哈里伯頓 (HAL) 2002 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. And welcome to today's Halliburton Company first quarter 2002 results conference call. Today's call is being recorded. At this time for opening remarks and introduction I would like to turn the call over to the vice president of investor relations, Mr. Cedric Burgher. Please go ahead, sir.

Thank you, Tony. Good morning. And welcome to Halliburton's first quarter 2002 earnings release conference call. Joining us today are Dave Lesar, chairman, president and chief executive officer and Doug Foshee, executive vice president and chief financial officer. Today's call will last approximately one hour. Following our prepared remarks we will take questions from the investment community. In order to achieve maximum participation in the time allowed we would like to limit each caller to one question. Before turning the call over to Dave for opening comments, I would like to remind our audience that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Halliburton Company cautions that some statements made today which are forward looking or provide other than historical information involve risks and uncertainties that may impact the company's future actual results of operations. For a more complete description of some of these risks and uncertainties, please refer to our Form 10K for the year ended December 31, 2001. Dave?

Thank you, Cedric. And good morning to everyone. As expected, drilling activity was down during the first quarter, which obviously impacted our overall results, both in terms of revenues and operating margins. We saw weaker industry conditions in the U.S. and international activity remained relatively flat. The energy services group at Halliburton was most affected by these industry conditions but KBR continued to perform well and added several significant jobs to its backlog in the first quarter. We continue to focus on strengthening our balance sheet and our liquidity position. And I believe that both our business segments performed well during the period of difficult economic and industry slowdowns.

I know that from the feedback I've gotten from many of you that there are concerns that are focused on asbestos as resulting in the management team taking its eye off the ball on operations. As you can see from our first quarter results, this is not the case. We have people outside of operations fully dedicated to managing our asbestos exposure and litigation so our business unit management can stay focused on running their businesses.

There's also been a lot of talk in the first quarter about us losing market share during the quarter. And I want to give you some facts as we start the conversation today based on our competitors' press releases and various investment reports so you can make your own determination on whether or not we've lost market share, which I clearly believe we did not. Overall, Halliburton Energy Services' revenues in the first quarter declined nine percent sequentially, compared to nine percent for one of our other major competitors, nine percent for the other and 13 and seven percent declines for some of our other competitors.

In regards to our pressure pumping business our sequential revenues declined 12 percent, compared to our competitors' 14 percent. For the combined drilling systems and fluids business our sequential revenues decreased only one percent, compared to our competitors' four percent. And in fact, our Sperry-Sun revenues are actually up three percent on a sequential basis.

In the drill bit business security D.B.S. is sequential revenues declined seven percent compared to a 12 percent decline for one competitor and a one percent increase for another. Completion products sequential revenues for us at Halliburton declined 12 percent compared to a 13 percent decline for the major competitor and completion products. Logging sequential revenues declined 12 percent, compared to a four percent decline for one of our other competitors. In the fluids business sequential revenues declined four percent, compared to an eight percent decrease for their largest competitors. To me, that doesn't sound at all like we're losing market share.

The first quarter was also unique with respect to a number of non-recurring items which Doug will cover in his comments. Excluding these items are reported earnings from continuing operations were 19 cents per share, which included a 1 cent per share charge related to business activities in Argentina. Excluding the non-recurring items highlights for the quarter included landmark continuing to meet all of our expectations with a 14 percent revenue increase and a significant increase in operating income. HBS' operating margins dropped four percentage points which compares at our competitors which dropped from two to seven percentage points. KBR's first quarter results included revenues of $1 billion and margins of 3.4 percent, which slightly exceeded our expectations for the quarter.

KBR was awarded $1.1 billion of work during the quarter, primarily in our onshore product line. We continue to develop opportunities in the gas monetization area including a new contract with Hunt Oil's Camisea Company to assess the feasibility of constructing a LNG facility in Peru. The contract to complete a major gas utilization study for the greater Plutonio Field in west Africa for British petroleum and as we previously announced we finalized contract negotiations for Nigeria and Egyptian LNG projects resulting in over $750 million of new backlog. These awards reaffirm KBR's leadership in LNG and gas monetization.

With respect to litigation in the quarter, I was disappointed with the jury decision in both B.J. Services case in which we are in the process of appealing and the Highlands case in which we are evaluating our alternatives. And Doug will cover these items in more detail when he gives you an update on asbestos but all of that being said, overall I think our operating performance during the quarter was essentially on par with what the industry gave us, with what our competitors did in light of the current and economic and industry conditions.

