comparative decline of
21% and a fourth quarter comparative decline of 30%, as customers of the Energy
Services Group reacted to reduced prices for their products. Revenues for
pressure pumping activities in 1998 were about 3% lower than 1997 but increased
compared to 1996. The decrease in pressure pumping activities for 1998 compared
to 1997 occurred in the second half of 1998. Other product and service lines
experienced similar results in this time period. The revenue declines in 1998
compared to 1997 were more pronounced in North America, including the Gulf of
Mexico shelf which declined about 6%, and Venezuela which declined about 25%.
Revenues from upstream oil and gas engineering services increased about 35% in
1998 compared to 1997 and 1996, benefiting from activities in subsea product
lines and from large engineering projects. Revenues for integrated exploration
and production information systems reached record high levels in 1998.
Approximately 67% of the Energy Services Group's revenues were derived from
international activities each year in 1998, 1997 and 1996.
Engineering and Construction Group revenues were $5,494.8 million for 1998,
an increase of 10% from 1997 revenues of $4,992.8 million and an increase of 16%
over 1996 revenues of $4,720.7 million. The increase in revenues in 1998
reflects LNG activities in Asia and Africa, an enhanced oil recovery project in
Africa, and a major ethylene project in Singapore. There were also increased
revenues in Asia/Pacific from Kinhill, which was acquired in the third quarter
of 1997. See Note 14 to our annual consolidated financial statements. For 1998
compared to 1997, revenues declined because of the sale of the environmental
services business in December 1997 and lower activity levels for repair and
refitting services for the British Royal Navy's fleet of submarines and surface
ships. For 1997 compared to 1996, revenues were aided by the consolidation of
Devonport Management Limited as a result of our increased ownership percentage
in that subsidiary. See Note 14 to our annual consolidated financial
statements. Revenues were reduced in 1997 compared to 1996 due to lower levels
of activity under service contracts with the U.S. Department of Defense to
provide technical and logistical support for military peacekeeping operations in
Bosnia by approximately $290.0 million.
11
<PAGE>
Dresser Equipment Group revenues were $2,848.8 million in 1998, an increase
of 3% over 1997 revenues of $2,774.1 million, and an increase of 5% over 1996
revenues of $2,710.5 million. The compression and pumping and flow control
product lines experienced small increases in revenues. The measurement and
power systems product lines reported a slight decline in revenues for 1998
compared to 1997. Most of the increase in 1997 compared to 1996 came from the
compressor joint venture with Ingersoll-Rand and the measurement product lines.
<TABLE>
<CAPTION>
OPERATING INCOME
Millions of dollars 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy Services Group $ 971.0 $ 1,019.4 $ 698.0
Engineering and Construction Group 237.2 219.0 134.0
Dresser Equipment Group 247.8 248.3 229.3
General corporate (79.4) (71.8) (72.3)
Special charges and credits:
Asset related (509.4) (32.7) (21.1)
Personnel reductions (234.7) (5.6) (41.0)
Facility consolidations (126.2) (11.0) -
Merger transaction costs (64.0) (8.6) (12.4)
Other costs and credits (45.8) 41.7 (11.3)
---------- ----------- ---------
Operating income $ 396.5 $ 1,398.7 $ 903.2
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Operating income was $396.5 million for 1998 compared to $1,398.7 million
for 1997 and $903.2 million for 1996. Excluding special charges of $980.1
million, $16.2 million and $85.8 million during 1998, 1997 and 1996,
respectively, operating income for 1998 decreased by 3% from 1997 and increased
by 39% over 1996. See Note 7 to our annual consolidated financial statements.
Energy Services Group operating income in 1998 was $971.0 million, a
decrease of 5% from 1997 operating income of $1,019.4 million and an increase of
39% over 1996 operating income of $698.0 million. Operating margins were 10.8%
in 1998 compared with 12.0% in 1997 and 10.7% in 1996. Most of the decline in
operating margins in 1998 compared to 1997 can be attributed to declines in the
completion products and pressure pumping lines, to lower activities in North
America and Venezuela, and to additional job loss provisions of $60 million
recorded in the fourth quarter of 1998. Approximately 54%, 59% and 63% of the
Energy Services Group's operating income was derived from international
activities for 1998, 1997 and 1996, respectively. Operating income for pressure
pumping in 1998 was about 10% lower than 1997. Activity levels were reduced in
response to lower oil and gas prices. Other product and service lines were also
impacted by reduced activity levels. Only the drilling related lines having
significantly better operating results in 1998 over 1997. Operating income in
1997 for the group benefited from increased activity levels and increased prices
charged to customers, especially for pressure pumping services in North America.
Operating income for drilling fluids increased in 1997 over 1996 due to the
growth of more technically demanding wells being drilled, particularly in the
Gulf of Mexico. Operating income for upstream oil and gas engineering
activities in 1998 was about the same as 1997 results. This occurred even after
providing additional provisions for project losses in the North Sea, North
Africa and Latin America related to variation orders for ongoing projects which
we do not believe will be accepted by the customers due to current industry
conditions. Energy Services Group results for 1996 include $35.0 million of
incentive revenue on its portion of the cost savings realized on the BP Andrew
alliance. The alliance completed the project seven months ahead of the
scheduled production of oil and achieved a $125.0 million savings compared with
the targeted cost. Operating income from pipecoating activities were
substantially improved in 1997 compared to 1996 due to higher activity levels in
the Far East, Middle East and the United States.
Engineering and Construction Group operating income for 1998 of $237.2
million increased 8% over 1997 and 77% over 1996. Operating margins were 4.3%
in 1998 compared with 4.4% for 1997 and 2.8% for 1996. Operating income in 1998
includes a favorable settlement of a claim on a Middle Eastern construction
project.
12
<PAGE>
Excluding this settlement, operating margins for 1998 were 4.0%. Operating
income and margins in 1998 were negatively affected by losses in the fourth
quarter on existing highway and paving business and for selected projects which
were impacted by the economic downturn in Asia. The Engineering and Construction
Group has not started any new significant jobs in Asia. Improvement in operating
income in 1997 over 1996 was realized through overhead reductions, a focus on
higher margin business lines and the consolidation of Devonport Management
Limited as a result of our increased ownership percentage in that subsidiary.
See Note 14 to the annual consolidated financial statements. The 1997 operating
income improvements over 1996 were aided by liquefied natural gas activities and
oil recovery work in Africa together with engineering services for the
fertilizer industry in Latin America. Operating income in 1996 included a $17.1
million charge for the impairment of the Engineering and Construction Group's
investment in the Dulles Greenway toll road extension project.
Dresser Equipment Group operating income in 1998 was $247.8 million or
almost unchanged compared to 1997 operating income of $248.3 million. Operating
income for 1998 increased 8% over 1996 operating income of $229.3 million.
Operating income was negatively impacted in 1998 by $17 million of fourth
quarter merger related expenses. Operating income in 1998 for the compression
and pumping product line increased 30% compared to 1997 due to restructuring
initiatives instituted in late 1997 and increased revenues. Operating income
for the flow control product line improved 20% in 1998 over 1997 from cost
improvements, better product mix, and increased volume. Operating income for
the measurement product line decreased in 1998 due to weakness in the gas
metering business as gas utilities continued to work off their excess inventory.
The power systems product line operating income declined about 35% in 1998
compared to 1997 due to customers' reduced capital spending caused by softer
demand in the gas compression and refining industries. Operating income
increased in 1997 compared to 1996 primarily from profit improvement initiatives
started in prior years by Ingersoll-Dresser Pump Company, introduction of new
technologies by Wayne fuel dispensing systems, and improved margins and product
mix at Energy Valve.
General corporate expenses for 1998 were $79.4 million and include expenses
for operating Dresser's corporate offices as well as our corporate offices. As
a percent of consolidated revenues, general corporate expenses were 0.5% in 1998
compared to 0.4% in 1997 and 0.5% in 1996.
NONOPERATING ITEMS
Interest expense was $136.8 million for 1998 compared to $111.3 million in
1997 and $84.6 million in 1996. The increase in 1998 over 1997 is due to the
increased level of short-term borrowings outstanding during 1998. These
borrowings carry a lower interest rate than our long-term debt. They were used
for working capital, capital expenditures and acquisitions. The increase in
1997 over 1996 is due to the issuance of debt under our medium-term note program
in 1997 and a full year's interest on $300.0 million of long-term debentures
issued in August 1996 at a higher interest rate than the previous short-term
debt.
Interest income increased to $27.8 million in 1998 compared to $21.9
million in 1997 and $26.9 million in 1996. Interest income is generally related
to the levels of invested cash we maintain.
Foreign currency gains (losses) netted to a loss of $12.4 million in 1998
compared to $0.7 million in 1997 and $19.1 million in 1996. The losses in 1998
occurred mainly in Asia/Pacific currencies. The 1996 losses were primarily due
to devaluations of the Venezuelan bolivar and costs of hedging foreign exchange
exposures of an Italian subsidiary.
Provision for income taxes was $244.4 million in 1998. The provision for
income taxes in 1998 includes a benefit of $234.1 million for special charge
items that are tax deductible. Nondeductible special charge items of $109.0
million include merger transaction costs and nondeductible goodwill which was
determined to be impaired. Excluding the special charge and applicable tax
benefits in 1998, the effective tax rate was 38.0%. The 1997 provision of
$491.4 million was higher than the 1996 provision of $248.4 million due in part
to improved earnings. The effective income tax rate was 37.4% in 1997, compared
with 29.9% in 1996. The lower effective income tax rate and provision for 1996
are due to credits of $43.7 million recorded during the third quarter of 1996 to
recognize net operating loss carryforwards and the settlement of various issues
with the Internal Revenue Service. Excluding the tax benefits recorded in 1996,
the effective income tax rate for 1996 was 35.2%. See Note 6 to our annual
consolidated financial statements.
13
<PAGE>
Minority interest in net income of consolidated subsidiaries was $49.1
million in 1998 compared to $49.3 million in 1997 and $24.7 million in 1996.
The increase in 1997 over 1996 is due primarily to Dresser Equipment Group's
ownership interests in Dresser-Rand and the Engineering and Construction Group's
ownership interests in Devonport Management Limited, which increased from
approximately 30% to 51% during March 1997.
Net income (loss) for 1998 was a loss of $14.7 million for a $0.03 diluted
loss per share. In 1997 net income of $772.4 million yielded $1.77 diluted
income per share while 1996 net income of $557.9 million yielded $1.29 diluted
income per share.
LIQUIDITY AND CAPITAL RESOURCES
We ended 1998 with cash and equivalents of $202.6 million compared with
$384.1 million in 1997 and $446.0 million in 1996. Beginning in 1998, we
changed Dresser's fiscal year-end to our calendar year-end. Dresser's cash
flows in 1998 are measured from December 31, 1997, rather than from the October
31, 1997 balances as reported on the consolidated balance sheets.
Cash flows from operating activities were $454.1 million for 1998 compared
to $833.1 million for 1997 and $864.2 million for 1996. In 1998, the primary
use of cash for operating activities was to fund increased working capital
requirements.
Cash flows used in investing activities were $846.1 million for 1998,
$873.3 million for 1997 and $759.1 million for 1996. The majority of cash used
for investing activities during 1998 was for capital expenditures. Capital
expenditures in 1998 increased slightly over 1997. Our continued investment in
our enterprise-wide information systems initiative offset declines in other
capital spending. Cash used in investing activities in 1997 also includes the
acquisitions of OGC of approximately $118.3 million, and Kinhill of
approximately $34.0 million, and an interest in PES (International) Limited of
approximately $33.6 million. These uses were offset by the sale of our
environmental business for about $32.0 million. In 1996, investing activities
included a $41.3 million expenditure for our share of the purchase price of a
subsidiary acquired by our former 36% owned affiliate, M-I L.L.C. Also in 1996,
several other acquisitions were made which used $32.2 million of cash.
Cash flows from financing activities provided $253.7 million in 1998 and
used $20.6 million in 1997 and $148.4 million in 1996. We issued $150.0 million
of long-term debt under our medium-term note program in 1998. Also in 1998, we
had net borrowings of short-term debt of $369.3 million and proceeds from
exercise of stock options of $49.1 million. Dividends to shareholders used
$254.2 million of cash in 1998. During 1997, cash was provided by proceeds from
debt issued under our medium-term note program of $300.0 million plus $3.2
million of other long-term borrowings and proceeds from the exercise of stock
options of $71.5 million. Offsetting these inflows were payments on long-term
debt of $17.7 million, net repayments on short-term borrowings of $85.8 million,
payments to reacquire common stock of $44.1 million, and dividend payments of
$250.3 million. Cash used for financing activities during 1996 consisted
primarily of dividend payments of $239.6 million and payments to reacquire
common stock of $235.2 million. These uses were offset by proceeds from long-
term borrowings of $295.6 million and proceeds from the exercise of stock
options of $42.6 million. Our combined short-term notes payable and long-term
debt was 32%, 24% and 23% of total capitalization at the end of 1998, 1997 and
1996, respectively.
We have the ability to borrow additional short-term and long-term funds if
necessary. See Note 8 to our annual consolidated financial statements regarding
our short-term lines of credit, notes payable and long-term debt.
FINANCIAL INSTRUMENT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange
rates, and to a lesser extent, to changes in interest rates. To mitigate market
risk, we selectively hedged our foreign currency exposure through the use of
currency derivative instruments. The objective of our hedging is to protect our
cash flows related to sales or purchases of goods or services from fluctuations
in currency rates. The use of derivative instruments include the following
types of market risk:
. volatility of the currency rates;
. time horizon of the derivative instruments;
14
<PAGE>
. market cycles; and
. the type of derivative instruments used.
We do not use derivative instruments for trading purposes. See Note 1 to
our annual consolidated financial statements for additional information on our
accounting policies on derivative instruments. See Note 15 to our consolidated
financial statements for additional disclosures related to derivative
instruments.
Foreign exchange. We operate in over 120 countries. However, we hedge
only foreign currencies that are highly liquid and select derivative instruments
or a combination of instruments whose fluctuation in value is offset by the
fluctuation in value to the underlying exposure. These hedges generally have
expiration dates that do not exceed two years. We manage our foreign exchange
hedging activities through a control system which includes monitoring of cash
balances in traded currencies and use analytical techniques which include value
at risk estimations, and other procedures.
Interest rates. We have exposure to interest rate risk from our long-term
debt with interest based on LIBOR for the U.K. pound sterling plus 0.75% which
was incurred to acquire the Royal Dockyard in Plymouth, England. This risk is
partially offset by a compensating balance of approximately one-half of the
outstanding debt amount which earns interest at the same rate. Our use of the
compensating balance is restricted and the balance is included in other assets
on our consolidated balance sheets. See Note 8 to our annual consolidated
financial statements for additional discussion of the Dockyard Loans.
Value at risk. We use a statistical model to estimate the potential loss
related to derivative instruments used to hedge the market risk of our foreign
exchange exposure. The model utilizes historical price and volatility patterns
to estimate the change in value of the derivative instruments. Changes in value
could occur from adverse movements in foreign exchange rates for a specified
time period at a specified confidence interval. The model is an undiversified
calculation based on the variance-covariance statistical modeling technique and
includes all foreign exchange derivative instruments outstanding at December 31,
1998. The resulting value at risk of $2.8 million estimates, with a 95%
confidence interval, the potential loss we could incur in a one-day period from
foreign exchange derivative instruments due to adverse foreign exchange rate
changes.
Interest rate exposures. The following table represents principal amounts
at December 31, 1998, and related weighted average interest rates by year of
maturity for our restricted cash and long-term debt obligations. Other notes
with varying interest rates of $10.2 million as shown in Note 8 to our annual
consolidated financial statements are excluded from the following table.
<TABLE>
<CAPTION>
Expected maturity date
------------------------------------------------------------------- Fair
Millions of dollars 1999 2000 2001 2002 2003 Thereafter Total Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Restricted cash - British
pound sterling 4.1 4.1 4.1 2.6 - - 14.9 14.9
Average variable rate 6.38% 6.17% 6.04% 5.93% - - 6.22%
Long-term debt:
U.S. dollar 50.0 300.0 - 75.0 138.6 825.0 1,388.6 1,538.0
Average fixed rate 6.27% 6.25% - 6.30% 8.0% 7.58% 7.56%
British pound sterling
(Dockyard Loans) 8.1 8.1 8.1 5.1 - - 29.4 29.4
Average variable rate 6.38% 6.17% 6.04% 5.93% - - 6.22%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted average variable rates are based on implied forward rates in the
yield curve at December 31, 1998. These implied forward rates should not be
viewed as predictions of actual future interest rates. Restricted cash and the
Dockyard Loans earn interest at LIBOR for U.K. pounds sterling plus 0.75%.
Instruments that are denominated in currencies other than the U.S. dollar
reporting currency are subject to foreign exchange rate risk as well as interest
rate risk.
15
<PAGE>
RESTRUCTURING ACTIVITIES
- ------------------------
During the third and fourth quarters of 1998, we incurred special charges
totaling $980.1 million related to the Dresser merger and industry downturn.
Summary. The 1998 special charges include actions necessary to more
efficiently meet the needs of our customers, to eliminate duplicate capabilities
and excess capacity and to position us for the future. These actions were also
taken to integrate our operations into three business segments, supported by a
shared services organization across the entire company.
All business segments, shared services and corporate offices have been
impacted since the Dresser merger by the restructuring activities, including:
. integration of two corporate offices,
. integration of operational and shared services officers and
management teams,
. personnel reductions necessary to match the new business structure
and industry environment,
. integration of businesses and product service lines, including:
- Halliburton Energy Services' drilling operations into Sperry-Sun,
- Dresser Oil Tools into Halliburton Energy Services completion
products,
- SubSea, Rockwater and Wellstream within Brown & Root Energy
Services, and
- M.W. Kellogg and Brown & Root Engineering and Construction into
Kellogg Brown & Root,
. integration of facilities across business units and the entire
company,
. impairments or write-offs of duplicate intangible assets and software,
. impairments or write-offs of excess or duplicate machinery, equipment,
and inventory, and
. integration of shared service support functions.
We believe the management and employees have remained focused on the needs
of our customers during this transitional period, although transitional demands
have required considerable amounts of time, energy and resources. At the time
of the merger, our senior management was selected from the aggregate senior
officers of Dresser and Halliburton. Operational and shared service managers
were then similarly selected. We expect most merger integration activities to be
complete by the end of the second quarter of 1999.
We expect most restructuring activities accrued for in the 1998 special
charges to be completed and expended by the end of 1999. The exceptions are
reserves for losses on facilities to be disposed of and any other actions, which
may require negotiations with outside parties extending past the end of the
year. Through December 31, 1998 we used $111.5 million in cash for items
associated with the 1998 special charges. The unutilized special charge reserve
balance at December 31, 1998 is expected to result in future cash outlays of
approximately $330.0 million during 1999 and possibly into 2000.
We have in process a program to exit over 400 service, administrative and
manufacturing facilities accrued for in the 1998 special charges. Most of these
properties are within the Energy Services Group.
The 1998 charges included $509.4 million of asset related write-offs,
write-downs and charges; $234.7 million of personnel related charges; $126.2
million of facility consolidation charges; $64.0 million of merger transaction
costs; and $45.8 million of other related charges.
Asset Related Charges. The $509.4 million of asset related charges related
to impairments created by both the merger with Dresser and market conditions.
We reviewed assets by product service line to determine if impairments existed
due to these major events as required by SFAS No. 121.
The overall market assumptions on which the impairment computations were made
assumed that 1999 calendar year drilling activity as measured by worldwide rig
count would be 1,900 rigs, an increase from the 1,700 level in the third quarter
of 1998. Rig count for calendar year 2000 and beyond was assumed to increase
about 3% per year based upon estimated long-term growth in worldwide demand for
oil and gas. These assumptions represented our best estimates and were based
on market data available at the time of the merger.
Approximately $325.9 million of the asset related charges related to two
product service lines, drilling and logging.
Our pre-merger drilling business consisted of logging-while-drilling,
measurement-while-drilling and directional drilling services. The majority of
our pre-merger logging-while-drilling business and a portion of the pre-merger
measurement-while-drilling business ("Pathfinder") were required to be sold
under a Department of
16
<PAGE>
Justice Consent Decree. We plan to integrate the remaining drilling business
with the Sperry Sun operations of Dresser. Our strategy will focus generally on
operating under the Sperry Sun name and using Sperry Sun's superior technology,
tools and industry reputation. Our remaining pre-merger drilling assets and
technology are to be de-emphasized as they wear out or become obsolete. These
tools will not be replaced resulting in significant decreases in future cash
flows and an impairment of the excess of cost over net assets and related long-
lived assets.
Significant forecast assumptions included a revenue decline in the
remaining pre-merger drilling business due to the Pathfinder sale in the first
year. Related revenue and operating income over the following 10 years were
projected to decline due to reduced business opportunities resulting from our
shift in focus toward Sperry Sun's tools and technologies. In addition to the
$125.2 million impairment of excess of cost over net assets acquired, related
long-lived asset impairments consisted of $61.0 million of property and
equipment and $13.7 million of related spare parts, the value of which was
estimated using the held for use model during the forecast period. In addition,
an impairment of $3.0 million was recorded related to property and equipment and
$18.0 million of spare parts sold in the Pathfinder sale using the held for sale
model.
