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 June 30, 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 for the quarterly period ended June 30, 1999 as
originally filed on August 13, 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 June 30, 1999 and
for the three and six months ended June 30, 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 7 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
second quarter Form 10-Q as originally filed on August 13, 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 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 for the quarter
ended June 30, 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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INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - Three months and six
months ended June 30, 1999 and 1998 3
Consolidated Condensed Statements of Financial Position - June 30, 1999
and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows - Six months ended
June 30, 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 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II - OTHER INFORMATION 29
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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
(As Restated - See Note 7)
-------------------------------------------------------------
Revenues $ 1,110.8 $ 1,532.4 $ 2,325.2 $ 3,056.3
---------- ---------- ---------- ----------
Costs and expenses:
Costs of revenues 870.3 1,158.8 1,807.4 2,303.8
Selling, general and administrative 151.1 165.2 322.7 352.3
Unusual charge(credit) (33.3) (33.3)
---------- ---------- ---------- ----------
Total costs and expenses 988.1 1,324.0 2,096.8 2,656.1
---------- ---------- ---------- ----------
Operating income 122.7 208.4 228.4 400.2
Interest expense (40.2) (35.5) (78.9) (65.1)
Interest income 1.3 .3 3.5 2.0
---------- ---------- ---------- ----------
Income from continuing operations before income taxes 83.8 173.2 153.0 337.1
Income taxes (12.4) (59.9) (35.8) (118.0)
---------- ---------- ---------- ----------
Income from continuing operations 71.4 113.3 117.2 219.1
Income (loss) from discontinued operations, net of tax (2.9) 5.0 (4.3) 11.1
---------- ---------- ---------- ----------
Net income $ 68.5 $ 118.3 $ 112.9 $ 230.2
========== ========== ========== ==========
Basic earnings per share:
Income from continuing operations $ 0.22 $ 0.36 $ 0.36 $ 0.69
Discontinued operations, net of tax (0.01) 0.01 (0.02) 0.04
---------- ---------- ---------- ----------
Net income $ 0.21 $ 0.37 $ 0.34 $ 0.73
========== ========== ========== ==========
Diluted earnings per share:
Income from continuing operations $ 0.22 $ 0.35 $ 0.36 $ 0.67
Discontinued operations, net of tax (0.01) 0.01 (0.02) 0.04
---------- ---------- ---------- ----------
Net income $ 0.21 $ 0.36 $ 0.34 $ 0.71
========== ========== ========== ==========
Cash dividends per share $ 0.115 $ 0.115 $ 0.23 $ 0.23
========== ========== ========== ==========
See accompanying notes to consolidated condensed financial statements.
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5
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
(Unaudited)
June 30, December 31,
1999 1998
------------- ------------
(As Restated -
ASSETS See Note 7)
-------------
CURRENT ASSETS:
Cash and cash equivalents $ 25.0 $ 19.5
Accounts receivable, net 1,062.4 1,258.2
Inventories 871.1 994.3
Net assets of discontinued operations 281.8 267.9
Other current assets 201.8 213.3
---------- ----------
Total current assets 2,442.1 2,753.2
Property, net 2,172.8 2,240.7
Goodwill and other intangibles, net 1,726.6 1,744.3
Multiclient seismic data and other assets 996.1 894.7
---------- ----------
Total assets $ 7,337.6 $ 7,632.9
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 361.9 $ 487.9
Short-term borrowings and current portion of long-term debt 32.1 44.4
Accrued employee compensation 194.8 272.2
Other current liabilities 260.5 378.8
---------- ----------
Total current liabilities 849.3 1,183.3
---------- ----------
Long-term debt 2,850.7 2,726.3
---------- ----------
Deferred income taxes 110.3 152.9
---------- ----------
Deferred revenue and other long-term liabilities 313.6 405.3
---------- ----------
Stockholders' equity:
Common stock 327.7 327.1
Capital in excess of par value 2,940.5 2,931.8
Retained earnings 103.7 66.1
Accumulated other comprehensive (loss) (158.2) (159.9)
---------- ----------
Total stockholders' equity 3,213.7 3,165.1
---------- ----------
Total liabilities and stockholders' equity $ 7,337.6 $ 7,632.9
========== ==========
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
June 30,
-----------------------------
1999 1998
----------- -----------
(As Restated - See Note 7)
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 117.2 $ 219.1
Adjustments to reconcile income from continuing operations to net cash flows
from operating activities:
Depreciation, depletion and amortization 398.6 345.6
Provision (benefit) for deferred income taxes (13.3) 27.9
