Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
at least the past 90 days.
Yes X No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated
Filer X
Accelerated
filer
Non-accelerated
filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes No X
As
of
July 20, 2007, 890,164,956 shares of Halliburton Company common stock, $2.50
par
value per share, were outstanding.
HALLIBURTON
COMPANY
Index
Page
No.
PART
I.
FINANCIAL
INFORMATION
Item
1.
Financial
Statements
3-5
- Condensed
Consolidated Statements of Operations
3
- Condensed
Consolidated Balance Sheets
4
- Condensed
Consolidated Statements of Cash Flows
5
- Notes
to Condensed Consolidated Financial Statements
6-19
Item
2.
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
20-44
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
45
Item
4.
Controls
and Procedures
45
PART
II.
OTHER
INFORMATION
Item
1.
Legal
Proceedings
46
Item
1(a).
Risk
Factors
46
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
46
Item
3.
Defaults
Upon Senior Securities
46
Item
4.
Submission
of Matters to a Vote of Security Holders
47-48
Item
5.
Other
Information
48
Item
6.
Exhibits
48
Signatures
49
2
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
HALLIBURTON
COMPANY
Condensed
Consolidated Statements of Operations
(Unaudited)
Three
Months Ended
Six
Months Ended
June
30
June
30
Millions
of dollars and shares except per share data
2007
2006
2007
2006
Revenue:
Services
$
2,744
$
2,312
$
5,266
$
4,507
Product
sales
991
804
1,891
1,547
Total
revenue
3,735
3,116
7,157
6,054
Operating
costs and expenses:
Cost
of services
1,980
1,630
3,797
3,187
Cost
of sales
829
654
1,578
1,267
General
and administrative
82
73
151
159
Gain
on sale of business assets, net
(49
)
(1
)
(50
)
(11
)
Total
operating costs and expenses
2,842
2,356
5,476
4,602
Operating
income
893
760
1,681
1,452
Interest
expense
(41
)
(42
)
(79
)
(84
)
Interest
income
36
35
74
58
Other,
net
(2
)
(1
)
(5
)
1
Income
from continuing operations before income taxes
Common
shares, par value $2.50 per share – authorized 2,000 shares, issued 1,061
and 1,060
shares
2,653
2,650
Paid-in
capital in excess of par value
1,662
1,689
Accumulated
other comprehensive income (loss)
(178
)
(437
)
Retained
earnings
6,942
5,051
11,079
8,953
Less
171 and 62 shares of treasury stock, at cost
5,221
1,577
Total
shareholders’ equity
5,858
7,376
Total
liabilities and shareholders’ equity
$
11,989
$
16,860
See
notes to condensed consolidated
financial statements.
4
HALLIBURTON
COMPANY
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
Six
Months Ended
June
30
Millions
of dollars
2007
2006
Cash
flows from operating activities:
Net
income
$
2,082
$
1,079
Adjustments
to reconcile net income to net cash from operations:
Income
from discontinued operations
(958
)
(132
)
Depreciation,
depletion, and amortization
271
234
Provision
(benefit) for deferred income taxes, including $(15) and $(4) related
to
discontinued
operations
(5
)
371
Gain
on sale of assets
(50
)
(20
)
Other
changes:
Receivables
(225
)
(187
)
Inventories
(263
)
(164
)
Accounts
payable
158
36
Contributions
to pension plans
(22
)
(49
)
Other
93
(97
)
Cash
flows from continuing operations
1,081
1,071
Cash
flows from discontinued operations
(56
)
(5
)
Total
cash flows from operating activities
1,025
1,066
Cash
flows from investing activities:
Capital
expenditures
(682
)
(339
)
Sales
of property, plant, and equipment
84
64
Dispositions
(acquisitions) of business assets, net of cash acquired or
disposed
(125
)
7
Sales
(purchases) of short-term investments in marketable securities,
net
(842
)
–
Investments
– restricted cash
49
–
Other
investing activities
(13
)
(6
)
Cash
flows from continuing operations
(1,529
)
(274
)
Cash
flows from discontinued operations
(13
)
238
Total
cash flows from investing activities
(1,542
)
(36
)
Cash
flows from financing activities:
Proceeds
from exercises of stock options
53
117
Payments
to reacquire common stock
(926
)
(190
)
Borrowings
(repayments) of short-term debt, net
(1
)
(10
)
Payments
of long-term debt
(2
)
(48
)
Payments
of dividends to shareholders
(157
)
(155
)
Tax
benefit from exercise of options and restricted stock
15
–
Other
financing activities
(1
)
(2
)
Cash
flows from continuing operations
(1,019
)
(288
)
Cash
flows from discontinued operations
(18
)
9
Total
cash flows from financing activities
(1,037
)
(279
)
Effect
of exchange rate changes on cash
(16
)
(9
)
Increase
(decrease) in cash and equivalents
(1,570
)
742
Cash
and equivalents at beginning of period
2,918
2,001
Cash
and equivalents at end of period
$
1,348
$
2,743
Supplemental
disclosure of cash flow information:
Cash
payments during the period for:
Interest
from continuing operations
$
72
$
84
Income
taxes from continuing operations
$
528
$
127
See
notes to condensed consolidated
financial statements.
5
HALLIBURTON
COMPANY
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1. Basis of Presentation and Description of
Company
The
accompanying unaudited condensed consolidated financial statements were prepared
using generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Regulation S-X. Accordingly,
these financial statements do not include all information or footnotes required
by generally accepted accounting principles for annual financial statements
and
should be read together with our 2006 Annual Report on Form 10-K.
Certain
prior period amounts have been reclassified to be consistent with the current
presentation.
Our
accounting policies are in accordance with generally accepted accounting
principles in the United States of America. The preparation of
financial statements in conformity with these accounting principles requires
us
to make estimates and assumptions that affect:
-
the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements;
and
-
the
reported amounts of revenue and expenses during the reporting
period.
Ultimate
results could differ from our estimates.
In
our
opinion, the condensed consolidated financial statements included herein contain
all adjustments necessary to present fairly our financial position as of June30, 2007, the results of our operations for the three and six months ended
June30, 2007 and 2006, and our cash flows for the six months ended June 30, 2007
and
2006. Such adjustments are of a normal recurring
nature. The results of operations for the three and six months ended
June 30, 2007 may not be indicative of results for the full year.
KBR,
Inc.
(KBR) has been reclassified to discontinued operations in the condensed
consolidated financial statements. All prior periods have been
restated to reflect this reclassification.
Note
2. KBR, Inc. Separation
In
November 2006, KBR completed an initial public offering (IPO), in which it
sold
approximately 32 million shares of KBR, Inc. common stock at $17.00 per
share. Proceeds from the IPO were approximately $508 million, net of
underwriting discounts and commissions and offering expenses. The
increase in the carrying amount of our investment in KBR, Inc., resulting from
the IPO, was recorded in “Paid-in capital in excess of par value” on our
condensed consolidated balance sheet at December 31, 2006. On April5, 2007, we completed the separation of KBR from us by exchanging the 135.6
million shares of KBR, Inc. common stock owned by us on that date for 85.3
million shares of our common stock. In the second quarter of 2007, we
recorded a gain on the disposition of KBR, Inc. of approximately $933 million,
net of tax and the estimated fair value of the indemnities and guarantees
provided to KBR as described below, which is included in income from
discontinued operations on the condensed consolidated statement of
operations.
The
following table presents the financial results of KBR, Inc. as discontinued
operations in our condensed consolidated statements of
operations. For accounting purposes, we ceased including KBR’s
operations in our results effective March 31, 2007.
Three
Months Ended
Six
Months Ended
June
30
June
30
Millions
of dollars
2007
2006
2007
2006
Revenue
$
-
$
2,429
$
2,250
$
4,675
Operating
income
$
-
$
(40
)
$
62
$
22
Net
income
$
-
$
94
$
23
(a)
$
131
(a)
Net
income for the six months ended June 30, 2007 represents our 81%
share of
KBR, Inc.’s results.
6
We
entered into various agreements relating to the separation of KBR, including,
among others, a master separation agreement, a registration rights agreement,
a
tax sharing agreement, transition services agreements, and an employee matters
agreement. The master separation agreement provides for, among other
things, KBR’s responsibility for liabilities related to its business and
Halliburton’s responsibility for liabilities unrelated to KBR’s
business. Halliburton provides indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s indemnification of KBR and any of its greater than 50%-owned
subsidiaries as of November 20, 2006, the date of the master separation
agreement, for:
-
fines
or other monetary penalties or direct monetary damages, including
disgorgement, as a result of a claim made or assessed by a governmental
authority in the United States, the United Kingdom, France, Nigeria,
Switzerland, and/or Algeria, or a settlement thereof, related to
alleged
or actual violations occurring prior to November 20, 2006 of the
United
States Foreign Corrupt Practices Act (FCPA) or particular, analogous
applicable foreign statutes, laws, rules, and regulations in connection
with investigations pending as of that date, including with respect
to the
construction and subsequent expansion by TSKJ of a natural gas
liquefaction complex and related facilities at Bonny Island in Rivers
State, Nigeria; and
-
all
out-of-pocket cash costs and expenses, or cash settlements or cash
arbitration awards in lieu thereof, KBR may incur after the effective
date
of the master separation agreement as a result of the replacement
of the
subsea flowline bolts installed in connection with the Barracuda-Caratinga
project. See Note 10 for further discussion of these
matters.
Additionally,
the Halliburton performance guarantees, surety bond guarantees, and letter
of
credit guarantees that are currently in place in favor of KBR’s customers or
lenders will continue until these guarantees expire at the earlier
of: (1) the termination of the underlying project contract or KBR
obligations thereunder or (2) the expiration of the relevant credit support
instrument in accordance with its terms or release of such instrument by the
customer. Further, KBR and we have agreed that, until December 31,2009, we will issue additional guarantees, indemnification, and reimbursement
commitments for KBR’s benefit in connection with (a) letters of credit necessary
to comply with KBR’s Egypt Basic Industries Corporation ammonia plant contract,
KBR’s Allenby & Connaught project, and all other KBR contracts that were in
place as of December 15, 2005; (b) surety bonds issued to support new task
orders pursuant to the Allenby & Connaught project, two job order contracts
for KBR’s Government and Infrastructure segment, and all other KBR contracts
that were in place as of December 15, 2005; and (c) performance guarantees
in
support of these contracts. KBR will compensate Halliburton for these
guarantees and indemnify Halliburton if Halliburton is required to perform
under
any of these guarantees.
As
a
result of these agreements, we recorded $190 million, as a reduction of the
gain
on the disposition of KBR, to reflect the estimated fair value of the above
indemnities and guarantees, net of the associated estimated future tax
benefit.
The
tax
sharing agreement provides for allocations of United States income tax
liabilities and other agreements between us and KBR with respect to tax
matters. Under the transition services agreements, we continue to
provide various interim corporate support services to KBR, and KBR continues
to
provide various interim corporate support services to us. The fees
are determined on a basis generally intended to approximate the fully allocated
direct and indirect costs of providing the services, without any
profit. Under an employee matters agreement, Halliburton and KBR have
allocated liabilities and responsibilities related to current and former
employees and their participation in certain benefit plans. Among
other items, the employee matters agreement provided for the conversion, which
occurred upon completion of the separation of KBR, of stock options and
restricted stock awards (with restrictions that had not yet lapsed as of the
final separation date) granted to KBR employees under our 1993 Stock and
Incentive Plan (1993 Plan) to options and restricted stock awards covering
KBR
common stock. As of April 5, 2007, these awards consisted of 1.2
million options with a weighted average exercise price per share of $15.01
and
approximately 600,000 restricted shares with a weighted average grant-date
fair
value per share of $17.95 under our 1993 Plan.
7
Note
3. Acquisitions and Dispositions
Dresser,
Ltd. interest
As
a part
of our sale of Dresser Equipment Group in 2001, we retained a small equity
interest in Dresser Inc.’s Class A common stock. Dresser Inc. was
later reorganized as Dresser, Ltd., and we exchanged our shares for shares
of
Dresser, Ltd. In May 2007, we sold our remaining interest in Dresser,
Ltd. We received $70 million in cash from the sale and recorded a $49
million gain. This investment was reflected in “Other assets” on our
condensed consolidated balance sheet at December 31, 2006.
Ultraline
Services Corporation
In
January 2007, we acquired all intellectual property, current assets, and
existing business associated with Calgary-based Ultraline Services Corporation
(Ultraline), a division of Savanna Energy Services Corp. Ultraline is
a provider of wireline services in Canada. As of June 30, 2007, we
paid approximately $176 million, subject to adjustment for working capital,
and
recorded goodwill of $108 million and intangible assets of $41
million. In July 2007, the working capital adjustment was finalized
for an immaterial amount. Ultraline’s results of operations are
included in our Drilling and Formation Evaluation segment.
Note
4. Business Segment Information
We
have
four business segments: Production Optimization, Fluid Systems,
Drilling and Formation Evaluation, and Digital and Consulting
Solutions. The two KBR segments have been reclassified to
discontinued operations as a result of the separation of KBR from
us.
Certain
indirect expenses that were previously allocated to the segments are now
included in general corporate expenses. All prior period amounts have
been reclassified accordingly.
The
following table presents information on our business segments.
Three
Months Ended
Six
Months Ended
June
30
June
30
Millions
of dollars
2007
2006
2007
2006
Revenue:
Production
Optimization
$
1,533
$
1,292
$
2,870
$
2,488
Fluid
Systems
1,045
870
2,038
1,706
Drilling
and Formation Evaluation
953
774
1,870
1,499
Digital
and Consulting Solutions
204
180
379
361
Total
revenue
$
3,735
$
3,116
$
7,157
$
6,054
Operating
income (loss):
Production
Optimization
$
403
$
368
$
728
$
701
Fluid
Systems
200
201
414
390
Drilling
and Formation Evaluation
235
194
491
373
Digital
and Consulting Solutions
117
51
167
101
General
corporate
(62
)
(54
)
(119
)
(113
)
Total
operating income
$
893
$
760
$
1,681
$
1,452
Intersegment
revenue was immaterial. Our equity in earnings and losses of
unconsolidated affiliates that are accounted for by the equity method is
included in revenue and operating income of the applicable segment.
As
of
June 30, 2007, 37% of our gross trade receivables were from customers in the
United States. As of December 31, 2006, 39% of our gross trade
receivables were from customers in the United States. No other
country accounted for more than 10% of our gross trade receivables at these
dates.
8
Note
5. Inventories
Inventories
are stated at the lower of cost or market. In the United States, we
manufacture certain finished products and have parts inventories for drill
bits,
completion products, bulk materials, and other tools that are recorded using
the
last-in, first-out method totaling $72 million at June 30, 2007 and $58 million
at December 31, 2006. If the weighted average cost method was used,
total inventories would have been $23 million higher than reported at June30,2007 and $20 million higher than reported at December 31,2006. Inventories consisted of the following:
June
30,
December
31,
Millions
of dollars
2007
2006
Finished
products and parts
$
987
$
883
Raw
materials and supplies
396
256
Work
in process
117
96
Total
$
1,500
$
1,235
Finished
products and parts are reported net of obsolescence reserves of $72 million
at
June 30, 2007 and $63 million at December 31, 2006.
