1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9397
BAKER HUGHES INCORPORATED
(a Delaware Corporation)
76-0207995
3900 Essex Lane
Houston, Texas 77027
Registrant's telephone number, including area code: (713) 439-8600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 1, 2000
Common Stock, $1.00 par value per share 330,122,441 shares
2
BAKER HUGHES INCORPORATED
Baker Hughes Incorporated hereby amends Items 1 and 2 of Part 1 of its
Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 1999.
On July 19, 1999 the Company amended its Quarterly Report on Form 10-Q as
originally filed on April 30, 1999.
RESTATEMENT
In December 1999, based on an internal review, the Company became aware
of several accounting misstatements at one of its operating divisions, Baker
Hughes INTEQ. A subsequent analysis determined that these misstatements amounted
to $31.0 million, net of taxes. As a result, the Company restated its previously
issued consolidated financial statements to reflect the adjustments required to
correct these misstatements. The adjustments relate to uncollectible accounts
receivable, inventory shortages, the recognition of inventory pricing
adjustments, the impairment of various other current and long-lived assets and
the recognition of certain previously unrecorded liabilities, including trade
accounts payable and employee compensation and benefits payable.
As a result of the above, the Company's unaudited consolidated
condensed financial statements and related disclosures as of March 31, 1999 and
for the three months ended March 31, 1999 and 1998 have been restated from
amounts previously reported. The principal effects of these adjustments on the
accompanying financial statements are set forth in Note 6 of the Notes to
Consolidated Condensed Financial Statements.
For purposes of this Form 10-Q/A, and in accordance with Rule 12B-15
under the Securities Exchange Act of 1934, as amended, each item of the 1999
first quarter Form 10-Q/A as filed on July 19, 1999 that was affected by the
restatement has been amended and restated in its entirety. No attempt has been
made in this Form 10-Q/A to modify or update other disclosures as presented in
the original Form 10-Q/A except as required to reflect the effects of the
restatement and the effects of accounting for the Company's Baker Process
division as a discontinued operation. In particular, and without limitation, in
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the captions "Business Environment", "Results of
Operations - Merger Related Charges", "Results of Operations - Unusual and
Nonrecurring Charges", "Capital Resources and Liquidity - Investing Activities",
"Year 2000 Issue" and "Euro Conversion", the Company has given certain
information about the business environment applicable to the Company, the
business outlook and certain forward looking information. This information has
not been revised from the information provided in the Form 10-Q/A for the
quarter ended March 31, 1999 because it was not affected by the restatement. For
current information regarding the Company's business environment, outlook and
this forward looking information, see the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1999.
1
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INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION --------
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - Three months ended
March 31, 1999 and 1998 3
Consolidated Condensed Statements of Financial Position - March 31, 1999
and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows - Three months ended
March 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II - OTHER INFORMATION 26
2
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
---------- ---------
(As Restated - See Note 6)
----------------------------
Revenues $ 1,214.4 $ 1,523.9
---------- ----------
Costs and expenses:
Costs of revenues 937.1 1,145.0
Selling, general and administrative 171.6 187.1
---------- ----------
Total 1,108.7 1,332.1
---------- ----------
Operating income 105.7 191.8
Interest expense (38.7) (29.6)
Interest income 2.2 1.7
---------- ----------
Income from continuing operations before income taxes 69.2 163.9
Income taxes (23.4) (58.1)
---------- ----------
Income from continuing operations 45.8 105.8
Income (loss) from discontinued operations, net of tax (1.4) 6.1
---------- ----------
Net income $ 44.4 $ 111.9
========== ==========
Basic earnings per share:
Income from continuing operations $ 0.14 $ 0.33
Discontinued operations, net of tax 0.02
---------- ----------
Net income $ 0.14 $ 0.35
========== ==========
Diluted earnings per share:
Income from continuing operations $ 0.14 $ 0.33
Discontinued operations, net of tax 0.02
---------- ----------
Net income $ 0.14 $ 0.35
========== ==========
Cash dividends per share $ 0.115 $ 0.115
========== ==========
See accompanying notes to consolidated condensed financial statements.
3
5
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
(Unaudited)
March 31, December 31,
1999 1998
-------------- ------------
(As Restated -
ASSETS See Note 6)
--------------
CURRENT ASSETS:
Cash and cash equivalents $ 29.8 $ 19.5
Accounts receivable, net 1,139.0 1,258.2
Inventories 930.7 994.3
Net assets of discontinued operations 270.0 267.9
Other current assets 194.8 213.3
-------- --------
Total current assets 2,564.3 2,753.2
Property, net 2,215.5 2,240.7
Goodwill and other intangibles, net 1,733.0 1,744.3
Multiclient seismic data and other assets 962.0 894.7
-------- --------
Total assets $7,474.8 $7,632.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 389.1 $ 487.9
Short-term borrowings and current portion of long-term debt 42.7 44.4
Accrued employee compensation 207.9 272.2
Other current liabilities 287.7 378.8
-------- --------
Total current liabilities 927.4 1,183.3
-------- --------
Long-term debt 2,849.4 2,726.3
-------- --------
Deferred income taxes 151.8 152.9
-------- --------
Deferred revenue and other long-term liabilities 386.6 405.3
-------- --------
Stockholders' equity:
Common stock 327.4 327.1
Capital in excess of par value 2,934.4 2,931.8
Retained earnings 72.9 66.1
Accumulated other comprehensive (loss) (175.1) (159.9)
-------- --------
Total stockholders' equity 3,159.6 3,165.1
-------- --------
Total liabilities and stockholders' equity $7,474.8 $7,632.9
======== ========
See accompanying notes to consolidated condensed financial statements.
