HAL

Halliburton Company (HAL) - Q1 2002 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2002. Halliburton operates two primary segments: the Energy Services Group (oilfield services and products) and the Engineering and Construction Group (Halliburton KBR). The company is currently undergoing a strategic reorganization to separate these two groups into distinct legal entities. The Dresser Equipment Group was divested in April 2001 and is reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 4% ($137 million) year-over-year. The Energy Services Group fell 2% due to a 28% drop in U.S. rig counts and increased discounting. The Engineering and Construction Group fell 8% due to project completions and economic slowdown.
• Profitability Drop: Operating income fell 38% ($75 million). This decline was driven by lower activity levels and significant non-recurring charges, partially offset by gains from asset sales.
• Discontinued Operations: Q1 2002 included a $28 million loss from discontinued operations (Dresser Equipment Group), primarily due to a $40 million payment related to the Harbison-Walker bankruptcy and asbestos claims. Q1 2001 showed a $22 million profit from this segment.
• Non-Recurring Items:
  • Gain: $108 million pretax gain from the sale of the 50% interest in European Marine Contractors Ltd.
  • Loss: $98 million pretax expense from a jury verdict in the BJ Services patent infringement case.
  • Write-off: $80 million write-off of receivables related to the Highlands Insurance Company litigation (asbestos coverage).

Outlook, Risks, and Management Commentary

• Market Conditions: Management notes that U.S. drilling activity is expected to improve in the second half of 2002 as natural gas prices rise and excess inventories are utilized. International rig counts remain stable.
• Reorganization: The company plans to complete the separation of its two business groups by mid-year 2002. Most reorganization costs (severance) are expected in Q2 2002, with cost savings anticipated in Q3 2002.
• Asbestos Litigation: A significant risk factor. The company faces approximately 292,000 open asbestos claims. The bankruptcy of Harbison-Walker (a former subsidiary) has stayed many claims, but the company recently lost a key appeal regarding insurance coverage from Highlands Insurance Company, resulting in an $80 million write-off. Future liability estimates for unknown claims are pending an external evaluation expected in Q2 2002.
• Patent Litigation: A $98 million verdict was rendered against Halliburton by BJ Services regarding a fracturing fluid patent. Halliburton plans to appeal, citing patent invalidity, and has alternative products available.
• Liquidity and Ratings: Credit ratings were lowered by Moody's (to Baa2) and S&P (to A-) due to asbestos concerns and sector weakness. While still investment grade, borrowing costs have increased. The company initiated a $150 million accounts receivable securitization program in April 2002 to enhance liquidity.

Investor Verification Checklist

• Asbestos Exposure: Verify the status of the Harbison-Walker bankruptcy plan and the potential for future accruals regarding unknown asbestos claims (expected Q2 2002).
• Patent Appeal: Monitor the appeal process for the BJ Services verdict and the potential impact of the injunction on the Phoenix fracturing fluid.
• Reorganization Costs: Track the actual severance and restructuring costs incurred in Q2 2002 against management's estimates.
• U.S. Rig Count: Confirm the projected recovery in U.S. land drilling activity and its impact on the Energy Services Group margins.
• Insurance Litigation: Review updates on the ongoing lawsuits with London-based insurers regarding coverage-in-place agreements.