Halliburton Company Annual Report 2002

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FY2002 Annual Report · Halliburton Company

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H A L L I B U R T O N
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H A L L I B U R T O N T O D AY

The Energy Services Group offers the broadest array of products and services to the upstream petroleum industry

worldwide. These services include decision support services for locating hydrocarbons and managing digital data;

creation and evaluation of the wellbore; creation of infrastructure to move hydrocarbons; and optimization of

hydrocarbon production.

KBR, the Engineering and Construction Group, serves the energy industry by designing, building and providing

operations and maintenance services for liquefied natural gas plants, refining and processing plants, production

facilities and pipelines both onshore and offshore. The non-energy business of the group meets the engineering and

construction needs of governments and civil infrastructure customers.

C O M PA R AT I V E H I G H L I G H T S

Millions of dollars and shares except per share data

2002

Diluted income (loss) per share from continuing operations

(0.80)

Diluted net income (loss) per share

Cash dividends per share

Shareholders’ equity per share

Revenues

Operating income (loss)

Income (loss) from continuing operations

Net income (loss)

Long-term debt (including current maturities)

Shareholders’ equity

Capital expenditures

Depreciation and amortization

Diluted average shares outstanding

(2.31)

0.50

8.16

12,572

(112)

(346)

(998)

1,476

3,558

764

505

432

2001

1.28

1.88

0.50

10.95

13,046

1,084

551

809

1,484

4,752

797

531

430

2000

0.42

1.12

0.50

9.20

11,944

462

188

501

1,057

3,928

578

503

446

Net income in 2001 includes a gain on disposal of discontinued operations of $299 million or $0.70 per diluted share.
Net income in 2000 includes a gain on disposal of discontinued operations of $215 million or $0.48 per diluted share.

C O N T E N T S

Letter to Shareholders
Operations Overview
Board of Directors
Corporate Information
Financial Information

2
6
30
32
33

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O U R M I S S I O N :

D E L I V E R I N G S E R V I C E Q U A L I T Y

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D A V I D J .

L E S A R

L E T T E R T O S H A R E H O L D E R S

David J. Lesar,
Chairman of the Board,
President and Chief Executive
Officer of Halliburton

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DEAR FELLOW SHAREHOLDERS,

And it is through their efforts, and the

increased pricing pressures in 2002

efforts of thousands more like them,

resulted in a 12 percent drop in

In 2001, Real Time technology began

that Halliburton has achieved good

revenues for the Energy Services

transforming Halliburton into a faster,

financial performance in 2002 – even

Group. Yet, in spite of the decline in

smarter, more responsive service

during a difficult environment.

rig activity, Sperry-Sun had record

company. This year, we took the next

Looking back, 2001 gave rise to a new

revenues of $1 billion, and Landmark

step and made Service Quality a

and frightening world with fear of

Graphics again had excellent revenues

Company-wide campaign.

terrorism, the war in Afghanistan, a

and operating income increases.

At Halliburton, we’ve always prided

global recession and growing geopoliti-

Higher revenues on the Engineering

ourselves on our ability to perform

cal instability. That atmosphere has

& Construction side of the business

under the most extreme conditions or

persisted, making many companies

offset the Energy Services Group’s

constraints. But with the economy

hesitant to increase their investments

decreased revenues. The Engineering

laboring under the strain of geopolitical

because of concerns of what might

& Construction Group’s onshore and

tensions and uncertainties, the market-

happen in the future. Yet, despite all

offshore business revenues increased

place demands even more. We believe

this, and the cloud of asbestos litiga-

by 25 percent or more, while the

that Service Quality, or knowing what

tion, 2002 was a very good year for

Infrastructure business experienced a

customers expect and delivering it

Halliburton. While revenues were down

22 percent rise.

right the first time, will give us the

slightly for the year, we are very

With large contract wins in Algeria,

edge. Companies that can consistently

pleased with our performance relative

Egypt and Nigeria, KBR continues to

deliver exceptional Service Quality

to our peers in this very difficult

perform extremely well in the liquefied

will win on every front – customer

environment. I’d like to thank the

natural gas (LNG) market. Government

satisfaction, employee motivation and

management team and hard-working

Services also experienced significant

shareholder value.

Halliburton people everywhere.

successes, including a site support serv-

Throughout these pages, you’re going

Certainly, one of the biggest news

ices contract with the U.S. Department

to see and read stories of Halliburton

items for Halliburton this year has

of Energy’s Los Alamos National

people achieving Service Quality

been the progress we have made toward

Laboratory in New Mexico, and a

beyond expectations. You’ll see them

resolving our asbestos litigation problem.

design-build contract for the new U.S.

on job sites in remote and demanding

We still have a long way to go and may

Embassy compound in Kabul,

places, in laboratories and manufactur-

not get there, but we are working

Afghanistan.

ing facilities around the world. You’ll

toward a resolution that we believe will

A continuing bright spot for both

meet teams, individuals, old hands

result in a fair and equitable settlement

business groups was the international

and newcomers. And what you’re going

with the asbestos claimants and free us

market. Halliburton’s international

to notice is how much pride they

to concentrate on the future.

revenues increased in 2002 to 67 percent

have in what they do. They are excited

Overall, we had solid results from

of total revenues from 62 percent

about where they work and how

the Energy Services Group. Following a

a year ago. Another positive was

hard they work. They’re proud of their

record year for the Energy Services

the dispositions of non-core business

years of experience and their loyalty

Group in 2001, reduced drilling activity

assets that bolstered our liquidity.

to the Company. They are Halliburton.

in the United States and Canada and

Last year, our message was of

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transformation. The transformation

• There have been fundamental business

with our customers to improve overall

continues, sweeping through every

changes, with the Engineering &

efficiency. This could mean a restruc-

part of the Company:

Construction Group making a bold

turing of traditional relationships. Or

• There have been major organizational

move in deciding it will no longer

it could mean collaborative relation-

changes, as the Energy Services

pursue lump-sum engineering,

ships yielding more focused, effective

Group (ESG) and Engineering &

procurement, installation and com-

products and services. At Halliburton,

Construction Group (KBR) became

missioning (EPIC) projects for the

different times call for fresh thinking.

two independent business units in

offshore oil and gas industry until and

Innovation is the means by which

2002. There were many reasons for

unless the current business model

companies exploit change as an oppor-

this restructuring: liquidity pressures

improves to allow for reasonable profits

tunity for growth, and technology will

in a more difficult global business

at reasonable risks.

continue to be a major thrust of our

environment; competitive pressures to

The oil and gas industry is historically

strategy. Over the past five years,

have the best possible cost structure;

boom or bust. Since the collapse in

Halliburton has invested more than

pressure on the stock price due to

prices in late 1998, oil prices have been

$1 billion developing game-changing

asbestos litigation; and the increasingly

even more unstable than in past decades.

technologies in almost every product

different business drivers, business

The tight energy supply-and-demand

line. Instead of designing products to

cycles and customers of the Energy

balance in the industry these days

compete head-to-head with others in

Services Group and Engineering &

means that even small shifts can lead

the market, our aim is to create products

Construction Group. But the overriding

to large swings in prices.

that optimize assets, solve problems

reason? Restructuring will enable both

Clearly, we are at a point in time

and deliver long-term value for ourselves

companies to strengthen their busi-

where we must redesign our Company

and our customers.

nesses and go head-to-head with our

for short commodity price cycles and

Today at the ESG, new technology

most powerful competitors, many of

position ourselves technologically,

accounts for more than 20 percent of

them companies that have an emphasis

operationally and culturally to respond

our total revenues. But innovation can

on one core competency. This will, in

as the energy industry is evolving.

also be achieved by integrating existing

turn, position Halliburton to achieve

That means looking beyond what will

technologies to provide new or improved

sustained growth and profitability.

make us successful this year, and for-

offerings, and we are pursuing opportuni-

• There have been management changes.

ward into the next 10 years.

ties to do this.

Edgar Ortiz, the chief executive

We’re working hard to increase our

At the same time, we are shifting our

officer of the ESG, retired Dec. 31

productivity so that we can accomplish

economic resources into areas of higher

after a distinguished 33-year career

more with a smaller core group.

productivity and greater yields. The

in the industry, and Halliburton

Programs that align employee perform-

Energy Services Group and Engineering

Energy Services President John Gibson

ance and compensation with our busi-

& Construction Group currently hold the

succeeded him. KBR continues under

ness objectives are an important first

No. 1 or No. 2 positions in most of their

the leadership of Randy Harl. Doug

step. Our intense Service Quality focus

product lines. The Energy Services Group

Foshee is now our chief operating

will produce more efficiencies, as well

derives more than 75 percent of its

officer, and C. Christopher Gaut has

as a competitive advantage.

revenue today from product service lines

joined us as chief financial officer.

We’re also finding ways to work

where it holds a No. 1 or No. 2 position.

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In the months ahead, you will see us

burn, back in 1994. It’s still considered

and drive. They are welcome additions

developing strategies and investing to

the industry standard. But as good as

to the Halliburton family.

sustain and grow those positions in all

it is, the result is still significant ther-

The next 10 years will require diligence

of our product lines because that’s what

mal releases that are suspected to add

and imagination. And despite current

will generate the profitability to sustain

to global warming. Now, we’re working

industry conditions, I am very encour-

us, boom or bust.

on technologies that will eliminate

aged. We are transforming our internal

I’ve said before how important Health,

flaring altogether, such as open-hole

processes. We’re improving our execution

Safety and Environment (HSE) is to

test techniques, formation testing while

and our products. Everywhere you

Halliburton. Respect for the environment

drilling and under-balanced drilling

look, the Energy Services Group and

and for the health and safety of our

methods that enable us to evaluate the

Engineering & Construction Group are

employees and others that we work with

reservoir in real time while drilling.

being re-energized.

is a core value, and we are a leader in

All of these technologies are environ-

We’re evolving in our industry from

this arena. HSE is really about good

mentally responsible, but none of them

having value in fixed assets to having

business practices. Take, for instance,

will be truly successful unless they are

value in intellectual capital, which

Company-mandated driver safety

more cost-efficient and effective. It’s

makes us very rich indeed. Because

initiatives. There’s a clear correlation

entirely achievable, too, as we learned

Halliburton people are the finest that

between not wearing seat belts and

from developing our new Accolade™

the industry has to offer. As I walk the

cell phone use while driving and the

drilling fluid system. Designed to conform

hallways and visit job sites, the feeling

quantity and severity of incidents

to stricter regulatory standards in the

I get from managers to field personnel

that impact the health and safety of our

Gulf of Mexico, Accolade dramatically

is that we are entering the most exciting

employees. Adverse incidents have a

increased the rate of penetration over

period in our history. They are pleased

negative impact on insurance rates

traditional fluids while significantly

to be here at this point in time, with all

and worker productivity, which increase

reducing fluid losses from as many as

its risks and opportunities, because for

our cost of operations. A zero incidents

5,000 barrels to a few hundred barrels.

the companies that can think clearly and

objective is not just a good idea, it’s

It’s a great example of how creativity

act quickly, the rewards will be great.

good business.

within guidelines resulted in cost and

I’d like to thank the people of

Protecting the environment as we go

performance breakthroughs.

Halliburton for their spirit, dedication

forward in the next decades is another

As we look into the future, we can see

and sense of adventure. I’m proud to

good business practice – management

that challenges abound in every area

work with you.

of environmental risks saves money

of our industry. Our industry’s workforce

today and demonstrates our commitment

in North America and Europe is aging,

to a better environment. Halliburton

and few young people are entering the

is developing new technologies that will

ranks. But Halliburton is finding and

help our customers address some of their

training talented young professionals

most pressing environmental needs.

at our locations around the world.

For instance, Halliburton developed

Engineers from countries like Malaysia,

the Sea Emerald Burner for well testing,

Angola, Russia and the Caspian Sea

which produces a 99.9 percent clean

region are bringing fresh perspectives

David J. Lesar
Chairman of the Board,
President and
Chief Executive Officer

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W O R L D ’ S B E S T F R A C C R E W S

“YOU CALL, WE HAUL.” Crews like this one in Mission are
a big reason why Halliburton is the “go-to” supplier of frac
services to South Texas. That, and the right tools: our one-
of-a-kind HT-2000 pump, the only 2000 HHP pump designed
to work at 20,000 psi; our high-tech, temperature-busting
SiroccoSM fracturing system and Expedite SM XT proppant
flowback control. Five wells treated with these technologies
increased production revenues some $1.5 million in eight
days. Halliburton’s “you call, we haul” tradition meets the
21st century.

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A R E C O R D R U N

THE NEW BENCHMARK. The result of a collaboration between Sperry-Sun
and Japan National Oil Corporation (JNOC), the Geo-Pilot system introduces
a new approach to rotary steerable drilling – point the bit. Using Security

DBS’ FullDrift™ extended-gauge bits, the Geo-Pilot system produces

unparalleled borehole quality, improved drilling efficiency and reliability,
and lower drilling costs – even under extreme North Slope conditions
where wellheads must be housed in special buildings (see above). Coupled

with the Geo-Span downlink system™ that provides full-time, two-way

communication, the Geo-Pilot system can change directions on-the-fly while
on bottom drilling. It’s the new benchmark in rotary steerable technology.

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G E T T I N G G R E E N

GREAT FOR THE ENVIRONMENT, GREAT FOR BUSINESS. Accolade’s exceptional properties provide
minimized swab and surge pressures, one of the most desired qualities in deepwater drilling fluids.
It reduces lost circulation, supplies better hole-cleaning efficiency and stability, and provides
superior rates of penetration. It also dramatically cuts fluid losses and consumption – in some
cases by 80 percent. For one customer, Accolade saved $3.8 million in reduced mud costs and rig
time. That’s great for the environment. Great for business.

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B E T T I N G O N B A K U

FIRST OIL IN 2005. With four offshore platforms, a major onshore terminal expansion, 600 kilometers
of subsea pipelines and the biggest water injection pumps ever manufactured, Azeri is among the
world’s largest infrastructure projects. Materials must be brought in through canals that are frozen
during winter. Local fabrication yards and marine equipment/vessels have required major upgrades.
Topsides weighing 15,000 tonnes must be barge loaded and floated over four platform jackets
constructed from launch frames, like the one above. Despite the challenges, KBR Engineering is on
schedule, with first oil expected in early 2005.

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S T E P C H A N G E R S

THE ULTIMATE VISION. For years, it has been
a goal within the oilfield services industry
to drill a mono-diameter well. A wellbore with
the same diameter top to bottom would allow
operators to drill deeper, faster, more cost
effectively – and with much less impact on

system, the ultimate application of SET tech-

the environment. Enventure’s MonoDiameter™
nology, along with Halliburton’s PoroFlex™
expandable screens, VersaFlex™ expandable
in the printout, left) and the ChannelSeal™

liner hangers (a section of which is shown

selective-set cementing system, brings
the reality even closer. At right, parts of an
expansion assembly of the SET system.

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G I A N T I N T H E D E S E R T

WHAT KBR DOES BEST. Many of KBR’s activities may seem surprising for an E&C company. Like
teaching people to make bricks and build homes, running a health clinic, or enabling home loans.
But the client is committed to responsible development. Meanwhile, with 270 well sites, miles of
gathering lines and related facilities, and an ambitious schedule, it’s an immense undertaking, and
KBR must deliver. So far, KBR has achieved 25 million incident-free work hours – and counting.

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A D R I V E F O R S A F E T Y

THE TRIPLE BOTTOM LINE. A winner of Halliburton’s HSE Award this year, Halliburton de Mexico has
an incredible safety record. After starting a driver safety program in 1997, the vehicle accident rate
plunged. But the team members weren’t satisfied. They started training families covered by Halliburton’s
employee medical insurance plan. Now, they’re training drivers who interact with Halliburton every
day, reducing the accident rate and serving the community at the same time – the bottom line of a
successful HSE policy.

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T H E Y E A R O F S E R V I C E Q U A L I T Y

Value for service, or Service Quality,

were already a significant number of

ESG’s Service Quality strategy, a key

isn’t a new concept. It is the age-old

Halliburton employees who had been

part of our business strategy and our

expectation of every buyer, and it’s

dedicated to these principles for years.

mantra. Poor Service Quality costs

at the heart of every service transac-

To strengthen this dedication, we made

companies millions of dollars every

tion. But how do you define it? Is it

HSE a focus of our business objectives

year and can end up costing some-

cost, or timeliness, or convenience? Is it

with a strong commitment – from

thing more valuable – a customer’s

shiny new technology introduced

the Board of Directors on down – and

trust. While our end-of-job customer

every year?

systems to measure our progress.

surveys say that 97 percent of our

At Halliburton, we believe that

Today, HSE is ingrained into the

customers are satisfied with the job

Service Quality comes from knowing

culture at Halliburton and is a core

we do, we aim for nothing less than

what our customers need and deliv-

value. We are one of the industry

100 percent. To do that takes refo-

ering it, when they need it and how

leaders in safety performance. In 2002,

cusing on what great customer satis-

they need it. Service Quality is not

we had a remarkable 30 percent

faction really means.

simply executing a job, but rather

decrease in the United States in our

doing it to meet or exceed our

Occupational Safety and Health

customers’ expectations. It’s results,

Administration (OSHA) recordable

pure and simple.

incident rate, and this has been

This is the story of how Halliburton

reflected in our global operations.

made Service Quality a business

If we can accomplish so much in a

strategy and a passionate focus –

short amount of time, who knows what

starting where it counts, from within.

we can achieve with the same focus

S E R V I C E Q U A L I T Y A N D P E O P L E

on Service Quality?

One thing that we know with certain-

ty: Important organizational change

S E R V I C E Q U A L I T Y A N D T H E

E N E R GY S E R V I C E S G R O U P

A year ago, we said that Halliburton

was transforming the way we deliver

solutions in order to help our customers

maximize the economic recovery of

their hydrocarbon reservoirs. By that

standard, Service Quality involves

more than excellent job execution. It’s

about using our resources and experi-

ence to help our customers optimize

reservoirs and produce a profitable

well – without significant failures or

down time, and with environmental

requires a cultural change. We’re not

For years, Halliburton has been known

compliance and zero incidents.

just changing actions; we’re changing

as the hardest-working, most-reliable

It’s about delivering the best solutions

a belief system.

energy services company in the oil

in four areas that are of particular

Halliburton has experience doing

patch. “You call, we haul, that’s all.”

concern to our customers: locating hydro-

that. In 1997, the Energy Services

But is it? After all, as an energy

carbons, creating the hole, putting in-

Group (ESG) and KBR made a com-

services company, it’s our responsibility

frastructure into the hole to move fluids

mitment to be the industry leaders in

to find out what challenges our cus-

and gases, and optimizing production.

Health, Safety and the Environment

tomers are facing and give them the

In this context, Service Quality

(HSE). At the time, most people agreed

means to meet them.

doesn’t necessarily mean designing a

that HSE was a good idea. And there

This year, “Done Right” became the

new drill bit, but rather finding the

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best way to get our customers to the

S E R V I C E Q U A L I T Y A N D

Halliburton’s Innovative Product

reservoir. Whatever way that might

T E C H N O L O GY

Commercialization (IPC) provides a

be. So we’re challenging the notion of

In 2002, the ESG spent $247 million on

clear path for identifying, developing

what it means to be an energy services

technology development. Halliburton

and commercializing new technologies.

company and to become what the

was awarded 194 patents in the U.S.

The IPC framework enables

industry needs us to be. That may

Due to this commitment, Halliburton

Halliburton to look into the future and

mean partnering with our customers

ranks among the top 100 U.S. technol-

uncover innovative, new ideas and

when we develop a special technology

ogy development companies. Our tech-

opportunities that will help us solve

for them, or getting involved in project

nologies are boosting our customers’

customer needs and profitably grow

planning upfront and taking more

production, increasing reserves, and

our business. The underlying purpose

responsibility for results. Service

reducing capital and operating

of IPC is to help us identify, develop

done right.

expenses. Can we do better?

and commercialize technology quickly

... the Service Quality
that we deliver today
with our existing
technology is what
foreshadows the
delivery of technology
for tomorrow ...

AN ENVIABLE RECORD. Enventure employees continue to demonstrate their commit-
ment to safety by completing a fourth year without a lost-time injury, a safety-performance
level they take pride in.

SAFETY MEETING. Before leaving for the job site, the Mission, Texas, frac crew gathers
for its first safety meeting of the day. Such meetings help reinforce safe behavior and cut
down on recordable incidents.

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and effectively in order to bring value

Landmark led the oil and gas industry

Landmark is currently developing

to Halliburton and our customers: the

by making its entire suite of integrated

technologies in the areas of prospect

right technology for right now.

software technology available to run

generation, field development and plan-

It takes a world-class organization

on Linux systems. Not only are they

ning, well design, and drilling and pro-

to consistently deliver the finest appli-

providing customers with greater

duction optimization. When combined

cations of technology to the well site.

platform choice and independence,

with leading-edge technologies from

And because customers vote “yes” or

but the cost-effective Linux platforms

Halliburton, these products will further

“no” in the marketplace, the Service

are producing measurable boosts in

increase the percentage of recoverable

Quality that we deliver today with our

performance of 10 times or more

reserves from new and existing reser-

existing technology is what foreshadows

and creating a significant customer

voirs, while significantly reducing

the delivery of technology for tomorrow.

advantage by lowering costs and

finding and lifting costs.

In 2002, the ESG introduced some

reducing cycle times.

Halliburton is also creating a new

truly ground-breaking technologies.

Throughout the world, nine out of

generation of drilling, completion and

But it’s technology with a purpose.

10 leading oil and gas companies are

production enhancement products that

Such is the case at Landmark

using Landmark products to dramati-

Graphics, where the first criterion of

cally compress many business-critical

solve an entire range of needs. One
SM
,

of them, Halliburton Micropolymer

any new technology is: How will it

workflows while increasing efficiencies.

is a non-surfactant based fluid system.

help our customers find, develop and

Tasks that used to take days or weeks

Using polymer chains 20 to 30 times

produce their oil and gas resources

can now be done in a matter of hours

smaller than conventional polymers,

more quickly and efficiently? Last year,

or even minutes.

these micropolymer systems greatly

RELIABILITY CHECK. A Sperry-Sun technician puts away the
electronics insert from a Logging-While-Drilling tool. After
every use, inserts are cleaned and inspected for signs of wear
before being stored in a laboratory-controlled environment.

DEEP FREEZE. To lessen the footprint, future North Slope
drill sites will be inaccessible by roads. Equipment and
personnel must be flown in by airplanes, or use temporary
ice roads built to last from November until the spring thaw.

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... Performance Excellence is driven by
implementing innovative ideas submitted
by KBR employees. Their ideas help us
work faster and more efficiently ...

improve conductivity and increase

The idea of Performance Excellence

E X A M P L E S O F I N N OVAT I O N

initial hydrocarbon production rates

seems natural to a company like

by up to 67 percent. Better still,

KBR. After all, we are known for

Halliburton Micropolymer is the

our ability to execute some of the

industry’s first and only reusable

most complex and exacting projects

frac fluid, making it much more cost

anywhere. Whether it’s designing

efficient and environmentally

and building a billion-dollar liquefied

responsible, too. That’s technology

natural gas (LNG) plant in Algeria

Years ago, we dreamed of the

24-hours-a-day, seven-days-a-week

virtual project. After all, sharing

work is shortening time to market in

the motor and aircraft industries.

Why not global work sharing in the

world of process plant design?

done right.

or rebuilding the U.S. Embassy in

Today, technology is providing this

Maximum profitability today has

Kabul, Afghanistan, KBR delivers.

a new definition. Companies in

But in the engineering and con-

the 21st century need to be socially

struction industry these days, the

capability, and KBR has embraced it.

In a recent project, KBR and its

German joint venture partner collabo-

responsible and environmentally

margins are thinner, room for error

rated over a common 3-D CAD system

conscious because their profitability

is narrower, the landing zone smaller.

to design a phenol and acetone plant.

depends on it, and it’s the right thing

It can take three to five years from

The teams worked concurrently,

to do. Successful services companies

contract to completion, and there

sharing files between offices on two

will deliver the products and services

are hundreds of chances for a project

continents and delivering a fully

that make this possible.

to fail. Our customers, our investors

integrated and successful design on

S E R V I C E Q U A L I T Y A N D K B R

and the marketplace demand pre-

a very aggressive schedule.

dictability and certainty.

This is also taking place in KBR’s

Service Quality is referred to at KBR

Performance Excellence is driven

Infrastructure business product line,

as Performance Excellence. A different

by implementing innovative ideas

where design and engineering work

name, but the meaning is the same:

submitted by KBR employees. Their

transcend geographical boundaries.

innovation and knowledge manage-

ideas help us work faster and more

On one of KBR’s large U.K. road

ment, excellent execution, predictable

efficiently, without compromising

concessions involving the upgrade of

results and customer value.

project integrity.

a major road to motorway standard,

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

MOVING OIL. Workers finish construction on Pump Station Three at the Belabo site in Cameroon.

... Halliburton has a workforce of
83,000 people in more than 100 countries.
With so many chances to do good or
harm, we choose to do what is right ...

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

bridge design and the development of

business processes, and to submit

can assess their skills and provide

the CAD design model are being

ideas for transforming work through

training where there are gaps.

carried out in Australia, while the

an online Idea Zone.

Employees will use the critical skills

road design is undertaken in the U.K.

Innovation is becoming part of

we’ve identified for all levels of man-

KBR’s Engineering Excellence

the KBR psyche, and Knowledge

agement, from first-time managers to

Group is working to make these break-

Management goes hand in hand with

the executive team, as a fast track for

through scenarios routine. A laboratory

it. Using Knowledge Management

career development. KBR’s executive

for purposeful engineering innovation,

techniques, we are capturing the very

team will assess its senior and middle

the group is blending process engi-

best of our expertise and our practices

managers through the Leadership

neers, layout engineers and cost

and making it accessible to our people

Performance Program. Already, KBR’s

engineers to create a new engineer –

through knowledge portals – providing

president and CEO met personally

the concept engineer – and improving

the right information at the right time.

with more than 100 senior managers

how a project gets done.

We are also connecting people

to evaluate their direct reports, guide

One approach being studied is using

through global discipline teams and

them in succession planning and

object-oriented data dynamically.

communities of practice to systemati-

identify high-potential employees to

Project teams around the globe will

cally capture, share and integrate

be the KBR leaders of tomorrow.

access warehoused data through a

information throughout KBR. The

Nurturing young talent is our invest-

secure Web-based portal and provide

effective utilization of our intellectual

ment in the future. IMPACT, the global

input to its development as it moves

capital enables us to achieve Perfor-

network for KBR’s young engineers,

through the system. This multi-dis-

mance Excellence and to produce value

was founded last year and now has

ciplinary involvement at every stage

for our shareholders and customers.

more than 1,000 members. Committed

helps to enhance overall knowledge,

Like the ESG, KBR believes that

to career and personal development

eliminate rework, compress schedules

by improving our people’s skills,

and making an “impact” on the compa-

and deliver a better project – the very

Performance Excellence will follow.

ny’s future, these enthusiastic young

definition of Performance Excellence.

A key piece – our Company-wide

professionals are, in turn, visiting area

P E O P L E E X C E L L E N C E

People, Performance, Results pro-

schools, colleges and universities, talk-

gram – aligns performance goals

ing to students and planting the seeds

“Entrepreneurs innovate,” writes Peter

and career objectives with business

for KBR’s next generation.

Drucker. But innovation isn’t only

strategy and ties compensation to

Our Performance Excellence focus

technical. Throughout KBR, innovation

accomplishment.

began just a little over a year ago.

champions are helping people apply

Also taking aim at people excellence,

But the idea has caught on, and it’s

creative problem-solving techniques

a worldwide taskforce is presently

quickly becoming our way of life.

and tools to daily tasks. Employees

defining the competencies needed for

Evidence of our success rests in our

are encouraged to challenge the existing

every job at KBR. By evaluating

new and repeat business. KBR

business model and remake critical

employees against this standard, we

booked an average of $1 billion in new

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

business each quarter of 2002.

pressure and cholesterol. Our office in

reduce waste; we’re removing toxic

It’s also evident as you walk our

Chad is helping to fund a center to

components from our formulations

hallways and hear the buzz. E&C

study tropical diseases that shorten

and eliminating flaring; and we’re

firms, especially the size and scope

lives and affect the quality of life for

researching solutions that will allow

of KBR, aren’t expected to have this

that country’s citizens.

us to clean and re-use water while

kind of excitement. But our aim is to

refashion KBR into a different kind

of company that will be a model for

the new millennium. And it’s working.

S E R V I C E Q U A L I T Y B E YO N D

P R O F I T S

As human beings and citizens of this

planet, we are inextricably linked.

While we understand that as a com-

pany we cannot expect to solve all the

world’s problems, we also believe that

we have a responsibility to make our

world a better place. To Halliburton,

Service Quality also means service to

a greater good.

We also believe that every employee

drilling. Our real time technologies

has the right to expect a safe, healthy

for remote monitoring of reservoirs

workplace. We begin meetings with

are reducing our footprint at the well

an HSE or safety moment, dis-

site, and by reducing travel, we’re

cussing specific on-the-job risks and

also reducing our emissions.

how to mitigate them. Everywhere we

Halliburton is a company of people,

operate, drivers receive safety training,

and it is to them that we owe our

seatbelts are mandatory, and the use

best effort. We have a 91 percent

of business cell phones while driving

nationalized workforce. We provide

is prohibited.

jobs to local people, fair trade oppor-

It’s the norm that during booming

tunities to local companies and

markets in our industry, increased

support to local communities. We’re

activity makes accident rates go up.

encouraging young people to enter

Yet, Halliburton’s incident rate has

our industry by subsidizing student

actually dropped for the last several

membership dues in professional

Halliburton has a workforce of

years in a row, including during the

organizations so they have a practical

83,000 people in more than 100 coun-

strong market of 2001. We are proud

and university education. Halliburton

tries. With so many chances to do

that our incident rate is much lower

people commit thousands of hours to

good or harm, we choose to do what

than the industry average because

community outreach projects – sup-

is right. We conduct business ethics

of our commitment to safety and our

porting schools, cleaning beaches and

training and have a strong code of

processes. In 2002 at Halliburton,

deserts, planting trees – because that’s

conduct that applies to all employees

we drove more than 400 million miles

what it means to be a good neighbor.

since we highly value principled busi-

– that’s about twice around the planet

We do these things because we

ness practices.

every hour – and we did it without a

understand that we are – all of us –

Health is the first word of our HSE

single employee driving-related

dependent on each other for the

initiative, and we take a proactive

fatality.

survival of our planet, and we realize

approach to health management. We’re

We’re also creating technologies

that our actions have consequences.

teaching workers in Africa about

that are reusable, sustainable and

We are keenly aware that to lead is

AIDS and mosquito-borne diseases,

environmentally responsible. We’ve

more than to make the most money.

and office workers about high blood

developed drilling systems that

We know that to lead is to serve.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

… Halliburton people
commit thousands of
hours to community
outreach projects –
supporting schools,
cleaning beaches and
deserts, planting
trees – because that’s
what it means to be
a good neighbor …

MAKING A CONTRIBUTION.
A mother and her young child stand
outside their home in a Chadian
village. Around the world, families
like this one often benefit from
the employment opportunities and
community involvement that
Halliburton brings to their homelands.

ABCs. Chadian children start their
day in the new village school. The
one-room schoolhouse was built with
donated materials and assistance from
KBR and its joint venture partners, and
holds around 30 students.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

H A L L I B U R T O N

B O A R D O F D I R E C T O R S

R O B E R T L . C R A N D A L L
( 1 9 8 6 ) (a), (b), (c)

K E N N E T H T. D E R R
( 2 0 0 1 ) (a), (c), (e)

C H A R L E S J . D I B O N A
( 1 9 9 7 ) (a), (b), (d)

Chairman Emeritus
AMR
Corporation/American
Airlines, Inc.
Irving, Texas

Retired Chairman of the

Retired President and

Board
Chevron Corporation
San Francisco, California

Chief Executive Officer
American Petroleum
Institute
Great Falls, Virginia

L A W R E N C E S .

E A G L E B U R G E R
( 1 9 9 8 ) (a), (c), (e)

Senior Foreign Policy

Advisor
Baker, Donelson,
Bearman & Caldwell
Washington, D.C.

J . L A N D I S M A R T I N
( 1 9 9 8 ) (a), (d), (e)
President and

J AY A . P R E C O U R T
( 1 9 9 8 ) (a), (b), (d)
Chairman of the Board

and Chief Executive Officer
Scissor Tail Energy, LLC
Vail, Colorado

Chief Executive Officer
NL Industries, Inc.
Houston, Texas

Chairman and

Chief Executive Officer
Titanium Metals
Corporation
Denver, Colorado

D E B R A L . R E E D
( 2 0 0 1 ) (a), (d), (e)

President and

Chief Financial Officer
Southern California Gas
Company and San Diego
Gas & Electric Company
San Diego, California

C . J . S I L A S
( 1 9 9 3 ) (a), (b), (c)

Retired Chairman of the

Board and Chief Executive

Officer
Phillips Petroleum
Company
Bartlesville, Oklahoma

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T
2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

W. R . H O W E L L
( 1 9 9 1 ) (a), (b), (c)

Chairman Emeritus
J.C. Penney Company,
Inc.
Dallas, Texas

R AY L . H U N T
( 1 9 9 8 ) (a), (c), (e)

D AV I D J . L E S A R

( 2 0 0 0 )

AY LW I N B . L E W I S
( 2 0 0 1 ) (a), (b), (d)

Chairman of the Board

Chairman of the Board,

President, Chief Multibranding

and Chief Executive Officer
Hunt Oil Company
Dallas, Texas

President and Chief

Executive Officer
Halliburton Company
Houston, Texas

& Operating Officer
YUM! Brands, Inc.
Louisville, Kentucky

(a) Member of the Management

Oversight Committee

(b) Member of the Compensation

Committee

(d) Member of the Health, Safety
and Environment Committee

(e) Member of the Nominating
and Corporate Governance
Committee

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T A N D C O R P O R A T E I N F O R M A T I O N

C O R P O R AT E O F F I C E R S

E N E R GY S E R V I C E S G R O U P

S H A R E H O L D E R I N F O R M AT I O N

D AV I D J . L E S A R
Chairman of the Board,
President and Chief Executive Officer

J O H N W. G I B S O N J R .
President and
Chief Executive Officer

E N G I N E E R I N G A N D

C O N S T R U C T I O N G R O U P
KBR

A L B E R T J . S TA N L E Y
Chairman

R O B E R T R . H A R L
President and
Chief Executive Officer

D O U G L A S L . F O S H E E
Executive Vice President
and Chief Operating Officer

C . C H R I S T O P H E R G A U T
Executive Vice President
and Chief Financial Officer

A L B E R T O . C O R N E L I S O N J R .
Executive Vice President
and General Counsel

J E R R Y H . B L U R T O N
Vice President and Treasurer

C E D R I C W. B U R G H E R
Vice President, Investor Relations

W E L D O N J . M I R E
Vice President, Human Resources

C H A R L E S E . D O M I N Y
Vice President, Government
Relations

A R T H U R D . H U F F M A N
Vice President
and Chief Information Officer

M A R G A R E T E . C A R R I E R E
Vice President, Secretary
and Corporate Counsel

R . C H A R L E S M U C H M O R E J R .
Vice President and Controller

D AV I D R . S M I T H
Vice President, Tax

Corporate Office
5 Houston Center
1401 McKinney, Suite 2400
Houston, TX 77010

S H A R E S L I S T E D
New York Stock Exchange
Swiss Exchange
Symbol: HAL

T R A N S F E R A G E N T A N D

R E G I S T R A R
Mellon Investor Services LLC
85 Challenger Road
Ridgefield Park
New Jersey 07660-2104
1-800-279-1227
www.melloninvestor.com

F O R M 1 0- K R E P O R T
Shareholders can obtain a copy of the
Company’s annual report to the
Securities and Exchange Commission
Form 10-K by contacting:
Vice President, Investor Relations
Halliburton Company
5 Houston Center
1401 McKinney, Suite 2400
Houston, TX 77010

For up-to-date information on
Halliburton Company, shareholders
may use the Company’s toll-free
telephone-based information service
available 24 hours a day at
1-888-669-3920 or contact the
Halliburton Company homepage on
the Internet’s World Wide Web at
www.halliburton.com.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

In this section, we discuss the business environment,

of our business activities reduces the risk that loss of

operating results and general financial condition of

business in any one country would be material to our

Halliburton Company and its subsidiaries. We explain:

consolidated results of operations.

• factors and risks that impact our business;

• why our earnings and expenses for the year 2002 vary

from 2001 and why our earnings and expenses for 2001
vary from 2000;

• capital expenditures;

• factors that impacted our cash flows; and

• other items that materially affect our financial condition

or earnings.

B U S I N E S S E N V I R O N M E N T

Our business is organized in the following two business

segments:

• Energy Services Group; and

• Engineering and Construction Group.

H a l l i b u r t o n C o m p a n y

Activity levels within our two business segments are

significantly impacted by the following:

• spending on upstream exploration, development and

production programs by major, national and independent
oil and gas companies;

• capital expenditures for downstream refining, processing,
petrochemical and marketing facilities by major, national
and independent oil and gas companies; and

• government spending levels.

Also impacting our activity is the status of the global

economy, which indirectly impacts oil and gas consumption,

demand for petrochemical products and investment in

infrastructure projects.

We currently operate in over 100 countries throughout the

Some of the more significant barometers of current and

world, providing a comprehensive range of discrete and

future spending levels of oil and gas companies are oil and

integrated products and services to the energy industry and

gas prices, exploration and production drilling prospects, the

to other industrial and governmental customers. The

majority of our consolidated revenues is derived from the

sale of services and products, including engineering and

construction activities to major, national and independent

world economy and global stability which together drive

worldwide drilling activity. As measured by rig count, high

levels of worldwide drilling activity during the first half of

2001 began to decline in the latter part of that year. Drilling

oil and gas companies. These services and products are used

levels reached a low, particularly in the United States for

throughout the energy industry from the earliest phases

gas drilling, in April 2002. The decline was partially due to

of exploration, development and production of oil and gas

general business conditions caused by global economic

resources through refining, processing and marketing.