The merger of Halliburton and Dresser enabled the acceleration of a
formation evaluation strategy. This strategy takes advantage of Sperry Sun's
logging-while-drilling competitive position and reputation for reliability
combined with our Magnetic Resonance Imaging Logging ("MRIL") technology
acquired with the NUMAR Corporation acquisition in 1997. Prior to the merger, we
were focused on growing the traditional logging business while working toward
development of new systems to maximize the MRIL technology. The merger allows us
to implement the new strategy and place the traditional logging business in a
sustaining mode. This change in focus and strategy will result in a shift of
operating cash flows away from our traditional logging business, creating an
impairment of the excess of cost over net assets and related long-lived assets
related to our logging business.
Significant forecast assumptions included revenues decreasing slowly over
the 10-year period, reflecting the decline in the traditional logging markets.
Operating income initially was forecasted to increase due to cost cutting
activity, and then to decline as revenue decreased due to the significant fixed
costs in this product service line. In addition to the $51.2 million impairment
of the excess of cost over net assets acquired, related long-lived asset
impairments consisted of $22.0 million of property and equipment and $31.8
million of spare parts which management estimated using the held for use model
during the forecast period.
Other significant Energy Services Group product service lines included in
asset related charges were Mono Pumps of $43.6 million and AVA of $37.0 million.
See Note 7 to the annual consolidated financial statements for further
information.
Other Merger Related Activities. We expect to incur additional merger
related incremental costs of approximately $120.0 million through the end of
1999 that do not qualify as a special charge under the accounting rules. These
costs include the relocation of personnel, inventory and equipment as part of
facility consolidation efforts; implementing a company-wide common information
technology infrastructure; merging engineering work practices; harmonizing
employee benefit programs; and developing common policies and procedures to
provide best practices. Approximately $24.0 million of such costs were incurred
during the fourth quarter of 1998. During 1999, approximately $50.0 million
will be expensed during the first and second quarters. See Note 7 to the annual
consolidated financial statements for additional information on special charges
incurred in 1998.
ENVIRONMENTAL MATTERS
Some of our subsidiaries are involved as a potentially responsible party in
remedial activities to clean up several "Superfund" sites under federal law.
Federal law imposes joint and several liability, if the harm is indivisible, on
certain persons without regard to fault, the legality of the original disposal
or ownership of the site. It is very difficult to quantify the potential impact
of compliance with environmental protection laws. However, our management
believes that any liability of our subsidiaries for all but one site will not
have a material adverse effect on our results of operations. See Note 10 to the
annual consolidated financial statements for additional information on the one
site.
17
<PAGE>
YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is the risk that systems, products and equipment
utilizing date-sensitive software or computer chips with two-digit date fields
will fail to properly recognize the Year 2000. Such failures by our software
and hardware or that of government entities, service providers, suppliers and
customers could result in interruptions of our business which could have a
material adverse impact on the results of our operations.
In response to the Y2K issue, we have implemented an enterprise-wide Year
2000 Program designed to identify, assess and address significant Y2K issues in
our key business operations, including products and services, suppliers,
business and engineering applications, information technology systems,
facilities, infrastructure and joint venture projects.
The Year 2000 Program is a comprehensive, integrated, multi-phase process
covering information technology systems and hardware as well as equipment and
products with embedded computer chip technology. The primary phases of the
program are:
. inventorying existing equipment and systems;
. assessing equipment and systems to identify those which are not Y2K
ready and to prioritize critical items;
. remediating, repairing or replacing non-Y2K ready equipment and systems;
. testing to verify Y2K readiness has been achieved; and
. deploying and certifying.
At the end of 1998, we completed our inventory and assessment of all
mission critical items. We estimate that we will complete the majority of our
remediation phase by the end of the third quarter of 1999.
In the fourth quarter of 1998, Landmark Graphics Corporation, our wholly-
owned subsidiary, released its Year 2000 tested version of its integrated
solutions software product.
Overall we estimate that we are approximately 50% complete with our Year
2000 Program and anticipate having our products and mission-critical systems and
equipment Y2K ready during the third quarter of 1999. The balance of 1999 will
be focused on deployment, certification, testing and implementation of new and
modified programs as required.
The Y2K issue is a pervasive problem for most companies due to the
interdependence of computer systems. Therefore, we are continually assessing
the risks surrounding this issue and its potential impact on us. This includes
the initial phases of business continuity planning, audits by customers and
meetings with our material customers and suppliers. Meetings and presentations
with key suppliers to date have not identified any key suppliers who expect
significant Y2K interruption of services or supplies to us. Failure to address
Y2K issues could result in business disruption that could materially affect our
operations. In an effort to minimize business interruptions, we are currently
in the process of developing contingency plans in the event circumstances
prevent us from meeting any portion of our current program schedule. These
contingency plans are expected to be completed by April 1999.
Through 1998, we have incurred approximately $22.0 million in costs related
to its Year 2000 Program. We estimate that prior to January 1, 2000 we will
have spent approximately $50.0 million to address the Y2K issue. These
estimates do not include the costs associated with our initiatives discussed
below. Costs associated with the Year 2000 Program are being treated as period
costs and expensed as incurred.
Independent of, but concurrent with, our Y2K review, we are installing an
enterprise-wide business information system which is scheduled to replace some
of our key finance, administrative and marketing software systems by the end of
1999 and is Y2K ready. In addition, and as a separate activity, we are in the
process of replacing and standardizing our desktop computing equipment and
software and updating our communications infrastructure. A third party is
updating the communications infrastructure. The replacement of desktop
equipment and software is an internal program based on our common office
environment initiative that has been expanded to include Dresser. Both of these
programs will be completed by the end of 1999. All hardware and software
installed as a part of these programs are Y2K ready.
18
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidelines
for companies to capitalize or expense costs incurred to develop or obtain
internal use software. The guidelines set forth in SOP 98-1 do not differ
significantly from our current accounting policy for internal use software and
therefore we do not expect a material impact on our results of operations or
financial position from the adoption of SOP 98-1. We adopted SOP 98-1 effective
January 1, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. We adopted SOP 98-5 effective January 1, 1999
and we expect to record expense of approximately $30 million pretax or $0.04
after-tax per diluted share from the adoption of SOP 98-5 as the cumulative
effect of an accounting change. Estimated annual expense for 1998 under SOP 98-
5 would not have been materially different from the amount expensed under the
current accounting treatment.
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. SFAS 133 is effective for us
beginning January 1, 2000. We are currently evaluating SFAS 133 to identify
implementation and compliance methods and we have not yet determined the effect,
if any, on our results of operations or financial position.
FORWARD-LOOKING INFORMATION
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, Halliburton Company cautions that the statements
in this annual report and elsewhere, which are forward-looking and which provide
other than historical information, involve risks and uncertainties that may
impact Halliburton Company's actual results of operations. While such forward-
looking information reflects Halliburton Company's best judgement based on
current information, it involves a number of risks and uncertainties and there
can be no assurance that other factors will not affect the accuracy of such
forward-looking information. While it is not possible to identify all factors,
Halliburton Company continues to face many risks and uncertainties that could
cause actual results to differ from those forward-looking statements including:
. litigation, including, for example, asbestosis litigation and
environmental litigation;
. trade restrictions and economic embargoes imposed by the United States
and other countries;
. environmental laws, including those that require emission performance
standards for new and existing facilities;
. 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, for
example, Russia, Algeria and Nigeria;
. the effects of severe weather conditions, including hurricanes and
tornadoes, on operations and facilities;
. the impact of prolonged mild weather conditions on the demand for and
price of oil and natural gas;
. the magnitude of governmental spending for military and logistical
support of the type that we provide;
. changes in capital spending by customers in the hydrocarbon 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;
. changes in capital spending by customers in the wood pulp and paper
industries for plants and equipment;
. consolidation of customers in the oil and gas industry;
19
<PAGE>
. technological and structural changes in the industries that we serve;
. changes in the price of 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 expected
profit margins;
. claim negotiations with customers on cost variances on major projects;
. computer software, hardware and other equipment utilizing computer
technology used by governmental entities, service providers, vendors,
customers and Halliburton which may be impacted by the Year 2000 issue;
. 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;
. increased competition in the hiring and retention of employees in
certain areas, for example, accounting, treasury and Year 2000
remediation; and
. integration of acquired businesses, including Dresser Industries, Inc.
and its subsidiaries, into Halliburton.
In addition, future trends for pricing, margins, revenues and profitability
remain difficult to predict in the industries served by Halliburton Company.
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Halliburton Company:
We have audited the accompanying consolidated balance sheets of Halliburton
Company (a Delaware corporation) and subsidiary companies as of December 31,
1998 and 1997, and the related consolidated statements of income, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1998. We did not audit the consolidated balance sheet of Dresser
Industries, Inc., a company acquired during 1998 in a transaction accounted for
as a pooling of interests, as of December 31, 1997, and the related consolidated
statements of income, cash flows and shareholders' equity for each of the two
years in the period ended December 31, 1997, as discussed in Note 14. Such
statements are included in the consolidated financial statements of Halliburton
Company and reflect total assets of 48% for the year ended December 31, 1997,
and total revenue of 46% and 47% for the years ended December 31, 1997 and 1996,
respectively, of the related consolidated totals. These statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to amounts included for Dresser Industries, Inc. is based
solely upon the report of the other auditors. These financial statements are
the responsibility of Halliburton Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Halliburton Company and subsidiary
companies as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 1999
21
<PAGE>
RESPONSIBILITY FOR FINANCIAL REPORTING
We are responsible for the preparation and integrity of our published
financial statements. The financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and, as such,
include amounts based on judgments and estimates made by our management. We
also prepared the other information included in the annual report and are
responsible for its accuracy and consistency with the financial statements.
The financial statements have been audited by the independent accounting
firm, Arthur Andersen LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders, the
Board of Directors and committees of the Board.
We maintain a system of internal control over financial reporting, which is
intended to provide reasonable assurance to our management and Board of
Directors regarding the preparation of financial statements. The system
includes a documented organizational structure and division of responsibility,
established policies and procedures, including a code of conduct to foster a
strong ethical climate which is communicated throughout the company, and the
careful selection, training and development of our people. Internal auditors
monitor the operation of the internal control system and report findings and
recommendations to management and the Board of Directors. Corrective actions
are taken to address control deficiencies and other opportunities for improving
the system as they are identified. The Board, operating through its Audit
Committee, which is composed entirely of Directors who are not current or former
officers or employees of the company, provides oversight to the financial
reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Furthermore, the effectiveness of an internal control system may
change over time.
We have assessed our internal control system in relation to criteria for
effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon that assessment, we
believe that, as of December 31, 1998, our system of internal control over
financial reporting met those criteria.
Halliburton Company
by:
/s/ RICHARD B. CHENEY /s/ GARY V. MORRIS
----------------------- ----------------------------
Richard B. Cheney Gary V. Morris
Chief Executive Officer Executive Vice President and
Chief Financial Officer
Dallas, Texas
January 11, 2000
22
<PAGE>
Halliburton Company
Consolidated Statements of Income
(Millions of dollars except per share data)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Services $ 12,089.4 $ 11,256.3 $ 9,461.1
Sales 5,069.9 4,857.0 4,351.7
Equity in earnings of unconsolidated affiliates 193.8 158.3 133.8
- ------------------------------------------------------------------------------------------------------------------------
Total revenues $ 17,353.1 $ 16,271.6 $ 13,946.6
- ------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 11,127.0 $ 10,163.9 $ 8,708.0
Cost of sales 4,342.0 4,037.8 3,628.3
General and administrative 600.1 665.0 621.3
Special charges and credits 887.5 6.2 85.8
- ------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 16,956.6 14,872.9 13,043.4
- ------------------------------------------------------------------------------------------------------------------------
Operating income 396.5 1,398.7 903.2
Interest expense (136.8) (111.3) (84.6)
Interest income 27.8 21.9 26.9
Foreign currency losses (12.4) (0.7) (19.1)
Other nonoperating income, net 3.7 4.5 4.6
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 278.8 1,313.1 831.0
Provision for income taxes (244.4) (491.4) (248.4)
Minority interest in net income of consolidated subsidiaries (49.1) (49.3) (24.7)
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (14.7) $ 772.4 $ 557.9
========================================================================================================================
Income (loss) per common share:
- ------------------------------------------------------------------------------------------------------------------------
Basic $ (0.03) $ 1.79 $ 1.30
- ------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.03) $ 1.77 $ 1.29
========================================================================================================================
Weighted average common shares outstanding:
Basic 438.8 431.1 429.2
Diluted 438.8 436.1 432.1
</TABLE>
See notes to annual financial statements.
23
<PAGE>
Halliburton Company
Consolidated Balance Sheets
(Millions of dollars and shares except per share data)
<TABLE>
<CAPTION>
December 31
--------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 202.6 $ 384.1
Receivables:
Notes and accounts receivable (less allowance for bad debts of $76.6 and $58.6) 3,345.5 2,980.4
Unbilled work on uncompleted contracts 514.9 407.2
- ---------------------------------------------------------------------------------------------------------------------
Total receivables 3,860.4 3,387.6
Inventories 1,284.7 1,294.1
Deferred income taxes, current 432.2 202.6
Other current assets 286.1 169.7
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 6,066.0 5,438.1
Property, plant and equipment:
At cost 6,824.4 6,646.0
Less accumulated depreciation 3,928.5 3,879.6
- ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,895.9 2,766.4
Equity in and net advances to related companies 587.0 761.2
Excess of cost over net assets acquired (net of accumulated amortization
of $240.1 and $205.7) 764.6 1,024.6
Deferred income taxes, noncurrent 336.9 273.0
Other assets 415.5 441.0
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 11,065.9 $ 10,704.3
=====================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable and current maturities of long-term debt $ 573.5 $ 57.9
Accounts payable 1,008.5 1,132.4
Accrued employee compensation and benefits 402.2 516.1
Advance billings on uncompleted contracts 513.3 638.3
Income taxes payable 245.6 335.2
Accrued special charges 359.1 6.1
Other current liabilities 834.2 767.3
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,936.4 3,453.3
Long-term debt 1,369.7 1,296.9
Employee compensation and benefits 1,006.6 1,013.7
Other liabilities 521.8 460.1
Minority interest in consolidated subsidiaries 170.2 163.4
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 7,004.7 6,387.4
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized 600.0 shares,
issued 445.9 and 453.7 shares 1,114.7 1,134.3
Paid-in capital in excess of par value 8.2 168.2
Deferred compensation (50.6) (44.3)
Accumulated other comprehensive income (148.8) (131.1)
Retained earnings 3,236.0 3,563.4
- ---------------------------------------------------------------------------------------------------------------------
4,159.5 4,690.5
Less 5.9 and 15.8 shares treasury stock, at cost 98.3 373.6
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,061.2 4,316.9
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,065.9 $ 10,704.3
=====================================================================================================================
See notes to annual financial statements.
</TABLE>
24
<PAGE>
HALLIBURTON COMPANY
Consolidated Statements of Cash Flows
(Millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (14.7) $ 772.4 $ 557.9
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization 587.0 564.3 497.7
Provision (benefit) for deferred income taxes (293.4) 2.6 (13.4)
Distributions from (advances to) related companies, net of equity in
(earnings) or losses (22.5) (84.6) (57.2)
Accrued special charges 329.7 (51.6) 57.7
Other non-cash items 355.8 66.2 33.1
Other changes, net of non-cash items:
Receivables (279.9) (408.8) (363.5)
Inventories (66.3) (117.1) (147.5)
Accounts payable (45.3) (49.7) 98.8
Other working capital, net (142.5) 39.9 286.9
Other, net 46.2 99.5 (86.3)
- ----------------------------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities 454.1 833.1 864.2
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (914.3) (880.1) (731.1)
Sales of property, plant and equipment 100.0 180.6 64.4
Acquisitions of businesses, net of cash acquired (40.4) (161.5) (60.5)
Dispositions of businesses, net of cash disposed 7.7 37.6 21.6
Other investing activities 0.9 (49.9) (53.5)
- ----------------------------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities (846.1) (873.3) (759.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings of long-term debt 150.0 303.2 295.6
Payments on long-term debt (26.7) (17.7) (8.2)
Net borrowings (payments) of short-term debt 369.3 (85.8) (7.3)
Payments of dividends to shareholders (254.2) (250.3) (239.6)
Proceeds from exercises of stock options 49.1 71.5 42.6
Payments to reacquire common stock (19.9) (44.1) (235.2)
Other financing activities (13.9) 2.6 3.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities 253.7 (20.6) (148.4)
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (5.4) (1.1) 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (143.7) (61.9) (42.3)
Cash and equivalents at beginning of year * 346.3 446.0 488.3
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 202.6 $ 384.1 $ 446.0
==================================================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 137.0 $ 106.1 $ 76.1
Income taxes 534.8 307.4 191.1
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 5.4 $ 337.1 $ 39.4
Liabilities disposed of in dispositions of businesses 23.6 205.5 9.8
==================================================================================================================================
</TABLE>
* Cash balance at the beginning of 1998 does not agree to the prior year ending
cash balance in order to conform
Dresser's fiscal year to Halliburton's calendar year.
See notes to annual financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
(Millions of dollars and shares except per share data)
Years ended December 31
-----------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock (number of shares)
Balance at beginning of year 453.7 221.7 221.3
Shares issued under incentive stock plans, net of forfeitures 1.1 1.3 0.3
Cancellation of treasury stock (8.9) - (0.1)
Shares issued in connection with acquisition - 8.2 -
Two-for-one common stock split - 222.5 -
Shares issued pursuant to stock warrant agreement - - 0.2
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 445.9 453.7 221.7
- ---------------------------------------------------------------------------------------------------------
Common stock (dollars)
Balance at beginning of year $ 1,134.3 $ 554.3 $ 553.3
Shares issued under incentive stock plans, net of forfeitures 2.7 3.2 0.9
Cancellation of treasury stock (22.3) - (0.3)
Shares issued in connection with acquisition - 20.5 -
Two-for-one common stock split - 556.3 -
Shares issued pursuant to stock warrant agreement - - 0.4
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,114.7 $ 1,134.3 $ 554.3
- ---------------------------------------------------------------------------------------------------------
Paid-in capital in excess of par value
Balance at beginning of year $ 168.2 $ 615.1 $ 593.9
Shares issued under incentive stock plans, net of forfeitures 43.0 51.4 18.3
Cancellation of treasury stock (209.3) - (3.6)
Shares issued in connection with employee compensation plans 6.3 21.4 (1.0)
Shares issued in connection with acquisition - 36.6 -
Two-for-one common stock split - (556.3) -
Shares issued pursuant to stock warrant agreement - - 7.5
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ 8.2 $ 168.2 $ 615.1
- ---------------------------------------------------------------------------------------------------------
Deferred compensation
Balance at beginning of year $ (44.3) $ (22.9) $ (23.9)
Current year awards, net (6.3) (21.4) 1.0
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ (50.6) $ (44.3) $ (22.9)
- ---------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Cumulative translation adjustment $ (141.4) $ (127.2) $ (93.9)
Pension liability adjustment (7.4) (3.9) (6.9)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ (148.8) $ (131.1) $ (100.8)
- ---------------------------------------------------------------------------------------------------------
Cumulative translation adjustment
Balance at beginning of year $ (127.2) $ (93.9) $ (104.7)
Conforming fiscal years (14.8) - -
Sale of M-I L.L.C. 9.4 - -
Current year changes, net of tax (8.8) (33.3) 10.8
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ (141.4) $ (127.2) $ (93.9)
- ---------------------------------------------------------------------------------------------------------
See notes to annual financial statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
(continued)
(Millions of dollars and shares except per share data)
Years ended December 31
------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pension liability adjustment
Balance at beginning of year $ (3.9) $ (6.9) $ (7.0)
Current year adjustment (3.5) 3.0 0.1
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $ (7.4) $ (3.9) $ (6.9)
- ----------------------------------------------------------------------------------------------------------
Retained earnings
Balance at beginning of year $ 3,563.4 $ 3,077.1 $ 2,758.8
Net income (loss) (14.7) 772.4 557.9
Cash dividends paid (254.2) (250.3) (239.6)
Cancellation of treasury stock (61.1) - -
Pooling of interests acquisition - (35.8) -
Conforming fiscal years 2.6 - -
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $ 3,236.0 $ 3,563.4 $ 3,077.1
- ----------------------------------------------------------------------------------------------------------
Treasury stock (number of shares)
Beginning of year 15.8 8.6 5.6
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (1.1) (1.5) (1.2)
Shares purchased 0.1 0.7 4.3
Cancellation of treasury stock (8.9) - (0.1)
Two-for-one common stock split - 8.0 -
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 5.9 15.8 8.6
- ----------------------------------------------------------------------------------------------------------
Treasury stock (dollars)
Beginning of year $ 373.6 $ 381.4 $ 193.4
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (8.5) (51.9) (43.3)
Shares purchased 3.5 44.1 235.2
Cancellation of treasury stock (270.3) - (3.9)
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $ 98.3 $ 373.6 $ 381.4
- ----------------------------------------------------------------------------------------------------------
Comprehensive income
Net income (loss) $ (14.7) $ 772.4 $ 557.9
Translation rate changes, net of tax (8.8) (33.3) 10.8
Current year adjustment to minimum pension liability (3.5) 3.0 0.1
- ----------------------------------------------------------------------------------------------------------
Total comprehensive income $ (27.0) $ 742.1 $ 568.8
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to annual financial statements.