When I come back at the end after Doug has made his presentation I'll talk about what we're seeing for the remainder of the year. Now I'll turn the call over to Doug.

Thanks, Dave. My comments today will include an update on asbestos and recent litigation. Total company results, results of operations by segment, a discussion of our liquidity and other financial items including our backlog and finally, I'll talk about where we are with the internal reorganization that was announced earlier.

Let me first talk about asbestos. During the quarter, about 25,000 new claims were filed against us, including those related to Harbison-Walker. This includes about 16,000 historical claims and 9,000 Harbison-Walker claims. As most of you know, Harbison-Walker filed for bankruptcy on February fourteenth and with it over 200,000 of our related claims were stayed. While the stay is in place new claims in this area essentially can't be filed. The significant increase in new Harbison-Walker claims against us relates to claims filed prior to February fourteenth, which we believe is due to claimants' anticipation of the bankruptcy filing and the need to get claims on file in order to create voting rights for our 524G Trust.

Also during the quarter we resolved 7,000 claims. That brings our cumulative total of resolved claims to 207,000. Our cumulative pre-tax cost for resolving claims is $162 million before insurance and $64 million after insurance. A significant amount of the increase and the after insurance cost this quarter relates to the loss of our Highlands Insurance primary coverage for E & C claims. Therefore, the cumulative resolved per claim average is $783 before insurance and $309 net of insurance, so in effect the after insurance cumulative cost per claim increased by about $80 as a result of the loss of our Highlands insurance coverage. With regard to our brown and root asbestos exposure, I want to be sure you understand that Highlands only provided our primary coverage, and we have over $2 billion of excess coverage in place through other insurance companies. The amount this excess coverage will pay us on an asbestos claim depends on a variety of factors, including which year the claim relates to and the definition of an occurrence. Coverage varies by year with excess coverage starting between $100,000 and $1 million, depending on the year. At present, we haven't assumed any excess coverage reimbursement for pending claims in our financial statement. At the end of the first quarter we had a 118,000 open claims relating to products formerly manufactured by Industries, Inc., 34,000 in engineering and construction claims, 7,000 in pre spin off and Walker claims, and 133,000 of post spin off and Walker claims. This brings the total open claims count to 292,000, a net increase of 18,000 for the quarter. As you know, we reserve for open claims at our historic cost at the time a claim is made. In the first quarter, our gross reserve went up $16 million to $753 million. Due to the Highlands Insurance court decision, estimated insurance recoveries decreased to $585 million, increasing the net liability to $168 million. We've had a number of questions about a jury verdict that came out last week in Houston. After receiving the verdict, which found the plaintiff 51 percent negligent and did not award his estate any actual damages, we left the courtroom believing we'd won. Under Texas law, a defendant is not responsible for damages where a plaintiff is found to be more than 50 percent responsible for his own injuries. We didn't issue a press release on this, because, as you know, we don't announce individual cases we win or resolve for a small amount. However, this particular jury verdict has confused a number of people, because it awarded punitive damages of $5.5 million. This award isn't permitted under Texas law unless there are actual damages awarded, or a finding that the injuries occurred during the course and scope of the defendant's employment, neither of which happened in this case. Therefore, we think that the court should enter a judgment in favor of , and we expect that in the next few weeks. Before I leave the asbestos topic, I'd like to go over one additional item. We announced in our 10K that we've retained a leading third party claims evaluation firm to assist us in estimating the number of claims that may be brought against us in the future, the value of those claims and the insurance recoveries against potential future claims. There are several purposes for this report. First, we'll record a liability for potential future claims and an asset for the insurance recoveries against those claims, and the third party report is key to that determination. Second, we continue to evaluate incremental risk management alternatives in the insurance markets with regard to this liability, and this report will be used to further advance those alternatives. And last, we believe the information from this report will be valuable to the investment community and its assessment of the value of the liability relative to the current discount and our market cap associated with it. The study will be completed in the second quarter. However, it's premature at this time to estimate the amount which we will record for future claims and related insurance recoveries. Now moving on to our operating results. Total company revenues of just over $3 billion for the quarter were down four percent year over year, and five percent sequentially. International revenues were 67 percent of the total in the first quarter, compared to 62 percent in the first quarter last year. Operating income for the quarter was significantly impacted by several non recurring items, which I'll discuss in a minute. Excluding these items, operating income decreased $33 million, or 16 percent year over year, and $106 million, or 36 percent sequentially. Excluding the effects of non recurring items, income from continuing operations was 19 cents per deluded share. Non recurring items during the quarter included, first a gain on the sale of our 50 percent interest in European marine contractors EFC Limited of $111 million pre tax, $68 million after tax, or 16 cents a share. Services Company was awarded $98 million by a jury in its patent infringement law suit against us. As a result, we accrued this amount, plus $4 million of estimated pre judgment interest, resulting in an after-tax charge of $62 million or 14 cents a share. We're currently appealing this judgment. While we are this result, it is important to recognize that the fracturing fluid in question was used almost exclusively in certain formations in South Texas and the Rockies. More importantly, we introduced alternative fluids last year, and thus this verdict won't significantly impact our ongoing operations. We also lost our appeal on the Highlands Insurance litigation and wrote off $80 million in bills and accrued receivables resulting in an after-tax charge of $49 million, or 11 cents a share. We recorded income of $28 million pre-tax, $17 million after tax, or four cents a share, for the value of stock received from the de-mutualization of one of our insurance providers. And finally, we incurred severance cost of $11 million pre tax, $7 million after tax, or two cents a share, related to our corporate re-org.