Noncash portion of nonrecurring items 3.2
Gain on disposal of assets (42.7) (24.9)
Change in accounts receivable 190.8 38.1
Change in inventories 120.6 (83.5)
Change in accounts payable (121.9) 5.1
Change in accrued compensation and other current liabilities (190.7) (51.7)
Change in deferred revenue and other long-term liabilities (91.7) 31.7
Changes in other assets and liabilities (103.6) (44.3)
---------- ----------
Net cash flows from continuing operations 266.5 463.1
Net cash flows from discontinued operations 4.7 8.8
---------- ----------
Net cash flows from operating activities 271.2 471.9
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (382.1) (651.7)
Proceeds from disposal of assets 79.9 49.4
Acquisition of businesses, net of cash acquired (461.3)
---------- ----------
Net cash flows from continuing operations (302.2) (1,063.6)
Net cash flows from discontinued operations (4.7) (8.8)
---------- ----------
Net cash flows from investing activities (306.9) (1,072.4)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings from commercial paper, revolving credit facilities
and short-term debt (751.9) 685.3
Repayment of matured indebtedness (150.0) (65.4)
Net proceeds from issuance of notes 1,010.7
Proceeds from issuance of common stock 9.3 19.0
Dividends (75.3) (39.1)
---------- ----------
Net cash flows from continuing operations 42.8 599.8
Net cash flows from discontinued operations -- --
---------- ----------
Net cash flows from financing activities 42.8 599.8
---------- ----------
Effect of exchange rate changes on cash (1.6) 1.3
Increase in cash and cash equivalents ---------- ----------
Cash and cash equivalents, beginning of period 5.5 .6
19.5 43.1
Cash and cash equivalents, end of period ---------- ----------
$ 25.0 $ 43.7
========== ==========
Income taxes paid
Interest paid $ 86.0 $ 77.6
$ 74.7 $ 60.3
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
RESTATEMENT
As more fully described in Note 7 "Restatement", the consolidated
condensed financial statements and related disclosures as of June 30, 1999 and
for the three and six months ended June 30, 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 8.
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 June 30, 1999, its
consolidated results of operations for the three and six months ended June 30,
1999 and 1998, and its consolidated cash flows for the six months ended June 30,
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 and six months
ended June 30, 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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(As Restated - See Note 7)
----------------------------------------------------------
Net income $ 68.5 $ 118.3 $ 112.9 $ 230.2
Other comprehensive income (loss) 16.9 3.6 1.7 (1.7)
---------- ---------- ---------- ----------
Total comprehensive income $ 85.4 $ 121.9 $ 114.6 $ 228.5
========== ========== ========== ==========
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 2. INVENTORIES
Inventories are comprised of the following:
June 30, December 31,
1999 1998
-------------- -------------
(As Restated -
See Note 7)
--------------
Finished goods $ 712.3 $ 808.6
Work in process 58.2 67.9
Raw materials 100.6 117.8
---------- ----------
Total $ 871.1 $ 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
June 30, 1999 June 30, 1998
----------------------------------------- -------------------------------------------
Income from Income from
continuing continuing
operations Shares operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
--------------- -------------- -------------- -------------
(As Restated - (As Restated -
See Note 7) See Note 7)
--------------- ---------------
Basic EPS $ 71.4 327.5 $ 113.3 317.9
Effect of dilutive securities:
Stock plans 2.1 5.3
Liquid Yield Option Notes 1.6 7.2
------------ ------------ ------------ ------------
Diluted EPS $ 71.4 329.6 $ 114.9 330.4
============ ============ ============ ============
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
---------------------------------- -----------------------------------
Income from Income from
continuing continuing
operations Shares operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
------------ ------------ ------------- ------------
(As Restated - (As Restated -
See Note 7) See Note 7)
------------ ------------ ------------ ------------
Basic EPS $ 117.2 327.4 $ 219.1 317.4
Effect of dilutive securities:
Stock plans 1.2 5.0
Liquid Yield Option Notes 3.2 7.2
------------ ------------ ------------ ------------
Diluted EPS $ 117.2 328.6 $ 222.3 329.6
============ ============ ============ ============
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Securities excluded from the computation of diluted EPS for the three
months ended June 30, 1999 that could have potentially diluted basic EPS in the
future were options to purchase 3.8 million shares and Liquid Yield Option Notes
convertible into 7.2 million shares. Such 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.