4
6
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended
March 31,
------------------------------
1999 1998
-------------- -------------
(As Restated - See Note 6)
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 45.8 $ 105.8
Adjustments to reconcile income from continuing operations to net
cash flow from operating activities:
Depreciation, depletion and amortization 200.6 157.0
Provision (benefit) for deferred income taxes 10.5 (8.6)
Loss (gain) on disposal of assets 13.2 (9.1)
Change in accounts receivable 117.4 (17.3)
Change in inventories 65.4 (77.7)
Change in accounts payable (96.2) 61.3
Change in accrued employee compensation and other current
liabilities (148.0) (46.6)
Change in deferred revenue and other long-term liabilities (16.8) 48.5
Changes in other assets and liabilities (47.8) (20.7)
-------- --------
Net cash flows from continuing operations 144.1 192.6
Net cash flows from discontinued operations 1.8 3.3
-------- --------
Net cash flows from operating activities 145.9 195.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (221.3) (302.5)
Proceeds from disposal of assets 5.0 20.1
Acquisition of businesses, net of cash acquired (47.5)
-------- --------
Net cash flows from continuing operations (216.3) (329.9)
Net cash flows from discontinued operations (1.3) (3.3)
-------- --------
Net cash flows from investing activities (217.6) (333.2)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings from commercial paper,
revolving credit facilities and short-term debt (740.6) 185.7
Repayment of matured indebtedness (150.0) (49.3)
Net proceeds from issuance of notes 1,010.7
Proceeds from issuance of common stock 2.8 9.0
Dividends (37.6) (19.4)
-------- --------
Net cash flows from continuing operations 85.3 126.0
Net cash flows from discontinued operations -- --
-------- --------
Net cash flows from financing activities 85.3 126.0
-------- --------
Effect of exchange rate changes on cash (3.3) 1.2
-------- --------
Increase (decrease) in cash and cash equivalents 10.3 (10.1)
Cash and cash equivalents, beginning of period 19.5 43.1
-------- --------
Cash and cash equivalents, end of period $ 29.8 $ 33.0
======== ========
Income taxes paid $ 35.5 $ 58.1
Interest paid $ 29.8 $ 22.7
See accompanying notes to consolidated condensed financial statements.
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7
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
RESTATEMENT
As more fully described in Note 6 "Restatement", the consolidated
condensed financial statements and related disclosures as of March 31, 1999 and
for the three months ended March 31, 1999 and 1998 have been restated to correct
accounting errors identified in the Company's accounting records.
DISCONTINUED OPERATIONS
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division. Accordingly, all
prior period consolidated financial statements and related notes thereto have
been restated to present the operations of Baker Process (which were separately
accounted for as a segment) as a discontinued operation. See Note 7.
GENERAL
In the opinion of Baker Hughes Incorporated ("Baker Hughes" or the
"Company"), the unaudited consolidated condensed financial statements include
all adjustments of a normal recurring nature necessary for a fair presentation
of the Company's consolidated financial position as of March 31, 1999, its
consolidated results of operations for the three months ended March 31, 1999 and
1998 and its consolidated cash flows for the three months ended March 31, 1999
and 1998. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (see the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 for the most recent annual
financial statements prepared in accordance with generally accepted accounting
principles). The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for the full year.
On August 10, 1998 Baker Hughes merged with Western Atlas Inc. Certain amounts
have been reclassified to conform the reporting practices of Baker Hughes and
Western Atlas Inc.
In the notes to consolidated condensed financial statements, all dollar
and share amounts in tabulations are in millions of dollars and shares,
respectively, unless otherwise indicated.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to owners. The
Company's total comprehensive income is as follows:
Three Months Ended
March 31,
-------------------------
1999 1998
------------ ----------
(As Restated - See Note 6)
-------------------------
Net income $ 44.4 $111.9
Other comprehensive (loss) (15.2) (5.3)
------ ------
Total comprehensive income $ 29.2 $106.6
====== ======
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 2. INVENTORIES
Inventories are comprised of the following:
March 31, December 31,
1999 1998
-------------- ------------
(As Restated -
See Note 6)
--------------
Finished goods $760.7 $808.6
Work in process 65.5 67.9
Raw materials 104.5 117.8
------ ------
Total $930.7 $994.3
====== ======
NOTE 3. EARNINGS PER SHARE ("EPS")
Reconciliation of the numerators and denominators of the basic and
diluted EPS computations is as follows:
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
----------------------------- ---------------------------------
Income From Income From
Continuing Continuing
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
-------------- ------------- --------------- -------------
(As Restated - (As Restated -
See Note 6) See Note 6)
-------------- ---------------
Basic $ 45.8 327.2 $ 105.8 317.2
Effect of dilutive securities:
Stock plans .3 4.9
Liquid Yield Option Notes 1.7 7.2
---------- ----- ---------- -----
Diluted $ 45.8 327.5 $ 107.5 329.3
========== ===== ========== =====
Securities excluded from the computation of diluted EPS for the three
months ended March 31, 1999 that could have potentially diluted basic EPS in the
future were options to purchase 13.0 million shares, Liquid Yield Option Notes
convertible into 7.2 million shares and .7 million shares estimated to be issued
under the Company's employee stock purchase plan. Such dilutive securities were
excluded as they would be anti-dilutive to basic EPS.
NOTE 4. SEGMENT AND RELATED INFORMATION
The Company's eight business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into one reportable segment - oilfield.
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9
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Oilfield consists of the following business units - Baker Atlas, Baker
Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions,
Hughes Christensen and Western Geophysical - that manufacture and sell equipment
and provide services used in the drilling, completion, production and
maintenance of oil and gas wells and in reservoir measurement and evaluation.
The principal markets for this segment include all major oil and gas producing
regions of the world including North America, Latin America, Europe, Africa, the
Middle East and the Far East. Customers include major multi-national,
independent and national or state-owned oil companies.
Segment profit (loss) is based on income before income taxes,
accounting changes, nonrecurring items and interest income and expense.
Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes
corporate-related items, results of insignificant operations and, as it relates
to segment profit (loss), income and expense not allocated to reportable
segments. Net assets of discontinued operations, which are excluded from total
assets in the following table, totaled $270.0 million and $267.9 million at
March 31, 1999 and December 31, 1998, respectively.