Note
6. Investments
Investments
in marketable securities
At
June30, 2007, we had $875 million invested in marketable securities, consisting
of
auction-rate securities, variable-rate demand notes, and municipal
bonds. Our auction-rate securities and variable-rate demand notes are
classified as available-for-sale and recorded at fair value. Our
municipal bond investments are classified as held-to-maturity and recorded
at
amortized cost. At December 31, 2006, our investments in marketable
securities were $20 million.
Restricted
and committed cash
At
June30, 2007, we had restricted cash of $59 million, which primarily consisted
of
collateral for potential future insurance claim reimbursements included in
“Other assets.” At December 31, 2006, we had restricted cash of $108
million in “Other assets,” which primarily consisted of similar
items. The $49 million decrease in restricted cash reflects the
release, due to the separation of KBR, of collateral related to potential
insurance claim reimbursements.
Note
7. Debt
The
stock
conversion rate for the $1.2 billion of 3.125% convertible senior notes issued
in June 2003 changed to 53.26 in the second quarter of 2007 due to the increased
quarterly dividend on the common stock.
On
July9, 2007, we entered into a new unsecured $1.2 billion five-year revolving credit
facility that replaced our then existing unsecured $1.2 billion five-year
revolving credit facility with generally similar terms and conditions except
that the new facility does not contain any financial covenants. At
June 30, 2007, we were required to maintain and were in compliance with a
maximum debt-to-capitalization ratio under our then existing unsecured $1.2
billion revolving credit facility. The purpose of both the new and
the replaced facility is to provide commercial paper support, general working
capital, and credit for other corporate purposes. There were no cash
drawings under the former facility as of June 30, 2007.
9
Note
8. Comprehensive Income
The
components of other comprehensive income included the following:
Three
Months Ended
Six
Months Ended
June
30
June
30
Millions
of dollars
2007
2006
2007
2006
Net
income
$
1,530
$
591
$
2,082
$
1,079
Cumulative
translation adjustments
1
43
–
37
Realization
of (gains) losses included in net income
(24
)
(19
)
(24
)
(16
)
Net
cumulative translation adjustments
(23
)
24
(24
)
21
Realized
pension liability adjustments
271
–
282
–
Unrealized
net gains (losses) on investments
and
derivatives
–
15
1
21
Realization
of (gains) losses on investments and
derivatives
included in net
income
–
(2
)
–
–
Net
unrealized gains (losses) on investments
and
derivatives
–
13
1
21
Total
comprehensive income
$
1,778
$
628
$
2,341
$
1,121
Accumulated
other comprehensive income consisted of the following:
June
30,
December
31,
Millions
of dollars
2007
2006
Cumulative
translation adjustments
$
(62
)
$
(38
)
Pension
liability adjustments
(118
)
(400
)
Unrealized
gains (losses) on investments and derivatives
2
1
Total
accumulated other comprehensive income
$
(178
)
$
(437
)
Note
9. Asbestos Insurance Recoveries
Several
of our subsidiaries or former subsidiaries, particularly DII Industries LLC
and
Kellogg Brown & Root LLC, had been named as defendants in a large number of
asbestos- and silica-related lawsuits. Effective December 31, 2004,
we resolved all open and future claims in the prepackaged Chapter 11 proceedings
of DII Industries LLC, Kellogg Brown & Root LLC, and our other affected
subsidiaries (which were filed on December 16, 2003) when the plan of
reorganization became final and nonappealable.
During
2004, we settled insurance disputes with substantially all the insurance
companies for asbestos- and silica-related claims and all other claims under
the
applicable insurance policies and terminated all the applicable insurance
policies. Under the terms of our insurance settlements, we would
receive cash proceeds with a nominal amount of approximately $1.5 billion and
with a then present value of approximately $1.4 billion for our asbestos- and
silica-related insurance receivables. Cash payments of approximately
$24 million related to these receivables were received in the first six months
of 2007. At June 30, 2007, the remaining amounts that we will receive
under the terms of the settlement agreements totaled $238 million or $220
million on a present value basis, to be paid in several installments through
2010. Of the $220 million recorded at June 30, 2007, $68 million was
classified as current.
Under
the
insurance settlements entered into as part of the resolution of our Chapter
11
proceedings, we have agreed to indemnify our insurers under certain historic
general liability insurance policies in certain situations. We have
concluded that the likelihood of any claims triggering the indemnity obligations
is remote, and we believe any potential liability for these indemnifications
will be immaterial. At June 30, 2007, we had not recorded any
liability associated with these indemnifications.
10
Note
10. Commitments and Contingencies
Foreign
Corrupt Practices Act investigations
The
Securities and Exchange Commission (SEC) is conducting a formal investigation
into whether improper payments were made to government officials in Nigeria
through the use of agents or subcontractors in connection with the construction
and subsequent expansion by TSKJ of a multibillion dollar natural gas
liquefaction complex and related facilities at Bonny Island in Rivers State,
Nigeria. The Department of Justice (DOJ) is also conducting a related
criminal investigation. The SEC has also issued subpoenas seeking
information, which we and KBR are furnishing, regarding current and former
agents used in connection with multiple projects, including current and prior
projects, over the past 20 years located both in and outside of Nigeria in
which
the Halliburton energy services business, KBR or affiliates, subsidiaries or
joint ventures of Halliburton or KBR, are or were participants. In
September 2006, the SEC requested that we enter into a tolling agreement with
respect to its investigation. We anticipate that we will enter into
an appropriate tolling agreement with the SEC.
TSKJ
is a
private limited liability company registered in Madeira, Portugal whose members
are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem
SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a
subsidiary of KBR), each of which had an approximate 25% interest in the
venture. TSKJ and other similarly owned entities entered into various
contracts to build and expand the liquefied natural gas project for Nigeria
LNG
Limited, which is owned by the Nigerian National Petroleum Corporation, Shell
Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V.
(an
affiliate of ENI SpA of Italy).
The
SEC
and the DOJ have been reviewing these matters in light of the requirements
of
the FCPA. In addition to performing our own investigation, we have
been cooperating with the SEC and the DOJ investigations and with other
investigations in France, Nigeria, and Switzerland regarding the Bonny Island
project. The government of Nigeria gave notice in 2004 to the French
magistrate of a civil claim as an injured party in the French
investigation. We are not aware of any further developments with
respect to this claim. We also believe that the Serious Fraud Office
in the United Kingdom is conducting an investigation relating to the Bonny
Island project. Our Board of Directors has appointed a committee of
independent directors to oversee and direct the FCPA
investigations. Through our committee of independent directors, we
will continue to oversee and direct the investigations.
The
matters under investigation relating to the Bonny Island project cover an
extended period of time (in some cases significantly before our 1998 acquisition
of Dresser Industries and continuing through the current time
period). We have produced documents to the SEC and the DOJ both
voluntarily and pursuant to company subpoenas from the files of numerous
officers and employees of Halliburton and KBR, including current and former
executives of Halliburton and KBR, and we are making our employees and KBR
is
making its employees available to the SEC and the DOJ for
interviews. In addition, the SEC has issued a subpoena to A. Jack
Stanley, who formerly served as a consultant and chairman of Kellogg Brown
&
Root LLC, and to others, including certain of our former and KBR’s current and
former employees, former executive officers of KBR, and at least one
subcontractor of KBR. We further understand that the DOJ has issued
subpoenas for the purpose of obtaining information abroad, and we understand
that other partners in TSKJ have provided information to the DOJ and the SEC
with respect to the investigations, either voluntarily or under
subpoenas.
The
SEC
and DOJ investigations include an examination of whether TSKJ’s engagements of
Tri-Star Investments as an agent and a Japanese trading company as a
subcontractor to provide services to TSKJ were utilized to make improper
payments to Nigerian government officials. In connection with the
Bonny Island project, TSKJ entered into a series of agency agreements, including
with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing
in
1995 and a series of subcontracts with a Japanese trading company commencing
in
1996. We understand that a French magistrate has officially placed
Mr. Tesler under investigation for corruption of a foreign public
official. In Nigeria, a legislative committee of the National
Assembly and the Economic and Financial Crimes Commission, which is organized
as
part of the executive branch of the government, are also investigating these
matters. Our representatives have met with the French magistrate and
Nigerian officials. In October 2004, representatives of TSKJ
voluntarily testified before the Nigerian legislative
committee.
11
TSKJ
suspended the receipt of services from and payments to Tri-Star Investments
and
the Japanese trading company and has considered instituting legal proceedings
to
declare all agency agreements with Tri-Star Investments terminated and to
recover all amounts previously paid under those agreements. In
February 2005, TSKJ notified the Attorney General of Nigeria that TSKJ would
not
oppose the Attorney General’s efforts to have sums of money held on deposit in
accounts of Tri-Star Investments in banks in Switzerland transferred to Nigeria
and to have the legal ownership of such sums determined in the Nigerian
courts.
As
a
result of these investigations, information has been uncovered suggesting that,
commencing at least 10 years ago, members of TSKJ planned payments to Nigerian
officials. We have reason to believe that, based on the ongoing
investigations, payments may have been made by agents of TSKJ to Nigerian
officials. In addition, information uncovered in the summer of 2006
suggests that, prior to 1998, plans may have been made by employees of The
M.W.
Kellogg Company (a predecessor of a KBR subsidiary) to make payments to
government officials in connection with the pursuit of a number of other
projects in countries outside of Nigeria. We are reviewing a number
of more recently discovered documents related to KBR’s activities in countries
outside of Nigeria with respect to agents for projects after
1998. Certain activities discussed in this paragraph involve current
or former employees or persons who were or are consultants to KBR, and our
investigation is continuing.
In
June
2004, all relationships with Mr. Stanley and another consultant and former
employee of M.W. Kellogg Limited were terminated. The terminations
occurred because of Code of Business Conduct violations that allegedly involved
the receipt of improper personal benefits from Mr. Tesler in connection with
TSKJ’s construction of the Bonny Island project.
In
2006
and 2007, KBR suspended the services of other agents in and outside of Nigeria,
including one agent who, until such suspension, had worked for KBR outside
of
Nigeria on several current projects and on numerous older projects going back
to
the early 1980s. Such suspensions have occurred when possible
improper conduct has been discovered or alleged or when Halliburton and KBR
have
been unable to confirm the agent’s compliance with applicable law and the Code
of Business Conduct.
If
violations of the FCPA were found, a person or entity found in violation could
be subject to fines, civil penalties of up to $500,000 per violation, equitable
remedies, including disgorgement (if applicable) generally of profits, including
prejudgment interest on such profits, causally connected to the violation,
and
injunctive relief. Criminal penalties could range up to the greater
of $2 million per violation or twice the gross pecuniary gain or loss from
the
violation, which could be substantially greater than $2 million per
violation. It is possible that both the SEC and the DOJ could assert
that there have been multiple violations, which could lead to multiple
fines. The amount of any fines or monetary penalties that could be
assessed would depend on, among other factors, the findings regarding the
amount, timing, nature, and scope of any improper payments, whether any such
payments were authorized by or made with knowledge of us, KBR or our or KBR’s
affiliates, the amount of gross pecuniary gain or loss involved, and the level
of cooperation provided the government authorities during the
investigations. Agreed dispositions of these types of violations also
frequently result in an acknowledgement of wrongdoing by the entity and the
appointment of a monitor on terms negotiated with the SEC and the DOJ to review
and monitor current and future business practices, including the retention
of
agents, with the goal of assuring compliance with the FCPA.
These
investigations could also result in third-party claims against us, which may
include claims for special, indirect, derivative or consequential damages,
damage to our business or reputation, loss of, or adverse effect on, cash flow,
assets, goodwill, results of operations, business prospects, profits or business
value or claims by directors, officers, employees, affiliates, advisors,
attorneys, agents, debt holders, or other interest holders or constituents
of us
or our current or former subsidiaries. In addition, we could incur
costs and expenses for any monitor required by or agreed to with a governmental
authority to review our continued compliance with FCPA law.
12
As
of
June 30, 2007, we are unable to estimate an amount of probable loss or a range
of possible loss related to these matters as it relates to Halliburton
directly. However, we provided indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s indemnification of KBR and any of its greater than 50%-owned
subsidiaries as of November 20, 2006, the date of the master separation
agreement, for fines or other monetary penalties or direct monetary damages,
including disgorgement, as a result of a claim made or assessed by a
governmental authority in the United States, the United Kingdom, France,
Nigeria, Switzerland, and/or Algeria, or a settlement thereof, related to
alleged or actual violations occurring prior to November 20, 2006 of the FCPA
or
particular, analogous applicable foreign statutes, laws, rules, and regulations
in connection with investigations pending as of that date, including with
respect to the construction and subsequent expansion by TSKJ of a natural gas
liquefaction complex and related facilities at Bonny Island in Rivers State,
Nigeria. We recorded the estimated fair market value of this
indemnity regarding FCPA matters described above upon our separation from
KBR. See Note 2 for additional information.
Our
indemnification obligation to KBR does not include losses resulting from
third-party claims against KBR, including claims for special, indirect,
derivative or consequential damages, nor does our indemnification apply to
damage to KBR’s business or reputation, loss of, or adverse effect on, cash
flow, assets, goodwill, results of operations, business prospects, profits
or
business value or claims by directors, officers, employees, affiliates,
advisors, attorneys, agents, debt holders, or other interest holders or
constituents of KBR or KBR’s current or former subsidiaries.
In
consideration of our agreement to indemnify KBR for the liabilities referred
to
above, KBR has agreed that we will at all times, in our sole discretion, have
and maintain control over the investigation, defense and/or settlement of these
FCPA matters until such time, if any, that KBR exercises its right to assume
control of the investigation, defense and/or settlement of the FCPA matters
as
it relates to KBR. KBR has also agreed, at our expense, to assist with
Halliburton’s full cooperation with any governmental authority in our
investigation of these FCPA matters and our investigation, defense and/or
settlement of any claim made by a governmental authority or court relating
to
these FCPA matters, in each case even if KBR assumes control of these FCPA
matters as it relates to KBR. If KBR takes control over the
investigation, defense and/or settlement of FCPA matters, refuses a settlement
of FCPA matters negotiated by us, enters into a settlement of FCPA matters
without our consent, or materially breaches its obligation to cooperate with
respect to our investigation, defense and/or settlement of FCPA matters, we
may
terminate the indemnity.
Barracuda-Caratinga
arbitration
We
also
provided indemnification in favor of KBR under the master separation agreement
for all out-of pocket cash costs and expenses (except for legal fees and other
expenses of the arbitration so long as KBR controls and directs it), or cash
settlements or cash arbitration awards in lieu thereof, KBR may incur after
November 20, 2006 as a result of the replacement of certain subsea flowline
bolts installed in connection with the Barracuda-Caratinga
project. Under the master separation agreement, KBR currently
controls the defense, counterclaim, and settlement of the subsea flowline bolts
matter. As a condition of our indemnity, for any settlement to be
binding upon us, KBR must secure our prior written consent to such settlement’s
terms. We have the right to terminate the indemnity in the event KBR
enters into any settlement without our prior written consent. See
Note 2 for additional information regarding the KBR
indemnification.
At
Petrobras’ direction, KBR replaced certain bolts located on the subsea flowlines
that failed through mid-November 2005, and KBR has informed us that additional
bolts have failed thereafter, which were replaced by Petrobras. These
failed bolts were identified by Petrobras when it conducted inspections of
the
bolts. The designation of the material to be used for the bolts was
issued by Petrobras, and as such, we understand that KBR believes the cost
resulting from any replacement is not KBR’s responsibility. We
understand Petrobras disagrees. We understand KBR believes several
possible solutions may exist, including replacement of the
bolts. Estimates indicate that costs of these various solutions range
up to $140 million. In March 2006, Petrobras commenced arbitration
against KBR claiming $220 million plus interest for the cost of monitoring
and
replacing the defective bolts and all related costs and expenses of the
arbitration, including the cost of attorneys fees. We understand KBR
intends to vigorously defend and pursue recovery of the costs incurred to date
through the arbitration process and to that end has submitted a counterclaim
in
the arbitration seeking the recovery of $22 million. The final
arbitration hearing is not expected to begin until 2008.
