Both income from continuing operations and net income in the fourth quarter of 2005 were $1.1 billion, or $2.08 per diluted share, of which $540 million, or $1.02 per diluted share, is related to a reduction in a deferred tax asset valuation allowance. This compares to income from continuing operations of $181 million, or $0.40 per diluted share, in the fourth quarter of 2004. Net loss for the fourth quarter of 2004 of $203 million, or $0.46 per diluted share, included a net loss from discontinued operations of $384 million, or $0.86 per diluted share, related to the asbestos and silica settlement.
Consolidated revenue in the fourth quarter of 2005 was $5.8 billion, up 12% from the fourth quarter of 2004. This increase was largely attributable to higher activity in the Energy Services Group (ESG), partially offset by lower revenue in KBR primarily on government services projects in the Middle East.
Consolidated operating income was $779 million in the fourth quarter of 2005 compared to $346 million in the fourth quarter of 2004, a 125% increase. ESG experienced strong performance reflecting increased rig activity, higher utilization of assets, and increased pricing. In addition, fourth quarter of 2005 operating income included a $24 million gain related to a patent infringement case settlement. KBR's performance improved in both the Government and Infrastructure (G&I) segment and the Energy and Chemicals (E&C) segment. KBR's operating income in the fourth quarter of 2004 was negatively impacted by a $22 million charge related to restructuring.
During the fourth quarter of 2005, Halliburton realized a $540 million contribution to net income from the reversal of the deferred tax asset valuation allowance related to the asbestos and silica settlement. This change is due to an increase in expected domestic taxable income in 2006 and beyond. The valuation allowance was originally established because the company believed it was more likely than not that a portion of the tax benefit associated with the charge for the asbestos and silica settlement would not be realized. Subsequently, significant upward revisions of estimated future United States taxable income have made it likely that these tax benefits will be realized.
"Our fourth quarter performance was outstanding for both the ESG and KBR. ESG's fourth quarter revenues grew 10% from the third quarter and operating margins grew to 23.8 percent, a 200 basis point increase. This demonstrates our customers' willingness to pay a premium for our technological expertise that results in accelerated production rates. In addition, KBR's two divisions both showed very solid operating income performance," said Dave Lesar, chairman, president, and chief executive officer of Halliburton. "For the full year 2005, we set a record for revenue and achieved net income of $2.4 billion with each of our six divisions posting record results. This accomplishment came from the hard work and determination of our 100,000 employees. The year 2005 was the best in our 86-year history, and both ESG and KBR are well positioned for strong performance into 2006."
2005 Fourth Quarter Segment Results
Energy Services Group
ESG posted revenue of $2.8 billion in the fourth quarter of 2005, a $678 million or 31% increase over the fourth quarter of 2004. ESG posted operating income of $678 million, up $311 million or 85% from the same period in the prior year. ESG's operating margin was 23.8% during the fourth quarter of 2005.
Production Optimization operating income for the fourth quarter of 2005 was $307 million, an increase of $99 million or 48% over the fourth quarter of 2004. Production Enhancement services operating income increased 80%, driven by strong demand for well stimulation services in natural gas applications, increased utilization of crews and assets, and improved pricing, particularly in the United States. Completion tools operating income increased 42% due to higher sales in West Africa, China, and the United Kingdom. Partially offsetting this increase were sales declines in Venezuela. Operating income in the fourth quarter of 2004 included a $14 million gain on the sale of surface well testing operations.
Fluid Systems operating income for the fourth quarter of 2005 was $157 million, a $59 million or 60% increase over the fourth quarter of 2004. Cementing services operating income increased 61% due to higher drilling activity, improved pricing, and increased asset utilization in the United States, partially offset by lower activity in the Gulf of Mexico as a result of the hurricanes in the third quarter of 2005. In addition, operating income was positively impacted by increased activity in Russia, the United Kingdom, and Indonesia. Baroid Fluid Services operating income grew 57% on strong natural gas operations in the United States and higher activity in West Africa, the United Kingdom, and Latin America.
Drilling and Formation Evaluation operating income for the fourth quarter of 2005 was $148 million, an $87 million or 143% increase over the prior year fourth quarter. Operating income in the fourth quarter of 2005 included a $24 million gain related to a patent infringement case settlement. Sperry Drilling Services operating income doubled in the fourth quarter of 2005 compared to the fourth quarter of 2004, benefiting from increased directional drilling activity in the Middle East and Asia Pacific, as well as in the United States and the Gulf of Mexico. Logging Services operating income increased 83% due to increased activity in the United States, solid growth in Latin America, and higher direct equipment sales in Asia. Security DBS Drill Bits operating income more than doubled over the prior year fourth quarter, reflecting strong fixed cutter bit sales in North America and Europe.
Digital and Consulting Solutions operating income in the fourth quarter of 2005 was $66 million as compared to breakeven in the prior year period. The fourth quarter of 2005 operating income increase was primarily driven by a 15% increase in consulting service revenue and in software sales from Landmark. Fourth quarter of 2004 operating income included a $33 million charge for two integrated solutions projects in Mexico and an $11 million charge for an intellectual property settlement.