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 $281.8 million and $267.9 million at June
30, 1999 and December 31, 1998, respectively.
Oilfield Other Total
------------------- ------------------------ ------------------
(As Restated - See Note 7)
----------------------------------------------------------------
REVENUES
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 $ 1,110.8 $ 1,110.8
Three months ended June 30, 1998 $ 1,526.0 $ 6.4 $ 1,532.4
Six months ended June 30, 1999 $ 2,325.2 $ 2,325.2
Six months ended June 30, 1998 $ 3,042.5 $ 13.8 $ 3,056.3
SEGMENT PROFIT (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 $ 98.9 $ (15.1) $ 83.8
Three months ended June 30, 1998 $ 223.8 $ (50.6) $ 173.2
Six months ended June 30, 1999 $ 228.2 $ (75.2) $ 153.0
Six months ended June 30, 1998 $ 443.4 $ (106.3) $ 337.1
TOTAL ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1999 $ 6,610.6 $ 445.2 $ 7,055.8
As of December 31, 1998 $ 6,946.8 $ 418.2 $ 7,365.0
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
The following table presents the details of "Other" segment
profit (loss):
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ -----------------
(As Restated - See Note 7)
---------------------------------------------
Corporate expenses $ (24.8) $ (15.4)
Interest - net (38.9) (35.2)
Unusual credit 33.3
Nonrecurring items reflected in SG&A 15.3
----------- -----------
Total $ (15.1) $ (50.6)
=========== ===========
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------ ----------------
(As Restated - See Note 7)
-------------------------------------------
Corporate expenses $ (48.4) $ (43.2)
Interest - net (75.4) (63.1)
Unusual credit 33.3
Nonrecurring items reflected in SG&A 15.3
----------- -----------
Total $ (75.2) $ (106.3)
=========== ===========
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 February 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.
NOTE 6. UNUSUAL AND OTHER NONRECURRING ITEMS
In June 1999, the Company completed the sale of a property in Houston,
Texas and recognized a net gain of $33.3 million recorded as an unusual credit
in the statement of operations. Such property was considered a duplicate
facility after the merger with Western Atlas Inc. The Company received net
proceeds of $48.2 million that were used to repay outstanding indebtedness.
During 1998, the Company sold its interest in a joint venture and
recorded a write-down to the estimated fair value of the assets received which
was reflected in selling, general and administrative ("SG&A") expenses. During
the quarter ended June 30, 1999, certain assets obtained as part of the
consideration from the sale were sold. The proceeds from the sale were $18.9
million and were received in July 1999. Certain other assets relating to these
operations were written-off and will be scrapped. The net gain from these items
totaled $15.3 million and is reflected in SG&A expenses.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 7. 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 consolidated
condensed financial statements and related disclosures as of June 30, 1999 and
for the three and six months ended June 30, 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 and six months ended June
30, 1999 and 1998 and the consolidated statement of financial position as of
June 30, 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.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
---------------------------------------- ------------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------- ------------------ ------------------- -------------------
As As As As
As Previously As Previously As Previously As Previously
(In millions, except per share amounts) Restated Reported Restated Reported Restated Reported Restated Reported
-------- -------- -------- -------- -------- -------- -------- --------
Revenues $1,110.8 $1,110.8 $1,532.4 $1,532.4 $2,325.2 $2,325.2 $3,056.3 $3,057.0
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Costs of revenues 870.3 873.8 1,158.8 1,159.0 1,807.4 1,812.5 2,303.8 2,303.6
Selling, general and administrative 151.1 150.6 165.2 165.5 322.7 322.1 352.3 352.5
Unusual charge (credit) (33.3) (33.3) (33.3) (33.3)