13
Securities
and related litigation
In
June
2002, a class action lawsuit was filed against us in federal court alleging
violations of the federal securities laws after the SEC initiated an
investigation in connection with our change in accounting for revenue on
long-term construction projects and related disclosures. In the weeks
that followed, approximately twenty similar class actions were filed against
us. Several of those lawsuits also named as defendants several of our
present or former officers and directors. The class action cases were
later consolidated, and the amended consolidated class action complaint, styled
Richard Moore, et al. v. Halliburton Company, et al., was filed and
served upon us in April 2003 (the “Moore class action”). As
a result of a substitution of lead plaintiffs, the case is now styled
Archdiocese of Milwaukee Supporting Fund (“AMSF”) v. Halliburton Company, et
al. We settled with the SEC in the second quarter of
2004.
In
early
May 2003, we entered into a written memorandum of understanding setting forth
the terms upon which the Moore class action would be
settled. In June 2003, the lead plaintiffs in the Moore
class action filed a motion for leave to file a second amended consolidated
complaint, which was granted by the court. In addition to restating
the original accounting and disclosure claims, the second amended consolidated
complaint included claims arising out of the 1998 acquisition of Dresser
Industries, Inc. by Halliburton, including that we failed to timely disclose
the
resulting asbestos liability exposure (the “Dresser claims”). The
memorandum of understanding contemplated settlement of the Dresser claims as
well as the original claims.
In
June
2004, the court entered an order preliminarily approving the
settlement. Following the transfer of the case to another district
judge, the court held that evidence of the settlement’s fairness was inadequate,
denied the motion for final approval of the settlement, and ordered the parties
to mediate. The mediation was unsuccessful.
In
April
2005, the court appointed new co-lead counsel and named AMSF the new lead
plaintiff, directing that they file a third consolidated amended complaint
and
that we file our motion to dismiss. The court held oral arguments on
that motion in August 2005, at which time the court took the motion under
advisement. In March 2006, the court entered an order in which it
granted the motion to dismiss with respect to claims arising prior to June
1999
and granted the motion with respect to certain other claims while permitting
the
plaintiffs to replead those claims to correct deficiencies in their earlier
complaint. In April 2006, the plaintiffs filed their fourth amended
consolidated complaint. We filed a motion to dismiss those portions
of the complaint that had been repled. A hearing was held on that
motion in July 2006, and in March 2007 the court ordered dismissal of the claims
against all individual defendants other than our CEO. The court
ordered that the case proceed against our CEO and Halliburton. In
response to a motion by the lead plaintiff, on February 26, 2007 the court
ordered the removal and replacement of their co-lead counsel. As of
June 30, 2007, we had not accrued any amounts related to this
matter.
Operations
in Iran
We
received and responded to an inquiry in mid-2001 from the Office of Foreign
Assets Control (OFAC) of the United States Treasury Department with respect
to
operations in Iran by a Halliburton subsidiary incorporated in the Cayman
Islands. The OFAC inquiry requested information with respect to
compliance with the Iranian Transaction Regulations. These
regulations prohibit United States citizens, including United States
corporations and other United States business organizations, from engaging
in
commercial, financial, or trade transactions with Iran, unless authorized by
OFAC or exempted by statute. Our 2001 written response to OFAC stated
that we believed that we were in compliance with applicable sanction
regulations. In the first quarter of 2004, we responded to a
follow-up letter from OFAC requesting additional information. We
understand this matter has now been referred by OFAC to the DOJ. In
July 2004, we received a grand jury subpoena from an Assistant United States
District Attorney requesting the production of documents. We are
cooperating with the government’s investigation and responded to the subpoena by
producing documents in September 2004. As of June 30, 2007, we had
not accrued any amounts related to this investigation.
Separate
from the OFAC inquiry, we completed a study in 2003 of our activities in Iran
during 2002 and 2003 and concluded that these activities were in compliance
with
applicable sanction regulations. These sanction regulations require
isolation of entities that conduct activities in Iran from contact with United
States citizens or managers of United States
companies. Notwithstanding our conclusions that our activities in
Iran were not in violation of United States laws and regulations, we announced
in April 2007 that all of our contractual commitments in Iran have been
completed, and we are no longer working in Iran.
14
David
Hudak and International Hydrocut Technologies Corp.
In
October 2004, David Hudak and International Hydrocut Technologies Corp.
(collectively, Hudak) filed suit against us in the United States District Court
alleging civil Racketeer Influenced and Corporate Organizations Act violations,
fraud, breach of contract, unfair trade practices, and other
torts. The action, which seeks unspecified damages, arises out of
Hudak’s alleged purchase from us in early 1994 of certain explosive charges that
were later alleged by the DOJ to be military ordnance, the possession of which
by persons not possessing the requisite licenses and registrations is
unlawful. As a result of that allegation by the government, Hudak was
charged with, but later acquitted of, certain criminal offenses in connection
with his possession of the explosive charges. As mentioned above, the
alleged transaction(s) took place more than 10 years ago. The fact
that most of the individuals that may have been involved, as well as the
entities themselves, are no longer affiliated with us will complicate our
investigation. For those reasons and because the litigation is in its
preliminary stages, it is premature to assess the likelihood of an adverse
result. It is our intention to vigorously defend this
action. Amounts accrued related to this matter as of June 30, 2007
were not material.
M-I,
LLC antitrust litigation
On
February 16, 2007, we were informed that M-I, LLC, a competitor of ours in
the
drilling fluids market has sued us for allegedly attempting to monopolize the
market for invert emulsion drilling fluids used in deep water and/or in cold
water temperatures. The claims M-I asserts are based upon its
allegation that the patent issued for our Accolade® drilling fluid was invalid
as a result of its allegedly having been procured by fraud on the United States
Patent and Trademark Office and that our subsequent prosecution of an
infringement action against M-I amounted to predatory conduct in violation
of
Section 2 of the Sherman Antitrust Act. In October 2006, a federal
court dismissed our infringement action based upon its holding that the claims
in our patent were indefinite and the patent was, therefore,
invalid. That judgment is now on appeal. M-I also alleges
that we falsely advertised our Accolade® drilling fluid in violation of the
Lanham Act and California law and that our earlier infringement action amounted
to malicious prosecution in violation of Texas state law. M-I seeks
compensatory damages, which it claims should be trebled, as well as punitive
damages and injunctive relief. We believe that M-I’s claims are
without merit and intend to aggressively defend them. As of June 30,2007, we had not accrued any amounts in connection with this
matter.
Environmental
We
are
subject to numerous environmental, legal, and regulatory requirements related
to
our operations worldwide. In the United States, these laws and
regulations include, among others:
-
the
Comprehensive Environmental Response, Compensation, and Liability
Act;
-
the
Resources Conservation and Recovery
Act;
-
the
Clean Air Act;
-
the
Federal Water Pollution Control Act;
and
-
the
Toxic Substances Control Act.
In
addition to the federal laws and regulations, states and other countries where
we do business often have numerous environmental, legal, and regulatory
requirements by which we must abide. We evaluate and address the
environmental impact of our operations by assessing and remediating contaminated
properties in order to avoid future liabilities and comply with environmental,
legal, and regulatory requirements. On occasion, we are involved in
specific environmental litigation and claims, including the remediation of
properties we own or have operated, as well as efforts to meet or correct
compliance-related matters. Our Health, Safety and Environment group
has several programs in place to maintain environmental leadership and to
prevent the occurrence of environmental contamination.
15
We
do not
expect costs related to these remediation requirements to have a material
adverse effect on our consolidated financial position or our results of
operations. Our accrued liabilities for environmental matters were
$47 million as of June 30, 2007 and $39 million as of December 31,2006. The liability covers numerous properties, and no individual
property accounts for more than $10 million of the liability
balance. We have subsidiaries that have been named as potentially
responsible parties along with other third parties for 10 federal and state
superfund sites for which we have established a liability. As of June30, 2007, those 10 sites accounted for approximately $11 million of our total
$47 million liability. For any particular federal or state superfund
site, since our estimated liability is typically within a range and our accrued
liability may be the amount on the low end of that range, our actual liability
could eventually be well in excess of the amount accrued. In some
instances, we have been named a potentially responsible party by a regulatory
agency, but, in each of those cases, we do not believe we have any material
liability. We also could be subject to third-party claims with
respect to environmental matters for which we have been named as a potentially
responsible party.
Letters
of credit
In
the
normal course of business, we have agreements with banks under which
approximately $2.2 billion of letters of credit, surety bonds, or bank
guarantees were outstanding as of June 30, 2007, including $1.3 billion that
relate to KBR. These KBR letters of credit, surety bonds, or bank
guarantees are being guaranteed by us in favor of KBR’s customers and
lenders. KBR has agreed to compensate us for these guarantees and
indemnify us if we are required to perform under any of these
guarantees. Some of the outstanding letters of credit have triggering
events that would entitle a bank to require cash collateralization.
Note
11. Income per Share
Basic
income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share includes
additional common shares that would have been outstanding if potential common
shares with a dilutive effect had been issued. A reconciliation of
the number of shares used for the basic and diluted income per share
calculations is as follows:
Three
Months
Six
Months
Ended
Ended
June
30
June
30
Millions
of shares
2007
2006
2007
2006
Basic
weighted average common shares outstanding
905
1,026
949
1,025
Dilutive
effect of:
Convertible
senior notes
premium
29
32
26
31
Stock
options
6
9
6
10
Restricted
stock
2
3
2
3
Diluted
weighted average common shares outstanding
942
1,070
983
1,069
Excluded
from the computation of diluted income per share are options to purchase four
million and three million shares of common stock that were outstanding during
the three and six months ended June 30, 2007 and one million shares during
the
three and six months ended June 30, 2006. These options were
outstanding during these quarters but were excluded because they were
antidilutive, as the option exercise price was greater than the average market
price of the common shares.
Effective
April 5, 2007, common shares outstanding were reduced by the 85.3 million shares
of our common stock that we accepted in exchange for the shares of KBR, Inc.
common stock we owned.
Note
12. Income Taxes
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.” FIN 48, as amended May
2007 by FASB Staff Position FIN 48-1, “Definition of ‘Settlement’ in FASB
Interpretation No. 48,” prescribes a minimum recognition threshold and
measurement methodology that a tax position taken or expected to be taken in
a
tax return is required to meet before being recognized in the financial
statements. It also provides guidance for derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
16
As
a
result of the adoption of FIN 48, we recognized a decrease of $4 million in
other liabilities to account for a decrease in unrecognized tax benefits and
an
increase of $34 million for accrued interest and penalties, which were accounted
for as a net reduction of $30 million to the January 1, 2007 balance of retained
earnings. Of the $30 million reduction to retained earnings, $10
million was attributable to KBR, which is now reported as discontinued
operations in the condensed consolidated financial statements.
The
following presents a rollforward of our unrecognized tax benefits and associated
interest and penalties.
We
recognize interest and penalties related to unrecognized tax benefits within
the
provision for income taxes on continuing operations in our condensed
consolidated statements of operations.
At
March31, 2007, approximately $30 million of tax benefits associated with United
States federal research and development credits was included in the balance
of
unrecognized tax benefits that could have been resolved with the United States
Internal Revenue Service (IRS) within the next twelve months. As of
June 30, 2007, based upon ongoing discussions with the IRS, we now believe
that
this issue will not be resolved within the next twelve months. If
this particular tax return position is not resolved in our favor, there would
be
no obligation to make additional payments to the IRS because we had not
previously claimed these benefits and, therefore, we had not previously reduced
taxes paid or payable for these credits. Also, as of June 30, 2007, a
significant portion of our non-United States unrecognized tax benefits, while
not individually significant, could be settled within the next twelve
months. As of June 30, 2007, we estimated that the entire balance of
unrecognized tax benefits, if resolved in our favor, would positively impact
the
effective tax rate and, therefore, be recognized as additional tax benefits
in
our income statement.
We
file
income tax returns in the United States federal jurisdiction and in various
states and foreign jurisdictions. In most cases, we are no longer
subject to United States federal, state, and local, or non-United States income
tax examination by tax authorities for years before 1998.
Note
13. Retirement Plans
The
components of net periodic benefit cost related to pension benefits for the
three and six months ended June 30, 2007 and June 30, 2006 were as
follows:
Three
Months Ended June 30
2007
2006
Millions
of dollars
United
States
International
United
States
International
Components
of net periodic
benefit
cost:
Service
cost
$
-
$
6
$
-
$
6
Interest
cost
1
10
1
8
Expected
return on plan assets
(1
)
(9
)
(1
)
(7
)
Recognized
actuarial loss (gain)
2
2
1
2
Net
periodic benefit cost
$
2
$
9
$
1
$
9
17
Six
Months Ended June 30
2007
2006
Millions
of dollars
United
States
International
United
States
International
Components
of net periodic
benefit
cost:
Service
cost
$
-
$
12
$
-
$
11
Interest
cost
3
21
3
17
Expected
return on plan assets
(3
)
(18
)
(3
)
(14
)
Settlement/curtailments
-
(1
)
-
-
Recognized
actuarial loss (gain)
3
4
3
4
Net
periodic benefit cost
$
3
$
18
$
3
$
18
We
currently expect to contribute approximately $25 million to our international
pension plans and $4 million to our domestic plans in 2007. During
the six months ended June 30, 2007, we contributed $22 million of the $29
million to our pension plans. We do not have a required minimum
contribution for our domestic plans; however, we may make additional
discretionary contributions.
The
components of net periodic benefit cost related to other postretirement benefits
for the three and six months ended June 30, 2007 and June 30, 2006 were as
follows:
Three
Months Ended
Six
Months Ended
June
30
June
30
Millions
of dollars
2007
2006
2007
2006
Components
of net periodic
benefit
cost:
Service
cost
$
-
$
1
$
-
$
1
Interest
cost
2
2
4
4
Net
periodic benefit cost
$
2
$
3
$
4
$
5
Note
14. Common Stock
In
February 2006, our Board of Directors approved a share repurchase program of
up
to $1.0 billion. In September 2006, our Board of Directors approved
an increase to our existing common share repurchase program of up to an
additional $2.0 billion. In July 2007, our Board of Directors
approved an additional increase to our existing common share repurchase program
of up to $2.0 billion, bringing the entire authorization to $5.0
billion. This additional authorization may be used for open market
share purchases or to settle the conversion premium on our 3.125% convertible
senior notes, should they be redeemed. From the inception of this
program, we have repurchased approximately 66 million shares of our common
stock
for approximately $2.2 billion at an average price per share of
$33.88. These numbers include the repurchases of approximately 26
million shares of our common stock for approximately $911 million at an average
price per share of $35.37 during the first six months of 2007. As of
July 23, 2007, $2.8 billion remained available under this program.
In
May
2007, the Board of Directors declared a dividend of $0.09 per common share
for
the second quarter of 2007, payable on June 21, 2007 to shareholders of record
at the close of business on June 1, 2007, reflecting a dividend increase of
$0.015 per share.
