Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
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 2007 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
March 31, 2008, the results of our operations for the three months ended March
31, 2008 and 2007, and our cash flows for the three months ended March 31, 2008
and 2007. Such adjustments are of a normal recurring nature. The results of
operations for the three months ended March 31, 2008 may not be indicative of
results for the full year.
Note 2. KBR Separation
On April 5, 2007, we completed the separation of KBR from us by exchanging the
135.6 million shares of KBR 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 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
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 8 for further discussion of these matters.
6
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 estimated fair value of these indemnities and guarantees is
primarily included in "Other liabilities" on the condensed consolidated balance
sheets at March 31, 2008 and December 31, 2007.
Additionally, Halliburton provides indemnities, performance guarantees, surety
bond guarantees, and letter of credit guarantees that are currently in place in
favor of KBR's customers or lenders under project contract, credit agreements,
letters of credit, and other KBR credit instruments. These indemnities and
guarantees will continue until they expire at the earlier of: (1) the
termination of the underlying project contract or KBR obligations thereunder;
(2) the expiration of the relevant credit support instrument in accordance with
its terms or release of such instrument by the customer; or (3) the expiration
of the credit agreements. 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 project
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 project contracts that were in place as of December 15, 2005; and (c)
performance guarantees in support of these contracts. KBR is compensating
Halliburton for these guarantees. Halliburton has also provided a limited
indemnity, with respect to FCPA governmental and third-party claims, to the
lender parties under KBR's revolving credit agreement expiring in December
2010. KBR has agreed to indemnify Halliburton, other than for the FCPA and
Barracuda-Caratinga bolts matter, if Halliburton is required to perform under
any of the indemnities or guarantees related to KBR's revolving credit
agreement, letters of credit, surety bonds, or performance guarantees described
above.
The tax sharing agreement provides for allocations of United States and certain
other jurisdiction tax liabilities between us and KBR. 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.
Note 3. Acquisitions and Dispositions
In March 2008, we completed the sale of a joint venture interest to our joint
venture partner. As a result of the transaction, we recorded a gain of $35
million during the first quarter of 2008. We accounted for our interest in the
joint venture using the cost method in our Completion and Production segment.
In July 2007, we acquired the entire share capital of PSL Energy Services
Limited (PSLES), a leading eastern hemisphere provider of process, pipeline, and
well intervention services. PSLES has operational bases in the United Kingdom,
Norway, the Middle East, Azerbaijan, Algeria, and Asia Pacific. We paid
approximately $332 million for PSLES, consisting of $328 million in cash and $4
million in debt assumed, subject to adjustment for working capital purposes. As
of March 31, 2008, we had recorded goodwill of $166 million and intangible
assets of $61 million on a preliminary basis until our analysis of the fair
value of assets acquired and liabilities assumed is complete. Beginning in
August 2007, PSLES's results of operations are included in our Completion and
Production segment.
7
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. We paid approximately $178 million for Ultraline
and recorded goodwill of $124 million and intangible assets of $41
million. Beginning in February 2007, Ultraline's results of operations are
included in our Drilling and Evaluation segment.
Note 4. Business Segment Information
We operate under two divisions, which form the basis for the two operating
segments we report: the Completion and Production segment and the Drilling and
Evaluation segment.
The following table presents information on our business segments. "Corporate
and other" includes expenses related to support functions and corporate
executives. Also included are certain gains and losses not attributable to a
particular business segment.
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.
Three Months Ended March 31
Millions of dollars 2008 2007
Revenue:
Completion and Production $ 2,191 $ 1,844
Drilling and Evaluation 1,838 1,578
Total revenue $ 4,029 $ 3,422
Operating income (loss):
Completion and Production $ 529 $ 477
Drilling and Evaluation 384 362
Total operations 913 839
Corporate and other (66 ) (51 )
Total operating income $ 847 $ 788
As of March 31, 2008, 33% of our gross trade receivables were from customers in
the United States. As of December 31, 2007, 35% 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.
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 $79 million at March 31, 2008 and $71 million
at December 31, 2007. If the average cost method was used, total inventories
would have been $27 million higher than reported at March 31, 2008 and $25
million higher than reported at December 31, 2007. Inventories consisted of the
following:
March 31, December 31,
Millions of dollars 2008 2007
Finished products and parts $ 1,143 $ 1,042
Raw materials and supplies 415 325
Work in process 97 92
Total $ 1,655 $ 1,459
8
Finished products and parts are reported net of obsolescence reserves of $74
million at March 31, 2008 and $65 million at December 31, 2007.
Note 6. Debt
In the first quarter of 2008, the stock conversion rate for the $1.2 billion of
3.125% convertible senior notes issued in June 2003 changed to 53.3768 shares of
common stock per each $1,000 principal amount of the convertible senior notes
due to the increased quarterly dividend paid on our common stock.
