Halliburton 2011 Annual Report Download - page 126

Download and view the complete annual report

Please find page 126 of the 2011 Halliburton annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 147

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147

111
Foreign currency exchange risk
We have operations in many international locations and are involved in transactions denominated
in currencies other than the United States dollar, our functional currency, which exposes us to foreign
currency exchange rate risk. Techniques in managing foreign currency exchange risk include, but are not
limited to, foreign currency borrowing and investing and the use of currency derivative instruments. We
attempt to selectively manage significant exposures to potential foreign currency exchange losses based on
current market conditions, future operating activities, and the associated cost in relation to the perceived
risk of loss. The purpose of our foreign currency risk management activities is to minimize the risk that our
cash flows from the sale and purchase of services and products in foreign currencies will be adversely
affected by changes in exchange rates.
We use forward exchange contracts to manage our exposure to fluctuations in the currencies of the
countries in which we do the majority of our international business. These forward exchange contracts are
not treated as hedges for accounting purposes, generally have an expiration date of one year or less, and are
not exchange traded. While forward exchange contracts are subject to fluctuations in value, the fluctuations
are generally offset by the value of the underlying exposures being managed. The use of some of these
contracts may limit our ability to benefit from favorable fluctuations in foreign currency exchange rates.
Forward exchange contracts are not utilized to manage exposures in some currencies due primarily
to the lack of available markets or cost considerations (non-traded currencies). We attempt to manage our
working capital position to minimize foreign currency exposure in non-traded currencies and recognize that
pricing for the services and products offered in these countries should account for the cost of exchange rate
devaluations. We have historically incurred transaction losses in non-traded currencies.
The notional amounts of open forward exchange contracts were $268 million at December 31,
2011 and $356 million at December 31, 2010. The notional amounts of our forward exchange contracts do
not generally represent amounts exchanged by the parties, and thus are not a measure of our exposure or of
the cash requirements related to these contracts. As such, cash flows related to these contracts are typically
not material. The amounts exchanged are calculated by reference to the notional amounts and by other
terms of the contracts, such as exchange rates.
Interest rate risk
We are subject to interest rate risk on our long-term debt. Our marketable securities and short-term
borrowings do not give rise to significant interest rate risk due to their short-term nature. We had fixed rate
long-term debt totaling $4.8 billion at December 31, 2011 and fixed rate long-term debt totaling $3.8
billion at December 31, 2010 with none maturing before May 2017.
We maintain an interest rate management strategy that is intended to mitigate the exposure to
changes in interest rates in the aggregate for our investment portfolio. During the second quarter of 2011,
we entered into a series of interest rate swaps relating to two of our debt instruments with a total notional
amount of $1.0 billion at a weighted-average, LIBOR-based, floating rate of 3.57% as of December 31,
2011. We utilize interest rate swaps to effectively convert a portion of our fixed rate debt to floating rates.
These interest rate swaps, which expire when the underlying debt matures, are designated as fair value
hedges of the underlying debt and are determined to be highly effective. The fair value of our interest rate
swaps are included in “Other assets” in our consolidated balance sheets as of December 31, 2011. The fair
value of our interest rate swaps was determined using an income approach model with inputs, such as the
notional amount, LIBOR rate spread, and settlement terms that are observable in the market or can be
derived from or corroborated by observable data. We did not have any interest rate swaps outstanding as of
December 31, 2010. At December 31, 2011, we had fixed rate debt aggregating $3.8 billion and variable
rate debt aggregating $1.0 billion, after taking into account the effects of the interest rate swaps.