27
<PAGE>
HALLIBURTON COMPANY
Notes to Annual Financial Statements
Note 1. Significant Accounting Policies
The Company employs accounting policies that are in accordance with
generally accepted accounting principles in the United States. The preparation
of financial statements in conformity with generally accepted accounting
principles requires Company management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
Basis of presentation. On September 29, 1998, the Company completed the
acquisition of Dresser Industries, Inc. (Dresser) pursuant to the Agreement and
Plan of Merger (the Merger) dated as of February 25, 1998. The Merger was
accounted for using the pooling of interests method of accounting for business
combinations. Accordingly, the Company's financial statements have been restated
to include the accounts of Dresser for all periods presented. Prior to the
Merger, Dresser had a fiscal year-end of October 31. Beginning in 1998,
Dresser's fiscal year-end of October 31 has been conformed to Halliburton's
calendar year-end. Periods through December 31, 1997 contain Dresser's
information on a fiscal year-end basis combined with Halliburton's information
on a calendar year-end basis. Dresser's operating results for November and
December of 1997 are presented within the consolidated statements of
shareholders' equity as "conforming fiscal years."
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and all majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
other companies in which the Company owns between 20-50% are accounted for on
the equity method. Certain prior year amounts have been reclassified to conform
with the current year presentation. Certain reclassifications and additional
disclosures have been made in this Form 10-K/A, primarily related to the
Company's special charges and credits.
Revenues and Income Recognition. The Company recognizes revenues as
services are rendered or products are shipped. The distinction between services
and product sales is based upon the overall activity of the particular business
operation. Revenues from engineering and construction contracts are reported on
the percentage of completion method of accounting using measurements of progress
towards completion appropriate for the work performed. All known or anticipated
losses on contracts are provided for currently. Post-contract customer support
agreements are recorded as deferred revenues and recognized as revenue ratably
over the contract periods of generally one year's duration. Training and
consulting service revenues are recognized as the services are performed.
Research and Development. Research and development expenses are charged
to income as incurred. Such charges were $308.1 million in 1998, $259.2 million
in 1997 and $218.0 million in 1996.
Software Development Costs. Costs of developing software for sale are
charged to expense when incurred, as research and development, until
technological feasibility has been established for the product. Thereafter,
software development costs are capitalized until the software is ready for
general release to customers. The Company capitalized costs of $13.4 million
in 1998, $14.5 million in 1997 and $12.9 million in 1996 related to software
developed for resale. Amortization expense related to these costs was $17.5
million for 1998, $15.0 million for 1997 and $12.5 million for 1996. Once the
software is ready for release, amortization of the software development costs
begins. Capitalized software development costs are amortized over periods which
do not exceed three years.
Income Per Share. Basic income per share amounts are based on the
weighted average number of common shares outstanding during the year. Diluted
income per share includes additional common shares that would have been
outstanding if potential common shares with a dilutive effect had been issued.
See Note 11 for a reconciliation of basic and diluted income per share from
continuing operations. Prior year amounts have been adjusted for the two-for-one
common stock split declared on June 9, 1997, and effected in the form of a stock
dividend paid on July 21, 1997.
28
<PAGE>
Cash Equivalents. The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
Receivables. The Company's receivables are generally not collateralized.
Notes and accounts receivable at December 31, 1998 include $33.2 million ($30.8
million at December 31, 1997) due from customers in accordance with applicable
retainage provisions of engineering and construction contracts, which will
become billable upon future deliveries or completion of such contracts. This
amount is expected to be collected during 1999. Additionally, other noncurrent
assets include $7.1 million ($7.3 million at December 31, 1997) of such
retainage which is expected to be collected in years subsequent to 1999.
Unbilled work on uncompleted contracts generally represents work currently
billable and such work is usually billed during normal billing processes in the
next month. At December 31, 1998, notes of $295.9 million ($34.4 million at
December 31, 1997) with varying interest rates are included in notes and
accounts receivable. See Note 5 for information on the note receivable
generated by the sale of M-I L.L.C. (M-I).
Inventories. Inventories are stated at the lower of cost or market. Cost
represents invoice or production cost for new items and original cost less
allowance for condition for used material returned to stock. Production cost
includes material, labor and manufacturing overhead. The cost of most
inventories is determined using either the first-in, first-out (FIFO) method or
the average cost method although the cost of U.S. manufacturing and U.S. field
service inventories is determined using the last-in, first-out (LIFO) method.
Inventories of sales items owned by foreign subsidiaries and inventories of
operating supplies and parts are generally valued at average cost.
Property, Plant and Equipment. Property, plant and equipment is reported
at cost less accumulated depreciation, which is generally provided on the
straight-line method over the estimated useful lives of the assets. Certain
assets are depreciated on accelerated methods. Accelerated depreciation methods
are also used for tax purposes, wherever permitted. Expenditures for
maintenance and repairs are expensed; expenditures for renewals and improvements
are generally capitalized. Upon sale or retirement of an asset, the related
costs and accumulated depreciation are removed from the accounts and any gain or
loss is recognized. When events or changes in circumstances indicate that
assets may be impaired, an evaluation is performed comparing the estimated
future undiscounted cash flows associated with the asset to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
value is required. The Company follows the successful efforts method of
accounting for oil and gas properties. At December 31, 1998, there were no
significant oil and gas properties in the production stage of development. The
Company is implementing an enterprise-wide information system. External direct
costs of materials and services and payroll-related costs of employees working
solely on development of the software system portion of the project are
capitalized. Capitalized costs of the project will be amortized over periods of
three to ten years beginning when the system is placed in service. Training
costs and costs to reengineer business processes are expensed as incurred.
Excess of Cost Over Net Assets Acquired. The excess of cost over net
assets acquired is amortized on a straight-line basis over periods not exceeding
40 years. The excess of cost over net assets acquired is continually monitored
for potential impairment. When negative conditions such as significant current
or projected operating losses exist, a review is performed to determine if the
projected undiscounted future cash flows indicate that an impairment exists. If
an impairment exists, the excess of cost over net assets acquired, and, if
appropriate, the associated assets are reduced to reflect the estimated
discounted cash flows to be generated by the underlying business, similar to
methodologies in Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of."
Income Taxes. A valuation allowance is provided for deferred tax assets if
it is more likely than not these items will either expire before the Company is
able to realize their benefit, or that future deductibility is uncertain.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been realized in the financial statements or
tax returns.
Derivative Instruments. The Company primarily enters into derivative
financial transactions to hedge existing or projected exposures to changing
foreign exchange rates and from time to time enters into derivatives to hedge
exposures to interest rates or commodity prices. The Company does not enter
into derivative transactions for speculative or trading purposes. Derivative
financial instruments to hedge exposure with an indeterminable maturity date are
generally carried at fair value with the resulting gains and losses reflected in
the results of
29
<PAGE>
operations. Gains or losses on hedges of identifiable commitments are deferred
and recognized when the offsetting gains or losses on the related hedged items
are recognized. Deferred gains or losses for hedges which are terminated prior
to the transaction date are recognized when the underlying hedged transactions
are recognized. In the event an identifiable commitment is no longer expected to
be realized, any deferred gains or losses on hedges associated with the
commitment are recognized currently. Costs associated with entering into such
contracts are presented in other assets, while deferred gains or losses are
included in other liabilities or other assets, respectively, on the consolidated
balance sheets. Recognized gains or losses on derivatives entered into to manage
foreign exchange risk are included in foreign currency gains and losses on the
consolidated statements of income, while gains or losses on interest rate
derivatives and commodity derivatives are included in interest expense and
operating income, respectively. During the years ended December 31, 1998, 1997
and 1996, the Company did not enter into any significant transactions to hedge
interest rates or commodity prices.
Foreign Currency Translation. Foreign entities whose functional
currency is the U.S. dollar translate monetary assets and liabilities at year-
end exchange rates and non-monetary items are translated at historical rates.
Income and expense accounts are translated at the average rates in effect during
the year, except for depreciation and cost of product sales which are translated
at historical rates. Gains or losses from changes in exchange rates are
recognized in consolidated income in the year of occurrence. Foreign entities
whose functional currency is the local currency translate net assets at year-end
rates and income and expense accounts at average exchange rates. Adjustments
resulting from these translations are reflected in the consolidated statements
of shareholders' equity titled "cumulative translation adjustment."
Note 2. Business Segment Information
The Company has three business segments. These segments are organized
around the products and services provided to the customers they serve. The
business units within each segment are evaluated on operating income, operating
margins and cash value added.
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 and well control. 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 four business units:
Halliburton Energy Services, Brown & Root Energy Services, Landmark Graphics,
and Halliburton Energy Development. (In March 1999, Halliburton Energy
Development became a part of Halliburton Energy Services.) The long term
performance for these business units is linked to the long term demand for
hydrocarbons. The products and services the group provides are designed to help
discover, develop and produce hydrocarbons. The customers for this segment are
major oil companies, national oil companies and independent oil and gas
companies.
The Engineering and Construction Group segment provides engineering,
procurement, construction, project management, and facilities operation and
maintenance for hydrocarbon processing and other industrial and governmental
customers. The Engineering and Construction Group has two business units:
Kellogg-Brown & Root and Brown & Root Services. Both business units are engaged
in the delivery of engineering and construction services.
The Dresser Equipment Group segment designs, manufactures and markets
highly engineered products and systems for oil and gas producers, transporters,
processors, distributors and petroleum users throughout the world. Dresser
Equipment Group operates as one business unit.
The Company's equity in pretax income or losses of related companies is
included in revenues and operating income of the applicable segment.
Intersegment revenues included in the revenues of the other business segments
and sales between geographic areas are immaterial. General corporate assets not
included in a business segment are primarily comprised of receivables, deferred
tax assets, and certain other investments including the investment in the
Company's enterprise-wide information system.
The tables below represent the Company's adoption of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
30
<PAGE>
<TABLE>
<CAPTION>
Operations by Business Segment
Years ended December 31
---------------------------------------------
Millions of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Energy Services Group $ 9,009.5 $ 8,504.7 $ 6,515.4
Engineering and Construction Group 5,494.8 4,992.8 4,720.7
Dresser Equipment Group 2,848.8 2,774.1 2,710.5
- -------------------------------------------------------------------------------------------------------
Total $ 17,353.1 $ 16,271.6 $ 13,946.6
- -------------------------------------------------------------------------------------------------------
Operating income:
Energy Services Group $ 971.0 $ 1,019.4 $ 698.0
Engineering and Construction Group 237.2 219.0 134.0
Dresser Equipment Group 247.8 248.3 229.3
Special charges and credits (980.1) (16.2) (85.8)
General corporate (79.4) (71.8) (72.3)
- -------------------------------------------------------------------------------------------------------
Total $ 396.5 $ 1,398.7 $ 903.2
- -------------------------------------------------------------------------------------------------------
Capital expenditures:
Energy Services Group $ 707.6 $ 682.9 $ 493.9
Engineering and Construction Group 33.5 61.5 105.6
Dresser Equipment Group 72.9 76.4 119.0
General corporate 100.3 59.3 12.6
- -------------------------------------------------------------------------------------------------------
Total $ 914.3 $ 880.1 $ 731.1
- -------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Energy Services Group $ 405.4 $ 395.0 $ 338.5
Engineering and Construction Group 48.8 63.3 58.7
Dresser Equipment Group 86.8 98.6 92.8
General corporate 46.0 7.4 7.7
- -------------------------------------------------------------------------------------------------------
Total $ 587.0 $ 564.3 $ 497.7
- -------------------------------------------------------------------------------------------------------
Total assets:
Energy Services Group $ 6,618.1 $ 6,050.5 $ 4,999.2
Engineering and Construction Group 1,404.7 1,645.8 1,490.7
Dresser Equipment Group 1,944.2 2,115.3 2,126.8
General corporate 1,098.9 892.7 970.1
- -------------------------------------------------------------------------------------------------------
Total $ 11,065.9 $ 10,704.3 $ 9,586.8
- -------------------------------------------------------------------------------------------------------
Research and development:
Energy Services Group $ 220.0 $ 173.8 $ 150.1
Engineering and Construction Group 3.9 2.1 4.0
Dresser Equipment Group 84.2 83.3 63.9
- -------------------------------------------------------------------------------------------------------
Total $ 308.1 $ 259.2 $ 218.0
- -------------------------------------------------------------------------------------------------------
Special charges and credits:
Energy Services Group $ 721.1 $ (13.8) $ 43.1
Engineering and Construction Group 39.6 2.8 42.7
Dresser Equipment Group 21.1 27.2 -
General corporate 198.3 - -
- -------------------------------------------------------------------------------------------------------
Total $ 980.1 $ 16.2 $ 85.8
- -------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Operations by Geographic Area
Years ended December 31
-------------------------------------------
Millions of dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
United States $ 6,132.2 $ 6,506.5 $ 5,730.0
United Kingdom 2,246.7 2,315.0 1,504.6
Other areas (over 120 countries) 8,974.2 7,450.1 6,712.0
- -----------------------------------------------------------------------------------------------------
Total $ 17,353.1 $ 16,271.6 $ 13,946.6
- -----------------------------------------------------------------------------------------------------
Long-lived assets:
United States $ 2,400.5 $ 2,518.9 $ 2,432.9
United Kingdom 594.5 775.0 626.9
Other areas (numerous countries) 1,053.1 980.9 956.6
- -----------------------------------------------------------------------------------------------------
Total $ 4,048.1 $ 4,274.8 $ 4,016.4
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Note 3. Inventories
Inventories at December 31, 1998 and 1997 are comprised of the following:
Millions of dollars 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Finished products and parts $ 621.2 $ 665.8
Raw materials and supplies 250.3 213.7
Work in process 561.4 535.8
Progress payments (148.2) (121.2)
- ----------------------------------------------------------------------------------
Total $ 1,284.7 $ 1,294.1
- ----------------------------------------------------------------------------------
</TABLE>
Inventories on the last-in, first-out (LIFO) method were $167.9 million and
$195.9 million at December 31, 1998 and December 31, 1997, respectively. If the
average cost or FIFO methods had been in use for inventories on the LIFO basis,
total inventories would have been about $110.6 million and $100.8 million higher
than reported at December 31, 1998 and 1997, respectively.
Note 4. Property, Plant and Equipment
Property, plant and equipment at December 31, 1998 and 1997 is comprised
of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 142.2 $ 136.0
Buildings and property improvements 1,131.6 1,055.9
Machinery, equipment and other 5,550.6 5,454.1
- ------------------------------------------------------------------------------------
Total $ 6,824.4 $ 6,646.0
- ------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, machinery, equipment and other property
includes oil and gas investments of approximately $223.7 million and $101.7
million, respectively and software developed for the Company's enterprise wide
information system of $132.7 million and $59.5 million, respectively.
Note 5. Related Companies
The Company conducts some of its operations through various joint
ventures which are in partnership, corporate and other business forms, which are
principally accounted for using the equity method.
32
<PAGE>
The larger unconsolidated entities include European Marine Contractors,
Limited (EMC), Bredero-Shaw and Ingersoll-Dresser Pump (IDP). EMC which is 50%
owned by a subsidiary of the Company and part of the Energy Services Group,
specializes in engineering, procurement and construction of marine pipelines.
Bredero-Shaw, which is 50% owned by a subsidiary of the Company and part of the
Energy Services Group, specializes in pipe coating. Effective February 29,
1996, a subsidiary of the Company entered into an agreement to form Bredero-
Shaw, a strategic pipe-coating joint venture, with Shaw Industries Ltd. (Shaw)
by contributing its Bredero Price assets and Shaw contributing its Shaw Pipe
Protection assets on a worldwide basis. From formation until the fourth quarter
of 1997, the Company fully consolidated Bredero-Shaw as its ownership interest
in this joint venture exceeded 50%. During the fourth quarter of 1997, the
Company and Shaw agreed to a long-term extension of the joint venture and
decreased the Company's interest to 50%. In connection with the new agreement,
Shaw agreed to pay a subsidiary of the Company $50 million over a four-year
period. This transaction resulted in a fourth quarter pretax gain of $41.7
million which is reported in the consolidated statements of income in the
caption "special charges and credits." For balance sheet purposes, at year-end
1997 the subsidiary of the Company deconsolidated Bredero-Shaw and accounted for
its 50% interest in the joint venture as an equity investment. The subsidiary
of the Company includes its share of equity earnings in the results of
operations beginning January 1, 1998 under the equity method. IDP which is 49%
owned by a subsidiary of the Company and part of the Dresser Equipment Group,
manufactures a broad range of pump products and services.
In the second quarter of 1996, M-I, formerly a 36% owned joint venture,
purchased Anchor Drilling Fluids. The Company's share of the purchase price was
$41.3 million and is included in cash flows from other investing activities.
The Company sold its 36% ownership interest in M-I to Smith International, Inc.
(Smith) on August 31, 1998. This transaction completed Halliburton's commitment
to the U.S. Department of Justice to sell its M-I interest in connection with
its merger with Dresser. The purchase price of $265 million was paid by Smith
in the form of a non-interest bearing promissory note due April 1999. This
receivable is included in "notes and accounts receivable" on the consolidated
balance sheets. All of M-I's debt remains an obligation of M-I.
Summarized financial statements for all combined jointly-owned operations
which are not consolidated are as follows:
<TABLE>
<CAPTION>
Combined Operating Results
Millions of dollars 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 5,244.0 $ 3,958.9 $ 3,505.5
- ----------------------------------------------------------------------------------
Operating income $ 478.3 $ 407.3 $ 325.7
- ----------------------------------------------------------------------------------
Net income $ 341.0 $ 316.2 $ 236.3
- ----------------------------------------------------------------------------------
<CAPTION>
Combined Financial Position
Millions of dollars 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Current assets $ 1,854.2 $ 1,779.5
Noncurrent assets 322.3 576.0
- --------------------------------------------------------------------
Total $ 2,176.5 $ 2,355.5
- --------------------------------------------------------------------
Current liabilities $ 1,074.6 $ 859.6
Noncurrent liabilities 118.2 245.3
Minority interests 3.9 8.1
Shareholders' equity 979.8 1,242.5
- --------------------------------------------------------------------
Total $ 2,176.5 $ 2,355.5
- --------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Note 6. Income Taxes
The components of the (provision) benefit for income taxes are:
Millions of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes
Federal $ (301.8) $ (167.2) $ (82.0)
Foreign (228.5) (306.1) (169.8)
State (7.5) (15.5) (10.0)
- -------------------------------------------------------------------------------------------------
Total (537.8) (488.8) (261.8)
- -------------------------------------------------------------------------------------------------
Deferred income taxes
Federal 291.8 5.4 61.2
Foreign and state 1.6 (8.0) (47.8)
- -------------------------------------------------------------------------------------------------
Total 293.4 (2.6) 13.4
- -------------------------------------------------------------------------------------------------
Total $ (244.4) $ (491.4) $ (248.4)
=================================================================================================
</TABLE>
Included in federal income taxes are foreign tax credits of $182.2 million
in 1998, $154.0 million in 1997 and $109.2 million in 1996. The United States
and foreign components of income (loss) before income taxes and minority
interests are as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ (306.4) $ 736.8 $ 484.2
Foreign 585.2 576.3 346.8
- ------------------------------------------------------------------------------------------------
Total $ 278.8 $ 1,313.1 $ 831.0
================================================================================================
</TABLE>
34
<PAGE>
The primary components of the Company's deferred tax assets and liabilities
and the related valuation allowances are as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
- ----------------------------------------------------------------------------------
<S> <C><C> <C><C>
Gross deferred tax assets
Employee benefit plans $ 314.9 $ 334.4
Special charges 135.3 -
Accrued liabilities 93.5 79.4
Insurance accruals 74.8 71.5
Construction contract accounting methods 93.0 70.6
Inventory 59.8 37.4
Intercompany profit 38.5 39.3
Net operating loss carryforwards 38.5 46.7
Intangibles 30.5 -
Foreign tax credits - 21.2
Alternative minimum tax carryforward 15.1 15.1
All other 125.7 80.1
- ----------------------------------------------------------------------------------
Total 1,019.6 795.7
- ----------------------------------------------------------------------------------
Gross deferred tax liabilities
Depreciation and amortization 85.0 124.5
Unrepatriated foreign earnings 25.5 35.6
Safe harbor leases 10.4 11.0
All other 99.6 85.0
- ----------------------------------------------------------------------------------
Total 220.5 256.1
- ----------------------------------------------------------------------------------
Valuation allowances
Net operating loss carryforwards 26.3 30.7
All other 3.7 33.3
- ----------------------------------------------------------------------------------
Total 30.0 64.0
- ----------------------------------------------------------------------------------
Net deferred income tax asset $ 769.1 $ 475.6
==================================================================================
</TABLE>
The Company has provided for the potential repatriation of certain
undistributed earnings of its foreign subsidiaries and considers earnings above
the amounts on which tax has been provided to be permanently reinvested. While
these additional earnings could become subject to additional tax if repatriated,
such a repatriation is not anticipated. Any additional amount of tax is not
practicable to estimate.
