01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
Halliburton Company's 2006 annual report (Form 10-K filed February 28, 2007) shows a strong year driven by its Energy Services Group (ESG), which produced revenue of $12.96 billiona (up $2.86 billion, or 28%, from 2005) and operating income of $3.38 billion (up 48%).
Consolidated revenue rose to $22.58 billionb from $20.24 billion, and operating income reached $3.48 billion from $2.62 billion. Net income was $2.35 billion, or $2.23 per diluted share, compared with $2.36 billion in 2005, which benefited from an $805 million valuation allowance release. Cash and equivalents ended the year at $4.38 billion, and the company reported a negative net debt-to-capitalization ratio.
Cash flow from operations was $3.66 billionc. The company repurchased about 40 million shares for $1.3 billion during 2006. KBR, Inc., which contains the Energy and Chemicals and Government and Infrastructure segments, had weaker results.
KBR revenue fell to $9.62 billion and operating income fell to $239 milliond, reflecting a $157 million Escravos GTL charge and lower Iraq-related government services. Iraq-related work contributed $4.7 billion of revenue in 2006. Halliburton holds about 81% of KBR, Inc. after a November 2006 IPO and plans to separate KBR by the end of April 2007 through an exchange offer and special dividend.
The filing also discloses significant legal and regulatory exposure, including SEC and DOJ investigations into Nigerian Bonny Island payments (for which the company cannot estimate probable loss), a bidding practices investigation, a possible $400 million cost suspension tied to Army security-cost adjustments on LogCAP III, and a $220 million Petrobras arbitration claim. The outlook calls for continued expansion in the Eastern Hemisphere, a 2007 capital spending plan of about $1.3 billion, and a 2007 technology investment increase of about 34%. The company also noted that the LogCAP III contract is expected to wind down by the third quarter of 2007, while the LogCAP IV award is expected in the second quarter of 2007.
02—Key points
Key Highlights
- ESG revenue rose 28% to $12.96 billion and operating income rose 48% to $3.38 billion, with North America revenue up 34%.
- Consolidated revenue increased to $22.58 billion from $20.24 billion, and operating income increased to $3.48 billion from $2.62 billion.
- KBR revenue declined to $9.62 billion and operating income fell to $239 million, driven by a $157 million Escravos GTL charge and lower Iraq-related government work.
- Net income was $2.35 billion ($2.23 per diluted share), compared with $2.36 billion in 2005, which included an $805 million valuation allowance benefit.
- Cash and equivalents reached $4.38 billion, and operating cash flow was $3.66 billion; the company repurchased about $1.3 billion of stock in 2006.
- Halliburton plans to separate its roughly 81% stake in KBR, Inc. by the end of April 2007 via an exchange offer and special dividend.
- Significant unresolved exposure includes SEC and DOJ FCPA investigations related to Nigeria, a bidding practices investigation, and a $220 million Petrobras arbitration claim; no probable loss can be estimated for the FCPA or bidding matters.
03—Questions
Frequently Asked Questions
What drove the growth in Halliburton's Energy Services Group in 2006?
ESG revenue grew $2.86 billion, or 28%, to $12.96 billion, driven by higher activity in North America, Asia Pacific, the Middle East, and the North Sea, along with price increases and higher asset utilization. Production Optimization revenue grew 34%, and Drilling and Formation Evaluation revenue grew 26%.
Why did KBR's results decline in 2006?
KBR revenue fell $519 million to $9.6 billion, and operating income fell $214 million to $239 million. The decline was primarily due to decreased military support activities in Iraq and a $157 million loss on the Escravos, Nigeria GTL project, as well as $58 million of impairment charges on an Australian railway investment.
What is the status of the KBR separation?
Halliburton expects to complete the separation of KBR, Inc. no later than the end of April 2007. The board approved a plan on February 26, 2007 to dispose of its remaining KBR interest through a tax-free exchange offer followed by a special pro rata dividend of any remaining shares. The company has received an IRS ruling on the pro rata dividend and has requested a supplemental ruling on the exchange offer.
What major legal and regulatory risks does the filing identify?
The SEC and DOJ are investigating whether improper payments were made to Nigerian officials related to the Bonny Island project, and a broader bidding practices investigation is also underway. The filing states that the company cannot estimate a probable loss or range of possible loss for these matters. Separately, the Army has indicated it may suspend about 6% of LogCAP III subcontractor costs, which could total approximately $400 million, and Petrobras has filed a $220 million arbitration claim related to Barracuda-Caratinga subsea bolts.
What is the company's 2007 outlook and capital plan?
Halliburton expects 2007 capital spending of approximately $1.3 billion, with $1.2 billion related to ESG and the largest increases directed to the Eastern Hemisphere. Technology investment is expected to rise about 34% over 2006, and the company plans to add manufacturing capacity and roughly 13,000 ESG employees. Subject to board approval, dividends are expected to be approximately $75 million per quarter.
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