-------- -------- -------- -------- -------- -------- -------- --------
Total 988.1 991.1 1,324.0 1,324.5 2,096.8 2,101.3 2,656.1 2,656.1
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 122.7 119.7 208.4 207.9 228.4 223.9 400.2 400.9
Interest expense (40.2) (40.2) (35.5) (35.5) (78.9) (78.9) (65.1) (65.1)
Interest income 1.3 1.3 0.3 0.3 3.5 3.5 2.0 2.0
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations before
income taxes 83.8 80.8 173.2 172.7 153.0 148.5 337.1 337.8
Income taxes (12.4) (10.9) (59.9) (59.6) (35.8) (34.5) (118.0) (117.9)
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations 71.4 69.9 113.3 113.1 117.2 114.0 219.1 219.9
Income (loss) from discontinued operations,
net of tax (2.9) (2.9) 5.0 5.0 (4.3) (4.3) 11.1 11.1
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 68.5 $ 67.0 $ 118.3 $ 118.1 $ 112.9 $ 109.7 $ 230.2 $ 231.0
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share:
Income from continuing operations $ 0.22 $ 0.21 $ 0.36 $ 0.36 $ 0.36 $ 0.35 $ 0.69 $ 0.69
Discontinued operations, net of tax (0.01) (0.01) 0.01 0.01 (0.02) (0.02) 0.04 0.04
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 0.21 $ 0.20 $ 0.37 $ 0.37 $ 0.34 $ 0.33 $ 0.73 $ 0.73
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations $ 0.22 $ 0.21 $ 0.35 $ 0.35 $ 0.36 $ 0.35 $ 0.67 $ 0.67
Discontinued operations, net of tax (0.01) (0.01) 0.01 0.01 (0.02) (0.02) 0.04 0.04
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 0.21 $ 0.20 $ 0.36 $ 0.36 $ 0.34 $ 0.33 $ 0.71 $ 0.71
======== ======== ======== ======== ======== ======== ======== ========
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
June 30, 1999
-------------
As Previously
(In millions) As Restated Reported
--------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25.0 $ 25.6
Accounts receivable, net 1,062.4 1,065.5
Inventories 871.1 878.0
Net assets of discontinued operations 281.8 281.8
Other current assets 201.8 206.1
---------- ----------
Total current assets 2,442.1 2,457.0
Property, net 2,172.8 2,176.8
Goodwill and other intangibles net 1,726.6 1,726.6
Multiclient seismic data and other assets 996.1 996.1
----------- ----------
Total assets $ 7,337.6 $ 7,356.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 361.9 $ 351.3
Short-term borrowings and current portion of long-term debt 32.1 32.1
Accrued employee compensation 194.8 191.2
Other accrued liabilities 260.5 260.3
---------- ----------
Total current liabilities 849.3 834.9
---------- ----------
Long-term debt 2,850.7 2,850.7
---------- ----------
Deferred income taxes 110.3 112.5
---------- ----------
Deferred revenue and other long-term liabilities 313.6 313.6
---------- ----------
Stockholders' equity:
Common stock 327.7 327.7
Capital in excess of par value 2,940.5 2,940.5
Retained earnings 103.7 134.8
Accumulated other comprehensive (loss) (158.2) (158.2)
---------- ----------
Total stockholders' equity 3,213.7 3,244.8
---------- ----------
Total liabilities and stockholders' equity $ 7,337.6 $ 7,356.5
========== ==========
NOTE 8. 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.
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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 Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue $ 100.2 $ 127.3 $ 211.0 $ 250.8
---------- ---------- ---------- ----------
Allocated interest expense (1.9) (1.5) (3.7) (2.8)
---------- ---------- ---------- ----------
Income (loss) before income taxes (4.0) 7.7 (6.1) 16.7
Benefit (provision) for income taxes 1.1 (2.7) 1.8 (5.6)
---------- ---------- ---------- ----------
Income (loss) from discontinued operations of
Baker Process $ (2.9) $ 5.0 $ (4.3) $ 11.1
========== ========== ========== ==========
Net assets of Baker Process are as follows:
As of As of
June 30, December 31,
------------ ------------
1999 1998
------------ -----------
Current assets $ 223.4 $ 221.3
Noncurrent assets 201.0 202.1
------------ ------------
Total assets 424.4 423.4
------------ ------------
Current liabilities 132.3 142.0
Noncurrent liabilities 10.3 13.5
------------ ------------
Total liabilities 142.6 155.5
------------ ------------
Net assets of Baker Process $ 281.8 $ 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.