Oilfield Other Total
---------- ---------- ----------
(As Restated - See Note 6)
-----------------------------------------
REVENUES
Three months ended March 31, 1999 $ 1,214.4 $ 1,214.4
Three months ended March 31, 1998 $ 1,516.5 $ 7.4 $ 1,523.9
SEGMENT PROFIT (LOSS)
Three months ended March 31, 1999 $ 129.3 $ (60.1) $ 69.2
Three months ended March 31, 1998 $ 219.6 $ (55.7) $ 163.9
TOTAL ASSETS
As of March 31, 1999 $ 6,792.3 $ 412.5 $ 7,204.8
As of December 31, 1998 $ 6,946.8 $ 418.2 $ 7,365.0
The following table presents the details of "Other" segment profit (loss):
Three Months Ended
March 31,
--------------------------
1999 1998
-------- --------
(As Restated - See Note 6)
--------------------------
Corporate expenses $ (23.6) $ (27.8)
Interest-net (36.5) (27.9)
-------- --------
Total $ (60.1) $ (55.7)
======== ========
NOTE 5. DEBT
During January and February 1999, the Company issued $400.0 million of
6.875% Notes due January 2029, $325.0 million of 6.25% Notes due January 2009,
$200.0 million of 6.0% Notes due February 2009 and $100.0 million of 5.8% Notes
due 2003 with effective interest rates of 7.07%, 6.36%, 6.09% and 6.01%,
respectively. The net proceeds of $1,010.7 million were used to repay $150.0
million of the 7.625% Notes due February 1999, commercial paper and other
short-term borrowings.
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10
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 6. RESTATEMENT
In December 1999, based on an internal review, the Company became aware
of several accounting misstatements at one of its operating divisions, Baker
Hughes INTEQ. A subsequent analysis determined these misstatements amounted to
$31.0 million, net of taxes, and related to multiple years. As a result, the
Company restated its previously issued consolidated financial statements to
reflect the adjustments required to correct these misstatements. The adjustments
relate to uncollectible accounts receivable, inventory shortages, the
recognition of inventory pricing adjustments, the impairment of various other
current and long-lived assets and the recognition of certain previously
unrecorded liabilities, including trade accounts payable and employee
compensation and benefits payable.
As a result of the above, the Company's unaudited condensed
consolidated financial statements and related disclosures as of March 31, 1999
and for the three months ended March 31, 1999 and 1998 have been restated from
amounts previously reported. The principal effects of these adjustments on the
consolidated statement of operations for the three months ended March 31, 1999
and 1998 and the consolidated statement of financial position as of March 31,
1999 are set forth below. See the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 for the effects of these adjustments on the
consolidated statement of financial position as of December 31, 1998. As
described in Note 1, Basis of Presentation, the Company plans to dispose of
Baker Process, which is presented in the consolidated financial statements as
"Discontinued Operations." The caption "As Previously Reported" in the following
summarized financial information reflects Baker Process as a discontinued
operation for all periods presented.
9
11
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------------------------------------------
March 31, 1999 March 31, 1998
As Previously As Previously
(In millions, except per share amounts) As Restated Reported As Restated Reported
----------- ------------- ----------- -------------
Revenues $ 1,214.4 $ 1,214.4 $ 1,523.9 $ 1,524.6
---------- ---------- ---------- ----------
Costs and expenses:
Costs of revenues 937.1 938.7 1,145.0 1,144.6
Selling, general and administrative 171.6 171.5 187.1 187.0
---------- ---------- ---------- ----------
Total 1,108.7 1,110.2 1,332.1 1,331.6
---------- ---------- ---------- ----------
Operating income 105.7 104.2 191.8 193.0
Interest expense (38.7) (38.7) (29.6) (29.6)
Interest income 2.2 2.2 1.7 1.7
---------- ---------- ---------- ----------
Income from continuing operations before
income taxes 69.2 67.7 163.9 165.1
Income taxes (23.4) (23.6) (58.1) (58.3)
---------- ---------- ---------- ----------
Income from continuing operations 45.8 44.1 105.8 106.8
Income (loss) from discontinued operations,
net of tax (1.4) (1.4) 6.1 6.1
---------- ---------- ---------- ----------
Net income $ 44.4 $ 42.7 $ 111.9 $ 112.9
========== ========== ========== ==========
Basic earnings per share:
Income from continuing operations $ 0.14 $ 0.13 $ 0.33 $ 0.34
Discontinued operations, net of tax 0.02 0.02
---------- ---------- ---------- ----------
Net income $ 0.14 $ 0.13 $ 0.35 $ 0.36
========== ========== ========== ==========
Diluted earnings per share:
Income from continuing operations $ 0.14 $ 0.13 $ 0.33 $ 0.33
Discontinued operations, net of tax 0.02 0.02
---------- ---------- ---------- ----------
Net income $ 0.14 $ 0.13 $ 0.35 $ 0.35
========== ========== ========== ==========
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12
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
March 31, 1999
-----------------------------
As Previously
(In millions) As Restated Reported
----------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29.8 $ 30.3
Accounts receivable, net 1,139.0 1,141.4
Inventories 930.7 941.6
Net assets of discontinued operations 270.0 270.0
Other current assets 194.8 198.6
---------- ----------
Total current assets 2,564.3 2,581.9
Property, net 2,215.5 2,219.6
Goodwill and other intangibles net 1,733.0 1,733.0
Multiclient seismic data and other assets 962.0 962.0
---------- ----------
Total assets $ 7,474.8 $ 7,496.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 389.1 $ 378.2
Short-term borrowings and current portion of
long-term debt 42.7 42.7
Accrued employee compensation 207.9 204.3
Other accrued liabilities 287.7 287.6
---------- ----------
Total current liabilities 927.4 912.8
---------- ----------
Long-term debt 2,849.4 2,849.4
---------- ----------
Deferred income taxes 151.8 155.5
---------- ----------
Deferred revenue and other long-term liabilities 386.6 386.6
---------- ----------
Stockholders' equity:
Common stock 327.4 327.4
Capital in excess of par value 2,934.4 2,934.4
Retained earnings 72.9 105.5
Accumulated other comprehensive (loss) (175.1) (175.1)
---------- ----------
Total stockholders' equity 3,159.6 3,192.2
---------- ----------
Total liabilities and stockholders' equity $ 7,474.8 $ 7,496.5
========== ==========
NOTE 7. DISCONTINUED OPERATIONS
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division. Baker Process
manufacturers and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes. Accordingly, the Company's consolidated condensed financial
statements and related notes thereto have been restated to present the
operations of Baker Process (which were separately accounted for as a segment)
as a discontinued operation. The Company has retained an investment-banking firm
to manage the sale process. Income (loss) from discontinued operations for all
respective periods presented includes interest expense allocated on the basis of
the net assets of Baker Process compared to the Company's stockholders' equity
and consolidated debt. Corporate, general and administrative costs of the
Company were not allocated to Baker Process for any of the periods presented.