The Company has net operating loss carryforwards which expire as follows:
1999 through 2003, $49.3 million; 2004 through 2008, $18.8 million; 2009 through
2010, $1.9 million. The Company also has net operating loss carryforwards of
$43.6 million with indefinite expiration dates. Reconciliations between the
actual provision for income taxes and that computed by applying the U.S.
statutory rate to income from continuing operations before income taxes and
minority interest are as follows:
35
<PAGE>
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision computed at statutory rate $ (97.6) $ (459.6) $ (290.9)
Reductions (increases) in taxes resulting from:
Tax differentials on foreign earnings (19.8) (4.3) 14.2
State income taxes, net of federal income tax benefit (7.8) (12.0) (7.0)
Net operating losses - - 22.7
Special charges (109.0) (3.0) (3.0)
Federal income tax settlement - - 16.1
Nondeductible goodwill (12.2) (12.5) (8.9)
Other items, net 2.0 - 8.4
- -------------------------------------------------------------------------------------------------
Total $ (244.4) $ (491.4) $ (248.4)
=================================================================================================
</TABLE>
The Company has received statutory notices of deficiency for the 1990 and
1991 tax years from the Internal Revenue Service (IRS) of $92.9 million and
$16.8 million, respectively, excluding any penalties or interest. The Company
believes it has meritorious defenses and does not expect that any liability
resulting from the 1990 or 1991 tax years will result in a material adverse
effect on its results of operations or financial position. In 1996, the Company
reached settlements with the IRS for certain matters including the 1989 taxable
year. As a result of the settlement for the 1989 taxable year, the Company
recognized tax benefits and net income was increased by $16.1 million in 1996.
Note 7. Special Charges and Credits
The Company has incurred various non-recurring transactions resulting
from acquisitions, profit initiatives, and industry downturns as summarized
below:
Asset Related Charges. Asset related charges include impairments and
write-offs of intangible assets and excess and/or duplicate machinery,
equipment, inventory and capitalized software. Charges also include write-offs
and lease cancellation costs related to acquired information technology
equipment replaced with the Company's standard common office equipment and exit
costs on other leased assets.
Personnel Charges. Personnel charges include severance and related costs
incurred to action announced employee reductions and personnel costs related to
change of control.
Facility Consolidation Charges. Facility consolidation charges include
costs to dispose of owned properties or exit leased facilities.
Merger Transaction Charges. Merger transaction costs include investment
banking, filing fees, legal and professional fees and other merger related
costs.
Other Charges. Other charges include eliminating duplicate agents,
contract cancellation costs and eliminating other duplicate capabilities.
36
<PAGE>
<TABLE>
<CAPTION>
1998 SPECIAL CHARGES
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
Business Segment
Energy Services Group $ 452.7 $ 156.7 $ 93.3 $ - $ 18.4 $ 721.1
Engineering & Construction Group 7.9 19.1 7.9 - 4.7 39.6
Dresser Equipment Group 18.1 1.4 1.6 - - 21.1
General corporate 30.7 57.5 23.4 64.0 22.7 198.3
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 509.4 $ 234.7 $ 126.2 $ 64.0 $ 45.8 $ 980.1
Utilized $ (509.4) $ (44.5) $ (3.4) $ (59.5) $ (4.2) $ (621.0)
- ---------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 $ -- $ 190.2 $ 122.8 $ 4.5 $ 41.6 $ 359.1
===========================================================================================================================
</TABLE>
The third quarter of 1998 financial results include a pretax charge of
$945.1 million ($722.0 million after tax) to provide for costs associated with
the Merger and industry downturn due to declining oil and gas prices. During the
fourth quarter, an additional charge of $35.0 million ($24.0 million after tax)
was taken to provide $30.0 million for additional personnel reduction costs
covering approximately 2,750 employees within the Energy Services Group and $5.0
million for additional facility consolidations within the Energy Services Group.
The above charges were reflected in the following captions of the
consolidated statements of income:
Twelve Months Ended
Millions of dollars December 31, 1998
- ------------------------------------------------
Cost of services $ 68.2
Cost of sales 24.4
Special charges and credits 887.5
- --------------------------------------------------
Total $ 980.1
==================================================
Most restructuring activities accrued for in the 1998 special charges are
expected to be completed and expended by the end of 1999. The exceptions are
reserves for losses on facilities to be disposed of and any other actions, which
may require negotiations with outside parties extending past the end of the
year. Through December 31, 1998 the Company used $111.5 million in cash for
items associated with the 1998 special charges. The unutilized special charge
reserve balance at December 31, 1998 is expected to result in future cash
outlays of approximately $330.0 million during 1999 and possibly into 2000.
ASSET RELATED CHARGES
As a result of the Merger, Halliburton and Dresser's completion products
operations and its formation evaluation businesses have been combined, excluding
Halliburton's logging-while-drilling (LWD) business and a portion of its
measurement-while-drilling (MWD) business which were required to be disposed of
in connection with a Department of Justice consent decree. See Note 14. Based on
the change in strategic direction, the outlook for the industry, the decision to
standardize equipment product offerings and the expected loss on the disposition
of the LWD business, the Company recorded impairments based upon anticipated
future cash flows in accordance with SFAS 121. This resulted in write-downs of
excess of cost over net assets acquired and associated long-lived assets
associated to the directional drilling and formation evaluation businesses
acquired in 1993 from Smith International Inc., the formation evaluation
business acquired in the 1988 acquisition of Gearhart Industries, Inc., and Mono
Pumps and AVA acquired in 1990 and 1992 as follows:
37
<PAGE>
<TABLE>
<CAPTION>
Excess of Related
Cost Long-
Over Net Lived
Millions of dollars Assets Assets Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Drilling operations of pre-merger Halliburton Energy Services $125.2 $ 95.7 $220.9
Logging operations of pre-merger Halliburton Energy Services 51.2 53.8 105.0
Mono industrial and oilfield pump operations of Dresser 43.6 -- 43.6
AVA completion products business of Dresser Oil Tools 33.5 3.5 37.0
Abandonment of a trademark 0.7 -- 0.7
- -------------------------------------------------------------------------------------------------------
Total $254.2 $153.0 $407.2
=======================================================================================================
</TABLE>
As discussed below, the merger caused the Company to reevaluate the
realizability of excess cost over net assets acquired and related long-lived
assets of these product service lines. Each business was considered to be
impaired under SFAS No. 121 guidance.
The overall market assumptions on which the impairment computations were
made assumed that 1999 calendar year drilling activity as measured by worldwide
rig count would be 1900 rigs which was up from the 1700 level in the third
quarter of 1998. Rig count for calendar year 2000 and beyond was assumed to
increase about 3% per year based upon estimated long-term growth in worldwide
demand for oil and gas. These assumptions were based on market data available at
the time of the merger.
In addition to these assumptions, management utilized a 10 year timeframe
for future projected cash flows, a discount rate that approximates its average
cost of capital, and specific assumptions for the future performance of each
product service line, the most significant of which are discussed below. In
each case, these analyses represented management's best estimate of future
results for these product service lines.
Drilling Operations of pre-merger Halliburton Energy Services. Our pre-merger
drilling business consisted of logging-while-drilling ("LWD"), measurement-
while-drilling ("MWD") and directional drilling services. The majority of the
pre-merger LWD business and a portion of the pre-merger MWD business
("Pathfinder") were required to be sold under the Department of Justice Consent
Decree. We plan to integrate the remaining drilling business with the Sperry
Sun operations of Dresser. Our strategy will focus generally on operating under
the Sperry Sun name and using Sperry Sun's superior technology, tools and
industry reputation. Our remaining pre-merger drilling assets and technology
are to be de-emphasized as they wear out or become obsolete. These tools will
not be replaced resulting in significant decreases in future cash flows and an
impairment of the excess of cost over net assets and related long-lived assets.
Significant forecast assumptions included a revenue decline in the remaining
pre-merger drilling business due to the Pathfinder sale in the first year.
Related revenue and operating income over the following 10 years were projected
to decline due to reduced business opportunities resulting from our shift in
focus toward Sperry Sun's tools and technologies. In addition to the $125.2
million impairment of excess of cost over net assets acquired, related long-
lived asset impairments consisted of $61.0 million of property and equipment and
$13.7 million of related spare parts, the value of which was estimated using the
held for use model during the forecast period. In addition, an impairment of
$3.0 million was recorded related to property and equipment and $18.0 million of
spare parts sold in the Pathfinder sale using the held for sale model.
Logging Operations of pre-merger Halliburton Energy Services. The merger of
Halliburton and Dresser enabled the acceleration of a formation evaluation
strategy. This strategy takes advantage of Sperry Sun's LWD competitive
position and reputation for reliability combined with our Magnetic Resonance
Imaging Logging ("MRIL") technology acquired with the NUMAR Corporation
acquisition in 1997. Prior to the merger, we were focused on growing the
traditional logging business while working toward development of new systems to
maximize the MRIL technology. The merger allows us to implement the new
strategy and place the traditional logging business in a sustaining mode. This
change in focus and strategy will result in a shift of operating cash flows away
from our traditional logging business creating an impairment of the excess of
cost over net assets and related long-lived assets related to our logging
business.
38
<PAGE>
Significant forecast assumptions included revenues decreasing slowly over
the 10-year period, reflecting the decline in the traditional logging markets.
Operating income initially was forecasted to increase due to cost cutting
activity, and then decline as revenue decreased due to the significant fixed
costs in this product service line. In addition to the $51.2 million impairment
of the excess of cost over net assets acquired, related long-lived asset
impairments consisted of $22.0 million of property and equipment and $31.8
million of spare parts which management estimated using the held for use model
during the forecast period.
Mono Pump operations of pre-merger Dresser. The amount of the impairment is
$43.6 million, all of which represents excess of cost over net assets acquired
associated with the business.
Our strategy for Mono Pump going forward from the merger is to focus
primarily on the oilfield business including manufacturing power sections for
drilling motors. The prior strategy included emphasis on non-oilfield related
applications of their pumping technology and the majority of Mono Pump revenues
were related to non-oilfield sales. The change in strategy will result in
reduced future cash flows resulting in an impairment of the excess of costs over
net assets acquired.
Significant forecast assumptions included stable revenue for several years
and then slowly declining due to decreasing emphasis of industrial market
applications. Operating income was forecasted to initially be even with current
levels but then decline over the period as revenues declined and fixed costs per
unit increased.
AVA Operations of Dresser Oil Tools. The amount of the impairment is $37.0
million of which $33.5 million relates to excess of costs over net assets
acquired.
The plan for Dresser's AVA business line (which supplies subsurface safety
valves and other completion equipment) is to rationalize product lines which
overlap with Halliburton's pre-existing completion equipment business line. The
vast majority of the AVA product lines will be de-emphasized except for
supporting the installed base of AVA equipment and specific special order
requests from customers. AVA products are generally aimed at the high-end
custom completion products market. Our strategy will be to focus on standardized
high-end products based upon pre-merger Halliburton designs thus reducing future
AVA cash flows and impairing its assets and related excess of costs over net
assets acquired.
Additional Asset Related Charges. Additional asset related charges include:
----------------------------------
. $37.3 million for various excess fixed assets as a result of merging
similar product lines. The Company has no future use for these assets
and plans to scrap them in the near future.
. $33.7 million for other assets related to capitalized software, which
became redundant with the merger. Major components included redundant
computer aided design systems and capitalized costs related to a
portion of the Company's enterprise-wide information system abandoned
due to changed requirements of the post merger company. The redundant
computer aided design systems were in both the energy services group
and the engineering and construction group and were immediately
abandoned and replaced by superior systems required to meet the needs
of the merged company.
. $25.6 million for the inventory charge relates to excess inventory as
a result of merging similar product lines and/or industry downturn.
This included approximately $16.7 million related to overlapping
product lines and excess inventory in the completion products
business and $8.9 million related to various Dresser Equipment Group
divisions due to excess inventory related to industry downturn.
Inventory that was overlapping due to the merger was segregated and
has been scrapped. Inventory reserves were increased to cover the
estimated write-down to market for inventory determined to be excess
as a result of the industry downturn. The inventory will be used in
the future. Any future sales are expected to approximate the new
lower carrying value of the inventory.
. $4.6 million for the impairment of excess of cost over net assets
acquired related to well construction technology that became
redundant once the merger was complete due to similar but superior
technology offered by Sperry Sun. This technology will no longer be
used as part of our Integrated Service offerings, thus reducing
future cash flows. The Company will, however, continue to market this
technology individually to third parties. An impairment based on a
"held
39
<PAGE>
for use" model was calculated using a ten year discounted cash flow
model with a discount rate which approximates our average cost of
capital.
. $1.0 million write-off of excess of cost over net assets acquired
related to the Steamford product line in the Dresser Equipment Group
Valve & Control Division. Management made the strategic decision to
exit this product line.
PERSONNEL CHARGES
Personnel charges in 1998 reflect announced headcount reductions of
10,850 affecting all segments, corporate and shared service functions. In total,
approximately 75% of the reductions will occur within the Energy Services Group.
During 1998, the Company reduced employment levels, primarily operations
personnel by approximately 5,000 (approximately 3,000 within North America and
1,100 within Latin America), including 4,700 within the Energy Services Group.
The remainder will be incurred over the balance of 1999, primarily during the
first and second quarter of the year.
FACILITY CONSOLIDATION CHARGE
As a result of the Merger and the industry downturn, the Company plans to
vacate, sell or close over 400 service, manufacturing and administrative
facilities throughout the world. Until the properties included in the facility
consolidation charges are vacated, the Company plans to continue its normal
depreciation, lease costs and operating expenses which will be charged against
the Company's results of operations. The majority of these facilities are
within the Energy Services Group. The liability accrual of $126.2 million
included:
. $85.5 million write-down of owned facilities for anticipated losses
on planned disposals based upon the difference between the assets'
net book value and anticipated future net realizable value based upon
the to be disposed of method.
. $37.2 million lease buyout costs or early lease termination cost
including:
. estimated costs to buy out leases;
. facility refurbishment/restoration expenses as required by the
lease in order to exit property;
. sublease differentials, as applicable; and
. related broker/agent fees to negotiate and close buyouts.
. $3.5 million facility maintenance costs to maintain vacated
facilities between the abandonment date and the expected disposition
date. Maintenance costs include lease expense, depreciation,
maintenance, utilities, and third party administrative costs.
During the fourth quarter of 1998, the Company sold or returned 33
service and administrative facilities. As of December 31, 1998, the Company had
an additional 100 vacated properties which it is in the process of selling,
subleasing or returning to the owner.
MERGER TRANSACTION CHARGES
Halliburton and Dresser merger transaction costs amounted to $64.0
million. At December 31, 1998, $4.5 million in estimated merger transaction
costs remain to be paid.
OTHER CHARGES
Other charges of $45.8 million include the estimated contract exit costs
associated with the elimination of duplicate agents and suppliers in various
countries throughout the world. These costs will occur during 1999 in
connection with the Company's renegotiation of these contractual agreements.
At December 31, 1998, no adjustments or reversals to the remaining
accrued special charges are planned.
40
<PAGE>
1997 SPECIAL CHARGES
During 1997 the Company's results of operations reflect various non-
recurring transactions resulting from acquisitions and restructuring activities
incurred by Halliburton, Dresser, NUMAR and Landmark, as follows:
<TABLE>
<CAPTION>
1997 Merger
Special Asset Personnel Facility Transaction
Charges Charges Charges Charges Costs Other Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charges $ 32.7 $ 5.6 $11.0 $ 8.6 $(41.7) $ 16.2
Utilized (32.7) (5.6) (4.9) (8.6) 41.7 (10.1)
- ----------------------------------------------------------------------------------
12/31/97 $ 0.0 $ 0.0 $ 6.1 $ 0.0 $ 0.0 6.1
Utilized - - (6.1) - - (6.1)
- ----------------------------------------------------------------------------------
12/31/98 $ - $ - $ - $ - $ - $ -
- ----------------------------------------------------------------------------------
</TABLE>
The above charges were reflected in the following captions of the
consolidated statements of income:
Twelve months ended
Millions of dollars December 31, 1997
- --------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates $ 4.9
Cost of sales 5.1
Special charges and credits 6.2
- --------------------------------------------------------------------
Total $ 16.2
====================================================================
Net special charges for 1997 of $16.2 million related to various
acquisition and restructuring activities consisted of the following:
. other credits include a $41.7 million pretax gain paid to Dresser by
Shaw Industries as consideration to terminate a call option
provision held by Dresser under the Bredero-Shaw pipe-coating joint
venture agreement,
. $13.1 million for restructuring activities at Dresser-Rand to close
a European manufacturing facility and discontinue a product line
along with associated support locations. The total includes $7.0
million of asset related charges and $6.1 million in facility
related charges,
. facility charges include $4.9 million for our 49% share of a
facility restructuring at Ingersoll-Dresser Pump, a joint venture
accounted for on the equity basis,
. asset charges, including:
- $6.7 million write-off of an investment in an oil and gas field
in the former Soviet Union which was deemed worthless,
- $6.4 million write-off of excess of cost over net assets acquired
associated with a UK manufacturing operation which was
substantially reduced in scope, and
- $12.6 million loss on the sale of certain assets of Dresser's
SubSea operation to Global Industries, Ltd.,
. merger transaction costs include $8.6 million of professional fees
associated with the acquisition of NUMAR Corporation, and
. personnel charges include a $5.6 million charge for negotiated early
retirement incentives for two Dresser executives.
Additionally, the Company recorded its share of personnel reduction charges
of $30.2 million during the two-month period ended December 31, 1997 to reduce
employment levels by approximately 1,000 at Dresser-Rand and Ingersoll-Dresser
Pump. The $30.2 million of personnel reduction charges is comprised of $23.3
million for Dresser-Rand and $6.9 million for Ingersoll-Dresser Pump. These
costs have been recorded in the consolidated statements of shareholders' equity
as part of conforming the fiscal year of Dresser to Halliburton's calendar year.
See Note 1.
41
<PAGE>
1996 SPECIAL CHARGES
1996 Special Charges of $85.8 million consisted of the following
categories:
<TABLE>
<CAPTION>
Landmark:
Restructuring: Acquisition of
Engineering & Assets from
Millions of Construction and Landmark Western Atlas
dollars Shared Services Acquisition Costs International Inc. Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charges $ 61.2 $ 12.4 $ 12.2 $ 85.8
Utilized (3.5) (12.4) (12.2) (28.1)
- -----------------------------------------------------------------------------------------
12/31/96 57.7 - - 57.7
Utilized (32.3) - - (32.3)
Transferred to
other accounts (1) (25.4) - - (25.4)
- -----------------------------------------------------------------------------------------
12/31/97 $ 0 $ 0 $ 0 $ 0
=========================================================================================
</TABLE>
(1) Items of a longer-term nature were reclassified to other liabilities at the
end of 1997.
Components of the charge were as follows:
. $61.2 million in relation to reorganization of the Engineering and
Construction Group and implementation of Shared Services across the
Company, including:
- $41.0 million related to 1,200 planned personnel reductions to
reorganize the Engineering and Construction Group and combine
administrative functions into a shared service organization. This
amount includes estimated severance, vesting of restricted stock,
outplacement services and employee legal claims,
- Asset related charges of $7.5 million for lease exit costs on
excess space,
- Asset related charges of $9.6 million to exit Engineering and
Construction Group businesses as follows:
. $2.5 million to write-down fixed assets to estimated realizable
value in a product line being exited, and
. $7.1 million write-off of investment in and receivables from an
eastern European engineering joint venture which was
terminated, and
- $3.1 million write-off of capitalized costs associated with an
abandoned system,
. merger transaction costs of $12.4 million for professional fees
incurred in relation to the merger with Landmark Graphics Corporation,
including investment banking, legal and other professional fees, and
. $12.2 million charge related to Landmark's acquisition of certain
assets and liabilities from Western Atlas International, Inc. in the
first quarter of 1996:
- Other charges of $11.3 million for the write-off of acquired in-
process research and development activities that had not reached
technological feasibility or were deemed to have no alternative
future use, and
- Asset charges of $0.9 million recorded by Landmark to write-off
redundant assets.
The special charges to net income in the third quarter of 1996 were offset
by tax credits during the same quarter of $43.7 million due to the recognition
of net operating loss carryforwards and the settlement during the quarter of
various issues with the Internal Revenue Service (IRS). The Company reached
agreement with the IRS and recognized net operating loss carryforwards of $62.5
million ($22.5 million in tax benefits) from the 1989 tax
42
<PAGE>
year. The net operating loss carryforwards were utilized in the 1996 tax year.
In addition, the Company also reached agreement with the IRS on issues related
to intercompany pricing of goods and services for the tax years 1989 through
1992 and entered into an advanced pricing agreement for the tax years 1993
through 1998. As a result of these agreements with the IRS, the Company
recognized tax benefits of $16.1 million. The Company also recognized net
operating loss carryforwards of $14.0 million ($5.1 million in tax benefits) in
certain foreign areas due to improving profitability and restructuring of
foreign operations.
