HALLIBURTON CO annual report, Q4 FY2003

Halliburton Company 2003 10-K Summary

Business Context and Reporting Period

This report covers the fiscal year ended December 31, 2003. Halliburton Company is a global provider of energy services, products, and engineering/construction services. The company operates through five segments: Drilling and Formation Evaluation, Fluids, Production Optimization, Landmark and Other Energy Services (collectively the Energy Services Group), and the Engineering and Construction Group (KBR). A defining event of the period was the filing of pre-packaged Chapter 11 proceedings on December 16, 2003, by subsidiaries DII Industries and Kellogg Brown & Root to resolve asbestos and silica liabilities.

Key Financial Metrics

Metric20032002
Total Revenues$16,271 million$12,572 million
Operating Income$720 million($112 million) loss
Net Income (Loss)($820 million)($998 million)
Cash and Equivalents$1,815 million$1,107 million
Long-Term Debt$3,415 million$1,181 million
Capital Expenditures$515 million$764 million
Employees101,00083,000

Note: Net loss in 2003 was driven by a $1.151 billion after-tax loss from discontinued operations related to asbestos/silica settlements. Income from continuing operations was $339 million.

Material Changes vs. Prior Period

  • Revenue Growth: Consolidated revenues increased 29.4% to $16.3 billion, primarily driven by a 61.7% surge in the Engineering and Construction Group (KBR) due to government services in Iraq ($3.6 billion).
  • Profitability: Operating income improved from a $112 million loss in 2002 to $720 million in 2003. This turnaround was aided by the absence of the $644 million asbestos charge recorded in 2002 and strong government contract performance.
  • Debt Structure: Long-term debt increased significantly (from $1.2 billion to $3.4 billion) as the company issued $2.2 billion in notes to fund working capital for Iraq operations and prepare for asbestos settlement obligations.
  • Discontinued Operations: A $1.016 billion pre-tax charge was recorded in 2003 for asbestos and silica liabilities, reclassified to discontinued operations following the Chapter 11 filing.

Guidance, Outlook, and Risks

  • Asbestos/Silica Settlement: The company expects to contribute up to $2.5 billion in cash, 59.5 million shares of common stock, and insurance proceeds to trusts upon confirmation of the reorganization plan. A settlement with insurer Equitas for $575 million was reached in January 2004, contingent on plan confirmation.
  • Government Contract Risks: Operations in Iraq face scrutiny from the Defense Contract Audit Agency (DCAA). The company has temporarily credited $36 million and withheld $141 million in invoices pending resolution of invoicing disputes regarding food services. An SEC investigation into revenue recognition practices is ongoing.
  • Barracuda-Caratinga Project: This Brazilian construction project remains in a loss position with an inception-to-date pretax loss of $355 million. The company faces potential liquidated damages of up to $96 million if time extension claims are unsuccessful.
  • Liquidity: Working capital requirements for Iraq operations are expected to increase in the first half of 2004. The company has secured a $700 million revolving credit facility and a delayed-draw term facility to manage cash needs.

Investor Verification Checklist

  • Chapter 11 Confirmation: Verify the status of the bankruptcy court confirmation hearing (scheduled for May 2004) and the finality of the asbestos/silica settlement plan.
  • Government Audit Outcomes: Monitor the resolution of DCAA inquiries regarding Iraq food service invoicing ($141 million withheld) and the SEC investigation into revenue recognition.
  • Insurance Recoveries: Track the timing and certainty of the $575 million Equitas payment and other insurance recoveries estimated at $2.0 billion.
  • Barracuda-Caratinga Status: Assess progress on claims negotiations and the risk of liquidated damages on the Brazil project.
  • Debt Ratings: Confirm that credit ratings remain at investment grade (BBB/Baa2) to avoid triggering collateral requirements on credit facilities.