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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 for the quarter ended June 30,
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 oil and gas 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. Oil and gas 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 that currently influence the worldwide crude oil
market and therefore current and future expenditures for exploration and
development by the Company's 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 maintain
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 Six Months Ended
June 30, June 30,
------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- -------------- -------------- -----------------
West Texas Intermediate Crude ($/bbl) $ 17.56 $ 14.51 $ 15.20 $ 15.33
U.S. Spot Natural Gas ($/mcf) $ 2.12 $ 2.10 $ 1.92 $ 2.13
WTI crude oil price averaged $17.56/bbl in the June 1999 quarter, with
prices ranging from $15.83/bbl to $19.28/bbl. The improvement in prices was
attributable to improved sentiment regarding OPEC's ability and willingness to
control production, improvements in the outlook for the world economy and
declining inventories driven largely by market expectations that an Asian
economic recovery could occur earlier than previously anticipated. U.S. natural
gas prices averaged $2.12/mcf in the June 1999 quarter, with prices ranging from
$1.75/mcf to $2.27/mcf. The increase in U.S. natural gas prices compared to the
same quarter of 1998 were due to the impact of a warmer summer on consumption
and storage injections as well as concern for the industry's ability to meet
storage targets by the end of the injection season, which is typically November
1st.
ROTARY RIG COUNT
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
U.S.- Land 421 732 437 782
U.S. - Offshore 100 132 102 134
Canada 101 175 194 317
---------- ---------- ---------- ----------
North America 622 1,039 733 1,233
---------- ---------- ---------- ----------
Latin America 185 261 183 267
North Sea 42 59 44 58
Other Europe 45 45 43 48
Africa 40 83 46 82
Middle East 140 167 144 166
Asia Pacific 145 183 149 184
---------- ---------- ---------- ----------
International 597 798 609 805
---------- ---------- ---------- ----------
Worldwide 1,219 1,837 1,342 2,038
========== ========== ========== ==========
U.S. Workover 785 1,122 752 1,210
========== ========== ========== ==========
Generally, as oil and gas prices decline, expectations of the Company's
customers about their prospects from oil and gas sales decline. Consequently,
customer expenditures to explore for or produce oil and gas decline. These
expenditures include decreased spending on the use of oil and gas rigs.
Accordingly, large reductions in rig count generally correspond to reductions in
customer spending, which, in turn, correspond to decreased activity levels and
decreased revenues to the Company. The reverse is generally true for increases
in rig count. Marginal reductions or increases in rig count may or may not have
a significant impact on revenues. There is often a lag between increases or
decreases in rig count and the impact on the Company's revenues.
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OUTLOOK
Oil prices improved in the June 1999 quarter, trading above $20/bbl.
Sustaining prices at this level will require continuing adherence by OPEC
members to quotas and continued movement towards economic recovery in Asia.
Prices are expected to trade between $17/bbl and $21/bbl for the remainder of
the year. The Company believes that if OPEC quota adherence falls below 70% then
oil could trade below this range. North American natural gas is expected to
remain strong for the remainder of the year, trading above $2.25/mcf.
In response to the improving commodity prices, customer spending in
North America is expected to improve sequentially through the end of the year.
The strength of the recovery in 2000 will depend on improved customer cash flow,
long-term forecasts of commodity prices and weather.
Outside North America, customer spending is expected to continue its
decline into the third quarter. The Company expects customer spending in areas
outside of North America to increase modestly in the fourth quarter. Customer
spending is expected to increase in 2000 following the customers' annual budget
cycle.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three months ended June 30, 1999 were $1,110.8
million, a decrease of 27.5% over revenues in the three months ended June 30,
1998 of $1,532.4 million. Geographically, revenues for the three months ended
June 30, 1999 were down 26.6% in North America and 28.1% outside North America
compared to the three months ended June 30, 1998. Revenues for the six months
ended June 30, 1999 were $2,325.2 million, a decrease of 23.9% over the same
period in 1998. Revenues were impacted by lower activity due to reduced customer
spending, as evidenced by a 33.6% decline in the worldwide rig count, and by
lower prices for the Company's products and services, particularly in seismic
services, drilling systems, wireline logging, drilling fluids and drill bits.
Revenues from production of oil and gas wells increased over 1998 as
certain projects previously in development stage began production during 1999.