In addition, for comparability purposes, our non recurring items include good-will amortization of $11 million pre tax, $9 million after tax, or two cents a share in the first quarter of '01, and $10 million pre tax, $8 million after tax or two cents a share in the fourth quarter of '01. Loss from discontinued operations from $28 million after tax, or seven cents a share. This relates to a $40 million pre-tax payment in conjunction with and Walker's bankruptcy filing, and $3 million pre tax of asbestos costs related to previously disposed businesses. Now I'd like to give you a little more detail by segment on our results. In the energy services group, quarterly revenues were $2 billion, a decrease of three percent year over year, and nine percent sequentially. Halliburton Energy Services first quarter revenues fell five percent year over year, and nine percent sequentially to $1.5 billion.

With the exception of Sperry-Sun , all product service lines had lower revenues reflecting the declining U.S. rig count and increasing pricing pressures. Pressure pumping revenues decreased seven percent year over year and 12 percent sequentially. Sperry-Sun's 15 percent year over year and three percent sequential revenue increase is particularly noteworthy in light of current industry conditions. Much of Sperry-Sun's improvement came from continued deployment of Sperry-Sun's industry-leading and geo-pilot tools in the directional drilling business.

Year-over-year, North American and Latin America reported revenue decreases of 21 percent and three percent respectively. The decrease in North America is primarily due to lower gas drilling activity. The decline in Latin America is primarily due to the economic uncertainties in Venezuela and Argentina. Revenues in all the other regions increased by an average of 22 percent, the largest increase occurred in Europe/Africa, where activity improved in the North Sea, Algeria, Nigeria, Angola and the Congo. Sequentially, Europe/Africa revenue was up six percent, while all other regions were down. Revenues for the balance of the energy services group, which includes surface subsidy major projects and landmark, increases $17 million year over year, due to increased activity on major project and landmark graphics. Revenues from the surface, sub-surface business decreased 13 percent. Excluding non recurring items, operating income or energy services group, decreased 24 percent year over year to $157 million. Also excluding non recurring items, HES operating income decreased approximately 19 percent year over year. Operating income increased for Sperry-Sun , , security DBS, which was offset by other product service lines. From a geographic prospective, and consistent with reduced activity, North American operating income decreased about 50 percent year over year, 46 percent sequentially. Operating income in all other regions increased in a year over year basis. However, only Europe/Africa and the Middle East experienced sequential operating income increases.

Talking about other ESG operating income now, excluding non recurring items, operating income for the remainder of the segment decreased $12 million year over year but increased $11 million sequentially. The sequential improvement is due to a reduced profit estimate on a major project in the fourth quarter of 2001. Operating income at Landmark Graphics increased significantly year over year but declined sequentially due to landmark's traditionally strong fourth quarter.

Now I'd like to move to our E&C segment, KBR which turns in a solid quarter. Although revenues for E&C decreased eight percent year over year to $1 billion operating income excluding $4 million in severance costs was $35 million, was representing a 3.4 percent margin. Excluding non-recurring items on a year over year basis operating margin improved from 2-3.4 percent due to improved results from government operations and on-shore projects. Sequentially, operating income decreased due to favorable -- operating margins decreased due to favorable settlements of claims and unusually strong operating performance in the prior quarter.