18
Note
15. New Accounting Standards
In
June
2006, the FASB ratified the consensus reached on Emerging Issues Task Force
Issue No. 06-3 (EITF 06-3), “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That
Is,
Gross versus Net Presentation).” EITF 06-3 requires a company to
disclose its policy regarding the presentation of tax receipts on the face
of
the income statement. The scope of this guidance includes any tax
assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer and may include,
but is not limited to, sales, use, value added, and some excise
taxes. The provisions of EITF 06-3 are effective for periods
beginning after December 15, 2006. Therefore, we adopted EITF 06-3 on
January 1, 2007. We present taxes collected from customers on a net
basis.
In
September 2006, the FASB issued Staff Position (FSP) AUG AIR-1, “Accounting for
Planned Major Maintenance Activities,” which prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance
activities. The provisions of this FSP are effective for the first
fiscal year beginning after December 15, 2006. We did not elect early
adoption and, therefore, adopted FSP AUG AIR-1 on January 1, 2007 without a
material impact to our financial statements.
Note
16. Subsequent Event
During
April 2007, we entered into a definitive agreement with the shareholders of
PSL
Energy Services Limited (PSLES) to purchase the entire share capital of the
company, which we expect to close in the third quarter of 2007.
Founded
in 2003, PSLES is a leading eastern hemisphere provider of process, pipeline
and
well intervention services, including flange management and bolting, leak
testing, pre-commissioning services, hydrotesting, hydraulic workover, coiled
tubing, slickline and wireline, and pumping services. The company,
headquartered in the United Kingdom, has approximately 1,000 employees and
operational bases in the United Kingdom, Norway, the Middle East, Azerbaijan,
Algeria, and Asia-Pacific locations.
19
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
EXECUTIVE
OVERVIEW
During
the first half of 2007, our continuing operations produced revenue of $7.2
billion and operating income of $1.7 billion, reflecting an operating margin
of
23%. Revenue increased $1.1 billion or 18% over the first six months
of 2006, primarily driven by higher activity in the United States, Africa,
and
Europe. Operating income improved $229 million or 16% over the first
half of 2006. Internationally, our operations experienced 20% revenue
growth and 22% operating income growth during the first six months of 2007
compared to the same period in 2006, most of which was derived from our eastern
hemisphere operations.
Separation
of KBR, Inc.
In
November 2006, KBR, Inc. (KBR) completed an initial public offering (IPO),
in
which it sold approximately 32 million shares of KBR, Inc. common
stock. The increase in the carrying amount of our investment in KBR,
Inc., resulting from the IPO, was recorded in “Paid-in capital in excess of par
value” on our condensed consolidated balance sheet at December 31,2006. On April 5, 2007, we completed the separation of KBR from us by
exchanging the 135.6 million shares of KBR, Inc. common stock owned by us on
that date for 85.3 million shares of our common stock. Consequently,
KBR operations have been reclassified to discontinued operations in the
condensed consolidated financial statements for all periods
presented. Income from discontinued operations related to our 81%
share of KBR’s results in the first half of 2007 was $23 million after tax or
$0.02 per share. In the second quarter of 2007, we recorded a gain on
the disposition of KBR, Inc. of approximately $933 million, net of tax and
the
estimated fair value of the indemnities and guarantees provided to KBR described
below, which is included in income from discontinued operations on the condensed
consolidated statement of operations.
We
entered into various agreements relating to the separation of KBR, including,
among others, a master separation agreement, a registration rights agreement,
a
tax sharing agreement, transition services agreements, and an employee matters
agreement. The master separation agreement provides for, among other
things, KBR’s responsibility for liabilities related to its business and
Halliburton’s responsibility for liabilities unrelated to KBR’s
business. Halliburton provides indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s indemnification of KBR and any of its greater than 50%-owned
subsidiaries as of November 20, 2006, the date of the master separation
agreement, for:
-
fines
or other monetary penalties or direct monetary damages, including
disgorgement, as a result of a claim made or assessed by a governmental
authority in the United States, the United Kingdom, France, Nigeria,
Switzerland, and/or Algeria, or a settlement thereof, related to
alleged
or actual violations occurring prior to November 20, 2006 of the
United
States Foreign Corrupt Practices Act (FCPA) or particular, analogous
applicable foreign statutes, laws, rules, and regulations in connection
with investigations pending as of that date, including with respect
to the
construction and subsequent expansion by TSKJ of a natural gas
liquefaction complex and related facilities at Bonny Island in Rivers
State, Nigeria; and
-
all
out-of-pocket cash costs and expenses, or cash settlements or cash
arbitration awards in lieu thereof, KBR may incur after the effective
date
of the master separation agreement as a result of the replacement
of the
subsea flowline bolts installed in connection with the Barracuda-Caratinga
project. See Note 10 to our condensed consolidated financial
statements for further discussion of these
matters.
20
Additionally,
the Halliburton performance guarantees, surety bond guarantees, and letter
of
credit guarantees that are currently in place in favor of KBR’s customers or
lenders will continue until these guarantees expire at the earlier
of: (1) the termination of the underlying project contract or KBR
obligations thereunder or (2) the expiration of the relevant credit support
instrument in accordance with its terms or release of such instrument by the
customer. Further, KBR and we have agreed that, until December 31,2009, we will issue additional guarantees, indemnification, and reimbursement
commitments for KBR’s benefit in connection with (a) letters of credit necessary
to comply with KBR’s Egypt Basic Industries Corporation ammonia plant contract,
KBR’s Allenby & Connaught project, and all other KBR contracts that were in
place as of December 15, 2005; (b) surety bonds issued to support new task
orders pursuant to the Allenby & Connaught project, two job order contracts
for KBR’s Government and Infrastructure segment, and all other KBR contracts
that were in place as of December 15, 2005; and (c) performance guarantees
in
support of these contracts. KBR will compensate Halliburton for these
guarantees and indemnify Halliburton if Halliburton is required to perform
under
any of these guarantees.
As
a
result of these agreements, we recorded $190 million, as a reduction of the
gain
on the disposition of KBR, to reflect the estimated fair value of the above
indemnities and guarantees, net of the associated estimated future tax
benefit.
The
tax
sharing agreement provides for allocations of United States income tax
liabilities and other agreements between us and KBR with respect to tax
matters. Under the transition services agreements, we continue to
provide various interim corporate support services to KBR, and KBR continues
to
provide various interim corporate support services to us. The fees
are determined on a basis generally intended to approximate the fully allocated
direct and indirect costs of providing the services, without any
profit. Under an employee matters agreement, Halliburton and KBR have
allocated liabilities and responsibilities related to current and former
employees and their participation in certain benefit plans. Among
other items, the employee matters agreement provided for the conversion, which
occurred upon completion of the separation of KBR, of stock options and
restricted stock awards (with restrictions that had not yet lapsed as of the
final separation date) granted to KBR employees under our 1993 Stock and
Incentive Plan (1993 Plan) to options and restricted stock awards covering
KBR
common stock. As of April 5, 2007, these awards consisted of 1.2
million options with a weighted average exercise price per share of $15.01
and
approximately 600,000 restricted shares with a weighted average grant-date
fair
value per share of $17.95 under our 1993 Plan.
See
Note
10 to our condensed consolidated financial statements for further
information.
Other
corporate matters
In
May
2007, we sold our remaining interest in Dresser, Ltd. for $70 million in cash
and recorded a $49 million gain on the sale.
In
May
2007, the Board of Directors declared a dividend of $0.09 per common share
for
the second quarter of 2007, payable on June 21, 2007 to shareholders of record
at the close of business on June 1, 2007, reflecting a dividend increase of
$0.015 per share.
In
February 2006, our Board of Directors approved a share repurchase program of
up
to $1.0 billion. In September 2006, our Board of Directors approved
an increase to our existing common share repurchase program of up to an
additional $2.0 billion. In July 2007, our Board of Directors
approved an additional increase to our existing common share repurchase program
of up to $2.0 billion, bringing the entire authorization to $5.0
billion. This additional authorization may be used for open market
share purchases or to settle the conversion premium on our 3.125% convertible
senior notes, should they be redeemed. From the inception of this
program, we have repurchased approximately 66 million shares of our common
stock
for approximately $2.2 billion at an average price per share of
$33.88. These numbers include the repurchases of approximately 26
million shares of our common stock for approximately $911 million at an average
price per share of $35.37 during the first six months of 2007. As of
July 23, 2007, $2.8 billion remained available under this program.
On
January 1, 2007, we adopted the provisions of the Financial Accounting Standards
Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109.” As a
result of the adoption of FIN 48, we recognized a decrease of $4 million in
other liabilities to account for a decrease in unrecognized tax benefits and
an
increase of $34 million for accrued interest and penalties, which were accounted
for as a net reduction of $30 million to the January 1, 2007 balance of retained
earnings. Of the $30 million reduction to retained earnings, $10
million was attributable to KBR. See Note 12 to our condensed
consolidated financial statements for additional information.
21
Business
outlook
The
outlook for our business remains favorable. This past winter we were
negatively impacted by decreased activity in North America, particularly the
well stimulation market in Canada and the United States Rocky
Mountains. This decline was primarily attributable to poor weather
and customer delays to certain completion and stimulation
plans. However, the second quarter of 2007 showed significant
recovery in our United States land operations. We are optimistic for
the remainder of the year, as we expect activity levels and equipment
utilization rates to continue to increase as our customers work toward achieving
their 2007 production goals. Activity levels in Canada decreased
during the second quarter due to the spring break-up season. Looking
ahead, we are not planning on a significant recovery in Canada this year,
outside of the seasonal recovery from break-up. Where appropriate, we
have reduced personnel and moved equipment to higher utilization
areas.
Outside
of North America, our outlook remains positive, especially in the eastern
hemisphere. Worldwide demand for hydrocarbons continues to grow, and
the reservoirs are becoming more complex. Therefore, we have been
investing and will continue to invest in infrastructure, capital, and technology
predominantly in the eastern hemisphere, consistent with our initiative to
grow
our operations in that part of the world. We expect to realize
continued expansion in the Middle East, Africa, Russia, the North Sea, and
Asia.
For
the
remainder of 2007, we are focusing on:
-
maintaining
optimal utilization of our equipment and
resources;
-
managing
pricing, as the market allows, for our services and
products;
-
leveraging
our technologies to provide our customers with the ability to more
efficiently drill and complete their wells and to increase their
productivity. To that end,
we have
plans for three international research and development centers with
global
technology and training missions;
-
expanding
our manufacturing capability and capacity with new manufacturing
plants,
such as the one in Monterrey, Mexico that opened in the second quarter
of
2007 and three others in Brazil, Malaysia, and Singapore expected
to open
later this year;
-
hiring
and training additional personnel to meet the increased demand for
our
services;
-
pursuing
strategic acquisitions in line with our core products and services
to
expand our portfolio in key geographic areas. Consistent with
this objective:
-
in
July 2007, we entered into a definitive agreement to purchase the
entire
share capital of OOO Burservice, a leading provider of directional
drilling services in Russia;
-
in
May 2007, we acquired the intellectual property, assets, and existing
business associated with Vector Magnetics LLC’s active ranging technology
for steam-assisted gravity drainage
applications;
-
in
April 2007, we entered into a definitive agreement to purchase the
United
Kingdom-based PSL Energy Services Limited, a leading eastern hemisphere
provider of process, pipeline, and well intervention
services. We expect to close on this acquisition in the third
quarter of 2007; and
-
in
January 2007, we acquired Ultraline Services Corporation, a provider
of
wireline services in Canada;
-
increasing
capital spending, primarily directed toward eastern hemisphere operations
for service equipment additions and infrastructure related to recent
project wins.
Detailed
discussions of the Foreign Corrupt Practices Act investigations and our
liquidity and capital resources follow. Our operating performance is
described thereafter in “Business Environment and Results of
Operations.”
22
Foreign
Corrupt Practices Act investigations
The
Securities and Exchange Commission (SEC) is conducting a formal investigation
into whether improper payments were made to government officials in Nigeria
through the use of agents or subcontractors in connection with the construction
and subsequent expansion by TSKJ of a multibillion dollar natural gas
liquefaction complex and related facilities at Bonny Island in Rivers State,
Nigeria. The Department of Justice (DOJ) is also conducting a related
criminal investigation. The SEC has also issued subpoenas seeking
information, which we and KBR are furnishing, regarding current and former
agents used in connection with multiple projects, including current and prior
projects, over the past 20 years located both in and outside of Nigeria in
which
the Halliburton energy services business, KBR or affiliates, subsidiaries or
joint ventures of Halliburton or KBR, are or were participants. In
September 2006, the SEC requested that we enter into a tolling agreement with
respect to its investigation. We anticipate that we will enter into
an appropriate tolling agreement with the SEC.
TSKJ
is a
private limited liability company registered in Madeira, Portugal whose members
are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem
SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a
subsidiary of KBR), each of which had an approximate 25% interest in the
venture. TSKJ and other similarly owned entities entered into various
contracts to build and expand the liquefied natural gas project for Nigeria
LNG
Limited, which is owned by the Nigerian National Petroleum Corporation, Shell
Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V.
(an
affiliate of ENI SpA of Italy).
The
SEC
and the DOJ have been reviewing these matters in light of the requirements
of
the FCPA. In addition to performing our own investigation, we have
been cooperating with the SEC and the DOJ investigations and with other
investigations in France, Nigeria, and Switzerland regarding the Bonny Island
project. The government of Nigeria gave notice in 2004 to the French
magistrate of a civil claim as an injured party in the French
investigation. We are not aware of any further developments with
respect to this claim. We also believe that the Serious Fraud Office
in the United Kingdom is conducting an investigation relating to the Bonny
Island project. Our Board of Directors has appointed a committee of
independent directors to oversee and direct the FCPA
investigations. Through our committee of independent directors, we
will continue to oversee and direct the investigations.
The
matters under investigation relating to the Bonny Island project cover an
extended period of time (in some cases significantly before our 1998 acquisition
of Dresser Industries and continuing through the current time
period). We have produced documents to the SEC and the DOJ both
voluntarily and pursuant to company subpoenas from the files of numerous
officers and employees of Halliburton and KBR, including current and former
executives of Halliburton and KBR, and we are making our employees and KBR
is
making its employees available to the SEC and the DOJ for
interviews. In addition, the SEC has issued a subpoena to A. Jack
Stanley, who formerly served as a consultant and chairman of Kellogg Brown
&
Root LLC, and to others, including certain of our former and KBR’s current and
former employees, former executive officers of KBR, and at least one
subcontractor of KBR. We further understand that the DOJ has issued
subpoenas for the purpose of obtaining information abroad, and we understand
that other partners in TSKJ have provided information to the DOJ and the SEC
with respect to the investigations, either voluntarily or under
subpoenas.
The
SEC
and DOJ investigations include an examination of whether TSKJ’s engagements of
Tri-Star Investments as an agent and a Japanese trading company as a
subcontractor to provide services to TSKJ were utilized to make improper
payments to Nigerian government officials. In connection with the
Bonny Island project, TSKJ entered into a series of agency agreements, including
with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing
in
1995 and a series of subcontracts with a Japanese trading company commencing
in
1996. We understand that a French magistrate has officially placed
Mr. Tesler under investigation for corruption of a foreign public official.
In
Nigeria, a legislative committee of the National Assembly and the Economic
and
Financial Crimes Commission, which is organized as part of the executive branch
of the government, are also investigating these matters. Our
representatives have met with the French magistrate and Nigerian
officials. In October 2004, representatives of TSKJ voluntarily
testified before the Nigerian legislative committee.
