HAL

Halliburton Company (10-Q) Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 1999, and the six 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. The business environment remains challenging due to a significant downturn in the oil and gas industry, characterized by low oil prices and reduced capital spending by customers.

Key Financial Metrics

Note: 1998 figures include Dresser Industries results restated for the merger.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 14% year-over-year for the six-month period. The Energy Services Group saw the steepest drop (26%), driven by a 34% decline in worldwide rotary rig counts. The Engineering and Construction Group was the only segment to report revenue growth (3%), aided by military logistics contracts.
• Profitability Compression: Operating income fell 56% to $348 million. The Energy Services Group operating margin contracted from 12.6% in 1998 to 3.1% in 1999 due to excess capacity and pricing pressures.
• Special Charge Reversal: The company recorded a $47 million credit to operating income, reversing a portion of the $980 million special charge taken in 1998. This adjustment resulted from lower-than-estimated severance and facility exit costs.
• Non-Operating Charge: A $26 million charge was recorded for the write-off of the entire investment in Bufete Industriale, S.A. de C.V. (Mexico) following the company's default on Eurobonds.
• Accounting Change: Adoption of SOP 98-5 resulted in a one-time after-tax charge of $19 million ($0.04 per share) related to expensing start-up costs previously capitalized.

Guidance, Outlook, and Risks

• Outlook: Management anticipates a recovery in 2000 following customer capital budget approvals. Recent strengthening of oil prices and a 20% increase in the U.S. rotary rig count from April lows are viewed positively.
• Restructuring: The company expects to complete most restructuring activities accrued in 1998 by year-end. Remaining cash outlays for these activities are estimated at approximately $130 million. Total annual cost savings from restructuring are projected at $500 million.
• Year 2000 (Y2K): The company estimates 84% completion of Y2K remediation tasks as of June 30, 1999. Total spending is projected to reach $48 million by January 1, 2000. Management believes third-party liability risks are not material.
• Legal and Environmental:
  • Asbestos: Approximately 74,000 claims are pending. Management believes current provisions are adequate.
  • Dispute with Global Industrial Technologies: A dispute regarding asbestos liability reimbursement is in arbitration; Halliburton expects a claim in excess of $40 million but asserts the claims are without merit.
  • Environmental: Kellogg Brown & Root is a potentially responsible party for the Jasper County Superfund Site; liability cannot currently be quantified.

Investor Verification Checklist

• Energy Services Margin Recovery: Verify if the 3.1% operating margin in Energy Services can improve as rig counts stabilize, given the heavy discounting environment.
• Restructuring Cost Accuracy: Confirm that the $130 million remaining cash outlay for 1998 special charges is sufficient to cover facility exits and severance.
• Bufete Write-off Impact: Assess if the $26 million write-off of the Mexican investment is fully recognized or if further impairment risks exist in other international joint ventures.
• Asbestos Liability Exposure: Monitor the arbitration outcome with Global Industrial Technologies and the volume of new asbestos claims filed.
• Y2K Readiness: Validate the 84% completion rate and the sufficiency of business continuity plans for operations in less developed countries.