Under the category other financial items, general corporate expenses of $70 million included the $80 million write-off for the Highlands Insurance receivables, $2 million of severance costs in corporate, a $28 million gain from the demutualization of one of our insurance providers and $5 million of E&C asbestos related costs recorded at corporate. Interest expense of $32 is flat sequentially and down $15 million year over year due to lower average borrowings.

Foreign currency loss was $8 million, primarily due to the continuing economic and financial crisis in Argentina. On the balance sheet side, we had a cash balance of about $266 million at the end of the quarter. In addition to our regular cash outflows for dividends and interest which totaled $327 million during the quarter we had significant cash outflows in February and March which included the following. $75 million was used to repay all of our commercial paper outstanding January 31. We paid $45 million to RHI in connection with the bankruptcy of their subsidiary, Harbison-Walker. $25 million was posted as cash collateral for letters of credit and $31 million was paid in employee bonuses.

After the end of the quarter we closed on an accounts receivable securitization facility that allows us to access capital markets through a third party commercial paper conduit. The maximum amount which can be sold under the program varies based on the amount of eligible receivables at any given time and other factors but can't exceed $400 million. Current availability under the facility is about $220 million.

Capital expenditures totaled $235 million for the quarter, up $90 million year over year and $7 million sequentially. We continue to invest over three fourths of our capital at HBS, primarily for frac equipment and directional and LWD tools at Sperry-Sun. We expect cap ex in 2002 to be about $550 million for the year, so capital spending in the remaining quarters of the year should be down fairly significantly.

Depreciation, depletion and amortization expense was $132 million for the quarter. The prior year quarter included goodwill amortization of $11 million or about 2 cents a diluted share after tax.

With regard to backlog, we ended the quarter with a total of $9.8 billion compared to $9.9 billion at year end but up over $8 million -- $800 million year over year. In fact, the $100 million decrease sequentially was largely related to the backlog associated with E& C, which we sold.

KBR backlog improved from year end by almost $300 million to $7.7 billion. Approximately 45 percent of the backlog is for lump sum contracts and about 50 percent -- 56 percent will be performed in the next 12 months.

Firm orders were $8.2 billion at the end of the quarter. The remainder of the backlog mostly relates to government awards not yet funded with the Balkan support contract in future years representing the majority of the balance.

During the quarter, KBR booked $1.1 billion worth of new awards into backlog. The following are some of the major awards: in onshore operations $430 million in revenue for the expansion of the N.LNG facility in Nigeria, also in onshore operations $320 million for the L&G project in Egypt for Union Penosa. Government operations secured a $75 million contract from the military district of Washington project and also government operations secured $46 million in new contracts for the base operating support contract for the Naval Air Facility in El Centro, California.

Our total debt at March 31 was $1.5 billion, which was flat sequentially and down from $2.9 billion last year. Our debts cap at end of the quarter stayed flat at 24 percent compared to 42 percent a year ago. Finally, our head count was around 85,000 at the end of the quarter, which is flat sequentially and down 1,000 year over year.

Now I want to talk a little bit about the corporate reorg. We achieved an awful lot since the merger with Dresser in '98 including offering customers more integrated services, creating synergies from complimentary businesses and implementing cost productions. The merger also enabled us to add capabilities to the energy services group and to combine the expertise of NW Kellogg with that of Brown and Root into what is now KBR while allowing us to divest assets that didn't fit strategically with either core business.

To better position us to capitalize on increased activity levels we expect later this year as well as to position us to ride the shorter business cycles our industry is experiencing we've had a team working together from across the organization for several months to look at a number of structural alternatives for Halliburton. From this review we've concluded that ESG and KBR would be better off as two separate businesses within Halliburton. This will allow each company to grow and prosper in their respective markets. Although there are no specific plans currently, this reorg will also allow us to consider separation of the ownership of the two companies in the future if we identify an opportunity that produces greater value to the shareholders with these companies as separate companies.