The industries we serve are highly competitive with

uncertainty which was accelerated by the terrorist attacks

on September 11, 2001. An abnormally warm 2001/2002

many substantial competitors for each segment. In 2002, the

winter season in the United States also resulted in

United States represented 33% of our total revenue and the

increased working gas in storage. The high level of gas in

United Kingdom represented 12%. No other country

storage put pressure on gas prices, which resulted in

accounted for more than 10% of our operations. Unsettled

reduced gas drilling activity particularly in the Western

political conditions, social unrest, acts of terrorism, force

portion of the United States.

majeure, war or other armed conflict, expropriation or other

For the year 2002, natural gas prices at Henry Hub

governmental actions, inflation, exchange controls or

averaged $3.33 per million cubic feet, commonly referred to

currency devaluation may result in increased business risk

as mcf, compared to $4.07 per mcf in 2001. Gas prices

in any one country. We believe the geographic diversification

continued to decline during the first two months of 2002 and

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

then steadily increased throughout the year ending at an

supply disruption as a result of the armed conflict in the

average of $4.65 per mcf in December. Based upon data from

Middle East. OPEC, on January 12, 2003, agreed to raise its

a leading research association at the end of 2002, the gas

output ceiling by 1.5 million barrels per day or 6.5% to 24.5

price at Henry Hub was expected to average slightly above

million barrels per day. Prices for the first and second

$3.73 per mcf for all of 2003 and $4.00 per mcf for the 2003

quarters of 2003 will be impacted by the length of disruption

first quarter. However, actual prices have been

of Venezuelan crude oil supplies, the ability of OPEC to

significantly higher averaging $6.33 per mcf during

manage country production quotas, political tensions in the

January and February. These higher gas prices have not

Middle East, global demand and the level of production by

translated into significantly increased gas drilling rig

major non-OPEC countries, including Norway, Russia and

activity as of the end of February.

other members of the former Soviet Union.

Natural gas prices have been impacted by an abnormally

cold 2002/2003 winter season thus far in the United States,

resulting in reduced gas storage levels. As of January 31,

2003, working gas in storage was 1,521 billion cubic feet,

commonly referred to as bcf, according to Energy

Information Administration estimates. These stocks were

811 bcf less than last year at this time and 287 bcf below

the 5-year average of 1,808 bcf. At 1,521 bcf, total working

gas in storage is within the 5-year historical range. While

gas prices in the United States have historically varied

somewhat geographically, this winter we have seen

significantly higher fluctuations in regional gas prices in the

United States. For example, while the price averaged

$4.27 per mcf in the fourth quarter at Henry Hub, it was

less than $2.00 per mcf in various parts of the Western

United States. This is resulting in significant variation in

gas drilling activity by region in the United States and

E n e r g y S e r v i c e s G r o u p

Lower natural gas and crude oil drilling activity since the

2001 third quarter has resulted in decreased demand for the

services and products provided by the Energy Services

Group. The yearly average and quarterly average rig count

based on the Baker Hughes Incorporated rig count

information is as follows:

Average Rig Counts

United States

Canada

International

(excluding Canada)

Worldwide Total

2002

831

266

732

2001

1,155

342

745

2000

916

344

652

1,829

2,242

1,912

Average Rig Counts

United States

Canada

International

Third

Fourth

First
Quarter Quarter Quarter Quarter
2002

Second

2002

847

283

753

853

250

718

806

147

725

818

383

731

Fourth
Quarter
2001

Third
Quarter
2001

1,004

1,241

278

748

320

757

much lower drilling and stimulation activity in the gas

(excluding Canada)

basins of the Western United States.

Worldwide Total

1,883

1,821

1,678

1,932

2,030

2,318

Crude oil prices for West Texas Intermediate, commonly

referred to as WTI, averaged $25.92 per barrel for all of

2002 compared to $26.02 per barrel for 2001. Oil prices have

continued to trend upward since the beginning of 2002.

Quarterly average WTI increased from $20.52 in the 2001

fourth quarter, to $28.23 in the 2002 third quarter and

increased slightly to $28.34 during the 2002 fourth quarter.

We believe that current oil prices reflect the disruption of

supplies from Venezuela due to political unrest related to

the national strike and a war premium due to the risk of

Worldwide rig activity started to decline in the latter part

of the third quarter 2001 and averaged 1,829 rigs in 2002 as

compared to 2,242 in 2001. The decline in rig activity was

most severe in North America, particularly the United

States, where the rig count dropped 28% from an average of

1,155 in 2001 to 831 in 2002, with the majority of this

decline due to reduced gas drilling. In the past, there has

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

generally been a good correlation between the price of oil

for most product and service lines on average between 2%

and gas in the United States and rig activity. However, this

and 12%. In January 2001, as a result of continued labor

has not been the case in recent months where the rig count

shortages and increased labor and materials costs, we

has declined as compared to the fourth quarter 2001, while

increased prices in the United States on average between

WTI oil and Henry Hub gas prices have increased. We

5% and 12%. In July 2001, as a result of continuing

believe this is due to economic uncertainty, which we expect

personnel and consumable material cost increases, we

to continue into at least the next quarter or two, created by

increased prices on average between 6% and 15%.

the following:

• volatility of oil and gas prices;

• disruption of oil supplies from Venezuela;

• differences in gas prices geographically in the United

States;

• less spending due to current uncertain global economic

environment;

• the armed conflict in the Middle East;

• budgetary constraints of some of our customers;

The decreased rig activity in 2002 from 2001 in the United

States has increased pressure on the oilfield services

product service lines to discount prices. The price increases

we implemented last year have mostly been eroded by

additional discounts. Our pressure pumping product service

line has been significantly impacted by the current economic

slowdown due to its dependence on United States gas drilling.

Our deepwater activity has not been as adversely

impacted as land activity by the downturn in the energy

industry, due to the level of investment and the long-term

• focus on debt reduction by some of our customers;

nature of contracts. Our drilling systems product service

• lack of quality drilling prospects by exploration and

line, which currently has a large percentage of its business

production companies; and

outside the United States and is currently heavily involved

• level of United States working gas in storage during the

in deepwater oil and gas exploration and development

winter heating season.

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 or substantially offset price book increases

in the weeks immediately following a price increase. The

discount applied normally decreases over time if the

activity levels remain strong. During periods of reduced

activity, discounts normally increase, reducing the net

revenue for our services and conversely during periods of

higher activity, discounts normally decline resulting in

net revenue increasing for our services.

During 2000 and 2001, we implemented several price

book increases. In July 2000, as a result of increased

drilling and longer term contracts, has remained relatively

strong despite the overall decline in the energy industry.

Our operations have also been impacted by political and

economic instability in Indonesia and in Latin America. In

Latin America, the impact was primarily in Argentina in

the earlier part of 2002 and then in Venezuela toward the

end of 2002, due to political unrest related to the national

strike. We also experienced disruptions due to Tropical

Storm Isidore and Hurricane Lili in the Gulf of Mexico.

Based upon data from Spears and Associates, drilling

activity in the United States and Canada in 2003 is expected

to increase compared to overall 2002 levels and compared

to the fourth quarter 2002. This reflects the current level of

oil and gas prices and tight supplies. International drilling

activity is expected to remain constant with fourth quarter

consumable materials costs and a tight labor market causing

2002 levels.

higher labor costs, we increased prices in the United States

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

At the end of 2002, two brokerage firms released

manufacturing. A number of large-scale gas and liquefied

exploration and production expenditure surveys for 2003.

natural gas development, offshore deepwater, government

Salomon Smith Barney reported that worldwide exploration

and infrastructure projects are being awarded or actively

and production spending is expected to increase 3.8% in

considered. However, in light of terrorist threats, the armed

2003. North America spending was forecasted to rise 1.5%.

conflict and increasing instability in the Middle East and

The report also noted that a lack of quality drilling

the modest growth of the global economy, many customers

prospects and uncertainty over Iraq have also contributed

are delaying some of their capital commitments and

to a weaker initial spending forecast. Lehman Brothers

international investments.

made similar predictions. They are projecting a 4.2%

We expect growth opportunities to exist for additional

increase in worldwide exploration and production

security and defense support to government agencies in the

expenditures for 2003, but a slight decrease in United States

United States and other countries. Demand for these

spending. Canadian exploration and production spending

services is expected to grow as a result of the armed conflict

is estimated to increase 7.2%. International exploration and

in the Middle East and as governmental agencies seek to

production expenditures are estimated to grow 5.5% in

control costs and promote efficiencies by outsourcing these

2003, led by national oil companies and European majors.

functions. We also expect growth due to new demands

According to the Lehman report, exploration and

created by increased efforts to combat terrorism and

production company budgets were based upon an average

enhance homeland security.

oil price estimate of $23.22 per barrel (WTI) and $3.42 per

Engineering and construction contracts can be broadly

mcf for natural gas (Henry Hub).

categorized as fixed-price, sometimes referred to as lump

Until economic and political uncertainties impacting

sum, or cost reimbursable contracts. Some contracts can

customer spending become clearer, we expect oilfield

involve both fixed-price and cost reimbursable elements.

services activity to be essentially flat in the short-term and

Fixed-price contracts are for a fixed sum to cover all costs

improve in the second half of 2003. The armed conflict in

and any profit element for a defined scope of work. Fixed-

the Middle East could disrupt our operations in the region

price contracts entail more risk to us as we must pre-

and elsewhere for the duration of the conflict. In the

determine both the quantities of work to be performed and

longer-term, we expect increased global demand for oil and

the costs associated with executing the work. The risks to us

natural gas, additional customer spending to replace

arise, among other things, from:

depleting reserves and our continued technological advances

to provide growth opportunities.

• having to judge the technical aspects and effort involved
to accomplish the work within the contract schedule;

E n g i n e e r i n g a n d C o n s t r u c t i o n G r o u p

• labor availability and productivity; and

Our engineering and construction projects are longer term

• supplier and subcontractor pricing and performance.

in nature than our energy services projects and are not

Fixed-price engineering, procurement and construction and

significantly impacted by short-term fluctuations in oil and

fixed-price engineering, procurement, installation and

gas prices. We believe that the global economy’s recovery

commissioning contracts involve even greater risks including:

is continuing, but its strength and sustainability are not

assured. Based on the uncertain economic recovery and

continuing excess capacity in petrochemical supplies,

customers have continued to delay project awards or reduce

the scope of projects involving hydrocarbons and

• bidding a fixed-price and completion date before detailed

engineering work has been performed;

• bidding a fixed-price and completion date before locking

in price and delivery of significant procurement

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

components (often items which are specifically designed
and fabricated for the project);

through a variety of other contracting forms. We have seven

fixed-price engineering, procurement, installation and

• bidding a fixed-price and completion date before
finalizing subcontractors terms and conditions;

• subcontractors individual performance and combined
interdependencies of multiple subcontractors (the
majority of all construction and installation work is
performed by subcontractors);

commissioning offshore projects underway and we are fully

committed to successful completion of these projects, several

of which are substantially complete. We plan to retain our

offshore engineering and services capabilities.

The approximate percentages of revenues attributable

to fixed-price and cost reimbursable engineering and

• contracts covering long periods of time;

construction segment contracts are as follows:

• contract values generally for large amounts; and

• contracts containing significant liquidated damages

provisions.

Cost reimbursable contracts include contracts where the

price is variable based upon actual costs incurred for time

and materials, or for variable quantities of work priced at

defined unit rates. Profit elements on cost reimbursable

contracts may be based upon a percentage of costs incurred

and/or a fixed amount. Cost reimbursable contracts are

generally less risky, since the owner retains many of the

risks. While fixed-price contracts involve greater risk,

they also potentially are more profitable for the contractor,

since the owner pays a premium to transfer many risks to

the contractor.

After careful consideration, we have decided no longer to

pursue riskier fixed-price engineering, procurement,

installation and commissioning contracts for the offshore

oil and gas industry. An important aspect of our 2002

reorganization was to look closely at each of our businesses

to ensure that they are self-sufficient, including their use of

capital and liquidity. In that process, we found that the

engineering, procurement, installation and commissioning

offshore business was using a disproportionate share of our

bonding and letter of credit capacity relative to its profit

contribution. The risk/reward relationship in that segment

is no longer attractive to us. We provide a range of

engineering, fabrication and project management services to

the offshore industry, which we will continue to service

2002

2001

2000

Fixed-Price

Cost
Reimbursable

47%

41%

47%

53%

59%

53%

R e o r g a n i z a t i o n o f B u s i n e s s O p e ra t i o n s

We have substantially completed a corporate reorganization

commenced in 2002 intended to restructure our businesses

into two operating subsidiary groups, the Energy Services

Group and KBR, representing the Engineering and

Construction Group. As part of this reorganization, we are

separating and consolidating the entities in our Energy

Services Group together as direct and indirect subsidiaries

of Halliburton Energy Services, Inc. We are also separating

and consolidating the entities in our Engineering and

Construction Group together as direct and indirect

subsidiaries of the former Dresser Industries Inc., which

became a limited liability company during the second

quarter of 2002 and was renamed DII Industries, LLC. The

reorganization of business operations facilitated the

separation, organizationally, financially and operationally, of

our two business segments, which we believe will

significantly improve operating efficiencies in both, while

streamlining management and easing manpower

requirements. In addition, many support functions that were

previously shared were moved into the two business groups.

Although we have no specific plans currently, the

reorganization would facilitate separation of the ownership

of the two businesses in the future if we identify an

opportunity that produces greater value for our shareholders

than continuing to own both businesses.

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

We expect only a minimal amount of restructuring costs

recoveries resulting in a total of $2.1 billion as of December

to be incurred in 2003. In 2002, we incurred approximately

31, 2002 and recorded a net pretax charge of $799 million

$107 million in restructuring charges consisting of

($675 million after-tax) in the fourth quarter of 2002.

the following:

• $64 million in personnel related expense;

• $17 million of asset related write-downs;

• $20 million in professional fees related to the

restructuring; and

• $6 million related to contract terminations.

We anticipate annualized cost savings of $200 million

compared to costs prior to the corporate reorganization.

As a part of the reorganization, we decided that the

operations of Major Projects, Granherne and Production

Services were better aligned with KBR in the current

business environment and these businesses were moved

from the Energy Services Group to the Engineering and

Construction Group during the second quarter of 2002. All

prior period segment results have been restated to reflect

this change. Major Projects, which currently consists of the

Should the proposed global settlement become probable

under Statement of Financial Accounting Standards No. 5,

we would adjust our accrual for probable and reasonably

estimable liabilities for current and future asbestos and

silica claims. The settlement amount initially would be up to

$4.0 billion, consisting of up to $2.775 billion in cash, 59.5

million Halliburton shares of common stock and notes with

a net present value expected to be less than $100 million.

Assuming the revised liability would be $4.0 billion, we

would also increase our probable insurance recoveries to

$2.3 billion. The impact on our income statement would be

an additional pretax charge of $322 million ($288 million

after-tax). This accrual (which values our stock to be

contributed at $1.1 billion using our stock price at December

31, 2002 of $18.71) would then be adjusted periodically

based on changes in the market price of our common stock

until the common stock was contributed to a trust for the

Barracuda-Caratinga project in Brazil, is now reported

benefit of the claimants.

through the Offshore operations product line, Granherne is

now reported in the Onshore operations product line, and

Production Services is now reported under the Operations

R E S U LT S O F O P E R AT I O N S I N 2 0 0 2

C O M PA R E D T O 2 0 0 1

and Maintenance product line.

A s b e s t o s a n d S i l i c a

On December 18, 2002, we announced that we had reached

an agreement in principle that, if and when consummated,

would result in a global settlement of all asbestos and silica

personal injury claims. The agreement in principle covers all

current and future personal injury asbestos claims against

DII Industries, Kellogg, Brown & Root and their current and

former subsidiaries, as well as all current silica claims

asserted presently or in the future. We revised our best

estimate of our asbestos and silica liability based on

information obtained while negotiating the agreement in

principle, and adjusted our asbestos and silica liability to

$3.425 billion, recorded additional probable insurance

R E V E N U E S

Millions of dollars

2002

2001

Increase/
(Decrease)

Energy Services Group

$ 6,836

$ 7,811

$(975)

Engineering and Construction Group

5,736

5,235

501

Total revenues

$12,572

$13,046

$(474)

Consolidated revenues for 2002 were $12.6 billion, a

decrease of 4% compared to 2001. International revenues

comprised 67% of total revenues in 2002 and 62% in 2001.

International revenues increased $298 million in 2002

partially offsetting a $772 million decline in the United States

where oilfield services drilling activity declined 28%,

putting pressure on pricing.

E n e r g y S e r v i c e s G r o u p revenues declined 12%, or $975

million, in 2002 from 2001. International revenues were 60%

of total revenues for 2002 as compared to 54% for 2001.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Revenues from our oilfield services product service lines

• revenues increased in Europe/Africa, the Middle East,

were $6.2 billion for 2002 compared to $6.8 billion for 2001.

and Asia Pacific due to increased activity.

The decline in revenue is attributable to lower levels of

activity in North America across all product service lines,

putting pressure on pricing of work in the United States.

The decrease in North America revenue was offset by 8%

higher international revenue. The change in revenues in

oilfield services is shown by product service line as follows:

Revenues for the remainder of the segment decreased

$308 million year-over-year. We account for our 50%

ownership interest in Subsea 7, which began operations in

May 2002, on the equity method of accounting. Prior to

the formation of Subsea 7, the revenue of our subsea

operations was included in our consolidated results. Had it

• pressure pumping revenue declined 13% due to reduced

not been for the change to the equity method of accounting

rig counts and activity in North America, partially offset
by increased activity internationally in Algeria, Nigeria,
Mexico, Brazil, Saudi Arabia, Oman, Egypt and China;

• logging revenue was down 13% due to lower North

American activity, partially offset by increased activity in
Nigeria, Mexico, Saudi Arabia and China;

• completion products revenue was down 10% due to lower
North American activity, partially offset by increased
activity in the UK, Nigeria, Indonesia and Malaysia;

• drilling fluids revenue was down 10%, principally in
North America, partially offset by increased sales in
Nigeria, Angola, Mexico, Saudi Arabia and Indonesia;

• drill bits revenue was down 12% principally due to lower
North American activity, partially offset by increased
sales in Algeria, UK, Angola, Mexico, Brazil, Saudi Arabia
and Indonesia; and

• drilling systems revenue was up 8% due to increased
activity in Saudi Arabia, Thailand, Mexico, Brazil
and the United Arab Emirates, offset by lower North
American activity.

On a geographic basis, our oilfield services revenues were

as follows:

• North American revenue decreased 24% across all product

service lines due to lower rig activity;

• Latin American revenue decreased 8% primarily as a

result of decreases in Argentina due to currency
devaluation and in Venezuela due to lower activity
brought on by uncertain market and political conditions
and the national strike; and

in connection with the transaction, revenues for the balance

of the segment would have decreased $79 million for 2002

as compared to 2001 due to lower subsea activity. Partially

offsetting the lower subsea activity, Landmark revenues

increased 12% compared to 2001 due to increased software

and professional services revenues.

E n g i n e e r i n g a n d Co n s t r u c t i o n G ro u p revenues increased

$501 million, or 10%, in 2002 compared to 2001. Year-over-

year revenues were 10% higher in North America and 9%

higher outside North America. Our revenue comparison by

product line is as follows:

• Offshore revenues increased 26% due to progress on the

Barracuda-Caratinga project in Brazil and the Belenak
project in Indonesia;

• Infrastructure revenues increased by 22% due to

increased progress on the Alice Springs to Darwin Rail
Line project in Australia and revenues from
Europe/Africa;

• Onshore revenues increased by 25% primarily due to
progress on several new projects in 2002 including gas
and LNG projects in Algeria, Nigeria, Chad, Cameroon
and Egypt;

• Government Operations revenues were 15% lower due to

completion of a major project at our shipyard in the
United Kingdom and lower volumes of logistical support
in the Balkans; and

• Operations and Maintenance revenue declined 3%

primarily due to reduced downstream maintenance activity.

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

O P E R AT I N G I N C O M E

Millions of dollars

Energy Services Group

Engineering and Construction Group

General corporate

Operating income (loss)

2002

2001

Increase/
(Decrease)

$ 638

$1,036

$ (398)

(685)

(65)

111

(63)

(796)

(2)

$(112)

$1,084

$(1,196)

E n e r g y S e r v i c e s G r o u p operating income for 2002

declined $398 million, or 38%, as compared to 2001.

Excluding a $79 million loss on the sale of our 50% interest

in the Bredero-Shaw joint venture, a $108 million gain on

the sale of our interest in European Marine Contractors, a

$98 million accrual related to the BJ Services litigation and

Consolidated operating loss was $112 million for 2002

$64 million in restructuring charges in 2002, and goodwill

compared to operating income of $1.1 billion in 2001. In

amortization of $24 million in 2001, operating income

2002, our results of operations included:

declined 27%. On the same basis, operating margin for 2002

• $107 million in pretax expense related to restructuring
charges, of which $64 million related to the Energy
Services Group, $18 million related to the Engineering
and Construction Group and $25 million related to
General corporate;

was 11% compared to 14% for 2001.

Operating income in our oilfield services product service

line declined $469 million or 46% compared to 2001.

Excluding the above-noted items, the decline was $323

million or 32%, reflecting lower rig activity primarily

• $117 million pretax loss in the Engineering and

in North America and net pretax losses of $51 million on

Construction Group on the Barracuda-Caratinga project
in Brazil;

integrated solutions properties. The change in operating

income in oilfield services is detailed by product service line

• $564 million pretax expense in the Engineering and

as follows:

Construction Group related to asbestos and silica liabilities;

• $79 million pretax loss in the Energy Services Group

on the sale of our 50% equity investment in the Bredero-
Shaw joint venture;

• $108 million pretax gain in the Energy Services Group
on the sale of our 50% interest in European Marine
Contractors;

• $98 million pretax expense in the Energy Services Group

related to patent infringement litigation;

• $80 million pretax expense resulting from write-off

of billed and accrued receivables related to the Highlands
Insurance Company litigation in the Engineering
and Construction Group, formerly reported in General
corporate; and

• $29 million pretax gain for the value of stock received

from the demutualization of an insurance provider in
General corporate.

In 2002, we recorded no amortization of goodwill due to

the adoption of SFAS No. 142. For the year ended 2001, we

recorded $42 million in goodwill amortization, of which

$24 million related to the Energy Services Group and $18

million related to the Engineering and Construction Group.

• pressure pumping operating income decreased 35%, as

a result of reduced oil and gas drilling in North America,
offset by increased international activity;

• our logging, drilling fluids and drill bits product services

lines were also affected by the reduced oil and gas
drilling in North America with operating income
declining 64% in logging, 42% in drilling fluids and 30%
in drill bits;

• our drilling systems product service line operating income
increased 19%, benefiting from improved international
activity; and

• our completion products and services product service line

had a 6% increase in operating income.

We also recorded impairments of $66 million on integrated

solutions properties primarily in the United States, Indonesia

and Colombia, net of gains of $45 million on disposals of

integrated solutions properties in the United States.

Operating income in the United States for our oilfield

services product service line decreased $459 million due to

lower activity levels and pricing pressures. International

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

operating income decreased $10 million where losses on

G e n e ra l c o r p o ra t e e x p e n s e s were $65 million for 2002

integrated solutions properties of $37 million offset improved

as compared to $63 million in 2001. Excluding restructuring

operating results of Sperry-Sun, pressure pumping and

charges and gain from the value of stock received from

completion products and services.

demutualization of an insurance provider, expenses would

Operating income for the remainder of the segment

have been $69 million.

increased $71 million in 2002 compared to 2001. Excluding

the $79 million loss on the sale of our 50% interest in the

Bredero-Shaw joint venture, a $108 million gain on the sale

of our interest in European Marine Contractors and $9

million in restructuring charges in 2002, and goodwill

amortization of $17 million in 2001, operating income for

the remainder of the segment increased $34 million due

to improved profitability in software sales and professional

services at Landmark and in our subsea operations.

E n g i n e e r i n g a n d C o n s t r u c t i o n G r o u p operating income

declined by $796 million compared to 2001. Excluding the

$117 million loss on the Barracuda-Caratinga project in

Brazil, $644 million of expenses related to net asbestos

and silica liabilities, $18 million in restructuring costs,

goodwill amortization in 2001 of $18 million and asbestos

charges for 2001 of $11 million, operating income declined

$46 million. On the same basis, operating margin for 2002

was 2% as compared to 3% for 2001. Operating income in

Offshore operations decreased $40 million in 2002 compared

to 2001 primarily due to a $36 million loss on a project in

the Philippines. Operating income decreased in Onshore

operations by $30 million in 2002 compared to 2001 due to

lower results in the construction segment and completion of

a project in Algeria. Offsetting the declines was increased

operating income of $21 million in Infrastructure primarily

due to the Alice Springs to Darwin Rail Line project, and in

Government operations where operating income increased

$22 million due to improved results from projects in Asia

Pacific, Europe/Africa and in the Americas.

Recognizing income due to an increase in our total

probable unapproved claims during 2002 reduced reported

losses by approximately $158 million.

N O N O P E R AT I N G I T E M S

I n t e r e s t e x p e n s e of $113 million for 2002 decreased $34

million compared to 2001. The decrease is due to repayment

of debt and lower average borrowings in 2002, partially

offset by the $5 million in interest related to the patent

infringement judgment which we are appealing.

I n t e r e s t i n c o m e was $32 million in 2002 compared to

$27 million in 2001. The increased interest income is for

interest on a note receivable from a customer which had

been deferred until collection.

Fo r e i g n c u r r e n c y l o s s e s , n e t were $25 million in 2002

compared to $10 million in 2001. The increase is due to

negative developments in Brazil, Argentina and Venezuela.

O t h e r, n e t was a loss of $10 million in 2002, which

includes a $9.1 million loss on the sale of ShawCor Ltd.

common stock acquired in the sale of our 50% interest in

Bredero-Shaw.

P r o v i s i o n f o r i n c o m e t a x e s was $80 million in 2002

compared to a provision for income taxes of $384 million in

2001. Exclusive of the tax effect on the asbestos and silica

accrual (net of insurance recoveries) and the loss on sale of

Bredero-Shaw, our 2002 effective tax rate from continuing

operations was 38.9% for 2002 compared to 40.3% in 2001.

The asbestos and silica accrual generates a United States

Federal deferred tax asset which was not fully benefited

because we anticipate that a portion of the asbestos and silica

deduction will displace foreign tax credits and those

credits will expire unutilized. As a result, we have recorded a

$114 million valuation allowance in continuing operations

and $119 million in discontinued operations associated with

the asbestos and silica accrual, net of insurance recoveries.

In addition, continuing operations has recorded a valuation

allowance of $49 million related to potential excess foreign

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

tax credit carryovers. Further, our impairment loss on

R E S U LT S O F O P E R AT I O N S I N 2 0 0 1

Bredero-Shaw cannot be fully benefited for tax purposes due

C O M PA R E D T O 2 0 0 0

to book and tax basis differences in that investment and the

R E V E N U E S

limited benefit generated by a capital loss carryback.

Millions of dollars

2001

2000

Increase/
(Decrease)

Settlement of unrealized prior period tax exposures had a

favorable impact to the overall tax rate.

M i n o r i t y i n t e r e s t i n n e t i n c o m e o f s u b s i d i a r i e s in

Energy Services Group

$ 7,811

$ 6,233

$1,578

Engineering and Construction Group

5,235

5,711

(476)

Total revenues

$13,046

$11,944

$1,102

2002 was $38 million as compared to $19 million in 2001.

Consolidated revenues for 2001 were $13.0 billion, an

The increase was primarily due to increased activity in

increase of 9% compared to 2000. International revenues

Devonport Management Limited.

comprised 62% of total revenues in 2001 and 66% in 2000 as

L o s s f r o m c o n t i n u i n g o p e ra t i o n s was $346 million in

activity and pricing increased in our Energy Services Group

2002 compared to income from continuing operations of

more rapidly in the United States and internationally

$551 million in 2001.

particularly in the first half of 2001. Our Engineering and

L o s s f r o m d i s c o n t i n u e d o p e ra t i o n s was $806 million

Construction Group revenues, which did not benefit from

pretax, $652 million after-tax, or $1.51 per diluted share in

the positive factors contributing to the growth of the Energy

2002 compared to a loss of $62 million pretax, $42 million

Services Group, decreased 8%. Engineering and construction

after-tax, or $0.10 per diluted share in 2001. The loss in

projects are long-term in nature and customers continued

2002 was due primarily to charges recorded for asbestos

to delay major projects with the slowdown in the economy

and silica liabilities. The pretax loss for 2001 represents

occurring in the latter part of 2001.

operating income of $37 million from Dresser Equipment

E n e r g y S e r v i c e s G r o u p revenues increased by $1.6

Group through March 31, 2001 offset by a $99 million pretax

billion, or 25%, in 2001 from 2000. International revenues

asbestos accrual primarily related to Harbison-Walker.

were 54% of the total segment revenues in 2001 compared

G a i n o n d i s p o s a l o f d i s c o n t i n u e d o p e ra t i o n s of

to 59% in 2000. Revenues in 2001 from our oilfield services

$299 million after-tax, or $0.70 per diluted share, in 2001

product service lines were $6.8 billion. Our oilfield services

resulted from the sale of our remaining businesses in the

product service lines experienced revenue growth of 29%

Dresser Equipment Group in April 2001.

despite a 14% decline in oil prices and a 3% decrease in

C u m u l a t i v e e f f e c t o f a c c o u n t i n g c h a n g e , n e t in 2001

natural gas prices between December 2000 and December

of $1 million reflects the impact of adoption of Statement of

2001. The revenue increase was primarily due to higher

Financial Accounting Standards No. 133, “Accounting for

drilling activity, as measured by the annual average oil and

Derivative Instruments and for Hedging Activities.” After

gas rig counts, and pricing improvements, particularly in the

recording the cumulative effect of the change our estimated

United States. Revenues increased across all product

annual expense under Financial Accounting Standards

service lines in 2001 compared to 2000 as follows:

No. 133 is not expected to be materially different from

• pressure pumping product service lines experienced

amounts expensed under the prior accounting treatment.

growth of 34% in 2001;

N e t l o s s for 2002 was $998 million, or $2.31 per diluted

share. Net income for 2001 was $809 million, or $1.88 per

diluted share.

• logging, drilling services and drilling fluids revenues

increased approximately 28%;

• drill bit revenues were 19% higher in 2001; and

• completion products revenues increased 13%.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Logging and drilling services revenues increases occurred

primarily due to the completion of a major project in

primarily in the United States, as the product service lines

Norway and lower activity on the logistical support contract

benefited from higher prices and increased drilling activity.

in the Balkans which moved to the sustainment phase,

Geo-Pilot TM and other new products introduced in the drilling

which involved providing support at the facilities which were

services product service line improved revenue in 2001 by

constructed during the initial phase of the contract. The

approximately $50 million. We design and assemble the

decline was partially offset by increases in activities at our

Geo-Pilot TM tool from parts manufactured to our specifications

shipyard in the United Kingdom of approximately $67

by third parties. Drilling fluid revenues increased in 2001

million which related to a contract with the United Kingdom

with higher activity levels in the Gulf of Mexico.

Ministry of Defense. North American revenues declined in

Geographically, all regions within the oilfield services

2001 partially due to the completion of highway and paving

product service lines prospered with North America

construction jobs and the baseball stadium in Houston.

revenues increasing 37% from 2000 to 2001 as follows:

These declines in North America were partially offset by a

• pressure pumping revenues in North America were

48% higher in 2001 primarily due to higher levels of
drilling activity;

• revenues from Latin America increased 27% with
significant increases in Venezuela and Brazil; and

• Europe/Africa and Middle East revenues were about 20%
higher in 2001 than 2000, arising primarily in Russia
and Egypt.

Revenues for the remainder of the segment of $980 million

increased by $58 million, or 6%, primarily due to Landmark.

slight increase in operations and maintenance revenues

as our customers focused on maintaining current facilities

and plant operations rather than adding new facilities.

These declines were partially offset by increases in revenue

in Latin America due to the Barracuda-Caratinga project

in Brazil which began in the third quarter of 2000.

O P E R AT I N G I N C O M E

Millions of dollars

Energy Services Group

Engineering and Construction Group

2001

Increase/
2000 (Decrease)

$1,036

$589

$447

111

(63)

(54)

(73)

165

$1,084

$462

$622

Landmark revenues were higher by 19% partially due to the

General corporate

acquisition of PGS Data Management as well as growth in

Operating income

software sales and professional services.

E n g i n e e r i n g a n d Co n s t r u c t i o n G ro u p revenues decreased

$476 million, or 8%, from 2000 to 2001. The decline was

primarily due to the completion of several large international

onshore and offshore projects which had not yet been fully

replaced with new project awards and delays in the awards

of new projects. International revenues were approximately

75% in 2001 as compared to 73% in 2000. Revenues for the

Asia/Pacific region were down nearly 40% due to the effects

of completing two major projects, partially offset by a new

liquefied natural gas project and the start-up of construction

on the Alice Springs to Darwin Rail Line project. In

Europe/Africa, revenues were down 6%. The decline was

Consolidated operating income increased $622 million, or

135%, from 2000 to 2001. In 2000 our results of operations

include two significant items: an $88 million pretax gain on

the sale of marine vessels and a pretax charge of $36 million

related to the restructuring of the engineering and

construction businesses. Excluding these items, operating

income increased by more than 160%.

E n e r g y S e r v i c e s G r o u p operating income increased $447

million, or 76%, in 2001 over 2000. Excluding the sale of

marine vessels, operating income increased more than 100%

compared to 2000. Increased operating income reflects

increased activity levels, higher equipment utilization and

improved pricing, particularly in the United States in the

first nine months of 2001. Our oilfield services product

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

service lines operating income in 2001 exceeded $1 billion,

N O N O P E R AT I N G I T E M S

more than double from 2000. Operating margins for our

I n t e r e s t e x p e n s e of $147 million in 2001 was $1 million

oilfield services product service lines increased from 8.6% in

higher than in 2000. Our outstanding short-term debt

2000 to 14.8% in 2001, resulting in an incremental margin

was substantially higher in the first part of 2001 due to

of 37%. Incremental margins are calculated by taking the

repurchases of our common stock in the fourth quarter of

change in operating income over the applicable periods and

2000 under our repurchase program and borrowings

dividing by the change in revenues over the same period.

associated with the acquisition of PGS Data Management

Operating income was higher in 2001 as compared to 2000

in March 2001. Cash proceeds of $1.27 billion received in

in all product service lines and geographic regions. The

April 2001 from the sale of the remaining businesses within

largest increase was in pressure pumping in North America,

the Dresser Equipment Group were used to repay our

which rose by over 130%. Substantial increases in operating

short-term borrowings; however, our average borrowings for

income were also made in the logging, drill bits and drilling

2001 were slightly higher than in 2000. The impact of

services product service lines. Operating income in North

higher average borrowings was mostly offset by lower interest

America was higher by 72% in 2001 as compared to 2000.

rates on short-term borrowings.

International regions, particularly Latin America and

I n t e r e s t i n c o m e was $27 million in 2001, an increase of

Europe/Africa, made significant improvements in operating

$2 million from 2000.

income. Excluding the sale of marine vessels in 2000,

Fo r e i g n c u r r e n c y l o s s e s , n e t were $10 million in 2001

operating income for the remainder of the segment decreased

as compared to $5 million in 2000. Argentina’s financial

$27 million, primarily due to lower operating margins in

crisis accounted for $4 million of the $5 million increase.

our Surface/Subsea product service line.

O t h e r, n e t was a loss of $1 million in 2000 and less than

E n g i n e e r i n g a n d C o n s t r u c t i o n G r o u p operating income

a $1 million gain in 2001.

increased $165 million from 2000 to 2001. Operating

P r o v i s i o n f o r i n c o m e t a x e s was $384 million for

margins improved to 2.1% in 2001. This increase was

an effective tax rate of 40.3% in 2001 compared to 38.5%

primarily due to the $167 million recorded in the fourth

in 2000.

quarter of 2000 as a result of higher than estimated costs on

M i n o r i t y i n t e r e s t i n n e t i n c o m e o f s u b s i d i a r i e s in

specific jobs and unfavorable claims negotiations on other

2001 was $19 million as compared to $18 million in 2000.

jobs. We also recorded a restructuring charge of $36 million

I n c o m e ( l o s s ) f r o m d i s c o n t i n u e d o p e r a t i o n s in 2001

in the fourth quarter of 2000 related to the reorganization of

was a $42 million loss, or $0.10 per diluted share, due to

the engineering and construction businesses under Kellogg,

accrued expenses associated with asbestos claims of

Brown & Root. Excluding these fourth quarter 2000

disposed businesses. See Note 3. The loss was partially offset

charges, operating income decreased $38 million, or 26%,

by net income for the first quarter of 2001 from Dresser

consistent with the decline in revenues and due to a revised

Equipment Group of $0.05 per diluted share. Income from

profit estimate on the Barracuda-Caratinga project.

discontinued operations of $98 million, or $0.22 per diluted

G e n e ra l c o r p o ra t e e x p e n s e s were $63 million for 2001

share, represents the net income of Dresser Equipment

as compared to $73 million in 2000. In 2000 general corporate

Group for the full year of 2000.

expenses included $9 million of costs related to the early

G a i n o n d i s p o s a l o f d i s c o n t i n u e d o p e ra t i o n s in

retirement of our previous chairman and chief executive

2001 was $299 million after-tax, or $0.70 per diluted share.

officer, which was recorded in the third quarter of 2000.

The 2001 gain resulted from the sale of our remaining

businesses within the Dresser Equipment Group in April

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

2001. The gain of $215 million after-tax, or $0.48 per diluted

to Halliburton Energy Services, for fracturing equipment and

share, in 2000 resulted from the sale of our 51% interest in

directional and logging-while-drilling equipment. In

Dresser-Rand, formerly a part of Dresser Equipment Group,

addition, we invested $60 million in an integrated solutions

in January 2000.

project. Included in sales of property, plant and equipment

C u m u l a t i v e e f f e c t o f a c c o u n t i n g c h a n g e , n e t of

is $130 million collected from the sale of integrated solutions

$1 million reflects the adoption of SFAS No. 133 “Accounting

properties and cash collected from other asset sales.

for Derivative Instruments and Hedging Activities” in the

Dispositions of businesses in 2002 include $134 million

first quarter of 2001.

collected from the sale of our European Marine Contractors

N e t i n c o m e for 2001 was $809 million, or $1.88 per

Ltd. joint venture. Proceeds from the sale of securities of

diluted share, as compared to net income of $501 million, or

$62 million was for the sale of ShawCor shares. Included in

$1.12 per diluted share in 2000.

the restricted cash balance for 2002 are the following:

L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S

We ended 2002 with cash and cash equivalents of $1.1 billion

compared with $290 million at the end of 2001 and $231

million at the end of 2000.

