HAL

Halliburton Company (HAL) - Q2 2004 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2004. Halliburton operates in two primary groups: the Energy Services Group (ESG) and the Engineering and Construction Group (KBR). The company is currently navigating a prepackaged Chapter 11 reorganization for several subsidiaries (including DII Industries and KBR) to resolve asbestos and silica liabilities. A significant portion of revenue is derived from U.S. Government contracts in Iraq (LogCAP, RIO I, PCO Oil South).

Key Financial Metrics (Six Months Ended June 30, 2004)

Note: Net loss is heavily impacted by discontinued operations related to asbestos/silica settlements and the Barracuda-Caratinga project charges.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 57% year-over-year, driven primarily by a 107% increase in the Engineering and Construction Group due to U.S. Government work in Iraq ($4.0 billion in revenue for the six months).
• Operating Loss Drivers: Despite revenue growth, operating income declined 30% due to a $407 million pretax charge related to the Barracuda-Caratinga project in Brazil (a $310 million charge in Q2 alone) and increased general corporate expenses.
• Discontinued Operations: A massive $750 million loss from discontinued operations was recorded, primarily due to a $680 million write-down of insurance receivables related to asbestos/silica liabilities and a $190 million revaluation of stock to be contributed to settlement trusts.
• Segment Performance: The Energy Services Group saw operating income rise 17% to $485 million, benefiting from higher oil/gas prices and rig counts. Conversely, the Engineering and Construction Group posted an operating loss of $292 million.

Guidance, Outlook, and Risks

• Barracuda-Caratinga Project: The project is significantly behind schedule and in a financial loss position. An inception-to-date pretax loss of $762 million has been recorded. Management expects completion in 2005 but faces potential additional liquidated damages if delays persist. An agreement in principle with Petrobras is pending final approval.
• Asbestos/Silica Settlement: The Chapter 11 plan of reorganization was confirmed by the bankruptcy court in July 2004, though insurance companies have filed notices of appeal. The plan requires contributing up to $2.3 billion in cash and 59.5 million shares of Halliburton stock to trusts. Management expects to receive approximately $1.4 billion (present value) from insurance settlements.
• Government Contract Risks: The Defense Contract Audit Agency (DCAA) is recommending withholding approximately $203 million of billings related to dining facilities in Iraq. Additional withholdings of $57 million exist for the RIO I contract pending definitization. Investigations by the DOJ and SEC regarding potential overbilling and improper payments in Iraq and Nigeria are ongoing.
• Liquidity: The company maintains investment-grade credit ratings and has secured $1.2 billion in revolving credit facilities (undrawn) to fund working capital and settlement obligations. Cash flow from operations improved significantly to $180 million in the first half of 2004.

Investor Verification Checklist

• Settlement Finality: Verify the status of the appeals filed by insurance companies against the Chapter 11 confirmation order and the likelihood of the $1.4 billion insurance recovery.
• Barracuda-Caratinga Exposure: Monitor the finalization of the agreement with Petrobras and the potential for additional liquidated damages beyond the $85 million already accrued.
• Government Audit Outcomes: Track the resolution of DCAA inquiries regarding Iraq dining facility billings ($203 million withheld) and the DOJ/SEC investigations into potential overbilling and the Nigerian joint venture.
• Working Capital Needs: Assess the impact of continued government contract withholdings on liquidity, given the substantial cash outflows required for the asbestos settlement later in 2004.