Halliburton Is a Multinational Corporation

Halliburton is a multinational corporation based in Houston, Texas, with over 97,000 employees worldwide at the end of 2004, compared to 101,000 at December 31, 2003. Halliburton operates in two major business groups, the KBR group, which is a major construction company, including the Government and Infrastructure and Energy and Chemicals segments, consisting mainly of refineries, oilfields & pipelines, and chemical plants, and the Energy Services Group which provides technical products and services for oil and gas exploration and production, and includes the combination of the Production Optimization, Fluid Systems, Drilling and Formation Evaluation, and Digital and Consulting Solutions segments.

The company conducts business worldwide in over 100 countries.

In 2004, based on the location of services provided and products sold, 26% of their consolidated revenue was from Iraq, primarily related to work for the United States Government, and 22% of their consolidated revenue was from the United States. In 2003, 27% of their consolidated revenue was from the United States and 15% of their consolidated revenue was from Iraq. No other country accounted for more than 10% of the consolidated revenue during these periods.

Revenue for the company, during the past three years, was mainly derived from the sale of services and products to the energy industry, including 54% in 2004, 66% in 2003, and 86% in 2002. Revenue from the United States government, resulting primarily from the work performed in the Middle East by the Government and Infrastructure segment, represented 39% of their 2004 consolidated revenue and 26% of the 2003 consolidated revenue. Revenue from the United States government during 2002 represented less than 10% of consolidated revenue. No other customer represented more than 10% of consolidated revenue in any period presented.

In 1919 two brothers, George Brown and Herman Brown, with money from their brother-in-law Dan Root, founded Brown and Root (B&R) in Texas. They began operations by supervising the building of warships for the United States (U.S.) Navy. One of the company's first and most significant large-scale projects, was to build a dam on the Texas Colorado River near Austin during the Depression years. The Lower Colorado River Authority (LCRA) began functioning in February 1935, and the Roosevelt administration was pressured into increasing Federal support for dam building on the Colorado from $4.5 to $20 million. They persuasively argued that an effective flood-control program meant constructing a small Roy Inks Dam just south of the Buchanan project and a Marshall Ford Dam, twenty-one miles northwest of Austin, where the waters from the Llano and Pedernales rivers joined with the Colorado to cause the worst floods. Despite these commitments, work on the dams proceeded slowly. Administration officials were reluctant to give the additional money. This caused a serious problem for B&R. They had begun work on the dam by "mortgaging all they owned. Building the Marshall Ford Dam was, therefore, a huge gamble for Herman Brown. If the authorization for the dam did not come through in 1937, he would be virtually wiped out."

By the middle of 1937, FDR, worried that deficit spending was leading to high inflation, believed that the government needed to curb its outlays. In the summer of 1937, however, Congressman Lyndon B. Johnson persuaded the White House to commit another $5 million to the Marshall Ford Dam, a third of the additional $15.5 million promised in 1935. The prospect of throwing some 2000 men out of work and of halting construction on a project that would ultimately save Texas millions of dollars in flood damages played a large part in the decision. The dam building also served Lyndon's political interests and the well being of Brown & Root. With Lyndon's help they won government contracts that turned a small road-building firm into a multimillion-dollar business. Their success gave Lyndon a financial angel that would help secure his political future.

M.W. Kellogg, a pipe fabrication business started by Morris W. Kellogg in 1900 and acquired by Dresser in 1988, was merged with Halliburton's construction subsidiary, Brown and Root, to form Kellogg, Brown, and Root. During World War II, B&R built the Corpus Christi Naval Air Station and a series of warships for the U.S. Government. In 1947, Brown & Root built one of the world's first offshore platforms.

Following the death of Herman Brown, Halliburton acquired Brown & Root in December 1962. The company became part of a consortium of four companies that built about eighty-five percent of the infrastructure needed by the Army during the Vietnam War.

In 1998, Halliburton acquired Dresser Industries, and the Kellogg-Brown & Root division (KBR) was formed by merging Halliburton's Brown & Root subsidiary, and the M.W. Kellogg division of Dresser, which Dresser had acquired in 1988.