C a s h f l o w s f r o m o p e r a t i n g a c t i v i t i e s provided $1.6

billion for 2002 compared to providing $1.0 billion in 2001

and using $57 million in 2000. The net loss in 2002 was due

to an after-tax asbestos and silica charge of $1.1 billion

which has no effect on 2002 cash flows. Some factors which

accounted for cash flows from operations for 2002 were

as follows:

• we collected large milestone payments on several long-

term contracts;

• $107 million deposit that collateralizes a bond for

a patent infringement judgment and interest, which
judgment is on appeal;

• $57 million as collateral for potential future insurance

claim reimbursements; and

• $26 million primarily related to cash collateral

agreements for outstanding letters of credit for several
construction projects.

In March 2001, we acquired the PGS Data Management

division of Petroleum Geo-Services ASA for $164 million

cash. In addition we spent $56 million for various other

acquisitions in 2001.

C a s h f l o w s f r o m f i n a n c i n g a c t i v i t i e s used $248 million

in 2002, $1.4 billion in 2001 and $584 million in 2000.

• we collected several large receivables during 2002 in our

Proceeds from exercises of stock options provided cash flows

Energy Services Group;

• we sold an undivided ownership interest to unaffiliated
companies under the accounts receivable securitization
agreement for a net cash inflow of $180 million (see Note 6
to the financial statements); and

of less than $1 million in 2002, $27 million in 2001 and

$105 million in 2000. We paid dividends of $219 million to

our shareholders in 2002, $215 million in 2001 and $221

million in 2000.

Included in payments on long-term borrowings of $81

• we managed inventory at lower levels during 2002.

million in 2002 is a repayment of a $75 million medium-

C a s h f l o w s f r o m i n v e s t i n g a c t i v i t i e s used $473 million

term note. In the fourth quarter of 2002, our 51% owned

for 2002, $858 million for 2001 and $411 million for 2000.

and consolidated subsidiary, Devonport Management

Capital expenditures of $764 million in 2002 were about 4%

Limited, signed an agreement for a credit facility of £80

lower than in 2001 and about 32% higher than in 2000.

million ($126 million as of December 31, 2002) maturing

Capital spending in 2002 continued to be primarily directed

in September 2009. Devonport Management Limited drew

down $66 million from this facility in the fourth quarter.

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Proceeds from the sale of the remaining businesses in

with proceeds from the sales of Ingersoll-Dresser Pump and

Dresser Equipment Group in April 2001, the sale of Dresser-

Dresser-Rand joint ventures early in the year. We increased

Rand in early 2000 and the collection of a note from the

short-term debt in the third quarter of 2000 to fund share

fourth quarter 1999 sale of Ingersoll-Dresser Pump received

repurchases. At December 31, 2002, we had $190 million in

in early 2000 were used to reduce short-term debt. On July

restricted cash included in “Other assets.” See Note 5 to the

12, 2001, we issued $425 million in two and five year

financial statements. In addition on April 15, 2002, we

medium-term notes under our medium-term note program.

entered into an agreement to sell accounts receivable to

The notes consist of $275 million of 6% fixed rate notes due

provide additional liquidity. See Note 6 to the financial

August 1, 2006 and $150 million of floating rate notes due

statements. Currently, we expect capital expenditures in

July 16, 2003. Net proceeds from the two medium-term note

2003 to be about $700 million. We have not finalized our

offerings were also used to reduce short-term debt. Net

capital expenditures budget for 2004 or later periods.

repayments of short-term debt in 2001 used $1.5 billion.

P r o p o s e d g l o b a l s e t t l e m e n t . On December 18, 2002,

On April 25, 2000, our Board of Directors approved plans

we announced that we had reached an agreement in principle

to implement a share repurchase program for up to 44

that, if and when consummated, would result in a global

million shares. We repurchased 1.2 million shares at a cost

settlement of all asbestos and silica personal injury claims

of $25 million in 2001 and 20.4 million shares at a cost of

against DII Industries, Kellogg, Brown & Root and their

$759 million in 2000. We currently have no plan to

current and former subsidiaries. The agreement in principle

repurchase the remaining shares under the approved plan.

provides that:

In addition, we repurchased $4 million of common stock in

2002, $9 million in 2001 and $10 million in 2000 from

employees to settle their income tax liabilities primarily for

restricted stock lapses.

C a s h f l o w s f r o m d i s c o n t i n u e d o p e r a t i o n s provided

$1.3 billion in 2001 and $826 million in 2000. No cash flows

from discontinued operations were provided in 2002. Cash

flows for 2001 included proceeds from the sale of Dresser

Equipment Group of approximately $1.27 billion. Cash

flows for 2000 include proceeds from the sale of Dresser-

Rand and Ingersoll-Dresser Pump of $913 million.

C a p i t a l r e s o u r c e s from internally generated funds and

access to capital markets are sufficient to fund our working

capital requirements and investing activities. Our combined

short-term notes payable and long-term debt was 30% of

total capitalization at the end of 2002, 24% at the end of

2001, and 40% at the end of 2000. Short-term debt was

reduced significantly in the second quarter of 2001 with the

proceeds from the sale of Dresser Equipment Group and in

the third quarter from the issuance of $425 million of

• up to $2.775 billion in cash, 59.5 million Halliburton

shares (valued at $1.1 billion using the stock price at
December 31, 2002 of $18.71) and notes with a net
present value expected to be less than $100 million will
be paid to a trust for the benefit of current and future
asbestos personal injury claimants and current silica
personal injury claimants upon receiving final and non-
appealable court confirmation of a plan of reorganization;

• DII Industries and Kellogg, Brown & Root will retain
rights to the first $2.3 billion of any insurance proceeds
with any proceeds received between $2.3 billion and $3.0
billion going to the trust;

• the agreement is to be implemented through a pre-
packaged Chapter 11 filing for DII Industries and
Kellogg, Brown & Root, and some of their subsidiaries; and

• the funding of the settlement amounts would occur upon
receiving final and non-appealable court confirmation
of a plan of reorganization of DII Industries and Kellogg,
Brown & Root and their subsidiaries in the Chapter 11
proceeding.

Subsequently, as of March 2003, DII Industries and

medium-term notes. In 2000 we reduced our short-term debt

Kellogg, Brown & Root have entered into definitive written

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

agreements finalizing the terms of the agreement in

• obtaining final and non-appealable bankruptcy court

principle. The proposed global settlement also includes silica

claims as a result of current or past exposure. These silica

approval and federal district court confirmation of the
plan of reorganization.

claims are less than 1% of the personal injury claims included

Many of these prerequisites are subject to matters and

in the proposed global settlement. We have approximately

uncertainties beyond our control. There can be no assurance

2,500 open silica claims.

that we will be able to satisfy the prerequisites for

Among the prerequisites for reaching a conclusion of the

completion of the settlement. If we were unable to complete

settlement are:
• agreement on the amounts to be contributed to the trust

the proposed settlement, we would be required to resolve

current and future asbestos claims in the tort system or, in

for the benefit of silica claimants;

the case of Harbison-Walker claims (see Note 12 to the

• our review of the more than 347,000 current claims to

financial statements), possibly through the Harbison-Walker

establish that the claimed injuries are based on exposure
to products of DII Industries, Kellogg, Brown & Root,
their subsidiaries or former businesses or subsidiaries;

• completion of our medical review of the injuries alleged

to have been sustained by plaintiffs to establish a medical
basis for payment of settlement amounts;

• finalizing the principal amount of the notes to be

contributed to the trust;

• agreement with a proposed representative of future

claimants and attorneys representing current claimants
on procedures for distribution of settlement funds to
individuals claiming personal injury;

• definitive agreement with the attorneys representing

current asbestos claimants and a proposed representative
of future claimants on a plan of reorganization for the
Chapter 11 filings of DII Industries, Kellogg, Brown &
Root and some of their subsidiaries; and agreement with
the attorneys representing current asbestos claimants
with respect to, and completion and mailing of, a
disclosure statement explaining the pre-packaged plan of
reorganization to the more than 347,000 current claimants;

• arrangement of financing on terms acceptable to us to
fund the cash amounts to be paid in the settlement;

• Halliburton board approval;

• obtaining affirmative votes to the plan of reorganization
from at least the required 75% of known present asbestos
claimants and from a requisite number of silica claimants
needed to complete the plan of reorganization; and

bankruptcy proceedings.

The template settlement agreement with attorneys

representing current claimants grants the attorneys a right

to terminate the definitive settlement agreement on ten

days’ notice if DII Industries does not file a plan of

reorganization on or before April 1, 2003. We are conducting

due diligence on the asbestos claims, which is not expected

to be completed by April 1, 2003. Therefore, we do not

expect DII Industries to file a plan of reorganization prior to

April 1. Although there can be no assurances, we do not

believe the claimants’ attorneys will terminate the

settlement agreements on April 1, 2003 as long as adequate

progress is being made toward a Chapter 11 filing.

We have begun our due diligence review of current

asbestos claims. While these results are preliminary and

not necessarily indicative of the eventual results of a

completed review of all current asbestos claims, it appears

that a substantial portion of the records for claims reviewed

to date do not provide detailed product identification. We

expect that many of these records could be supplemented

by attorneys representing the claimants to provide

additional information on product identification. However,

no assurance can be given that the additional product

identification documentation will be timely provided or

sufficient for us or the plaintiffs to proceed with the proposed

global settlement. In addition, although the medical

information in the files we preliminarily reviewed appears

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significantly more complete, if a material number of claims

May, August and November, beginning after certain

ultimately do not meet the medical criteria for alleged

conditions are met, until the earlier of the date that the

injuries, no assurance can be given that a sufficient number

$450 million is paid or the date the proposed settlement is

of plaintiffs would vote to ratify the plan of reorganization

abandoned.

that would implement the global settlement. In such case,

P r o p o s e d b a n k r u p t c y o f D I I I n d u s t r i e s , Ke l l o g g ,

we would not proceed with a Chapter 11 filing.

B r o w n & R o o t a n d s u b s i d i a r i e s . Under the terms of the

In March 2003, we agreed with Harbison-Walker and

proposed global settlement, the settlement would be

the asbestos creditors committee in the Harbison-Walker

implemented through a pre-packaged Chapter 11 filing for

bankruptcy to consensually extend the period of the stay

DII Industries, Kellogg, Brown & Root and some of their

contained in the Bankruptcy Court’s temporary restraining

subsidiaries. Other than those debtors, none of the

order until July 21, 2003. The court’s temporary restraining

subsidiaries of Halliburton (including Halliburton Energy

order, which was originally entered on February 14, 2002,

Services) or Halliburton itself will be a debtor in the

stays more than 200,000 pending asbestos claims against

Chapter 11 proceedings. We anticipate that Halliburton,

DII Industries. The agreement provides that if the pre-

Halliburton Energy Services and each of the debtors’ non-

packaged Chapter 11 filing by DII Industries, Kellogg, Brown

debtor affiliates will continue normal operations and

& Root and their subsidiaries is not made by July 14, 2003,

continue to fulfill all of their respective obligations in the

the Bankruptcy Court will hear motions to lift the stay on

ordinary course as they become due.

July 21, 2003. The asbestos creditors committee also

As part of any proposed plan of reorganization, the

reserves the right to monitor progress toward the filing of

debtors intend to seek approval of the bankruptcy court

the Chapter 11 proceeding and seek an earlier hearing

for debtor-in-possession financing to provide for operating

to lift the stay if satisfactory progress toward the Chapter 11

needs and to provide additional liquidity during the

filing is not being made.

pendency of the Chapter 11 proceeding. We currently are

Of the up to $2.775 billion cash amount included as part

negotiating with several banks and non-bank lenders

of the proposed global settlement, approximately $450

over the terms of such facility. See “ – Financing the

million primarily relates to claims previously settled but

proposed settlement”. Obtaining a commitment for debtor-

unpaid by Harbison-Walker (see Note 12 to the financial

in-possession financing is a condition precedent to the filing

statements), but not previously agreed to by us. As part of

of any Chapter 11 proceeding.

the proposed settlement, we have agreed that, if a Chapter

Any plan of reorganization will provide that all of the

11 filing by DII Industries, Kellogg, Brown & Root and

debtors’ obligations under letters of credit, surety bonds,

their subsidiaries were to occur, we would pay this amount

corporate guaranties and indemnity agreements (except for

within four years if not paid sooner pursuant to a final

agreements relating to asbestos claims or silica claims) will

bankruptcy court approved plan of reorganization for DII

be unimpaired. In addition, the Bankruptcy Code allows a

Industries, Kellogg, Brown & Root and their subsidiaries.

debtor to assume most executory contracts without regard to

Effective November 30, 2002, we are making cash

bankruptcy default provisions, and it is the intention of

payments in lieu of interest at a rate of 5% per annum to

DII Industries, Kellogg, Brown & Root and the other filing

the holders of these claims. These cash payments in lieu

entities to assume and continue to perform all such

of interest are being made in arrears at the end of February,

executory contracts. Representatives of DII Industries,

Kellogg, Brown & Root and their subsidiaries have advised

their customers of this intention.

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After filing any Chapter 11 proceeding, the debtors would

that has jurisdiction over the case. After the expiration of the

seek an order of the bankruptcy court scheduling a hearing

time for appeal of the order, the injunction becomes valid

to consider confirmation of the plan of reorganization. In

and enforceable.

order to be confirmed, the Bankruptcy Code requires that an

The debtors believe that, if they proceed with a Chapter

impaired class of creditors vote to accept the plan of

11 filing, they will be able to satisfy all the requirements

reorganization submitted by the debtors. In order to carry a

of Section 524(g), so long as the requisite number of holders

class, approval of over one-half in number and at least

of asbestos claims vote in favor of the plan of reorganization.

two-thirds in amount are required. In addition, to obtain an

If the 524(g) and 105 injunctions are issued, all unsettled

injunction under Section 524(g) of the Bankruptcy Code, at

current asbestos claims, all future asbestos claims and all

least 75% of current asbestos claimants must vote to accept

silica claims based on exposure that has already occurred

the plan of reorganization. In addition to obtaining the

will be channeled to a trust for payment, and the debtors

required votes, the requirements for a bankruptcy court to

and related parties (including Halliburton, Halliburton

approve a plan of reorganization include, among other

Energy Services and other subsidiaries and affiliates of

judicial findings, that:

• the plan of reorganization complies with applicable

provisions of the Bankruptcy Code;

• the debtors have complied with the applicable provisions

of the Bankruptcy Code;

• the trust will value and pay similar present and future

claims in substantially the same manner;

• the plan of reorganization has been proposed in good faith

and not by any means forbidden by law; and

• any payment made or promised by the debtors to any

person for services, costs or expenses in or in
connection with the Chapter 11 proceeding or the plan
of reorganization has been or is reasonable.

Section 524(g) of the Bankruptcy Code authorizes the

bankruptcy court to enjoin entities from taking action to

collect, recover or receive payment or recovery with respect

to any asbestos claim or demand that is to be paid in whole

or in part by a trust created by a plan of reorganization that

satisfies the requirements of the Bankruptcy Code. Section

105 of the Bankruptcy Code authorizes a similar injunction

for silica claims. The injunction also may bar any action

based on such claims or demands against the debtors that

are directed at third parties. The order confirming the plan

must be issued or affirmed by the federal district court

Halliburton and the debtors) will be released from any

further liability under the plan of reorganization.

A prolonged Chapter 11 proceeding could adversely affect

the debtor’s relationships with customers, suppliers and

employees, which in turn could adversely affect the debtors’

competitive position, financial condition and results of

operations. A weakening of the debtors’ financial condition

and results of operations could adversely affect the debtors’

ability to implement the plan of reorganization.

F i n a n c i n g t h e p r o p o s e d s e t t l e m e n t . The plan of

reorganization through which the proposed settlement will

be implemented will require us to contribute up to $2.775

billion in cash to the Section 524(g)/105 trust established for

the benefit of claimants, which we will need to finance on

terms acceptable to us. We are pursuing a number of

financing alternatives for the cash amount to be contributed

to the trust. The availability of these alternatives depend in

large part on market conditions. We are currently negotiating

with several banks and non-bank lenders over the terms of

multiple credit facilities. A proposed banking syndicate is

currently performing due diligence in an effort to make a

funding commitment before the bankruptcy filing. We will

not proceed with the Chapter 11 filing for DII Industries,

Kellogg, Brown & Root and some of their subsidiaries until

financing commitments are in place.

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

The anticipated credit facilities include:

under consideration for possible downgrade pending the

• debtor-in-possession financing to provide for the

operating needs of the filing entities;

• a revolving line of credit for general working capital

purposes;

• a master letter of credit facility intended to ensure that

existing letters of credit supporting our contracts remain
in place during the filing; and

• a delayed-draw term facility to be available for funding of
up to $2.775 billion to the trust for the benefit of claimants.

The delayed-draw term facility is intended to eliminate

uncertainty the capital markets might have concerning our

ability to meet our funding requirement once final and non-

appealable court confirmation of a plan of reorganization

has been obtained.

None of these credit facilities are currently in place, and

there can be no assurances that we will complete these

facilities. We are not obligated to enter into these facilities if

the terms are not acceptable to us. Moreover, these facilities

would only be available for limited periods of time. As a

result, if we were delayed in filing the Chapter 11 proceeding

or delayed in completing the plan of reorganization after a

Chapter 11 filing, the credit facilities may expire and no

longer be available. In such circumstances, we would have

to terminate the proposed settlement if replacement financing

were not available on acceptable terms.

We have sufficient authorized and unrestricted shares

to issue 59.5 million shares to the trust. No shareholder

approval is required for issuance of the shares.

C r e d i t ra t i n g s . Late in 2001 and early in 2002, Moody’s

Investors’ Services lowered its ratings of our long-term senior

unsecured debt to Baa2 and our short-term credit and

commercial paper ratings to P-2. In addition, Standard &

Poor’s lowered its ratings of our long-term senior unsecured

debt to A- and our short-term credit and commercial paper

ratings to A-2 in late 2001. In December 2002, Standard &

Poor’s lowered these ratings to BBB and A-3. These ratings

were lowered primarily due to our asbestos exposure, and

both agencies have indicated that the ratings continue

results of the proposed global settlement. Although our

long-term ratings continue at investment grade levels, the

cost of new borrowing is higher and our access to the debt

markets is more volatile at the new rating levels.

Investment grade ratings are BBB- or higher for Standard

& Poor’s and Baa3 or higher for Moody’s Investors’

Services. Our current ratings are one level above BBB- on

Standard & Poor’s and one level above Baa3 on Moody’s

Investors’ Services.

We have $350 million of committed lines of credit from

banks that are available if we maintain an investment

grade rating. This facility expires on August 16, 2006. As of

December 31, 2002, no amounts have been borrowed under

these lines.

If our debt ratings fall below investment grade, we would

also be in technical breach of a bank agreement covering

$160 million of letters of credit at December 31, 2002, which

might entitle the bank to set-off rights. In addition, a $151

million letter of credit line, of which $121 million has been

issued, includes provisions that allow the banks to require

cash collateralization for the full line if debt ratings of either

rating agency fall below the rating of BBB by Standard &

Poor’s or Baa2 by Moody’s Investors’ Services, one

downgrade from our current ratings. These letters of credit

and bank guarantees generally relate to our guaranteed

performance or retention payments under our long-term

contracts and self-insurance.

In the event the ratings of our debt by either agency fall,

we may have to issue additional debt or equity securities

or obtain additional credit facilities in order to satisfy the

cash collateralization requirements under the instruments

referred to above and meet our other liquidity needs. We

anticipate that any such new financing would not be on terms

as attractive as those we have currently and that we

would also be subject to increased borrowing costs and

interest rates. Our Halliburton Elective Deferral Plan has a

provision which states that if the Standard & Poor’s rating

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falls below BBB the amounts credited to the participants’

into term loans. However, this letter of credit facility is not

accounts will be paid to the participants in a lump-sum

currently in place, and, if we were required to cash

within 45 days. At December 31, 2002 this was approximately

collateralize letters of credit prior to obtaining the facility,

$49 million.

we would be required to use cash on hand or existing credit

L e t t e r s o f c r e d i t . In the normal course of business, we

facilities. We will not enter into the pre-packaged Chapter 11

have agreements with banks under which approximately

filing without having this credit facility in place. In

$1.4 billion of letters of credit or bank guarantees were

addition, representatives of DII Industries, Kellogg, Brown &

issued, including at least $204 million which relate to our

Root and their subsidiaries have been in discussions with

joint ventures’ operations. The agreements with these

their customers in order to reduce the possibility that any

banks contain terms and conditions that define when the

material draw on the existing letters of credit will occur

banks can require cash collateralization of the entire line.

due to the anticipated Chapter 11 proceedings.

Agreements with banks covering at least $150 million of

Effective October 9, 2002, we amended an agreement

letters of credit allow the bank to require cash collaterali-

with banks under which $261 million of letters of credit

zation for the full line for any reason, and agreements

have been issued on the Barracuda-Caratinga project. The

covering another at least $890 million of letters of credit

amended agreement removes the provision that previously

allow the bank to require cash collateralization for the

allowed the banks to require collateralization if ratings of

entire line in the event of a bankruptcy or insolvency event

Halliburton debt fell below investment grade ratings. The

involving one of our subsidiaries.

revised agreement includes provisions that require us to

Our letters of credit also contain terms and conditions

maintain ratios of debt to total capital and of total earnings

that define when they may be drawn. At least $230 million

before interest, taxes, depreciation and amortization to

of letters of credit permit the beneficiary of such letters of

interest expense. The definition of debt includes our asbestos

credit to draw against the line for any reason and another at

liability. The definition of total earnings before interest,

least $560 million of letters of credit permit the beneficiary

taxes, depreciation and amortization excludes any non-cash

of such letters of credit to draw against the line in the event

charges related to the proposed global settlement through

of a bankruptcy or insolvency event involving one of our

December 31, 2003.

subsidiaries who will be party to the proposed reorganization.

In the past, no significant claims have been made against

Our anticipated credit facilities described above would

letters of credit issued on our behalf.

include a master letter of credit facility intended to replace

B a r r a c u d a - C a r a t i n g a P r o j e c t . In June 2000, KBR

any cash collateralization rights of issuers of substantially

entered into a contract with the project owner, Barracuda

all our existing letters of credit during the pendency of the

& Caratinga Leasing Company B.V., to develop the

anticipated Chapter 11 proceedings by DII Industries and

Barracuda and Caratinga crude oil fields, which are located

Kellogg, Brown & Root. The master letter of credit facility is

off the coast of Brazil. The project manager and owner

also intended to provide reasonably sufficient credit lines

representative is Petrobras, the Brazilian national oil

for us to be able to fund any such cash requirements. If any

company. See Note 12 to the financial statements.

of such existing letters of credit are drawn during the

KBR’s performance under the contract is secured by:

bankruptcy and we are required to provide cash to

collateralize or reimburse for such draws, it is anticipated

that the letter of credit facility would provide the cash

needed for such draws, with any borrowings being converted

• two performance letters of credit, which together have
an available credit of approximately $261 million

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and which represent approximately 10% of the contract
amount, as amended to date by change orders;

but excluding consequential damages) against KBR for up to

$500 million plus the return of up to $300 million in advance

• a retainage letter of credit in an amount equal to $121

payments that would otherwise have been credited back

million as of December 31, 2002 and which will increase
in order to continue to represent 10% of the cumulative
cash amounts paid to KBR; and

• a guarantee of KBR’s performance of the contract by
Halliburton Company in favor of the project owner.

to the project owner had the contract not been terminated.

In addition, although the project financing includes

borrowing capacity in excess of the original contract amount,

only $250 million of this additional borrowing capacity is

reserved for increases in the contract amount payable to

As of December 31, 2002, the project was approximately

KBR and its subcontractors other than Petrobras. Because

63% complete and KBR had recorded a loss of $117 million

our claims, together with change orders that are currently

related to the project. The probable recovery from unapproved

under negotiation, exceed this amount, we cannot give

claims included in determining the loss on the project was

assurance that there is adequate funding to cover current or

$182 million as of December 31, 2002.

future KBR claims. Unless the project owner provides

The project owner has procured project finance funding

additional funding or permits us to defer repayment of the

obligations from various banks to finance the payments due

$300 million advance, and assuming the project owner

to KBR under the contract. The project owner currently has

does not allege default on our part, we may be obligated to

no other committed source of funding on which we can

fund operating cash flow shortages over the remaining

necessarily rely other than the project finance funding for

project life in an amount we currently estimate to be up to

the project. While we believe the banks have an incentive to

approximately $400 million.

complete the financing of the project, there is no assurance

The possible Chapter 11 pre-packaged bankruptcy filing

that they would do so. If the banks ceased funding the

by Kellogg, Brown & Root in connection with the

project, we believe that Petrobras would provide for or secure

settlement of its asbestos and silica claims would constitute

other funding to complete the project, although there is no

an event of default under the loan documents with the

assurance that it will do so. To date, the banks have made

banks unless waivers are obtained. KBR believes that it is

funds available, and the project owner has continued to

unlikely that the banks will exercise any right to cease

disburse funds to KBR as payment for its work on the

funding given the current status of the project and the fact

project, even though the project completion has been delayed.

that a failure to pay KBR may allow KBR to cease work

In the event that KBR is alleged to be in default under

on the project without Petrobras having a readily available

the contract, the project owner may assert a right to draw

substitute contractor.

upon the letters of credit. If the letters of credit were drawn,

C u r r e n t m a t u r i t i e s . We have approximately $295 million

KBR would be required to fund the amount of the draw to

of current maturities of long-term debt as of December 31,

the issuing bank. In the event that KBR was determined

2002. This includes a repayment of a $139 million senior

after an arbitration proceeding to have been in default

note due April 2003 and a $150 million medium-term note

under the contract, and if the project was not completed by

due July 2003.

KBR as a result of such default (i.e., KBR’s services are

C a s h a n d c a s h e q u i v a l e n t s . We ended 2002 with cash

terminated as a result of such default), the project owner

and equivalents of $1.1 billion.

may seek direct damages (including completion costs in

excess of the contract price and interest on borrowed funds,

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• amounts of any probable unapproved claims and change

The preparation of financial statements requires the use of

orders included in revenues.

judgments and estimates. Our critical accounting policies

At the onset of each contract, we prepare a detailed

are described below to provide a better understanding of

analysis of our estimated cost to complete the project. Risks

how we develop our judgments about future events and

relating to service delivery, usage, productivity and other

related estimations and how they can impact our financial

factors are considered in the estimation process. Our project

statements. A critical accounting policy is one that requires

personnel periodically evaluate the estimated costs, claims

our most difficult, subjective or complex estimates and

and change orders, and percentage of completion at the

assessments and is fundamental to our results of operations.

project level. The recording of profits and losses on long-term

We identified our most critical accounting policies to be:

contracts requires an estimate of the total profit or loss

• percentage of completion accounting for our long-term

over the life of each contract. This estimate requires

engineering and construction contracts;

consideration of contract revenue, change orders and claims,

• allowance for bad debts;

• forecasting our effective tax rate, including our ability to
utilize foreign tax credits and the realizability of deferred
tax assets; and

• loss contingencies, primarily related to:

– asbestos litigation; and

– other litigation.

We base our estimates on historical experience and on

various other assumptions we believe to be reasonable

under the circumstances, the results of which form the basis

for making judgments about the carrying values of assets

and liabilities that are not readily apparent from other

sources. This discussion and analysis should be read in

conjunction with our consolidated financial statements and

related notes included in this report.

P e r c e n t a g e o f c o m p l e t i o n

We account for our revenues on long-term engineering and

construction contracts on the percentage-of-completion

method. This method of accounting requires us to calculate job

profit to be recognized in each reporting period for each job

based upon our predictions of future outcomes which include:

• estimates of the total cost to complete the project;

• estimates of project schedule and completion date;

less costs incurred and estimated costs to complete.

Anticipated losses on contracts are recorded in full in the

period in which they become evident. Profits are recorded

based upon the total estimated contract profit times the

current percentage complete for the contract.

When calculating the amount of total profit or loss on a

long-term contract, we include unapproved claims as

revenue when the collection is deemed probable based upon

the four criteria for recognizing unapproved claims under

the American Institute of Certified Public Accountants’

Statement of Position 81-1 “Accounting for Performance of

Construction-Type and Certain Production-Type Contracts.”

Including probable unapproved claims in this calculation

increases the operating income or decreases the operating

loss that would otherwise be recorded without consideration

of the probable unapproved claims. Probable unapproved

claims are recorded to the extent of costs incurred and include

no profit element. In substantially all cases, the probable

unapproved claims included in determining contract profit or

loss are less than the actual claim that will be or has been

presented to the customer. We actively engage in claims

negotiations with our customers and the success of claims

negotiations have a direct impact on the profit or loss

recorded for any related long-term contract. Unsuccessful

claims negotiations could result in decreases in estimated

• estimates of the percentage the project is complete; and

contract profits or additional contract losses and

successful claims negotiations could result in increases in

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estimated contract profits or recovery of previously recorded

the current year; and an asset and liability approach in

contract losses.

recognizing the amount of deferred tax liabilities and assets

Significant projects are reviewed in detail by senior

for the future tax consequences of events that have been

engineering and construction management at least quarterly.

recognized in our financial statements or tax returns. We

Preparing project cost estimates and percentages of

apply the following basic principles in accounting for our

completion is a core competency within our engineering and

income taxes at the date of the financial statements:

construction businesses. We have a long history of dealing

with multiple types of projects and in preparing cost

estimates. However, there are many factors that impact

• a current tax liability or asset is recognized for the

estimated taxes payable or refundable on tax returns for
the current year;

future costs, including but not limited to weather,

inflation, labor disruptions and timely availability of

materials, and other factors as outlined in our “Forward-

Looking Information” section. These factors can affect

the accuracy of our estimates and materially impact our

future reported earnings.

A l l o wa n c e f o r b a d d e b t s

We evaluate our accounts receivable through a continuous

process of assessing our portfolio on an individual customer

and overall basis. This process comprises a thorough review

of historical collection experience, current aging status of

the customer accounts, financial condition of our customers,

and other factors such as whether the receivables involve

retentions or billing disputes. We also consider the economic

environment of our customers, both from a marketplace and

geographic perspective, in evaluating the need for an

allowance. Based on our review of these factors, we establish

or adjust allowances for specific customers and the accounts

receivable portfolio as a whole. This process involves a high

degree of judgment and estimation and frequently involves

significant dollar amounts. Accordingly, our results of

operations can be affected by adjustments to the allowance

due to actual write-offs that differ from estimated amounts.

Ta x a c c o u n t i n g

We account for our income taxes in accordance with

Statement of Financial Accounting Standards No. 109

“Accounting for Income Taxes”, which requires the

• a deferred tax liability or asset is recognized for the

estimated future tax effects attributable to temporary
differences and carryforwards;

• the measurement of current and deferred tax liabilities
and assets is based on provisions of the enacted tax law
and the effects of potential future changes in tax laws or
rates are not considered; and

• the value of deferred tax assets is reduced, if necessary,

by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.

We determine deferred taxes separately for each tax-paying

component (an entity or a group of entities that is

consolidated for tax purposes) in each tax jurisdiction. That

determination includes the following procedures:

• identify the types and amounts of existing temporary

differences;

• measure the total deferred tax liability for taxable

temporary differences using the applicable tax rate;

• measure the total deferred tax asset for deductible

temporary differences and operating loss carryforwards
using the applicable tax rate;

• measure the deferred tax assets for each type of tax

credit carryforward; and

• reduce the deferred tax assets by a valuation allowance
if, based on available evidence, it is more likely than
not that some portion or all of the deferred tax assets
will not be realized prior to expiration, or that future
deductibility is uncertain.

recognition of the amount of taxes payable or refundable for

This methodology requires a significant amount of

judgment regarding assumptions and the use of estimates,

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which can create significant variances between actual

• epidemiological studies to estimate the number of people

results and estimates. Examples include the forecasting of

who might allege exposure to products.

our effective tax rate and the potential realization of

deferred tax assets in the future, such as utilization of

foreign tax credits. This process involves making forecasts of

current and future years’ United States taxable income,

foreign taxable income and related taxes in order to

estimate the foreign tax credits. Unforeseen events, such as

the timing of asbestos or silica settlements, and other tax

timing issues may significantly affect these estimates. These

factors can affect the accuracy of our tax account balances

and impact our future reported earnings.

L o s s c o n t i n g e n c i e s

A s b e s t o s . Prior to June 2002, we provided for known out-

standing asbestos and silica claims because we did not have

sufficient information to make a reasonable estimate of

future unknown asbestos claims liability. DII Industries

retained Dr. Francine F. Rabinovitz of Hamilton,

Rabinovitz & Alschuler, Inc. to estimate the probable number

and value, including defense costs, of unresolved current

and future asbestos and silica related bodily injury claims

asserted against DII Industries and its subsidiaries.

Dr. Rabinovitz’s estimates are based on historical data

supplied by DII Industries, KBR and Harbison-Walker and

publicly available studies, including annual surveys by the

National Institutes of Health concerning the incidence of

mesothelioma deaths. In her analysis, Dr. Rabinovitz

projected that the elevated and historically unprecedented

rate of claim filings of the last two years (particularly in

2000 and 2001), especially as expressed by the ratio of

nonmalignant claim filings to malignant claim filings, would

continue into the future for five more years. After that,

Dr. Rabinovitz projected that the ratio of nonmalignant

claim filings to malignant claim filings will gradually

decrease for a 10 year period ultimately returning to the

historical claiming rate and claiming ratio. In making her

calculation, Dr. Rabinovitz alternatively assumed a

somewhat lower rate of claim filings, based on an average of

the last five years of claims experience, would continue into

the future for five more years and decrease thereafter.

Other important assumptions utilized in Dr. Rabinovitz’s

estimates, which we relied upon in making our accrual are:

Dr. Rabinovitz is a nationally renowned expert in conducting

• an assumption that there will be no legislative or other

such analyses.

systemic changes to the tort system;

The methodology utilized by Dr. Rabinovitz to project

• that we will continue to aggressively defend against

DII Industries and its subsidiaries’ asbestos and silica

asbestos and silica claims made against us;

related liabilities and defense costs relied upon and included:

• an inflation rate of 3% annually for settlement payments

• an analysis of historical asbestos and silica settlements

and defense costs;

• an analysis of the pending inventory of asbestos and

and an inflation rate of 4% annually for defense costs; and

• we would receive no relief from our asbestos obligation

due to actions taken in the Harbison-Walker bankruptcy.

silica related claims;

Through 2052, Dr. Rabinovitz estimated the current and

• an analysis of the claims filing history for asbestos and

future total undiscounted liability for personal injury

silica related claims since January 2000 (two-year claim
history) and alternatively since January 1997 (five-year
claim history);

• an analysis of the population likely to have been exposed
or claim exposure to specific products or construction and
renovation projects; and

asbestos and silica claims, including defense costs, would be

a range between $2.2 billion and $3.5 billion as of June 30,

2002 (which includes payments related to the approximately

347,000 claims currently pending). The lower end of the

range is calculated by using an average of the last five years

of asbestos and silica claims experience and the upper end

of the range is calculated using the more recent two-year

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elevated rate of asbestos and silica claim filings in projecting

the case of Harbison-Walker claims (See Note 12 to the

the rate of future claims.

financial statements), possibly through the Harbison-

P r o p o s e d G l o b a l S e t t l e m e n t . On December 18, 2002,

Walker bankruptcy proceedings. Given the uncertainties

we announced that we had reached an agreement

surrounding the completion of the global settlement and

in principle that, if and when consummated, would result

the uncertainty as to the amounts that could be paid under

in a global settlement of all asbestos and silica personal

the proposed global settlement, we believe Dr. Rabinovitz’s

injury claims against DII Industries, Kellogg, Brown & Root

study continues to provide the best possible range of

and their current and former subsidiaries. The agreement in

estimated loss associated with known and future asbestos

principle provides that:

• up to $2.775 billion in cash, 59.5 million Halliburton

• DII Industries and Kellogg, Brown & Root will retain

rights to the first $2.3 billion of any insurance proceeds
with any proceeds received between $2.3 billion and $3.0
billion going to the trust;

• the agreement is to be implemented through a pre-

packaged Chapter 11 filing for DII Industries, Kellogg,
Brown & Root, and some of their subsidiaries; and

• the funding of the settlement amounts would occur upon
receiving final and non-appealable court confirmation of a
plan of reorganization of DII Industries, Kellogg, Brown &
Root and their subsidiaries on the Chapter 11 proceeding.

and silica claims liabilities. As a result of negotiating the

proposed global settlement, we have determined that the

best estimate of the probable loss is $3.4 billion ($3.5 billion

estimate as of June 30, 2002 in Dr. Rabinovitz’s study

less $50 million in payments in the third and fourth

quarter of 2002) and we have adjusted our liability to this

amount at December 31, 2002.

I n s u ra n c e R e c o v e r i e s . In 2002, we retained Peterson

Consulting, a nationally-recognized consultant in liability

and insurance, to work with us to project the amount of

probable insurance recoveries using the current and future

asbestos and silica liabilities recorded by us at December 31,

2002. Using Dr. Rabinovitz’s estimate of liabilities through

2052 using the two-year elevated rate of asbestos and silica

claim filings, Peterson Consulting assisted us in conducting

an analysis to determine the amount of insurance that we

estimate is probable that we will recover in relation to

the projected claims and defense costs. In conducting this

analysis, Peterson Consulting:

Subsequently, as of March 2003, DII Industries and

• reviewed DII Industries’ historical course of dealings

Kellogg, Brown & Root have entered into definitive written

agreements finalizing the terms of the agreement in principle.

Please see “Liquidity and Capital Resources” for a

discussion of the prerequisites to reaching a conclusion of

the settlement.

Asbestos and Silica Liability Estimate as of December 31,

2 0 0 2 . We currently do not believe that completion of the

proposed global settlement is probable as defined by State-

ment of Financial Accounting Standards No. 5. If the

proposed global settlement is not completed, we will continue

to resolve asbestos and silica claims in the tort system or, in

with its insurance companies concerning the payment of
asbestos and silica related claims, including DII
Industries’ 15 year litigation and settlement history;

• reviewed the terms of DII Industries’ prior and current

coverage-in-place settlement agreements;

• reviewed the status of DII Industries’ and Kellogg, Brown

& Root’s current insurance-related lawsuits and the
various legal positions of the parties in those lawsuits in
relation to the developed and developing case law and
the historic positions taken by insurers in the earlier filed
and settled lawsuits;

• engaged in discussions with our counsel; and

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• analyzed publicly-available information concerning

• the continuing solvency of various insurance companies.

the ability of the DII Industries’ insurers to meet their
obligations.