The realignment is a positive response to the clear view of our shareholders and the investment community that Halliburton needs to put even more sharper focus on each of our two separate businesses. It will also help shareholders and analysts more clearly understand the company's operational finances. This reorg requires us to align all employees, operations and support services with one business or the other. The process involves the reconfiguring of all support functions to focus on each business' specific needs. The creation of two separate business groups under the Halliburton umbrella should be substantially complete by mid-year. Accordingly, substantially all of the reorg costs, severance and restructuring related will be incurred within the second quarter with some possible carryover into the second half. Prior to our formal announcement of the reorg we incurred approximately $7 million after tax and severance costs relating to several executives who were impacted by our reorg plan. And this cost was recorded in the first quarter. We anticipate most cost savings from the reorg to commence in the third quarter. We'll be in a better position in the latter part of the second quarter to provide you with the costs associated with the reorg and the related estimated cost savings but I can say that the ongoing savings will be material.

Finally, as a part of the reorg of the company both business units, ESG and KBR are going through a strategic review of their businesses. I fully expect that out of those reviews we'll identify assets that no longer fit strategically and I anticipate going to market with some divestiture candidates in the second half of the year. Having said that, I don't expect any of our significant business lines to go on the block and total anticipated proceeds will be less than $500 million.

Now I'll turn the call back over to Dave for some closing comments.

Thanks, Doug. Overall, I'm very proud of our organization and believe we performed well in the first quarter in light of current industry conditions and the asbestos cloud that's hanging over the company. We are well positioned to weather this difficult market and clearly take advantage of the coming recovery that we see in our industry. We have $10 billion of backlog. We have industry-leading technology, the best people in the industry, excellent products and services and a reorganization program underway that will enhance our competitiveness and our cost structure. The engineering and construction groups' operating margins were up significantly compared to the prior year's quarter. Margins are expected to hold in the three to four percent range for the year although I would expect a slight dip in margins in the second quarter because of the transition we're having on several of our big jobs but overall they will be in the three to four percent range for the year.

So we have a healthy backlog and with the anticipated awards we expect to get we continue to have a very positive long term outlook for this business segment. We are particularly excited about the expected contributions from gas monetization and other international contracts in the LNG area. However, the current difficult investment climate may impact the development of some of the new large world class projects that we see on the horizon and as a result would clearly impact the timing of new awards for us. In addition, we believe that there will be increasing opportunities in government operations and that particular aspect of our business as governments throughout the world continue to respond to the threat of terrorism.

In the energy services group it was impacted by the industry downturn in the first quarter, as you've heard. We see a continuation of weak industry conditions certainly through the second quarter. However, should the commodity prices remain strong and continue to get better as gas prices are I believe that gas drilling activity will continue to improve throughout the balance of the year. High depletion rates on U.S. gas wells coupled with diminished drilling are expected to increase the need for gas and gas drilling later in the year. The international and deep water markets where we are very well-positioned are also expected to remain stable as long as OPEC can maintain their production quotas and pricing objectives.

We will also be concluding, as Doug said much of our reorganization activities in the second quarter and will record significant severance charges in related restructuring charges in that quarter. We'll restate our segments as a result of that reorganization. And finally, we anticipate recording a material liability for future asbestos claims based on the third party study that we have in process.

As I look at the quarter excluding the effects of the reorganization costs and the addition of the net asbestos liability we expect earnings per share for the second quarter to be in the 15 to 17 percent -- 15 cents to 17 cents per share range compared with this quarter's 19 cents per share. This reflects about a one or two cent reduction in the operating results that I see for the energy services group and a one or two percent decline in KBR although as I said, I expect their margins to bounce back up in the latter half of the year. This decline is essentially in line with what others in the industry have said about the second quarter where we have seen sequential declines in the nine to 25 percent range. And I think we'll be somewhere in that range that the others are seeing but we do expect the second half of the year to reflect an increase in energy services group activities and also gain the benefits of the cost savings from the actions we have underway.

In terms of our operating businesses I remain very optimistic about Halliburton's future because I think the long-term industry fundamentals are solid and getting better. We have the right people and the best technology and are in a very strong competitive position no matter where we are in the cycle. As Doug has said, our balance sheet is healthy. We have a new accounts receivables securitization facility in place. This gives us increased liquidity. We continue to have a low debt to cap ratio of 24 percent. And as we stated, we do not see any need for us to access the capital markets in the foreseeable future. We have $2.7 billion working capital and strong cash flow, so as I said, we're very optimistic, both from the liquidity standpoint and where we see the industry going the balance of the year.

This really concludes our comments. And what we'll do now is open it up for questions.