KBR is a major international construction company, which is a highly volatile undertaking subject to wild fluctuations in revenue and profit. As a result of the asbestos-related litigation from the Kellogg acquisition, Halliburton lost approximately $900 million a year from 2002 through 2004. "The Halliburton Company settled legal claims with about 120 families of asbestos victims in the Pacific Northwest this week, agreeing to pay out $30 million and to create a fund for future victims of the deadly fiber. Matthew Bergman, attorney for the local families and one of seven lawyers involved in negotiating the settlement, said today that Dresser Industries, a Halliburton subsidiary, knew since the 1930s that asbestos was harmful, yet issued no warnings. Locally, asbestos products were widely used in shipyards, pulp mills and power plants."

The Energy Services Group provides a wide range of discrete services and products, as well as bundled services and integrated services and solutions to customers for the exploration, development, and production of oil and gas. It serves major, national, and independent oil and gas companies throughout the world, and includes drilling & formation evaluation, digital & consulting solutions, production volume optimization, and fluid Systems. This business continues to be a profitable, and the company is a world leader in this industry. Schlumberger is the company's closest competitor.

At a meeting for investors and analysts in August 2004, a plan was outlined to divest the KBR division through a possible sale, spin-off or initial public offering. Analysts at Deutsche Bank value KBR at up to $2.15 billion, while others believe it could be worth closer to $3 billion when management decides what to do with the business in 2005.

Halliburton revenue from fiscal year 2002 to fiscal year 2004 rose from $12.498 billion to $20.466 billion, representing an annualized growth rate of 27.97%. Gross profit (revenues less cost of revenues) for the same period rose from $119 million to $1.143 billion, for an annualized growth rate of gross profit of 209.92%. Operating income (gross profit less operating expenses) rose from ($186 million) to $837 million. Earnings before interest and taxes (EBIT) rose from ($115 million) to $880 million, and net income from continuing operations for the period climbed from -$346 million to $385 million. The Company took charges against net income from continuing operations in 2002, 2003, and 2004, respectively, of $652 million, $1.151 billion, and $1.364 billion to report net income available for common stock for the three years, again respectively, of ($998 million), ($820 million), and ($979 million). A large portion of these charges were related to the asbestos litigation.

The Company's total assets rose from $12.844 billion to $15.796 billion, for an annualized growth rate of 10.90%; however, the current component of those assets grew from $5.560 billion to $9.962 billion, for an annualized growth rate of current assets of 33.86%, more than triple the growth rate of the Company's overall asset base.

Halliburton's liability structure largely mirrors the Company's shift toward a more liquid configuration, with current liabilities rising from $3.272 billion at year end 2002 to $7.064 billion at year end 2004 and total liabilities rising in the same time frame from $9.286 billion to $11.864 billion, meaning that current liabilities over the period grew on an annualized basis by 46.93%-again, better than three times the annualized growth rate through the same period of total liabilities, which grew on an annualized basis by only 13.03%.

The following schedule summarizes Halliburton's project backlog:

December 31

Millions of dollars

Firm orders:

Government and Infrastructure

Energy and Chemicals

Energy Services Group segments

Government orders firm but not yet funded, letters of intent, and contracts awarded but not signed:

Government and Infrastructure

Energy and Chemicals

Energy Services Group segments

Total backlog

Halliburton's common stock has risen substantially since 2002, but that is part of a somewhat longer-term trend. After a precipitous sell-off during 2001, the Company's common stock has been on a relatively smooth growth path since the later part of 2002. From September 25, 2002, when the stock had reached its low point of $12.05 per share, to June 17, 2005, when the stock closed at $46.39 per share, the annualized rate of share price appreciation has been 63.89%, compared to annualized share price appreciation of 14.57% for the Standard & Poor's 500 index over the same period. This means that, while an investment of $1,000 made in an index fund in September of 2002 in the 500 large-capitalization, public corporations comprising the Standard & Poor's 500 would, as of June 17, 2005, be worth $1,449, an investment in Halliburton stock of $1,000 made on September 25, 2002 would be, as of June 17, 2005, worth $3,850.

Selected financial ratios for Halliburton are presented below:

Ratio

Short-Term Liquidity

Current Ratio

Acid Test

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.