HAL

Halliburton Company (HAL) - Q2 2002 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2002. Halliburton operates in two primary segments: the Energy Services Group (oilfield services) and the Engineering and Construction Group (operating as Kellogg Brown & Root, or KBR). The company is currently undergoing a significant reorganization to separate these businesses into wholly-owned subsidiary groups. The reporting period was heavily impacted by a downturn in the global energy sector, specifically reduced drilling activity in North America, and substantial non-recurring charges related to asbestos litigation and project losses.

Key Financial Metrics

Note: Debt figures derived from Balance Sheet (Short-term notes payable + Current maturities + Long-term debt).

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 3% in Q2 and 4% YTD compared to 2001. The Energy Services Group saw a 13% revenue drop in Q2 due to lower rig counts in North America and increased discounting. Conversely, the Engineering and Construction Group revenues increased 11% in Q2, driven by progress on large offshore projects in Latin America.
• Operating Loss: The company swung from an operating profit of $272 million in Q2 2001 to a loss of $405 million in Q2 2002. This reversal was driven by specific charges rather than core operational failure alone.
• Asbestos Accrual: A major non-cash charge of $483 million (pretax) was recorded in Q2 2002 based on a new econometric study projecting future asbestos liabilities through 2017. Of this, $330 million was allocated to the Engineering and Construction Group and $153 million to discontinued operations.
• Project Losses: The Engineering and Construction Group recorded a $119 million pretax loss on a fixed-price offshore project in Brazil (Barracuda-Caratinga).
• Investment Impairment: A $61 million pretax charge was recorded for the impairment of the company's 50% equity interest in the Bredero-Shaw joint venture.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Restructuring: The company is restructuring into two distinct groups to improve efficiency. YTD restructuring costs totaled $67 million, with an additional $20 million expected in the second half of 2002. Management anticipates annualized cost savings of $200 million in 2003.
• Market Conditions: Management expects natural gas prices to remain under pressure due to high storage levels, potentially impacting drilling activity in the U.S. through the third quarter. Oil prices are expected to remain volatile but stable around current levels.
• Backlog: Total backlog stands at $9.8 billion ($9.4 billion in Engineering and Construction, $0.4 billion in Energy Services).

• Asbestos Litigation: Approximately 312,000 open claims exist. The company faces uncertainty regarding insurance recoveries, particularly due to the Chapter 11 bankruptcy of Harbison-Walker and disputes with insurers (e.g., Equitas, Highlands Insurance). A $106 million bond has been posted for a patent infringement appeal.
• SEC Inquiry: The SEC has initiated a preliminary inquiry into the company's accounting practices regarding the accrual of revenue from unapproved claims on construction contracts. The company is cooperating fully.
• Securities Litigation: Multiple class-action lawsuits have been filed alleging violations of federal securities laws related to the disclosure of accounting changes for unapproved claims.
• Credit Ratings: Moody's and Standard & Poor's have lowered credit ratings (to Baa2 and A-, respectively) due to asbestos concerns and sector weakness. This increases borrowing costs and may trigger collateral requirements on letters of credit if ratings fall further.
• Patent Litigation: A jury awarded BJ Services $98 million in damages for patent infringement regarding fracturing fluids. Halliburton has appealed and posted a $106 million bond.

Investor Verification Checklist

• Asbestos Reserve Adequacy: Verify the assumptions used in the Dr. Rabinovitz econometric study regarding future claim filings and insurance recoverability, given the ongoing Harbison-Walker bankruptcy.
• SEC Investigation Status: Monitor the outcome of the SEC's inquiry into the accrual of unapproved claims revenue, as this could lead to restatements or fines.
• Project Loss Containment: Assess the likelihood of recovering the $101 million in unapproved claims associated with the Brazilian project loss.
• Liquidity Constraints: Review the impact of credit rating downgrades on the company's ability to secure letters of credit and the potential need for cash collateralization ($260 million at risk).
• Restructuring Execution: Track the realization of the projected $200 million in annualized cost savings from the business reorganization.