Note 8. Lines of Credit, Notes Payable and Long-Term Debt
Short-term notes payable and current maturities consists of:
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------
Short-term notes payable $ 515.0 $ 50.5
Current maturities of long-term debt 58.5 7.4
- ------------------------------------------------------------------------------
Total $ 573.5 $ 57.9
==============================================================================
At year-end 1998, the Company had committed short-term lines of credit
totaling $550.0 million available and unused, and other short-term lines of
credit totaling $315.0 million. There were no borrowings outstanding under
these facilities. The remaining short-term debt consists primarily of $462.9
million in commercial paper with an effective interest rate of 5.30% and $52.1
million in foreign bank loans and overdraft facilities with varying rates of
interest.
Long-term debt at the end of 1998 and 1997 consists of the following:
Millions of dollars 1998 1997
- -------------------------------------------------------------------------------
6.25% notes due June 2000 $ 300.0 $ 300.0
7.6% debentures due August 2096 300.0 300.0
8.75% debentures due February 2021 200.0 200.0
8% senior notes due April 2003 138.6 149.5
Medium-term notes due 1999 through 2027 450.0 300.0
Term loans at LIBOR (GBP) plus 0.75% payable in
semi-annual installments through March 2002 29.4 45.9
Other notes with varying interest rates 10.2 8.9
1,428.2 1,304.3
Less current portion 58.5 7.4
- -------------------------------------------------------------------------------
Total long-term debt $1,369.7 $1,296.9
===============================================================================
The Company has issued notes under its medium-term note program as follows:
<TABLE>
<CAPTION>
Amount Issue Date Due Rate Prices Yield
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125 million 02/11/97 02/01/2027 6.75% 99.78% 6.78%
$ 50 million 05/12/97 05/12/2017 7.53% Par 7.53%
$ 50 million 07/08/97 07/08/1999 6.27% Par 6.27%
$ 75 million 08/05/97 08/05/2002 6.30% Par 6.30%
$150 million 11/24/98 12/01/2008 5.63% 99.97% 5.63%
- -------------------------------------------------------------------------------
</TABLE>
The Company's 8.75% debentures due February 2021 do not have sinking fund
requirements and are not redeemable prior to maturity. The medium-term notes
may not be redeemed at the option of the Company prior to maturity. There is no
sinking fund applicable to the notes. Each holder of the 6.75% medium-term
notes has the
43
<PAGE>
right to require the Company to repay such holder's notes, in whole or in part,
on February 1, 2007. The net proceeds from the sale of the notes were used for
general corporate purposes.
During March 1997, a subsidiary of the Company incurred $56.3 million of
term loans in connection with the acquisition of the Royal Dockyard in Plymouth,
England (the Dockyard Loans). The Dockyard Loans are denominated in GBP and
bear interest at LIBOR (GBP) plus 0.75% payable in semi-annual installments
through March 2002. Pursuant to certain terms of the Dockyard Loans, a
subsidiary of the Company was initially required to provide a compensating
balance of $28.7 million which is restricted as to use by the subsidiary. The
compensating balance amount decreases in proportion to the outstanding debt
related to the Dockyard Loans and earns interest at a rate equal to that of the
Dockyard Loans. At December 31, 1998, the compensating balance of $14.9 million
is included in other assets in the consolidated balance sheets.
Long-term debt matures over the next five years as follows: $58.5 million
in 1999; $308.3 million in 2000; $8.3 million in 2001; $85.3 million in 2002;
and $138.8 million in 2003.
Note 9. 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% senior notes (the Notes) remain outstanding and the Notes are fully
and unconditionally guaranteed by the Company. See Note 8. As long as the
Notes remain outstanding, summarized financial information of Dresser will be
presented in periodic reports filed by the Company on Form 10-K and Form 10-Q.
The Company has not presented separate financial statements and other
disclosures concerning Dresser because management has determined such
information is not material to holders of the Notes.
In January 1999, as part of the legal reorganization associated with the
Merger, Halliburton Delaware, Inc., a first tier holding company subsidiary, was
merged into Dresser Industries, Inc. As a result of this action, the majority
of the operating assets and activities of the combined company in 1999 will be
included within the legal structure of Dresser Industries, Inc.
<TABLE>
<CAPTION>
Dresser Industries, Inc.
Financial Position December 31 October 31
- --------------------------------------------------------------------------------------------
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 2,417.2 $ 2,471.6
Noncurrent assets 2,613.7 2,627.2
- --------------------------------------------------------------------------------------------
Total $ 5,030.9 $ 5,098.8
============================================================================================
Current liabilities $ 1,388.6 $ 1,687.4
Noncurrent liabilities 1,544.4 1,535.5
Minority interest 153.5 143.7
Shareholders' equity 1,944.4 1,732.2
- --------------------------------------------------------------------------------------------
Total $ 5,030.9 $ 5,098.8
============================================================================================
<CAPTION>
Dresser Industries, Inc. Twelve months ended
--------------------------------------------------
Operating Results December 31 October 31 October 31
- -----------------------------------------------------------------------------------------------------------
Millions of dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 8,135.7 $ 7,453.0 $ 6,561.5
- -----------------------------------------------------------------------------------------------------------
Operating income $ 677.1 $ 600.6 $ 485.3
- -----------------------------------------------------------------------------------------------------------
Net income $ 343.8 $ 318.0 $ 257.5
===========================================================================================================
</TABLE>
44
<PAGE>
Note 10. Commitments and Contingencies
Leases. At year end 1998, the Company and its subsidiaries were obligated
under noncancelable operating leases, expiring on various dates through 2021,
principally for the use of land, offices, equipment, field facilities, and
warehouses. Aggregate rentals charged to operations for such leases totaled
$207.1 million in 1998, $202.8 million in 1997 and $177.8 million in 1996.
Future aggregate rentals on noncancelable operating leases are as follows: 1999,
$147.3 million; 2000, $121.0 million; 2001, $96.6 million; 2002, $83.1 million;
2003, $60.9 million; and thereafter, $150.7 million.
Asbestosis Litigation. Since 1976, Dresser and its former divisions or
subsidiaries have been involved in litigation resulting from allegations that
third parties had sustained injuries and damage from the inhalation of asbestos
fibers contained in certain products manufactured by Dresser and its former
divisions or subsidiaries or companies acquired by Dresser. In addition, the
Engineering and Construction Group businesses are involved in litigation
resulting from allegations that third parties sustained injuries and damage from
the inhalation of asbestos fibers contained in certain materials which were used
in various construction and renovation projects in the past.
Dresser and its former divisions or subsidiaries have entered into
agreements with insurance carriers which cover, in whole or in part, indemnity
payments, legal fees and expenses for certain categories of claims. Dresser and
its former divisions or subsidiaries are in negotiation with carriers over
coverage for the remaining categories of claims. Because these agreements are
governed by exposure dates, payment type and the product involved, the covered
amount varies by individual claim. In addition, lawsuits are pending against
several carriers seeking to recover additional amounts related to these claims.
Engineering and Construction Group businesses are also involved in negotiations
with carriers over coverage of their claims.
Since 1976, approximately 190,000 claims have been filed against various
current and former divisions and subsidiaries of the Company. Most of these
claims relate to Dresser and its former divisions or subsidiaries.
Approximately 120,000 of these claims have been settled or disposed of at a
gross cost of approximately $89 million with insurance carriers responsible for
all but approximately $30 million. Claims continue to be filed with 36,400 new
claims filed in 1998. Provision has been made for the estimated exposure, based
on historical experience and settlements and expected recoveries from insurance
carriers based upon the agreements in place with the carriers or estimated
recoveries where agreements are still under negotiation. Management has no
reason to believe that the insurance carriers will not be able to meet their
share of future obligations under the agreements. At the end of 1998, there
were 70,500 open claims, including 14,000 for which settlements are pending.
This compares with 66,300 open claims at the end of 1997. The accrued
liabilities for these claims and corresponding receivables from carriers were as
follows:
Years ended December 31
---------------------------
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------
Accrued liability $ 48 $ 32
Receivables from Insurance Companies (34) (22)
- ------------------------------------------------------------------------------
Net asbestos liability $ 14 $ 10
==============================================================================
Management recognizes the uncertainties of litigation and the possibility
that a series of adverse rulings could materially impact operating results.
However, based upon the Company's historical experience with similar claims, the
time elapsed since Dresser and its former divisions or subsidiaries discontinued
sale of products containing asbestos, and management's understanding of the
facts and circumstances that gave rise to such claims, management believes that
the pending asbestos claims will be resolved without material effect on the
Company's financial position or results of operations.
Dispute with Global Industrial Technologies, Inc. Pursuant to an agreement
entered into at the time of the spin-off, Global Industrial Technologies, Inc.
("Global" formerly INDRESCO, Inc.) assumed liability for asbestos related claims
filed against Dresser after July 31, 1992 relating to refractory products
manufactured or marketed by the Harbison-Walker Refractories Division of Dresser
Industries, Inc. These asbestos claims are subject to certain agreements with
insurance carriers that cover expense and indemnity payments. However, the
insurance coverage is
45
<PAGE>
incomplete and Global has to date paid any uncovered portion of those asbestos
claims with its own funds. Global now disputes that it assumed liability for any
of these asbestos claims based upon Dresser's negligence, the acts of Harbison-
Walker prior to its merger with Dresser in 1967, or punitive damages. In order
to resolve these assertions, Global has invoked the dispute resolution
provisions of the 1992 agreement, which require binding arbitration. We expect
that Global's claim for reimbursement will be in excess of $40 million. In
addition, Global is seeking relief from responsibility for pending claims based
upon Dresser's negligence, the acts of Harbison-Walker prior to its merger with
Dresser in 1967, punitive damages, and for all similar future claims. The
Company believes that these new assertions by Global are without merit and
intends to vigorously defend itself against them.
Environmental. The Company is involved through its subsidiaries as a
potential responsible party (PRP) in remedial activities to clean up various
"Superfund" sites under applicable federal law which imposes joint and several
liability, if the harm is indivisible, on certain persons without regard to
fault, the legality of the original disposal, or ownership of the site.
Although it is very difficult to quantify the potential impact of compliance
with environmental protection laws, management of the Company believes that any
liability of the Company with respect to all but one of such sites will not have
a material adverse effect on the results of operations of the Company.
With respect to a site in Jasper County, Missouri (Jasper County Superfund
Site), sufficient information that would enable management to quantify the
Company's potential liability has not been developed and management believes the
process of determining the nature and extent of remediation at this site and the
total costs thereof will be lengthy. Brown & Root, Inc., now Kellogg Brown &
Root, Inc. (KBR), a subsidiary of the Company, has been named as a PRP with
respect to the Jasper County Superfund Site by the Environmental Protection
Agency (EPA). The Jasper County Superfund Site includes areas of mining activity
that occurred from the 1800s through the mid 1950s in the southwestern portion
of Missouri. The site contains lead and zinc mine tailings produced from mining
activities. KBR is one of nine participating PRPs that have agreed to perform a
Remedial Investigation/Feasibility Study (RI/FS), which, due to various delays,
is not expected to be completed until late 1999. Although the entire Jasper
County Superfund Site comprises 237 square miles as listed on the National
Priorities List, in the RI/FS scope of work, the EPA has only identified seven
areas, or subsites, within this area that need to be studied and then possibly
remediated by the PRPs. Additionally, the Administrative Order on Consent for
the RI/FS only requires KBR to perform RI/FS work at one of the subsites within
the site, the Neck/Alba subsite, which only comprises 3.95 square miles. KBR's
share of the cost of such a 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 the present time KBR cannot
determine the extent of its liability, if any, for remediation costs or natural
resource damages on any reasonably practicable basis.
The accrued liabilities for environmental liabilities were $28.9 million as
of December 31, 1998 and $32.2 million as of December 31, 1997. Amounts accrued
in 1998 were $2.8 million and amounts paid out were $6.1 million.
General Litigation. The purchasers of Dresser's former hand tool division
sued Dresser for fraud in connection with the October 1983 transaction. In May
1994, the jury returned a verdict awarding the plaintiffs $4.0 million in
compensatory damages and $50.0 million in punitive damages. On October 13,
1994, the Court ordered a reduction of damages from $54.0 to $12.0 million. On
October 15, 1996, the Court of Appeals issued its decision reversing the trial
court's decision as to compensatory and punitive damages and remanding the case
for a new trial on damages. On remand, the trial court ordered that the new
trial contemplated by the appellate decision be limited to compensatory damages
only, despite the express statement that punitive damages were also reversed,
and decided that the court would review the original punitive damages verdict
after the retrial on compensatory damages.
As of October, 1998 the trial was held on compensatory damages and
concluded with a jury award of $1. Following that, a hearing was held in
January, at which the judge reduced the punitive damage award from $50 million
to $650,000. The sum of $650,001 was paid during the first week of February
1999, and this case is now concluded.
46
<PAGE>
Merger. In connection with the Merger, Dresser and its directors have been
named as defendants in three lawsuits filed in late February of 1998 and early
March of 1998 in the Delaware Court of Chancery. The lawsuits each purports to
be a class action filed on behalf of Dresser's stockholders and alleges that the
consideration to be paid to Dresser's stockholders in the Merger is inadequate
and does not reflect the true value of Dresser. Each complaint also alleges that
the directors of Dresser have breached their fiduciary duties in approving the
Merger. One of the actions further alleges self-dealing on the part of the
individual defendants and asserts that the directors are obliged to conduct an
auction to assure that stockholders receive the maximum realizable value for
their shares. All three actions seek preliminary and permanent injunctive relief
as well as damages. On June 10, 1998 the court issued an order consolidating the
three lawsuits which requires the plaintiffs to file an amended consolidated
complaint "as soon as practicable." To date, plaintiffs have not filed an
amended complaint. The Company believes that the lawsuits are without merit and
intends to defend the lawsuits vigorously.
Other. The Company and its subsidiaries are parties to various other legal
proceedings. Although the ultimate dispositions of such proceedings are not
presently determinable, in the opinion of the Company any liability that may
ensue will not be material in relation to the consolidated financial position
and results of operations of the Company.
Note 11. Income Per Share
Millions of dollars and shares
except per share data 1998 1997 1996
- ------------------------------------------------------------------------------
Net income (loss) $ (14.7) $ 772.4 $ 557.9
- ------------------------------------------------------------------------------
Basic weighted average shares 438.8 431.1 429.2
Effect of common stock equivalents - 5.0 2.9
- ------------------------------------------------------------------------------
Diluted weighted average shares 438.8 436.1 432.1
- ------------------------------------------------------------------------------
Income (loss) per common share:
Basic $ (0.03) $ 1.79 $ 1.30
- ------------------------------------------------------------------------------
Diluted $ (0.03) $ 1.77 $ 1.29
- ------------------------------------------------------------------------------
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. Diluted earnings per share for
1998 excludes 3.3 million potential common shares which were antidilutive for
earnings per share purposes. Also excluded from the computation of diluted
earnings per share are options to purchase 1.4 million shares of common stock in
1998; 1.1 million shares in 1997; and 2.6 million shares in 1996. These options
were outstanding during these respective years, but were excluded because the
option exercise price was greater than the average market price of the common
shares.
Note 12. Common Stock
On June 25, 1998, the Company's shareholders voted to increase the
Company's number of authorized shares from 400.0 million to 600.0 million.
On May 20, 1997, the Company's shareholders voted to increase the Company's
number of authorized shares from 200.0 million shares to 400.0 million shares.
On June 9, 1997, the Company's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend distributed on July 21, 1997 to
shareholders of record on June 26, 1997. The par value of the Company's common
stock of $2.50 per share remained unchanged. As a result of the stock split,
$556.3 million was transferred from paid-in capital in excess of par value to
common stock. Historical share and per share amounts presented on the
supplemental consolidated statements of income and in the discussion below
concerning stock options and restricted stock have been restated to reflect the
stock split.
47
<PAGE>
The Company's 1993 Stock and Long-Term Incentive Plan (1993 Plan) provides
for the grant of any or all of the following types of awards: (1) stock
options, including incentive stock options and non-qualified stock options; (2)
stock appreciation rights, in tandem with stock options or freestanding; (3)
restricted stock; (4) performance share awards; and (5) stock value equivalent
awards. Under the terms of the 1993 Plan as amended, 27 million shares of the
Company's Common Stock have been reserved for issuance to key employees. At
December 31, 1998, 14.6 million shares were available for future grants under
the 1993 Plan.
In connection with the acquisitions of Dresser, Landmark Graphics
Corporation (Landmark) and NUMAR Corporation (NUMAR) (see Note 14), outstanding
stock options under the stock option plans maintained by Dresser, Landmark and
NUMAR were assumed by the Company. Stock option transactions summarized below
include amounts for the 1993 Plan, the Dresser plans using the acquisition
exchange rate of 1 share for each Dresser share, the Landmark plans using the
acquisition exchange rate of 1.148 shares for each Landmark share, and the NUMAR
plans using the acquisition exchange rate of .9664 shares for each NUMAR share.
The period from December 1997 to December 1998 includes Dresser's activities
from its fiscal year-end of October 1997 to December 1997 in order to conform
Dresser's fiscal year-end to Halliburton's calendar year-end.
<TABLE>
<CAPTION>
Exercise Weighted Average
Number of Price per Exercise Price
Stock Options Shares Share per Share
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 12,289,650 $ 2.90 - 29.73 $18.53
- -----------------------------------------------------------------------------------------------
Granted 4,295,409 14.48 - 29.57 27.49
Exercised (2,722,828) 2.90 - 23.88 16.72
Forfeited (445,660) 8.71 - 28.09 18.81
- -----------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 13,416,571 3.49 - 29.73 21.77
- -----------------------------------------------------------------------------------------------
Options assumed in acquisition 854,050 3.10 - 22.12 12.22
Granted 2,194,972 30.69 - 61.50 46.18
Exercised (3,684,923) 3.10 - 29.56 17.95
Forfeited (395,833) 9.15 - 39.88 22.69
- -----------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 12,384,837 3.10 - 61.50 26.55
- -----------------------------------------------------------------------------------------------
Granted 4,273,368 26.19 - 46.50 33.07
Exercised (2,435,393) 3.10 - 37.88 20.84
Forfeited (397,610) 5.40 - 54.50 33.64
- -----------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 13,825,202 $ 3.10 - 61.50 $29.37
===============================================================================================
</TABLE>
Options outstanding at December 31, 1998 are composed of the following:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------- ---------------------------
Weighted
Number of Average Weighted Number of Weighted
Shares at Remaining Average Shares at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.10 - 14.38 354,189 3.81 $10.36 354,189 $10.36
14.48 - 18.13 1,806,304 6.12 16.68 1,660,940 16.71
18.24 - 29.19 5,519,919 7.88 25.28 2,943,534 23.11
29.56 - 61.50 6,144,790 8.30 37.87 2,885,151 35.46
- ---------------------------------------------------------------------------------------------
$ 3.10 - 61.50 13,825,202 7.73 $29.37 7,843,814 $25.72
=============================================================================================
</TABLE>
48
<PAGE>
There were 6.9 million options exercisable with a weighted average exercise
price of $21.17 at December 31, 1997, and 6.5 million options exercisable with a
weighted average exercise price of $18.57 at December 31, 1996.
All stock options under the 1993 Plan, including options granted to
employees of Dresser, Landmark and NUMAR since the acquisition of such
companies, are granted at the fair market value of the Common Stock at the grant
date. Landmark, prior to its acquisition by the Company, had provisions in its
plans that allowed Landmark to set option exercise prices at a defined
percentage below fair market value.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. The weighted average assumptions and
resulting fair values of options granted are as follows:
<TABLE>
<CAPTION>
Assumptions
------------------------------------------------------------------------------ Weighted Average
Risk-Free Expected Expected Expected Fair Value of
Interest Rate Dividend Yield Life (in years) Volatility Options Granted
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 4.3 - 5.3% 1.2 - 2.7% 5 - 6.5 20.1 - 38.0% $11.63
1997 6.0 - 6.4% 1.0 - 2.7% 5 - 6.5 22.8 - 43.3% $17.29
1996 5.8 - 5.9% 1.6 - 2.7% 5 - 6.5 23.1 - 39.7% $ 9.44
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options generally expire ten years from the grant date. Stock
options vest over a three-year period, with one-third of the shares becoming
exercisable on each of the first, second and third anniversaries of the grant
date.
The Company accounts for its option plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for the Company's
stock option programs been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company's pro forma net income (loss) for 1998, 1997 and 1996 would
have been $(42.6) million, $750.3 million and $547.1 million, respectively,
resulting in diluted earnings (loss) per share of $(0.10), $1.72 and $1.27,
respectively.
Restricted shares awarded under the 1993 Plan for 1998, 1997 and 1996 were
414,510; 515,650; and 363,800, respectively. The shares awarded are net of
forfeitures of 136,540; 34,900; and 34,600 shares in 1998, 1997 and 1996,
respectively. The weighted average fair market value per share at the date of
grant of shares granted in 1998, 1997 and 1996 was $34.77, $45.29 and $28.24,
respectively.
The Company's Restricted Stock Plan for Non-Employee Directors (Restricted
Stock Plan) allows for each non-employee director to receive an annual award of
400 restricted shares of Common Stock as a part of compensation. The Company
reserved 100,000 shares of Common Stock for issuance to non-employee directors.
The Company issued 3,200; 3,200 and 3,600 restricted shares in 1998, 1997 and
1996, respectively, under this plan. At December 31, 1998, 20,400 shares have
been issued to non-employee directors under this plan. The weighted average
fair market value per share at the date of grant of shares granted in 1998, 1997
and 1996 was $36.31, $46.06 and $26.57, respectively.