11
13
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Certain information with respect to discontinued operations of Baker
Process is as follows:
Three Months Ended
March 31,
------------------
1999 1998
------ ------
Revenue $110.8 $123.5
------ ------
Allocated interest expense 1.8 1.3
------ ------
Income (loss) before income taxes (2.1) 9.0
Benefit (provision) for income taxes .7 (2.9)
------ ------
Income (loss) from discontinued operations of Baker Process $ (1.4) $ 6.1
====== ======
Net assets of Baker Process are as follows:
As of As of
March 31, December 31,
--------- ------------
1999 1998
-------- --------
Current assets $ 227.7 $ 221.3
Noncurrent assets 198.3 202.1
-------- --------
Total assets 426.0 423.4
-------- --------
Current liabilities 145.5 142.0
Noncurrent liabilities 10.5 13.5
-------- --------
Total liabilities 156.0 155.5
-------- --------
Net assets of Baker Process $ 270.0 $ 267.9
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with the Company's
consolidated condensed financial statements and the related notes thereto.
FORWARD-LOOKING STATEMENTS
MD&A includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, (each a "Forward-Looking Statement"). The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "forecasts," "will," "could," "may" and similar expressions are
intended to identify forward-looking statements. No assurance can be given that
actual results may not differ materially from those in the forward-looking
statements herein for reasons including the effects of competition, the level of
petroleum industry exploration and production expenditures, world economic
conditions, prices of, and the demand for, crude oil and natural gas, drilling
activity, weather, the legislative environment in the United States and other
countries, OPEC policy, conflict in the Middle East and other major petroleum
producing or consuming regions, the development of technology that lowers
overall finding and development costs and the condition of the capital and
equity markets.
Baker Hughes' expectations regarding its level of capital expenditures
described in "Investing Activities" below are only its forecasts regarding these
matters. In addition to the factors described in the previous paragraph and in
"Business Environment," these forecasts may be substantially different from
actual results, which are affected by the following factors: the accuracy of the
Company's estimates regarding its spending requirements, regulatory, legal and
contractual impediments to spending reduction measures; the occurrence of any
unanticipated acquisition or research and development opportunities; changes in
the Company's strategic direction; and the need to replace any unanticipated
losses in capital assets.
RESTATEMENT
In December 1999, based on an internal review, the Company became aware
of several accounting misstatements at one of its operating divisions, Baker
Hughes INTEQ ("INTEQ"). A subsequent analysis determined that these
misstatements amounted to $31.0 million, net of taxes, and related to multiple
years. As a result, the Company restated its previously issued consolidated
financial statements to reflect the adjustments required to correct these
misstatements. The adjustments relate to uncollectible accounts receivable,
inventory shortages, the recognition of inventory pricing adjustments, the
impairment of various other current and long-lived assets and the recognition of
certain previously unrecorded liabilities, including trade accounts payable and
employee compensation and benefits payable. Although the amounts were
attributable to several of the INTEQ division locations, $24.2 million, net of
tax, was related to INTEQ's Venezuela operations. Of the amounts pertaining to
locations other than Venezuela, no one location accounted for more than $2.7
million on an after tax basis.
13
15
As a result of the analysis of these amounts, the Company determined
that the specific years affected and the applicable amounts, net of tax, are as
follows:
Increase (decrease)
(In millions) to Net Income
-------------------
1999
Third quarter $ 0.1
Second quarter 1.5
First quarter 1.7
1998
Fourth quarter 1.2
Third quarter 0.9
Second quarter 0.2
First quarter (1.0)
Transition Period 0.2
1997 (8.5)
1996 (2.8)
1995 (0.6)
Periods prior to 1995 (23.9)
-------
Total $ (31.0)
=======
As a result of the above, the Company's financial statements for the
interim periods in 1999 and 1998, the year ended December 31, 1998, the three
months ended December 31, 1997, and the years ended September 30, 1997, 1996 and
1995 have been restated from amounts previously reported.
Management believes the misstatements were primarily the result of
noncompliance with the Company's accounting and operating procedures and that
such noncompliance was isolated primarily to INTEQ's operations in Venezuela.
The Company is in the process of reviewing the administrative, accounting and
operational policies and procedures for its foreign units, and compliance
therewith, to identify potential areas where revisions may be warranted. To the
extent that changes to current procedures are warranted, they will be
implemented as quickly as practicable.
DISCONTINUED OPERATIONS
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division, which
manufacturers and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes. Accordingly, the Company's consolidated financial
statements and related notes thereto have been restated to present the
operations of Baker Process (which were separately accounted for as a segment)
as discontinued operations.
BUSINESS ENVIRONMENT
In "Business Environment", the Company has given certain information
about the business environment applicable to the Company, the business outlook
and certain forward looking information. This information has not been revised
from the information provided in the Form 10-Q/A for the quarter ended March 31,
1999 because it was not affected by the restatement. For current information
regarding the Company's business environment, outlook and this forward looking
information, see the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1999.
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The Company is primarily engaged in the oilfield service industry and
currently consists of eight business units - Baker Atlas, Baker Hughes INTEQ,
Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions, Hughes Christensen
and Western Geophysical - that manufacture and sell equipment and provide
related services used in the drilling, completion, production and maintenance of
oil and gas wells and in reservoir measurement and evaluation. The business
environment for the Company and its corresponding operating results are affected
significantly by the petroleum industry exploration and production expenditures.
