Halliburton Company 10-Q Summary: Period Ended September 30, 1998
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 1998. The filing reflects the completion of the merger with Dresser Industries, Inc. on September 29, 1998, accounted for using the pooling of interests method. Consequently, financial statements are restated to include Dresser's results for all periods presented. The company operates in three segments: Energy Services, Engineering and Construction, and Dresser Equipment.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Total Revenues | $4,224.0 million | $13,064.0 million |
| Operating Income (Loss) | $(577.5) million | $219.7 million |
| Net Income (Loss) | $(527.0) million | $(80.4) million |
| Diluted EPS | $(1.20) | $(0.18) |
| Cash and Equivalents | $228.5 million (Sep 30, 1998) | $228.5 million (Sep 30, 1998) |
| Operating Cash Flow | N/A | $313.6 million |
| Short-term Debt | $572.3 million | $572.3 million |
| Long-term Debt | $1,284.9 million | $1,284.9 million |
Operating Margins (Excluding Special Charges): The company reported an operating margin of 12.1% for the Energy Services Group and 3.9% for the Engineering and Construction Group in the third quarter. Consolidated operating income before special charges was $367.6 million for the quarter and $1,164.8 million for the nine-month period.
Material Changes vs. Prior Period
- Special Charges: The primary driver of the reported loss was a pretax special charge of $945.1 million ($722 million after tax) recorded in the third quarter. This charge covered consolidation, restructuring, and merger-related expenses, including $509 million in asset write-offs, $205 million in personnel reduction costs (approx. 8,100 employees), and $121 million in facility consolidation.
- Revenue Growth: Consolidated revenues increased 1% in the third quarter and 11% for the nine-month period compared to 1997, driven largely by the inclusion of Dresser Industries and growth in international operations.
- Segment Performance: Energy Services revenues declined 3% in the quarter due to a 21% drop in worldwide rotary rig counts, though upstream engineering services grew. Engineering and Construction revenues rose 9% due to active projects in Algeria, Norway, and Qatar.
- Liquidity: Cash and equivalents decreased by $117.8 million year-to-date. Short-term borrowings increased significantly ($426.7 million net borrowings in the first nine months) to fund working capital and capital expenditures.
Guidance, Outlook, and Risks
- Market Conditions: Management notes that declining oil prices in 1998 have reduced drilling activity and caused customer hesitation on long-term projects. The company is implementing cost-cutting measures, including employee reductions in low-activity areas and scaling back discretionary spending.
- Year 2000 (Y2K) Readiness: The company estimates it is 30-35% complete with its Y2K program, with remediation expected to finish by Q3 1999. Estimated total costs are $60-$65 million. Failure to address Y2K issues poses a risk of material business disruption.
- Legal and Environmental Contingencies:
- Asbestosis Litigation: Approximately 63,000 claims are pending; management believes current provisions are adequate.
- Environmental: The company is a potentially responsible party (PRP) for the Jasper County Superfund Site in Missouri. Liability extent is currently indeterminable.
- Merger Litigation: Three class-action lawsuits regarding the Dresser merger consideration are pending; management intends to defend vigorously.
- Divestitures: The company sold its 36% interest in M-I L.L.C. for $265 million and is required by a consent decree to divest its logging-while-drilling (LWD) business by March 28, 1999.
Investor Verification Checklist
- Special Charge Validity: Verify the composition and necessity of the $945.1 million special charge, specifically the $509 million in asset write-offs and the $205 million in severance costs.
- Merger Integration: Assess the progress of integrating Dresser Industries and the impact of the pooling of interests accounting method on comparability.
- Debt Structure: Review the increase in short-term debt ($572.3 million) and the company's ability to service this debt given the reported net loss.
- Y2K Execution: Confirm the timeline and budget adherence for the Y2K remediation program, given the 30-35% completion status.
- Regulatory Compliance: Monitor the timeline for the mandatory divestiture of the LWD business and the resolution of the Jasper County Superfund liability.