Note 7. Comprehensive Income
The components of other comprehensive income included the following:
Three Months Ended
March 31
Millions of dollars 2008 2007
Net income $ 584 $ 552
Net cumulative translation adjustments 1 (1 )
Realized defined benefit and other postretirement plans
adjustments, net 3 11
Net unrealized gains (losses) on investments (2 ) 1
Total comprehensive income $ 586 $ 563
Accumulated other comprehensive loss consisted of the following:
March 31, December 31,
Millions of dollars 2008 2007
Cumulative translation adjustments $ (60 ) $ (61 )
Defined benefit and other postretirement liability adjustments (42 ) (45 )
Unrealized gains on investments and derivatives - 2
Total accumulated other comprehensive loss $ (102 ) $ (104 )
Note 8. 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 and October
2007, the SEC and the DOJ, respectively, each requested that we enter into an
agreement to extend the statute of limitations with respect to its
investigation. We have entered into tolling agreements with the SEC and the DOJ.
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).
9
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 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.
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 from the files of numerous officers
and employees of Halliburton and KBR, including current and former executives of
Halliburton and KBR, both voluntarily and pursuant to company subpoenas from the
SEC and a grand jury, and we are making our employees and we understand 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 and KBR's current or former executive officers or
employees, 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. The government has recently confirmed that it has evidence of such
payments. The government has also recently advised Halliburton and KBR that it
has evidence of payments to Nigerian officials by another agent in connection
with a separate KBR-managed project in Nigeria called the Shell EA project and
possibly evidence of payments in connection with other projects in Nigeria,
potentially including energy services projects. 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.
10
In 2006 and 2007, KBR or Halliburton suspended the services of two agents in and
outside of Nigeria, including the agent in connection with the Shell EA project
and another 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.
The SEC and DOJ are also investigating and have issued subpoenas concerning
TSKJ's use of an immigration services provider, apparently managed by a Nigerian
immigration official, to which approximately $1.8 million in payments in excess
of costs of visas were allegedly made between approximately 1997 and the
termination of the provider in December 2004. We understand that TSKJ terminated
the immigration services provider after a KBR employee discovered the issue. We
reported this matter to the United States government in 2007. The SEC has issued
a subpoena requesting documents among other things concerning any payment of
anything of value to Nigerian government officials. In response to such
subpoena, we have produced and continue to produce additional documents
regarding KBR and Halliburton's energy services business use of immigration and
customs service providers, which may result in further inquiries. Furthermore,
as a result of these matters, we have expanded our own investigation to consider
any matters raised by energy services activities in Nigeria.
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. The government has expressed concern
regarding the level of our cooperation. 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 March 31, 2008, 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.
11
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. A key issue in the arbitration is which party is responsible for the
designation of the material to be used for the bolts. We understand that KBR
believes that an instruction to use the particular bolts was issued by
Petrobras, and as such, 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 is vigorously defending and
pursuing 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 arbitration panel held an evidentiary hearing
during the week of March 31, 2008 and took evidence and arguments under
advisement.
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. 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.
12
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 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 it 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 AMSF to
re-plead some of those claims to correct deficiencies in its earlier
complaint. In April 2006, AMSF filed its fourth amended consolidated
complaint. We filed a motion to dismiss those portions of the complaint that had
been re-pled. 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. In
June 2007, upon becoming aware of a United States Supreme Court opinion issued
in that month, the court allowed further briefing on the motion to dismiss filed
on behalf of our CEO. The court again denied the motion to dismiss in March
2008. In September 2007, AMSF filed a motion for class certification, and our
response was filed in November 2007. A hearing was held in March 2008, and we
await the court's ruling. The case is set for trial in July 2009.
As of March 31, 2008, we had not accrued any amounts related to this matter
because we do not believe that a loss is probable. Further, an estimate of
possible loss or range of loss related to this matter cannot be made.
Asbestos insurance settlements
At December 31, 2004, we resolved all open and future asbestos- and
silica-related claims in the prepackaged Chapter 11 proceedings of DII
Industries LLC, Kellogg Brown & Root LLC, and our other affected subsidiaries
that had previously been named as defendants in a large number of asbestos- and
silica-related lawsuits. 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 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. Further, an estimate of possible loss or range of loss
related to this matter cannot be made. At March 31, 2008, we had not recorded
any liability associated with these indemnifications.
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, had 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, LLC asserted were 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, LLC amounted to predatory conduct in violation of Section 2 of the
Sherman Antitrust Act. M-I, LLC also alleged 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. This case was settled in the first quarter of 2008
for an immaterial amount.
13
Dirt, Inc. litigation
In April 2005, Dirt, Inc. brought suit in Alabama against Bredero-Shaw (a joint
venture in which we formerly held a 50% interest that we sold to the other party
in the venture, ShawCor Ltd., in 2002), Halliburton Energy Services, Inc., and
ShawCor Ltd., claiming that Bredero-Shaw disposed of hazardous waste in a
construction materials landfill owned and operated by Dirt, Inc. Bredero-Shaw
has offered to take responsibility for cleanup of the site. The plaintiff did
not accept that offer, and the method and cost of such cleanup are disputed,
with expert opinions ranging from $6 million to $144 million. On November 1,
2007, the trial court in the above-referenced matter entered a judgment in the
total amount of $108 million, of which Halliburton Energy Services, Inc. could
be responsible for as much as 50%. We are pursuing an appeal and believe that it
is probable that the Alabama Supreme Court will reverse the trial court's
judgment because, among other things:
- the trial court misapplied the law on the measure of damages;
- Halliburton Energy Services, Inc., as a shareholder, should not have liability
for actions of the venture; and
- the statute of limitations had run on an issue submitted to the jury.