These expenditures are influenced strongly by oil company expectations about the
supply and demand for crude oil and natural gas, energy prices, and finding and
development costs. Petroleum supply and demand, pricing, and finding and
development costs, in turn, are influenced by numerous factors including, but
not limited to, those described above in "Forward-Looking Statements."
Four key factors which currently influence the worldwide crude oil
market and therefore current and future expenditures for exploration and
development by our customers are:
o The degree to which certain large producing countries, in
particular Saudi Arabia, UAE, Kuwait, Iran, Venezuela and
Mexico, are willing and able to restrict production and
exports of crude oil.
o The increasing rate of depletion of known hydrocarbon
reserves. Technological advances are resulting in accelerated
decline rates and shorter well lives. In general, accelerated
decline rates require additional customer spending to hold
production levels.
o The level of economic growth in certain key areas of the
world, particularly Japan, China and South Korea, as well as
developing areas in Asia where the correlation between energy
demand and economic growth is particularly strong.
o The amount of crude oil in storage relative to historic
levels.
These four factors, together with oil and gas company projections for
future commodity price movement, influence overall levels of expenditures for
exploration and development by the Company's customers.
More specifically, two key factors influence the level of exploration
and development spending:
o Technology: Advances in the design and application of more
technologically advanced products and services allow oil and
gas companies to drill fewer wells, place the wells they drill
more precisely in the higher yielding or more easily produced
hydrocarbon zones of the reservoir, and allow operators to
drill, complete, and operate wells at lower overall costs.
o Price Volatility: Changes in hydrocarbon markets create
uncertainty in the future price of hydrocarbons and therefore
create uncertainty about the aggregate level of customer
spending. Multi-year projects, such as deep-water exploration
and drilling, are the least likely to be impacted by price
volatility. Projects with relatively short payback periods or
low profit margins, such as workover activity or the
extraction of heavy oil, are more likely to be impacted.
Crude oil and natural gas prices and the Baker Hughes rotary rig count
are summarized in the tables below as averages for the periods indicated and are
followed by the Company's outlook. While reading the Company's outlook set forth
below, caution is advised that the factors described above in "Forward-Looking
Statements" and "Business Environment" could negatively impact the Company's
expectations for oil demand, oil and gas prices, and drilling activity.
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OIL AND GAS PRICES
Three Months Ended
March 31,
------------------
1999 1998
---- ----
West Texas Intermediate Crude ($/bbl) $12.95 $15.90
U. S. Spot Natural Gas ($/mcf) $ 1.71 $ 2.06
Crude oil prices averaged $12.95/bbl in the quarter. Prices varied
between $11-$13/bbl for most of the quarter before rising above $15/bbl at the
end of the quarter. The improvement in prices was primarily the result of an
announcement by OPEC and certain non-OPEC countries of an agreement for
additional production cuts. U.S. natural gas prices weakened in the first
quarter of 1999 compared to the same period in the prior year due to abnormally
warm winter weather.
ROTARY RIG COUNT
Three Months Ended
March 31,
------------------
1999 1998
----- -----
U.S. - Land 448 830
U.S. - Offshore 103 136
Canada 290 459
----- -----
North America 841 1,425
----- -----
Latin America 180 272
North Sea 45 60
Other Europe 42 49
Africa 53 82
Middle East 147 165
Asia Pacific 152 184
----- -----
International 619 812
----- -----
Worldwide 1,460 2,237
===== =====
U.S. Workover 718 1,298
===== =====
OUTLOOK
In 1998, declining demand from developing Asia and a warmer than normal
winter coupled with increases in Iraqi exports and increases in non-OPEC and
OPEC supply resulted in historically high inventory levels and lower oil prices.
Oil prices that had ranged from $18-$26/barrel in 1997 fell to $15-$18/barrel in
the first part of 1998. At the end of 1998, oil was trading between
$10-$13/barrel. In response to lower oil prices and expectations for continued
low oil prices in 1999, oil companies cut upstream capital spending particularly
in the second half of 1998. In late March 1999, OPEC and certain non-OPEC
countries announced an agreement for additional production cuts. The level of
adherence to these agreed cuts will be a key determination of crude oil prices
in 1999 and 2000. If adherence is greater than approximately 70%, the Company
expects oil to trade between $15-$19/bbl for the balance of 1999. If adherence
falls significantly below 70%, oil could trade $4-$5/bbl lower.
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As a result of recent low oil prices and concern over OPEC/non-OPEC
quota compliance, 1999 oil company capital spending is expected to decline
approximately 25% from 1998 spending levels. Cuts in upstream capital spending
were more significant in North and South America than in the Eastern Hemisphere
in 1998. The Company expects customer spending in the Eastern Hemisphere to be
reduced more significantly in 1999. Customer spending is expected to decline
sequentially during the first two quarters of 1999 before stabilizing in the
second half of the year.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three months ended March 31, 1999 were $1,214.4
million, a decrease of 20.3% over revenues in the three months ended March 31,
1998 of $1,523.9 million. Geographically, revenues were down 18.2% in North
America and 21.7% outside North America. The revenue decline resulted from lower
activity levels as the worldwide rig count decreased 34.7% and from lower prices
for the Company's products and services, particularly in drilling systems,
wireline logging and drilling fluids.
GROSS MARGIN
Gross margins for the three months ended March 31, 1999 and 1998 were
22.8% and 24.9%, respectively. The decrease is due primarily to cost associated
with excess manufacturing capacity and pricing pressure.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses as a percentage
of consolidated revenues for the three months ended March 31, 1999 and 1998 were
14.1% and 12.3%, respectively. While these costs were down on an absolute basis,
the increase as a percent of consolidated revenues is due primarily to these
costs being more fixed in nature producing a slower rate of decline than
consolidated revenues.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 1999 increased
$9.1 million compared to the corresponding period in 1998. These increases were
due to higher debt levels that funded capital expenditures, acquisitions, and
working capital.
INCOME TAXES
The effective tax rate for the three months ended March 31, 1999 and
1998 was 33.8% and 35.4%, respectively.