Oil and gas revenues for the three months ended June 30, 1999 and 1998 were
$13.2 million and $1.5 million, respectively, and for the six months ended June
30, 1999 and 1998 were $14.9 million and $2.5 million, respectively.
GROSS MARGIN
Gross margins for the three months ended June 30, 1999 and 1998 were
21.7% and 24.4%, respectively. The decrease is due primarily to costs associated
with excess manufacturing capacity, low utilization of seismic assets 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 June 30, 1999 and 1998 were
13.6% and 10.8%, respectively. In June 1999, a nonrecurring credit of $15.3
million was recorded in SG&A expenses. While these costs are down on an absolute
basis, the increase as a percentage of consolidated revenues is due primarily to
these costs being more fixed in nature producing a slower rate of decline than
consolidated revenues.
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UNUSUAL AND OTHER NONRECURRING ITEMS
In June 1999, the Company completed the sale of a property in Houston,
Texas and recognized a net gain of $33.3 million recorded as an unusual credit
in the statement of operations. Such property was considered a duplicate
facility after the merger with Western Atlas Inc. The Company received net
proceeds of $48.2 million that were used to repay outstanding indebtedness.
During 1998, the Company sold its interest in a joint venture and
recorded a write-down to the estimated fair value of the assets received which
was reflected in SG&A expenses. During the quarter ended June 30, 1999, certain
assets obtained as part of the consideration from the sale were sold. The
proceeds from the sale were $18.9 million and were received in July 1999.
Certain other assets relating to these operations were written-off and will be
scrapped. The net gain from these items totaled $15.3 million and is reflected
in SG&A expenses.
INTEREST EXPENSE
Interest expense for the three and six months ended June 30, 1999
increased $4.7 million and $13.8 million, respectively, compared to the
corresponding periods in 1998. These increases were due to higher debt levels
that funded capital expenditures, acquisitions, and working capital.
INCOME TAXES
During the quarter ended June 30, 1999, the Company reached an
agreement with the Internal Revenue Service ("IRS") regarding the audit of its
1994 and 1995 U.S. consolidated income tax returns. As a result of the
agreement, the Company recognized a tax benefit through the reversal of deferred
income taxes previously provided of $19.9 million, less related interest expense
of $1.8 million, for a net benefit of $18.1 million.
The effective tax rate for the three months ended June 30, 1999 was
14.8%. The effective tax rate before the tax benefit of $18.1 million, as
described above, for the three months ended June 30, 1999 was 36.4%, compared to
34.6% for the three months ended June 30, 1998.
MERGER RELATED CHARGES - 1998
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 June
30, 1999 are summarized below:
Accrued
Balance at
Paid in Paid in June 30,
Total 1998 1999 1999
---------- ---------- ---------- ----------
Cash costs:
Transaction costs $ 51.5 $ (46.9) $ (2.5) $ 2.1
Employee costs 87.2 (66.2) (8.4) 12.6
Other merger integration costs 20.6 (9.0) (5.8) 5.8
---------- ---------- ---------- ----------
Total $ 159.3 $ (122.1) $ (16.7) $ 20.5
========== ========== ========== ==========
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The Company expects that, of the $20.5 million accrual at June 30,
1999, $5.9 million will be spent by December 31, 1999 and $2.7 million will be
spent by December 31, 2001, with the remaining accrual being spent over the
remaining life of the related contractual obligations.
UNUSUAL AND OTHER NONRECURRING CHARGES - 1998
In 1998, as a result of a sharp decline in the demand for the Company's
products and services, 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 June 30, 1999 are
summarized below:
Accrued
Balance at
Paid in Paid in June 30,
Total 1998 1999 1999
---------- ---------- ---------- ----------
Cash costs
Severance for approximately 5,200
employees $ 58.0 $ (24.2) $ (26.0) $ 7.8
Integration costs, abandoned leases
and other contractual obligations 29.8 (12.0) (6.9) 10.9
Environmental accruals 8.8 (4.3) (.7) 3.8
Other cash costs (includes litigation
accruals) 21.4 (4.7) (5.3) 11.4
---------- ---------- ---------- ----------
Total $ 118.0 $ (45.2) $ (38.9) $ 33.9
========== ========== ========== ==========
The Company expects that, of the $33.9 million accrual at June 30,
1999, $15.7 million will be spent by December 31, 1999, with the remaining
accrual relating to contractual obligations, anticipated legal settlements and
environmental remediation to be spent during 2000 and after.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Net cash inflows from operating activities of continuing operations
were $266.5 million and $463.5 million for the six months ended June 30, 1999
and 1998, respectively. Lower net income, increased payments on current
liabilities and payments made for merger and unusual charge related accruals of
$55.6 million offset by reductions in receivables and inventory due to activity
declines and management focus resulted in a decrease in cash flow from
operations.