Thank you . Today's question and answer session will be conducted electronically. If you would like to signal to ask a question please do so by pressing the star key followed by the digit one on your touch tone telephone. Again, that is star, one to signal to ask a question. We do ask that you initially limit yourself to one question with no follow up. Again, that is star, one to signal to ask a question. If you do find that your question has been answered and would like to remove yourself from the queue you may do so by pressing the pound sign. Once, again, that is star, one to signal and pound to remove yourself. We take our first question from with Goldman Sachs.

Thanks. Good morning, gentlemen. I'm wondering if you could comment on oil field pricing, particularly in North America. As you move through the quarter are you seeing any deceleration in the rate of pressure, particularly in the pressure pumping business and can you also speak to on the oil field side how the reorganization efforts will lower the cost structure?

Okay. , let me start on the pricing. And I'll let Doug pick up on the second part of your question. There's no question that as we went through the first quarter we saw an enormous pressure on margins via the discounting in the business. And I think that we've continued to see that as we've gone through the second quarter. I do think that we are starting to see some deceleration now in the reduction of pricing. And as I indicated earlier, I think the second quarter is going to be the trough in this particular downturn. And as drilling starts to pick up and we start to anticipate that I think that we will continue to take a firmer line on pricing, anticipating the volume and activity will be up in the balance of the year. So I think we'll probably see the bottom this quarter in terms of pricing and then a gradual increase the balance of the year. And I'll let Doug handle the second part of the question.

Good morning, . You know, we have not announced the magnitude of the cost reductions. We expect to do that either during this quarter or on our next quarterly teleconference. We're not doing that because we don't want to be predicted . We actually want to tell you what those cost reductions are or are left after they have occurred so that when you hear them you'll be able to bake them into the next quarter's run rate . What I can say that we do know now is that they are going to be material. A lot of people in the company are working on this. It's been an incredible work product across the board. And I think you'll be very pleased with the results and what they do to our competitive position in terms of not just the cost structure in ESG but also in KBR

We take our next question from with Simmons & Company.

Yes, good morning, gentlemen. Dave or Doug, either one can you talk just a little bit more about this third party study, more specifically the timing of the release? How do you plan to disclose that information to Wall Street? And you know, when can we expect that type of disclosure?

Okay. Good question, . And I'll let Doug handle it because he is basically doing it as part of his day to day responsibilities.

Yeah, , we don't expect the report to be completed until probably toward the end of the second quarter. How we release it -- the most tangible evidence of the report will be in the ., the accrual that we make for the second quarter for claims not yet filed. And of course, we'll be talking about that in some detail. The balance of the information in the report will be released in some summary form. And we will communicate that to the street, either in a special call or in a press release.

And then of course, , the quarter that we do it, the voluminous detail will be in the 10Q that quarter on the process of what we went through and how we arrived at the conclusion and the opinion of the third party provider.

We go next to with Deutsche Bank.

Good morning. Just trying to understand what's going on in the reorganization and with your results this quarter in oil field services which were impressive in terms of relative revenue growth. My question is how have you accomplished this kind of performance, in your opinion? Has it been willing to be more aggressive on pricing or what distinguished that? And as you're doing this reorganization is there a risk that you're setting yourself up to be somewhat shorthanded when the recovery comes up how well positioned are you as a company to be able to take advantage of the upturn?

I think, that the reorganization, if you listen closely -- and maybe we were a little subtle -- really is not impacting our field operations. We have been very careful in our internal communications and our customer communications to indicate that this is not a reorganization that affects our revenue producing assets and our revenue producing people that are in the field. This has been a reorganization effort that has been focused on the administrative infrastructure that was in place after the merger that was put there to essentially service the organization when we had the big joint ventures with Ingersoll. We had the Equipment Group. We had a lot broader product portfolio at the time. And the infrastructure we had was one that made sense for a broader infrastructure, a broader portfolio of businesses.

Now that we're essentially focused down to the business and the energy services business we don't need that in place, so most of the cost reductions and certainly the reductions in head count are focused on administrative positions and not revenue generating positions. In fact, as I said in the last call we were very careful because we saw that this cycle in our view was going to be a very short downturn. We essentially have had very few layoffs in terms of field operations that have been responsive to business conditions, so as I said at the beginning, we're very cognizant that there is a concern out there that with our structure and with asbestos that we are taking our eye off the ball operationally and we want to make sure that you understand that we understand that that's a concern, that it's not happening. We have very good people running our day to day operations in the field. And they're focused on growing the business and bringing technology to the marketplace. And that's what they're doing. And all of these other efforts that we have are going on around them but are not disrupting them day to day.

