HAL

Halliburton Company (10-Q) Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 1999, and the nine months ended on that date. Halliburton operates in three primary segments: Energy Services, Engineering and Construction, and Dresser Equipment. The company is in a post-merger integration phase following the 1998 acquisition of Dresser Industries, Inc., and is navigating a downturn in the global energy industry characterized by low oil prices and reduced drilling activity.

Key Financial Metrics

Margins: Operating margins for the Energy Services Group were 3.3% for the quarter and 3.2% for the nine-month period, significantly down from 12.2% and 12.4% in the prior year periods, respectively.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 16% in the third quarter and 15% for the nine months compared to 1998. This was driven by a 29% drop in worldwide rotary rig counts and reduced capital spending by customers.
• Profitability Improvement: Despite revenue declines, the company reported a net income of $58 million for the quarter, a significant turnaround from a net loss of $527 million in the same period of 1998. The 1998 loss included a $722 million after-tax special charge.
• Special Charge Reversal: In the second quarter of 1999, the company reversed $47 million of the 1998 special charges due to lower-than-estimated costs for severance and facility exits.
• Segment Performance: The Energy Services Group saw the steepest declines in operating income (down 80% for the quarter), while the Engineering and Construction Group remained relatively stable.

Guidance, Outlook, and Risks

• Outlook: Management anticipates a recovery in 2000 following customer approval of new capital budgets. Recent increases in oil prices and U.S. rig counts are viewed as positive indicators.
• Joint Venture Sale: Halliburton announced the sale of its interests in Dresser-Rand and Ingersoll-Dresser Pump to Ingersoll-Rand Company for approximately $1.1 billion. The transaction is expected to close December 30, 1999, generating an after-tax gain of roughly $380 million ($0.84 per share) and net cash proceeds of $630 million.
• Restructuring: The company expects to complete most restructuring activities accrued in 1998 by the end of 1999. Remaining cash outlays for these activities are estimated at $93 million.
• Year 2000 (Y2K): The company reports 96% completion of Y2K remediation tasks. Approximately $40 million has been spent, with an estimated $45 million total spend by January 1, 2000. Management believes third-party liability will not be material.
• Contingencies: Significant litigation risks include approximately 92,600 pending asbestosis claims (net liability of $13 million) and environmental remediation liabilities (accrued at $31 million). A dispute with Global Industrial Technologies regarding asbestos liability is in arbitration.

Investor Verification Checklist

• Joint Venture Closing: Verify the closing of the $1.1 billion sale of Dresser-Rand and Ingersoll-Dresser Pump interests and the recognition of the $380 million gain in Q4 1999.
• Restructuring Costs: Monitor the utilization of the remaining $93 million special charge reserve and confirm that actual costs align with the revised estimates.
• Energy Sector Recovery: Track worldwide rig counts and oil prices to validate the projected 2000 revenue recovery.
• Asbestos Litigation: Review updates on the 92,600 pending claims and the outcome of the arbitration with Global Industrial Technologies.
• Y2K Readiness: Confirm the final deployment and certification of systems by the end of 1999 to mitigate operational disruption risks.