INVESTING ACTIVITIES
Net cash outflows from investing activities of continuing operations
were $302.2 million and $1,064.0 million for the six months ended June 30, 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 $650.0 million (excluding acquisitions), a significant reduction
from 1998 capital spending levels. 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 $79.9 million during the
six months ended June 30, 1999 and $49.4 million during the six months ended
June 30, 1998.
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During the six months ended June 30, 1998, the Company used short-term
borrowings to purchase various businesses including WEDGE DIA-Log, Inc. for
$218.5 million, net of cash acquired; 3-D Geophysical, Inc. for $117.5 million;
and Western Rock Bit Company Limited for $31.4 million.
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 $42.8 million and $599.8 million for the six months ended June 30, 1999 and
1998, respectively. Total debt outstanding at June 30, 1999 was $2,882.8
million, compared to $2,770.7 million at December 31, 1998. The debt to equity
ratio was 0.90 at June 30, 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 June 30, 1999, the Company had $1,571.2 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.
In June 1999, the FASB issued SFAS No. 137, that defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Retroactive
application to periods prior to adoption is not allowed. The Company will adopt
the standard in the first quarter of 2001. 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 for the quarter ended June 30, 1999
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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 later 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.
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. Most of the inventoried items
in the Company's database have been assessed for Y2K compliance, of which
approximately 15% are noncompliant. 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
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performing this work. The Company established a target date of June 30, 1999 for
the completion of the work on a majority of its material noncompliant systems
and technologies. For those systems and technologies that have not yet been
remediated, the Company expects to complete its development of contingency plans
by August 31, 1999.
The Company is unable to reasonably estimate the absolute dollar effect
on the Company's results of operations, liquidity or financial condition if its
remediation efforts are unsuccessful, although the Company believes the effect
would be material.
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 the Company's risk
assessment, testing, and validation.
YEAR 2000 PROGRAM COSTS
Baker Hughes has approximately 100 full time equivalent employees
("FTEs") involved in the Y2K effort, which the Company estimates has an
associated annual cost of approximately $7.0 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 $42.0 million in the Y2K compliance effort, of
which, the Company has spent approximately $32.0 million through June 30, 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.
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 is doing 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 are identifying
alternate sources, if available, for vendors if those sources are needed because
of an inability to perform due to Y2K noncompliance. The Company has completed
its initial identification of high risk vendors. 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 45% 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 and vendors who have not responded, the Company is identifying sourcing
alternatives.
Assurances from vendors that have been obtained may take the form of
written or oral assurances or contractual assurances, depending on the vendor.
Depending upon the facts and circumstances of each case, the Company may or may
not have effective legal remedies if a vendor fails in its Y2K compliance
obligations to the Company. Factors that affect each case would include the
assurances received from each
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vendor, the vendor's ability to correct any Y2K noncompliance, the vendor's
wherewithal to pay any damages that are assessed against the vendor in any legal
proceeding or settlement of a claim, the extent to which a vendor is insured for
such damages, the existence of any contractual provisions or laws that may be
adopted that liquidate a vendor's damages or limit its damages and other facts
and circumstances that affect the Company's ability to obtain redress from the
vendor's failure to perform its Y2K compliance obligations for the Company's
benefit.
KNOWN MATERIAL Y2K NON-COMPLIANT HARDWARE AND SOFTWARE
The following are certain hardware and software that are material to
the Company's business that the Company knows is or was not in Y2K compliance.
The failure to remediate any of this hardware or software or develop an
appropriate contingency plan could have a material adverse effect on the
Company's business.