Based on these reviews, analyses and discussions, Peterson

Consulting assisted us in making judgments concerning

insurance coverage that we believe are reasonable and

consistent with our historical course of dealings with our

insurers and the relevant case law to determine the

probable insurance recoveries for asbestos and silica

liabilities. This analysis factored in the probable effects of

self-insurance features, such as self-insured retentions,

policy exclusions, liability caps and the financial status of

applicable insurers, and various judicial determinations

relevant to DII Industries’ insurance programs.

Based on Peterson Consulting analysis of the probable

insurance recoveries, we increased our insurance receivable

to $2.1 billion at December 31, 2002. The insurance

receivable recorded by us does not assume any recovery

from insolvent carriers and assumes that those carriers which

are currently solvent will continue to be solvent through-

out the period of the applicable recoveries in the

projections. However, there can be no assurance that these

assumptions will be accurate. The insurance receivables

recorded at December 31, 2002 do not exhaust applicable

insurance coverage for asbestos and silica related liabilities.

Projecting future events is subject to many uncertainties

that could cause the asbestos and silica related liabilities

and insurance recoveries to be higher or lower than those

projected and accrued, such as:

P o s s i b l e A d d i t i o n a l A c c r u a l s . Should the proposed

global settlement become probable as defined by Statement

of Financial Accounting Standards No. 5, we would

adjust our accrual for probable and reasonably estimable

liabilities for current and future asbestos and silica

claims. The settlement amount would be up to $4.0 billion,

consisting of up to $2.775 billion in cash, 59.5 million

Halliburton shares and notes with a net present value

expected to be less than $100 million. Assuming the revised

liability would be $4.0 billion, we would also increase our

probable insurance recoveries to $2.3 billion. The impact

on our income statement would be an additional pretax

charge of $322 million ($288 million after-tax). This accrual

(which values our stock to be contributed at $1.1 billion

using our stock price at December 31, 2002 of $18.71) would

then be adjusted periodically based on changes in the

market price of our common stock until the common stock is

contributed to a trust for the benefit of the claimants.

C o n t i n u i n g R e v i e w. Given the inherent uncertainty in

making future projections, we plan to have the projections

periodically reexamined, and update them based on our

experience and other relevant factors such as changes in the

tort system, the resolution of the bankruptcies of various

asbestos defendants, and our proposed global settlement.

Similarly, we will re-evaluate our projections concerning our

probable insurance recoveries in light of any updates to Dr.

Rabinovitz’s projections, developments in DII Industries’ and

Kellogg, Brown & Root’s various lawsuits against their

• the number of future asbestos and silica related

insurance companies, factors related to the global

lawsuits to be filed against DII Industries and Kellogg,
Brown & Root;

settlement, if consummated, and other developments that

may impact the probable insurance recoveries.

• the average cost to resolve such future lawsuits;

L i t i g a t i o n . We are currently involved in other legal

• coverage issues among layers of insurers issuing different
policies to different policyholders over extended periods
of time;

proceedings not involving asbestos and silica. As discussed

in Note 12 of our consolidated financial statements, as of

December 31, 2002, we have accrued an estimate of the

• the impact on the amount of insurance recoverable in

probable costs for the resolution of these claims. Attorneys

light of the Harbison-Walker and Federal-Mogul
bankruptcies; and

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in our legal department specializing in litigation claims,

undivided ownership interests. No additional amounts were

monitor and manage all claims filed against us. The estimate

received from our accounts receivable facility since the

of probable costs related to these claims is developed in

second quarter of 2002. The total amount outstanding under

consultation with outside legal counsel representing us in

this facility was $180 million as of December 31, 2002. We

the defense of these claims. Our estimates are based upon

continue to service, administer and collect the receivables on

an analysis of potential results, assuming a combination of

behalf of the purchaser. The amount of undivided ownership

litigation and settlement strategies. We attempt to resolve

interest in the pool of receivables sold to the unaffiliated

claims through mediation and arbitration where possible. If

companies is reflected as a reduction of accounts receivable

the actual settlement costs and final judgments, after

in our consolidated balance sheet and as an increase in cash

appeals, differ from our estimates, our future financial

flows from operating activities in our consolidated statement

results may be adversely affected.

of cash flows.

O F F B A L A N C E S H E E T R I S K

L O N G -T E R M C O N T R A C T U A L O B L I G AT I O N S A N D

On April 15, 2002, we entered into an agreement to sell

certain of our accounts receivable to a bankruptcy-remote

C O M M E R C I A L C O M M I T M E N T S

The following table summarizes our various long-term

limited-purpose funding subsidiary. Under the terms of the

contractual obligations:

agreement, new receivables are added on a continuous basis

Millions of dollars

2003

2004

2005

2006

2007 Thereafter

Total

Payments due

to the pool of receivables, and collections reduce previously

Long-term debt

$295 $ 21 $ 20 $293 $ 8 $ 826 $1,463

sold accounts receivable. This funding subsidiary sells an

undivided ownership interest in this pool of receivables to

Operating leases

Capital leases

Total contractual

119

1 — —

249

—

609

entities managed by unaffiliated financial institutions under

obligations

$415 $105 $ 84 $348 $48 $1,075 $2,075

another agreement. Sales to the funding subsidiary have

been structured as “true sales” under applicable bankruptcy

laws, and the assets of the funding subsidiary are not

available to pay any creditors of Halliburton or of its

subsidiaries or affiliates, until such time as the agreement

with the unaffiliated companies is terminated following

sufficient collections to liquidate all outstanding undivided

ownership interests. The funding subsidiary retains the

interest in the pool of receivables that are not sold to the

unaffiliated companies, and is fully consolidated and

reported in our financial statements.

The amount of undivided interests, which can be sold

under the program, varies based on the amount of eligible

Energy Services Group receivables in the pool at any given

time and other factors. The funding subsidiary sold a $200

million undivided ownership interest to the unaffiliated

companies, and may from time to time sell additional

Included in long-term debt is an additional $13 million

at December 31, 2002 related to the terminated interest

rate swaps.

We also have $350 million of committed lines of credit

from banks that are available if we maintain an investment

grade rating. Investment grade ratings are BBB- or higher

for Standard & Poor’s and Baa3 or higher for Moody’s

Investors’ Services and we are currently above these levels.

In the normal course of business we have agreements with

banks under which approximately $1.4 billion of letters of

credit or bank guarantees were issued, including $204

million which relate to our joint ventures’ operations.

Effective October 9, 2002, we amended an agreement with

banks under which $261 million of letters of credit have

been issued. The amended agreement removes the provision

that previously allowed the banks to require collateralization

if ratings of Halliburton debt fell below investment grade

ratings. The revised agreements include provisions that

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require us to maintain ratios of debt to total capital and of

We do not use derivative instruments for trading

total earnings before interest, taxes, depreciation and

purposes. We do not consider any of these risk management

amortization to interest expense. The definition of debt

activities to be material. See Note 1 to the financial

includes our asbestos and silica liability. The definition of

statements for additional information on our accounting

total earnings before interest, taxes, depreciation and

policies on derivative instruments. See Note 19 to the

amortization excludes any non-cash charges related to the

financial statements for additional disclosures related to

proposed global settlement through December 31, 2003.

derivative instruments.

If our debt ratings fall below investment grade, we would

I n t e r e s t ra t e r i s k . We have exposure to interest rate risk

also be in technical breach of a bank agreement covering

from our long-term debt and related interest rate swaps.

another $160 million of letters of credit at December 31,

The following table represents principal amounts of our

2002, which might entitle the bank to set-off rights. In

long-term debt at December 31, 2002 and related weighted

addition, a $151 million letter of credit line, of which $121

average interest rates by year of maturity for our long-

million has been issued, includes provisions that allow the

term debt.

banks to require cash collateralization for the full line if

Millions of dollars

2003

2004

2005

2006

2007 Thereafter

Total

debt ratings of either rating agency fall below the rating of

Long-term debt:

BBB by Standard & Poor’s or Baa2 by Moody’s Investors’

Services, one downgrade from our current ratings. These

Fixed rate debt

$140 $ 2 $ 1 $274 $ — $825 $1,242

Weighted average

interest rate

8.0% 7.7% 7.0% 6.0% —

7.4%

7.1%

letters of credit and bank guarantees generally relate to our

Variable rate debt

$155 $ 19 $ 19 $ 19 $ 8 $

1 $ 221

guaranteed performance or retention payments under our

Weighted average

long-term contracts and self-insurance.

interest rate

2.3% 5.4% 5.4% 5.4% 5.4% 5.8%

3.2%

F I N A N C I A L I N S T R U M E N T M A R K E T R I S K

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 program 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.

Fair market value of long-term debt was $1.3 billion as of

December 31, 2002.

In the second quarter 2002, we terminated our interest

rate swap agreement on our 8% senior note. The notional

amount of the swap agreement was $139 million. This

interest rate swap was designated as a fair value hedge

under SFAS No. 133. Upon termination, the fair value of the

interest rate swap was $0.5 million. In the fourth quarter

2002, we terminated our interest rate swap agreement on

our 6% fixed rate medium-term notes. The notional amount

of the swap agreement was $150 million. This interest rate

swap was designated as a fair value hedge under SFAS No.

133. Upon termination, the fair value of the interest rate

swap was $13 million. These swaps had previously been

classified in “Other assets” on the balance sheet. The fair

value adjustment to these debt instruments that were

hedged will remain and be amortized as a reduction in

interest expense using the “Effective Yield Method” over the

remaining life of the notes.

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

R E O R G A N I Z AT I O N O F B U S I N E S S O P E R AT I O N S

reorganization would facilitate separation of the ownership

On March 18, 2002 we announced plans to restructure our

of the two businesses in the future if we identify an

businesses into two operating subsidiary groups, the Energy

opportunity that produces greater value for our shareholders

Services Group and KBR, representing the Engineering and

than continuing to own both businesses. See Note 14 to the

Construction Group. As part of this reorganization, we are

financial statements.

separating and consolidating the entities in our Energy

In the fourth quarter of 2000 we approved a plan to

Services Group together as direct and indirect subsidiaries

reorganize our engineering and construction businesses into

of Halliburton Energy Services, Inc. We are also separating

one business unit. This restructuring was undertaken

and consolidating the entities in our Engineering and

Construction Group together as direct and indirect

because our engineering and construction businesses

continued to experience delays in customer commitments for

subsidiaries of the former Dresser Industries, Inc., which

new upstream and downstream projects. With the exception

became a limited liability company during the second

of deepwater projects, short-term prospects for increased

quarter of 2002 and was renamed DII Industries, LLC. The

engineering and construction activities in either the

reorganization of business operations facilitated the

upstream or downstream businesses were not positive. As a

separation, organizationally, financially, and operationally, of

result of the reorganization of the engineering and

our two business segments, which we believe will

construction businesses, we took actions to rationalize our

significantly improve operating efficiencies in both, while

operating structure, including write-offs of equipment and

streamlining management and easing manpower

licenses of $10 million, engineering reference designs of $4

requirements. In addition, many support functions, which

million and capitalized software of $6 million, and recorded

were previously shared, were moved into the two business

severance costs of $16 million. Of these charges, $30 million

groups. As a result, we took actions during 2002 to reduce

was reflected under the captions cost of services and $6

our cost structure by reducing personnel, moving previously

million as general and administrative in our 2000

shared support functions into the two business groups and

consolidated statements of income. Severance and related

realigning ownership of international subsidiaries by group.

costs of $16 million were for the reduction of approximately

In 2002, we incurred approximately $107 million for the year

30 senior management positions. In January 2002, the last

of personnel reduction costs and asset related write-offs. Of

of the personnel actions was completed and we have no

this amount, $8 million remains in accruals for severance

remaining accruals related to the 2000 restructuring. See

arrangements and approximately $2 million for other items.

Note 14 to the financial statements.

We expect these remaining payments will be made during

2003. Reorganization charges for 2002 consisted of the

following:

• $64 million in personnel related expense;

• $17 million of asset related write-downs;

E N V I R O N M E N TA L M AT T E R S

We are subject to numerous environmental, legal and

regulatory requirements related to our operations

worldwide. In the United States, these laws and regulations

include the Comprehensive Environmental Response,

• $20 million in professional fees related to the

Compensation and Liability Act, the Resources Conservation

restructuring; and

and Recovery Act, the Clean Air Act, the Federal Water

• $6 million related to contract terminations.

Pollution Control Act and the Toxic Substances Control Act,

Although we have no specific plans currently, the

among others. In addition to the federal laws and regulations,

states where we do business may have equivalent laws and

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

regulations by which we must also abide.

actual results to differ from our forward-looking statements

We evaluate and address the environmental impact of our

and potentially adversely affect our financial condition and

operations by assessing and remediating contaminated

results of operations, including risks relating to:

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

A s b e s t o s

• completion of the proposed global settlement, prerequisites

to which include:

own or have operated as well as efforts to meet or correct

– agreement on the amounts to be contributed to the trust

compliance-related matters.

for the benefit of current silica claimants;

We do not expect costs related to these remediation

– our due diligence review for product exposure and

requirements to have a material adverse effect on our

medical basis for claims;

consolidated financial position or our results of operations.

– agreement on procedures for distribution of settlement

We have subsidiaries that have been named as potentially

funds to individuals claiming personal injury;

responsible parties along with other third parties for ten

– definitive agreement on a plan of reorganization and

federal and state superfund sites for which we have

disclosure statement relating to the proposed settlement;

established a liability. As of December 31, 2002, those ten

– arrangement of acceptable financing to fund the

sites accounted for $8 million of our total $48 million

proposed settlement;

liability. See Note 12 to the financial statements.

– Board of Directors approval;

F O R WA R D - L O O K I N G I N F O R M AT I O N

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-K are forward-looking and use words like

“may,” “may not,” “believes,” “do not believe,” “expects,” “do

not expect,” “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 risks 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.

While it is not possible to identify all factors, we continue

to face many risks and uncertainties that could cause

– obtaining approval from 75% of current asbestos

claimants to the plan of reorganization implementing
the proposed global settlement; and

– obtaining final and non-appealable bankruptcy court

approval and federal district court confirmation of the
plan of reorganization;

• the results of being unable to complete the proposed

global settlement, including:

– continuing asbestos and silica litigation against us,
which would include the possibility of substantial
adverse judgments, the timing of which could not be
controlled or predicted, and the obligation to provide
appeals bonds pending any appeal of any such
judgment, some or all of which may require us to post
cash collateral;

– current and future asbestos claims settlement and
defense costs, including the inability to completely
control the timing of such costs and the possibility of
increased costs to resolve personal injury claims;

– the possibility of an increase in the number and type of

asbestos and silica claims against us in the future;

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

– future events in the Harbison-Walker bankruptcy

proceeding, including the possibility of discontinuation
of the temporary restraining order entered by the
Harbison-Walker bankruptcy court that applies to over
200,000 pending claims againt DII Industries; and

• liquidity risks resulting from being unable to complete
a global settlement or timely recovery of insurance
reimbursement for amounts paid, each as discussed
further below; and

• an adverse effect on our financial condition or results of

– any adverse changes to the tort system allowing

operations as a result of any of the foregoing;

additional claims or judgments against us;

• the results of being unable to recover, or being delayed in
recovering, insurance reimbursement in the amounts
anticipated to cover a part of the costs incurred defending
asbestos and silica claims, and amounts paid to settle
claims or as a result of court judgments, due to:

– the inability or unwillingness of insurers to timely

reimburse for claims in the future;

– disputes as to documentation requirements for DII

Industries in order to recover claims paid;

– the inability to access insurance policies shared with,
or the dissipation of shared insurance assets by,
Harbison-Walker Refractories Company or Federal-
Mogul Products, Inc.;

– the insolvency or reduced financial viability of insurers;

– the cost of litigation to obtain insurance reimbursement;

and

– adverse court decisions as to our rights to obtain

insurance reimbursement;

• the results of recovering, or agreeing in settlement of

litigation to recover, less insurance reimbursement than
the insurance receivable recorded in our financial
statements;

L i q u i d i t y

• adverse financial developments that could affect our

available cash or lines of credit, including:

– the effects described above of not completing the

proposed global settlement or not being able to timely
recover insurance reimbursement relating to amounts
paid as part of a global settlement or as a result of
judgments against us or settlements paid in the absence
of a global settlement;

– our inability to provide cash collateral for letters of

credit or any bonding requirements from customers or
as a result of adverse judgments that we are
appealing; and

– a reduction in our credit ratings as a result of the above

or due to other adverse developments;

• requirements to cash collateralize letters of credit and

surety bonds by issuers and beneficiaries of these
instruments in reaction to:

– our plans to place DII Industries, Kellogg, Brown &

Root and some of their subsidiaries into a pre-packaged
Chapter 11 bankruptcy as part of the proposed global
settlement;

– in the absence of a global settlement, one or more

• continuing exposure to liability even after the proposed

substantial adverse judgments;

settlement is completed, including exposure to:

– not being able to timely recover insurance

– any claims by claimants exposed outside of the United

reimbursement; or

States;

– a reduction in credit ratings;

– possibly any claims based on future exposure to silica;

• our ability to secure financing on acceptable terms to fund

– property damage claims as a result of asbestos and

our proposed global settlement;

silica use; or

– any claims against any other subsidiaries or business
units of Halliburton that would not be released in the
Chapter 11 proceeding through the 524(g) injunction;

• defaults that could occur under our and our subsidiaries’
debt documents as a result of a Chapter 11 filing unless
we are able to obtain consents or waivers to those events
of default, which events of default could cause defaults
under other of our credit facilities and possibly result in

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

an obligation to immediately pay amounts due
thereunder;

• actions by issuers and beneficiaries of current letters of
credit to draw under such letters of credit prior to our
completion of a new letter of credit facility that is
intended to provide reasonably sufficient credit lines for
us to be able to fund any such cash requirements;

• restrictions on our ability to provide products and services

to Iran, Iraq and Libya, all of which are significant
producers of oil and gas;

• protective government regulation in many of the

countries where we operate, including, for example,
regulations that:

– encourage or mandate the hiring of local contractors;

• obtaining debtor-in-possession financing for DII Industries,

and

Kellogg, Brown & Root and their subsidiaries prior to
filing a Chapter 11 proceeding;

• reductions in our credit ratings by rating agencies, which

could result in:

– the unavailability of borrowing capacity under our

existing $350 million line of credit facility, which is only
available to us if we maintain an investment grade
credit rating;

– reduced access to lines of credit, credit markets and

credit from suppliers under acceptable terms;

– borrowing costs in the future; and

– inability to issue letters of credit and surety bonds with

or without cash collateral;

• debt and letter of credit covenants;

• volatility in the surety bond market;

• availability of financing from the United States

Export/Import Bank;

• ability to raise capital via the sale of stock; and

– require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction;

• potentially adverse reaction, and time and expense

responding to, the increased scrutiny of Halliburton by
regulatory authorities, the media and others;

• potential liability and adverse regulatory reaction in

Nigeria to the theft from us of radioactive material used
in wireline logging operations;

• environmental laws and regulations, including, for

example, those that:

– require emission performance standards for facilities; and

– the potential regulation in the United States of our

Energy Services Group’s hydraulic fracturing services
and products as underground injection; and

• the proposed excise tax in the United States targeted at
heavy equipment of the type we own and use in our
operations would negatively impact our Energy Services
Group operating income;

• an adverse effect on our financial condition or results of

E f f e c t o f C h a p t e r 1 1 P r o c e e d i n g s

operations as a result of any of the foregoing;

L e g a l

• litigation, including, for example, class action shareholder

and derivative lawsuits, contract disputes, patent
infringements, and environmental matters;

• any adverse outcome of the SEC’s current investigation

into Halliburton’s accounting policies, practices and
procedures that could result in sanctions and the payment
of fines or penalties, restatement of financials for years
under review or additional shareholder lawsuits;

• trade restrictions and economic embargoes imposed by the

United States and other countries;

• the adverse effect on the ability of the subsidiaries that

are proposed to file a Chapter 11 proceeding to obtain new
orders from current or prospective customers;

• the potential reluctance of current and prospective

customers and suppliers to honor obligations or continue
to transact business with the Chapter 11 filing entities;

• the potential adverse effect of the Chapter 11 filing of

negotiating favorable terms with customers, suppliers and
other vendors;

• a prolonged Chapter 11 proceeding that could adversely

affect relationships with customers, suppliers and
employees, which in turn could adversely affect our

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

competitive position, financial condition and results of
operations and our ability to implement the proposed
plan of reorganization; and

• the adverse affect on our financial condition or results of

operations as a result of the foregoing;

G e o p o l i t i c a l

• armed conflict in the Middle East that could:

– impact the demand and pricing for oil and gas;

– disrupt our operations in the region and elsewhere; and

– increase our costs for security worldwide;

– weather related damage to our facilities;

– inability to deliver materials to jobsites in accordance

with contract schedules; and

– loss of productivity; and

• demand for natural gas in the United States drives a

disproportionate amount of our Energy Services Group’s
United States business. As a result, warmer than normal
winters in the United States are detrimental to the
demand for our services to gas producers. Conversely,
colder than normal winters in the United States result in
increased demand for our services to gas producers;

• unsettled political conditions, consequences of war or

C u s t o m e r s

other armed conflict, the effects of terrorism, civil unrest,
strikes, currency controls and governmental actions in
many oil producing countries and countries in which we
provide governmental logistical support that could
adversely affect our revenues and profit. Countries where
we operate which have significant amounts of political
risk include Afghanistan, Algeria, Angola, Colombia,
Indonesia, Libya, Nigeria, Russia, and Venezuela. For
example, the national strike in Venezuela as well as
seizures of offshore oil rigs by protestors and cessation of
operations by some of our customers in Nigeria have
disrupted our Energy Services Group’s ability to provide
services and products to our customers in these
countries during 2002 and likely will continue to do so in
2003; and

• changes in foreign exchange rates and exchange controls
as were experienced in Argentina in late 2001 and early
2002. For example, the changes in Argentina exchange
rates in late 2001 and early 2002 were detrimental
to results of our Energy Services Group operations in
Argentina;

We a t h e r r e l a t e d

• severe weather that impacts our business, particularly in
the Gulf of Mexico where we have significant operations.
Impacts may include:

– evacuation of personnel and curtailment of services;

– weather related damage to offshore drilling rigs

resulting in suspension of operations;

• the magnitude of governmental spending and outsourcing

for military and logistical support of the type that we
provide, including, for example, support services in the
Balkans;

• changes in capital spending by customers in the oil and
gas industry for exploration, development, production,
processing, refining, and pipeline delivery networks;

• changes in capital spending by governments for

infrastructure projects of the sort that we perform;

• consolidation of customers including, for example, the
merger of Conoco and Phillips Petroleum, has caused
customers to reduce their capital spending which has
negatively impacted the demand for our services and
products;

• potential adverse customer reaction, including potential

draws upon letters of credit, due to their concerns
about our plans to place DII Industries, Kellogg, Brown &
Root and some of their subsidiaries into a pre-packaged
bankruptcy as part of the global settlement;

• customer personnel changes due to mergers and

consolidation which impacts the timing of contract
negotiations and settlements of claims;

• claim negotiations with engineering and construction
customers on cost and schedule variances and change
orders on major projects, including, for example, the
Barracuda-Caratinga project in Brazil; and

• ability of our customers to timely pay the amounts due us;

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

I n d u s t r y

P e r s o n n e l a n d m e r g e r s /r e o r g a n i z a t i o n s /d i s p o s i t i o n s

• changes in oil and gas prices, among other things,

• integration of acquired businesses into Halliburton,

result from:

including:

– the armed conflict in the Middle East;

– standardizing information systems or integrating data

– OPEC’s ability to set and maintain production levels

from multiple systems;

and prices for oil;

– maintaining uniform standards, controls, procedures,

– the level of oil production by non-OPEC countries;

and policies; and

– the policies of governments regarding exploration

for and production and development of their oil and
natural gas reserves; and

– the level of demand for oil and natural gas, especially

natural gas in the United States;

• obsolescence of our proprietary technologies, equipment

and facilities, or work processes;

• changes in the price or the availability of commodities

that we use;

– combining operations and personnel of acquired

businesses with ours;

• effectively restructuring operations and personnel within
Halliburton including, for example, the segregation of our
business into two operating subsidiary groups under
Halliburton;

• ensuring acquisitions and new products and services add

value and complement our core businesses; and

• successful completion of planned dispositions.

• our ability to obtain key insurance coverage on acceptable

In addition, future trends for pricing, margins, revenues

terms;

• nonperformance, default or bankruptcy of joint venture

and profitability remain difficult to predict in the industries

we serve. We do not assume any responsibility to publicly

partners, key suppliers or subcontractors;

update any of our forward-looking statements regardless of

• performing fixed-price projects, where failure to meet
schedules, cost estimates or performance targets could
result in reduced profit margins or losses;

• entering into complex business arrangements for

technically demanding projects where failure by one or
more parties could result in monetary penalties; and

• the use of derivative instruments of the sort that we use
which could cause a change in value of the derivative
instruments as a result 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 the United States

Securities and Exchange Commission. We also suggest that

you listen to our quarterly earnings release conference calls

with financial analysts.

No assurance can be given that our financial condition or

results of operations would not be materially and adversely

– adverse movements in foreign exchange rates, interest

affected by some of the events described above, including:

rates, or commodity prices; or

– the value and time period of the derivative being

different than the exposures or cash flows being hedged;

Sy s t e m s

• the successful identification, procurement and installation
of a new financial system to replace the current system
for the Engineering and Construction Group;

• the inability to complete a global settlement;

• in the absence of a global settlement, adverse developments

in the tort system, including adverse judgments and
increased defense and settlement costs relating to claims
against us;

• liquidity issues resulting from failure to complete a global

settlement, adverse developments in the tort system,
including adverse judgments and increased defense and
settlement costs, and resulting or concurrent credit

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

ratings downgrades and/or demand for cash collateral-
ization of letters of credit or surety bonds;

termination costs and some employee severance costs that

are associated with a restructuring, discontinued operation,

• the filing of Chapter 11 proceedings by some of our

plant closing, or other exit or disposal activity. SFAS No.

subsidiaries or a prolonged Chapter 11 proceeding; and

146 is to be applied prospectively to exit or disposal

• adverse geopolitical developments, including armed

activities initiated after December 31, 2002 and would only

conflict, civil disturbance and unsettled political conditions
in foreign countries in which we operate.

N E W A C C O U N T I N G P R O N O U N C E M E N T S

In August 2001, the Financial Accounting Standards Board

issued SFAS No. 143, “Accounting for Asset Retirement

affect the timing of charges associated with any future exit

or disposal activity.

In November 2002, the Financial Accounting Standards

Board issued FASB Interpretation No. 45, “Guarantor’s

Accounting and Disclosure Requirements for Guarantees,

Including Indirect Guarantees of Indebtedness of Others”

Obligations” which addresses the financial accounting and

(FIN 45). This statement requires that a liability be

reporting for obligations associated with the retirement of

recorded in the guarantor’s balance sheet upon issuance of a

tangible long-lived assets and the associated assets’

guarantee. In addition, FIN 45 requires disclosures about

retirement costs. SFAS No. 143 requires that the fair value

the guarantees that an entity has issued, including a

of a liability associated with an asset retirement be

rollforward of the entity’s product warranty liabilities. We

recognized in the period in which it is incurred if a reasonable

will apply the recognition provisions of FIN 45 prospectively

estimate of fair value can be made. The associated

retirement costs are capitalized as part of the carrying

to guarantees issued after December 31, 2002. The disclosure

provisions of FIN 45 are effective for financial statements of

amount of the long-lived asset and subsequently depreciated

interim and annual periods ending December 15, 2002.

over the life of the asset. We currently account for

liabilities associated with asset retirement obligations

under existing accounting standards, such as SFAS 19,

SFAS 5, SOP 96-1, and EITF 89-30, which do not require

The adoption of FIN 45 will not have a material effect on

our consolidated financial position and results of operations.

In January 2003, the Financial Accounting Standards

Board issued FASB Interpretation No. 46, “Consolidation of

the asset retirement obligations to be recorded at fair value

Variable Interest Entities, an Interpretation of ARB No. 51”

and in some instances do not require the costs to be

recognized in the carrying amount of the related asset. The

new standard is effective for us beginning January 1, 2003,

and the effects of this standard will be immaterial to our

(FIN 46). This statement requires specified variable interest

entities to be consolidated by the primary beneficiary of the

entity if the equity investors in the entity do not have the

characteristics of a controlling financial interest or do not

future financial condition and we estimate will require a

have sufficient equity at risk for the entity to finance its

charge of less than $10 million after tax as a cumulative

activities without additional subordinated financial support

effect of a change in accounting principle.

from other parties. FIN 46 is effective for all new variable

In July 2002 the Financial Accounting Standards Board

interest entities created or acquired after January 31, 2003

issued SFAS No. 146, “Accounting for Costs Associated with

and beginning July 1, 2003 for variable interest entities

Exit or Disposal Activities”. The standard requires

created or acquired prior to February 1, 2003. Our exposure

companies to recognize costs associated with exit or disposal

to variable interest entities is limited and, therefore, the

activities when the liabilities are incurred rather than at

adoption of FIN 46 is not expected to have a material

the date of a commitment to an exit or disposal plan.

impact on our consolidated financial position and results

Examples of costs covered by the standard include lease

of operations.

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R E S P O N S I B I L I T Y F O R F I N A N C I A L R E P O R T I N G

We are responsible for the preparation and integrity of our

are taken to address control deficiencies and other

published financial statements. The financial statements

opportunities for improving the system as they are

have been prepared in accordance with accounting principles

identified. In accordance with the Securities and Exchange

generally accepted in the United States of America and,

Commission’s rules to improve the reliability of financial

accordingly, include amounts based on judgments and

statements, our 2002 interim financial statements were

estimates made by our management. We also prepared the

reviewed by KPMG LLP.

other information included in the annual report and

There are inherent limitations in the effectiveness of any

are responsible for its accuracy and consistency with the

system of internal control, including the possibility of human

financial statements.

error and the circumvention or overriding of controls.

Our 2002 financial statements have been audited by the

Accordingly, even an effective internal control system can

independent accounting firm, KPMG LLP. KPMG LLP

provide only reasonable assurance with respect to the

was given unrestricted access to all financial records and

reliability of our financial statements. Also, the effectiveness

related data, including minutes of all meetings of

of an internal control system may change over time.

stockholders, the Board of Directors and committees of the

We have assessed our internal control system in relation

Board. Halliburton’s Audit Committee of the Board of

to criteria for effective internal control over financial

Directors consists of directors who, in the business judgment

reporting described in “Internal Control-Integrated

of the Board of Directors, are independent under the

Framework” issued by the Committee of Sponsoring

New York Stock Exchange listing standards. The Board of

Organizations of the Treadway Commission. Based upon

Directors, operating through its Audit Committee,

that assessment, we believe that, as of December 31, 2002,

provides oversight to the financial reporting process. Integral

our system of internal control over financial reporting met

to this process is the Audit Committee’s review and

those criteria.

discussion with management and the external auditors of

the quarterly and annual financial statements prior to

their respective filing.

We maintain a system of internal control over financial

reporting, which is intended to provide reasonable assurance

HALLIBURTON COMPANY

to our management and Board of Directors regarding the

David J. Lesar

reliability of our financial statements. The system includes:

Chairman of the Board,

• a documented organizational structure and division of

responsibility;

President and

Chief Executive Officer

• established policies and procedures, including a code

of conduct to foster a strong ethical climate which is
communicated throughout the company; and

• the careful selection, training and development of our

people.

Internal auditors monitor the operation of the internal

control system and report findings and recommendations to

management and the Board of Directors. Corrective actions

Douglas L. Foshee

Executive Vice President and

Chief Financial Officer

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

I N D E P E N D E N T A U D I T O R ’ S R E P O R T

T O T H E S H A R E H O L D E R S A N D

B O A R D O F D I R E C T O R S

O F H A L L I B U R T O N C O M PA N Y:

We have audited the accompanying consolidated balance

sheet of Halliburton Company and subsidiaries as of

December 31, 2002, and the related consolidated statements

of operations, shareholders’ equity, and cash flows for the

year then ended. These consolidated financial statements

are the responsibility of the Company’s management. Our

responsibility is to express an opinion on these consolidated

financial statements based on our audit. The accompanying

2001 and 2000 consolidated financial statements of

Halliburton Company and subsidiaries were audited by other

auditors who have ceased operations. Those auditors

expressed an unqualified opinion on those consolidated

financial statements, before the restatement described in

Note 4 to the consolidated financial statements and before

the revision described in Note 22 to the consolidated financial

statements, in their report dated January 23, 2002 (except

with respect to matters discussed in Note 9 to those financial

statements, as to which the date was February 21, 2002).

We conducted our audit in accordance with auditing

standards generally accepted in the United States of America.

Those standards require that we plan and perform the audit

to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit

includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. An

audit also includes assessing the accounting principles used

and significant estimates made by management, as well

as evaluating the overall financial statement presentation.

We believe that our audit provides a reasonable basis for

our opinion.

In our opinion, the 2002 consolidated financial statements

referred to above present fairly, in all material respects,

the financial position of Halliburton Company and

subsidiaries as of December 31, 2002, and the results of

their operations and their cash flows for the year then

ended in conformity with accounting principles generally

accepted in the United States of America.

As discussed above, the 2001 and 2000 consolidated

financial statements of Halliburton Company and

subsidiaries were audited by other auditors who have

ceased operations. As described in Note 4, the Company

changed the composition of its reportable segments in 2002,

and the amounts in the 2001 and 2000 consolidated

financial statements relating to reportable segments have

been restated to conform to the 2002 composition of

reportable segments. We audited the adjustments that were

applied to restate the disclosures for reportable segments

reflected in the 2001 and 2000 consolidated financial

statements. In our opinion, such adjustments are appropriate

and have been properly applied. Also, as described in Note

22, these consolidated financial statements have been

revised to include the transitional disclosures required by

Statement of Financial Accounting Standards No. 142,

Goodwill and Other Intangible Assets, which was adopted by

the Company as of January 1, 2002. In our opinion, the

disclosures for 2001 and 2000 in Note 22 are appropriate.

However, we were not engaged to audit, review, or apply any

procedures to the 2001 and 2000 consolidated financial

statements of Halliburton Company and subsidiaries other

than with respect to such adjustments and revisions and,

accordingly, we do not express an opinion or any other form

of assurance on the 2001 and 2000 consolidated financial

statements taken as a whole.

K P M G L L P

Houston, Texas

March 13, 2003

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S

This report is a copy of a previously issued report, the
predecessor auditor has not reissued this report, the previously
issued report refers to financial statements not physically
included in this document, and the prior-period financial
statements have been revised or restated.

T O T H E S H A R E H O L D E R S A N D

B O A R D O F D I R E C T O R S

O F H A L L I B U R T O N C O M PA N Y:

management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a

reasonable basis for our opinion.

In our opinion, the financial statements referred to above

present fairly, in all material respects, the financial

position of Halliburton Company and subsidiary companies

as of December 31, 2001 and 2000, and the results of

their operations and their cash flows for each of the three

We have audited the accompanying consolidated balance

years in the period ended December 31, 2001, in

sheets of Halliburton Company (a Delaware corporation)

conformity with accounting principles generally accepted in

and subsidiary companies as of December 31, 2001 and

the United States of America.

2000, and the related consolidated statements of income,

cash flows, and shareholders’ equity for each of the three

years in the period ended December 31, 2001. These

financial statements are the responsibility of the Company’s

management. Our responsibility is to express an opinion on

these financial statements based on our audits.

We conducted our audits in accordance with auditing

standards generally accepted in the United States of

America. Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting

principles used and significant estimates made by

A R T H U R A N D E R S E N L L P

Dallas, Texas

January 23, 2002

(Except with respect to certain matters discussed in Note 9,

as to which the date is February 21, 2002.)

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S

Years ended December 31
(Millions of dollars and shares except per share data)
REVENUES:
Services
Product sales
Equity in earnings of unconsolidated affiliates

Total revenues

OPERATING COSTS AND EXPENSES:
Cost of services
Cost of sales
General and administrative
Gain on sale of marine vessels
Gain on sale of business assets

Total operating costs and expenses

OPERATING INCOME (LOSS)
Interest expense
Interest income
Foreign currency losses, net
Other, net
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,

MINORITY INTEREST, AND CHANGE IN ACCOUNTING METHOD, NET
Provision for income taxes
Minority interest in net income of subsidiaries
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CHANGE IN

ACCOUNTING METHOD, NET

DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations, net of tax

(provision) benefit of $154, $20, and ($60)

Gain on disposal of discontinued operations, net of tax

provision of $0, $199, and $141

Income (loss) from discontinued operations, net
Cumulative effect of change in accounting method, net
NET INCOME (LOSS)

BASIC INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations before change

in accounting method, net

Income (loss) from discontinued operations
Gain on disposal of discontinued operations
Net income (loss)
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations before change

in accounting method, net

Income (loss) from discontinued operations
Gain on disposal of discontinued operations
Net income (loss)
Basic average common shares outstanding
Diluted average common shares outstanding

See notes to annual financial statements.