KBR revenue for the fourth quarter of 2005 was $3.0 billion, a 3% decrease compared to the fourth quarter of 2004, primarily due to decreased military support activities in Iraq. Operating income for the fourth quarter of 2005 was $121 million compared to breakeven in the prior year quarter.
Government and Infrastructure operating income for the fourth quarter of 2005 was $55 million compared to operating income of $9 million in the fourth quarter of 2004. Iraq-related operating income increased primarily due to the favorable settlement of the remaining fuel cost and other issues under the RIO contract and progress on issues under the LogCAP contract. Included in operating income in the fourth quarter of 2004 was a total $16 million charge related to the 2004 restructuring of KBR and a loss on a construction project in Asia.
Energy and Chemicals operating income was $66 million in the fourth quarter of 2005 compared to an operating loss of $9 million in the fourth quarter of 2004. Fourth quarter of 2005 results included higher income on recently awarded liquefied natural gas (LNG) and gas-to-liquids projects and were favorably affected by lower support function costs. Older LNG projects in Nigeria and Egypt were completed or nearing completion during 2005 and, as a result, contributed less operating income in the 2005 quarter as compared to the 2004 fourth quarter. The operating loss in the fourth quarter of 2004 included $14 million of restructuring charges.
Halliburton's Iraq-related work contributed approximately $1.3 billion in revenue in the fourth quarter of 2005 and $42 million of operating income, or a 3.2% margin, before corporate expenses and taxes.
Technology and Significant Achievements
Halliburton made a number of advances in technology and new contract awards.
Energy Services Group new technologies and contract awards: * World Oil® magazine announced Sperry Drilling Services as the winner of "The Best Data Visualization Solution Award" for their StrataSteer® 3D Service. The StrataSteer 3D Geosteering service helps to place a well in smaller targets that often require complex well paths and more accurate wellbore positioning. The service integrates a digital 3D geological earth model, directional well plans, petrophysical model, and real-time LWD sensor data into a dynamic, interactive, and intuitive geosteering application. * Halliburton's Baroid Surface Solutions(TM), part of the company's Fluid Systems segment, has been awarded a drilling waste management contract by TOTAL E&P INDONESIE for the Mahakam Delta in East Kalimantan. This four-year contract is the largest of its kind in the Asia Pacific region. Scheduled to begin in the second quarter of 2006, the contract will include treatment of drill cuttings and recovery of oil for re-use in drilling fluids. Halliburton will be providing rig site waste management supervisors and collection equipment, along with a purpose-built Ground Control(TM) site. This Ground Control facility will use thermal desorption units to handle and treat the waste streams generated by drilling operations, returning the maximum possible recovered fluids to the operator. * ESG recently installed its 150th VersaFlex(TM) expandable liner hanger system. Since its recent introduction, the VersaFlex system has been deployed worldwide, to include deepwater Gulf of Mexico, the North Sea, South America, Middle East, and North America. The VersaFlex liner hanger has been designed with no movable components, allowing it to function with a drill string and retain integrity even when rotation and torque are necessary during deployment. Instead of relying on cement to provide the seal, the VersaFlex system develops a gas-tight seal at the liner lap because there are multiple sealing elastomers. * Landmark has been awarded a five-year contract to provide software maintenance and support at LUKOIL's headquarters in Moscow and in the LUKOIL-Komi company unit in the northwest region of Russia. * Landmark has opened an Application Hosting Center in Kuala Lumpur to provide infrastructure, applications, and services to support the existing and virtual exploration and production (E&P) team environment for oil and gas companies in Malaysia. Services offered by the Application Hosting Center will help E&P companies allow their asset teams to have on-demand access to business-critical data via up-to- date and sophisticated technical applications. KBR new technologies and contract awards: * KBR has been selected by Motiva Enterprises LLC, a joint venture between Shell Oil Company and Saudi Refining Inc, to provide conceptualization, planning, and early design services for a major refinery expansion being considered by Motiva in the United States. This 325,000 barrel per day capacity increase will be designed to process heavy sour crudes. * KBR's proprietary SCORE(TM) (Selective Cracking Optimum REcovery) ethylene technology has been selected by PT Chandra Asri Petrochemical in West Java, Indonesia, for an ethylene furnace expansion. KBR will provide the technology license and begin work on the furnace design. * Through a competitive procurement process, KBR has been awarded a contract by the United States Department of State to design and build a New Embassy Compound (NEC) in Skopje, Macedonia. When built, the NEC will consist of a new office building, support annex, utility building, and compound access control facilities. * KBR has been awarded a contract announced by the Department of Homeland Security's United States Immigration and Customs Enforcement (ICE) component. The Indefinite Delivery/Indefinite Quantity contingency contract is to support ICE facilities and has a maximum total value of $385 million over a five-year term. The contract provides for establishing temporary detention and processing capabilities in the event of an emergency influx of immigrants into the United States, or to support the rapid development of new programs.
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