23
TSKJ
suspended the receipt of services from and payments to Tri-Star Investments
and
the Japanese trading company and has considered instituting legal proceedings
to
declare all agency agreements with Tri-Star Investments terminated and to
recover all amounts previously paid under those agreements. In
February 2005, TSKJ notified the Attorney General of Nigeria that TSKJ would
not
oppose the Attorney General’s efforts to have sums of money held on deposit in
accounts of Tri-Star Investments in banks in Switzerland transferred to Nigeria
and to have the legal ownership of such sums determined in the Nigerian
courts.
As
a
result of these investigations, information has been uncovered suggesting that,
commencing at least 10 years ago, members of TSKJ planned payments to Nigerian
officials. We have reason to believe that, based on the ongoing
investigations, payments may have been made by agents of TSKJ to Nigerian
officials. In addition, information uncovered in the summer of 2006
suggests that, prior to 1998, plans may have been made by employees of The
M.W.
Kellogg Company (a predecessor of a KBR subsidiary) to make payments to
government officials in connection with the pursuit of a number of other
projects in countries outside of Nigeria. We are reviewing a number
of more recently discovered documents related to KBR’s activities in countries
outside of Nigeria with respect to agents for projects after
1998. Certain activities discussed in this paragraph involve current
or former employees or persons who were or are consultants to KBR, and our
investigation is continuing.
In
June
2004, all relationships with Mr. Stanley and another consultant and former
employee of M.W. Kellogg Limited were terminated. The terminations
occurred because of Code of Business Conduct violations that allegedly involved
the receipt of improper personal benefits from Mr. Tesler in connection with
TSKJ’s construction of the Bonny Island project.
In
2006
and 2007, KBR suspended the services of other agents in and outside of Nigeria,
including one agent who, until such suspension, had worked for KBR outside
of
Nigeria on several current projects and on numerous older projects going back
to
the early 1980s. Such suspensions have occurred when possible
improper conduct has been discovered or alleged or when Halliburton and KBR
have
been unable to confirm the agent’s compliance with applicable law and the Code
of Business Conduct.
If
violations of the FCPA were found, a person or entity found in violation could
be subject to fines, civil penalties of up to $500,000 per violation, equitable
remedies, including disgorgement (if applicable) generally of profits, including
prejudgment interest on such profits, causally connected to the violation,
and
injunctive relief. Criminal penalties could range up to the greater
of $2 million per violation or twice the gross pecuniary gain or loss from
the
violation, which could be substantially greater than $2 million per
violation. It is possible that both the SEC and the DOJ could assert
that there have been multiple violations, which could lead to multiple
fines. The amount of any fines or monetary penalties that could be
assessed would depend on, among other factors, the findings regarding the
amount, timing, nature, and scope of any improper payments, whether any such
payments were authorized by or made with knowledge of us, KBR or our or KBR’s
affiliates, the amount of gross pecuniary gain or loss involved, and the level
of cooperation provided the government authorities during the
investigations. Agreed dispositions of these types of violations also
frequently result in an acknowledgement of wrongdoing by the entity and the
appointment of a monitor on terms negotiated with the SEC and the DOJ to review
and monitor current and future business practices, including the retention
of
agents, with the goal of assuring compliance with the FCPA.
These
investigations could also result in third-party claims against us, which may
include claims for special, indirect, derivative or consequential damages,
damage to our business or reputation, loss of, or adverse effect on, cash flow,
assets, goodwill, results of operations, business prospects, profits or business
value or claims by directors, officers, employees, affiliates, advisors,
attorneys, agents, debt holders, or other interest holders or constituents
of us
or our current or former subsidiaries. In addition, we could incur
costs and expenses for any monitor required by or agreed to with a governmental
authority to review our continued compliance with FCPA law.
24
As
of
June 30, 2007, we are unable to estimate an amount of probable loss or a range
of possible loss related to these matters as it relates to Halliburton
directly. However, we provided indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s indemnification of KBR and any of its greater than 50%-owned
subsidiaries as of November 20, 2006, the date of the master separation
agreement, for fines or other monetary penalties or direct monetary damages,
including disgorgement, as a result of a claim made or assessed by a
governmental authority in the United States, the United Kingdom, France,
Nigeria, Switzerland, and/or Algeria, or a settlement thereof, related to
alleged or actual violations occurring prior to November 20, 2006 of the FCPA
or
particular, analogous applicable foreign statutes, laws, rules, and regulations
in connection with investigations pending as of that date, including with
respect to the construction and subsequent expansion by TSKJ of a natural gas
liquefaction complex and related facilities at Bonny Island in Rivers State,
Nigeria. We recorded the estimated fair market value of this
indemnity regarding FCPA matters described above upon our separation from
KBR. See Note 2 to our condensed consolidated financial statements
for additional information.
Our
indemnification obligation to KBR does not include losses resulting from
third-party claims against KBR, including claims for special, indirect,
derivative or consequential damages, nor does our indemnification apply to
damage to KBR’s business or reputation, loss of, or adverse effect on, cash
flow, assets, goodwill, results of operations, business prospects, profits
or
business value or claims by directors, officers, employees, affiliates,
advisors, attorneys, agents, debt holders, or other interest holders or
constituents of KBR or KBR’s current or former subsidiaries.
In
consideration of our agreement to indemnify KBR for the liabilities referred
to
above, KBR has agreed that we will at all times, in our sole discretion, have
and maintain control over the investigation, defense and/ or settlement of
these
FCPA matters until such time, if any, that KBR exercises its right to assume
control of the investigation, defense and/or settlement of the FCPA matters
as
it relates to KBR. KBR has also agreed, at our expense, to assist with
Halliburton’s full cooperation with any governmental authority in our
investigation of these FCPA matters and our investigation, defense and/or
settlement of any claim made by a governmental authority or court relating
to
these FCPA matters, in each case even if KBR assumes control of these FCPA
matters as it relates to KBR. If KBR takes control over the
investigation, defense and/or settlement of FCPA matters, refuses a settlement
of FCPA matters negotiated by us, enters into a settlement of FCPA matters
without our consent, or materially breaches its obligation to cooperate with
respect to our investigation, defense and/or settlement of FCPA matters, we
may
terminate the indemnity.
LIQUIDITY
AND CAPITAL RESOURCES
We
ended
the second quarter of 2007 with cash and equivalents of $1.3 billion compared
to
$2.9 billion at December 31, 2006. The decrease in cash and
equivalents was primarily because we repurchased 26 million shares of our common
stock at a cost of $911 million under our share repurchase program and invested
$842 million in various marketable securities in the first half of 2007,
consisting of auction-rate securities, variable-rate demand notes, and municipal
bonds.
Significant
sources of cash
Cash
flows from operations contributed $1.0 billion to cash in the first six months
of 2007. This included $56 million in cash outflows related to
discontinued operations.
In
May
2007, we sold our remaining interest in Dresser, Ltd. for $70 million in
cash.
We
received approximately $24 million in asbestos- and silica-related insurance
proceeds in the first six months of 2007 and expect to receive additional
amounts as follows:
Further
available sources of cash. On July 9, 2007, we entered into a
new unsecured $1.2 billion five-year revolving credit facility that replaced
our
then existing unsecured $1.2 billion five-year revolving credit
facility. The purpose of both the new and the replaced facility is to
provide commercial paper support, general working capital, and credit for other
corporate purposes. There were no cash drawings under the former
facility as of June 30, 2007.
Significant
uses of cash
Capital
expenditures of $682 million in the first six months of 2007.
During
the first six months of 2007, we invested in approximately $842 million in
marketable securities, consisting of auction-rate securities, variable-rate
demand notes, and municipal bonds.
In
January 2007, we acquired all of the intellectual property, current assets,
and
existing wireline services business associated with Ultraline Services
Corporation, a division of Savanna Energy Services Corp., for approximately
$176
million, subject to adjustments for working capital.
In
May
2007, the Board of Directors declared a dividend of $0.09 per common share
for
the second quarter of 2007, payable on June 21, 2007 to shareholders of record
at the close of business on June 1, 2007, reflecting a dividend increase of
$0.015 per share. We paid $157 million in dividends to our
shareholders in the first six months of 2007.
During
the first six months of 2007, we repurchased approximately 26 million shares
of
our common stock at a cost of approximately $911 million at an average price
per
share of $35.37, under our share repurchase program.
During
the first six months of 2007, we invested approximately $161 million in
technology, including $145 million for company-sponsored research and
development.
Future
uses of cash. Capital spending for 2007 is expected to be
approximately $1.4 billion. The capital expenditures forecast for
2007 is primarily directed toward our Sperry Drilling Services, wireline and
perforating, production enhancement, and cementing operations.
In
April
2007, we entered into a definitive agreement with the shareholders of PSL Energy
Services Limited (PSLES) to purchase the entire share capital of the
company. We expect to close on this acquisition in the third quarter
of 2007.
In
July
2007, our Board of Directors approved an increase to our existing common share
repurchase program of up to an additional $2.0 billion, bringing the entire
authorization to $5.0 billion. This additional authorization may be
used for open market share purchases or to settle the conversion premium over
the face amount of the company’s 3.125% convertible senior notes, should they be
redeemed. As of July 23, 2007, $2.8 billion remained available under
this program.
Subject
to board approval, we expect to pay dividends of approximately $80 million
per
quarter for the remainder of 2007.
Other
factors affecting liquidity
Letters
of credit. In the normal course of business, we have agreements
with banks under which approximately $2.2 billion of letters of credit, surety
bonds, or bank guarantees were outstanding as of June 30, 2007, including $1.3
billion that relate to KBR. These KBR letters of credit, surety
bonds, or bank guarantees are being guaranteed by us in favor of KBR’s customers
and lenders. KBR will compensate us for these guarantees and
indemnify us if we are required to perform under any of these
guarantees. Some of the outstanding letters of credit have triggering
events that would entitle a bank to require cash collateralization.
Credit
ratings. The credit ratings for our long-term debt are A2 with
Moody’s Investors Service and BBB+ with Standard and Poor’s. Our
Moody’s rating became effective May 1, 2007, and was an upward revision from our
previous Moody’s rating of Baa1, which had been in effect since December
2005. Our current credit rating with Standard and Poor’s has been in
effect since May 2006. On April 11, 2007, Standard and Poor’s placed
us on “Creditwatch Positive,” indicating that our ratings are under review for a
potential upgrade in the near term. The credit ratings on our
short-term debt are P1 with Moody’s Investors Service and A2 with Standard and
Poor’s.
Debt
covenants.At June 30, 2007, we were required to maintain and were in
compliance with a maximum debt-to-capitalization ratio under our then existing
unsecured $1.2 billion revolving credit facility. The new facility
does not contain any financial covenants.
26
BUSINESS
ENVIRONMENT AND RESULTS OF OPERATIONS
We
operate in nearly 70 countries throughout the world to provide a comprehensive
range of discrete and integrated services and products to the energy
industry. The majority of our consolidated revenue is derived from
the sale of services and products to major, national, and independent oil and
gas companies worldwide. We serve the upstream oil and gas industry
throughout the lifecycle of the reservoir: from locating hydrocarbons
and managing geological data, to drilling and formation evaluation, well
construction and completion, and optimizing production through the life of
the
field. Our four business segments are: Production
Optimization, Fluid Systems, Drilling and Formation Evaluation, and Digital
and
Consulting Solutions. The two KBR segments have been reclassified to
discontinued operations as a result of the separation of KBR.
The
industries we serve are highly competitive with many substantial competitors
in
each segment. In the first six months of 2007, based upon the
location of the services provided and products sold, 45% of our consolidated
revenue was from the United States. In the first six months of 2006,
46% of our consolidated revenue was from the United States. No other
country accounted for more than 10% of our revenue during these
periods.
Operations
in some countries may be adversely affected by unsettled political conditions,
acts of terrorism, civil unrest, force majeure, war or other armed conflict,
expropriation or other governmental actions, inflation, exchange controls,
or
currency devaluation. We believe the geographic diversification of
our business activities reduces the risk that loss of operations in any one
country would be material to our consolidated results of
operations.
Activity
levels within our business segments are significantly impacted by spending
on
upstream exploration, development, and production programs by major, national,
and independent oil and gas companies. Also impacting our activity is
the status of the global economy, which impacts oil and gas
consumption.
Some
of
the more significant barometers of current and future spending levels of oil
and
gas companies are oil and gas prices, the world economy, and global stability,
which together drive worldwide drilling activity. Our financial
performance is significantly affected by oil and gas prices and worldwide rig
activity, which are summarized in the following tables.
This
table shows the average oil and gas prices for West Texas Intermediate (WTI)
and
United Kingdom Brent crude oils, and Henry Hub natural gas:
Three
Months Ended
Year
Ended
June
30
December
31
Average
Oil Prices (dollars per barrel)
2007
2006
2006
West
Texas Intermediate
$
64.59
$
70.52
$
66.17
United
Kingdom Brent
68.63
69.58
65.35
Average
United States Gas Prices (dollars per million
British
thermal
units, or
mmBtu)
Henry
Hub
$
7.65
$
6.59
$
6.81
27
The
quarterly and year-to-date average rig counts based on the Baker Hughes
Incorporated rig count information were as follows:
Three
Months Ended
Six
Months Ended
June
30
June
30
Land
vs. Offshore
2007
2006
2007
2006
United
States:
Land
1,679
1,536
1,665
1,487
Offshore
77
97
80
89
Total
1,756
1,633
1,745
1,576
Canada:
Land
136
279
333
471
Offshore
3
3
3
3
Total
139
282
336
474
International
(excluding Canada):
Land
710
643
705
636
Offshore
292
270
287
269
Total
1,002
913
992
905
Worldwide
total
2,897
2,828
3,073
2,955
Land
total
2,525
2,458
2,703
2,594
Offshore
total
372
370
370
361
Three
Months Ended
Six
Months Ended
June
30
June
30
Oil
vs. Gas
2007
2006
2007
2006
United
States:
Oil
284
268
279
250
Gas
1,472
1,365
1,466
1,326
Total
1,756
1,633
1,745
1,576
Canada:
Oil
65
65
130
95
Gas
74
217
206
379
Total
139
282
336
474
International
(excluding Canada):
Oil
781
698
772
694
Gas
221
215
220
211
Total
1,002
913
992
905
Worldwide
total
2,897
2,828
3,073
2,955
Oil
total
1,130
1,031
1,181
1,039
Gas
total
1,767
1,797
1,892
1,916
Our
customers’ cash flows, in many instances, depend upon the revenue they generate
from the sale of oil and gas. Higher oil and gas prices usually
translate into higher exploration and production budgets. Higher
prices also improve the economic attractiveness of marginal exploration
areas. This promotes additional investment by our customers in the
sector. The opposite is true for lower oil and gas
prices.
28
After
declining from record highs during the third and fourth quarters of 2006, WTI
oil spot prices are expected to average $65.56 per barrel in 2007 and $66.92
per
barrel in 2008 per the Energy Information Administration
(EIA). Between mid-December 2006 and mid-January 2007, the WTI crude
oil price fell about $12 per barrel to a low of $50.51 per barrel, as warm
weather reduced demand for heating fuels throughout most of the United
States. The WTI price recovered to over $66 per barrel by the end of
March 2007, as the weather turned colder than normal and geopolitical tensions
intensified. Crude oil prices have continued to rise in the second
quarter of 2007 due to a tight world oil supply and demand
balance. We expect that prices will remain at these historically high
levels due to a combination of the following factors:
-
continued
growth in worldwide petroleum demand, despite high oil
prices;
-
projected
production growth in non-Organization of Petroleum Exporting Countries
(non-OPEC) supplies is not expected to accommodate world wide demand
growth;
-
OPEC’s
commitment to control production;
-
modest
increases in OPEC’s current and forecasted production capacity;
and
-
geopolitical
tensions in major oil-exporting
nations.