2002

2001

2000

$10,658
1,840
74
$12,572

$10,737
1,642
335
—
(30)
$12,684
(112)
(113)
32
(25)
(10)

(228)
(80)
(38)

(346)

(652)

—
( 652)
—

$ (998)

$ (0.80)
(1.51)
—
$ (2.31)

$ (0.80)
(1.51)
—
$ (2.31)
432
432

$10,940
1,999
107
$13,046

$ 9,831
1,744
387
—
—
$11,962
1,084
(147)
27
(10)
—

954
(384)
(19)

551

(42)

299
257
1
809

1.29
(0.10)
0.70
1.89

1.28
(0.10)
0.70
1.88
428
430

$10,185
1,671
88
$11,944

$ 9,755
1,463
352
(88)
—
$11,482
462
(146)
25
(5)
(1)

335
(129)
(18)

188

215
313
—
501

0.42
0.22
0.49
1.13

0.42
0.22
0.48
1.12
442
446

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

C O N S O L I D A T E D B A L A N C E S H E E T S

December 31
(Millions of dollars and shares except per share data)
ASSETS

CURRENT ASSETS:
Cash and equivalents
Receivables:
Notes and accounts receivable (less allowance for bad debts of $157 and $131)
Unbilled work on uncompleted contracts

TOTAL RECEIVABLES

Inventories
Current deferred income taxes
Other current assets

TOTAL CURRENT ASSETS

Net property, plant and equipment
Equity in and advances to related companies
Goodwill
Noncurrent deferred income taxes
Insurance for asbestos and silica related liabilities
Other assets

TOTAL ASSETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Short-term notes payable
Current maturities of long-term debt
Accounts payable
Accrued employee compensation and benefits
Advance billings on uncompleted contracts
Deferred revenues
Income taxes payable
Other current liabilities

TOTAL CURRENT LIABILITIES

Long-term debt
Employee compensation and benefits
Asbestos and silica related liabilities
Other liabilities
Minority interest in consolidated subsidiaries

TOTAL LIABILITIES

SHAREHOLDERS’ EQUITY:
Common shares, par value $2.50 per share – authorized 600 shares,

issued 456 and 455 shares

Paid-in capital in excess of par value
Deferred compensation
Accumulated other comprehensive income
Retained earnings

Less 20 and 21 shares of treasury stock, at cost

TOTAL SHAREHOLDERS’ EQUITY

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

See notes to annual financial statements.

2002

2001

$ 1,107

290

2,533
724
3,257
734
200
262
5,560
2,629
413
723
607
2,059
853
$12,844

49
295
1,077
370
641
100
148
592
3,272
1,181
756
3,425
581
71
9,286

1,141
293
(75)
(281)
3,110
4,188
630
3,558
$12,844

3,015
1,080
4,095
787
154
247
5,573
2,669
551
720
410
612
431
$10,966

44
81
917
357
611
99
194
605
2,908
1,403
570
737
555
41
6,214

1,138
298
(87)
(236)
4,327
5,440
688
4,752
$10,966

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y

Years ended December 31
(Millions of dollars and shares)
COMMON STOCK (NUMBER OF SHARES):

Balance at beginning of year
Shares issued under compensation and incentive stock plans,

net of forfeitures

Shares issued for acquisition
Balance at end of year
COMMON STOCK (DOLLARS):

Balance at beginning of year
Shares issued under compensation and incentive stock plans,

net of forfeitures

Shares issued for acquisition
Balance at end of year

PAID-IN CAPITAL IN EXCESS OF PAR VALUE:

Balance at beginning of year
Shares issued under compensation and incentive stock plans,

net of forfeitures

Tax benefit
Shares issued for acquisition, net
Balance at end of year
DEFERRED COMPENSATION:

Balance at beginning of year
Current year awards, net of tax
Balance at end of year

ACCUMULATED OTHER COMPREHENSIVE INCOME:

Cumulative translation adjustment
Pension liability adjustment
Unrealized loss on investments and derivatives
Balance at end of year

CUMULATIVE TRANSLATION ADJUSTMENT:

Balance at beginning of year
Sales of subsidiaries
Current year changes
Balance at end of year

* Actual shares issued in 2002 were 357,000.

See notes to annual financial statements.

2002

2001

2000

455

— *
1
456

453

1
1
455

448

4
1
453

$ 1,138

$1,132

$1,120

1
2
$ 1,141

2
4
$1,138

9
3
$1,132

$ 298

$ 259

(24)
(5)
24
$ 293

(87)
12
(75)

$ (121)
(157)
(3)
$ (281)

$ (205)

15
69

$ (121)

30
(2)
11
$ 298

(63)
(24)
(87)

$ (205)
(27)
(4)
$ (236)

$ (275)
102
(32)
$ (205)

109
38
44
$ 259

$ (51)
(12)
$ (63)

$ (275)
(12)
(1)
$ (288)

$ (185)
11
(101)
$ (275)

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y ( c o n t ’ d )

Years ended December 31
(Millions of dollars and shares)
PENSION LIABILITY ADJUSTMENT:
Balance at beginning of year
Sale of subsidiary
Current year change, net of tax
Balance at end of year

UNREALIZED GAIN (LOSS) ON INVESTMENTS:

Balance at beginning of year
Current year unrealized gain (loss) on investments and derivatives
Balance at end of year

(4)
1
(3)

RETAINED EARNINGS:

Balance at beginning of year
Net income (loss)
Cash dividends paid
Balance at end of year

TREASURY STOCK (NUMBER OF SHARES):

Beginning of year
Shares issued under benefit, dividend reinvestment plan and

incentive stock plans, net
Shares issued for acquisition
Shares purchased
Balance at end of year

TREASURY STOCK (DOLLARS):

$ 4,327

(998)
(219)
$ 3,110

(2)
—
1
20

2002

2001

2000

(27)
—
(130)
$ (157)

(12)
12
(27)
(27)

(1)
(3)
(4)

$3,733
809
(215)
$4,327

(2)
(4)
1
21

$ (19)
7
—
$ (12)

$ —
(1)
(1)

$3,453
501
(221)
$3,733

—
—
20
26

Beginning of year
Shares issued under benefit, dividend reinvestment plan and

688

$ 845

incentive stock plans, net
Shares issued for acquisition
Shares purchased
Balance at end of year

COMPREHENSIVE INCOME (LOSS):

Net income (loss)
Cumulative translation adjustment, net of tax
Less reclassification adjustments for losses included in net income
Net cumulative translation adjustment
Current year adjustment to minimum pension liability, net of tax
Unrealized gain/(loss) on investments and derivatives
Total comprehensive income (loss)

See notes to annual financial statements.

(62)
—
4
630

$ (998)

69
15
84
(130)
1
$ (1,043)

(51)
(140)
34
$ 688

$ 809
(32)
102
70
(15)
(3)
$ 861

(23)
—
769
$ 845

$ 501
(101)
11
(90)
7
(1)
$ 417

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S

Years ended December 31
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)
Adjustments to reconcile net income to net cash from operations:

Loss (income) from discontinued operations
Depreciation, depletion and amortization
Provision (benefit) for deferred income taxes
Distributions from (advances to) related companies, net of equity

in (earnings) losses

Change in accounting method, net
Gain on sale of assets
Gain on option component of joint venture sale
Asbestos and silica related liabilities, net
Accrued special charges
Other non-cash items
Other changes, net of non-cash items:

Receivables and unbilled work on uncompleted contracts
Sale of receivables, net
Inventories
Accounts payable
Other working capital, net
Other operating activities

Total cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures
Sales of property, plant and equipment
Acquisitions of businesses, net of cash acquired
Dispositions of businesses, net of cash disposed
Proceeds from sale of securities
Investments – restricted cash
Other investing activities
Total cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from long-term borrowings
Payments on long-term borrowings
(Repayments) borrowings of short-term debt, net
Payments of dividends to shareholders
Proceeds from exercises of stock options
Payments to reacquire common stock
Other financing activities
Total cash flows from financing activities

Effect of exchange rate changes on cash
Net cash flows from discontinued operations (1)
Increase (decrease) in cash and equivalents
Cash and equivalents at beginning of year
CASH AND EQUIVALENTS AT END OF YEAR

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash payments during the year for:

Interest
Income taxes

Non-cash investing and financing activities:

Liabilities assumed in acquisitions of businesses
Liabilities disposed of in dispositions of businesses

2002

2001

2000

$ (998)

$ 809

$ 501

652
505
(151)

3
—
(22)
(3)

588
—
101

675
180
62
71
(78)
(23)

1,562

(764)
266
—
170
62
(187)
(20)
(473)

66
(81)
(2)
(219)
—
(4)
(8)
(248)
(24)
—
817
290
$ 1,107

$ 104
94
$

$ —
$ —

(257)
531
26

8
(1)
—
—
96
(6)
(3)

(199)
—
(91)
118
122
(124)
1,029

(797)
120
(220)
61
—
4
(26)
(858)

425
(13)
(1,528)
(215)
27
(34)
(17)
(1,355)
(20)
1,263
59
231
$ 290

$ 132
$ 382

$
92
$ 500

(313)
503
(6)

(64)
—
—
—
4
(63)
(22)

(896)
—
8
170
155
(34)
(57)

(578)
209
(10)
19
—
5
(56)
(411)

—
(308)
629
(221)
105
(769)
(20)
(584)
(9)
826
(235)
466
$ 231

$ 144
$ 310

$
95
$ 499

(1) Net cash flows from discontinued operations in 2001 include proceeds of $1.27 billion from the sale of the remaining businesses in Dresser Equipment Group and in

2000 proceeds of $913 million from the sales of Dresser-Rand in 2000 and Ingersoll-Dresser Pump in 1999. See Note 3.

See notes to annual financial statements.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

N O T E 1 .

S I G N I F I C A N T A C C O U N T I N G P O L I C I E S

transactions are eliminated. Investments in companies in

which we own a 50% interest or less and have a significant

We employ accounting policies that are in accordance with

influence are accounted for using the equity method and if

accounting principles generally accepted in the United

we do not have significant influence we use the cost method.

States of America. The preparation of financial statements

Prior year amounts have been reclassified to conform to the

in conformity with accounting principles generally accepted

current year presentation.

in the United States of America requires us to make

R e v e n u e r e c o g n i t i o n . We recognize revenues as

estimates and assumptions that affect:

services are rendered or products are shipped. Generally the

• the reported amounts of assets and liabilities and

disclosure of contingent assets and liabilities at the date
of the financial statements; and

date of shipment corresponds to the date upon which the

customer takes title to the product and assumes all risk and

rewards of ownership. The distinction between services

• the reported amounts of revenues and expenses during

and product sales is based upon the overall activity of the

the reporting period.

Ultimate results could differ from those estimates.

D e s c r i p t i o n o f C o m p a n y. Halliburton Company’s

predecessor was established in 1919 and incorporated under

the laws of the State of Delaware in 1924. Halliburton

Company provides a variety of services, products,

maintenance, engineering and construction to energy,

industrial and governmental customers. We operate in two

business segments:

• Energy Services Group; and

• Engineering and Construction Group.

particular business operation. Training and consulting

service revenues are recognized as the services are performed.

Sales of perpetual software licenses, net of deferred

maintenance fees, are recorded as revenue upon shipment.

Sales of use licenses are recognized as revenue over the

license period. Post-contract customer support agreements

are recorded as deferred revenues and recognized as

revenue ratably over the contract period of generally one

year’s duration.

E n g i n e e r i n g a n d c o n s t r u c t i o n c o n t ra c t s . Revenues

from engineering and construction contracts are reported on

the percentage of completion method of accounting using

The Energy Services Group segment provides discrete

measurements of progress toward completion appropriate

services and products and integrated solutions ranging from

for the work performed. Progress is generally based upon

the initial evaluation of producing formations to drilling,

physical progress, man-hours or costs incurred based upon

completion, production and well maintenance. In addition,

the appropriate method for the type of job. When revenue

the segment is the leading supplier of integrated exploration

and costs are recorded from engineering and construction

and production software information systems as well as

contracts, we comply with paragraph 81 of American Institute

professional and data management services for the upstream

of Certified Public Accountants Statement of Position 81-1,

oil and gas industry. The Engineering and Construction

also known as SOP 81-1. Under this method, revenues are

Group segment, operating as KBR, provides a wide range of

recognized as the sum of costs incurred during the period

services to energy and industrial customers and government

plus the gross profit earned, measured using the percentage

entities worldwide.

of completion method of accounting. All known or

P r i n c i p l e s o f c o n s o l i d a t i o n . The consolidated financial

anticipated losses on contracts are provided for when they

statements include the accounts of our company and all of

become evident in accordance with paragraph 85 of SOP

our subsidiaries in which we own greater than 50% interest

81-1. Claims and change orders which are in the process

or control. All material intercompany accounts and

of being negotiated with customers, for extra work or

changes in the scope of work, are included in revenue when

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

collection is deemed probable. For more details of revenue

bulk materials are recorded using the last-in, first-out

recognition, including other aspects of engineering and

method. The cost of over 90% of the remaining inventory is

construction accounting, including billings, claims and change

recorded on the average cost method, with the remainder

orders and liquidated damages, see Note 8 and Note 12.

on the first-in, first-out method. See Note 7.

R e s e a r c h a n d d e v e l o p m e n t . Research and development

P r o p e r t y, p l a n t a n d e q u i p m e n t . Property, plant and

expenses are charged to income as incurred. See Note 4

equipment are reported at cost less accumulated

for research and development expense by business segment.

depreciation, which is generally provided on the straight-

S o f t wa r e d e v e l o p m e n t c o s t s . Costs of developing

line method over the estimated useful lives of the assets.

software for sale are charged to expense when incurred, as

Some assets are depreciated on accelerated methods.

research and development, until technological feasibility

Accelerated depreciation methods are also used for tax

has been established for the product. Once technological

purposes, wherever permitted. Upon sale or retirement of an

feasibility is established, software development costs are

asset, the related costs and accumulated depreciation are

capitalized until the software is ready for general release to

removed from the accounts and any gain or loss is

customers. We capitalized costs related to software

recognized. When events or changes in circumstances

developed for resale of $11 million in 2002, $19 million in

indicate that assets may be impaired, an evaluation is

2001 and $7 million in 2000. Amortization expense of

performed. The estimated future undiscounted cash flows

software development costs was $19 million for 2002, $16

associated with the asset are compared to the asset’s

million for 2001 and $12 million for 2000. Once the

carrying amount to determine if a write-down to fair value

software is ready for release, amortization of the software

is required. We follow the successful efforts method of

development costs begins. Capitalized software

accounting for oil and gas properties. See Note 9.

development costs are amortized over periods which do not

M a i n t e n a n c e a n d r e p a i r s . Expenditures for maintenance

exceed five years.

and repairs are expensed; expenditures for renewals and

I n c o m e p e r s h a r e . Basic income per share is based

improvements are generally capitalized. We use the accrue-

on the weighted average number of common shares

in-advance method of accounting for major maintenance

outstanding during the year. Diluted income per share

and repair costs of marine vessel dry docking expense and

includes additional common shares that would have been

major aircraft overhauls and repairs. Under this method

outstanding if potential common shares with a dilutive

we anticipate the need for major maintenance and repairs

effect had been issued. See Note 13 for a reconciliation of

and charge the estimated expense to operations before the

basic and diluted income per share.

actual work is performed. At the time the work is

C a s h e q u i v a l e n t s . We consider all highly liquid

performed, the actual cost incurred is charged against the

investments with an original maturity of three months or

amounts that were previously accrued with any deficiency

less to be cash equivalents.

or excess charged or credited to operating expense.

I n v e n t o r i e s . Inventories are stated at the lower of cost or

G o o d w i l l . For acquisitions occurring prior to July 1, 2001,

market. Cost represents invoice or production cost for new

goodwill was amortized on a straight-line basis over periods

items and original cost less allowance for condition for used

not exceeding 40 years through December 31, 2001.

material returned to stock. Production cost includes

Effective July 1, 2001, we adopted SFAS No. 141, “Business

material, labor and manufacturing overhead. Some United

Combinations” and SFAS No. 142, “Goodwill and Other

States manufacturing and field services finished products

Intangible Assets”, which precludes amortization of goodwill

and parts inventories for drill bits, completion products and

related to acquisitions completed subsequent to June 30,

2001. Additionally, SFAS No. 142 precludes the amortization

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

of existing goodwill related to acquisitions completed prior

No. 133 requires that we recognize all derivatives on the

to July 1, 2001 for periods beginning January 1, 2002. See

balance sheet at fair value. Derivatives that are not hedges

Note 22 for discussion of this accounting change. SFAS No.

must be adjusted to fair value and reflected immediately

142 requires an entity to segregate its operations into

through the results of operations. If the derivative is

“reporting units,” which we have determined to be the same

designated as a hedge under SFAS No. 133, depending on

as our reportable operating segments, or the Energy

the nature of the hedge, changes in the fair value of

Services Group and Engineering and Construction Group.

derivatives are either offset against:

Additionally, all goodwill has been assigned to one of these

• the change in fair value of the hedged assets, liabilities or

reporting units for purposes of determining impairment of

firm commitments through earnings; or

the goodwill. Because goodwill and some intangible assets

• recognized in other comprehensive income until the

are no longer amortized, the reported amounts of goodwill

hedged item is recognized in earnings.

and intangible assets are reviewed for impairment on an

annual basis and more frequently when negative conditions

such as significant current or projected operating losses

exist. The annual impairment test is a two-step process and

involves comparing the estimated fair value of each

reporting unit to the reporting unit’s carrying value, including

goodwill. If the fair value of a reporting unit exceeds its

carrying amount, goodwill of the reporting unit is not

considered impaired, and the second step of the impairment

test is unnecessary. If the carrying amount of a reporting

unit exceeds its fair value, the second step of the goodwill

impairment test would be performed to measure the amount

of impairment loss to be recorded, if any.

I n c o m e t a x e s . Deferred tax assets and liabilities are

recognized for the expected future tax consequences of

events that have been recognized in the financial statements

or tax returns. A valuation allowance is provided for

deferred tax assets if it is more likely than not that these

items will either expire before we are able to realize their

benefit, or that future deductibility is uncertain.

D e r i v a t i v e i n s t r u m e n t s . We enter into derivative

financial transactions to hedge existing or projected exposures

to changing foreign currency exchange rates, interest rates

and commodity prices. We do not enter into derivative

transactions for speculative or trading purposes. Effective

January 1, 2001, we adopted SFAS No. 133 “Accounting

for Derivative Instruments and Hedging Activities.” SFAS

The ineffective portion of a derivative’s change in fair

value is immediately recognized in earnings. Recognized

gains or losses on derivatives entered into to manage foreign

exchange risk are included in foreign currency gains and

losses on the consolidated statements of operations. Gains or

losses on interest rate derivatives are included in interest

expense and gains or losses on commodity derivatives are

included in operating income. During the three years ended

December 31, 2002, we did not enter into any significant

transactions to hedge commodity prices. See Note 11 for

discussion of interest rate swaps and Note 19 for further

discussion of foreign currency exchange derivatives.

Fo r e i g n c u r r e n c y t r a n s l a t i o n . Foreign entities whose

functional currency is the United States dollar translate

monetary assets and liabilities at year-end exchange rates,

and non-monetary items are translated at historical rates.

Income and expense accounts are translated at the average

rates in effect during the year, except for depreciation, cost

of product sales and revenues, and expenses associated with

non-monetary balance sheet accounts which are translated

at historical rates. Gains or losses from changes in exchange

rates are recognized in consolidated income in the year of

occurrence. Foreign entities whose functional currency is the

local currency translate net assets at year-end rates and

income and expense accounts at average exchange rates.

Adjustments resulting from these translations are reflected

in the consolidated statements of shareholders’ equity under

“Cumulative translation adjustment”.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

L o s s c o n t i n g e n c i e s . We accrue for loss contingencies

N O T E 2 .

based upon our best estimates in accordance with SFAS

A C Q U I S I T I O N S A N D D I S P O S I T I O N S

No. 5, “Accounting for Contingencies”. See Note 12 for

M a g i c E a r t h a c q u i s i t i o n . We acquired Magic Earth, Inc., a

discussion of our significant loss contingencies.

3-D visualization and interpretation technology company

S t o c k- B a s e d C o m p e n s a t i o n . At December 31, 2002, we

with broad applications in the area of data interpretation in

have six stock-based employee compensation plans, which are

November 2001 for common shares with a value of $100

described more fully in Note 17. We account for those plans

million. At the consummation of the transaction, we issued

under the recognition and measurement principles of APB

4.2 million shares, valued at $23.93 per share, to complete

Opinion No. 25, “Accounting for Stock Issued to Employees”,

the purchase. Magic Earth became a wholly-owned

and related Interpretations. No cost for stock options granted

subsidiary and is reported within our Energy Services

is reflected in net income, as all options granted under our

Group segment. We recorded goodwill of $71 million, all of

plans have an exercise price equal to the market value of the

which is nondeductible for tax purposes. In addition, we

underlying common stock on the date of grant.

recorded intangible assets of $19 million, which are being

The fair value of options at the date of grant was estimated

amortized based on a five-year life.

using the Black-Scholes option pricing model. The weighted

P E S a c q u i s i t i o n . In February 2000, we acquired the

average assumptions and resulting fair values of options

remaining 74% of the shares of PES (International) Limited

granted are as follows:

Assumptions

Risk-Free
Interest
Rate

Expected
Dividend
Yield

Expected
Life
(in years)

Expected
Volatility

2.9%

4.5%

5.2%

2.7%

2.3%

1.3%

63%

58%

54%

Weighted
Average Fair
Value of
Options
Granted

$ 6.89

$ 19.11

$ 21.57

2002

2001

2000

The following table illustrates the effect on net income

and earnings per share if we had applied the fair value

recognition provisions of FASB Statement No. 123,

“Accounting for Stock-Based Compensation”, to stock-based

employee compensation.

Years ended December 31
Millions of dollars except per share data

2002

2001

2000

that we did not already own for a value of $126.7 million.

This was based on 3.3 million shares of Halliburton common

stock valued at $37.75 per share which was the closing stock

price on January 12, 2000. PES is based in Aberdeen,

Scotland, and has developed technology that complements

Halliburton Energy Services’ real time reservoir solutions.

To acquire the remaining 74% of PES, we issued 1.2 million

shares of Halliburton common stock in February 2002, and

we also issued rights that resulted in the issuance of 2.1

million additional shares of Halliburton common stock

between February 2001 and February 2002. We issued 1

million shares in February 2001; 400,000 shares in June

2001; and the remaining 700,000 shares in February 2002

under these rights. These shares were included in the

Net income (loss), as reported

$ (998) $ 809

$ 501

cost of the acquisition as a contingent liability. We recorded

Total stock-based employee compensation

expense determined under fair value

based method for all awards, net of

related tax effects

Net income (loss), pro forma

Basic earnings (loss) per share:

As reported

Pro forma

Diluted earnings (loss) per share:

As reported

Pro forma

$115 million of goodwill, all of which is non-deductible

for tax purposes.

(26)

(42)
$ (1,024) $ 767

(41)
$ 460

During the second quarter of 2001, we contributed the

majority of PES’ assets and technologies, including $130

$ (2.31) $1.89

$ ( 2.37) $1.79

$1.13

$1.04

$ ( 2.31) $1.88

$ ( 2.37) $1.77

$1.12

$1.03

million of goodwill associated with the purchase of PES, to a

newly formed joint venture with Shell Technology Ventures

BV, WellDynamics. We received $39 million in cash as an

equity equalization adjustment, which we recorded as a

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

reduction in our investment in the joint venture. We own

approximately $94 million. The $12 million difference is

50% of WellDynamics and account for this investment using

being amortized over ten years representing the average

the equity method. The formation of WellDynamics resulted

remaining useful life of the assets contributed. We own 50%

in a difference of $90 million between the carrying amount

of Subsea 7 and account for this investment using the equity

of our investment and our equity in the underlying net assets

method. The remaining 50% is owned by DSND Subsea ASA.

of the joint venture, which has been recorded as goodwill

B r e d e r o - S h a w d i s p o s i t i o n . On September 30, 2002 we

under “Equity in and advances to related companies”. The

sold our 50% interest in the Bredero-Shaw joint venture to

remaining assets and goodwill of PES relating to completions

our partner ShawCor Ltd. The purchase price of $149

and well intervention products have been combined with our

million is comprised of $53 million in cash, a short-term

existing completion products product service line.

note for $25 million and 7.7 million of ShawCor Class A

P G S D a t a M a n a g e m e n t a c q u i s i t i o n . In March 2001, we

Subordinate shares. In addition to our second quarter

acquired the PGS Data Management division of Petroleum

impairment charge of $61 million ($0.14 per diluted share

Geo-Services ASA (PGS) for $164 million in cash. The

after-tax) related to the pending sale of Bredero-Shaw, we

acquisition agreement also calls for Landmark to provide, for

recorded a third quarter pretax loss on sale of $18 million,

a fee, strategic data management and distribution services

or $0.04 per diluted share. Included in this loss was $15

to PGS for three years from the date of acquisition. We

million of cumulative translation adjustment loss which was

recorded intangible assets of $14 million and goodwill of $149

realized upon the disposition of our investment in Bredero-

million in our Energy Services Group segment, $9 million of

Shaw. During the 2002 fourth quarter, we recorded in “Other,

which is non-deductible for tax purposes. The intangible

net” a $9.1 million loss on the sale of ShawCor shares, or

assets are being amortized based on a three-year life.

$0.02 per diluted share.

E u r o p e a n M a r i n e C o n t ra c t o r s L t d . d i s p o s i t i o n . In

D r e s s e r E q u i p m e n t G r o u p d i s p o s i t i o n . In April 2001,

January 2002, we sold our 50% interest in European Marine

we disposed of the remaining businesses in the Dresser

Contractors Ltd., an unconsolidated joint venture reported

Equipment Group. See Note 3.

within our Energy Services Group, to our joint venture

partner, Saipem. At the date of sale, we received $115 million

in cash and a contingent payment option valued at $16

million resulting in a pretax operating income gain of $108

million. The contingent payment option was based on a

formula linked to performance of the Oil Service Index. In

February 2002, we exercised our option receiving an

additional $19 million and recorded a pretax gain of $3

million in “Other, net” in the statement of operations as a

result of the increase in value of this option. The total

transaction resulted in an after-tax gain of $68 million, or

$0.16 per diluted share.

S u b s e a 7 f o r m a t i o n . In May 2002, we contributed

substantially all of our Halliburton Subsea assets to a newly

formed company, Subsea 7, Inc. We contributed assets with a

book value of approximately $82 million. The contributed

assets were recorded by the new company at a fair value of

N O T E 3 .

D I S C O N T I N U E D O P E R AT I O N S

For the twelve months ended December 31, 2002, we

recorded a $806 million pretax charge in discontinued

operations. The $806 million charge is primarily comprised

of the following:

• a $567 million charge during the fourth quarter due to

a revision of our best estimate of our asbestos and silica
liability based upon knowledge gained throughout the
development of the agreement in principle for our
proposed global settlement. The charge consisted of $1,047
million related to the asbestos and silica claims gross
liability, which was offset by $480 million in anticipated
related insurance recoveries;

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

• a $153 million charge during the second quarter in
connection with our econometric study. The charge
consisted of $1,176 million related to the gross liability
on our asbestos and silica claims, which was offset by
$1,023 million in anticipated insurance recoveries;

• a $40 million payment associated with the Harbison-

Walker bankruptcy filing recorded in the first quarter; and

• $46 million in costs primarily related to the negotiation

of the agreement in principle.

During the second and third quarters of 2001, we recorded

a $95 million pretax expense to discontinued operations.

This amount was comprised of a $632 million charge related

to the gross liability on Harbison-Walker asbestos claims,

I n c o m e ( L o s s) f r o m O p e ra t i o n s o f D i s c o n t i n u e d

B u s i n e s s e s

Years ended December 31
Millions of dollars

Revenues

Operating income

Asbestos litigation claims, net of

insurance recoveries

Tax benefit (expense)

Net income (loss)

2002

2001

2000

$ — $359

$1,400

$ — $ 37

$ 158

(806)

154

(99)

—

(60)

$(652) $ (42) $

Gain on disposal of discontinued operations reflects the

gain on the sale of the remaining businesses within the

Dresser Equipment Group in the second quarter of 2001 and

the gain on the sale of Dresser-Rand in February 2000.

which was offset by $537 million in anticipated related

G a i n o n D i s p o s a l o f D i s c o n t i n u e d O p e ra t i o n s

insurance recoveries. See Note 12.

In late 1999 and early 2000 we sold our interest in two

joint ventures that were a significant portion of our

Dresser Equipment Group. These sales prompted a strategic

review of the remaining businesses within the Dresser

Equipment Group. As a result of this review, we determined

that these remaining businesses did not closely fit with our

core businesses, long-term goals and strategic objectives.

In April 2000, our Board of Directors approved plans to sell

all the remaining businesses within the Dresser Equipment

Group. We sold these businesses on April 10, 2001 and we

recognized a pretax gain of $498 million ($299 million after-

tax) during the second quarter of 2001. The financial results

of the Dresser Equipment Group through March 31, 2001

are presented as discontinued operations in our financial

statements. As part of the terms of the transaction, we

retained a 5.1% equity interest of Class A common stock in

the Dresser Equipment Group, which has been renamed

Dresser, Inc. In July 2002, Dresser, Inc. announced a

reorganization, and we have exchanged our shares for shares

of Dresser Ltd. Our equity interest is accounted for under

the cost method.

Millions of dollars

2001

2000

Proceeds from sale, less intercompany

settlement

Net assets disposed

Gain before taxes

Income taxes

$1,267

$ 536

(769)

(180)

498

356

(199)

(141)

Gain on disposal of discontinued operations

$ 299

$ 215

N O T E 4 .

B U S I N E S S S E G M E N T I N F O R M AT I O N

We operate in two business segments – the Energy Services

Group and the Engineering and Construction Group. Dresser

Equipment Group is presented as part of discontinued

operations through March 31, 2001 as a result of the sale in

April 2001 of the remaining businesses within Dresser

Equipment Group. See Note 3. Our segments are organized

around the products and services provided to our customers.

During the first quarter of 2002, we announced plans to

restructure our businesses into two operating subsidiary

groups. One group is focused on energy services and the

other is focused on engineering and construction. As part of

this restructuring, many support functions that were

previously shared were moved into the two business groups.

We also decided that the operations of Major Projects,

Granherne and Production Services better aligned with our

Kellogg Brown & Root subsidiary, or KBR, in the current

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

business environment. These businesses were moved for

• Other product service lines provide installation and

management and reporting purposes from the Energy

Services Group segment to the Engineering and Construction

Group segment during the second quarter of 2002. Major

Projects, which consisted of the Barracuda-Caratinga project

in Brazil, is now reported through the Offshore Operations

product line, Granherne is now reported in the Onshore

product line, and Production Services is now reported under

the Operations and Maintenance product line.

In addition, during the fourth quarter of 2000, we

combined all engineering, construction, fabrication and

project management operations into one segment, reporting

as our Engineering and Construction Group. This

restructuring resulted in some activities moving from the

Energy Services Group to the Engineering and Construction

Group, effective January 1, 2001.

All prior period segment results have been restated to

reflect these changes.

E n e r g y S e r v i c e s G r o u p . The Energy Services Group

provides a wide range of discrete services and products and

integrated solutions to customers for the exploration,

development, and production of oil and gas. The customers

for this segment are major, national and independent oil and

gas companies. This segment consists of:

• Halliburton Energy Services provides oilfield services and
products including discrete products and services and
integrated solutions ranging from the initial evaluation
of producing formations to drilling, completion,
production and well maintenance. Products and services
include pressure pumping equipment and services,
logging and perforating, drilling systems and services,
drilling fluids systems, drill bits, specialized completion
and production equipment and services, well control and
integrated solutions;

• Landmark Graphics provides integrated exploration and

production software information systems, data
management services, and professional services for the
upstream oil and gas industry; and

servicing of subsea facilities and pipelines. In January
2002, we sold to Saipem, our joint venture partner, our
50% interest in European Marine Contractors Ltd., a
joint venture that provided pipeline services for offshore
customers. In May 2002, we contributed substantially
all of our Halliburton Subsea assets to a newly formed
company, Subsea 7, Inc. We own 50% of Subsea 7, Inc.
and DSND Subsea ASA owns the other 50%. In
September 2002, we sold our 50% interest in Bredero-
Shaw, a pipecoating joint venture, to our partner
ShawCor Ltd. See Note 2.

E n g i n e e r i n g a n d C o n s t r u c t i o n G r o u p . The

Engineering and Construction Group provides engineering,

procurement, construction, project management, and

facilities operation and maintenance for oil and gas and

other industrial and governmental customers. The

Engineering and Construction Group, operating as KBR,

offers the following five product lines:

• Onshore operations consist of engineering and construction

activities, including engineering and construction of
liquefied natural gas, ammonia and crude oil refineries
and natural gas plants;

• Offshore operations include specialty offshore deepwater

engineering and marine technology and worldwide
fabrication capabilities;

• Government operations provide operations, construction,

maintenance and logistics activities for government
facilities and installations;

• Operations and maintenance services include plant

operations, maintenance, and start-up services for both
upstream and downstream oil, gas and petrochemical
facilities as well as operations, maintenance and logistics
services for the power, commercial and industrial
markets; and

• Infrastructure provides civil engineering, consulting and

project management services.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

G e n e ra l c o r p o ra t e . General corporate represents assets

O p e ra t i o n s b y G e o g ra p h i c A r e a

not included in a business segment and is primarily

composed of cash and cash equivalents, deferred tax assets

and insurance for asbestos and silica litigation claims.

Intersegment revenues included in the revenues of the

Years ended December 31
Millions of dollars

R E V E N U E S :

United States

United Kingdom

Other areas (numerous countries)

business segments and revenues between geographic areas

Total

are immaterial. Our equity in pretax earnings and losses of

L O N G - L I V E D A S S E T S :

2002

2001

2000

$ 4,139

$ 4,911

$ 4,073

1,521

6,912

1,800

6,335

1,512

6,359

$12,572

$13,046

$11,944

unconsolidated affiliates that are accounted for on the

equity method is included in revenues and operating income

of the applicable segment.

The tables below present information on our continuing

operations business segments.

United States

United Kingdom

Other areas (numerous countries)

Total

$ 4,617

$ 3,030

$ 2,068

691

711

617

744

525

776

$ 6,019

$ 4,391

$ 3,369

N O T E 5 .

R E S T R I C T E D C A S H

O p e ra t i o n s b y B u s i n e s s S e g m e n t

At December 31, 2002, we had restricted cash of $190 million

2002

2001

2000

included in “Other assets”. Restricted cash consists of:

Years ended December 31
Millions of dollars

R E V E N U E S :

Energy Services Group

$ 6,836

$ 7,811

$ 6,233

Engineering and Construction Group

5,736

5,235

5,711

• $107 million deposit that collateralizes a bond for a

patent infringement judgment on appeal;

$12,572

$13,046

$11,944

• $57 million as collateral for potential future insurance

Total

O P E R AT I N G I N C O M E ( L O S S ) :

General corporate

Total

C A P I TA L E X P E N D I T U R E S :

Energy Services Group

638

$ 1,036

589

Engineering and Construction Group

(685)

(65)

111

(63)

$ (112)

$ 1,084

Energy Services Group

603

743

Engineering and Construction Group

General corporate

Total

161

—

764

797

D E P R EC I AT I O N , D E P L E T I O N A N D A M O R T I Z AT I O N :

Energy Services Group

475

474

Engineering and Construction Group

General corporate

Total

TOTA L A S S E T S :

claim reimbursements; and

• $26 million primarily related to cash collateral

agreements for outstanding letters of credit for various
construction projects.

At December 31, 2001, we had $3 million of restricted

cash in “Other assets”.

N O T E 6 .

R E C E I VA B L E S

Our receivables are generally not collateralized. Included in

notes and accounts receivable are notes with varying

(54)

(73)

462

533

578

435

505

531

503

interest rates totaling $53 million at December 31, 2002 and

Energy Services Group

$ 5,944

$ 6,564

$ 5,964

Engineering and Construction Group

3,104

3,187

2,885

Net assets of discontinued operations

—

General corporate

Total

3,796

1,215

$12,844

$10,966

$10,192

R E S E A R C H A N D D E V E L O P M E N T:

Energy Services Group

Engineering and Construction Group

Total

228

233

226

233

224

231

$19 million at December 31, 2001.

On April 15, 2002, we entered into an agreement to sell

690

653

accounts receivable to a bankruptcy-remote limited-purpose

funding subsidiary. Under the terms of the agreement, new

receivables are added on a continuous basis to the pool of

receivables, and collections reduce previously sold accounts

receivable. This funding subsidiary sells an undivided

ownership interest in this pool of receivables to entities

managed by unaffiliated financial institutions under

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

another agreement. Sales to the funding subsidiary have

method had been used, total inventories would have been

been structured as “true sales” under applicable bankruptcy

$17 million higher than reported at December 31, 2002 and

laws, and the assets of the funding subsidiary are not

$20 million higher than reported at December 31, 2001.

available to pay any creditors of Halliburton or of its

Over 90% of remaining inventory is recorded on the

subsidiaries or affiliates, until such time as the agreement

average cost method, with the remainder on the first-in,

with the unaffiliated companies is terminated following

first-out method.

sufficient collections to liquidate all outstanding undivided

Inventories at December 31, 2002 and December 31, 2001

ownership interests. The funding subsidiary retains the

are composed of the following:

interest in the pool of receivables that are not sold to the

unaffiliated companies, and is fully consolidated and

reported in our financial statements.

December 31
Millions of dollars

Finished products and parts

Raw materials and supplies

The amount of undivided interests, which can be sold

Work in process

under the program, varies based on the amount of eligible

Total

Energy Services Group receivables in the pool at any given

time and other factors. The funding subsidiary sold a $200

N O T E 8 .

million undivided ownership interest to the unaffiliated

U N A P P R OV E D C L A I M S A N D L O N G -T E R M

2002

2001

$ 545

$ 520

141

192

$ 734

$ 787

companies, and may from time to time sell additional

undivided ownership interests. No additional amounts were

received from our accounts receivable facility since the

second quarter of 2002. The total amount outstanding under

this facility was $180 million as of December 31, 2002. We

continue to service, administer and collect the receivables on

behalf of the purchaser. The amount of undivided ownership

interest in the pool of receivables sold to the unaffiliated

companies is reflected as a reduction of accounts receivable

in our consolidated balance sheet and as an increase

in cash flows from operating activities in our consolidated

statement of cash flows.

N O T E 7.

I N V E N T O R I E S

Inventories are stated at the lower of cost or market. Some

United States manufacturing and field service finished

products and parts inventories for drill bits, completion

products and bulk materials are recorded using the last-in,

first-out method, totaling $43 million at December 31, 2002

and $54 million at December 31, 2001. If the average cost

C O N S T R U C T I O N C O N T R A C T S

Billing practices for engineering and construction projects

are governed by the contract terms of each project based

upon costs incurred, achievement of milestones or pre-agreed

schedules. Billings do not necessarily correlate with revenues

recognized under the percentage of completion method of

accounting. Billings in excess of recognized revenues are

recorded in “Advance billings on uncompleted contracts”.

