Halliburton Company 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Halliburton Company for the period ended June 30, 2003. Halliburton operates globally in the energy industry, providing services and products for oil and gas exploration, development, and production, as well as engineering and construction services. During the second quarter of 2003, the company restructured its Energy Services Group into four divisions: Drilling and Formation Evaluation, Fluids, Production Optimization, and Landmark and Other Energy Services. The Engineering and Construction Group (KBR) remains a separate segment.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2003 | Six Months Ended June 30, 2003 |
|---|---|---|
| Total Revenues | $3,599 million | $6,659 million |
| Operating Income | $71 million | $213 million |
| Net Income | $26 million | $69 million |
| Diluted EPS | $0.06 | $0.16 |
| Cash and Equivalents | $1,859 million (Balance Sheet) | N/A |
| Operating Cash Flow | N/A | ($213 million) used |
| Long-Term Debt | $2,374 million (Balance Sheet) | N/A |
| Asbestos/Silica Liability (Gross) | $3,396 million | N/A |
Note: Operating cash flow for the six months ended June 30, 2003, was negative $213 million, compared to positive $620 million in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $364 million (11%) in the second quarter and $417 million (7%) for the six months compared to 2002. This was driven primarily by the Engineering and Construction Group, which saw a $340 million increase in Q2 revenues.
- Profitability Turnaround: The company returned to profitability, reporting a net income of $26 million in Q2 2003, compared to a net loss of $498 million in Q2 2002. Operating income improved by $476 million in Q2.
- Segment Performance:
- Energy Services: Revenues were relatively flat or slightly down in some segments (Drilling, Landmark) due to divestitures (Mono Pumps, Wellstream) and lower activity in Venezuela, but offset by gains in Fluids and Production Optimization.
- Engineering & Construction (KBR): Revenues surged due to government services and onshore projects. However, the segment reported an operating loss of $148 million in Q2, largely due to a $173 million charge related to the Barracuda-Caratinga project in Brazil.
- Discontinued Operations: Losses from discontinued operations decreased significantly to $16 million in Q2 2003 from $140 million in Q2 2002, primarily due to the absence of the massive asbestos charges recorded in 2002.
Guidance, Outlook, Risks, and Unusual Items
- Asbestos and Silica Settlement: The company is pursuing a pre-packaged Chapter 11 bankruptcy filing for subsidiaries DII Industries and Kellogg Brown & Root to settle asbestos and silica claims. The proposed settlement involves up to $2.775 billion in cash, 59.5 million shares of Halliburton stock (valued at $1.4 billion), and notes. If the settlement becomes probable, the company expects to record an additional pretax charge of $606 million. The filing is expected in late Q3 or early Q4 2003, pending financing and court approval.
- Barracuda-Caratinga Project: This major offshore project in Brazil incurred a $173 million loss in Q2 2003 due to higher costs and schedule delays. The project is 75% complete. A non-binding agreement was reached to extend timelines and arbitrate claims, but lender approval is required. The company faces potential liquidated damages and the risk of letters of credit being drawn.
- SEC Investigation: The SEC is conducting a formal investigation into Halliburton's accounting practices regarding revenue recognition for unapproved claims on long-term construction projects. The company has settled related securities class actions for $6 million (covered by insurance).
- Liquidity and Financing: In June 2003, Halliburton issued $1.2 billion of 3.125% convertible senior notes to help fund the proposed asbestos settlement. The company maintains investment-grade credit ratings but faces risks of downgrade if the settlement is not completed or if credit ratings fall below investment grade, which could trigger collateral requirements on letters of credit.
- Outlook: Management expects modest increases in U.S. activity levels in the second half of 2003, driven by natural gas prices. Pricing for products and services is expected to gradually improve.
Key Facts for Investor Verification
- Settlement Probability: Verify the status of the proposed asbestos/silica settlement, specifically the completion of due diligence on claims and the securing of financing commitments required for the Chapter 11 filing.
- Barracuda-Caratinga Resolution: Monitor the finalization of the heads of agreement with Petrobras and the approval by project lenders, as this impacts potential liquidated damages and cash flow requirements.
- SEC Investigation Outcome: Track the conclusion of the SEC investigation into revenue recognition practices and any potential restatements or penalties.
- Credit Ratings: Watch for any changes in credit ratings from Moody's and Standard & Poor's, as a downgrade below investment grade could trigger cash collateralization of letters of credit and restrict access to credit lines.
- Working Capital Trends: Review future cash flow statements for continued pressure on working capital, particularly related to government services and the Barracuda project.