According
to the International Energy Agency’s (IEA) July 2007 “Oil Market Report,” the
outlook for world oil demand remains strong, with China, the Middle East, and
North America accounting for approximately 75% of the expected demand growth
in
2007. Excess oil production capacity is expected to remain
constrained and that, along with steady demand, is expected to keep supplies
tight. Thus, any unexpected supply disruption or change in demand
could lead to fluctuating prices. The IEA forecasts world petroleum
demand growth in 2007 to increase 2% over 2006.
Volatility
in natural gas prices has the potential to impact our customers' drilling and
production activities, particularly in the United States. In the
first quarter of 2007, we experienced lower than anticipated customer activity
in North America, particularly the pressure pumping market in Canada and the
United States Rockies. Some of this activity decline was attributable
to poor weather, including an early spring break-up season in Canada and severe
weather early in 2007 in the United States Rockies and mid-continent
regions. In addition, the unusually warm start to the United States
winter caused concern about natural gas storage levels, which negatively
impacted the price of natural gas. This uncertainty made many of our
customers more cautious about their drilling and production plans in the early
part of 2007. The second quarter of 2007 was characterized by
stronger natural gas prices and increased activity by our United States
customers. Canada has experienced a significant decline in activity
as compared to 2006. Beginning in late 2006, we began moving
equipment and personnel from Canada to the United States and Latin America
to
address the anticipated slowdown. The EIA projects that the Henry Hub
spot price will average $7.91 per thousand cubic feet (mcf) in 2007 and $8.39
per mcf in 2008.
It
is
common practice in the United States oilfield services industry to sell services
and products based on a price book and then apply discounts to the price book
based upon a variety of factors. The discounts applied typically
increase to partially offset price book increases. The discounts
applied normally decrease if activity levels are strong. During
periods of reduced activity, discounts normally increase, reducing the revenue
for our services and, conversely, during periods of higher activity, discounts
normally decline resulting in revenue increasing for our services. We
are currently experiencing increased pricing pressure from our customers in
the
North American market, particularly in Canada and our United States well
stimulation operations. This has resulted in a slight deterioration
in well stimulation pricing, less than 5% in the first half of 2007, which
could
continue during the second half of 2007.
Focus
on international growth. Consistent with our strategy to grow
our international operations, following is a brief discussion of some of our
recent initiatives:
-
we
have opened a corporate office in Dubai, United Arab Emirates, allowing
us
to focus more attention on customer relationships in that part of
the
world, particularly with national oil
companies;
-
in
order to continue to supply our customers with leading-edge services
and
products, we plan to increase our technology spending by approximately
34%
during 2007 as compared to the prior year. We have plans for
three new international research and development centers with global
technology and training missions. The first will open in Pune,
India in the third quarter of 2007, and the second facility, which
will be
in Singapore, is expected to open during the first half of
2008. The location of the third facility is currently being
determined;
29
-
we
are expanding our manufacturing capability and capacity during 2007
to
meet the increasing demands for our services and products. In
the second quarter of 2007, we opened a manufacturing plant in Mexico,
and
later this year we plan to open additional plants in Brazil, Singapore,
and Malaysia. Having manufacturing facilities closer to our
worksites will allow us to more efficiently deploy equipment to our
field
operations, as well as increase our use of local people and
materials;
-
as
our workforce becomes more global, the need for regional training
centers
increases. To meet the increasing need for technical training,
we opened a new training center in Tyumen, Russia during the first
quarter
of 2007. We have also recently expanded training centers in
Malaysia, Egypt, and Mexico;
-
part
of our growth strategy includes select acquisitions that will enhance
or
augment our current portfolio of products and services, including
those
with unique technologies or distribution networks in areas where
we do not
already have large operations;
-
in
January 2007, we acquired Ultraline Services Company, a provider
of
wireline services in Canada. Prior to this acquisition, we did
not have meaningful wireline and perforating operations in
Canada;
-
in
April 2007, we entered into a definitive agreement to purchase PSL
Energy
Services Limited, a leading eastern hemisphere provider of process,
pipeline, and well intervention services. This acquisition will
increase our eastern hemisphere production enhancement operations
significantly, putting us in a strong position in pipeline processing
services both in the eastern hemisphere and
globally;
-
in
May 2007, we acquired the intellectual property, assets, and existing
business associated with Vector Magnetics LLC’s active ranging technology
for steam-assisted gravity drainage applications;
and
-
in
July 2007, we entered into a definitive agreement to purchase the
entire
share capital of OOO Burservice, a leading provider of directional
drilling services in Russia.
Recent
contract wins are positioning us to grow our international operations over
the
coming years. Examples include:
-
the
Khurais project in Saudi Arabia, which was awarded in
mid-2006. This large contract is progressing well, and we now
believe the project will reach its peak during the first quarter
of
2008;
-
a
contract to provide hydraulic fracturing services on the Right Bank
of the
Priobskye field in Siberia. The scope of work includes
providing services for 327 wells;
-
a
multiservices contract for work in the Tyumen region of
Russia. We will be providing drilling fluids, waste management,
cementing, drill bits, directional drilling, and logging-while-drilling
services;
-
a
contract to provide acidizing, acid fracturing, water control, and
nitrogen stimulation services for a customer in the Bay of Campeche,
Mexico;
-
a
contract to provide deepwater sand control completion technology
in two
offshore fields of India;
-
a
contract to provide completion products and services to a group of
energy
companies for operations throughout Malaysia for a term of five
years;
-
a
contract to provide exploration and development testing services
in high
pressure, high temperature environments in Latin America;
and
-
a
five-year contract for sand control completions for over 200 wells
in
offshore China.
All
periods presented reflect the reclassification of certain indirect
expenses that were previously allocated to the segments and are now
included as general corporate
expenses.
32
The
increase in consolidated revenue in the second quarter of 2007 compared to
the
second quarter of 2006 spanned all regions in every segment and was attributable
to higher worldwide activity, particularly in the United States, Africa, and
Europe. International revenue was 55% of consolidated revenue in the
second quarter of 2007 and 54% of consolidated revenue in the second quarter
of
2006.
The
increase in consolidated operating income, which spanned all geographic regions,
was due to increased customer activity, pricing gains, and new contracts
primarily in the Middle East, Europe, and Latin America. Contributing
to the increase in operating income is a $49 million gain recorded in the second
quarter of 2007 for the sale of our remaining interest in Dresser,
Ltd.
Following
is a discussion of our results of operations by reportable segment.
Production
Optimization increase in revenue compared to the second quarter of 2006 was
derived from all regions. Production enhancement services revenue
grew 13% largely driven by increased activity in the United States, increased
stimulation activity in Mexico, and additional projects in the North
Sea. Partially offsetting production enhancement services revenue was
a decline in Asia Pacific’s activity. Revenue from completion tools
sales and services increased 33% compared to the second quarter of 2006,
benefiting from increased sand control product sales and increased activity
in
our intelligent completions joint venture in Africa, increased completions
in
the Middle East, Malaysia, and Indonesia, and a new contract in
Brazil. International revenue was 44% of total segment revenue in the
second quarter of 2007 and 43% of total segment revenue in the second quarter
of
2006.
The
increase in operating income for the segment compared to the second quarter
of
2006 was led by completion tools sales and services, which grew
58%. The improvement spanned all regions, particularly driven by a
new contract in Brazil and increased sales in Asia
Pacific. Production enhancement services operating income fell 2%,
primarily from reduced activity in Asia Pacific. Partially offsetting
production enhancement’s decline was increased stimulation activity in Mexico
and the North Sea.
Fluid
Systems revenue improvement in the second quarter of 2007 compared to the
second quarter of 2006 resulted from a 23% increase in revenue from sales of
Baroid Fluid Services and an 18% increase in revenue from cementing
services. The segment realized revenue growth in all four regions
despite lower activity in Canada. Baroid Fluid Services revenue
benefited from new contracts in the North Sea, increased prices and higher
rig
count in the United States, and increased rig count and new contracts in
Africa. Cementing services increase in revenue stemmed from higher
equipment utilization and increased prices in the United States, new contracts,
increased activity, and better prices in Latin America, and increased activity
in Eurasia. International revenue was 53% of total segment revenue in
the second quarter of 2007 and 51% of total segment revenue in the second
quarter of 2006.
The
decrease in operating income for the segment compared to the second quarter
of
2006 was due to a 22% decline in Baroid Fluid Services operating
income. Baroid Fluid Services operating income was negatively
impacted by a provision for an environmental exposure recorded in the second
quarter of 2007 and reduced activity in Latin America and
Canada. Cementing services operating income grew 9% on new contracts
and higher activity in Mexico and increased activity in the United
States.
Drilling
and Formation Evaluation revenue growth for the second quarter of 2007
compared to the second quarter of 2006 came from all product service lines
improving in every region. Drilling services contributed a 30%
increase primarily from the introduction of new technology and increased
activity in the United States, Eurasia, and the Middle East. Wireline
and perforating services revenue improved 15% on new contracts and increased
activity in Africa and Latin America. Drill bits revenue increased
19% due to higher rig activity in the United States. International
revenue was 71% of total segment revenue in the second quarter of 2007 and
70%
of total segment revenue in the second quarter of 2006.
The
increase in segment operating income was predominantly due to a 42% increase
in
drilling services operating income from new contracts in Eurasia and increased
activity in the Middle East. Drill bits operating income increased
42% from improved fixed cutter bit sales in the United
States. Wireline and perforating services operating income fell 7%
due to decreased sales in Asia Pacific and the slowdown of activity in
Canada.
Digital
and Consulting Solutions revenue improvement for the second quarter of 2007
compared to the second quarter of 2006 was led by a 22% increase in Landmark,
primarily reflecting improved software-related sales and consulting services
revenue in the United States, Latin America, and Eurasia. Project
management revenue declined 5% due to the completion of a project in
Mexico. International revenue was 70% of total segment revenue in the
second quarter of 2007 and 69% of total segment revenue in the second quarter
of
2006.
33
The
segment operating income improvement is primarily due to the $49 million gain
recorded on the sale of our remaining interest in Dresser,
Ltd. Landmark operating income grew 49% with increases in all four
regions on improved sales of software and consulting services.
General
corporate expenses were $62 million in the second quarter of 2007 compared
to $54 million in the second quarter of 2006. The increase was
primarily due to increased legal fees and corporate development
costs.
NONOPERATING
ITEMS
Minority
interest in net income of subsidiariesdecreased $2 million compared to the
second quarter of 2006 related primarily to decreased earnings from our
WellDynamics and Saudi logging joint ventures.
Provision
for income taxes from continuing operations of $284 million in the second
quarter of 2007 resulted in an effective tax rate of 32% compared to an
effective tax rate of 33% in the second quarter of 2006.
Income
from discontinued operations, net of income tax in the second quarter of
2007 primarily consisted of the $933 million net gain recorded on the
disposition of KBR, Inc.
All
periods presented reflect the reclassification of certain indirect
expenses that were previously allocated to the segments and are now
included as general corporate
expenses.
36
The
increase in consolidated revenue in the first six months of 2007 compared to
the
first six months of 2006 spanned all four regions and was attributable to higher
worldwide activity. Revenue derived from the eastern hemisphere
contributed 54% to the total revenue increase. International revenue
was 55% of consolidated revenue in the first six months of 2007 and 54% of
consolidated revenue in the first six months of 2006.
The
increase in consolidated operating income in the first six months of 2007
compared to the first six months of 2006 spanned all four regions and was
predominantly due to the operating income increase in the eastern hemisphere,
which contributed 61% of the total operating income
increase. Operating income increased 50% in Africa and 45% in the
Middle East compared to the first six months of 2006, with all segments
contributing to these increases. Operating income in the first six
months of 2007 was positively impacted by a $49 million gain recorded on the
sale of our remaining interest in Dresser, Ltd.
Following
is a discussion of our results of operations by reportable
segments.
Production
Optimization revenue increase compared to the first six months of 2006 was
driven by an 11% increase in revenue from production enhancement services and
a
27% increase from completion tools and services. Both product service
lines had increases in all geographic regions. Production enhancement
services revenue benefited from increased resources and improved weather
conditions in the United States, increased stimulation activity in Mexico,
additional projects in the North Sea, and higher utilization of equipment in
Angola. Production enhancement services revenue was partially offset
by decreased activity in Canada and Asia Pacific. Sales of completion
tools and services benefited from a 53% increase in revenue in Africa from
increased testing activity and increased activity in our intelligent completions
joint venture, and increases in the United States, Brazil, and
Malaysia. International revenue was 44% of total segment revenue in
both the first six months of 2007 and the first six months of 2006.
The
increase in segment operating income in the first six months of 2007 compared
to
the first six months of 2006 was led by completion tools sales and services
operating income, which increased 50% and spanned all
regions. Contributing to the completion tools sales and services
increase were a full recovery in the Gulf of Mexico after the hurricanes in
2005, increased testing activity in Brazil, and increased product sales in
Asia
Pacific. Production enhancement services operating income declined 6%
compared to the first half of 2006 due to decreased activity in Canada and
the
Caspian. Partially offsetting the decline in production enhancement
services operating income were increased stimulation activity in Mexico and
additional projects in the North Sea.
Fluid
Systems revenue increase compared to the first six months of 2006 came from
increases in all regions. A 29% increase in the eastern hemisphere
contributed to the segment’s improvement. Partially offsetting the
segment’s revenue growth was decreased rig activity in
Canada. Cementing services revenue increased 17% compared to the
first half of 2006 due primarily to new contracts in the Middle East and Mexico
and increased activity and pricing gains in the United States and Latin
America. Baroid Fluid Services revenue increased 22% compared to the
first six months of 2006 on increased land rig activity and prices in the United
States and new contracts in the North Sea. International revenue was
54% of total segment revenue in the first six months of 2007 and 52% in the
first six months of 2006.
The
increase in segment operating income in the first six months of 2007 compared
to
the first six months of 2006 was led by a 10% increase from cementing services
from increased activity and pricing gains in the United States and new
technology and new contracts in Latin America. Baroid Fluid Services
operating income fell 2% compared to the first half of 2006 primarily due to
decreased activity in Canada and Latin America and a provision for an
environmental exposure recorded in the second quarter of
2007. Partially offsetting the segment decline were new contracts,
improved sales, and increased rig activity in Africa.
Drilling
and Formation Evaluation revenue increase compared to the first six months
of 2006 was due to a 29% increase in drilling services revenue, a 23% increase
in wireline and perforating services revenue, and a 15% increase in drill bits
revenue. The increase spanned all four regions in every product
service line. The increase in drilling services revenue was primarily
the result of additional contract awards in the United States, the Middle East,
and Asia Pacific. Also contributing to drilling services revenue
improvement was increased drilling activity in Eurasia. Wireline and
perforating services revenue benefited from new projects in Africa, increased
rig count in the United States, and a new contract in Asia
Pacific. Increased United States rig count and fixed cutter activity
in the United States and Europe contributed to the increase in drill bits
revenue. International revenue was 71% of total segment revenue in
the first six months of 2007 and 70% in the first six months of
2006.