When billings are less than recognized revenues, the

difference is recorded in “Unbilled work on uncompleted

contracts”. With the exception of claims and change orders

which are in the process of being negotiated with customers,

unbilled work is usually billed during normal billing pro-

cesses following achievement of the contractual requirements.

Recording of profits and losses on long-term contracts

requires an estimate of the total profit or loss over the life of

each contract. This estimate requires consideration of

contract revenue, change orders and claims reduced by costs

incurred and estimated costs to complete. Anticipated losses

on contracts are recorded in full in the period they become

evident. Profits are recorded based upon the total estimated

contract profit multiplied by the current percentage

complete for the contract.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

When calculating the amount of total profit or loss on a

probable unapproved claim in arbitration is $2 million. The

long-term contract, we include unapproved claims as

largest claim relates to the Barracuda-Caratinga contract

revenue when the collection is deemed probable based upon

which was approximately 63% complete at the end of 2002.

the four criteria for recognizing unapproved claims under

The probable unapproved claims included in determining

the American Institute of Certified Public Accountants

this contract’s loss were $182 million at December 31, 2002

Statement of Position 81-1, “Accounting for Performance of

and $43 million at December 31, 2001. As the claim for this

Construction-Type and Certain Production-Type Contracts.”

contract most likely will not be settled within one year,

Including unapproved claims in this calculation increases

amounts in unbilled work on uncompleted contracts of $115

the operating income (or reduces the operating loss) that

million at December 31, 2002 and $10 million at December

would otherwise be recorded without consideration of the

31, 2001 included in the table above have been recorded

probable unapproved claims. Unapproved claims are

to long-term unbilled work on uncompleted contracts which

recorded to the extent of costs incurred and include no profit

is included in “Other assets” on the balance sheet. All other

element. In substantially all cases, the probable unapproved

claims included in the table above have been recorded to

claims included in determining contract profit or loss are

“Unbilled work on uncompleted contracts” included in the

less than the actual claim that will be or has been presented

“Total receivables” amount on the balance sheet.

to the customer.

A summary of unapproved claims activity for the years

When recording the revenue and the associated unbilled

ended December 31, 2002 and 2001 is as follows:

receivable for unapproved claims, we only accrue an amount

equal to the costs incurred related to probable unapproved

claims. Therefore, the difference between the probable

unapproved claims included in determining contract profit

Millions of dollars

Beginning balance

Additions

or loss and the probable unapproved claims recorded in

Costs incurred during period

unbilled work on uncompleted contracts relates to forecasted

costs which have not yet been incurred. The amounts

Approved claims

Write-offs
Other *

Total Probable
Unapproved Claims

Probable
Unapproved Claims
Accrued Revenue

2002

$ 137

158

—

(4)

(7)

(5)

2001

$ 93

—

(15)

(33)

—

2002

$102

105

(4)

(7)

(5)

2001

$ 92

58
—
(15)

(33)

—

included in determining the profit or loss on contracts, and

Ending balance

$ 279

$137

$210

$102

the amounts booked to “Unbilled work on uncompleted

* Other primarily relates to claims in which the customer has agreed to a change order

relating to the scope of work.

contracts” for each period are as follows:

Years ended December 31
Millions of dollars

Probable unapproved claims (included in

In addition, our unconsolidated related companies include

2002

2001

probable unapproved claims as revenue to determine the

determining contract profit or loss)

$ 279

$ 137

amount of profit or loss for their contracts. Our “Equity in

Unapproved claims in unbilled work on

earnings of unconsolidated affiliates” includes our equity

uncompleted contracts

$ 210

$ 102

The claims at December 31, 2002 listed in the above table

relate to ten contracts, most of which are complete or

substantially complete. We are actively engaged in claims

negotiation with the customer in all but one case, and in

that case we have initiated the arbitration process. The

percentage of unapproved claims related to unconsolidated

projects. Amounts for unapproved claims from our related

companies are included in “Equity in and advances to

related companies” and totaled $9 million at December 31,

2002 and $0.3 million at December 31, 2001.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

N O T E 9.

P R O P E R T Y, P L A N T A N D E Q U I P M E N T

Property, plant and equipment at December 31, 2002 and

2001 are composed of the following:

Millions of dollars

Land

Buildings and property improvements

Machinery, equipment and other

Total

Less accumulated depreciation

2002

2001

1,024

4,842

5,952

3,323

942

4,926

5,950

3,281

Net property, plant and equipment

$2,629

$2,669

Buildings and property improvements are depreciated

over 5-40 years; machinery, equipment and other are

depreciated over 3-25 years.

Machinery, equipment and other includes oil and gas

investments of $356 million at December 31, 2002 and

$423 million at December 31, 2001.

N O T E 1 0 .

R E L AT E D C O M PA N I E S

C o m b i n e d F i n a n c i a l P o s i t i o n

December 31
Millions of dollars

Current assets

Noncurrent assets

Total

Current liabilities

Noncurrent liabilities

Minority interests

Shareholders’ equity

Total

2002

2001

$1,404

$1,818

1,876

1,672

$3,280

$3,490

$1,155

$1,522

1,367

1,272

—

758

694

$3,280

$3,490

N O T E 1 1 .

L I N E S O F C R E D I T, N O T E S PAYA B L E A N D

L O N G -T E R M D E B T

At December 31, 2002, we had committed lines of credit

totaling $350 million which expire in August 2006. There

were no borrowings outstanding under these lines of credit.

These lines are not available if our senior unsecured

long-term debt is rated lower than BBB- by Standard &

Poor’s Ratings Service Group or lower than Baa3 by

Moody’s Investors’ Services. Fees for committed lines of

We conduct some of our operations through various joint

credit were immaterial.

ventures which are in partnership, corporate and other

Short-term debt at December 31, 2002 consists primarily

business forms, and are principally accounted for using the

of $37 million in overdraft facilities and $12 million of other

equity method. Financial information pertaining to related

facilities with varying rates of interest.

companies for our continuing operations is set out below.

Long-term debt at the end of 2002 and 2001 consists of

This information includes the total related company

the following:

balances and not our proportional interest in those balances.

Millions of dollars

Our larger unconsolidated entities include Subsea 7,

7.6% debentures due August 2096

Inc., a 50% owned subsidiary, formed in May of 2002 and

the partnerships created to construct the Alice Springs

8.75% debentures due February 2021

8% senior notes due April 2003

Variable interest credit facility maturing

to Darwin rail line in Australia. During 2002, we sold our

September 2009

50% interest in European Marine Contractors and

Medium-term notes due 2002 through 2027

Bredero-Shaw. See Note 2.

Combined summarized financial information for all jointly

Effect of interest rate swaps

Term loans at LIBOR (GBP) plus 0.75% payable in

semiannual installments through March 2002

owned operations that are not consolidated is as follows:

Other notes with varying interest rates

C o m b i n e d O p e ra t i n g R e s u l t s

Years ended December 31
Millions of dollars

Revenues

Operating income
Net income

2002

2001

2000

$1,948

$1,987

$3,098

$ 200

$ 159

$ 231
$ 169

$ 192
$ 169

Total long-term debt

Less current portion

Noncurrent portion of long-term debt

$1,181

$1,403

The 7.6% debentures due 2096, 8.75% debentures due

2021, and 8% senior notes due 2003 may not be redeemed

prior to maturity and do not have sinking fund requirements.

2002

2001

$ 300

200

139

750

—

1,476

295

200

139

—

825

1,484

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

In the fourth quarter of 2002, our 51% owned and

the swap agreement was $150 million. This interest rate

consolidated subsidiary, Devonport Management Limited

swap was designated as a fair value hedge under SFAS No.

(DML), signed an agreement for a credit facility of £80

133. Upon termination, the fair value of the interest rate

million ($126 million as of December 31, 2002) maturing

swap was $13 million. These swaps had previously been

in September 2009. This credit facility has a variable

classified in “Other assets” on the balance sheet. The fair

interest rate that was equal to 5.375% on December 31,

value adjustment to these debt instruments that were

2002. There are various financial covenants which must

hedged will remain and be amortized as a reduction in

be maintained by DML. DML has drawn down an initial

interest expense using the “Effective Yield Method” over

amount of $66 million as of December 31, 2002. Under

the remaining life of the notes.

this agreement, payments of approximately $4.5 million

Our debt, excluding the effects of our interest rate swaps,

are due in quarterly installments. As of December 31,

matures as follows: $295 million in 2003; $21 million in

2002, the available credit under this facility was

2004; $20 million in 2005; $293 million in 2006; $8 million

approximately $60 million.

in 2007; and $826 million thereafter.

On July 12, 2001, we issued $425 million of two and five-

year notes under our medium-term note program. The notes

consist of $275 million 6% fixed rate notes due August 2006

and $150 million LIBOR + 0.15% floating rate notes due

July 2003. At December 31, 2002, we have outstanding notes

under our medium-term note program as follows:

Amount

$150 million

$275 million

$150 million

$ 50 million

$125 million

Due

Rate

07/2003 Floating %

08/2006

12/2008

05/2017

02/2027

6.00%

5.63%

7.53%

6.75%

Issue
Price

Par

99.57%

99.97%

Par

99.78%

Each holder of the 6.75% medium-term notes has the

right to require us to repay the holder’s notes in whole or in

part on February 1, 2007. We may redeem the 5.63% and

6.00% medium-term notes in whole or in part at any time.

Other notes issued under the medium-term note program

may not be redeemed prior to maturity. The medium-term

notes do not have sinking fund requirements.

In the second quarter of 2002, we terminated our interest

rate swap agreement on our 8% senior note. The notional

amount of the swap agreement was $139 million. This

interest rate swap was designated as a fair value hedge

under SFAS No. 133. Upon termination, the fair value of the

interest rate swap was $0.5 million. In the fourth quarter

N O T E 1 2 .

C O M M I T M E N T S A N D C O N T I N G E N C I E S

L e a s e s . At year-end 2002, we were obligated under

noncancelable operating leases, principally for the use of

land, offices, equipment, field facilities and warehouses.

Total rentals, net of sublease rentals, for noncancelable

leases in 2002, 2001 and 2000 were as follows:

Millions of dollars

Rental expense

2002

$ 149

2001

$ 172

2000

$149

Future total rentals on noncancelable operating leases are

as follows: $119 million in 2003; $83 million in 2004; $63

million in 2005; $55 million in 2006; $40 million in 2007; and

$249 million thereafter.

A s b e s to s l i t i g a t i o n . Several of our subsidiaries,

particularly DII Industries, LLC (DII Industries) and

Kellogg, Brown & Root, Inc. (Kellogg, Brown & Root), are

defendants in a large number of asbestos-related lawsuits.

The plaintiffs allege injury as a result of exposure to asbestos

in products manufactured or sold by former divisions

of DII Industries or in materials used in construction or

maintenance projects of Kellogg, Brown & Root. These claims

are in three general categories:

• refractory claims;

2002, we terminated the interest rate swap agreement on

• other DII Industries claims; and

our 6% fixed rate medium-term note. The notional amount of

• construction claims.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

R e f ra c t o r y c l a i m s . Asbestos was used in a small number

not be able to fulfill its indemnification obligation to DII

of products manufactured or sold by Harbison-Walker

Industries. Accordingly, DII Industries took up the defense

Refractories Company, which DII Industries acquired in

of unsettled post spin-off refractory claims that name it

1967. The Harbison-Walker operations were conducted as a

as a defendant in order to prevent Harbison-Walker from

division of DII Industries (then named Dresser Industries,

unnecessarily eroding the insurance coverage both

Inc.) until those operations were transferred to another then-

companies access for these claims. These claims are now

existing subsidiary of DII Industries in preparation for a

stayed in the Harbison-Walker bankruptcy proceeding.

spin-off. Harbison-Walker was spun-off by DII Industries in

As of December 31, 2002, there were approximately

July 1992. At that time, Harbison-Walker assumed liability

6,000 open and unresolved pre-spin-off refractory claims

for asbestos claims filed after the spin-off and it agreed to

against DII Industries. In addition, there were

defend and indemnify DII Industries from liability for those

approximately 142,000 post spin-off claims that name DII

claims, although DII Industries continues to have direct

Industries as a defendant.

liability to tort claimants for all post spin-off refractory

O t h e r D I I I n d u s t r i e s c l a i m s . As of December 31, 2002,

claims. DII Industries retained responsibility for all

there were approximately 147,000 open and unresolved

asbestos claims pending as of the date of the spin-off.

claims alleging injuries from asbestos used in other products

The agreement governing the spin-off provided that

formerly manufactured by DII Industries. Most of these

Harbison-Walker would have the right to access DII

claims involve gaskets and packing materials used in pumps

Industries’ historic insurance coverage for the asbestos-

and other industrial products.

related liabilities that Harbison-Walker assumed in the

C o n s t r u c t i o n c l a i m s . Our Engineering and Construction

spin-off. After the spin-off, DII Industries and Harbison-

Group includes engineering and construction businesses

Walker jointly negotiated and entered into coverage-in-place

formerly operated by The M.W. Kellogg Company and Brown

agreements with a number of insurance companies that

& Root, Inc., now combined as Kellogg, Brown & Root. As of

had issued historic general liability insurance policies which

December 31, 2002, there were approximately 52,000 open

both DII Industries and Harbison-Walker had the right

and unresolved claims alleging injuries from asbestos in

to access for, among other things, bodily injury occurring

materials used in construction and maintenance projects,

between 1963 and 1985. These coverage-in-place

most of which were conducted by Brown & Root, Inc.

agreements provide for the payment of defense costs,

Approximately 2,200 of these claims are asserted against

settlements and court judgments paid to resolve refractory

The M.W. Kellogg Company. We believe that Kellogg, Brown

asbestos claims.

& Root has a good defense to these claims, and a prior

As Harbison-Walker’s financial condition worsened in late

owner of The M.W. Kellogg Company provides Kellogg,

2000 and 2001, Harbison-Walker began agreeing to pay

Brown & Root a contractual indemnification for claims

more in settlement of the post spin-off refractory claims

against The M.W. Kellogg Company.

than it historically had paid. These increased settlement

H a r b i s o n -Wa l k e r C h a p t e r 1 1 b a n k r u p t c y. On February

amounts led to Harbison-Walker making greater demands

14, 2002, Harbison-Walker filed a voluntary petition for

on the shared insurance asset. By July 2001, DII Industries

reorganization under Chapter 11 of the United States

determined that the demands that Harbison-Walker was

Bankruptcy Code in the Bankruptcy Court in Pittsburgh,

making on the shared insurance policies were not acceptable

Pennsylvania. In its bankruptcy-related filings, Harbison-

to DII Industries and that Harbison-Walker probably would

Walker said that it would seek to utilize Sections 524(g) and

105 of the Bankruptcy Code to propose and seek

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

confirmation of a plan of reorganization that would provide

the benefits of an injunction channeling to a Section

for distributions for all legitimate, pending and future

524(g)/105 trust all present and future asbestos claims,

asbestos claims asserted directly against Harbison-Walker

including with respect to DII Industries, Kellogg, Brown &

or asserted against DII Industries for which Harbison-

Root and Halliburton, claims that do not relate to the

Walker is required to indemnify and defend DII Industries.

Harbison-Walker business or share insurance with

Harbison-Walker’s failure to fulfill its indemnity

Harbison-Walker.

obligations, and its erosion of insurance coverage shared

Harbison-Walker has not yet submitted a proposed plan of

with DII Industries, required DII Industries to assist

reorganization to the Bankruptcy Court. Moreover,

Harbison-Walker in its bankruptcy proceeding in order to

although possible, at this time we do not believe it likely

protect the shared insurance from dissipation. At the time

that Harbison-Walker will propose or ultimately there would

that Harbison-Walker filed its bankruptcy, DII Industries

be confirmed a plan of reorganization in its bankruptcy

agreed to provide up to $35 million of debtor-in-possession

proceeding that is acceptable to DII Industries. In general,

financing to Harbison-Walker during the pendency of the

in order for a Harbison-Walker plan of reorganization

Chapter 11 proceeding, of which $5 million was advanced

involving a Section 524(g)/105 trust to be confirmed, among

during the first quarter of 2002. On February 14, 2002, in

other things the creation of the trust would require the

accordance with the terms of a letter agreement, DII

approval of 75% of the asbestos claimant creditors of

Industries also paid $40 million to Harbison-Walker’s

Harbison-Walker. There can be no assurance that any plan

United States parent holding company, RHI Refractories

proposed by Harbison-Walker would obtain the necessary

Holding Company. This payment was charged to

approval or that it would provide for an injunction

discontinued operations in our financial statements in the

channeling to a Section 524(g)/105 trust all present and

first quarter of 2002.

future asbestos claims against DII Industries arising out of

The terms of the letter agreement also requires DII

the Harbison-Walker business or that share insurance with

Industries to pay to RHI Refractories an additional $35

Harbison-Walker.

million if a plan of reorganization is proposed in the

In addition, we anticipate that a significant financial

Harbison-Walker bankruptcy proceedings, and an additional

contribution to the Harbison-Walker estate could be

$85 million if a plan is confirmed in the Harbison-Walker

required from DII Industries to obtain confirmation of a

bankruptcy proceedings, in each case acceptable to DII

Harbison-Walker plan of reorganization if that plan were to

Industries in its sole discretion. The letter agreement

include an injunction channeling to a Section 524(g)/105

provides that a plan acceptable to DII Industries must

trust all present and future asbestos claims against DII

include an injunction channeling to a Section 524(g)/105

Industries arising out of the Harbison-Walker business or

trust all present and future asbestos claims against DII

that have claims to shared insurance with the Harbison-

Industries, arising out of the Harbison-Walker business or

Walker business. This contribution to the estate would be in

other DII Industries’ businesses that share insurance with

addition to DII Industries’ contribution of its interest to

Harbison-Walker.

insurance coverage for refractory claims to the Section

By contrast, the global settlement being pursued by

524(g)/105 trust. At this time, we are not able to quantify

Halliburton contemplates that DII Industries and Harbison-

the amount of this contribution in light of numerous

Walker, among others including Halliburton, would receive

uncertainties. These include the amount of Harbison-Walker

in a DII Industries and Kellogg, Brown & Root bankruptcy

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

assets available to satisfy its asbestos and trade creditors

Walker, or that any plan that is confirmed will provide relief

and the results of negotiations that must be completed

to DII Industries.

among Harbison-Walker, the asbestos claims committee

The stayed asbestos claims are those covered by insurance

under its Chapter 11 proceeding, a legal representative for

that DII Industries and Harbison-Walker each access to

future asbestos claimants (which has not yet been appointed

pay defense costs, settlements and judgments attributable to

by the Bankruptcy Court), DII Industries and the relevant

both refractory and non-refractory asbestos claims. The

insurance companies.

stayed claims include approximately 142,000 post-1992

Whether or not Halliburton has completed, is still

spin-off refractory claims, 6,000 pre-spin-off refractory claims

pursuing or has abandoned its previously announced global

and approximately 135,000 other types of asbestos claims

settlement, DII Industries would be under no obligation

pending against DII Industries. Approximately 51,000 of the

to make a significant financial contribution to the Harbison-

claims in the third category are claims made against DII

Walker estate, although Halliburton intends to consider

Industries based on more than one ground for recovery and

all of its options if in the future it ceased pursuing the

the stay affects only the portion of the claim covered by the

global settlement.

shared insurance. The stay prevents litigation from

For the reasons outlined above among others, we do not

proceeding while the stay is in effect and also prohibits the

believe it probable that DII Industries will be obligated to

filing of new claims. One of the purposes of the stay is to

make either of the additional $35 million and $85 million

allow Harbison-Walker and DII Industries time to develop

payments to RHI Refractories described above. During

and propose a plan of reorganization.

February 2003, representatives of RHI A.G., the ultimate

A s b e s t o s i n s u r a n c e c o v e r a g e . DII Industries has

corporate parent of RHI Refractories, met with represen-

substantial insurance for reimbursement for portions of

tatives of DII Industries and indicated that they believed

the costs incurred defending asbestos and silica claims, as

that DII Industries would be obligated to pay RHI

well as amounts paid to settle claims and court judgments.

Refractories the $35 million and the $85 million described

This coverage is provided by a large number of insurance

above in the event that our proposed global settlement

policies written by dozens of insurance companies. The

were to be consummated. For a number of reasons, DII

insurance companies wrote the coverage over a period of

Industries believes that the global settlement would not be

more than 30 years for DII Industries, its predecessors or its

the cause of a failure of a Harbison-Walker plan to be

subsidiaries and their predecessors. Large amounts of this

acceptable to DII Industries, and intends vigorously to

coverage are now subject to coverage-in-place agreements

defend against this claim if formally asserted.

that resolve issues concerning amounts and terms of

In connection with the Chapter 11 filing by Harbison-

coverage. The amount of insurance available to DII

Walker, the Bankruptcy Court on February 14, 2002 issued

Industries and its subsidiaries depends on the nature and

a temporary restraining order staying all further litigation

time of the alleged exposure to asbestos or silica, the

of more than 200,000 asbestos claims currently pending

specific subsidiary against which an asbestos or silica claim

against DII Industries in numerous courts throughout the

is asserted and other factors.

United States. The period of the stay contained in the

R e f ra c t o r y c l a i m s i n s u ra n c e . DII Industries has

temporary restraining order has been extended to July 21,

approximately $2.1 billion in aggregate limits of insurance

2003. Currently, there is no assurance that a stay will

coverage for refractory asbestos and silica claims, of which

remain in effect beyond July 21, 2003, that a plan of

over one-half is with Equitas or other London-based

reorganization will be proposed or confirmed for Harbison-

insurance companies. Most of this insurance is shared with

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

Harbison-Walker. Many of the issues relating to the majority

Bankruptcy Court’s mediation order remains in effect.

of this coverage have been resolved by coverage-in-place

Given the early stages of these negotiations, DII Industries

agreements with dozens of companies, including Equitas

cannot predict whether a negotiated resolution of this

and other London-based insurance companies. Coverage-in-

dispute will occur or, if such a resolution does occur, the

place agreements are settlement agreements between

precise terms of such a resolution.

policyholders and the insurers specifying the terms and

Prior to the Harbison-Walker bankruptcy, on August 7,

conditions under which coverage will be applied as claims

2001, DII Industries filed a lawsuit in Dallas County, Texas,

are presented for payment. These agreements in an asbestos

against a number of these insurance companies asserting

claims context govern such things as what events will be

DII Industries rights under an existing coverage-in-place

deemed to trigger coverage, how liability for a claim will be

agreement and under insurance policies not yet subject to

allocated among insurers and what procedures the

coverage-in-place agreements. The coverage-in-place

policyholder must follow in order to obligate the insurer to

agreements allow DII Industries to enter into settlements

pay claims. Recently, however, Equitas and other London-

for small amounts without requiring claimants to produce

based companies have attempted to impose new restrictive

detailed documentation to support their claims, when DII

documentation requirements on DII Industries and other

Industries believes the settlements are an effective claims

insureds. Equitas and the other London-based companies

management strategy. DII Industries believes that the new

have stated that the new requirements are part of an effort

documentation requirements are inconsistent with the

to limit payment of settlements to claimants who are truly

current coverage-in-place agreements and are unenforceable.

impaired by exposure to asbestos and can identify the

The insurance companies that DII Industries has sued have

product or premises that caused their exposure.

not refused to pay larger claim settlements where documen-

On March 21, 2002, Harbison-Walker filed a lawsuit in

tation is obtained or where court judgments are entered.

the United States Bankruptcy Court for the Western

On May 10, 2002, the London-based insuring entities and

District of Pennsylvania in its Chapter 11 bankruptcy

companies removed DII Industries’ Dallas County State

proceeding. This lawsuit is substantially similar to DII

Court Action to the United States District Court for the

Industries’ lawsuit filed in Texas State Court in 2001 and

Northern District of Texas alleging that federal court

seeks, among other relief, a determination as to the rights of

jurisdiction existed over the case because it is related to the

DII Industries and Harbison-Walker to the shared general

Harbison-Walker bankruptcy. DII Industries has filed an

liability insurance. The lawsuit also seeks damages against

opposition to that removal and has asked the federal court

specific insurers for breach of contract and bad faith, and a

to remand the case back to the Dallas County state court.

declaratory judgment concerning the insurers’ obligations

On June 12, 2002, the London-based insuring entities and

under the shared insurance. Although DII Industries is also

companies filed a motion to transfer the case to the federal

a defendant in this lawsuit, it has asserted its own claim

court in Pittsburgh, Pennsylvania. DII Industries has filed

to coverage under the shared insurance and is cooperating

an opposition to that motion to transfer. The federal court

with Harbison-Walker to secure both companies’ rights to

in Dallas has yet to rule on any of these motions. Regardless

the shared insurance. The Bankruptcy Court has ordered

of the outcome of these motions, because of the similar

the parties to this lawsuit to engage in non-binding

insurance coverage lawsuit filed by Harbison-Walker in its

mediation. The first mediation session was held on July 26,

bankruptcy proceeding, it is unlikely that DII Industries’

2002 and additional sessions have since taken place and

case will proceed independently of the bankruptcy.

further sessions are scheduled to take place, provided the

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

O t h e r D I I I n d u s t r i e s c l a i m s i n s u ra n c e . DII Industries

Inc. and a large number of its affiliated companies filed a

has substantial insurance to cover other non-refractory

voluntary petition for reorganization under Chapter 11 of

asbestos claims. Two coverage-in-place agreements cover

the Bankruptcy Code in the Bankruptcy Court in

DII Industries for companies or operations that DII

Wilmington, Delaware.

Industries either acquired or operated prior to November 1,

In response to Federal-Mogul’s allegations, on December

1957. Asbestos claims that are covered by these

7, 2001, DII Industries filed a lawsuit in the Delaware

agreements are currently stayed by the Harbison-Walker

Bankruptcy Court asserting its rights to insurance coverage

bankruptcy because the majority of this coverage also

under historic general liability policies issued to

applies to refractory claims and is shared with Harbison-

Studebaker-Worthington, Inc. and its successor for asbestos-

Walker. Other insurance coverage is provided by a number

related liabilities arising from, among other operations,

of different policies that DII Industries acquired rights to

Worthington’s and its successors’ historic operations. This

access when it acquired businesses from other companies.

lawsuit also seeks a judicial declaration concerning the

Three coverage-in-place agreements provide reimbursement

competing rights of DII Industries and Federal-Mogul, if

for asbestos claims made against DII Industries’ former

any, to this insurance coverage. DII Industries recently filed

Worthington Pump division. There is also other substantial

a second amended complaint in that lawsuit and the parties

insurance coverage with approximately $2.0 billion in

are now beginning the discovery process. The parties to

aggregate limits that has not yet been reduced to coverage-

this litigation, including Federal-Mogul, have agreed to

in-place agreements.

mediate this dispute. The first mediation session is

On August 28, 2001, DII Industries filed a lawsuit in the

scheduled for April 2, 2003. Unlike the Harbison-Walker

192nd Judicial District of the District Court for Dallas

insurance coverage litigation, in which the litigation is

County, Texas against specific London-based insuring

stayed while the mediation proceeds, the insurance coverage

entities that issued insurance policies that provide coverage

litigation concerning the Worthington-related asbestos

to DII Industries for asbestos-related liabilities arising out

liabilities has not been stayed and such litigation will proceed

of the historical operations of Worthington Corporation or its

simultaneously with the mediation.

successors. This lawsuit raises essentially the same issue as

At the same time, DII Industries filed its insurance

to the documentation requirements as the August 7, 2001

coverage action in the Federal-Mogul bankruptcy, DII

Harbison-Walker lawsuit filed in the same court. The

Industries also filed a second lawsuit in which it has filed a

London-based insuring entities filed a motion in that case

motion for preliminary injunction seeking a stay of all

seeking to compel the parties to binding arbitration. The

Worthington asbestos-related lawsuits against DII

trial court denied that motion and the London-based

Industries that are scheduled for trial within the six months

insuring entities appealed that decision to the state appellate

following the filing of the motion. The stay that DII

court. The state appellate courts denied the appeal and,

Industries seeks, if granted, would remain in place until the

most recently, the London-based insuring entities have

competing rights of DII Industries and Federal-Mogul to

removed the case from the state court to the federal court.

the allegedly shared insurance are resolved. The Court has

DII Industries was successful in remanding the case back to

yet to schedule a hearing on DII Industries’ motion for

the state court.

preliminary injunction.

A significant portion of the insurance coverage applicable

A number of insurers who have agreed to coverage-in-

to Worthington claims is alleged by Federal-Mogul Products,

place agreements with DII Industries have suspended

Inc. to be shared with it. In 2001, Federal-Mogul Products,

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

payment under the shared Worthington policies until the

historic insurers that issued these excess insurance policies.

Federal-Mogul Bankruptcy Court resolves the insurance

In the lawsuit, Kellogg, Brown & Root seeks to establish

issues. Consequently, the effect of the Federal-Mogul

the specific terms under which it can seek reimbursement for

bankruptcy on DII Industries’ rights to access this shared

costs it incurs in settling and defending asbestos claims

insurance is uncertain.

from its historic construction operations. On January 6, 2003,

C o n s t r u c t i o n c l a i m s i n s u ra n c e . Nearly all of our

this lawsuit was transferred to the 11th Judicial District of

construction asbestos claims relate to Brown & Root, Inc.

the District Court of Harris County, Texas. Until this lawsuit

operations before the 1980s. Our primary insurance

is resolved, the scope of the excess insurance will remain

coverage for these claims was written by Highlands

uncertain. We do not expect the excess insurers will

Insurance Company during the time it was one of our

reimburse us for asbestos claims until this lawsuit is resolved.

subsidiaries. Highlands was spun-off to our shareholders in

S i g n i f i c a n t a s b e s t o s j u d g m e n t s o n a p p e a l . During

1996. On April 5, 2000, Highlands filed a lawsuit against us

2001, there were several adverse judgments in trial court

in the Delaware Chancery Court. Highlands asserted that

proceedings that are in various stages of the appeal process.

the insurance it wrote for Brown & Root, Inc. that covered

All of these judgments concern asbestos claims involving

construction asbestos claims was terminated by agreements

Harbison-Walker refractory products. Each of these appeals,

between Halliburton and Highlands at the time of the 1996

however, has been stayed by the Bankruptcy Court in the

spin-off. In March 2001, the Chancery Court ruled that a

Harbison-Walker Chapter 11 bankruptcy.

termination did occur and that Highlands was not obligated

On November 29, 2001, the Texas District Court in Orange,

to provide coverage for Brown & Root, Inc.’s asbestos

Texas, entered judgments against Dresser Industries, Inc.

claims. This decision was affirmed by the Delaware Supreme

(now DII Industries) on a $65 million jury verdict rendered in

Court on March 13, 2002. As a result of this ruling, we

September 2001 in favor of five plaintiffs. The $65 million

wrote-off approximately $35 million in accounts receivable

amount includes $15 million of a $30 million judgment

for amounts paid for claims and defense costs and $45 million

against DII Industries and another defendant. DII Industries

of accrued receivables in relation to estimated insurance

is jointly and severally liable for $15 million in addition to

recoveries claims settlements from Highlands in the first

$65 million if the other defendant does not pay its share of

quarter 2002. In addition, we dismissed the April 24, 2000

this judgment. Based upon what we believe to be controlling

lawsuit we filed against Highlands in Harris County, Texas.

precedent, which would hold that the judgment entered is

As noted in our 2001 Form 10-K, the amount of the billed

void, we believe that the likelihood of the judgment being

insurance receivable related to Highlands Insurance

affirmed in the face of DII Industries’ appeal is remote.

Company included in “Accounts receivable” was $35 million.

As a result, we have not accrued any amounts for this

As a consequence of the Delaware Supreme Court’s

judgment. However, a favorable outcome from the appeal

decision, Kellogg, Brown & Root no longer has primary

is not assured.

insurance coverage from Highlands for asbestos claims.

On November 29, 2001, the same District Court in Orange,

However, Kellogg, Brown & Root has significant excess

Texas, entered three additional judgments against Dresser

insurance coverage. The amount of this excess coverage that

Industries, Inc. (now DII Industries) in the aggregate

will reimburse us for an asbestos claim depends on a variety

amount of $35.7 million in favor of 100 other asbestos

of factors. On March 20, 2002, Kellogg, Brown & Root filed

plaintiffs. These judgments relate to an alleged breach of

a lawsuit in the 172nd Judicial District of the District Court

purported settlement agreements signed early in 2001 by

of Jefferson County, Texas, against Kellogg, Brown & Root’s

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

a New Orleans lawyer hired by Harbison-Walker, which had

which we are named as a defendant along with a number of

been defending DII Industries pursuant to the agreement

other defendants, often exceeding 100 unaffiliated defendant

by which Harbison-Walker was spun-off by DII Industries in

companies in total. During the fourth quarter of 2002,

1992. These settlement agreements expressly bind

we received approximately 32,000 new claims and we closed

Harbison-Walker Refractories Company as the obligated

approximately 13,000 claims. The number of open claims

party, not DII Industries, which is not a party to the

pending against us is as follows:

agreements. For that reason, and based upon what we believe

to be controlling precedent which would hold that the

judgment entered is void, we believe that the likelihood of

the judgment being affirmed in the face of DII Industries’

appeal is remote. As a result, we have not accrued any

amounts for this judgment. However, a favorable outcome

from the appeal is not assured.

On December 5, 2001, a jury in the Circuit Court for

Baltimore County, Maryland, returned verdicts against

Period Ending

December 31, 2002

September 30, 2002

June 30, 2002

March 31, 2002

December 31, 2001

September 30, 2001

June 30, 2001

March 31, 2001

December 31, 2000

Total Open Claims

347,000

328,000

312,000

292,000

274,000

146,000

145,000

129,000

117,000

Dresser Industries, Inc. (now DII Industries) and other

The claims include approximately 142,000 at December

defendants following a trial involving refractory asbestos

31, 2002 and September 30, 2002, 139,000 at June 30, 2002,

claims. Each of the five plaintiffs alleges exposure to

133,000 at March 31, 2002 and 125,000 at December 31,

Harbison-Walker products. DII Industries’ portion of the

2001 of post spin-off Harbison-Walker refractory related

verdicts was approximately $30 million, which we have fully

claims that name DII Industries as a defendant. All such

accrued at December 31, 2002. DII Industries intends to

claims have been factored into the calculation of our

appeal the judgment to the Maryland Supreme Court. While

asbestos liability.

we believe we have a valid basis for appeal and intend to

We manage asbestos claims to achieve settlements of

vigorously pursue our appeal, any favorable outcome from

valid claims for reasonable amounts. When reasonable

that appeal is not assured.

settlement is not possible, we contest claims in court. Since

On October 25, 2001, in the Circuit Court of Holmes

1976, we have closed approximately 231,000 claims

County, Mississippi, a jury verdict of $150 million was

through settlements and court proceedings at a total cost of

rendered in favor of six plaintiffs against Dresser Industries,

approximately $202 million. We have received or expect to

Inc. (now DII Industries) and two other companies. DII

receive from our insurers all but approximately $93 million

Industries’ share of the verdict was $21.3 million which

of this cost, resulting in an average net cost per closed

we have fully accrued at December 31, 2002. The award was

claim of about $403.

for compensatory damages. The jury did not award any

punitive damages. The trial court has entered judgment on

the verdict. While we believe we have a valid basis for

appeal and intend to vigorously pursue our appeal, any

favorable outcome from that appeal is not assured.

A s b e s t o s c l a i m s h i s t o r y. Since 1976, approximately

578,000 asbestos claims have been filed against us. Almost

all of these claims have been made in separate lawsuits in

A s b e s t o s s t u d y a n d t h e v a l u a t i o n o f u n r e s o l v e d

c u r r e n t a n d f u t u r e a s b e s t o s c l a i m s .

A s b e s t o s S t u d y. In late 2001, DII Industries retained

Dr. Francine F. Rabinovitz of Hamilton, Rabinovitz &

Alschuler, Inc. to estimate the probable number and value,

including defense costs, of unresolved current and future

asbestos and silica-related bodily injury claims asserted

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

against DII Industries and its subsidiaries. Dr. Rabinovitz is

• an analysis of the population likely to have been exposed

a nationally renowned expert in conducting such analyses,

has been involved in a number of asbestos-related and other

toxic tort-related valuations of current and future liabilities,

has served as the expert for three representatives of future

claimants in asbestos related bankruptcies and has had her

valuation methodologies accepted by numerous courts.

Further, the methodology utilized by Dr. Rabinovitz is the

same methodology that is utilized by the expert who is

routinely retained by the asbestos claimants committee in

asbestos-related bankruptcies. Dr. Rabinovitz estimated

the probable number and value of unresolved current and

future asbestos and silica-related bodily injury claims

asserted against DII Industries and its subsidiaries over a

50 year period. The report took approximately seven

months to complete.

M e t h o d o l o g y. The methodology utilized by Dr. Rabinovitz

to project DII Industries’ and its subsidiaries’ asbestos-

or claim exposure to products manufactured by DII
Industries, its predecessors and Harbison-Walker or to
Brown & Root construction and renovation projects; and

• epidemiological studies to estimate the number of people
who might allege exposure to products manufactured
by DII Industries, its predecessors and Harbison-Walker
or to Brown & Root construction and renovation projects
that would be likely to develop asbestos-related diseases.
Dr. Rabinovitz’s estimates are based on historical
data supplied by DII Industries, Kellogg, Brown & Root
and Harbison-Walker and publicly available studies,
including annual surveys by the National Institutes of
Health concerning the incidence of mesothelioma deaths.

In her estimates, Dr. Rabinovitz relied on the source data

provided by our management; she did not independently

verify the accuracy of the source data. The source data

provided by us was based on our 24-year history in

gathering claimant information and defending and settling

related liabilities and defense costs relied upon and included:

asbestos claims.

• an analysis of DII Industries, Kellogg, Brown & Root’s
and Harbison-Walker Refractories Company’s historical
asbestos settlements and defense costs to develop
average settlement values and average defense costs for
specific asbestos-related diseases and for the specific
business operation or entity allegedly responsible for the
asbestos-related diseases;

• an analysis of DII Industries’, Kellogg, Brown & Root’s
and Harbison-Walker Refractories Company’s pending
inventory of asbestos-related claims by specific asbestos-
related diseases and by the specific business operation or
entity allegedly responsible for the asbestos-related disease;

• an analysis of the claims filing history for asbestos-

related claims against DII Industries, Kellogg, Brown &
Root and Harbison-Walker Refractories Company for
the approximate two-year period from January 2000 to
May 31, 2002, and for the approximate five-year period
from January 1997 to May 31, 2002 by specific asbestos-
related disease and by business operation or entity
allegedly responsible for the asbestos-related disease;

In her analysis, Dr. Rabinovitz projected that the elevated

and historically unprecedented rate of claim filings of the

last several years (particularly in 2000 and 2001), especially

as expressed by the ratio of nonmalignant claim filings to

malignant claim filings, would continue into the future for

five more years. After that, Dr. Rabinovitz projected that the

ratio of nonmalignant claim filings to malignant claim

filings will gradually decrease for a 10 year period

ultimately returning to the historical claiming rate and

claiming ratio. In making her calculation, Dr. Rabinovitz

alternatively assumed a somewhat lower rate of claim

filings, based on an average of the last five years of claims

experience, would continue into the future for five more

years and decrease thereafter.