The Company's Employees' Restricted Stock Plan was established for
employees who are not officers, for which 200,000 shares of Common Stock have
been reserved. At December 31, 1998, 170,300 shares (net of 26,700 shares
forfeited) have been issued. Forfeitures were 1,900; 14,600 and 8,400 in 1998,
1997 and 1996, respectively, and no further grants are being made under this
plan.
Under the terms of the Company's Career Executive Incentive Stock Plan, 15
million shares of the Company's Common Stock were reserved for issuance to
officers and key employees at a purchase price not to exceed par value of $2.50
per share. At December 31, 1998, 11.7 million shares (net of 2.2 million shares
forfeited) have been issued under the plan. No further grants will be made
under the Career Executive Incentive Stock Plan.
Restricted shares issued under the 1993 Plan, Restricted Stock Plan,
Employees' Restricted Stock Plan and the Career Executive Incentive Stock Plan
are limited as to sale or disposition with such restrictions lapsing
periodically over an extended period of time not exceeding ten years. The fair
market value of the stock, on the date of issuance, is being amortized and
charged to income (with similar credits to paid-in capital in excess of par
value)
49
<PAGE>
generally over the average period during which the restrictions lapse.
Compensation costs recognized in income for 1998, 1997 and 1996 were $7.6
million, $7.1 million and $6.9 million, respectively. At December 31, 1998, the
unamortized amount is $50.6 million.
Note 13. Series A Junior Participating Preferred Stock
The Company has previously declared a dividend of one preferred stock
purchase right (a Right) on each outstanding share of Common Stock. This
dividend is also applicable to each share of Halliburton Common Stock that was
issued subsequent to adoption of the Rights Agreement entered into with
ChaseMellon Shareholder Services, L.L.C. (the Rights Agent). Each Right
entitles its holder to buy one two-hundredth of a share of the Company's Series
A Junior Participating Preferred Stock, without par value, at an exercise price
of $75. These Rights are subject to certain antidilution adjustments, which
have been set out in the Rights Agreement entered into with the Rights Agent.
The Rights do not have any voting rights and are not entitled to dividends.
The Rights become exercisable in certain limited circumstances involving a
potential business combination. After the Rights become exercisable, each Right
will entitle its holder to an amount of Common Stock of the Company, or in
certain circumstances, securities of the acquirer, having in the aggregate, a
market value equal to two times the exercise price of the Right. The Rights are
redeemable at the Company's option at any time before they become exercisable.
The Rights expire on December 15, 2005. No event during 1998 made the Rights
exercisable.
Note 14. Acquisitions and Dispositions
Dresser Merger. On September 29, 1998 the Company completed the
acquisition of Dresser Industries, Inc. (the Merger), by converting the
outstanding Dresser common stock into an aggregate of approximately 176 million
shares of Common Stock of the Company. The Company has also reserved
approximately 7.3 million shares of common stock for outstanding Dresser stock
options and other employee and directors plans. The Merger qualified as a tax-
free exchange to Dresser's shareholders for U.S. federal income tax purposes and
was accounted for using the pooling of interests method of accounting for
business combinations. Accordingly, the Company's financial statements have
been restated to include the results of Dresser for all periods presented.
Beginning in 1998, Dresser's year-end of October 31 has been conformed to
Halliburton's calendar year-end. Periods through December 1997 contain
Dresser's information on a fiscal year-end basis combined with Halliburton's
information on a calendar year-end basis. For the two months ended December 31,
1997, Dresser had revenues of $1,110.2 million, operating income of $53.2
million, and net income of $35.8 million. Operating income for the two-month
period includes a pretax special charge of $30.2 million ($12.0 million after
tax and minority interest) related to Dresser's share of profit improvement
initiatives at the Dresser-Rand and Ingersoll-Dresser Pump joint ventures. The
$30.2 million pretax special charge is comprised of $23.3 million for Dresser-
Rand and $6.9 million for Ingersoll-Dresser Pump.
Results for the two-month period have been included in retained earnings,
and dividends of $33.2 million paid in December 1997 have been deducted from
retained earnings in the consolidated statements of shareholders' equity at
December 31, 1998 as conforming fiscal years. The change to Dresser's
cumulative translation adjustment account for the period between October 31,
1997 and December 31, 1997 of $14.8 million is also included in the consolidated
statements of shareholders' equity as conforming fiscal years. There were no
material transactions between Halliburton and Dresser prior to the Merger.
Combined and separate companies results of Halliburton and Dresser for the
periods preceding the merger are as follows:
50
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended Years ended
September 30 December 31
--------------------------------------------------------
Millions of dollars 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Halliburton $ 7,044.5 $ 8,818.6 $ 7,385.1
Dresser 6,019.5 7,453.0 6,561.5
- ----------------------------------------------------------------------------------------------------------------------------------
Combined $ 13,064.0 $ 16,271.6 $ 13,946.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss):
Halliburton $ 359.3 $ 454.4 $ 300.4
Dresser 282.3 318.0 257.5
1998 Special charge, net of tax (722.0) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Combined $ (80.4) $ 772.4 $ 557.9
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LWD Divestiture. In January 1999, in accordance with the consent decree
Halliburton entered into with the U.S. Department of Justice on September 29,
1998, an agreement was reached with W-H Energy Services, Inc. (W-H) for the sale
of Halliburton's logging-while-drilling (LWD) and related measurement-while-
drilling (MWD) business known as PathFinder and currently a part of the Energy
Services Group.
Completion of the sale of the PathFinder business was approved by the
Department of Justice on March 3, 1999. The Company expects to incur a loss on
the sale which is expected to be completed in March 1999. Halliburton will
provide separate LWD services through its Sperry Sun business unit, which was
acquired as part of the merger with Dresser and is now a part of Halliburton
Energy Services. In addition, Halliburton will continue to provide sonic LWD
services using its existing technologies, which it will share with PathFinder.
M-I L.L.C. Drilling Divestiture. In August 1998, the Company sold its 36%
interest in M-I L.L.C. (M-I) with no significant effect on net income for the
year. M-I was previously a part of the Energy Services Group. See Note 5.
Acquisition of Devonport Royal Dockyard. During March 1997, the Devonport
management consortium, Devonport Management Limited (DML), which is 51% owned by
a subsidiary of the Company, completed the acquisition of Devonport Royal
Dockyard plc, which owns and operates the Government of the United Kingdom's
Royal Dockyard in Plymouth, England, for approximately $64.9 million.
Concurrent with the acquisition of the Royal Dockyard, the Company's ownership
interest in DML increased from about 30% to 51% and DML borrowed $56.3 million
under term loans. The dockyard principally provides repair and refitting
services for the British Royal Navy's fleet of submarines and surface ships.
DML is a part of the Engineering and Construction Group.
Acquisition of OGC International and Kinhill. During April 1997, the
Company completed its acquisition of the outstanding common stock of OGC
International plc (OGC) for approximately $118.3 million. OGC is engaged in
providing a variety of engineering, operations and maintenance services,
primarily to the North Sea oil and gas production industry and is a part of the
Energy Services Group.
During July 1997, the Company acquired all of the outstanding common stock
and convertible debentures of Kinhill Holdings Limited (Kinhill) for
approximately $34 million. Kinhill, headquartered in Australia, provides
engineering in mining and minerals processing, petroleum and chemicals, water
and wastewater, transportation and commercial and civil infrastructure. Kinhill
markets its services primarily in Australia, Indonesia, Thailand, Singapore,
India and the Philippines. Kinhill is a part of the Engineering and
Construction Group.
In 1997, the Company recorded approximately $99.1 million excess of cost
over net assets acquired primarily related to the purchase acquisitions of OGC
and Kinhill.
Acquisition of NUMAR. On September 30, 1997, the Company completed its
acquisition of NUMAR through the merger of a subsidiary of the Company with and
into NUMAR, the conversion of the outstanding NUMAR common stock into an
aggregate of approximately 8.2 million shares of common stock of the Company and
the assumption by the Company of the outstanding NUMAR stock options (for the
exercise of which the
51
<PAGE>
Company has reserved an aggregate of approximately 0.9 million shares of common
stock of the Company). The merger qualified as a tax-free exchange and was
accounted for using the pooling of interests method of accounting for business
combinations. The Company has not restated its financial statements to include
NUMAR's historical operating results because they were not material to the
Company.
NUMAR's assets and liabilities on September 30, 1997 were included in the
Company's accounts of the same date, resulting in an increase in net assets of
$21.3 million. Headquartered in Malvern, Pennsylvania, NUMAR designs,
manufactures and markets the Magnetic Resonance Imaging Logging (MRIL) tool
which utilizes magnetic resonance imaging technology to evaluate subsurface rock
formations in newly drilled oil and gas wells. NUMAR is a part of the Energy
Services Group.
SubSea Asset Sale. In June 1997, a subsidiary of the Company sold certain
assets of its SubSea operations to Global Industries, Ltd. for $102.0 million
and recognized a loss of $6.3 million (net of tax of $3.4 million) on the sale.
SubSea is a part of the Energy Services Group.
Environmental Services Divestiture. On December 31, 1997, a subsidiary of
the Company sold its environmental services business to Tetra Tech, Inc. for
approximately $32 million. The sale was prompted by the Company's desire to
divest non-core businesses and had no significant effect on the net income for
the year. The environmental services business was previously a part of the
Engineering and Construction Group.
Landmark Graphics. In October 1996, the Company completed its acquisition
of Landmark through the merger of Landmark with and into a subsidiary of the
Company, the conversion of the outstanding Landmark common stock into an
aggregate of approximately 20.4 million shares of common stock of the Company
(after giving effect to the Company's two-for-one stock split) and the
assumption by the Company of the outstanding Landmark stock options. The merger
qualified as a tax-free exchange and was accounted for using the pooling of
interests method of accounting for business combinations. The Company's
financial statements have been restated to include the results of Landmark for
all periods presented prior to the date of completion. Landmark is a part of
the Energy Services Group.
Prior to its acquisition by Halliburton, Landmark had a fiscal year-end of
June 30. Landmark's results have been restated to conform with Halliburton
Company's calendar year-end. Combined and separate results of Halliburton and
Landmark for the periods preceding the merger are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
Millions of dollars September 30, 1996
- -------------------------------------------------------------------------------
<S> <C>
Revenues:
Halliburton $ 5,251.5
Landmark 143.9
- -------------------------------------------------------------------------------
Combined $ 5,395.4
- -------------------------------------------------------------------------------
Net income:
Halliburton $ 201.2
Landmark (8.4)
- -------------------------------------------------------------------------------
Combined $ 192.8
- -------------------------------------------------------------------------------
</TABLE>
The Company acquired other businesses in 1998, 1997 and 1996 for $42.0
million, $3.6 million and $32.2 million, respectively. These businesses did not
have a significant effect on revenues or earnings.
Note 15. Financial Instruments and Risk Management
Foreign Exchange Risk. Techniques in managing foreign exchange risk
include, but are not limited to, foreign currency borrowing and investing and
the use of currency derivative instruments. The Company selectively hedges
significant exposures to potential foreign exchange losses considering current
market conditions, future
52
<PAGE>
operating activities and the cost of hedging the exposure in relation to the
perceived risk of loss. The purpose of the Company's foreign currency hedging
activities is to protect the Company from the risk that the eventual dollar cash
flows resulting from the sale and purchase of products in foreign currencies
will be adversely affected by changes in exchange rates. The Company does not
hold or issue derivative financial instruments for trading or speculative
purposes.
The Company hedges its currency exposure through the use of currency
derivative instruments. Such contracts generally have an expiration date of two
years or less. Forward exchange contracts (commitments to buy or sell a
specified amount of a foreign currency at a specified price and time) are
generally used to hedge identifiable foreign currency commitments. Losses of
$1.4 million for identifiable foreign currency commitments were deferred at
December 31, 1998. Forward exchange contracts and foreign exchange option
contracts (which convey the right, but not the obligation, to sell or buy a
specified amount of foreign currency at a specified price) are generally used to
hedge foreign currency commitments with an indeterminable maturity date. None
of the forward or option contracts are exchange traded.
While hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposures being
hedged. The use of some contracts may limit the Company's ability to benefit
from favorable fluctuations in foreign exchange rates. The notional amounts of
open forward contracts and options were $595.9 million and $697.2 million at
year-end 1998 and 1997, respectively. The notional amounts of the Company's
foreign exchange contracts do not generally represent amounts exchanged by the
parties, and thus, are not a measure of the exposure of the Company or of the
cash requirements relating to these contracts. The amounts exchanged are
calculated by reference to the notional amounts and by other terms of the
derivatives, such as exchange rates. The Company actively monitors its foreign
currency exposure and adjusts the amounts hedged as appropriate.
Exposures to certain currencies are generally not hedged due primarily to
the lack of available markets or cost considerations (non-traded currencies).
The Company attempts to manage its working capital position to minimize foreign
currency commitments in non-traded currencies and recognizes that pricing for
the services and products offered in such countries should cover the cost of
exchange rate devaluations. The Company has historically incurred transaction
losses in non-traded currencies.
Credit Risk. Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash equivalents, investments and
trade receivables. It is the Company's practice to place its cash equivalents
and investments in high quality securities with various investment institutions.
The Company derives the majority of its revenues from sales and services to,
including engineering and construction for, the energy industry. Within the
energy industry, trade receivables are generated from a broad and diverse group
of customers. There are concentrations of receivables in the United States and
the United Kingdom. The Company maintains an allowance for losses based upon
the expected collectibility of all trade accounts receivable.
There are no significant concentrations of credit risk with any individual
counterparty or groups of counterparties related to the Company's derivative
contracts. Counterparties are selected by the Company based on
creditworthiness, which the Company continually monitors, and on the
counterparties' ability to perform their obligations under the terms of the
transactions. The Company does not expect any counterparties to fail to meet
their obligations under these contracts given their high credit ratings and, as
such, considers the credit risk associated with its derivative contracts to be
minimal.
Fair Value of Financial Instruments. The estimated fair value of long-term
debt at year-end 1998 and 1997 was $1,577.6 million and $1,380.8 million,
respectively, as compared to the carrying amount of $1,428.2 million at year-end
1998 and $1,304.3 million at year-end 1997. The fair value of fixed rate long-
term debt is based on quoted market prices for those or similar instruments.
The carrying amount of variable rate long-term debt and restricted cash (see
Note 8) approximates fair value because such instruments reflect market changes
to interest rates. The carrying amount of short-term financial instruments
(cash and equivalents, receivables, short-term notes payable and accounts
payable) as reflected in the consolidated balance sheets approximates fair value
due to the short maturities of these instruments. The fair value of currency
derivative instruments which generally approximates their carrying amount based
upon third party quotes was $4.4 million receivable and $4.7 million payable at
December 31, 1998.
53
<PAGE>
Note 16. Retirement Plans
The Company and its subsidiaries have various plans which cover a
significant number of their employees. These plans include defined contribution
plans, which provide retirement contributions in return for services rendered,
provide an individual account for each participant and have terms that specify
how contributions to the participant's account are to be determined rather than
the amount of pension benefits the participant is to receive. Contributions to
these plans are based on pre-tax income and/or discretionary amounts determined
on an annual basis. The Company's expense for the defined contribution plans
totaled $151.8 million, $213.2 million, and $156.0 million in 1998, 1997 and
1996. Other retirement plans include defined benefit plans, which define an
amount of pension benefit to be provided, usually as a function of age, years of
service or compensation. These plans are funded to operate on an actuarially
sound basis. Plan assets are primarily invested in cash, short-term
investments, real estate, equity and fixed income securities of entities
domiciled in the country of the plan's operation.
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Millions of dollars U.S. International U.S. International
- ------------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 377.6 $ 1,569.9 $ 386.6 $ 1,361.8
Service cost 5.4 57.3 8.1 44.6
Interest cost 27.3 111.2 29.1 102.7
Plan participants' contributions - 14.0 - 12.7
Effect of business combinations - 20.7 - -
Amendments 13.6 - (16.6) -
Settlements/curtailments (2.3) (9.2) - (1.9)
Currency fluctuations - (1.7) - (1.6)
Actuarial gain/(loss) 37.8 (5.2) 1.9 88.0
Benefits paid (29.1) (41.2) (31.5) (36.4)
- ------------------------------------------------------------------------------ --------------------------------
Benefit obligation at end of year $ 430.3 $ 1,715.8 $ 377.6 $ 1,569.9
- ------------------------------------------------------------------------------ --------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 421.4 $ 1,775.4 $ 351.0 $ 1,617.6
Actual return on plan assets 38.8 28.4 81.8 158.6
Employer contribution 17.4 25.2 20.1 25.5
Settlements (3.0) - - (1.9)
Plan participants' contributions - 14.0 - 12.7
Effect of business combinations - 20.7 - -
Currency fluctuations - (5.1) - (0.7)
Benefits paid (29.1) (41.2) (31.5) (36.4)
- ------------------------------------------------------------------------------ --------------------------------
Fair value of plan assets at end of year $ 445.5 $ 1,817.4 $ 421.4 $ 1,775.4
- ------------------------------------------------------------------------------ --------------------------------
Funded status $ 15.2 $ 101.6 $ 43.8 $ 205.5
Unrecognized transition obligation 3.0 (8.1) 0.9 (10.2)
Unrecognized actuarial (gain)/loss 5.1 (59.2) (34.9) (162.7)
Unrecognized prior service cost 1.1 1.5 (17.0) 4.1
- ------------------------------------------------------------------------------ --------------------------------
Net amount recognized $ 24.4 $ 35.8 $ (7.2) $ 36.7
- ------------------------------------------------------------------------------ --------------------------------
</TABLE>
The Company recognized an additional minimum pension liability for
underfunded defined benefit plans. The additional minimum liability is equal to
the excess of the accumulated benefit obligation over plan assets and accrued
liabilities. A corresponding amount is recognized as either an intangible asset
or a reduction of shareholders' equity.
54
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------------------------------- -------------------------------
Millions of dollars U.S. International U.S. International
- -------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 30.9 $ 67.4 $ 21.2 $ 73.7
Accrued benefit liability (33.7) (33.1) (38.2) (38.3)
Intangible asset 17.0 0.4 4.4 0.7
Deferred tax asset 3.7 0.2 1.9 0.2
Accumulated other comprehensive income 6.5 0.9 3.5 0.4
- -------------------------------------------------------------------------------- -------------------------------
Net amount recognized $ 24.4 $ 35.8 $ (7.2) $ 36.7
- -------------------------------------------------------------------------------- -------------------------------
</TABLE>
Assumed long-term rates of return on plan assets, discount rates for
estimating benefit obligations and rates of compensation increases vary for the
different plans according to the local economic conditions. The rates used are
as follows:
<TABLE>
<CAPTION>
Weighted-average assumptions as of December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected return on plan assets:
United States plans 8.5% to 9.0% 8.5% to 9.0% 8.0% to 9.0%
International plans 7.0% to 11.0% 7.0% to 13.5% 7.0% to 13.5%
Discount rate:
United States plans 7.25% to 8.0% 7.25% to 8.0% 7.0% to 8.0%
International plans 2.0% to 12.5% 7.0% to 12.5% 7.0% to 12.5%
Rate of compensation increase:
United States plans 4.5% to 5.0% 4.0% to 5.5% 4.0% to 5.5%
International plans 2.0% to 11.0% 4.0% to 11.0% 4.0% to 11.0%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------
Millions of dollars U.S. International U.S. International
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 5.4 $ 57.3 $ 8.1 $ 44.6
Interest cost 27.3 111.2 29.1 102.7
Expected return on plan assets (30.0) (123.0) (31.4) (127.6)
Transition amount 0.6 (1.9) (0.7) (1.8)
Amortization of prior service cost (4.0) (7.1) (1.1) (7.1)
Settlements/curtailments loss/(gain) (3.9) (2.1) 0.4 -
Recognized actuarial (gain)/loss 0.2 0.1 (0.5) (1.8)
- -------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (4.4) $ 34.5 $ 3.9 $ 9.0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996 the pension plans had net service cost of $31.3 million; net
interest cost of $73.5 million; net actual return on plan assets of ($109.8
million); and net amortization and deferral of $10.0 million, resulting in net
periodic pension cost of $5 million.
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $201 million, $193 million, and $123
million, respectively, as of December 31, 1998, and $103 million, $97 million,
and $51 million, respectively, as of December 31, 1997.
Postretirement Medical Plan. The Company offers postretirement medical
plans to certain eligible employees. In some plans the Company's liability is
limited to a fixed contribution amount for each participant or dependent. The
plan participants share the total cost for all benefits provided above the fixed
Company contribution
55
<PAGE>
and participants' contributions are adjusted as required to cover benefit
payments. The Company has made no commitment to adjust the amount of its
contributions; therefore, the computed accumulated postretirement benefit
obligation amount is not affected by the expected future health care cost
inflation rate.
Other postretirement medical plans are contributory but the Company
generally absorbs the majority of the costs. In these plans the Company may
elect to adjust the amount of its contributions. As a result the computed
accumulated postretirement benefit obligation amount is affected by the expected
future healthcare cost inflation rate. These plans have assumed health care
trend rates (weighted based on the current year benefit obligation) for 1998 of
7% which are expected to decline to 5% by 2002.