37
The
increase in segment operating income in the first six months of 2007 compared
to
the first six months of 2006 came from all geographic regions, with Eurasia,
the
Middle East, and the United States as the largest
contributors. Drilling services operating income grew 46% over the
first six months of 2006, which spanned all four regions, primarily from
increased drilling activity in the United States and Eurasia and new contracts
in the Middle East. Wireline and perforating services operating
income improved 14%, which spanned all regions, from new projects in Africa
and
increased deepwater activity in the Gulf of Mexico. Partially
offsetting wireline and perforating services operating income was the slowdown
in Canada. Drill bits operating income increased 29% compared to the
first six months of 2006 due primarily to increased rig activity in the United
States.
Digital
and Consulting Solutions revenue increase compared to the first six months
of 2006 was primarily attributable to Landmark, with revenue increasing
18%. Landmark revenue grew in all four regions, with the largest
increases occurring in the United States and Eurasia due to stronger software
sales and consulting services. Project management revenue declined
24% due to the completion of a project in Mexico. International
revenue was 67% of total segment revenue in the first six months of 2007 and
69%
in the first six months of 2006.
The
increase in segment operating income in the first six months of 2007 compared
to
the first six months of 2006 was primarily due to a $49 million gain recorded
on
the sale of our remaining interest in Dresser, Ltd. Also contributing
to the segment increase in operating income was a 34% increase in Landmark
operating income. Project management’s operating income fell 16% from
lower activity in the United States.
General
corporate expenses were $119 million in the first six months of 2007
compared to $113 million in the first six months of 2006. The
increase in general corporate expenses is due to increased corporate development
costs.
NONOPERATING
ITEMS
Interest
expense decreased $5 million in the first six months of 2007 compared to
the first six months of 2006 due to the repayment in August 2006 of our $275
million 6% medium-term notes.
Interest
income increased $16 million in the first six months of 2007 compared to
the first six months of 2006 due to higher interest-rate-driven earnings on
higher cash balances and marketable investments.
Other,
net in the first six months of 2007 includes losses on the Norwegian
krone. The first six months of 2006 includes gains on the Mexican
peso and a gain on the sale of stock, offset by losses incurred on the
extinguishment of debt.
Minority
interest in net income of subsidiariesdecreased $8 million compared to the
first six months of 2006 related primarily to decreased earnings from our
WellDynamics joint venture.
Provision
for income taxes from continuing operations of $543 million in the first
six months of 2007 resulted in an effective tax rate of 33% compared to an
effective tax rate of 33% in the first six months of 2006.
Income
from discontinued operations, net of income tax in the first six months of
2007 primarily consisted of the approximate $933 million net gain recorded
on
the disposition of KBR, Inc.
ENVIRONMENTAL
MATTERS
We
are
subject to numerous environmental, legal, and regulatory requirements related
to
our operations worldwide. In the United States, these laws and
regulations include, among others:
-
the
Comprehensive Environmental Response, Compensation, and Liability
Act;
-
the
Resources Conservation and Recovery
Act;
-
the
Clean Air Act;
-
the
Federal Water Pollution Control Act;
and
-
the
Toxic Substances Control Act.
38
In
addition to the federal laws and regulations, states and other countries where
we do business often have numerous environmental, legal, and regulatory
requirements by which we must abide. We evaluate and address the
environmental impact of our operations by assessing and remediating contaminated
properties in order to avoid future liabilities and comply with environmental,
legal, and regulatory requirements. On occasion, we are involved in
specific environmental litigation and claims, including the remediation of
properties we own or have operated, as well as efforts to meet or correct
compliance-related matters. Our Health, Safety and Environment group
has several programs in place to maintain environmental leadership and to
prevent the occurrence of environmental contamination.
We
do not
expect costs related to these remediation requirements to have a material
adverse effect on our consolidated financial position or our results of
operations. Our accrued liabilities for environmental matters were
$47 million as of June 30, 2007 and $39 million as of December 31,2006. The liability covers numerous properties, and no individual
property accounts for more than $10 million of the liability
balance. We have subsidiaries that have been named as potentially
responsible parties along with other third parties for 10 federal and state
superfund sites for which we have established a liability. As of June30, 2007, those 10 sites accounted for approximately $11 million of our total
$47 million liability. For any particular federal or state superfund
site, since our estimated liability is typically within a range and our accrued
liability may be the amount on the low end of that range, our actual liability
could eventually be well in excess of the amount accrued. In some
instances, we have been named a potentially responsible party by a regulatory
agency, but, in each of those cases, we do not believe we have any material
liability. We also could be subject to third-party claims with
respect to environmental matters for which we have been named as a potentially
responsible party.
NEW
ACCOUNTING STANDARDS
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.” FIN 48 prescribes a
minimum recognition threshold and measurement methodology that a tax position
taken or expected to be taken in a tax return is required to meet before being
recognized in the financial statements. It also provides guidance for
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. In May 2007, the FASB issued
Staff Position (FSP) FIN 48-1, “Definition of ‘Settlement’ in FASB
Interpretation No. 48.” This FSP amended FIN 48 to provide additional
guidance on how an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized
tax
benefits. We applied the FSP guidance regarding whether a tax
position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits since the initial adoption of FIN 48.
As
a
result of the adoption of FIN 48, we recognized a decrease of $4 million in
other liabilities to account for a decrease in unrecognized tax benefits and
an
increase of $34 million for accrued interest and penalties, which were accounted
for as a net reduction of $30 million to the January 1, 2007 balance of retained
earnings. Of the $30 million reduction to retained earnings, $10
million was attributable to KBR, which is now reported as discontinued
operations in the condensed consolidated financial statements. See
Note 12 to our condensed consolidated financial statements for further
information.
In
June
2006, the FASB ratified the consensus reached on EITF Issue No 06-3 (EITF 06-3),
“How Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That Is, Gross versus Net
Presentation).” EITF 06-3 requires a company to disclose its policy
regarding the presentation of tax receipts on the face of the income
statement. The scope of this guidance includes any tax assessed by a
governmental authority that is directly imposed on a revenue-producing
transaction between a seller and a customer and may include, but is not limited
to, sales, use, value added, and some excise taxes. The provisions of
EITF 06-3 are effective for periods beginning after December 15,2006. Therefore, we adopted EITF 06-3 on January 1,2007. We present taxes collected from customers on a net
basis.
In
September 2006, the FASB issued FSP AUG AIR-1, “Accounting for Planned Major
Maintenance Activities,” which prohibits the use of the accrue-in-advance method
of accounting for planned major maintenance activities. The
provisions of this FSP are effective for the first fiscal year beginning after
December 15, 2006. We did not elect early adoption and, therefore,
adopted FSP AUG AIR-1 on January 1, 2007 without material impact to
us.
39
FORWARD-LOOKING
INFORMATION
The
Private Securities Litigation Reform Act of 1995 provides safe harbor provisions
for forward-looking information. Forward-looking information is based
on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like “may,”“may
not,”“believes,”“do not believe,”“expects,”“do not expect,”“anticipates,”“do not anticipate,” and other expressions. We may also provide oral
or written forward-looking information in other materials we release to the
public. Forward-looking information involves risk and uncertainties
and reflects our best judgment based on current information. Our
results of operations can be affected by inaccurate assumptions we make or
by
known or unknown risks and uncertainties. In addition, other factors
may affect the accuracy of our forward-looking information. As a
result, no forward-looking information can be guaranteed. Actual
events and the results of operations may vary materially.
We
do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events, or for any other reason. You should review any
additional disclosures we make in our press releases and Forms 10-K, 10-Q,
and
8-K filed with or furnished to the SEC. We also suggest that you
listen to our quarterly earnings release conference calls with financial
analysts.
While
it
is not possible to identify all factors, we continue to face many risks and
uncertainties that could cause actual results to differ from our forward-looking
statements and potentially materially and adversely affect our financial
condition and results of operations.
Due
to
the separation of KBR, Inc., a number of risk factors previously disclosed
in
our 2006 annual report on Form 10-K are no longer applicable to our continuing
business operations, including: “United States Government Contract
Work,”“Bidding practices investigation,”“Possible Algerian investigation,”“Risk related to award of new gas monetization and upstream projects,”“Government spending,”“Risks related to contracts,” and “Other KBR
risks.”
The
risk
factors discussed below update the remaining risk factors previously disclosed
in our 2006 annual report on Form 10-K.
RISK
FACTORS
Foreign
Corrupt Practices Act Investigations
The
Securities and Exchange Commission (SEC) is conducting a formal investigation
into whether improper payments were made to government officials in Nigeria
through the use of agents or subcontractors in connection with the construction
and subsequent expansion by TSKJ of a multibillion dollar natural gas
liquefaction complex and related facilities at Bonny Island in Rivers State,
Nigeria. The Department of Justice (DOJ) is also conducting a related
criminal investigation. The SEC has also issued subpoenas seeking
information, which we and KBR are furnishing, regarding current and former
agents used in connection with multiple projects, including current and prior
projects, over the past 20 years located both in and outside of Nigeria in
which
the Halliburton energy services business, KBR or affiliates, subsidiaries or
joint ventures of Halliburton or KBR, are or were participants. In
September 2006, the SEC requested that we enter into a tolling agreement with
respect to its investigation. We anticipate that we will enter into
an appropriate tolling agreement with the SEC.
TSKJ
is a
private limited liability company registered in Madeira, Portugal whose members
are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem
SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a
subsidiary of KBR), each of which had an approximate 25% interest in the
venture. TSKJ and other similarly owned entities entered into various
contracts to build and expand the liquefied natural gas project for Nigeria
LNG
Limited, which is owned by the Nigerian National Petroleum Corporation, Shell
Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V.
(an
affiliate of ENI SpA of Italy).
40
The
SEC
and the DOJ have been reviewing these matters in light of the requirements
of
the FCPA. In addition to performing our own investigation, we have
been cooperating with the SEC and the DOJ investigations and with other
investigations in France, Nigeria, and Switzerland regarding the Bonny Island
project. The government of Nigeria gave notice in 2004 to the French
magistrate of a civil claim as an injured party in the French
investigation. We are not aware of any further developments with
respect to this claim. We also believe that the Serious Fraud Office
in the United Kingdom is conducting an investigation relating to the Bonny
Island project. Our Board of Directors has appointed a committee of
independent directors to oversee and direct the FCPA
investigations. Through our committee of independent directors, we
will continue to oversee and direct the investigations.
The
matters under investigation relating to the Bonny Island project cover an
extended period of time (in some cases significantly before our 1998 acquisition
of Dresser Industries and continuing through the current time
period). We have produced documents to the SEC and the DOJ both
voluntarily and pursuant to company subpoenas from the files of numerous
officers and employees of Halliburton and KBR, including current and former
executives of Halliburton and KBR, and we are making our employees and KBR
is
making its employees available to the SEC and the DOJ for
interviews. In addition, the SEC has issued a subpoena to A. Jack
Stanley, who formerly served as a consultant and chairman of Kellogg Brown
&
Root LLC, and to others, including certain of our former and KBR’s current and
former employees, former executive officers of KBR, and at least one
subcontractor of KBR. We further understand that the DOJ has issued
subpoenas for the purpose of obtaining information abroad, and we understand
that other partners in TSKJ have provided information to the DOJ and the SEC
with respect to the investigations, either voluntarily or under
subpoenas.
The
SEC
and DOJ investigations include an examination of whether TSKJ’s engagements of
Tri-Star Investments as an agent and a Japanese trading company as a
subcontractor to provide services to TSKJ were utilized to make improper
payments to Nigerian government officials. In connection with the
Bonny Island project, TSKJ entered into a series of agency agreements, including
with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing
in
1995 and a series of subcontracts with a Japanese trading company commencing
in
1996. We understand that a French magistrate has officially placed
Mr. Tesler under investigation for corruption of a foreign public official.
In
Nigeria, a legislative committee of the National Assembly and the Economic
and
Financial Crimes Commission, which is organized as part of the executive branch
of the government, are also investigating these matters. Our
representatives have met with the French magistrate and Nigerian officials.
In
October 2004, representatives of TSKJ voluntarily testified before the Nigerian
legislative committee.
TSKJ
suspended the receipt of services from and payments to Tri-Star Investments
and
the Japanese trading company and has considered instituting legal proceedings
to
declare all agency agreements with Tri-Star Investments terminated and to
recover all amounts previously paid under those agreements. In
February 2005, TSKJ notified the Attorney General of Nigeria that TSKJ would
not
oppose the Attorney General’s efforts to have sums of money held on deposit in
accounts of Tri-Star Investments in banks in Switzerland transferred to Nigeria
and to have the legal ownership of such sums determined in the Nigerian
courts.
As
a
result of these investigations, information has been uncovered suggesting that,
commencing at least 10 years ago, members of TSKJ planned payments to Nigerian
officials. We have reason to believe that, based on the ongoing
investigations, payments may have been made by agents of TSKJ to Nigerian
officials. In addition, information uncovered in the summer of 2006
suggests that, prior to 1998, plans may have been made by employees of The
M.W.
Kellogg Company (a predecessor of a KBR subsidiary) to make payments to
government officials in connection with the pursuit of a number of other
projects in countries outside of Nigeria. We are reviewing a number
of more recently discovered documents related to KBR’s activities in countries
outside of Nigeria with respect to agents for projects after
1998. Certain activities discussed in this paragraph involve current
or former employees or persons who were or are consultants to KBR, and our
investigation is continuing.
In
June
2004, all relationships with Mr. Stanley and another consultant and former
employee of M.W. Kellogg Limited were terminated. The terminations
occurred because of Code of Business Conduct violations that allegedly involved
the receipt of improper personal benefits from Mr. Tesler in connection with
TSKJ’s construction of the Bonny Island project.
41
In
2006
and 2007, KBR suspended the services of other agents in and outside of Nigeria,
including one agent who, until such suspension, had worked for KBR outside
of
Nigeria on several current projects and on numerous older projects going back
to
the early 1980s. Such suspensions have occurred when possible
improper conduct has been discovered or alleged or when Halliburton and KBR
have
been unable to confirm the agent’s compliance with applicable law and the Code
of Business Conduct.
If
violations of the FCPA were found, a person or entity found in violation could
be subject to fines, civil penalties of up to $500,000 per violation, equitable
remedies, including disgorgement (if applicable) generally of profits, including
prejudgment interest on such profits, causally connected to the violation,
and
injunctive relief. Criminal penalties could range up to the greater
of $2 million per violation or twice the gross pecuniary gain or loss from
the
violation, which could be substantially greater than $2 million per
violation. It is possible that both the SEC and the DOJ could assert
that there have been multiple violations, which could lead to multiple
fines. The amount of any fines or monetary penalties that could be
assessed would depend on, among other factors, the findings regarding the
amount, timing, nature, and scope of any improper payments, whether any such
payments were authorized by or made with knowledge of us, KBR or our or KBR’s
affiliates, the amount of gross pecuniary gain or loss involved, and the level
of cooperation provided the government authorities during the
investigations. Agreed dispositions of these types of violations also
frequently result in an acknowledgement of wrongdoing by the entity and the
appointment of a monitor on terms negotiated with the SEC and the DOJ to review
and monitor current and future business practices, including the retention
of
agents, with the goal of assuring compliance with the FCPA.