Other important assumptions utilized in Dr. Rabinovitz’s

estimates, which we relied upon in making our accrual are:

• there will be no legislative or other systemic changes to

the tort system;

• that we will continue to aggressively defend against

asbestos claims made against us;

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N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

• an inflation rate of 3% annually for settlement

against us. The proposed settlement provides that up to

payments and an inflation rate of 4% annually for
defense costs; and

$2.775 billion in cash, 59.5 million shares of our common

stock (with a value of $1.1 billion using the stock price at

• we would receive no relief from our asbestos obligation

December 31, 2002 of $18.71) and notes with a net present

due to actions taken in the Harbison-Walker bankruptcy.

value expected to be less than $100 million would be

R a n g e o f L i a b i l i t i e s . Based upon her analysis, Dr.

paid to a trust for the benefit of current and future asbestos

Rabinovitz estimated total, undiscounted asbestos and silica

personal injury claimants and current silica personal injury

liabilities, including defense costs, of DII Industries,

claimants. Under the proposed agreement, Kellogg, Brown

Kellogg, Brown & Root and some of their current and

& Root and DII Industries will retain the rights to the first

former subsidiaries. Through 2052, Dr. Rabinovitz estimated

$2.3 billion of any insurance proceeds with any proceeds

the current and future total undiscounted liability for

received between $2.3 billion and $3.0 billion going to the

personal injury asbestos and silica claims, including defense

trust. The proposed settlement will be implemented through

costs, would be a range between $2.2 billion and $3.5 billion

a pre-packaged Chapter 11 filing of DII Industries and

as of June 30, 2002 (which includes payments related to

Kellogg, Brown & Root as well as some other DII

the claims currently pending). The lower end of the range is

Industries and Kellogg, Brown & Root subsidiaries with

calculated by using an average of the last five years of

U.S. operations. The funding of the settlement amounts

asbestos claims experience and the upper end of the range is

would occur upon receiving final and non-appealable court

calculated using the more recent two-year elevated rate of

confirmation of a plan of reorganization of DII Industries

asbestos claim filings in projecting the rate of future claims.

and Kellogg, Brown & Root and their subsidiaries in the

2 n d Q u a r t e r 2 0 0 2 A c c r u a l . Based on that estimate, in

Chapter 11 proceeding.

the second quarter of 2002, we accrued asbestos and silica

Subsequently, as of March 2003, DII Industries and

claims liability and defense costs for both known outstanding

Kellogg, Brown & Root have entered into definitive written

and future refractory, other DII Industries, and construction

agreements finalizing the terms of the agreement in

asbestos and silica claims using the low end of the range of

principle. The proposed global settlement also includes

Dr. Rabinovitz’s study, or approximately $2.2 billion. In

silica claims as a result of current or past exposure. These

establishing our liability for asbestos, we included all post

silica claims are less than 1% of the personal injury

spin-off claims against Harbison-Walker that name DII

claims included in the proposed global settlement. We have

Industries as a defendant. Our accruals are based on an

approximately 2,500 open silica claims.

estimate of personal injury asbestos claims through 2052

The agreement contemplated that we would conduct due

based on the average claims experience of the last five

diligence on the claims, and that we and attorneys for the

years. At the end of the second quarter of 2002, we did not

claimants would use reasonable efforts to execute definitive

believe that any point in the expert’s range was better

settlement agreements. While all the required settlement

than any other point, and accordingly, based our accrual on

agreements have not yet been executed, we and attorneys

the low end of the range in accordance with FIN 14.

for some of the asbestos claimants have now reached

A g r e e m e n t R e g a r d i n g P r o p o s e d G l o b a l S e t t l e m e n t .

agreement on what they believe will be a template for such

In December 2002, we announced that we had reached an

settlement agreements. These agreements are subject to a

agreement in principle that could result in a global

number of conditions, including agreement on a Chapter 11

settlement of all personal injury asbestos and silica claims

plan of reorganization for DII Industries, Kellogg, Brown

& Root and some of their subsidiaries, approval by 75% of

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

current asbestos claimants to the plan of reorganization,

R e v i e w o f A c c r u a l s . As a result of the proposed

the negotiation of financing acceptable to us, approval by

settlement, in the fourth quarter of 2002, we re-evaluated

Halliburton’s Board of Directors, and confirmation of the

our accruals for known outstanding and future asbestos

plan of reorganization by a bankruptcy court. The template

claims. Although we have reached an agreement in principle

settlement agreement also grants the claimants’ attorneys a

with respect to a proposed settlement, we do not believe the

right to terminate the definitive settlement agreement on

settlement is “probable” under SFAS No. 5 at the current

ten days’ notice if Halliburton’s DII Industries subsidiary

time. Among the prerequisites to reaching a conclusion of

does not file a plan of reorganization under the bankruptcy

the settlement are:

code on or before April 1, 2003.

• agreement on the amounts to be contributed to the trust

We are conducting due diligence on the asbestos claims,

for the benefit of silica claimants;

which is not expected to be completed by April 1, 2003.

Therefore, we do not expect DII Industries, Kellogg, Brown

& Root and some of their subsidiaries to file a plan of

reorganization prior to April 1. Although there can be no

assurances, we do not believe the claimants’ attorneys

will terminate the settlement agreements on April 1, 2003

as long as adequate progress is being made toward a

Chapter 11 filing. In March 2003, we agreed with

• our review of the more than 347,000 current claims to

establish that the claimed injuries are based on exposure
to products of DII Industries, Kellogg, Brown & Root,
their subsidiaries or former businesses or subsidiaries;

• completion of our medical review of the injuries alleged

to have been sustained by plaintiffs to establish a
medical basis for payment of settlement amounts;

• finalizing the principal amount of the notes to be contri-

Harbison-Walker and the asbestos creditors committee in

buted to the trust;

the Harbison-Walker bankruptcy to consensually extend

the period of the stay contained in the Bankruptcy Court’s

temporary restraining order until July 21, 2003. The court’s

temporary restraining order, which was originally entered

• agreement with a proposed representative of future

claimants and attorneys representing current claimants
on procedures for distribution of settlement funds to
individuals claiming personal injury;

on February 14, 2002, stays more than 200,000 pending

• definitive agreement with the attorneys representing

asbestos claims against DII Industries. The agreement

provides that if the pre-packaged Chapter 11 filing by DII

Industries, Kellogg, Brown & Root and their subsidiaries is

not made by July 14, 2003, the Bankruptcy Court will hear

motions to lift the stay on July 21, 2003. The asbestos

creditors committee also reserves the right to monitor

progress toward the filing of the Chapter 11 proceeding and

seek an earlier hearing to lift the stay if satisfactory

progress toward the Chapter 11 filing is not being made.

• arrangement of financing on terms acceptable to us to
fund the cash amounts to be paid in the settlement;

• Halliburton board approval;

• obtaining affirmative votes to the plan of reorganization

from at least the required 75% of known present asbestos
claimants and from a requisite number of silica claimants
needed to complete the plan of reorganization; and

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N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

• obtaining final and non-appealable bankruptcy court

• reviewed our insurance coverage policy database

approval and federal district court confirmation of the
plan of reorganization.

containing information on key policy terms as provided
by outside counsel;

Because we do not believe the settlement is currently

• reviewed the terms of DII Industries’ prior and current

probable as defined by Statement of Financial Standards

coverage-in-place settlement agreements;

No. 5, we have continued to establish our accruals in

• reviewed the status of DII Industries’ and Kellogg, Brown

accordance with the analysis performed by Dr. Rabinovitz.

However, as a result of the settlement and the payment

amounts contemplated thereby, we believed it appropriate to

adjust our accrual to use the upper end of the range of

probable and reasonably estimable liabilities for current and

future asbestos liabilities contained in Dr. Rabinovitz’s

study, which estimated liabilities through 2052 and assumed

the more recent two-year elevated rate of claim filings in

projecting the rate of future claims.

• engaged in discussions with our counsel; and

• analyzed publicly-available information concerning the
ability of the DII Industries’ insurers to meet their
obligations.

As a result, in the fourth quarter of 2002, we have

Based on that review, analyses and discussions, Peterson

determined that the best estimate of the probable loss is the

Consulting assisted us in making judgments concerning

$3.5 billion estimate in Dr. Rabinovitz’s study, and

insurance coverage that we believe are reasonable and

accordingly, we have increased our accrual for probable and

consistent with our historical course of dealings with our

reasonably estimable liabilities for current and future

insurers and the relevant case law to determine the

asbestos and silica claims to $3.4 billion.

probable insurance recoveries for asbestos liabilities. This

I n s u ra n c e . In 2002, we retained Peterson Consulting, a

analysis factored in the probable effects of self-insurance

nationally-recognized consultant in asbestos liability and

features, such as self-insured retentions, policy exclusions,

insurance, to work with us to project the amount of

liability caps and the financial status of applicable insurers,

insurance recoveries probable in light of the projected

and various judicial determinations relevant to the

current and future liabilities accrued by us. Using

applicable insurance programs. The analysis of Peterson

Dr. Rabinovitz’s projection of liabilities through 2052 using

Consulting is based on its best judgment and information

the two-year elevated rate of asbestos claim filings,

provided by us.

Peterson Consulting assisted us in conducting an analysis to

P r o b a b l e I n s u ra n c e R e c o v e r i e s . Based on this analysis

determine the amount of insurance that we estimate is

of the probable insurance recoveries, in the second quarter

probable that we will recover in relation to the projected

of 2002, we recorded a receivable of $1.6 billion for probable

claims and defense costs. In conducting this analysis,

insurance recoveries.

Peterson Consulting:

• reviewed DII Industries’ historical course of dealings

with its insurance companies concerning the payment
of asbestos-related claims, including DII Industries’
15 year litigation and settlement history;

In connection with our adjustment of our accrual for

asbestos liability and defense costs in the fourth quarter of

2002, Peterson Consulting assisted us in re-evaluating our

receivable for insurance recoveries deemed probable through

2052, assuming $3.5 billion of liabilities for current and

future asbestos claims using the same factors cited above

through that date. Based on Peterson Consulting analysis of

2002

737

2,820

(132)

2001

696

(39)

$ 3,425

737

(45) $

—

(39)

(18)

—

(45)

(12)

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

the probable insurance recoveries, we increased our

December 31
Millions of dollars

insurance receivable to $2.1 billion as of the fourth quarter

Gross liability – beginning balance

of 2002. The insurance receivable recorded by us does not

assume any recovery from insolvent carriers and assumes

that those carriers which are currently solvent will continue

Accrued liability

Payments on claims

Gross liability – ending balance

Estimated insurance recoveries:

to be solvent throughout the period of the applicable

Highlands Insurance Company –

recoveries in the projections. However, there can be no

assurance that these assumptions will be correct. These

beginning balance

Accrued insurance recoveries

Write-off of recoveries

insurance receivables do not exhaust the applicable insurance

Insurance billings

coverage for asbestos-related liabilities.

C u r r e n t A c c r u a l s . The current accrual of $3.4 billion for

probable and reasonably estimable liabilities for current and

future asbestos and silica claims and the $2.1 billion in

insurance receivables are included in noncurrent assets and

liabilities due to the extended time periods involved to settle

claims. In the second quarter of 2002, we recorded a pretax

Highlands Insurance Company –

ending balance

Other insurance carriers – beginning balance $ (567) $

Accrued insurance recoveries

Insurance billings

(1,530)

(563)

Other insurance carriers – ending balance

$(2,059) $ (567)

Total estimated insurance recoveries

Net liability for known asbestos claims

$(2,059) $ (612)

$ 1,366

125

charge of $483 million, and, in the fourth quarter of 2002,

Accounts receivable for billings to insurance companies

we recorded a pretax charge of $799 million ($675 million

for payments made on asbestos claims were $44 million at

after-tax).

December 31, 2002, and $18 million at December 31, 200l,

In the fourth quarter of 2002, we recorded pretax charges

excluding $35 million in accounts receivable written off at

of $232 million ($212 million after-tax) for claims related

the conclusion of the Highlands litigation.

to Brown & Root construction and renovation projects under

P o s s i b l e A d d i t i o n a l A c c r u a l s . When and if the

the Engineering and Construction Group segment. The

currently proposed global settlement becomes

balance of $567 million ($463 million after-tax) related to

probable under SFAS No. 5, we would increase our accrual

claims associated with businesses no longer owned by

for probable and reasonably estimable liabilities for current

us and was recorded as discontinued operations. The low

and future asbestos claims up to $4.0 billion, reflecting

effective tax rate on the asbestos charge is due to the

the amount in cash and notes we would pay to fund the

recording of a valuation allowance against the United States

settlement combined with the value of 59.5 million shares of

Federal deferred tax asset associated with the accrual as

Halliburton common stock using $18.71, which was trading

the deferred tax asset may not be fully realizable based upon

value of the stock at the end of the fourth quarter of 2002.

future taxable income projections.

In addition, at such time as the settlement becomes

The total estimated claims through 2052, including the

probable, we would adjust our accrual for liabilities for

347,000 current open claims, are approximately one million.

current and future asbestos claims and we would expect

A summary of our accrual for all claims and corresponding

to increase the amount of our insurance receivables to $2.3

insurance recoveries is as follows:

billion. As a result, we would record at such time an

additional pretax charge of $322 million ($288 million after-

tax). Beginning in the first quarter in which the settlement

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N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

becomes probable, the accrual would then be adjusted

company. When completed, the project will consist of two

from period to period based on positive and negative

converted supertankers which will be used as floating

changes in the market price of our common stock until the

production, storage and offloading platforms, or FPSO’s, 33

payment of the shares into the trust.

hydrocarbon production wells, 18 water injection wells,

C o n t i n u i n g R e v i e w. Projecting future events is subject to

and all sub-sea flow lines and risers necessary to connect the

many uncertainties that could cause the asbestos-related

underwater wells to the FPSO’s.

liabilities and insurance recoveries to be higher or lower

KBR’s performance under the contract is secured by:

than those projected and booked such as:

• the number of future asbestos-related lawsuits to be filed

against DII Industries, and Kellogg, Brown & Root;

• the average cost to resolve such future lawsuits;

• coverage issues among layers of insurers issuing different
policies to different policyholders over extended periods
of time;

• the impact on the amount of insurance recoverable in

light of the Harbison-Walker and Federal-Mogul
bankruptcies; and

• the continuing solvency of various insurance companies.

Given the inherent uncertainty in making future

projections, we plan to have the projections of current and

future asbestos and silica claims periodically reexamined,

and we will update them if needed based on our experience

and other relevant factors such as changes in the tort

system, the resolution of the bankruptcies of various

asbestos defendants and the probability of our settlement of

all claims becoming effective. Similarly, we will re-evaluate

our projections concerning our probable insurance recoveries

in light of any updates to Dr. Rabinovitz’s projections,

developments in DII Industries’ and Kellogg, Brown & Root’s

various lawsuits against its insurance companies and other

developments that may impact the probable insurance.

B a r ra c u d a - C a ra t i n g a P r o j e c t . In June 2000, KBR

entered into a contract with the project owner, Barracuda &

Caratinga Leasing Company B.V., to develop the

Barracuda and Caratinga crude oil fields, which are located

off the coast of Brazil. The project manager and owner

representative is Petrobras, the Brazilian national oil

• two performance letters of credit, which together have an

available credit of approximately $261 million and
which represent approximately 10% of the contract
amount, as amended to date by change orders;

• a retainage letter of credit in an amount equal to $121

million as of December 31, 2002 and which will increase
in order to continue to represent 10% of the cumulative
cash amounts paid to KBR; and

• a guarantee of KBR’s performance of the agreement by
Halliburton Company in favor of the project owner.

The project owner has procured project finance funding

obligations from various banks to finance the payments due

to KBR under the contract.

As of December 31, 2002, the project was approximately

63% complete and KBR had recorded a loss of $117 million

related to the project. The probable unapproved claims

included in determining the loss on the project were $182

million as of December 31, 2002. The claims for the project

most likely will not be settled within one year. Accordingly,

probable unapproved claims of $115 million at December 31,

2002 have been recorded to long-term unbilled work on

uncompleted contracts. Those amounts are included in

“Other assets” on the balance sheet. KBR has asserted claims

for compensation substantially in excess of $182 million. The

project owner, through its project manager, Petrobras, has

denied responsibility for all such claims. Petrobras has,

however, agreed in principle to the scope, but not yet the

amount, of issues valued by KBR approximately $29 million

which are not related to the $182 million in probable

unapproved claims. Additionally we are in discussion with

Petrobras about responsibility for $78 million of new tax

costs that were not foreseen in the contract price.

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KBR expects the project will likely be completed more

is no assurance that it would do so. To date, the banks have

than 12 months later than the original contract completion

made funds available, and the project owner has continued to

date. KBR believes that the project’s delay is due primarily

disburse funds to KBR as payment for its work on the

to the actions of Petrobras. In the event that any portion of

project even though the project completion has been delayed.

the delay is determined to be attributable to KBR and any

In the event that KBR is alleged to be in default under

phase of the project is completed after the milestone dates

the contract, the project owner may assert a right to draw

specified in the contract, KBR could be required to pay

upon the letters of credit. If the letters of credit were drawn,

liquidated damages. These damages would be calculated on

KBR would be required to fund the amount of the draw to

an escalating basis of up to $1 million per day of delay

the issuing bank. In the event that KBR was determined

caused by KBR subject to a total cap on liquidated damages

after an arbitration proceeding to have been in default

of 10% of the final contract amount (yielding a cap of

under the contract, and if the project was not completed by

approximately $263 million as of December 31, 2002). We are

KBR as a result of such default (i.e., KBR’s services are

in discussions with Petrobras regarding a settlement of the

terminated as a result of such default), the project owner

amount of unapproved claims. There can be no assurance

may seek direct damages (including completion costs in

that we will reach any settlement regarding these

excess of the contract price and interest on borrowed funds,

claims. We expect any settlement, if reached, will result in a

but excluding consequential damages) against KBR for

schedule extension that would eliminate liability for

up to $500 million plus the return of up to $300 million in

liquidated damages based on the currently forecasted

advance payments that would otherwise have been

schedule. We have not accrued any amounts for liquidated

credited back to the project owner had the contract not

damages, since we consider the imposition of liquidated

been terminated.

damages to be unlikely.

In addition, although the project financing includes

The project owner currently has no other committed

borrowing capacity in excess of the original contract

source of funding on which we can necessarily rely other

amount, only $250 million of this additional borrowing

than the project finance funding for the project. If the banks

capacity is reserved for increases in the contract amount

cease to fund the project, the project owner may not have

payable to KBR and its subcontractors other than

the ability to continue to pay KBR for its services. The

Petrobras. Because our claims, together with change

original bank documents provide that the banks are not

orders that are currently under negotiation, exceed this

obligated to continue to fund the project if the project has

amount, we cannot give assurance that there is adequate

been delayed for more than 6 months. In November 2002,

funding to cover current or future KBR claims. Unless the

the banks agreed to extend the 6-month period to 12 months.

project owner provides additional funding or permits us to

Other provisions in the bank documents may provide for

defer repayment of the $300 million advance, and assuming

additional time extensions. However, delays beyond 12

the project owner does not allege default on our part, we

months may require bank consent in order to obtain

may be obligated to fund operating cash flow shortages over

additional funding. While we believe the banks have an

the remaining project life in an amount we currently

incentive to complete the financing of the project, there is no

estimate to be up to approximately $400 million.

assurance that they would do so. If the banks did not

The possible Chapter 11 pre-packaged bankruptcy filing

consent to extensions of time or otherwise ceased funding the

by KBR in connection with the settlement of its asbestos

project, we believe that Petrobras would provide for or

claims would constitute an event of default under the loan

secure other funding to complete the project, although there

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N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

documents with the banks unless waivers are obtained.

American Institute of Certified Public Accountants’

KBR believes that it is unlikely that the banks will exercise

Statement of Position 81-1, “Accounting for Performance of

any right to cease funding given the current status of the

Construction-Type and Certain Production-Type

project and the fact that a failure to pay KBR may allow KBR

Contracts,” and satisfied the relevant criteria for accruing

to cease work on the project without Petrobras having a

this revenue, although the SEC may conclude otherwise.

readily available substitute contractor.

On December 21, 2001, the SEC’s Division of Corporation

KBR and Petrobras are currently attempting to resolve

Finance announced that it would review the annual reports

any disputes through ongoing negotiations between

of all Fortune 500 companies that file periodic reports with

the parties and each has appointed a high-level team for

the SEC. We received the SEC’s initial comments in letter

this purpose.

form dated September 20, 2002 and responded on October 31,

S e c u r i t i e s a n d E x c h a n g e C o m m i s s i o n ( “ S EC ” )

2002. Since then, we have received and responded to three

I n v e s t i g a t i o n a n d Fo r t u n e 5 0 0 R e v i e w. In late May 2002,

follow-up sets of comments, most recently in March 2003.

we received a letter from the Fort Worth District Office of

S e c u r i t i e s a n d r e l a t e d l i t i g a t i o n . On June 3, 2002, a

the Securities and Exchange Commission stating that it was

class action lawsuit was filed against us in the United

initiating a preliminary inquiry into some of our accounting

States District Court for the Northern District of Texas on

practices. In mid-December 2002, we were notified by the

behalf of purchasers of our common stock alleging

SEC that a formal order of investigation had been issued.

violations of the federal securities laws. After that date,

Since that time, the SEC has issued subpoenas calling for

approximately twenty similar class actions were filed

the production of documents and requiring the appearance

against us in that or other federal district courts. Several of

of a number of witnesses to testify regarding those

those lawsuits also named as defendants Arthur Andersen,

accounting practices, which relate to the recording of

LLP (“Arthur Andersen”), our independent accountants for

revenues associated with cost overruns and unapproved

the period covered by the lawsuit, and several of our

claims on long-term engineering and construction projects.

present or former officers and directors. Those lawsuits

Throughout the informal inquiry and during the

allege that we violated federal securities laws in failing to

pendency of the formal investigation, we have provided

disclose a change in the manner in which we accounted for

approximately 300,000 documents to the SEC. The

revenues associated with unapproved claims on long-term

production of documents is essentially complete and the

engineering and construction contracts, and that we

process of providing witnesses to testify is ongoing. To our

overstated revenue by accruing the unapproved claims. One

knowledge, the SEC’s investigation has focused on the

such action was subsequently dismissed voluntarily, without

compliance with generally accepted accounting principles

prejudice, upon motion by the filing plaintiff. The federal

of our recording of revenues associated with cost overruns

securities fraud class actions have all been transferred to

and unapproved claims for long-term engineering and

the U.S. District Court for the Northern District of Texas

construction projects, and the disclosure of our accrual

and consolidated before the Honorable Judge David Godbey.

practice. Accrual of revenue from unapproved claims is an

The amended consolidated class action complaint in that

accepted and widely followed accounting practice for

case, styled Richard Moore v. Halliburton, was scheduled to

companies in the engineering and construction business.

be filed in February 2003, but that date has been extended

Although we accrued revenue related to unapproved

by agreement of the parties. It is unclear as of this time

claims in 1998, we first made disclosures regarding the

when the amended consolidated class action complaint will

accruals in our 1999 Annual Report on Form 10-K. We

believe we properly applied the required methodology of the

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be filed. However, we believe that we have meritorious

plus pre-judgment interest, which was less than one-quarter

defenses to the claims and intend to vigorously defend

of BJ’s claim at the beginning of the trial. A total of $102

against them.

million was accrued in the first quarter, which was

Another case, also filed in the United States District

comprised of the $98 million judgment and $4 million in

Court for the Northern District of Texas on behalf of three

pre-judgment interest costs. The jury also found that there

individuals, and based upon the same revenue recognition

was no intentional infringement by Halliburton Energy

practices and accounting treatment that is the subject of the

Services. As a result of the jury’s determination of

securities class actions, alleges only common law and

infringement, the court has enjoined us from further use of

statutory fraud in violation of Texas state law. We moved to

our Phoenix fracturing fluid. We have posted a supersedeas

dismiss that action on October 24, 2002, as required by

bond in the amount of approximately $107 million to

the court’s scheduling order, on the bases of lack of federal

cover the damage award, pre-judgment and post-judgment

subject matter jurisdiction and failure to plead with that

interest, and awardable costs. We timely appealed the

degree of particularity required by the rules of procedure.

judgment and the appeal has now been fully briefed and we

That motion has now been fully briefed and is before the

are awaiting notice of a date of hearing before the United

court awaiting ruling.

States Court of Appeals for the Federal Circuit, which hears

In addition to the securities class actions, one additional

all appeals of patent cases. While we believe we have a

class action, alleging violations of ERISA in connection with

valid basis for appeal and intend to vigorously pursue our

the Company’s Benefits Committee’s purchase of our stock

appeal, any favorable outcome from that appeal is not

for the accounts of participants in our 401 (k) retirement

assured. We have alternative products to use in our

plan during the period we allegedly knew or should have

fracturing operations, and do not expect the loss of the use

known that our revenue was overstated as a result of the

of the Phoenix fracturing fluid to have a material adverse

accrual of revenue in connection with unapproved claims,

impact on our overall energy services business.

was filed and subsequently voluntarily dismissed.

A n g l o - D u t c h ( Te n g e) . We have been sued in the District

Finally, on October 11, 2002, a shareholder derivative

Court of Harris County, Texas by Anglo-Dutch (Tenge)

action against present and former directors and our former

L.L.C. and Anglo-Dutch Petroleum International, Inc. for

CFO was filed alleging breach of fiduciary duty and

allegedly breaching a confidentiality agreement related to

corporate waste arising out of the same events and

an investment opportunity we considered in the late 1990s

circumstances upon which the securities class actions are

in an oil field in the former Soviet republic of Kazakhstan.

based. We have moved to dismiss that action and a hearing

While we believe the claims raised in that lawsuit are

on that motion has taken place in March 2003. We believe

without merit and are vigorously defending against them,

the action is without merit and we intend to vigorously

the plaintiffs have announced their intention to seek

defend it.

approximately $680 million in damages. We have moved for

B J S e r v i c e s C o m p a n y p a t e n t l i t i g a t i o n . On April 12,

summary judgment and a hearing on that motion was

2002, a federal court jury in Houston, Texas, returned a

held on March 12 of 2003. The court’s ruling on this motion

verdict against Halliburton Energy Services, Inc. in a patent

is still pending. Trial is set for April 21, 2003.

infringement lawsuit brought by BJ Services Company, or

I m p r o p e r p a y m e n t s r e p o r t e d t o t h e S e c u r i t i e s a n d

BJ. The lawsuit alleged that our Phoenix fracturing fluid

E x c h a n g e C o m m i s s i o n . We have reported to the SEC that

infringed a patent issued to BJ in January 2000 for a

one of our foreign subsidiaries operating in Nigeria made

method of well fracturing using a specific fracturing fluid.

The jury awarded BJ approximately $98 million in damages,

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improper payments of approximately $2.4 million to an

million as of December 31, 2002 and $49 million as of

entity owned by a Nigerian national who held himself out as

December 31, 2001. The liability covers numerous properties

a tax consultant when in fact he was an employee of a local

and no individual property accounts for more than 10% of

tax authority. The payments were made to obtain favorable

the current liability balance. In some instances, we have

tax treatment and clearly violated our Code of Business

been named a potentially responsible party by a regulatory

Conduct and our internal control procedures. The payments

agency, but in each of those cases, we do not believe we have

were discovered during an audit of the foreign subsidiary.

any material liability. We have subsidiaries that have

We have conducted an investigation assisted by outside

been named as potentially responsible parties along with

legal counsel. Based on the findings of the investigation we

other third parties for ten federal and state superfund sites

have terminated several employees. None of our senior

for which we have established liabilities. As of December 31,

officers were involved. We are cooperating with the SEC in

2002, those ten sites accounted for $8 million of our total

its review of the matter. We plan to take further action to

$48 million liability.

ensure that our foreign subsidiary pays all taxes owed in

L e t t e r s o f c r e d i t . In the normal course of business, we

Nigeria, which may be as much as an additional $3 million,

have agreements with banks under which approximately

which amount was fully accrued as of March 31, 2002.

$1.4 billion of letters of credit or bank guarantees were

The integrity of our Code of Business Conduct and our

issued, including $204 million which relate to our joint

internal control procedures are essential to the way we

ventures’ operations. Effective October 9, 2002, we amended

conduct business.

an agreement with banks under which $261 million of

E n v i r o n m e n t a l . We are subject to numerous

letters of credit have been issued. The amended agreement

environmental, legal and regulatory requirements related to

removes the provision that previously allowed the banks to

our operations worldwide. In the United States, these laws

require collateralization if ratings of Halliburton debt fell

and regulations include the Comprehensive Environmental

below investment grade ratings. The revised agreements

Response, Compensation and Liability Act, the Resources

include provisions that require us to maintain ratios of

Conservation and Recovery Act, the Clean Air Act, the

debt to total capital and of total earnings before interest,

Federal Water Pollution Control Act and the Toxic Substances

taxes, depreciation and amortization to interest expense.

Control Act, among others. In addition to the federal laws

The definition of debt includes our asbestos liability. The

and regulations, states where we do business may have

definition of total earnings before interest, taxes, depreciation

equivalent laws and regulations by which we must also

and amortization excludes any non-cash charges related

abide. We evaluate and address the environmental impact of

to the proposed global asbestos settlement through

our operations by assessing and remediating contaminated

December 31, 2003.

properties in order to avoid future liabilities and comply

If our debt ratings fall below investment grade, we would

with environmental, legal and regulatory requirements. On

be in technical breach of a bank agreement covering another

occasion, we are involved in specific environmental litigation

$160 million of letters of credit at December 31, 2002, which

and claims, including the remediation of properties we own

might entitle the bank to set-off rights. In addition, a $151

or have operated as well as efforts to meet or correct

million letter of credit line, of which $121 million has been

compliance-related matters.

issued, includes provisions that allow the bank to require

We do not expect costs related to these remediation

cash collateralization for the full line if debt ratings of either

requirements to have a material adverse effect on our

rating agency fall below the rating of BBB by Standard &

consolidated financial position or our results of operations.

Our accrued liabilities for environmental matters were $48

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Poor’s or Baa2 by Moody’s Investors’ Services. These letters

N O T E 1 3 .

of credit and bank guarantees generally relate to our

guaranteed performance or retention payments under our

long-term contracts and self-insurance.

In the past, no significant claims have been made

against letters of credit we have issued. We do not

I N C O M E ( L O S S ) P E R S H A R E

Millions of dollars and shares
except per share data

Income (loss) from continuing

operations before change

in accounting method, net

Basic weighted average shares

anticipate material losses to occur as a result of these

Effect of common stock equivalents

2002

2001

2000

$ (346) $ 551

$ 188

432

—

432

428

430

442

446

financial instruments.

L i q u i d a t e d d a m a g e s . Many of our engineering and

construction contracts have milestone due dates that must

be met or we may be subject to penalties for liquidated

damages if claims are asserted and we were responsible for

the delays. These generally relate to specified activities

within a project by a set contractual date or achievement of

a specified level of output or throughput of a plant we

construct. Each contract defines the conditions under which

a customer may make a claim for liquidated damages. In

most instances, liquidated damages are never asserted by

the customer but the potential to do so is used in

negotiating claims and closing out the contract. We had not

accrued a liability for $364 million at December 31, 2002

and $97 million at December 31, 2001 of possible liquidated

damages as we consider the imposition of liquidated

damages to be unlikely. We believe we have valid claims for

schedule extensions against the customers which would

eliminate any liability for liquidated damages. Of the total

liquidated damages, $263 million at December 31, 2002 and

$77 million at December 31, 2001 relate to unasserted

liquidated damages for the Barracuda-Caratinga project.

The estimated schedule impact of change orders requested

by the customer is expected to cover approximately one-half

Diluted weighted average shares

Income (loss) per common share

from continuing operations before

change in accounting method, net:

Basic

Diluted

$(0.80) $1.29

$0.42

$(0.80)

$1.28

$0.42

Basic income (loss) per share is based on the weighted

average number of common shares outstanding during the

period. Diluted income (loss) per share includes additional

common shares that would have been outstanding if

potential common shares with a dilutive effect had been

issued. For 2002, we have used the basic weighted average

shares in the calculation as the effect of the common stock

equivalents would be antidilutive based upon the net loss

from continuing operations. Included in the computation

of diluted income per share in 2001 and 2000 are rights we

issued in connection with the PES acquisition for between

850,000 and 2.1 million shares of Halliburton common stock.

Excluded from the computation of diluted income per

share are options to purchase 10 million shares of common

stock in 2001 and 1 million shares in 2000. These options

were outstanding during these years, but were excluded

because the option exercise price was greater than the

average market price of the common shares.

of the $263 million exposure at December 31, 2002 and

N O T E 1 4 .

claims for schedule extension are expected to cover the

remaining exposure.

R E O R G A N I Z AT I O N O F B U S I N E S S O P E R AT I O N S

On March 18, 2002 we announced plans to restructure our

O t h e r. We are a party to various other legal proceedings.

businesses into two operating subsidiary groups, the Energy

We expense the cost of legal fees related to these

Services Group and the Engineering and Construction

proceedings as incurred. We believe any liabilities we may

Group. As part of this reorganization, we separated and

have arising from these proceedings will not be material to

our consolidated financial position or results of operations.

consolidated the entities in our Energy Services Group

together as direct and indirect subsidiaries of Halliburton

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Energy Services, Inc. We also separated and consolidated the

continued to experience delays in customer commitments for

entities in our Engineering and Construction Group

new upstream and downstream projects. With the exception

together as direct and indirect subsidiaries of the former

of deepwater projects, short-term prospects for increased

Dresser Industries, Inc., which became a limited liability

engineering and construction activities in either the

company during the second quarter of 2002 and was

upstream or downstream businesses were not positive. As a

renamed DII Industries. The reorganization of business

result of the reorganization of the engineering and

operations facilitated the separation, organizationally,

construction businesses, we took actions to rationalize our

financially, and operationally, of our two business segments,

operating structure including write-offs of equipment and

which we believe will significantly improve operating

licenses of $10 million, engineering reference designs of $4

efficiencies in both, while streamlining management and

million, capitalized software of $6 million, and recorded

easing manpower requirements. In addition, many support

severance costs of $16 million. Of these charges, $30 million

functions, which were previously shared, were moved into

was reflected under the captions Cost of services and $6

the two business groups. As a result, we took actions during

million as General and administrative in our 2000

2002 to reduce our cost structure by reducing personnel,

consolidated statements of income. Severance and related

moving previously shared support functions into the two

costs of $16 million were for the reduction of approximately

business groups and realigning ownership of international

30 senior management positions. In January 2002, the

subsidiaries by group.

last of the personnel actions was completed and we have no

In 2002, we incurred costs related to the restructuring of

remaining accruals related to the 2000 restructuring.

approximately $107 million which consisted of the following:

• $64 million in personnel related expense;

• $17 million of asset related write-downs;

N O T E 1 5 .

C H A N G E I N A C C O U N T I N G M E T H O D

In July 2001, the Financial Accounting Standards Board

• $20 million in professional fees related to the

issued SFAS No. 142, “Goodwill and Other Intangible

restructuring; and

Assets.” Effective January 1, 2002, goodwill is no longer

• $6 million related to contract terminations.

amortized but is tested for impairment as set forth in the

Of this amount, $8 million remains in accruals for

severance arrangements and approximately $2 million for

other items. We expect these remaining payments will be

made during 2003.

Although we have no specific plans currently, the

reorganization would facilitate separation of the ownership

of the two businesses in the future if we identify an

opportunity that produces greater value for our shareholders

than continuing to own both businesses.

In the fourth quarter of 2000 we approved a plan to

reorganize our engineering and construction businesses into

one business unit. This restructuring was undertaken

because our engineering and construction businesses

statement. We now perform our goodwill impairment test

for each of our reporting units in accordance with SFAS

No. 142 and those tests indicate that none of the goodwill we

currently have recorded is impaired. Amortization of

goodwill for 2001 totaled $42 million pretax and $38 million

after-tax.

In July 2001, the Financial Accounting Standards Board

issued SFAS No. 141, “Business Combinations” which

requires the purchase method of accounting for business

combination transactions initiated after June 30, 2001. The

statement requires that goodwill recorded on acquisitions

completed prior to July 1, 2001 be amortized through

December 31, 2001. Goodwill amortization is precluded on

acquisitions completed after June 30, 2001. We ceased

amortization of goodwill on December 31, 2001.

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N O T E 1 6 .

I N C O M E TA X E S

December 31
Millions of dollars

Gross deferred tax assets:

2002

2001

The components of the (provision) benefit for income taxes are:

Employee compensation and benefits

$ 282

$ 214

Years ended December 31
Millions of dollars

Current income taxes:

Federal

Foreign

State

Total

Deferred income taxes:

Federal
Foreign and state

Total

2002

2001

2000

$ 71

$(146) $ (16)

(173)

(157)

(114)

(20)

(5)

(98)

(323)

(135)

(11)

(58)

(3)

(61)

(20)

Total continuing operations

$ (80)

$(384) $(129)

Discontinued operations:

Current income taxes

Deferred income taxes

Disposal of discontinued operations

Total

133

—

(15)

(60)

—

(199)

(141)

$ 74

$(563) $(330)

Included in the current (provision) benefit for income

taxes are foreign tax credits of $89 million in 2002, $106

million in 2001 and $113 million in 2000. The United States

and foreign components of income before income taxes,

Capitalized research and experimentation

Accrued liabilities

Insurance accruals

Construction contract accounting methods

Inventory

102

114

Asbestos and silica related liabilities

1,201

Intercompany profit

Net operating loss carryforwards

Foreign tax credit carryforward

AMT credit carryforward

Intangibles

Allowance for bad debt

Other

Total

Gross deferred tax liabilities:

121

100

258

—

$ 2,134

$1,067

Insurance for asbestos and silica related liabilities $ 724

$ 214

Depreciation and amortization

Nonrepatriated foreign earnings

All other

Total

Valuation allowances:

188

106

101

$ 961

$ 457

Net operating loss carryforwards

Future tax attributes related to asbestos

Foreign tax credit limitation

All other

Total

233

366

—

minority interests, discontinued operations, and change in

litigation

accounting method are as follows:

Years ended December 31
Millions of dollars

United States

Foreign

Total

2002

2001

2000

$(537)

$565

$ 128

309

389

207

$(228)

$954

$ 335

Net deferred income tax asset

$ 807

$ 564

We have $158 million of net operating loss carryforwards

that expire from 2003 through 2011 and net operating loss

The primary components of our deferred tax assets and

carryforwards of $71 million with indefinite expiration

liabilities and the related valuation allowances, including

dates. The federal alternative minimum tax credits are

federal deferred tax assets of discontinued operations are

available to reduce future U.S. federal income taxes on an

as follows:

indefinite basis.