Yeah, I just wanted to add one thing, to that, to Dave's point. And that is I think I can pretty effectively argue that we will actually be better positioned with regard to delivering our products and services in what everybody believes is an upturn in the business for the second half of the year simply because we're going to be more cost competitive. So in terms of our ability to generate attractive margins and grow market share I think we're going to be well positioned to do that.

We go next to with Salomon Smith Barney.

Hi, .

I have a three part single question.

You're getting tricky.

I apologize for that. One part is very, very small. In your discussion of general corporate expense in the press release you mentioned a $5 million asbestos related charge that doesn't show up in the reconciliation table. If you could, address that question. Two, in talking I know -- I understand your hesitancy to make estimates about the significant cost savings you're expecting but -- insofar as it's mostly G&A related is it fair to assume that it's not going to be as large as the impact of the '94 reorganization? And does the third party actuarial report, is it going to take into account in their work the reorganization and the splitting of the businesses into two legal entities.

Let me answer the middle one, . And I'll let Doug take the book ends on that . On the G&A it will not be similar in size to what we did in the 1994 reorganization. And that was a pretty massive reorganization. It served us well for a number of years. It put in place a basic operating structure of product service lines and geographics that has served us well. And it's not our intention to touch that matrix in terms of how it delivers technology and products to the customers. It's really the infrastructure that's wrapped around that that will be impacted but it wont' be anything close to what we saw at that period of time, although Doug has said you'll see some significant benefits out of it.

As to the asbestos thing, I think it was about $5 million that we announced in the general corporate. Why it wasn't in our reconciliation, I'll let Doug handle that one. And then the second part was the, the second part of your three part was related to the -- and I'll let Doug handle that, too.

Yeah, the $5 million at corporate really is no different than -- I think previous quarters it's been one to two. All that is - is that's the effect of not having Highlands as the primary carrier on the related asbestos claims, so that's the only reason that you may not have noticed it in the past because it was probably $1 million instead of $5 million. With regard to the third party econometric report, there will be -- it will not take effect of the reorg because the report will be designed to anticipate future claims sort of in the three or four buckets that we've always described, , one being Harbison-Walker related, one being non-Harbison- related and one being the E&C claims. And that's the format that the report will carry.

Thanks so much.

We take our next question from Jim with Morgan Stanley.

Hello. This is a question for Doug. I found your discussion on the cash outflows in the quarter useful. I was wondering if you could give a little more guidance on what we would expect to see when we see the cash flow statement in the queue in terms of cash from operations, change in working capital and other operating assets and liabilities and just a recap of the major other sources and uses.

Yeah, I think you should anticipate -- just trying to answer your question -- you should anticipate that working capital was basically flat quarter to quarter. Cash flow from operations was relatively flat compared to first quarter 2001.

We go next to Jamie Stone with UBS Warburg.

My first question -- my question regarding -- has two aspects to it on the asbestos side. The first one is could you discuss your thoughts about the relatively high rate of filings in the non-Harbison side in the first quarter? Secondly, there's been a lot of discussion in the marketplace since you announced the reorganization as to whether or not you view the reorganization as a way to shield the energy services part of the business from the asbestos liabilities which are largely contained in the KBR business. Can you address that issue as to whether that's part of your thinking or whether or not that could be a consequence of the reorganization or if that's just off the table completely?

I think Jamie, let me address the second part of the question. And I think it's premature to go into a great deal of detail on it at this point in time. As I indicated earlier, once we get the third party actuarial report, once we complete the reorganization which will be toward the end of the second quarter we will lay it our for everybody at that point in time exactly what the reorganization has done from a structural and legal standpoint, where the liabilities reside at that point in time. And I think that would be a more appropriate time to have that discussion. I think it's premature now because we really can't lay out the full story. And I think it's important to see the entire restructuring in its full context for everyone to understand it at that point in time. I'm going to defer off on that part of the questioning for now and let Doug handle the first part of the question.