We have accrued an amount less than $10 million, which represents our 50%
portion of what we believe it will cost to remediate the site.
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 Resource 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.
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 $70 million
as of March 31, 2008 and $72 million as of December 31, 2007. Our total
liability related to environmental matters covers numerous properties, including
the property in regard to which Dirt, Inc. has brought suit against Bredero-Shaw
(a joint venture in which we formerly held a 50% interest that we sold to the
other party in the venture, ShawCor Ltd., in 2002), Halliburton Energy Services,
Inc., and ShawCor Ltd. See "Dirt, Inc. litigation" in this note for further
information regarding this matter.
We have subsidiaries that have been named as potentially responsible parties
along with other third parties for 9 federal and state superfund sites for which
we have established a liability. As of March 31, 2008, those 9 sites accounted
for approximately $10 million of our total $70 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. Despite attempts to resolve these superfund matters, the
relevant regulatory agency may at any time bring suit against us for amounts in
excess of the amount accrued. With respect to some superfund sites, we have been
named a potentially responsible party by a regulatory agency; however, 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.
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Letters of credit
In the normal course of business, we have agreements with banks under which
approximately $2.4 billion of letters of credit, surety bonds, or bank
guarantees were outstanding as of March 31, 2008, including $1.1 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 9. 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 Ended March 31
Millions of shares 2008 2007
Basic weighted average common shares outstanding 873 992
Dilutive effect of:
Convertible senior notes premium 31 24
Stock options 6 7
Restricted stock 1 2
Diluted weighted average common shares outstanding 911 1,025
Excluded from the computation of diluted income per share are options to
purchase four million shares of common stock that were outstanding during the
three months ended March 31, 2008 and options to purchase three million shares
that were outstanding during the three months ended March 31, 2007. 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 common stock we owned.
Note 10. Retirement Plans
The components of net periodic benefit cost related to pension benefits for the
three months ended March 31, 2008 and March 31, 2007 were as follows:
Three Months Ended March 31
2008 2007
Millions of dollars United States International United States International
Service cost $ - $ 7 $ - $ 6
Interest cost 2 13 2 11
Expected return on plan assets (2 ) (11 ) (2 ) (9 )
Settlements/curtailments - - - (1 )
Amortization of unrecognized loss 1 1 1 2
Net periodic benefit cost $ 1 $ 10 $ 1 $ 9
We currently expect to contribute approximately $28 million to our international
pension plans in 2008. During the three months ended March 31, 2008, we
contributed $16 million to our international pension plans. We do not have a
required minimum contribution for our domestic plans; however, we may make
additional discretionary contributions.
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The components of net periodic benefit cost related to other postretirement
benefits for the three months ended March 31, 2008 and March 31, 2007 were as
follows:
Three Months Ended March 31
Millions of dollars 2008 2007
Service cost $ - $ -
Interest cost 1 2
Unrecognized actuarial loss (1 ) -
Net periodic benefit cost $ - $ 2
Note 11. 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 89 million shares
of our common stock for approximately $3.0 billion at an average price of $34.28
per share. These amounts include the repurchases of approximately 10 million
shares of our common stock for approximately $360 million at an average price of
$37.26 per share during the first quarter of 2008. As of March 31, 2008,
approximately $2.0 billion remained available under this program.
Note 12. New Accounting Standards
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 161, "Disclosure about Derivative
Instruments and Hedging Activities - An Amendment of FASB Statement No.
133." SFAS No. 161 requires more disclosures about an entity's derivative and
hedging activities in order to improve the transparency of financial
reporting. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We will adopt
the provisions of SFAS No. 161 on January 1, 2009, which we do not expect will
have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which is intended to increase consistency and comparability in fair value
measurements by defining fair value, establishing a framework for measuring fair
value, and expanding disclosures about fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require or permit fair value
measurements and is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1,
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13," which removes certain
leasing transactions from the scope of SFAS No. 157, and FSP FAS 157-2,
"Effective Date of FASB Statement No. 157," which defers the effective date of
SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. On January 1, 2008, we adopted
without material impact on our consolidated financial statements the provisions
of SFAS No. 157 related to financial assets and liabilities and to nonfinancial
assets and liabilities measured at fair value on a recurring basis. Beginning
January 1, 2009, we will adopt the provisions for nonfinancial assets and
nonfinancial liabilities that are not required or permitted to be measured at
fair value on a recurring basis, which include those measured at fair value in
goodwill impairment testing, indefinite-lived intangible assets measured at fair
value for impairment assessment, nonfinancial long-lived assets measured at fair
value for impairment assessment, asset retirement obligations initially measured
at fair value, and those initially measured at fair value in a business
combination. We do not expect the provisions of SFAS No. 157 related to these
items to have a material impact on our consolidated financial statements.
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