Halliburton Company 2002 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2002. Halliburton Company operates in two primary segments: the Energy Services Group (providing oilfield services and software) and the Engineering and Construction Group (operating as KBR). The company serves energy, industrial, and governmental customers in over 100 countries. In 2002, the company completed a major corporate reorganization to separate these two segments into distinct operating subsidiary groups to improve efficiency and potentially facilitate future separation.
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Total Revenues | $12,572 million | $13,046 million |
| Operating Income (Loss) | $(112) million | $1,084 million |
| Net Income (Loss) | $(998) million | $809 million |
| Diluted EPS | $(2.31) | $1.88 |
| Cash and Equivalents (Year End) | $1,107 million | $290 million |
| Operating Cash Flow | $1,562 million | $1,029 million |
| Long-Term Debt (Total) | $1,476 million | $1,484 million |
| Capital Expenditures | $764 million | $797 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 4% to $12.6 billion. The Energy Services Group saw a 12% revenue drop due to a 28% decline in U.S. rig counts and pricing pressure. Conversely, the Engineering and Construction Group revenues increased 10% to $5.7 billion.
- Net Loss: The company reported a net loss of $998 million, a reversal from the $809 million profit in 2001. This was primarily driven by a $675 million after-tax charge related to asbestos and silica liabilities recorded in discontinued operations and continuing operations.
- Segment Performance:
- Energy Services: Operating income fell 38% to $638 million, impacted by lower activity in North America and a $79 million loss on the sale of a joint venture.
- Engineering & Construction: Operating income swung to a loss of $685 million from a profit of $111 million. This was largely due to a $117 million loss on the Barracuda-Caratinga project in Brazil and significant asbestos-related charges.
- Liquidity: Despite the net loss, cash and equivalents increased significantly to $1.1 billion, driven by strong operating cash flows ($1.6 billion) and the sale of receivables.
Guidance, Outlook, Risks, and Contingencies
- Asbestos and Silica Settlement: On December 18, 2002, Halliburton announced an agreement in principle for a global settlement of asbestos and silica claims. The settlement involves up to $2.775 billion in cash, 59.5 million Halliburton shares (valued at $1.1 billion), and notes. Implementation requires a pre-packaged Chapter 11 filing for subsidiaries DII Industries and Kellogg, Brown & Root. As of the filing date, the settlement was not deemed "probable" under SFAS No. 5, but the company adjusted its liability estimate to $3.4 billion.
- SEC Investigation: The SEC initiated a formal investigation into Halliburton's accounting practices regarding the recording of revenues associated with cost overruns and unapproved claims on long-term engineering and construction projects. The company is cooperating and believes it properly applied accounting standards.
- Geopolitical Risks: Operations in Venezuela and Nigeria were negatively impacted by political instability and civil disturbances. The armed conflict in the Middle East also poses risks to operations and oil prices.
- Outlook: Management expects oilfield services activity to be flat in the short term with improvement in the second half of 2003. Capital expenditures for 2003 are expected to be approximately $700 million.
Investor Verification Checklist
- Asbestos Settlement Status: Verify the progress of the Chapter 11 filing for DII Industries and KBR and the likelihood of court confirmation for the global settlement.
- SEC Investigation Outcome: Monitor developments regarding the SEC's inquiry into revenue recognition practices for unapproved claims.
- Barracuda-Caratinga Project: Assess the resolution of the $117 million loss and potential liquidated damages on the Brazil project.
- Credit Ratings: Confirm current credit ratings (downgraded to BBB/A-3 by S&P and Baa2/P-2 by Moody's) and the impact on borrowing costs and letter of credit collateralization.
- Insurance Recoveries: Review the status of litigation with insurers regarding the $2.1 billion in probable insurance recoveries for asbestos claims.