MERGER RELATED CHARGES
In connection with the merger with Western Atlas Inc. (the "Merger"),
in 1998 the Company recorded Merger related costs of $217.5 million. Cash
provisions of the Merger related costs totaled $159.3 million. The categories of
costs incurred, the actual cash payments made and the accrued balances at March
31, 1999 are summarized below:
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Accrued
Balance at
Paid in Paid in March 31,
Total 1998 1999 1999
-------- -------- -------- --------
Cash costs
Transaction costs $ 51.5 $ (46.9) $ (1.6) $ 3.0
Employee costs 87.2 (66.2) (5.8) 15.2
Other merger integration costs 20.6 (9.0) (1.0) 10.6
-------- -------- -------- --------
Total $ 159.3 $ (122.1) $ (8.4) $ 28.8
======== ======== ======== ========
The Company expects that, of the $28.8 million accrual at March 31,
1999, $14.0 million will be spent by December 31, 1999 and $3.0 million will be
spent by December 31, 2001, with the remaining accrual spent over the remaining
life of the related contractual obligations.
UNUSUAL AND OTHER NONRECURRING CHARGES
In 1998, as a result of a sharp decline in demand and to adjust to the
lower level of activity, the Company assessed its overall operations and
recorded charges of $551.9 million. Cash provisions of the charges totaled
$118.0 million. The categories of costs incurred, the actual cash payments and
the accrued balances at March 31, 1999 are summarized below:
Accrued
Balance at
Paid in Paid in March 31,
Total 1998 1999 1999
-------- -------- -------- --------
Cash costs
Severance for approximately 5,200
Employees $ 58.0 $ (24.2) $ (16.6) $ 17.2
Integration costs, abandoned leases
and other contractual obligations 29.8 (12.0) (4.8) 13.0
Environmental accruals 8.8 (4.3) 4.5
Other cash costs (includes litigation
accruals) 21.4 (4.7) (4.1) 12.6
-------- -------- -------- --------
Total $ 118.0 $ (45.2) $ (25.5) $ 47.3
======== ======== ======== ========
The Company expects that, of the $47.3 million accrual at March 31,
1999, $27.1 million will be spent by December 31, 1999, with the remaining
accrual relating to contractual obligations, anticipated legal settlements and
environmental remediation.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Net cash inflows from operating activities of continuing operations
were $144.1 million and $192.6 million for the three months ended March 31, 1999
and 1998, respectively. Lower net income and increased payments on current
liabilities resulted in a decline in cash flow from operations.
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INVESTING ACTIVITIES
Net cash outflows from investing activities of continuing operations
were $216.3 million and $329.9 million for the three months ended March 31, 1999
and 1998, respectively.
Property additions in 1999 decreased as the Company adjusted to softer
market conditions. The Company currently expects 1999 capital expenditures to be
approximately $600.0 million (excluding acquisitions), a significant reduction
from 1998 capital spending. Funds provided from operations and outstanding lines
of credit are expected to be adequate to meet future capital expenditure
requirements.
Proceeds from the disposal of assets generated $5.0 million during the
three months ended March 31, 1999 and $20.1 million during the three months
ended March 31, 1998.
The words "expected" and "expects" are intended to identify
Forward-Looking Statements in "Investing Activities." See "Forward-Looking
Statements" and "Business Environment" above for a description of risk factors
related to these Forward-Looking Statements.
FINANCING ACTIVITIES
Net cash inflows from financing activities of continuing operations
were $85.3 million and $126.0 million for the three months ended March 31, 1999
and 1998, respectively. Total debt outstanding at March 31, 1999 was $2,892.1
million, compared to $2,770.7 million at December 31, 1998. The debt to equity
ratio was 0.92 at March 31, 1999 compared to 0.88 at December 31, 1998.
During January and February 1999, the Company issued $400.0 million of
6.875% Notes due January 2029, $325.0 million of 6.25% Notes due January 2009,
$200.0 million of 6.0% Notes due February 2009 and $100.0 million of 5.8% Notes
due February 2003 with effective interest rates of 7.07%, 6.36%, 6.09% and
6.01%, respectively. The proceeds were used to repay $150.0 million of the
7.625% Notes due February 1999, commercial paper and other short-term
borrowings.
Cash dividends in 1999 increased due to the increase in the number of
shares of common stock outstanding after the Merger. On an annualized basis the
cash dividend of $0.46 per share of common stock will require approximately
$150.0 million of cash which compares to an annual requirement of approximately
$80.0 million before the Merger.
At March 31, 1999, the Company had $1,595.2 million of credit
facilities with commercial banks, of which $1,000.0 million was committed. These
facilities are subject to normal banking terms and conditions that do not
significantly restrict the Company's activities.
ACCOUNTING STANDARDS
DERIVATIVE AND HEDGE ACCOUNTING
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at fair value. Depending on the intended use of the derivative, changes in its
fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income.
SFAS No. 133 is effective for all quarters of fiscal years beginning
after June 15, 1999. Retroactive application to periods prior to adoption is not
allowed. The Company will adopt the standard in the first quarter
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21
of 2000. The Company has not quantified the impact of the adoption of SFAS No.
133 on its consolidated financial statements.
YEAR 2000 ISSUE
FORWARD-LOOKING STATEMENTS REGARDING THE YEAR 2000 ISSUE
In "Year 2000 Issue", the Company has given certain forward looking
information. This information has not been revised from the information provided
in the Form 10-Q/A for the quarter ended March 31, 1999 because it was not
affected by the restatement. For current information regarding the Year 2000
Issue, see "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations - Year 2000 Issue" in the Company's Annual Report on
Form 10-K for its fiscal year ended December 31, 1999.
The words "expect," "believe," "will," "estimate," "target" and similar
expressions are intended to identify Forward-Looking Statements in "Year 2000
Issue." Although the Company expects that it will complete various phases of its
Year 2000 Program Plan (the "Program Plan") as described below, including
(without limitation) the specific remedial and corrective aspects of the program
or the contingency plans described below, there can be no assurance that the
Company will be successful in completing each and every aspect of the Program
Plan and, if successful, within the expected schedules described below. Factors
that could affect the Company's implementation of its Program Plan include
unforeseen difficulties in remediating a specific problem due to the complexity
of hardware and software, the inability of third parties to adequately address
their own year 2000 issues, including vendors, contractors, financial
institutions, U.S. and foreign governments and customers, the delay in
completion of a phase of the Program Plan necessary to begin a latter phase, the
discovery of a greater number of hardware and software systems or technologies
with material year 2000 issues than the Company presently anticipates, and the
lack of alternatives that the Company previously believed existed.
