HAL

Halliburton Company (10-Q) Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 1998. Halliburton Company operates in over 100 countries, providing energy services and engineering/construction services. Approximately 79% of 1997 revenues were derived from the energy industry. The company is currently in the process of merging with Dresser Industries, Inc., a transaction approved by shareholders and cleared by the European Commission and Canadian authorities, with completion expected in the fall of 1998.

Key Financial Metrics

Margins: Energy Group operating margin was 11.6% for both the quarter and the six-month period. Engineering and Construction Group operating margin was 6.5% for the quarter and 5.1% for the six months.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 11% for the quarter and 17% for the six months compared to the prior year. The Energy Group drove this growth with a 17% quarterly increase and 28% six-month increase, despite a decline in the worldwide rotary rig count.
• Profitability: Net income rose 34% for the quarter and 38% for the six months. Operating income increased 31% (quarter) and 38% (six months).
• Segment Performance: The Engineering and Construction Group saw a slight revenue decline (1% for six months) due to the sale of its environmental services business and lower activity in pulp/paper and military support contracts. However, operating income surged 66% (quarter) and 32% (six months), aided by a claim settlement on a Middle Eastern project.
• Liquidity: Cash and equivalents decreased by $75.9 million to $145.4 million. Operating activities used $22.2 million in cash, primarily to fund working capital requirements for increased revenues.
• Debt: Short-term borrowings increased significantly to $319.1 million (from $2.7 million at year-end 1997) to fund working capital and capital expenditures. Total debt represented 23% of total capitalization.

Outlook, Risks, and Unusual Items

• Merger with Dresser: The merger is proceeding with regulatory approvals received from the EU and Canada. The U.S. Department of Justice has requested additional information; Halliburton has offered to divest its 36% interest in M-I L.L.C. to resolve antitrust concerns.
• Market Conditions: Declining oil prices in the first half of 1998 have reduced the worldwide rotary rig count. Management is implementing plans to reduce employees in weaker geographic areas and curtail discretionary spending.
• Environmental Contingencies: The company is a potentially responsible party (PRP) for the Jasper County Superfund Site in Missouri. While management believes most environmental liabilities will not be material, the cost for the Jasper County site cannot be determined at this time.
• Year 2000 (Y2K): The company is executing an enterprise-wide Y2K program. Inventory of systems is complete, and analysis is underway. The company anticipates mission-critical systems will be Y2K ready by the first half of 1999. Costs are not expected to be material.
• Unusual Items: Operating income for the Engineering and Construction Group included a settlement on a Middle Eastern construction project. Excluding this, margins were lower (approx. 4.5% for the quarter).

Investor Verification Checklist

• Merger Completion: Verify the final status of the U.S. Department of Justice review and the timeline for closing the Dresser merger.
• Oil Price Sensitivity: Monitor the impact of continued low oil prices on the worldwide rig count and Halliburton's ability to maintain revenue growth in the Energy Group.
• Working Capital Trends: Review future cash flow statements to ensure the company can manage the significant increase in receivables and inventory without further straining liquidity.
• Environmental Liability: Track developments regarding the Jasper County Superfund Site to assess potential future costs.
• Y2K Remediation: Confirm the progress of the Y2K remediation program and any potential disruptions from suppliers or customers.