The first part of your question related to a relative increase in the number of non-Harbison related filings for the quarter. And actually, I don't have a direct answer to the question. What we are trying to do research on now is whether or not other bankruptcy related activity may have had an impact on that, for example, the Federal Mobile bankruptcy where lots of things are going on. And as you know, these bankruptcies with other companies sometimes cause spikes in filings as people try to get as many claims as they can on file. And what that does for you in the context of a bankruptcy is 75 percent of existing claimants have to approve to the formation of a 524G trust. The more claims you can get on file ahead of the bar date the more votes you get, the bigger seat at the table you have in the negotiations.

And when that happens in one bankruptcy -- remember, when they file a claim they typically name 50 to 100 defendants, so it could be in advance of another, say a Federal Mobile type situation where that ends up impacting us because we were an additional named party. I can't categorically tell you that that is the reason for it in the quarter. We have a suspicion it might be. And we're doing some work on that now.

And we go next to Robin with Bear Sterns.

Yes, good morning. If you could just follow up there I wanted to know the status of the 524G trust process for Halliburton. If you can, give us an update on that, the likelihood of a continuation of the restraining order. And in terms of the claims that you've indicated that you settled in the quarter, the 8,000 or so claims assuming those were claims that were not affected by the restraining order relating to the establishment of a trust.

Okay. I think that it's important to note that only a company in bankruptcy can use a 524G trust to resolve its outstanding litigation. And so the discussion that we're having within the bankruptcy of Harbison-Walker relates to those claims that were filed against and in conjunction with activities of Harbison-Walker. Those discussions with the asbestos claims committee are ongoing. The stay has stayed in effect. And the judge basically has not moved to lift that at this point in time. And we will continue to have an ongoing dialogue along with Harbison-Walker in an attempt to put together a 524G trust in the context of the Harbison bankruptcy settlement which would take the Harbison claims off the table from a Halliburton standpoint. So I think that you know, you just will have to continue to monitor it. We obviously, if anything breaks and becomes news in that area we'll put out a press release and discuss it but for right now discussions continue and have been since the day that Harbison went into bankruptcy.

Yeah, I think the second part of your question related to the nature of the 7,000 plus settlements we had during the quarter. Remember that Harbison filed bankruptcy I think in mid-February. And so the settlements you see there include some Harbison settlements as well as the other two categories. It's a mix for the quarter .

Yeah, I think it's important to understand that Harbison didn't go into bankruptcy until about halfway through the first quarter, so we had our normal ongoing settlement and litigation going on until about the middle of February, at which time all of the claims were stayed at that point in time. So you have kind of a half a quarter's activity there.

Okay. I think we have time for one more question.

We'll go to with Wachovia Securities.

Thank you. Good morning. I guess I have a two parter, as well. One is a easy question for you. Why is the cap ex so front end moded? And the second question relates again to the third party assessment. Theoretically, will that hold up the court proceedings in terms of waiting for that report to come out?

No. I can answer both those, . One, it will not hold up the court proceedings because the proceedings are entirely driven by Harbison-Walker and the bankruptcy judge that is handling that case. We will of course make an assessment of the related exposure related to Harbison-Walker claims as part of that third party assessment and we would use that as part of our settlement discussions that I referred to earlier as part of those bankruptcy discussions to get to a 524G. So it will be part and parcel of it but the timing of coming out with that third party assessment will not be driven by progress within the Harbison-Walker bankruptcy. With respect to the first part of your question there is a bit on an anomaly there where in the first quarter we did bang out about half of our capital budget for the year. And there is a couple of pretty simple answers to that.

As Doug has indicated, it's primarily fracturing pressure pumping equipment, which we always need in the marketplace because as I said earlier, we do see that that market is going to turn up in the back half of the year. And I would prefer to have that equipment manufactured and available in crews trained and ready to take advantage of that market when it gets here. And the second part of it is the substantial investment that we are making in our geosteering tools, I think one of the real positives of the corridor, as I said was the fact that sequentially Sperry-Sun's revenues were up. And the reason for that is that our geopilot, geosteering tool is being rapidly accepted and taken up by the marketplace. And I saw no reason to delay significant manufacturing in delivery of those tools to the field. So once they're in the field we'll slow down a little bit the manufacturing process and temper down the balance of the year. But I didn't want to miss the upturn by not having equipment available. And that's the reason for it.

Okay. I'd like to thank you for joining us on today's call. I want to remind you that a replay of the call will be available on our website for the next seven days.

This does conclude today's Halliburton company first quarter 2002 results conference. We thank you for your participation. You may now disconnect.