We have accrued for the potential repatriation of

undistributed earnings of our foreign subsidiaries and

consider earnings above the amounts on which tax has been

provided to be permanently reinvested. While these

additional earnings could become subject to additional tax if

repatriated, repatriation is not anticipated. Any additional

amount of tax is not practicable to estimate.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

107

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

We have established a $49 million valuation allowance

potential excess foreign tax credit carryovers. Further, our

against the 2002 foreign tax credit carryovers, on the basis

impairment loss on Bredero-Shaw cannot be fully benefited

that we believe these credits will not be utilized in the

for tax purposes due to book and tax basis differences in

statutory carryover period. We also have recorded a $233

that investment and the limited benefit generated by a

million valuation allowance on the asbestos liabilities based

capital loss carryback. Settlement of unrealized prior period

on the anticipated impact of the future asbestos deductions

tax exposures had a favorable impact to the overall tax rate.

on our ability to utilize future foreign tax credits. We

Exclusive of the asbestos and silica charges net of

anticipate that a portion of the asbestos deductions will

insurance recoveries and the impairment loss on

displace future foreign tax credits and those credits will

Bredero-Shaw, our 2002 effective tax rate from continuing

expire unutilized.

operations would be 38.9% for fiscal 2002 compared to

Pension liability adjustment included in Other

40.3% in 2001.

comprehensive income is net of a tax benefit of $69 million

in 2002, and $15 million in 2001.

Reconciliations between the actual provision for

income taxes and that computed by applying the United

States statutory rate to income from continuing operations

before income taxes and minority interest are as follows:

N O T E 1 7.

C O M M O N S T O C K

Our 1993 Stock and Long-Term Incentive Plan provides for

the grant of any or all of the following types of awards:

• stock options, including incentive stock options and non-

qualified stock options;

2002

2001

2000

• stock appreciation rights, in tandem with stock options or

Years ended December 31
Millions of dollars

(Provision) benefit computed at

statutory rate

$ 80

$ (334) $ (117)

Reductions (increases) in taxes

resulting from:

Rate differentials on foreign earnings

(4)

(32)

(14)

State income taxes, net of federal

income tax benefit

Prior years

Loss on disposals of equity method investee

(28)

(13)

—

(3)

—

Non-deductible goodwill

Valuation allowance

Other items, net

Total continuing operations

Discontinued operations

Disposal of discontinued operations

—

(163)

—

(80)

154

—

(384)

(199)

—

(129)

(60)

(141)

Total

$ 74

$ (563) $ (330)

We have recognized a $114 million valuation allowance in

continuing operations and $119 million in discontinued

operations associated with the asbestos charges net of

insurance recoveries. In addition, continuing operations has

recorded a valuation allowance of $49 million related to

(11)

have been reserved for issuance to key employees. The plan

freestanding;

• restricted stock;

• performance share awards; and

• stock value equivalent awards.

Under the terms of the 1993 Stock and Long-Term Incentive

Plan as amended, 49 million shares of common stock

specifies that no more than 16 million shares can be

awarded as restricted stock. At December 31, 2002, 19

million shares were available for future grants under the

1993 Stock and Long-Term Incentive Plan of which 10

million shares remain available for restricted stock awards.

In connection with the acquisition of Dresser Industries,

Inc. in 1998, we assumed the outstanding stock options

under the stock option plans maintained by Dresser

Industries, Inc. Stock option transactions summarized below

include amounts for the 1993 Stock and Long-Term

Incentive Plan and stock plans of Dresser Industries, Inc.

and other acquired companies. No further awards are being

made under the stock plans of acquired companies.

108

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

The following table represents our stock options granted,

Stock options generally expire 10 years from the grant

exercised and forfeited during the past three years:

date. Stock options under the 1993 Stock and Long-Term

Stock Options

Outstanding at

December 31, 1999

Granted

Exercised

Forfeited

Outstanding at

December 31, 2000

Granted

Exercised

Forfeited

Outstanding at

Number
of Shares
(in millions)

Exercise Price
per Share

Weighted
Average
Exercise
Price
per Share

Incentive Plan vest ratably over a three or four year period.

Other plans have vesting periods ranging from three to 10

years. Options under the Non-Employee Directors’ Plan vest

17.1

1.7

(3.6)

(0.5)

14.7

3.6

(0.7)

(0.5)

$ 3.10 – 61.50

$ 32.03

after six months.

34.75 – 54.00

3.10 – 45.63

12.20 – 54.50

41.61

25.89

37.13

Restricted shares awarded under the 1993 Stock and

Long-Term Incentive Plan were 1,706,643 in 2002, 1,484,034

in 2001, and 695,692 in 2000. The shares awarded are net

$ 8.28 – 61.50

$ 34.54

of forfeitures of 46,894 in 2002, 170,050 in 2001, and 69,402

12.93 – 45.35

8.93 – 40.81

12.32 – 54.50

35.56

25.34

36.83

in 2000. The weighted average fair market value per share

at the date of grant of shares granted was $14.95 in 2002,

$30.90 in 2001, and $42.25 in 2000.

December 31, 2001

17.1

$ 8.28 – 61.50

$ 35.10

Our Restricted Stock Plan for Non-Employee Directors

Granted

Exercised

Forfeited

Outstanding at

2.6
— *
(1.2)

9.10 – 19.75

8.93 – 17.21

8.28 – 54.50

12.57

11.39

31.94

December 31, 2002

18.5

$9.10 – 61.50

$32.10

* Actual exercises for 2002 were approximately 30,000 shares.

allows for each non-employee director to receive an annual

award of 400 restricted shares of common stock as a part

of compensation. We reserved 100,000 shares of common

stock for issuance to non-employee directors. Under this plan

we issued 4,400 restricted shares in 2002, 4,800 restricted

Options outstanding at December 31, 2002 are composed of

shares in 2001, and 3,600 restricted shares in 2000. At

the following:

December 31, 2002, 38,000 shares have been issued to non-

Range of
Exercise Prices

$ 9.10 – 19.27

$ 19.28 – 30.14

$ 30.15 – 39.54

$ 39.55 – 61.50

Number of
Shares
(in millions)

3.2

5.1

6.3

3.9

$ 9.10 – 61.50

18.5

Outstanding
Weighted
Average
Remaining
Contractual
Life

7.4

4.8

6.5

6.7

6.2

Exercisable

employee directors under this plan. The weighted average

Weighted
Average
Exercise
Price

$13.41

27.50

37.30

45.28

Number
of Shares
(in millions)

0.7

4.8

2.2

Weighted
Average
Exercise
Price

$16.96

27.79

38.55

48.34

fair market value per share at the date of grant of shares

granted was $12.56 in 2002, $34.35 in 2001, and $46.81

in 2000.

Our Employees’ Restricted Stock Plan was established for

employees who are not officers, for which 200,000 shares

$32.10

12.5

$34.98

of common stock have been reserved. At December 31, 2002,

There were 10.7 million options exercisable with a

weighted average exercise price of $34.08 at December 31,

2001, and 8.8 million options exercisable with a weighted

average exercise price of $32.81 at December 31, 2000.

All stock options under the 1993 Stock and Long-Term

Incentive Plan, including options granted to employees of

Dresser Industries, Inc. since its acquisition, are granted at

the fair market value of the common stock at the grant date.

152,650 shares (net of 42,750 shares forfeited) have been

issued. Forfeitures were 400 in 2002, 800 in 2001, and 6,450

in 2000. No further grants are being made under this plan.

Under the terms of our Career Executive Incentive Stock

Plan, 15 million shares of our common stock were reserved

for issuance to key officers and key employees at a

purchase price not to exceed par value of $2.50 per share. At

December 31, 2002, 11.7 million shares (net of 2.2 million

shares forfeited) have been issued under the plan. No

further grants will be made under the Career Executive

Incentive Stock Plan.

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

109

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

Restricted shares issued under the 1993 Stock and Long-

N O T E 1 8 .

Term Incentive Plan, Restricted Stock Plan for Non-

Employee Directors, Employees’ Restricted Stock Plan and

the Career Executive Incentive Stock Plan are limited as to

sale or disposition. These restrictions lapse periodically over

an extended period of time not exceeding 10 years.

Restrictions may also lapse for early retirement and other

conditions in accordance with our established policies. Upon

termination of employment, shares in which restrictions

have not lapsed must be returned to us, resulting in

restricted stock forfeitures. The fair market value of the

stock, on the date of issuance, is being amortized and

charged to income (with similar credits to paid-in capital in

excess of par value) generally over the average period

during which the restrictions lapse. At December 31, 2002,

the unamortized amount is $75 million. We recognized

compensation costs of $38 million in 2002, $23 million in

2001, and $18 million in 2000.

During 2002, our Board of Directors approved the 2002

Employee Stock Purchase Plan (ESPP) and reserved

12 million shares for issuance. Under the ESPP, eligible

employees may have up to 10% of their earnings withheld,

subject to some limitations, to be used to purchase shares

of our common stock. Unless the Board of Directors

shall determine otherwise, each 6-month offering period

commences on January 1 and July 1 of each year. The

price at which common stock may be purchased under the

ESPP is equal to 85% of the lower of the fair market value

S E R I E S A J U N I O R PA R T I C I PAT I N G

P R E F E R R E D S T O C K

We previously declared a dividend of one preferred stock

purchase right on each outstanding share of common stock.

The dividend is also applicable to each share of our common

stock that was issued subsequent to adoption of the Rights

Agreement entered into with Mellon Investor Services LLC.

Each preferred stock purchase right entitles its holder to

buy one two-hundredth of a share of our Series A Junior

Participating Preferred Stock, without par value, at an

exercise price of $75. These preferred stock purchase rights

are subject to anti-dilution adjustments, which are

described in the Rights Agreement entered into with Mellon.

The preferred stock purchase rights do not have any voting

rights and are not entitled to dividends.

The preferred stock purchase rights become exercisable in

limited circumstances involving a potential business

combination. After the preferred stock purchase rights

become exercisable, each preferred stock purchase right will

entitle its holder to an amount of our common stock, or in

some circumstances, securities of the acquirer, having a total

market value equal to two times the exercise price of the

preferred stock purchase right. The preferred stock purchase

rights are redeemable at our option at any time before they

become exercisable. The preferred stock purchase rights

expire on December 15, 2005. No event during 2002 made

the preferred stock purchase rights exercisable.

of the common stock on the commencement date or last

N O T E 1 9.

trading day of each offering period. There were approximately

F I N A N C I A L I N S T R U M E N T S A N D R I S K M A N A G E M E N T

541,000 shares sold through the ESPP in 2002.

In June 1998, the Financial Accounting Standards Board

On April 25, 2000, our Board of Directors approved plans to

issued SFAS No. 133 “Accounting for Derivative Instruments

implement a share repurchase program for up to 44 million

and for Hedging Activities”, subsequently amended by SFAS

shares. No shares were repurchased in 2002. We repurchased

No. 137 and SFAS No. 138. This standard requires entities

1.2 million shares at a cost of $25 million in 2001 and 20.4

to recognize all derivatives on the balance sheet as assets or

million shares at a cost of $759 million in 2000.

liabilities and to measure the instruments at fair value.

Accounting for gains and losses from changes in those fair

values is specified in the standard depending on the

intended use of the derivative and other criteria. We adopted

110

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

SFAS No. 133 effective January 2001 and recorded a $1

The use of some contracts may limit our ability to benefit

million after-tax credit for the cumulative effect of adopting

from favorable fluctuations in foreign exchange rates.

the change in accounting method. We do not expect future

Foreign currency contracts are not utilized to manage

measurements at fair value under the new accounting

exposures in some currencies due primarily to the lack of

method to have a material effect on our financial condition

available markets or cost considerations (non-traded

or results of operations.

currencies). We attempt to manage our working capital

Fo r e i g n e x c h a n g e r i s k . Techniques in managing foreign

position to minimize foreign currency commitments in non-

exchange risk include, but are not limited to, foreign

traded currencies and recognize that pricing for the

currency borrowing and investing and the use of currency

services and products offered in these countries should cover

derivative instruments. We selectively manage significant

the cost of exchange rate devaluations. We have historically

exposures to potential foreign exchange losses considering

incurred transaction losses in non-traded currencies.

current market conditions, future operating activities and

A s s e t s , l i a b i l i t i e s a n d f o r e c a s t e d c a s h f l o w s

the associated cost in relation to the perceived risk of loss.

d e n o m i n a t e d i n f o r e i g n c u r r e n c i e s . We utilize the

The purpose of our foreign currency risk management

derivative instruments described above to manage the

activities is to protect us from the risk that the eventual

foreign currency exposures related to specific assets and

dollar cash flows resulting from the sale and purchase of

liabilities, which are denominated in foreign currencies;

products and services in foreign currencies will be adversely

however, we have not elected to account for these

affected by changes in exchange rates. We do not hold

instruments as hedges for accounting purposes. Additionally,

or issue derivative financial instruments for trading or

we utilize the derivative instruments described above to

speculative purposes.

manage forecasted cash flows denominated in foreign

We manage our currency exposure through the use of

currencies generally related to long-term engineering and

currency derivative instruments as it relates to the major

construction projects. While we enter into these instruments

currencies, which are generally the currencies of the

to manage the foreign currency risk on these projects,

countries for which we do the majority of our international

we have chosen not to seek hedge accounting treatment for

business. These contracts generally have an expiration

these contracts. The fair value of these contracts was

date of two years or less. Forward exchange contracts, which

immaterial as of the end of 2002 and 2001.

are commitments to buy or sell a specified amount of a

N o t i o n a l a m o u n t s a n d fa i r m a r k e t v a l u e s . The notional

foreign currency at a specified price and time, are generally

amounts of open forward contracts and options for

used to manage identifiable foreign currency commitments.

continuing operations were $609 million at December 31,

Forward exchange contracts and foreign exchange option

2002 and $505 million at December 31, 2001. The notional

contracts, which convey the right, but not the obligation, to

amounts of our foreign exchange contracts do not generally

sell or buy a specified amount of foreign currency at a

represent amounts exchanged by the parties, and thus, are

specified price, are generally used to manage exposures

not a measure of our exposure or of the cash requirements

related to assets and liabilities denominated in a foreign

relating to these contracts. The amounts exchanged are

currency. None of the forward or option contracts are

calculated by reference to the notional amounts and by other

exchange traded. While derivative instruments are subject

terms of the derivatives, such as exchange rates.

to fluctuations in value, the fluctuations are generally offset

C r e d i t r i s k . Financial instruments that potentially

by the value of the underlying exposures being managed.

subject us to concentrations of credit risk are primarily cash

equivalents, investments and trade receivables. It is our

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

111

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

practice to place our cash equivalents and investments in

N O T E 2 0 .

high-quality securities with various investment institutions.

R E T I R E M E N T P L A N S

We derive the majority of our revenues from sales and

Our Company and subsidiaries have various plans which

services, including engineering and construction, to the

cover a significant number of their employees. These plans

energy industry. Within the energy industry, trade

include defined contribution plans, which provide retirement

receivables are generated from a broad and diverse group of

contributions in return for services rendered, provide an

customers. There are concentrations of receivables in the

individual account for each participant and have terms that

United States and the United Kingdom. We maintain an

specify how contributions to the participant’s account are to

allowance for losses based upon the expected collectibility of

be determined rather than the amount of pension benefits

all trade accounts receivable.

the participant is to receive. Contributions to these plans

There are no significant concentrations of credit risk with

are based on pretax income and/or discretionary amounts

any individual counterparty related to our derivative

contracts. We select counterparties based on their

profitability, balance sheet and a capacity for timely

determined on an annual basis. Our expense for the defined

contribution plans for both continuing and discontinued

operations totaled $80 million in 2002 compared to $129

payment of financial commitments which is unlikely to be

million in 2001 and $140 million in 2000. Other retirement

adversely affected by foreseeable events.

plans include defined benefit plans, which define an amount

I n t e r e s t ra t e r i s k . We have several debt instruments

of pension benefit to be provided, usually as a function of age,

outstanding which have both fixed and variable interest

years of service or compensation. These plans are funded to

rates. We manage our ratio of fixed to variable-rate debt

operate on an actuarially sound basis. Plan assets are

through the use of different types of debt instruments and

primarily invested in cash, short-term investments, real

derivative instruments.

estate, equity and fixed income securities of entities domiciled

Fa i r m a r k e t v a l u e o f f i n a n c i a l i n s t r u m e n t s . The

in the country of the plan’s operation. Plan assets, expenses

estimated fair market value of long-term debt at year-end

and obligations for retirement plans in the following tables

for both 2002 and 2001 was $1.3 billion as compared to the

include both continuing and discontinued operations.

Millions of dollars

U.S.

Int’l.

U.S.

Int’l.

2002

2001

carrying amount of $1.5 billion at year-end for both 2002

and 2001. The fair market value of fixed rate long-term debt

is based on quoted market prices for those or similar

instruments. The carrying amount of variable rate long-term

debt approximates fair market value because these

instruments reflect market changes to interest rates. See

CHANGE IN BENEFIT

OBLIGATION

Benefit obligation at

beginning of year

Service cost

Interest cost

Note 11. The carrying amount of short-term financial

Plan participants’ contributions

instruments, cash and equivalents, receivables, short-term

Effect of business combinations

notes payable and accounts payable, as reflected in the

consolidated balance sheets approximates fair market value

due to the short maturities of these instruments. The

currency derivative instruments are carried on the balance

sheet at fair value and are based upon third-party quotes.

The fair market values of derivative instruments used for

and new plans

Amendments

Divestitures
Settlements/curtailments

Currency fluctuations

Actuarial gain/(loss)

Benefits paid

Benefit obligation at

$140

$1,968

$ 288

$1,670

—

(1)

—

(11)

102

(4)

(5)

(1)

102

(27)

(52)

—

(111)
(46)

—

(14)

—

(90)
—

270

(60)

fair value hedging and cash flow hedging were immaterial.

end of year

$144

$2,239

$ 140

$1,968

112

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

Millions of dollars

U.S.

Int’l.

U.S.

Int’l.

2002

2001

Assumed long-term rates of return on plan assets,

CHANGE IN PLAN ASSETS

Fair value of plan assets at

beginning of year

$130

$1,827

$ 313

$2,165

Actual return on plan assets

Employer contribution

Settlements

Plan participants’ contributions

Effect of business combinations

and new plans

Divestitures

Currency fluctuations

Benefits paid

Fair value of plan assets at

end of year

Funded status

Unrecognized transition

(6)

(1)

—

(11)

(69)

(22)

(294)

—

(46)

—

(5)

(109)

(51)

—

(14)

—

(45)

(58)

$113

$1,886

$ 130

$1,827

$ (31) $ (353) $ (10) $ (141)

obligation/(asset)

—

(2)

(1)

(3)

Unrecognized actuarial

(gain)/loss

477

308

Unrecognized prior service

cost/(benefit)

(70)

(2)

(96)

Net amount recognized

$ 26

$ 21

We recognized an additional minimum pension liability

for the underfunded defined benefit plans. The additional

minimum liability is equal to the excess of the accumulated

benefit obligation over plan assets and accrued liabilities. A

discount rates for estimating benefit obligations and rates of

compensation increases vary for the different plans according

to the local economic conditions. The rates used are as follows:

Weighted-average assumptions

2002

2001

2000

Expected return on plan assets:

United States plans
International plans

9.0%
5.5% to 8.16%

9.0%
5.5% to 9.0%

9.0%
3.5% to 9.0%

Discount rate:

United States plans
International plans

7.0%
5.25% to 20.0%

7.25%
5.0% to 8.0%

7.5%
4.0% to 8.0%

Rate of compensation increase:

United States plans
International plans

4.5%
3.0% to 21.0%

4.5%
3.0% to 7.0%

4.5%
3.0% to 7.6%

Millions of dollars

U.S.

Int’l.

U.S.

Int’l.

U.S.

Int’l.

2002

2001

2000

COMPONENTS OF NET

PERIODIC BENEFIT COST

Service cost

Interest cost

$ 1

$ 72

$ 2

$ 60

$ 4

$ 57

102

Expected return on

plan assets

(13)

(106)

Transition amount

—

(2)

(18)

—

(95)

(2)

(26)

(99)

—

Amortization of prior

service cost

Settlements/

(2)

(6)

(2)

(6)

(1)

(6)

curtailments

—

(2)

—

Recognized actuarial

corresponding amount is recognized as either an intangible

(gain)/loss

(1)

(9)

—

(10)

asset or a reduction of shareholders’ equity. For the year

Net periodic benefit

ended December 31, 2002 we recognized $212 million in

additional minimum pension liability of which $130 million

was recorded as Other comprehensive income, net of tax.

(income) cost

$ (4) $ 61

$ 10

$ 37

$ 7

$ 29

The projected benefit obligation, accumulated benefit

obligation, and fair value of plan assets for the pension

2002

2001

U.S.

Int’l.

U.S.

Int’l.

plans with accumulated benefit obligations in excess of plan

assets as of December 31, 2002 and 2001 are as follows:

Millions of dollars

AMOUNTS RECOGNIZED IN THE

CONSOLIDATED BALANCE SHEETS

Prepaid benefit cost

$ 30

$ 102

$ 7

$ 85

Accrued benefit liability including

additional minimum liability

(59)

(250)

(10)

(36)

Intangible asset

Millions of dollars

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets

2002

2001

$ 2,319

$ 2,121

$ 1,942

$ 235

$ 215

$ 175

Accumulated other comprehensive

income, net of tax

Deferred tax asset

Net amount recognized

122

P o s t r e t i r e m e n t m e d i c a l p l a n . We offer postretirement

medical plans to specific eligible employees. For some plans,

$ 26

$ 52

$ 21

$ 68

our liability is limited to a fixed contribution amount for

each participant or dependent. The plan participants share

the total cost for all benefits provided above our fixed

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

113

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

contribution and participants’ contributions are adjusted as

Millions of dollars

2002

2001

required to cover benefit payments. We have made no

commitment to adjust the amount of our contributions;

therefore, the computed accumulated postretirement benefit

obligation amount is not affected by the expected future

health care cost inflation rate.

Other postretirement medical plans are contributory but

we generally absorb the majority of the costs. We may elect

AMOUNTS RECOGNIZED IN THE

CONSOLIDATED BALANCE SHEETS

Accrued benefit liability

Net amount recognized

$(162) $ (166)

$(162)

$ (166)

Weighted-average assumptions

Discount rate

2002

2001

2000

7.0%

7.25%

7.50%

to adjust the amount of our contributions for these plans. As

Millions of dollars

2002

2001

2000

a result, the expected future health care cost inflation rate

affects the accumulated postretirement benefit obligation

amount. These plans have assumed health care trend rates

(weighted based on the current year benefit obligation) for

2002 of 13% which are expected to decline to 5% by 2007.

Obligations and expenses for postretirement medical

plans in the following tables include both continuing and

discontinued operations.

Millions of dollars

2002

2001

CHANGE IN BENEFIT OBLIGATION

COMPONENTS OF NET PERIODIC

BENEFIT COST

Service cost

Interest cost

Amortization of prior service cost

Settlements/curtailments

Recognized actuarial gain

Net periodic benefit cost

$ 1

—

(1)

(3)

(221)

(1)

$ 3

(7)

—

(1)

$11

$ (208)

$15

Assumed health care cost trend rates have a significant

effect on the amounts reported for the total of the health

care plans. A one-percentage-point change in assumed

Benefit obligation at beginning of year

$ 157

$ 296

health care cost trend rates would have the following effects:

Service cost

Interest cost

Plan participants’ contributions

Settlements/curtailments

Actuarial gain

Benefits paid

—

(27)

(144)

(29)

Millions of dollars

Effect on total of service and interest

cost components

Effect on the postretirement benefit obligation

One-Percentage-Point
(Decrease)
Increase

$ 1

$ 10

$ (1)

$ (9)

Benefit obligation at end of year

$ 186

$ 157

CHANGE IN PLAN ASSETS

Fair value of plan assets at beginning of year

$ — $ —

Employer contribution

Plan participants’ contributions

Benefits paid

Fair value of plan assets at end of year

Funded status

Employer contribution

Unrecognized actuarial gain

Unrecognized prior service cost

Net amount recognized

(27)

(29)

$ — $ —

$(186)

$ (157)

(14)

$(162) $ (166)

N O T E 2 1 .

D R E S S E R I N D U S T R I E S , I N C .

F I N A N C I A L I N F O R M AT I O N

Since becoming a wholly owned subsidiary of Halliburton,

DII Industries (formerly Dresser Industries, Inc.) has ceased

filing periodic reports with the United States Securities and

Exchange Commission. DII Industries 8% guaranteed senior

notes, which were initially issued by Baroid Corporation,

remain outstanding and are fully and unconditionally

guaranteed by Halliburton. Under the terms of a Fourth

Supplemental Indenture, Halliburton Company in December

2002 assumed as co-obligor the payment of principle and

interest on the notes, and the performance of all of the

covenants and conditions of the related indenture.

114

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

N O T E S T O A N N U A L F I N A N C I A L S T A T E M E N T S

N O T E 2 2 .

G O O D W I L L A N D O T H E R I N TA N G I B L E A S S E T S

Years ended December 31
Millions of dollars except per share data

Reported net income (loss)

2002

2001

2000

$ (998)

$ 809

$ 501

We adopted the SFAS No. 142, “Goodwill and Other

Goodwill amortization, net of tax

—

Intangible Assets”, and in accordance with the statement,

amortization of goodwill has been discontinued. Our

Adjusted net income (loss)

$ (998)

$ 847

$ 537

Basic earnings (loss) per share:

Reported net income (loss)

$(2.31) $1.89

$1.13

reporting units as defined under SFAS No. 142 are the same

Goodwill amortization, net of tax

—

0.09

0.08

as our reportable operating segments: Energy Services

Adjusted net income (loss)

$(2.31)

$1.98

$1.21

Group and Engineering and Construction Group. Goodwill

for the Energy Services Group was $402 million (net of $118

Diluted earnings (loss) per share:

Reported net income (loss)

$(2.31)

$1.88

$1.12

Goodwill amortization, net of tax

—

0.09

0.08

million accumulated amortization) in 2002, $386 million (net

Adjusted net income (loss)

$(2.31)

$1.97

$1.20

of $118 million accumulated amortization) in 2001, and

$310 million (net of $97 million accumulated amortization)

in 2000. Goodwill for the Engineering and Construction

Group was $321 million (net of $152 million accumulated

amortization) in 2002, $334 million (net of $151 million

accumulated amortization) in 2001, and $287 million (net

of $134 million accumulated amortization) in 2000.

Had we been accounting for our goodwill under SFAS No.

142 for all periods presented, our net income (loss) and

earnings (loss) per share would have been as follows:

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

115

S E L E C T E D F I N A N C I A L D A T A ( U N A U D I T E D )

Years ended December 31
Millions of dollars and shares except
per share and employee data
OPERATING RESULTS
Net revenues

Energy Services Group
Engineering and Construction Group

Total revenues

OPERATING INCOME (LOSS)
Energy Services Group
Engineering and Construction Group
Special charges and credits (1)
General corporate

Total operating income (1)

Nonoperating income (expense), net (2)
INCOME/(LOSS) FROM CONTINUING OPERATIONS

BEFORE INCOME TAXES AND MINORITY INTEREST
Provision for income taxes (3)
Minority interest in net income of consolidated

subsidiaries

Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
BASIC INCOME (LOSS) PER COMMON SHARE

2002

2001

2000

1999

1998

$ 6,836
5,736
$12,572

$ 7,811
5,235
$13,046

$ 6,233
5,711
$11,944

$ 5,402
6,911
$ 12,313

$ 7,258
7,246
$ 14,504

638
(685)
—
(65)
(112)
(116)

(228)
(80)

(38)
$ (346)
$ (652)
$ (998)

$
$
$

$ 1,036
111
—
(63)
1,084
(130)

954
(384)

(19)
551
257
809

$
$
$

589
(54)
—
(73)
462
(127)

335
(129)

(18)
188
313
501

$
$
$

241
184
47
(71)
401
(94)

307
(116)

(17)
174
283
438

0.40
1.00

$
$
$

934
274
(959)
(79)
170
(115)

55
(155)

(20)
(120)
105
(15)

(0.27)
(0.03)

(0.27)
(0.03)
0.50
(0.35)%

Continuing operations
Net income (loss)

$ (0.80)
(2.31)

$ 1.29
1.89

$ 0.42
1.13

DILUTED INCOME (LOSS) PER COMMON SHARE

Continuing operations
Net income (loss)

Cash dividends per share
Return on average shareholders’ equity
FINANCIAL POSITION
Net working capital
Total assets
Property, plant and equipment, net
Long-term debt (including current maturities)
Shareholders’ equity
Total capitalization
Shareholders’ equity per share
Average common shares outstanding (basic)
Average common shares outstanding (diluted)
OTHER FINANCIAL DATA
Capital expenditures
Long-term borrowings (repayments), net
Depreciation, depletion and amortization expense
Goodwill amortization included in depreciation,

depletion and amortization expense:

Energy Services Group
Engineering and Construction Group

Payroll and employee benefits (4)
Number of employees (4) (5)

(continued on next page)

(0.80)
(2.31)
0.50
(24.02)%

1.28
1.88
0.50
18.64%

0.42
1.12
0.50
12.20%

0.39
0.99
0.50
10.49%

$ 2,288
12,844
2,629
1,476
3,588
5,083
8.16
432
432

$ 2,665
10,966
2,669
1,484
4,752
6,280
10.95
428
430

$ 1,742
10,192
2,410
1,057
3,928
6,555
9.20
442
446

$ 2,329
9,639
2,390
1,364
4,287
6,590
9.69
440
443

$ 2,129
10,072
2,442
1,426
4,061
5,990
9.23
439
439

$ (764)
(15)
505

$ (797)
412
531

$ (578)
(308)
503

(520)
(59)
511

(841)
122
500

—
—

(4,875)
83,000

24
18
(4,818)
85,000

19
25
(5,260)
93,000

12
21
(5,647)
103,000

22
14
(5,880)
107,800

116

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

S E L E C T E D F I N A N C I A L D A T A ( U N A U D I T E D ) ( c o n t i n u e d )

Years ended December 31
Millions of dollars and shares except
per share and employee data
OPERATING RESULTS
Net revenues

Energy Services Group
Engineering and Construction Group

Total revenues
OPERATING INCOME

Energy Services Group
Engineering and Construction Group
Special charges and credits (1)
General corporate

Total operating income (1)

Nonoperating income (expense), net (2)
INCOME FROM CONTINUING OPERATIONS BEFORE

INCOME TAXES AND MINORITY INTEREST
Provision for income taxes (3)
Minority interest in net income of consolidated

subsidiaries

Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
BASIC INCOME (LOSS) PER COMMON SHARE

Continuing operations
Net income (loss)

DILUTED INCOME (LOSS) PER COMMON SHARE

Continuing operations
Net income (loss)

depletion and amortization expense:

Energy Services Group
Engineering and Construction Group

Payroll and employee benefits (4)
Number of employees (4), (5)

(continued on next page)

1997

1996

1995

1994

1993

$ 7,152
6,346
$ 13,498

$ 5,696
5,540
$11,236

$ 4,838
4,207
$ 9,045

$ 4,548
3,992
$ 8,540

$ 5,065
4,080
$ 9,145

$
$
$

959
279
11
(71)
1,178
(82)

1,096
(406)

(30)
660
112
772

1.53
1.79

1.51
1.77
0.50
19.16%

$
$
$

644
188
(86)
(72)
674
(70)

604
(158)

—
446
112
558

1.04
1.30

$
$
$

552
89
(8)
(71)
562
(34)

528
(167)

(1)
360
36
381

$
$
$

411
66
(19)
(56)
402
333

735
(275)

(14)
446
97
543

$
$
$

395
95
(419)
(63)
8
(61)

(53)
(18)

(24)
(95)
81
(14)

0.83
0.88

$ 1.04
1.26

$ (0.23)
(0.04)

1.03
1.29
0.50
15.25%

0.83
0.88
0.50
10.44%

1.03
1.26
0.50
15.47%

(0.23)
(0.04)
0.50
(0.43)%

$ 1,985
9,657
2,282
1,303
4,317
5,647
9.86
431
436

$ 1,501
8,689
2,047
957
3,741
4,828
8.78
429
432

$ 1,477
7,723
1,865
667
3,577
4,378
8.29
431
432

$ 2,197
7,774
1,631
1,119
3,723
4,905
8.63
431
432

$ 1,563
8,087
1,747
1,129
3,296
4,746
7.70
422
422

(804)
285
465

$ (612)
286
405

$ (474)
(481)
380

$ (358)
(120)
387

$ (373)
192
574

20
12
(5,479)
102,000

19
7

(4,674)
93,000

17
7
(4,188)
89,800

14
7
(4,222)
86,500

11
7
(4,429)
90,500

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

117

S E L E C T E D F I N A N C I A L D A T A ( U N A U D I T E D ) ( c o n t i n u e d )

(1) Operating income includes the following special charges and credits:

1999 – $47 million: reversal of a portion of the 1998 special charges.

1998 – $959 million: asset related charges ($491 million), personnel reductions ($234 million), facility consolidations ($124 million), merger transaction costs ($64

million), and other related costs ($46 million).

1997 – $11 million: merger costs ($9 million), write-downs on impaired assets and early retirement incentives ($10 million), losses from the sale of assets ($12

million), and gain on extension of joint venture ($42 million).

1996 – $86 million: merger costs ($13 million), restructuring, merger and severance costs ($62 million), and write-off of acquired in-process research and development

costs ($11 million).

1995 – $8 million: restructuring costs ($5 million) and write-off of acquired in-process research and development costs ($3 million).

1994 – $19 million: merger costs ($27 million), litigation ($10 million), and litigation and insurance recoveries ($18 million).

1993 – $419 million: loss on sale of business ($322 million), merger costs ($31 million), restructuring ($5 million), litigation ($65 million), and gain on curtailment of

medical plan ($4 million).

(2) Nonoperating income in 1994 includes a gain of $276 million from the sale of an interest in Western Atlas International, Inc. and a gain of $102 million from the sale

of our natural gas compression business.

(3) Provision for income taxes in 1996 includes tax benefits of $44 million due to the recognition of net operating loss carryforwards and the settlement of various issues

with the Internal Revenue Service.

(4)

Includes employees of Dresser Equipment Group which is accounted for as discontinued operations for the years 1993 through 2000.

(5) Does not include employees of less than 50%-owned affiliated companies.

118

2 0 0 2 H A L L I B U R T O N A N N U A L R E P O R T

Q U A R T E R L Y D A T A A N D M A R K E T P R I C E I N F O R M A T I O N ( U N A U D I T E D )

Millions of dollars except per share data
2002
Revenues
Operating income (loss)
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss)
Earnings per share:

Basic income (loss) per common share:

Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss)

Diluted income (loss) per common share:

Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss)

Cash dividends paid per share
Common stock prices (1)

High
Low

2001
Revenues
Operating income
Income from continuing operations before

change in accounting method, net

Income (loss) from discontinued operations
Gain on disposal of discontinued operations
Change in accounting method, net
Net income
Earnings per share:

Basic income (loss) per common share:
Income from continuing operations
Income (loss) from discontinued operations
Gain on disposal of discontinued operations
Net income

Diluted income (loss) per common share:
Income from continuing operations
Income (loss) from discontinued operations
Gain on disposal of discontinued operations
Net income

Cash dividends paid per share
Common stock prices (1)

High
Low

Quarter

First

Second

Third

Fourth

Year

$3,007
123
50
(28)
22

$3,235
(405)
(358)
(140)
(498)

$2,982
191
94
—
94

$3,348
(21)
(132)
(484)
(616)

$12,572

(112)
(346)
(652)
(998)

0.12
(0.07)
0.05

0.12
(0.07)
0.05
0.125

18.00
8.60

(0.83)
(0.32)
(1.15)

(0.83)
(0.32)
(1.15)
0.125

19.63
14.60

0.22
—
0.22

0.22
—
0.22
0.125

16.00
8.97

(0.30)
(1.12)
(1.42)

(0.30)
(1.12)
(1.42)
0.125

21.65
12.45

(0.80)
(1.51)
(2.31)

(0.80)
(1.51)
(2.31)
0.50

21.65
8.60

$3,144
198

$3,339
272

$3,391
342

$3,172
272

$13,046
1,084

86
22
—
1
109

0.20
0.05
—
0.25

0.20
0.05
—
0.25
0.125

45.91
34.81

143
(60)
299
—
382

0.34
(0.14)
0.70
0.90

0.33
(0.14)
0.70
0.89
0.125

49.25
32.20

181
(2)
—
—
179

0.42
—
—
0.42

0.42
—
—
0.42
0.125

36.79
19.35

141
(2)
—
—
139

0.33
(0.01)
—
0.32

0.33
(0.01)
—
0.32
0.125

28.90
10.94

551
(42)
299
1
809

1.29
(0.10)
0.70
1.89

1.28
(0.10)
0.70
1.88
0.50

49.25
10.94

(1) New York Stock Exchange – composite transactions high and low intraday price.

P R O D U C T I O N
Halliburton Communications

C O R P O R A T E O F F I C E :
5 H O U S T O N C E N T E R
1 4 0 1 M c K I N N E Y , S U I T E 2 4 0 0
H O U S T O N , T E X A S 7 7 0 1 0 U S A
W W W . H A L L I B U R T O N . C O M

H 0 3 4 1 8