During 1997, the Company adopted amendments to eliminate certain
postretirement medical benefit programs. These amendments resulted in a
curtailment gain of $11.2 million.
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 373.0 $ 394.6
Service cost 3.9 4.5
Interest cost 28.4 29.3
Plan participants' contributions 12.0 13.8
Amendments (4.4) 3.0
Settlements/curtailments (6.3) -
Actuarial gain/(loss) 36.8 (30.1)
Benefits paid (40.3) (42.1)
- --------------------------------------------------------------------------
Benefit obligation at end of year $ 403.1 $ 373.0
==========================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ - $ -
Employer contribution 28.3 28.3
Plan participants' contributions 12.0 13.8
Benefits paid (40.3) (42.1)
- --------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ -
==========================================================================
Funded status $ (403.1) $ (373.0)
Unrecognized actuarial (gain)/loss (66.0) (98.7)
Unrecognized prior service cost (5.4) (6.3)
Unamortized gains from plan amendments (140.2) (155.5)
- --------------------------------------------------------------------------
Net amount recognized $ (614.7) $ (633.5)
==========================================================================
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Accrued benefit liability $ (614.7) $ (633.5)
- --------------------------------------------------------------------------
Net amount recognized $ (614.7) $ (633.5)
==========================================================================
56
<PAGE>
<TABLE>
<CAPTION>
Weighted-average assumptions as of December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.0% to 8.0% 7.25% to 8.0%
Expected return on plan assets N/A N/A
Rate of compensation increase 5.0% 5.0%
<CAPTION>
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Components of net periodic benefit cost
Service cost $ 3.9 $ 4.5
Interest cost 28.4 29.3
Amortization of prior service cost (10.3) (10.2)
Settlements/curtailments loss/(gain) - (11.2)
Recognized actuarial (gain)/loss (7.8) (8.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 14.2 $ 3.6
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996 the postretirement medical plans had net service cost of $4.7
million; net interest cost of $30.9 million; and net amortization and deferral
of ($20.4 million), resulting in net periodic postretirement medical cost of
$15.2 million.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the total of the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage-Point
Millions of dollars Increase Decrease
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ 2.7 $ (2.5)
Effect on the postretirement benefit obligation 28.5 (26.9)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 17. Sale of Joint Ventures (unaudited) subsequent to the date of the
Independent Public Accountant's Report
On October 4, 1999, we announced we will sell our interests in
Dresser-Rand and Ingersoll-Dresser Pump to Ingersoll-Rand Company for total cash
consideration of approximately $1.1 billion. The transaction will result in an
after-tax gain of approximately $380 million or $0.84 per diluted share. The
sale is being made based upon elections triggered by Ingersoll-Rand. We expect
to close the sale on December 30, 1999. After paying off intercompany accounts
with the joint ventures, we expect to receive net cash of approximately $630
million. This cash will initially be used to reduce short-term borrowings and
for other general corporate purposes.
Revenues, operating income and net income from Dresser-Rand and
Ingersoll- Dresser Pump included in our results for the first nine months of
1999 and year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended September 30, 1999 Ended December 31, 1998
-------------------------------------------------------------------
<S> <C> <C>
Millions of dollars
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $729.1 $1,287.5
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income $ 46.6 $ 120.6
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 18.1 $ 49.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
10K/A
HALLIBURTON COMPANY
Selected Financial Data
Millions of dollars and shares except per share and employee data
Prior year information presented has been restated for the merger of
Dresser Industries, Inc. Beginning in 1998, Dresser's year-end of October 31 has
been conformed to Halliburton's calendar year-end. Periods through December 1997
contain Dresser's information on a fiscal year-end basis combined with
Halliburton's information on a calendar year-end basis.
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------------------
1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating results
Net revenues
Energy Services Group $ 9,009.5 $ 8,504.7 $ 6,515.4 $ 5,307.7
Engineering and Construction Group 5,494.8 4,992.8 4,720.7 3,736.5
Dresser Equipment Group 2,848.8 2,774.1 2,710.5 2,467.4
- --------------------------------------------------------------------------------------------------------------------------
Total revenues $ 17,353.1 $ 16,271.6 $ 13,946.6 $ 11,511.6
==========================================================================================================================
Operating income
Energy Services Group $ 971.0 $ 1,019.4 $ 698.0 $ 544.5
Engineering and Construction Group 237.2 219.0 134.0 96.6
Dresser Equipment Group 247.8 248.3 229.3 200.7
Special charges and credits (a) (980.1) (16.2) (85.8) (8.4)
General corporate (79.4) (71.8) (72.3) (70.8)
- --------------------------------------------------------------------------------------------------------------------------
Total operating income (a) 396.5 1,398.7 903.2 762.6
Nonoperating income (expense), net (117.7) (85.6) (72.2) (32.6)
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and minority interest 278.8 1,313.1 831.0 730.0
Provision for income taxes (c) (244.4) (491.4) (248.4) (247.0)
Minority interest in net income of
consolidated subsidiaries (49.1) (49.3) (24.7) (20.7)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ (14.7) $ 772.4 $ 557.9 $ 462.3
==========================================================================================================================
Basic income (loss) per common share
Continuing operations $ (0.03) $ 1.79 $ 1.30 $ 1.07
Net income (loss) (0.03) 1.79 1.30 0.88
Diluted income (loss) per share
Continuing operations (0.03) 1.77 1.29 1.07
Net income (loss) (0.03) 1.77 1.29 0.88
Cash dividends per share (d), (e) 0.50 0.50 0.50 0.50
Return on average shareholders' equity (0.35%) 19.17% 15.25% 10.43%
- --------------------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 2,129.6 $ 1,984.8 $ 1,501.0 $ 1,476.7
Total assets 11,065.9 10,704.3 9,586.8 8,569.4
Property, plant and equipment, net 2,895.9 2,766.4 2,554.0 2,285.0
Long-term debt (including current maturities) 1,428.2 1,304.3 958.0 666.8
Shareholders' equity 4,061.2 4,316.9 3,741.4 3,577.0
Total capitalization 6,004.4 5,671.7 4,830.1 4,377.9
Shareholders' equity per share (d) 9.23 9.86 8.78 8.29
Average common shares outstanding (basic) (d) 438.8 431.1 429.2 431.1
Average common shares outstanding (diluted) (d) 438.8 436.1 432.1 432.3
- --------------------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 454.1 $ 833.1 $ 864.2 $ 1,094.6
Cash flows from investing activities (846.1) (873.3) (759.1) (837.0)
Cash flows from financing activities 253.7 (20.6) (148.4) (721.4)
Capital expenditures 914.3 880.1 731.1 591.5
Long-term borrowings (repayments), net 123.3 285.5 287.4 (482.2)
Depreciation and amortization expense 587.0 564.3 497.7 466.4
Payroll and employee benefits 5,880.1 5,478.9 4,674.3 4,188.0
Number of employees (f) 107,800 102,000 93,000 89,800
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
HALLIBURTON COMPANY
Selected Financial Data
Millions of dollars and shares except per share and employee data
Prior year information presented has been restated for the merger of
Dresser Industries, Inc. Beginning in 1998, Dresser's year-end of October 31 has
been conformed to Halliburton's calendar year-end. Periods through December 1997
contain Dresser's information on a fiscal year-end basis combined with
Halliburton's information on a calendar year-end basis.
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating results
Net revenues
Energy Services Group $ 4,977.5 $ 5,470.5 $ 5,038.6 $ 5,155.5 $ 4,894.5
Engineering and Construction Group 3,562.3 3,674.9 4,409.6 4,721.2 4,596.8
Dresser Equipment Group 2,452.0 2,281.6 1,660.1 1,760.3 1,622.4
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 10,991.8 $ 11,427.0 $ 11,108.3 $ 11,637.0 $ 11,113.7
================================================================================================================================
Operating income
Energy Services Group $ 405.8 $ 413.8 $ 303.3 $ 377.8 $ 473.0
Engineering and Construction Group 71.0 76.0 32.2 47.9 50.9
Dresser Equipment Group 198.1 208.4 168.5 163.7 155.1
Special charges and credits (a) (24.6) (426.9) (342.9) (144.7) -
General corporate (56.2) (63.5) (58.3) (56.2) (48.9)
- --------------------------------------------------------------------------------------------------------------------------------
Total operating income (a) 594.1 207.8 102.8 388.5 630.1
Nonoperating income (expense), net (b) 323.1 (63.5) (60.7) (20.5) 11.9
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and minority interest 917.2 144.3 42.1 368.0 642.0
Provision for income taxes (346.9) (95.8) (78.3) (182.5) (269.4)
Minority interest in net income of
consolidated subsidiaries (33.1) (42.8) (8.6) (18.5) (16.6)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 537.2 $ 5.7 $ (44.8) $ 167.0 $ 356.0
================================================================================================================================
Basic income (loss) per common share
Continuing operations $ 1.25 $ 0.01 $ (0.11) $ 0.41 $ 0.89
Net income (loss) 1.26 (0.04) (1.18) 0.45 1.11
Diluted income (loss) per share
Continuing operations 1.24 0.01 (0.11) 0.41 0.89
Net income (loss) 1.26 (0.04) (1.18) 0.45 1.11
Cash dividends per share (d), (e) 0.50 0.50 0.50 0.50 0.50
Return on average shareholders' equity 15.47% (0.45%) (12.75%) 4.15% 10.29%
- --------------------------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 2,196.7 $ 1,562.9 $ 1,423.0 $ 1,775.1 $ 1,905.5
Total assets 8,521.0 8,764.2 8,087.2 8,265.5 7,813.0
Property, plant and equipment, net 2,047.0 2,154.7 2,128.2 1,891.7 1,766.9
Long-term debt (including current maturities) 1,119.8 1,130.9 873.3 928.1 611.7
Shareholders' equity 3,722.5 3,295.7 3,276.6 4,314.8 4,426.0
Total capitalization 4,905.9 4,748.1 4,179.5 5,266.8 5,063.2
Shareholders' equity per share (d), (e) 8.63 7.70 7.99 10.61 11.03
Average common shares outstanding (basic) (d) 430.6 421.9 408.4 405.4 397.8
Average common shares outstanding (diluted) (d) 431.5 422.2 408.7 405.7 398.1
- --------------------------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 793.1 $ 468.0 $ 624.9 $ 595.2 $ 437.7
Cash flows from investing activities 528.6 (817.9) (312.8) (909.5) (729.1)
Cash flows from financing activities (644.5) 331.4 (397.4) 244.2 35.8
Capital expenditures 432.1 463.5 457.5 633.6 494.6
Long-term borrowings (repayments), net (120.8) 192.4 (187.4) 459.5 83.1
Depreciation and amortization expense 487.6 671.6 516.1 440.7 375.5
Payroll and employee benefits 4,222.3 4,428.9 4,590.3 4,660.8 4,415.4
Number of employees (f) 86,500 90,500 96,400 104,500 109,700
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
(a) Operating income includes the following special charges and credits:
1998 - $980.1 million: asset related charges ($509.4 million), personnel
reductions ($234.7 million), facility consolidations ($126.2 million),
merger transaction costs ($64.0 million), and other related costs ($45.8
million).
1997 - $16.2 million: merger costs ($8.6 million), restructuring of joint
ventures ($18.0 million), write-downs on impaired assets and early
retirement incentives ($18.7 million), losses from the sale of assets
($12.6 million), and gain on extension of joint venture ($41.7 million).
1996 - $85.8 million: merger costs ($12.4 million), restructuring, merger
and severance costs ($62.1 million), and write-off of acquired in-process
research and development costs ($11.3 million).
1995 - $8.4 million: restructuring costs ($4.7 million) and write-off of
acquired in-process research and development costs ($3.7 million).
1994 - $24.6 million: merger costs ($27.3 million), restructuring costs
($6.2 million), litigation ($9.5 million), and litigation and insurance
recoveries ($18.4 million).
1993 - $426.9 million: loss on sale of business ($321.8 million), merger
costs ($31.0 million), restructuring ($13.2 million), litigation ($65.0
million), and gain on curtailment of medical plan ($4.1 million).
1992 - $342.9 million: merger costs ($272.9 million) and restructuring and
severance ($70.0 million).
1991 - $144.7 million: restructuring ($123.4 million) and loss on sale of
business ($21.3 million).
(b) Nonoperating income in 1994 includes a gain of $275.7 million from the sale
of an interest in Western Atlas International, Inc. and a gain of $102.0 million
from the sale of the Company's natural gas compression business.
(c) Provision for income taxes in 1996 includes tax benefits of $43.7 million
due to the recognition of net operating loss carryforwards and the settlement of
various issues with the Internal Revenue Service.
(d) Weighted average shares, cash dividends paid per share and shareholders'
equity per share have been restated to reflect the two-for-one common stock
split declared on June 9, 1997, and effected in the form of a stock dividend
paid on July 21, 1997.
(e) Represents Halliburton Company amounts prior to the merger with Dresser.
(f) Does not include employees of 50% or less owned affiliated companies.
60
<PAGE>
HALLIBURTON COMPANY
Quarterly Data and Market Price Information
(Unaudited)
(Millions of dollars except per share data)
<TABLE>
<CAPTION>
Quarter
---------------------------------------------------------
First Second Third Fourth Year
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 (1)
Revenues $ 4,254.8 $ 4,585.2 $ 4,224.0 $ 4,289.1 $ 17,353.1
Operating income (loss) 361.1 436.1 (577.5) 176.8 396.5
Net income (loss) (7), (8) 203.4 243.2 (527.0) 65.7 (14.7)
Earnings per share:
Basic net income (loss) per share (7), (8) 0.46 0.55 (1.20) 0.15 (0.03)
Diluted net income (loss) per share (7), (8) 0.46 0.55 (1.20) 0.15 (0.03)
Cash dividends paid per share (3) 0.125 0.125 0.125 0.125 0.50
Common stock prices (3), (4)
High 52.44 56.63 45.00 38.56 56.63
Low 42.38 42.06 26.25 26.19 26.19
- ---------------------------------------------------------------------------------------------------------------------
1997 (1)
Revenues $ 3,602.0 $ 4,002.4 $ 4,177.0 $ 4,490.2 $ 16,271.6
Operating income (5), (6) 242.5 321.6 372.2 462.4 1,398.7
Net income (5), (6) 135.1 176.7 202.6 258.0 772.4
Earnings per share: (2)
Basic net income per share (5), (6) 0.32 0.41 0.47 0.59 1.79
Diluted net income per share (5), (6) 0.31 0.41 0.47 0.58 1.77
Cash dividends paid per share (3) 0.125 0.125 0.125 0.125 0.50
Common stock prices (2), (3), (4)
High 36.69 41.00 52.88 62.69 62.69
Low 30.00 32.06 42.00 47.25 30.00
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts for revenues, operating income, net income, and earnings per share
have been restated to reflect the merger with Dresser which was accounted
for using the pooling of interests method of accounting for business
combinations.
(2) Amounts presented reflect the two-for-one common stock split declared on
June 9, 1997, and effected in the form of a stock dividend paid on July 21,
1997.
(3) Represents Halliburton Company amounts prior to the merger with Dresser.
(4) New York Stock Exchange - composite transactions high and low closing stock
price.
(5) Includes pretax special charge $18.3 million ($14.9 million after tax or
$0.03 per diluted share) in the third quarter of 1997.
(6) Includes pretax special charge net gain of $2.1 million ($5.6 million after
tax and minority interest or $0.01 per diluted share) in the fourth quarter
of 1997.
(7) Includes pretax special charge of $945.1 million ($722.0 million after tax
or $1.64 per diluted share) in the third quarter of 1998.
(8) Includes pretax special charge of $35.0 million ($24.0 million after tax or
$0.05 per diluted share) in the fourth quarter of 1998.
61
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant.
The information required for the directors of the Registrant is incorporated
by reference to the Halliburton Company Proxy Statement dated March 25, 1999,
under the caption "Election of Directors." The information required for the
executive officers of the Registrant is included under Part I on pages 5 and 6
of this annual report.
Item 11. Executive Compensation.
This information is incorporated by reference to the Halliburton Company Proxy
Statement dated March 25, 1999, under the captions "Compensation Committee
Report on Executive Compensation," "Comparison of Five-Year Cumulative Total
Return," "Summary Compensation Table," "Option Grants in Last Fiscal Year,"
"Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values," "Retirement Plans," "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements" and "Directors' Compensation, Restricted
Stock Plan and Retirement Plan."
Item 12(a). Security Ownership of Certain Beneficial Owners and Management.
This information is incorporated by reference to the Halliburton Company Proxy
Statement dated March 25, 1999, under the caption "Stock Ownership of Certain
Beneficial Owners and Management."
Item 12(b). Security Ownership of Management.
This information is incorporated by reference to the Halliburton Company Proxy
Statement dated March 25, 1999, under the caption "Stock Ownership of Certain
Beneficial Owners and Management."
Item 12(c). Changes in Control.
Not applicable.
Item 13. Certain Relationships and Related Transactions.
This information is incorporated by reference to the Halliburton Company Proxy
Statement dated March 25, 1999, under the caption "Certain Relationships and
Related Transactions."
62
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements: The report of Arthur Andersen LLP, Independent
Public Accountants, and the financial statements of the Company as
required by Part II, Item 8, are included on pages 19 through 61 of
this annual report. See index on page 8.
2. Financial Statement Schedules: Page No.
Report on supplemental schedule of Arthur Andersen LLP 71
Schedule II - Valuation and qualifying accounts for
the three years ended December 31, 1998 72
Note: All schedules not filed herein for which provision is made
under rules of Regulation S-X have been omitted as not applicable or
not required or the information required therein has been included in
the notes to financial statements.
3. Exhibits:
Exhibit
Number Exhibits
------ --------
3.1 Restated Certificate of Incorporation of the Company filed
with the Secretary of State of Delaware on July 23, 1998
(incorporated by reference to Exhibit 3(a) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998).
3.2 By-laws of the Company, as amended and restated effective
September 29, 1998 (incorporated by reference to Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998).
4.1 Subordinated Indenture dated as of January 2, 1991 between
Halliburton Company, now known as Halliburton Energy Services,
Inc. (the "Predecessor") and Texas Commerce Bank National
Association, as trustee (incorporated by reference to Exhibit
4(c) to the Predecessor's Registration Statement on Form S-3
(File No. 33-38394) originally filed with the Securities and
Exchange Commission on December 21, 1990), as supplemented and
amended by the First Supplemental Indenture dated as of
December 12, 1996 among the Predecessor, the Company and the
Trustee (incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form 8-B dated December
12, 1996, File No. 1-03492).
4.2 Form of debt security of 8.75% Debentures due February 12,
2021 (incorporated by reference to Exhibit 4(a) to the
Predecessor's Form 8-K dated as of February 20, 1991).
4.3 Senior Indenture dated as of January 2, 1991 between the
Predecessor and Texas Commerce Bank National Association, as
trustee (incorporated by reference to Exhibit 4(b) to the
Predecessor's Registration Statement on Form S-3 (File No. 33-
38394) originally filed with the Securities and Exchange
Commission on December 21, 1990), as supplemented and
63
<PAGE>
amended by the First Supplemental Indenture dated as of
December 12, 1996 among the Predecessor, the Company and the
Trustee (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form 8-B dated December
12, 1996, File No. 1-03492).
4.4 Resolutions of the Predecessor's Board of Directors adopted at
a meeting held on February 11, 1991 and of the special pricing
committee of the Board of Directors of the predecessor adopted
at a meeting held on February 11, 1991 and the special pricing
committee's consent in lieu of meeting dated February 12, 1991
(incorporated by reference to Exhibit 4(c) to the
Predecessor's Form 8-K dated as of February 20, 1991).
4.5 Form of debt security of 6.75% Notes due February 1, 2027
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of February 11, 1997).
4.6 Second Senior Indenture dated as of December 1, 1996 between
the Predecessor and Texas Commerce Bank National Association,
as trustee, as supplemented and amended by the First
Supplemental Indenture dated as of December 5, 1996 between
the Predecessor and the trustee and the Second Supplemental
Indenture dated as of December 12, 1996 among the Predecessor,
the Company and the Trustee (incorporated by reference to
Exhibit 4.2 of the Company's Registration Statement on Form 8-
B dated December 12, 1996, File No. 1-03492).
4.7 Third Supplemental Indenture dated as of August 1, 1997
between the Company and Texas Commerce Bank National
Association, as Trustee, to the Second Senior Indenture dated
as of December 1, 1996 (incorporated by reference to Exhibit
4.7 to the Company's Form 10-K for the year ended December 31,
1998).
4.8 Fourth Supplemental Indenture dated as of September 29, 1998
between the Company and Chase Bank of Texas, National
Association (formerly Texas Commerce Bank National
Association), as Trustee, to the Second Senior Indenture dated
as of December 1, 1996 (incorporated by reference to Exhibit
4.8 to the Company's Form 10-K for the year ended December 31,
1998).
4.9 Resolutions of the Company's Board of Directors adopted by
unanimous consent dated December 5, 1996 (incorporated by
reference to Exhibit 4(g) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996).
4.10 Resolutions of the Company's Board of Directors adopted at a
special meeting held on September 28, 1998 (incorporated by
reference to Exhibit 4.10 to the Company's Form 10-K for the
year ended December 31, 1998).
