HAL

Halliburton Company (HAL) - Q2 2001 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2001. Halliburton operates two primary segments: the Energy Services Group (oilfield services and products) and the Engineering and Construction Group (Kellogg Brown & Root). The company is in the process of divesting its former Dresser Equipment Group, which is now reported as discontinued operations.

Key Financial Metrics

Operating Margins: Consolidated operating margin for Q2 2001 was approximately 8.1% ($272M / $3,339M), compared to 4.4% in Q2 2000.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16% in Q2 2001 and 13% for the six-month period. The Energy Services Group drove this growth with a 37% revenue increase in Q2, fueled by higher rig counts and natural gas prices in North America.
• Segment Performance: While Energy Services revenues and operating income surged, the Engineering and Construction Group saw revenues decline 10% in Q2 and 17% for the six months due to the completion of large projects and customer delays in capital spending.
• Discontinued Operations: Net income was significantly boosted by a $299 million after-tax gain from the sale of the remaining Dresser Equipment Group businesses in April 2001. Conversely, discontinued operations recorded a $60 million loss in Q2 2001 due to a $92 million accrual for asbestos liabilities related to the Harbison-Walker spin-off.
• Liquidity: Cash and equivalents increased to $328 million. Short-term debt decreased significantly from $1.57 billion to $717 million, largely due to the use of proceeds from the Dresser sale to repay borrowings.

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth in the Energy Services Group through Q3 2001, driven by strong North American activity and international improvements. The Engineering and Construction Group is expected to improve later in the year as new projects are finalized.
• Asbestos Litigation (Critical Risk): The company faces significant uncertainty regarding asbestos claims. A Delaware Chancery Court ruled that Highlands Insurance Company is not obligated to cover claims against Kellogg Brown & Root; Halliburton is appealing this decision. Additionally, Halliburton has determined that Harbison-Walker (a former subsidiary) cannot fulfill its indemnity obligations for assumed claims, leading to a $92 million accrual. The company is actively litigating against Harbison-Walker and its insurers.
• Acquisitions: Halliburton agreed to acquire Magic Earth Inc. (stock valued at $100M) and completed the acquisition of PGS Data Management for $175 million.
• Accounting Changes: The company is evaluating the impact of new FASB standards (No. 141 and 142) regarding business combinations and goodwill amortization, which will cease amortization of goodwill effective Jan 1, 2002.

Investor Verification Checklist

• Asbestos Liability Exposure: Verify the status of the appeal against the Delaware Chancery Court ruling regarding Highlands Insurance coverage and the outcome of litigation against Harbison-Walker.
• Discontinued Operations Gain: Confirm the final purchase price adjustments for the Dresser Equipment Group sale to ensure the $299 million gain is accurate.
• Engineering Backlog: Monitor the Engineering and Construction Group's backlog and new contract awards to validate the management's expectation of a turnaround in the second half of 2001.
• Debt Structure: Review the terms of the new $425 million medium-term notes issued in July 2001 and the company's ability to maintain liquidity without the Dresser sale proceeds.