These
investigations could also result in third-party claims against us, which may
include claims for special, indirect, derivative or consequential damages,
damage to our business or reputation, loss of, or adverse effect on, cash flow,
assets, goodwill, results of operations, business prospects, profits or business
value or claims by directors, officers, employees, affiliates, advisors,
attorneys, agents, debt holders, or other interest holders or constituents
of us
or our current or former subsidiaries. In addition, we could incur
costs and expenses for any monitor required by or agreed to with a governmental
authority to review our continued compliance with FCPA law.
As
of
June 30, 2007, we are unable to estimate an amount of probable loss or a range
of possible loss related to these matters as it relates to Halliburton
directly. However, we provided indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s indemnification of KBR and any of its greater than 50%-owned
subsidiaries as of November 20, 2006, the date of the master separation
agreement, for fines or other monetary penalties or direct monetary damages,
including disgorgement, as a result of a claim made or assessed by a
governmental authority in the United States, the United Kingdom, France,
Nigeria, Switzerland, and/or Algeria, or a settlement thereof, related to
alleged or actual violations occurring prior to November 20, 2006 of the FCPA
or
particular, analogous applicable foreign statutes, laws, rules, and regulations
in connection with investigations pending as of that date, including with
respect to the construction and subsequent expansion by TSKJ of a natural gas
liquefaction complex and related facilities at Bonny Island in Rivers State,
Nigeria. We recorded the estimated fair market value of this
indemnity regarding FCPA matters described above upon our separation from
KBR. See Note 2 to our condensed consolidated financial statements
for additional information.
Our
indemnification obligation to KBR does not include losses resulting from
third-party claims against KBR, including claims for special, indirect,
derivative or consequential damages, nor does our indemnification apply to
damage to KBR’s business or reputation, loss of, or adverse effect on, cash
flow, assets, goodwill, results of operations, business prospects, profits
or
business value or claims by directors, officers, employees, affiliates,
advisors, attorneys, agents, debt holders, or other interest holders or
constituents of KBR or KBR’s current or former subsidiaries.
42
In
consideration of our agreement to indemnify KBR for the liabilities referred
to
above, KBR has agreed that we will at all times, in our sole discretion, have
and maintain control over the investigation, defense and/or settlement of these
FCPA matters until such time, if any, that KBR exercises its right to assume
control of the investigation, defense and/or settlement of the FCPA matters
as
it relates to KBR. KBR has also agreed, at our expense, to assist
with Halliburton’s full cooperation with any governmental authority in our
investigation of these FCPA matters and our investigation, defense and/or
settlement of any claim made by a governmental authority or court relating
to
these FCPA matters, in each case even if KBR assumes control of these FCPA
matters as it relates to KBR. If KBR takes control over the
investigation, defense and/or settlement of FCPA matters, refuses a settlement
of FCPA matters negotiated by us, enters into a settlement of FCPA matters
without our consent, or materially breaches its obligation to cooperate with
respect to our investigation, defense and/or settlement of FCPA matters, we
may
terminate the indemnity.
Operations
in Iran
We
received and responded to an inquiry in mid-2001 from the Office of Foreign
Assets Control (OFAC) of the United States Treasury Department with respect
to
operations in Iran by a Halliburton subsidiary incorporated in the Cayman
Islands. The OFAC inquiry requested information with respect to
compliance with the Iranian Transaction Regulations. These
regulations prohibit United States citizens, including United States
corporations and other United States business organizations, from engaging
in
commercial, financial, or trade transactions with Iran, unless authorized by
OFAC or exempted by statute. Our 2001 written response to OFAC stated
that we believed that we were in compliance with applicable sanction
regulations. In the first quarter of 2004, we responded to a
follow-up letter from OFAC requesting additional information. We
understand this matter has now been referred by OFAC to the DOJ. In
July 2004, we received a grand jury subpoena from an Assistant United States
District Attorney requesting the production of documents. We are
cooperating with the government’s investigation and responded to the subpoena by
producing documents in September 2004.
Separate
from the OFAC inquiry, we completed a study in 2003 of our activities in Iran
during 2002 and 2003 and concluded that these activities were in compliance
with
applicable sanction regulations. These sanction regulations require
isolation of entities that conduct activities in Iran from contact with United
States citizens or managers of United States
companies. Notwithstanding our conclusions that our activities in
Iran were not in violation of United States laws and regulations, we announced
in April 2007 that all of our contractual commitments in Iran have been
completed, and we are no longer working in Iran.
Barracuda-Caratinga
Arbitration
We
also
provided indemnification in favor of KBR under the master separation agreement
for all out-of pocket cash costs and expenses (except for legal fees and other
expenses of the arbitration so long as KBR controls and directs it), or cash
settlements or cash arbitration awards in lieu thereof, KBR may incur after
November 20, 2006 as a result of the replacement of certain subsea flowline
bolts installed in connection with the Barracuda-Caratinga
project. Under the master separation agreement, KBR currently
controls the defense, counterclaim, and settlement of the subsea flowline bolts
matter. As a condition of our indemnity, for any settlement to be
binding upon us, KBR must secure our prior written consent to such settlement’s
terms. We have the right to terminate the indemnity in the event KBR
enters into any settlement without our prior written consent. See
Note 2 to our condensed consolidated financial statements for additional
information regarding the KBR indemnification.
At
Petrobras’ direction, KBR replaced certain bolts located on the subsea flowlines
that failed through mid-November 2005, and KBR has informed us that additional
bolts have failed thereafter, which were replaced by Petrobras. These
failed bolts were identified by Petrobras when it conducted inspections of
the
bolts. The designation of the material to be used for the bolts was
issued by Petrobras, and as such, we understand that KBR believes the cost
resulting from any replacement is not KBR’s responsibility. We
understand Petrobras disagrees. We understand KBR believes several
possible solutions may exist, including replacement of the
bolts. Estimates indicate that costs of these various solutions range
up to $140 million. In March 2006, Petrobras commenced arbitration
against KBR claiming $220 million plus interest for the cost of monitoring
and
replacing the defective bolts and all related costs and expenses of the
arbitration, including the cost of attorneys fees. We understand KBR
intends to vigorously defend and pursue recovery of the costs incurred to date
through the arbitration process and to that end has submitted a counterclaim
in
the arbitration seeking the recovery of $22 million. The final
arbitration hearing is not expected to begin until 2008.
43
Impairment
of Oil and Gas Properties
We
have
interests in oil and gas properties totaling $127 million, net of accumulated
depletion, which we account for under the successful efforts
method. The majority of this amount is related to one property in
Bangladesh. These oil and gas properties are assessed for impairment
whenever changes in facts and circumstances indicate that the properties’
carrying amounts may not be recoverable. The expected future cash
flows used for impairment reviews and related fair-value calculations are based
on judgmental assessments of future production volumes, prices, and costs,
considering all available information at the date of review. In the
second quarter of 2007, we undertook a detailed review of the expected cash
flows of the Bangladesh property. As a result of that review, we
determined that the expected cash flows exceeded the carrying value of the
properties. A downward trend in estimates of production volumes or
prices or an upward trend in costs could result in an impairment of our oil
and
gas properties, which in turn could have a material and adverse effect on our
results of operations.
Environmental
Requirements
Our
businesses are subject to a variety of environmental laws, rules, and
regulations in the United States and other countries, including those covering
hazardous materials and requiring emission performance standards for
facilities. For example, our well service operations routinely
involve the handling of significant amounts of waste materials, some of which
are classified as hazardous substances. We also store, transport, and
use radioactive and explosive materials in certain of our
operations. Environmental requirements include, for example, those
concerning:
-
the
containment and disposal of hazardous substances, oilfield waste,
and
other waste materials;
-
the
importation and use of radioactive
materials;
-
the
use of underground storage tanks;
and
-
the
use of underground injection wells.
Environmental
and other similar requirements generally are becoming increasingly
strict. Sanctions for failure to comply with these requirements, many
of which may be applied retroactively, may include:
-
administrative,
civil, and criminal penalties;
-
revocation
of permits to conduct business; and
-
corrective
action orders, including orders to investigate and/or clean up
contamination.
Failure
on our part to comply with applicable environmental requirements could have
a
material adverse effect on our consolidated financial condition. We
are also exposed to costs arising from environmental compliance, including
compliance with changes in or expansion of environmental requirements, which
could have a material adverse effect on our business, financial condition,
operating results, or cash flows.
We
are
exposed to claims under environmental requirements and, from time to time such
claims have been made against us. In the United States, environmental
requirements and regulations typically impose strict
liability. Strict liability means that in some situations we could be
exposed to liability for cleanup costs, natural resource damages, and other
damages as a result of our conduct that was lawful at the time it occurred
or
the conduct of prior operators or other third parties. Liability for
damages arising as a result of environmental laws could be substantial and
could
have a material adverse effect on our consolidated results of
operations.
For
any
particular federal or state superfund site, since our estimated liability is
typically within a range and our accrued liability may be the amount on the
low
end of that range, our actual liability could eventually be well in excess
of
the amount accrued. We also could be subject to third-party claims
with respect to environmental matters for which we have been named as a
potentially responsible party.
Changes
in environmental requirements may negatively impact demand for our
services. For example, oil and natural gas exploration and production
may decline as a result of environmental requirements (including land use
policies responsive to environmental concerns). A decline in
exploration and production, in turn, could materially and adversely affect
us.
44
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
We
are
exposed to financial instrument market risk from changes in foreign currency
exchange rates, interest rates, and, to a limited extent, commodity
prices. We selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these
exposures. The objective of our risk management is to protect our
cash flows related to sales or purchases of goods or services from market
fluctuations in currency rates. Our use of derivative instruments
includes the following types of market risk:
-
volatility
of the currency rates;
-
time
horizon of the derivative
instruments;
-
market
cycles; and
-
the
type of derivative instruments
used.
We
do not
use derivative instruments for trading purposes. We do not consider
any of these risk management activities to be material.
Item
4. Controls and Procedures
In
accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15,
we
carried out an evaluation, under the supervision and with the participation
of
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures as of the end
of
the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of June 30, 2007 to provide
reasonable assurance that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Our disclosure controls and procedures
include controls and procedures designed to ensure that information required
to
be disclosed in reports filed or submitted under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
There
has
been no change in our internal control over financial reporting that occurred
during the three months ended June 30, 2007 that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
45
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Information
related to various commitments and contingencies is described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in
“Forward-Looking Information” and “Risk Factors,” and in Notes 2, 9, and 10 to
the condensed consolidated financial statements.
Item
1(a). Risk Factors
Information
related to risk factors is described in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under “Forward-Looking
Information” and “Risk Factors.”
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Following
is a summary of our repurchases of our common stock during the three-month
period ended June 30, 2007.
Total
Number of
Shares
Purchased
as
Part of Publicly
Total
Number of
Average
Price
Announced Plans
Period
Shares
Purchased (a)
Paid
per Share
or
Programs (b)
April
1-30
112,276
$ 32.55
–
May
1-31
10,999,803
$ 35.14
10,968,468
June
1-30
14,874,941
$ 35.52
14,777,204
Total
25,987,020
$ 35.35
25,745,672
(a)
Of
the 25,987,020 shares purchased during the three-month period ended
June30, 2007, 241,348 shares were acquired from employees in connection
with
the settlement of income tax and related benefit withholding obligations
arising from vesting in restricted stock grants. These shares
were not part of a publicly announced program to purchase common
shares.
(b)
In
February 2006, our Board of Directors approved a share repurchase
program
of up to $1.0 billion. In September 2006, our Board of
Directors approved an increase to our existing common share repurchase
program of up to an additional $2.0 billion. In July 2007, our
Board of Directors approved an additional increase to our existing
common
share repurchase program of up to $2.0 billion, bringing the entire
authorization to $5.0 billion. This additional authorization
may be used for open market share purchases or to settle the conversion
premium on our 3.125% convertible senior notes, should they be
redeemed. From the inception of this program, we have
repurchased approximately 66 million shares of our common stock for
approximately $2.2 billion at an average price per share of
$33.88. These numbers include the repurchases of approximately
26 million shares of our common stock for approximately $911 million
at an
average price per share of $35.37 during the first six months of
2007. As of July 23, 2007, $2.8 billion remained available
under this program.
Item
3. Defaults Upon Senior Securities
None.
46
Item
4. Submission of Matters to a Vote of Security
Holders
At
our
Annual Meeting of Stockholders held on May 16, 2007, stockholders were asked
to
consider and act upon:
(1)
the
election of Directors for the ensuing
year;
(2)
a
proposal to ratify the appointment of KPMG LLP as independent accountants
to examine the financial statements and books and records of Halliburton
for the year 2007;
(3)
a
stockholder proposal regarding a human rights
review;
(4)
a
stockholder proposal regarding political contributions;
and
(5)
a
stockholder proposal regarding stockholder rights
plans.
The
following table sets out, for each matter where applicable, the number of votes
cast for, against, or withheld, as well as the number of abstentions and broker
non-votes.
(1) Election
of Directors:
Name
of Nominee
Votes
For
Votes
Against
Votes
Abstain
Kathleen
M. Bader
815,811,965
8,735,113
7,521,797
Alan
M. Bennett
816,799,117
7,712,385
7,557,373
James
R. Boyd
815,837,656
8,697,422
7,533,797
Milton
Carroll
809,351,263
15,307,991
7,409,621
Robert
L. Crandall
811,548,202
13,048,582
7,472,091
Kenneth
T. Derr
815,263,737
9,458,111
7,347,027
S.
Malcolm Gillis
803,439,106
20,750,516
7,879,253
W.
R. Howell
804,525,903
19,998,389
7,544,583
David
J. Lesar
812,464,375
11,743,698
7,860,802
J.
Landis Martin
816,536,375
7,998,678
7,533,822
Jay
A. Precourt
816,094,603
8,442,934
7,531,338
Debra
L. Reed
816,001,036
8,721,721
7,346,118
(2)
Proposal
for ratification of the selection of
auditors:
Number
of Votes For
813,223,629
Number
of Votes Against
11,903,458
Number
of Votes Abstain
6,941,788
(3)
Stockholder
proposal regarding a human rights
review:
Number
of Votes For
132,302,253
Number
of Votes Against
410,515,296
Number
of Votes Abstain
104,202,582
Number
of Broker Non-Votes
185,048,744
(4)
Stockholder
proposal regarding political
contributions:
Number
of Votes For
128,436,555
Number
of Votes Against
409,874,146
Number
of Votes Abstain
108,709,426
Number
of Broker Non-Votes
185,048,748
47
(5)
Stockholder
proposal regarding a stockholder rights
plan:
Number
of Votes For
136,072,355
Number
of Votes Against
497,098,194
Number
of Votes Abstain
13,849,574
Number
of Broker Non-Votes
185,048,752
Item
5. Other Information
None.
Item
6. Exhibits
10.1
Five
Year Revolving Credit Agreement among Halliburton, as Borrower, the
Banks
party
thereto,
and Citicorp North America, Inc., as Administrative Agent (incorporated
by
reference
to Exhibit 10.1 to Halliburton’s Form 8-K filed July 13, 2007, File No.
1-3492).
* 31.1
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
of
2002.
* 31.2
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
of
2002.
** 32.1
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
of
2002.
**
32.2
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
of
2002.
*
Filed
with this Form 10-Q
**
Furnished
with this Form 10-Q
48
SIGNATURES
As
required by the Securities Exchange Act of 1934, the registrant has authorized
this report to be signed on behalf of the registrant by the undersigned
authorized individuals.