4.11 Restated Rights Agreement dated as of December 1, 1996 between
the Company and ChaseMellon Shareholder Services, L.L.C.
(incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form 8-B dated December 12, 1996,
File No. 1-03492).
4.12 Copies of instruments that define the rights of holders of
miscellaneous long-term notes of the Company and its
subsidiaries, totaling $39.6 million in the aggregate at
December 31, 1998, have not been filed with the Commission.
The Company agrees herewith to furnish copies of such
instruments upon request.
64
<PAGE>
4.13 Form of debt security of 7.53% Notes due May 12, 2017
(incorporated by reference to Exhibit 4.4 to the Company's
Form 10-Q for the quarterly period ended March 31, 1997).
4.14 Form of debt security of 6.27% Notes due July 8, 1999
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of July 8, 1997).
4.15 Form of debt security of 6.30% Notes due August 5, 2002
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of August 5, 1997).
4.16 Form of debt security of 5.63% Notes due December 1, 2008
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of November 24, 1998).
4.17 Form of Indenture, between Dresser Industries, Inc.
("Dresser") and NationsBank of Texas, N.A., as Trustee, for
unsecured debentures, notes and other evidences of
indebtedness (incorporated by reference to Exhibit 4.1 to
Dresser's Registration Statement on Form S-3, Registration No.
33-59562).
4.18 Form of Indenture, between Baroid Corporation and Texas
Commerce Bank National Association, as trustee, for 8% Senior
Notes due 2003 (incorporated by reference to Exhibit 4.01 to
the Registration Statement on Form S-3, Registration No. 33-
60174), as supplemented and amended by Form of Supplemental
Indenture, between Dresser, Baroid Corporation and Texas
Commerce Bank N.A. as Trustee, for 8% Guaranteed Senior Notes
due 2003 (incorporated by reference to Exhibit 4.3 to
Registration Statement on Form S-4 filed by Baroid
Corporation, Registration No. 33-53077).
4.19 Second Supplemental Indenture dated October 30, 1997 between
Dresser and Texas Commerce Bank National Association, as
Trustee, for 8% Senior Notes due 2003 (incorporated by
reference to Exhibit 4.19 to the Company's Form 10-K for the
year ended December 31, 1998).
4.20 Third Supplemental Indenture dated September 29, 1998 between
Dresser, the Company, as Guarantor, and Chase Bank of Texas,
National Association, as Trustee, for 8% Senior Notes due 2003
(incorporated by reference to Exhibit 4.20 to the Company's
Form 10-K for the year ended December 31, 1998).
4.21 Form of Indenture, between Dresser and Texas Commerce Bank
National Association, as Trustee, for 7.60% Debentures due
2096 (incorporated by reference to Exhibit 4 to the
Registration Statement on Form S-3 as amended, Registration
No. 333-01303), as supplemented and amended by Form of
Supplemental Indenture, between Dresser and Texas Commerce
Bank National Association, Trustee, for 7.60% Debentures due
2096 (incorporated by reference to Exhibit 4.1 to Dresser's
Form 8-K filed on August 9, 1996).
10.1 Halliburton Company Career Executive Incentive Stock Plan as
amended November 15, 1990 (incorporated by reference to
Exhibit 10(a) to the Predecessor's Annual Report on Form 10-K
for the year ended December 31, 1992).
10.2 Retirement Plan for the Directors of Halliburton Company
adopted and effective January 1, 1990 (incorporated by
reference to Exhibit 10(c) to the Predecessor's Annual Report
on Form 10-K for the year ended December 31, 1992).
65
<PAGE>
10.3 Halliburton Company Directors' Deferred Compensation Plan as
amended and restated effective May 1, 1994 (incorporated by
reference to Exhibit 10(c) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.4 Halliburton Company 1993 Stock and Long-Term Incentive Plan,
as amended and restated February 19, 1998 (incorporated by
reference to Exhibit 10.4 to the Company's Form 10-K for the
year ended December 31, 1998).
10.5 Halliburton Company Restricted Stock Plan for Non-Employee
Directors (incorporated by reference to Appendix B of the
Predecessor's proxy statement dated March 23, 1993).
10.6 Halliburton Elective Deferral Plan, as amended and restated
effective January 1, 1998 (incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998).
10.7 Employment agreement (incorporated by reference to Exhibit 10
to the Predecessor's Form 10-Q for the quarterly period ended
September 30, 1995).
10.8 Halliburton Company Senior Executives' Deferred Compensation
Plan, as amended and restated effective January 1, 1999
(incorporated by reference to Exhibit 10.8 to the Company's
Form 10-K for the year ended December 31, 1998).
10.9 Halliburton Company Annual Performance Pay Plan, as amended
and restated effective January 1, 1997 (incorporated by
reference to Exhibit 10(k) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.10 Employment agreement (incorporated by reference to Exhibit
10(n) to the Predecessor's Form 10-K for the year ended
December 31, 1995).
10.11 Halliburton Company 1993 Stock and Long-Term Incentive Plan,
as amended and restated February 19, 1998 (incorporated by
reference to Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.12 Agreement and Plan of Merger, dated as of February 25, 1998,
by and among the Company, Halliburton N.C., Inc. and Dresser
(incorporated by reference to Exhibit C to the Company's
Schedule 13D filed on March 9, 1998).
10.13 Stock Option Agreement, dated as of February 25, 1998, by and
between the Company and Dresser (incorporated by reference to
Exhibit B to the Company's Schedule 13D filed on March 9,
1998).
10.14 Employment agreement and amendment thereto (incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
1998).
10.15 Employment agreement and amendment thereto (incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
1998).
66
<PAGE>
10.16 Employment agreement (incorporated by reference to Exhibit
10.16 to the Company's Form 10-K for the year ended December
31, 1998).
10.17 Employment agreement (incorporated by reference to Exhibit
10.17 to the Company's Form 10-K for the year ended December
31, 1998).
10.18 Employment agreement (incorporated by reference to Exhibit
10.18 to the Company's Form 10-K for the year ended December
31, 1998).
10.19 Employment agreement (incorporated by reference to Exhibit
10.19 to the Company's Form 10-K for the year ended December
31, 1998).
10.20 Early retirement agreement (incorporated by reference to
Exhibit 10.20 to the Company's Form 10-K for the year ended
December 31, 1998).
10.21 Early retirement agreement (incorporated by reference to
Exhibit 10.21 to the Company's Form 10-K for the year ended
December 31, 1998).
10.22 Dresser Industries, Inc. Deferred Compensation Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 11, 1966, filed pursuant to
Regulation 14A, File No. 1-4003).
10.23 Dresser Industries, Inc. 1982 Stock Option Plan (incorporated
by reference to Exhibit A to Dresser's Proxy Statement dated
February 12, 1982, filed pursuant to Regulation 14A, File No.
1-4003).
10.24 ERISA Excess Benefit Plan for Dresser Industries, Inc. as
amended and restated effective June 1, 1995 (incorporated by
reference to Exhibit 10.7 to Dresser's Form 10-K for the year
ended October 31, 1995).
10.25 ERISA Compensation Limit Benefit Plan for Dresser Industries,
Inc., as amended and restated effective June 1, 1995
(incorporated by reference to Exhibit 10.8 to Dresser's Form
10-K for the year ended October 31, 1995).
10.26 Supplemental Executive Retirement Plan of Dresser Industries,
Inc., as amended and restated effective January 1, 1998
(incorporated by reference to Exhibit 10.9 to Dresser's Form
10-K for the period ended October 31, 1997).
10.27 Stock Based Compensation Arrangement of Non-Employee Directors
(incorporated by reference to Exhibit 4.4 to Dresser's
Registration Statement on Form S-8, Registration No. 333-
40829).
10.28 Dresser Industries, Inc. Deferred Compensation Plan for Non-
employee Directors, as restated and amended effective November
1, 1997 (incorporated by reference to Exhibit 4.5 to Dresser's
Registration Statement on Form S-8, Registration No. 333-
40829).
10.29 Dresser Industries, Inc. 1989 Restricted Incentive Stock Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 10, 1989, filed pursuant to
Regulation 14A, File No. 1-4003).
67
<PAGE>
10.30 Long-Term Performance Plan for Selected Employees of The M. W.
Kellogg Company (incorporated by reference to Exhibit 10(r) to
Dresser's Form 10-K for the year ended October 31, 1991).
10.31 Dresser Industries, Inc. 1992 Stock Compensation Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 7, 1992, filed pursuant to Regulation
14A, File No. 1-4003).
10.32 Amendments No. 1 and 2 to Dresser Industries, Inc. 1992 Stock
Compensation Plan (incorporated by reference to Exhibit A to
Dresser's Proxy Statement dated February 6, 1995, filed
pursuant to Regulation 14A, File No. 1-4003).
10.33 Dresser Industries, Inc. 1995 Executive Incentive Compensation
Plan (incorporated by reference to Exhibit B to Dresser's
Proxy Statement dated February 6, 1995, filed pursuant to
Regulation 14A, File No. 1-4003).
10.34 Special 1997 Restricted Incentive Stock Grant (incorporated by
reference to Exhibit 10.26 to Dresser's Form 10-K for the year
ended October 31, 1996).
10.35 Form of Executive Life Insurance Agreement (individual as
beneficiary) (incorporated by reference to Exhibit 10.22 to
Dresser's Form 10-K for the period ended October 31, 1997).
10.36 Form of Executive Life Insurance Agreement (trust as
beneficiary) (incorporated by reference to Exhibit 10.23 to
Dresser's Form 10-K for the period ended October 31, 1997).
10.37 Amendment No. 3 to the Dresser Industries, Inc. 1992 Stock
Compensation Plan (incorporated by reference to Exhibit 10.25
to Dresser's Form 10-K for the period ended October 31, 1997).
10.38 The Dresser Industries, Inc. 1998 Executive Incentive
Compensation Plan (incorporated by reference to Exhibit B to
Dresser's Proxy Statement dated February 10, 1998, filed
pursuant to Regulation 14A, File No. 1-4003).
10.39 Form of Waiver of Rights Under the Dresser Industries, Inc.
Long-Term Incentive and Retention Plan (incorporated by
reference to Exhibit 10.5 to Dresser's Form 10-Q for the
period ended January 31, 1998).
10.40 Amendment No. 1 to the Supplemental Executive Retirement Plan
of Dresser Industries, Inc. (incorporated by reference to
Exhibit 10.1 to Dresser's Form 10-Q for the period ended April
30, 1998).
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to the Company's Form 10-K for the year ended
December 31, 1998).
* 23.1 Consent of Arthur Andersen LLP.
* 23.2 Consent of PricewaterhouseCoopers LLP.
68
<PAGE>
24.1 Powers of attorney for the following directors signed in
February, 1997 (incorporated by reference to Exhibit 24 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996):
Anne L. Armstrong
Richard B. Cheney
Lord Clitheroe
Robert L. Crandall
W. R. Howell
Delano E. Lewis
C. J. Silas
Richard J. Stegemeier
24.2 Power of attorney signed in December 1997 for Charles J.
DiBona (incorporated by reference to Exhibit 24(b) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
24.3 Powers of attorney for the following directors signed in
October, 1998 (incorporated by reference to Exhibit 24.3 to
the Company's Form 10-K for the year ended December 31, 1998):
William E. Bradford
Lawrence S. Eagleburger
Ray L. Hunt
J. Landis Martin
Jay A. Precourt
* 27.1 Amended financial data schedule for the Registrant for the
twelve months ended December 31, 1998.
* 27.2 Amended financial data schedule for the Registrant for the
twelve months ended December 31, 1997.
99.1 Report of independent accountants, PricewaterhouseCoopers LLP.
* Filed with this Form 10-K/A
------------------------------------------------------------------------------
(b) Reports on Form 8-K:
During the fourth quarter of 1998:
A Current Report on Form 8-K dated September 29, 1998, was filed reporting
on Item 5. Other Events, regarding a press release dated September 29,
1998 announcing the completion of the Merger between the Company and
Dresser Industries, Inc.
A Current Report on Form 8-K dated September 29, 1998, was filed reporting
on Item 2. Acquisition or Disposition of Assets, regarding the acquisition
of Dresser Industries, Inc., pursuant to the plan of merger dated as of
February 25, 1998.
69
<PAGE>
A Current Report on Form 8-K/A dated September 29, 1998, was filed reporting on
Item 2. Acquisition or Disposition of Assets, regarding the acquisition of
Dresser Industries, Inc., and included supplemental financial statements for
Halliburton Company for the three years ended December 31, 1997 and six months
ended June 30, 1998.
A Current Report on Form 8-K dated October 29, 1998, was filed reporting on Item
5. Other Events, regarding a press release dated October 29, 1998, announcing
third quarter earnings.
A Current Report on Form 8-K dated October 30, 1998, was filed reporting on Item
5. Other Events, regarding a press release dated October 30, 1998 announcing the
fourth quarter dividend.
A Current Report on Form 8-K dated November 19, 1998, was filed reporting on
Item 5. Other Events, regarding a press release dated November 19, 1998
announcing Halliburton Company $150 million notes offering.
A Current Report on Form 8-K dated November 24, 1998, was filed reporting on
Item 5. Other Events, regarding the $150 million notes offering and the filing
of the final copy of the Terms Agreement and the form of Note.
A Current Report on Form 8-K dated November 30, 1998, was filed reporting on
Item 5. Other Events, regarding a press release dated November 30, 1998
announcing Dresser Industries, Inc. Change of Control Offer to purchase all
outstanding and guaranteed senior notes of Baroid Corporation.
A Current Report on Form 8-K dated December 28, 1998, was filed reporting on
Item 5. Other Events, regarding a press release dated December 28, 1998
announcing a $35 million pretax special charge in the 1998 fourth quarter to
provide for reduction of personnel.
During the first quarter of 1999 through March 23, 1999:
A Current Report on Form 8-K dated January 22, 1999, was filed reporting on Item
5. Other Events, regarding a press release dated January 22, 1999 announcing
that the Company has entered into an agreement with W-H Energy Services, Inc.
for the sale of the Company's logging-while-drilling (LWD) and related
measurement-while-drilling (MWD) business.
A Current Report on Form 8-K dated January 25, 1999, was filed reporting on Item
5. Other Events, regarding a press release dated January 25, 1999 announcing
fourth quarter earnings.
A Current Report on Form 8-K dated February 18, 1999, was filed reporting on
Item 5. Other Events, regarding a press release dated February 18, 1999
announcing declaration of the first quarter dividend.
70
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To Halliburton Company:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in this Form 10-K, and have issued
our report thereon dated January 25, 1999. Our audits were made for the purpose
of forming an opinion on those statements taken as a whole. The supplemental
schedule (Schedule II) is the responsibility of Halliburton Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
---------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 1999
71
<PAGE>
HALLIBURTON COMPANY
Schedule II - Valuation and Qualifying Accounts
(Millions of Dollars)
<TABLE>
<CAPTION>
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End of
Descriptions of Period Expenses Accounts (A) Period
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 58.6 $ 26.5 $ - $ (8.5) $ 76.6
--------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 6.1 $ 910.8 (B) $ - $ (557.8) $ 359.1
---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 65.3 $ 13.7 $ - $ (20.4) $ 58.6
---------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 57.7 $ 6.2 $ - $ (57.8)(C) $ 6.1
--------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 62.7 $ 15.8 $ - $ (13.2) $ 65.3
--------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 0.0 $ 85.8 $ - $ (28.1) $ 57.7
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Receivable write-offs and reclassifications, net of recoveries.
(B) Includes $887.5 million during the calendar year ended December 31, 1998
and $23.3 million during Dresser's two-month period ended December 31,
1997. See Note 14.
(C) Includes $25.4 million for items of a longer-term nature reclassified to
Other Liabilities at the end of 1997. See Note 7.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 11th day of
January, 2000.
HALLIBURTON COMPANY
By /s/ Richard B. Cheney
-----------------------------
Richard B. Cheney
Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities indicated on
this 11th day of January, 2000.
Signature Title
- --------- -----
/s/ Richard B. Cheney Chief Executive Officer and Director
- -------------------------------
Richard B. Cheney
/s/ Gary V. Morris Executive Vice President and
- ------------------------------- Chief Financial Officer
Gary V. Morris
/s/ R. Charles Muchmore, Jr. Vice President and Controller and
- ------------------------------- Principal Accounting Officer
R. Charles Muchmore, Jr.
73
<PAGE>
Signature Title
- --------- -----
* ANNE L. ARMSTRONG Director
- ---------------------------------------
Anne L. Armstrong
* WILLIAM E. BRADFORD Chairman of the Board and Director
- ---------------------------------------
William E. Bradford
* LORD CLITHEROE Director
- ---------------------------------------
Lord Clitheroe
*ROBERT L. CRANDALL Director
- ---------------------------------------
Robert L. Crandall
* CHARLES J. DIBONA Director
- ---------------------------------------
Charles J. DiBona
* LAWRENCE S. EAGLEBURGER Director
- ---------------------------------------
Lawrence S. Eagleburger
* W. R. HOWELL Director
- ---------------------------------------
W. R. Howell
* RAY L. HUNT Director
- ---------------------------------------
Ray L. Hunt
* J. LANDIS MARTIN Director
- ---------------------------------------
J. Landis Martin
* JAY A. PRECOURT Director
- ---------------------------------------
Jay A. Precourt
* C. J. SILAS Director
- ---------------------------------------
C. J. Silas
* RICHARD J. STEGEMEIER Director
- ---------------------------------------
Richard J. Stegemeier
* /s/ SUSAN S. KEITH
- ---------------------------------------
Susan S. Keith, Attorney-in-fact
74
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K/A into the Company's previously filed
registration statements on Form S-3 (Nos. 33-65772 and 333-32731).
/s/ ARTHUR ANDERSEN LLP
---------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 10, 2000
23-1
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-65777, 33-
65772, and 333-32731) and the Registration Statements on Form S-8 (Nos. 33-
54881, 333-40717, 333-37533, 333-13475, 333-65373, and 333-55747) of Halliburton
Company of our report dated November 26, 1997 appearing on page 27 of Dresser
Industries, Inc.'s Annual Report on Form 10-K for the year ended October 31,
1997 and included as Exhibit 99.1 of this Form 10-K/A.
/s/ PRICEWATERHOUSECOOPERS LLP
- ---------------------------------
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas,
January 10, 2000
23-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains amended summary financial information extracted from
Halliburton Company's financial statements for the year ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998
<EXCHANGE-RATE> 1 1 1 1
<CASH> 270 281 229 203
<SECURITIES> 0 0 0 0
<RECEIVABLES> 3,525 3,718 3,995 3,937
<ALLOWANCES> 0 0 0 77
<INVENTORY> 1,390 1,451 1,432 1,285
<CURRENT-ASSETS> 5,617 5,854 6,292 6,066
<PP&E> 6,805 6,952 6,967 6,825
<DEPRECIATION> 3,958 4,012 3,995 3,929
<TOTAL-ASSETS> 10,996 11,369 11,656 11,066
<CURRENT-LIABILITIES> 3,671 3,850 4,693 3,937
<BONDS> 1,296 1,285 1,285 1,370
0 0 0 0
0 0 0 0
<COMMON> 1,133 1,136 1,114 1,115
<OTHER-SE> 3,299 3,479 2,934 2,946
<TOTAL-LIABILITY-AND-EQUITY> 10,996 11,369 11,656 11,066
<SALES> 1,192 2,461 3,693 5,070
<TOTAL-REVENUES> 4,254 8,840 13,064 17,353
<CGS> 1,005 2,119 3,127 4,342
<TOTAL-COSTS> 3,734 7,718 12,409 16,357
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 29 61 96 137
<INCOME-PRETAX> 338 748 138 279
<INCOME-TAX> 127 281 184 244
<INCOME-CONTINUING> 204 447 (81) (15)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 204 447 (81) (15)
<EPS-BASIC> 0.46 1.02 (0.18) (0.03)
<EPS-DILUTED> 0.46 1.01 (0.18) (0.03)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains amended summary financial information extracted from
Halliburton Company's financial statements for the year ended December 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 384
<SECURITIES> 0
<RECEIVABLES> 3,447
<ALLOWANCES> 59
<INVENTORY> 1,294
<CURRENT-ASSETS> 5,438
<PP&E> 6,646
<DEPRECIATION> 3,880
<TOTAL-ASSETS> 10,704
<CURRENT-LIABILITIES> 3,453
<BONDS> 1,297
0
0
<COMMON> 1,134
<OTHER-SE> 3,183
<TOTAL-LIABILITY-AND-EQUITY> 10,704
<SALES> 4,857
<TOTAL-REVENUES> 16,272
<CGS> 4,038
<TOTAL-COSTS> 14,208
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111
<INCOME-PRETAX> 1,313
<INCOME-TAX> 491
<INCOME-CONTINUING> 772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 772
<EPS-BASIC> 1.79
<EPS-DILUTED> 1.77
</TABLE>
<PAGE>
Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the balance sheet, the statements of income, of cash flows and
of shareholders' equity of Dresser Industries, Inc. and subsidiaries (not
presented separately herein) present fairly in all material respects its
financial position at October 31, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended October 31, 1997,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
- ----------------------------------
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas,
November 26, 1997
99-1