OVERVIEW
Many computer hardware and software products have not been engineered
with internal calendars or date-processing logic capable of accommodating dates
after December 31, 1999. In most cases, the problem is due to the hardware or
software application storing the year as a two-digit field. In applications
where this year 2000 ("Y2K") problem exists, the year 2000 will appear as 00,
and current applications could interpret the year as 1900 or some date other
than 2000. The same error may exist for years later than 2000 because the
application cannot distinguish which century the date represents. These errors
could negatively affect the Company's business application systems,
manufacturing, engineering and process control systems, products sold to
customers, equipment used in providing services, facilities equipment and
information technology ("IT") infrastructure. Additionally, Y2K issues impacting
suppliers and customers could have an indirect negative impact on the Company.
A more detailed breakdown of the current status of the Baker Hughes
Incorporated Year 2000 Program Plan can be found below.
YEAR 2000 PROGRAM PLAN
Baker Hughes has developed a Year 2000 Program Plan for identifying,
assessing and correcting its Y2K problems. This Program Plan strives to achieve
a consistent approach to the Y2K issue throughout the Company. The Program Plan
has the following aspects: program management, inventory and risk assessment,
remediation, testing and implementation, contingency planning, and quality
assurance.
The Company has completed an inventory of all hardware and software
that the Company incorporates in its products or utilizes to support its
operations or provide services to its customers. The Company is also
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determining whether the inventoried items have Y2K problems. Approximately 35%
of the inventoried items in the Company's database have been assessed for Y2K
compliance as of March 31, 1999, of which approximately 6% is non-compliant. If
a Y2K problem exists, the Company will assess the risks associated with the
problem.
Baker Hughes has adopted the British Standards Institute Year 2000
Conformity Guidelines as a reasonable standard for determining whether software
and hardware are not materially affected by Y2K problems. When meeting these
guidelines, the Company has deemed that hardware or software are not materially
affected by Y2K problems and, thus, are "in Y2K compliance."
The Company's remediation efforts include the correction or replacement
of noncompliant hardware and software and are scheduled to be completed by mid
to late 1999 for all material noncompliant hardware and software that the
Company has identified to date. Both Company employees and outside vendors are
performing this work. The Company has established a target date of June 30, 1999
for the completion of the work on a majority of its material noncompliant
systems and technologies. The Company expects to complete its development of
contingency plans by August 31, 1999 for any material systems and technologies
not remediated by June 30, 1999.
The Company is unable to reasonably estimate the absolute dollar effect
on the Company's results of operation, liquidity or financial condition if its
remediation efforts are unsuccessful, although the Company believes the effect
would be material.
Baker Hughes has performed testing and validation of the compliance
status for all critical hardware and software as the Company has completed each
remediation project. Hardware and software that is not critical may not be
tested and validated. The Company is currently testing and validating, among
other hardware and software, its seismic data acquisition and analysis systems,
surface data acquisition and logging systems, wire- line logging systems,
certain filtration and separation equipment that has been customized with
program logic controllers, and certain motor controllers that include embedded
chips and internal clocks. The Company's employees and, in some cases, third
party contractors have performed the testing and validation work.
The Company has completed a review of its program management effort.
This review was performed by external resources who are engaged in the practice
of performing these reviews for other companies. Additional internal efforts may
be used to evaluate the adequacy and completeness of its risk assessment,
testing, and validation.
YEAR 2000 PROGRAM COSTS
Baker Hughes has approximately 80 full time equivalent employees
("FTEs") involved in the Y2K effort, which the Company estimates has an
associated annual cost of approximately $5.6 million. Generally, these FTEs are
full-time employees who are devoting some portion of their schedule to the Y2K
effort.
In addition to the payroll and payroll-related costs, Baker Hughes
estimates spending approximately $48.0 million in the Y2K compliance effort, of
which approximately $35.0 million would be capitalized as replacement hardware
and software equipment. Of the $48.0 million, the Company has spent
approximately $27.5 million through March 31, 1999. The Company has funded, and
expects to continue to fund, these expenditures from cash that it generates from
operating activities or existing credit facilities. These cost estimates could
change materially based upon the completion of the inventory and risk assessment
phase of the Program Plan.
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23
THIRD PARTY ISSUES
The failure of third-parties, which have a material relationship with
the Company, to address their Y2K problems could negatively and materially
impact the Company. To address this risk, the Company is assessing the effect of
Y2K on key vendor and contractor relationships and has begun to do the same with
respect to key customer relationships. This assessment includes key
relationships with parties with which the Company interfaces electronically and
with which the Company has entered into strategic alliances.
The Company is evaluating vendors that the Company believes are
material to its operations and assessing the business risk of Y2K noncompliance
on their part. Based upon this assessment, the Company is seeking to obtain
written confirmation from key vendors and contractors that they are adequately
addressing their Y2K issues. Additionally, the Company seeks to review the Y2K
statements of these vendors and contractors to the extent they exist. Where the
Company cannot obtain satisfactory confirmation from these vendors, the
purchasing departments of each operating division of the Company intends to
identify alternate sources, if available, for vendors if those sources are
needed because of an inability to perform due to Y2K noncompliance. The Company
expects to complete the initial identification of high risk vendors by May 31,
1999. Additional analysis will be required to determine if alternative sourcing
is required. The Company has sent surveys to certain of its vendors, including
all of the vendors that the Company believes are critical to its success.
Approximately 31% of the vendors that have been surveyed have responded. Based
upon the responses and, in some cases, follow-up discussions with vendors, the
Company believes that approximately 20% of the vendors responding appear to have
a high risk of Y2K noncompliance. For these vendors, the Company is identifying
sourcing alternatives.
