Selected financial ratios for Halliburton are presented below:
Capital Structure & Long-Term Solvency
Net Worth to Total Debt
Net Worth to Long-Term Debt
Net Worth to Total Assets
Return on Investment
Return on Total Assets
Return on Equity Capital
Operating Performance Ratios
Gross Margin Ratio
Operating Profits to Sales
Net Income to Sales
Asset Utilization Ratios
Sales to Cash
Sales to Accounts Receivables
Sales to Working Capital
Sales to Total Assets
Halliburton appears to be healthy in terms of short-term liquidity. The Acid Test Ratio is normal for companies of this size and the Current Ratio is normal which indicates that the company should have no trouble meeting short-term financial commitments. The capital structure ratios also appear to indicate that the company is able to finance operations, but does not have too large exposure in terms of debt. The Return on Assets and Return on Investment are not applicable, because of net losses in recent years.
The Gross Margin appears low, but this is due to the nature of the business. Halliburton does not have a large cost of goods sold. Because it is partially a service business, a large part of operating expenses are personnel costs. Operating Profits to Sales and Net Income to Sales Ratios are within norms, although the increased expenses in 2003 are reflected in the negative Net Income to Sales Ratio. The Sales to Cash Ratio indicates that Halliburton is not holding an excess amount of cash, which would provide little or no return. The other asset utilization ratios are within industry norms, further highlighting the normal amount of cash on hand.
During the period under consideration, Halliburton lost money according to its certified financial statements, and according to those same financial statements, retained earnings, an accounting measure of the total value of the claim the shareholders have on the assets of the corporation, eroded from $3.11 billion to $871 million. This means that the book value of the shareholders' residual in the Company fell by 28% from the end of 2002 to the end of 2004. Yet, despite this, the Company's common stock price, which represents the market's objective assessment of the value of that same residual claim, has risen aggressively compared to market's assessment of the claim on residual value of an index of the 500 largest public corporations in the world. Any possible explanation that could include some "irrationality" on the part of investors is specious: markets do not price based upon irrational sentiments; and this is particularly true in the case of stock in a corporation like Halliburton, where 85% is held by institutional investors and only a fraction of a percent is held by insiders. The reality is that Halliburton, which for the year 2004 lost $2.22 per share (fully diluted), has a total value of its equity outstanding of $23.46 billion, and that value has been on a growth path for the past nearly three years. This so-called "market capitalization" is the market price per share times the number of shares outstanding, and this is, therefore, the objective, entirely rational determination of the millions upon millions of buyers and sellers of equities converging from day-to-day to clear the offers to sell with the bids to purchase stocks.
In the case of Halliburton, the markets are rationally judging that, in spite of the unprofitability and eroding equity value on paper, the Company has been, for the past nearly three years, a worthwhile and worthy investment based upon the expected value of its future cash flows, which is all that matters in financial markets. The historical numbers for Halliburton may be disappointing, but for a company in the forefront of acquiring revenues through providing security in a time of terror threats and supporting supplies and services in a time of wars, the prospects for the future couldn't be brighter.
Halliburton is a company involved in controversy because it's former CEO is now the Vice President of the U.S., but more importantly, a firm that has benefited significantly and materially from public expenditures. Democrats have taken also issue with Cheney's statement to Tim Russert on NBC's Meet the Press September. 14, 2003, when he said he had no "financial interest" in Halliburton. "I've severed all my ties with the company, gotten rid of all my financial interests. I have no financial interest in Halliburton of any kind and haven't had now for over three years. And as Vice President, I have absolutely no influence of, involvement of, knowledge of in any way, shape or form of contracts led by the Corps of Engineers or anybody else in the federal government."
For a federal official in his position, with deferred compensation covered by insurance, and stock options whose after-tax profits that had been assigned to charity, he would still retain an "interest" that must be reported on an official's annual disclosure forms. And in fact, Cheney does report his options and deferred salary each year. The language of the Office of Government Ethics regulations on this matter seems clear enough. The regulations state: "The term financial interest means the potential for gain or loss to the employee... As a result of governmental action on the particular matter." So by removing the "potential for gain or loss" Cheney has solid grounds to argue that he has removed any "financial interest" that would pose a conflict under federal regulations.
Despite allegations of cronyism, the company's contracts in Iraq are much less profitable than its core energy business. They are expected to have generated more than $13 billion in sales by the time they start to expire in 2006 but most offer low margins, less than 2% on average in 2003 and just 1.4% this year for the logistics work. Halliburton is also the only company mentioned by terrorist Osama bin Laden. In an April 2004 tape "bin Laden decried the fact that 'this is a war that is benefiting major companies with billions of dollars.'"
KBR has contracts in Iraq worth up to $18 billion, including a single "No bid" contract known as "Restore Iraqi Oil" (RIO) which has an estimated worth of $7 billion. Currently, KBR employs over 30,000 men and women in Iraq. Halliburton's work in Iraq is diverse and complicated. In addition to troop support, Halliburton also provides air traffic control support; produces 74 million gallons of water a month for consumption, hygiene and laundry; deploys as many as 700 trucks a day to deliver essentials to American forces; and provides firefighter and crash-rescue services, as well as working to restore Iraqi oil infrastructure.
An audit of KBR by the Pentagon's Defense Contract Audit Agency (DCAA) found $108 million in "questioned costs" and, as of mid-March 2005, said they still had major unresolved issues with Halliburton. For many critics of the Administration's close ties to a company formerly led by the U.S. Vice President, the recent announcement by Halliburton of a newly-awarded, $30 million contract to build facilities at Guantanamo represented still more of the large-scale benefits enjoyed by one of many of the corporations with ties to the Bush Administration. For the company, these ties are seen as an exposure that must be disclosed to shareholders. "The quarterly report filed on Friday [July 29, 2005] with the Securities and Exchange Commission discussed the 'intense scrutiny' the company has been operating under. 'Some of this scrutiny is a result of the Vice President of the United States being a former Chief Executive Officer of Halliburton,' the company said in the filing. 'This scrutiny has recently centered on our government contracts work, especially in Iraq and other parts of the Middle East.' Halliburton said it is the target of such scrutiny for its problems 'even if (they are) unintentional, insignificant, or subsequently self-reported to the applicable government agency.'"
Most analysts expect worldwide exploration and production spending in 2005 to increase over 2004 spending, predominantly in the United States and Canada. The three-year downturn in the United States offshore rig count is expected to end in 2005, and international drilling activity is predicted to turn in another solid year of growth in 2005, with a prediction of a 5% increase in international rig count. The company is well positioned to return to profitability.
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