KNOWN MATERIAL Y2K NON-COMPLIANT HARDWARE AND SOFTWARE
INTEQ and Baker Oil Tools are implementing SAP R/3 for domestic
operations during 1999. INTEQ has delayed remediation of its existing payroll
system, and Baker Oil Tools has delayed remediation for certain other business
applications, in each case, pending the implementation of SAP R/3. Contingencies
for these operational areas are being evaluated, and the Company expects to
implement a contingency plan if the SAP implementation is not timely.
Older versions of INTEQ's PC-based surface data acquisition systems are
not Y2K compliant. The software is in the process of being remediated. The
noncompliant PC hardware cannot be economically remediated, and the purchase of
new, higher grade personal computers is required to replace the noncompliant
equipment. This remediation began in 1997 with the replacement of personal
computers being phased in and is expected to be completed by late 1999. The
Company estimates that as of March 31, 1999, it was approximately 65% complete
in the replacement of the noncompliant personal computer hardware and software
for the surface data acquisition systems.
Baker Atlas is rewriting the bonded inventory control module that
tracks assets that are used in international waters that may be exempt from
import duties. The upgrade is scheduled to be in place by June 1999.
The Company's Western Geophysical operating division relies heavily
upon Global Positioning System ("GPS") equipment that the U.S. Navy operates.
The noncompliance of this equipment is a known problem outside the control of
the Company that affects other businesses, the government, the military services
and individuals that rely upon GPS services, including most of the Company's
competitors. Based upon information obtained from the U.S. government, this
system was remediated during early 1999. The Company is not aware of any
contingency system that its GPS receivers can utilize if the government's GPS
remediation efforts were somehow unsuccessful. A failure to correct the Y2K
problems of this equipment could have a material adverse impact on the Company's
results of operations.
22
24
Western Geophysical uses a seismic acquisition synchronizer as part of
its marine seismic acquisition services. This product was not Y2K compliant, and
its noncompliance would have had a material impact on the Company's marine
seismic acquisition revenues if not corrected. The Company has completed an
upgrade remediation plan for this equipment.
Baker Process is implementing a new business application system to
replace its existing systems, which are not Y2K compliant. This system includes
financial, purchasing, inventory management, and manufacturing functionality.
The Company expects Baker Process to complete the implementation of the new
system by late 1999.
The Baker Process operating division provides mechanical equipment
that, in some cases, has been customized at the request of the customer to
include control panels and circuit boards. The Company obtained these control
panels and circuit boards from third-party vendors at the request of various
customers. The Company is researching the Y2K compliance status of these boards.
This status is often dependent upon the purchase date and serial number of the
product. The warranties from the Company or its subcontractors have, in many
instances, lapsed with respect to these panels and circuit boards. The Company
expects to have completed its investigation of these systems by mid 1999.
Pending the results of this evaluation, there could be a material noncompliance
issue with these products.
Baker Petrolite operates a MSDS authoring and label creation software
system that is not Y2K compliant. Baker Petrolite expects to replace this system
by August 1999 and has developed a contingency plan if the system is not
replaced.
Baker Petrolite operates a system that controls treater truck
scheduling and customer invoicing. This system is not Y2K compliant. Baker
Petrolite expects to complete remediation of this system by July 1999.
EURO CONVERSION
In "Euro Conversion", the Company has given certain forward looking
information. This information has not been revised from the information provided
in the Form 10-Q/A for the quarter ended March 31, 1999 because it was not
affected by the restatement. For current information regarding the Year 2000
Issue, see "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations - Euro Conversion" in the Company's Annual Report on
Form 10-K for its fiscal year ended December 31, 1999.
A single European currency ("the Euro") was introduced on January 1,
1999, at which time the conversion rates between legacy currencies and the Euro
were set for 11 participating member countries. However, the legacy currencies
in those countries will continue to be used as legal tender through January 1,
2002. Thereafter, the legacy currencies will be canceled, and Euro bills and
coins will be used in the 11 participating countries.
Transition to the Euro creates a number of issues for the Company.
Business issues that must be addressed include pricing policies and ensuring the
continuity of business and financial contracts. Finance and accounting issues
include the conversion of accounting systems, statutory records, tax books and
payroll systems to the Euro, as well as conversion of bank accounts and other
treasury and cash management activities.
The Company is assessing and addressing these transition issues. The
Company does not presently anticipate that the transition to the Euro will have
a significant impact on its results of operations, financial position or cash
flows.
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The word "anticipate" is intended to identify a Forward-Looking
Statement in "Euro Conversion." Baker Hughes' anticipation regarding the lack of
significance of the Euro introduction on Baker Hughes' operations is only its
forecast regarding this matter. This forecast may be substantially different
from actual results, which are affected by factors substantially similar to
those described in "Year 2000 Issue - Forward-Looking Statements Regarding the
Year 2000 Issue" above.
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ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
At March 31, 1999, the Company had Norwegian Krone denominated
commitments of $43.6 million to purchase a seismic vessel and Australian Dollar
denominated commitments of $22.7 million to purchase seismic vessel equipment at
various times through February 2000. The Company has entered into forward
exchange contracts to purchase the required amount of Norwegian Krone and
Australian Dollars for $43.6 million and $21.1 million, respectively.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(3)(ii) Bylaws as amended on April 28, 1999 (filed as Exhibit 3ii to
the Quarterly Report of the Company on Form 10-Q for the
quarterly period ended March 31, 1999 and incorporated herein
by reference).
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAKER HUGHES INCORPORATED
(REGISTRANT)
Date: April 10, 2000 By /s/ G. STEPHEN FINLEY
------------------------
Sr. Vice President - Finance and
Administration and Chief Financial Officer
Date: April 10, 2000 By /s/ ALAN J. KEIFER
---------------------
Vice President and Controller
29
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
(3)(ii) Bylaws as amended on April 28, 1999 (filed as Exhibit 3ii to the
Quarterly Report of the Company on Form 10-Q for the quarterly
period ended March 31, 1999 and incorporated herein by reference)
(27) Financial Data Schedule