INTEQ and the Polymers division of Baker Petrolite are implementing SAP
R/3 for domestic operations during 1999. INTEQ has delayed remediation of its
existing payroll system, and the Polymers division of Baker Petrolite has
delayed implementation of its business applications systems that SAP R/3 will
replace, 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. INTEQ
has released for distribution Y2K compliant products for its well planning and
surface logging products. INTEQ has also released a Y2K compliant version of its
MSS Surface software that supports its measurement while drilling, surface
logging system and RigLink products and services. Finally, INTEQ has released a
Y2K compliant version of its survey product line (SSP).
Baker Atlas' bonded inventory control module was not Y2K compliant.
Baker Atlas rewrote this module that tracks assets that are used in
international waters that may be exempt from import duties.
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.
Western Geophysical uses a seismic acquisition synchronizer as part of
its marine seismic data acquisition services. This product was not Y2K
compliant. The Company has completed an upgrade remediation plan for this
equipment.
Western Geophysical has discovered two seismic data acquisition systems
used on its marine vessels that have components that are not Y2K compliant. One
system is used on nine vessels, and the other system is used on eight vessels. A
single third party manufacturer makes both systems. The manufacturer has created
a Y2K compliant version of the first of these systems, which Western Geophysical
expects to obtain and install in August 1999. The manufacturer has advised
Western Geophysical that it will not bring the second of these two systems into
Y2K compliance. Western Geophysical is negotiating with the manufacturer to
license the source code to this second system for Western Geophysical to
remediate this system itself by late 1999. Additionally, contingency plans for
both of these systems are being developed.
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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.
Baker Process' North American operations are now utilizing this new system. The
Company expects Baker Process to complete the implementation of the new system
outside of North America 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 researches the Y2K compliance status of these boards when
its customers requests it to do so. The Y2K status of these boards 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.
Baker Petrolite operates a system that controls treater truck
scheduling and customer invoicing. This system was not Y2K compliant. Baker
Petrolite has now completed remediation of this system.
Baker Petrolite has been unable to obtain assurances from its payroll
service provider that certain custom processing services will be Y2K compliant.
The Company is performing testing services with this vendor to determine whether
the vendor's services as applicable to the Company will be Y2K compliant. The
Company expects that this testing and any resulting remediation will be
completed by September 30, 1999.
E&P Services' oil and gas accounting system is not Y2K compliant. E&P
Services expects to obtain an upgrade to this system from its third party vendor
to bring this system into compliance by September 30, 1999.
E&P Services obtains oil and gas interpretation systems from third
party vendors. E&P Services is testing these systems to determine whether they
are Y2K compliant.
The Company's customers ordinarily contract for helicopter and fixed-wing air
transport services to transport Company personnel and equipment to customer oil
and gas operations sites. Often these services are provided by smaller aircraft
operators. The Company believes that many of these operators have not yet
adequately addressed their Y2K compliance needs. If a material number of these
operators experience flight disruptions because of Y2K non-compliance, the
Company's customers could have difficulties in obtaining transport services,
which in turn, could delay the Company in providing its products and services to
its customers. The Company is developing contingency plans for this problem and
contacting these air transport service providers to enhance their awareness of
Y2K issues and promote their Y2K compliance.
Certain of the Company's divisions and corporate operations are in the
process of upgrading their network and personal computer based hardware and
software, including hardware and software of general application, to be Y2K
compliant. Likewise, certain of the Company's divisions and corporate operations
are in the process of upgrading hardware and software that operate facilities,
particularly foreign facilities, to be Y2K compliant. While the Company does not
believe that the failure of any one of these systems alone would materially and
adversely affect the Company's operations, a failure to upgrade a substantial
number of these systems would have a material adverse effect on the Company. The
Company expects that it will have upgraded a substantial number of these systems
by the end of 1999.
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Based upon the status of the Company's Y2K compliance effort to date
and those facts and circumstances known to the Company, the Company believes
that the most reasonably likely worst case scenario as a result of Y2K
noncompliance would be as follows:
o the Company's INTEQ division (and to a lesser extent, its
Baker Atlas division) is unable to complete deployment of Y2K
compliant data acquisition systems by December 31, 1999;
o Baker Process is unable to complete implementation of Y2K
compliant business systems by the end of the fourth quarter of
1999;
o the infrastructure in certain international locations such as
countries in Latin America, the Middle and Far East and
Africa, would experience failures in utility service because
the utility service providers are not Y2K compliant; and
o critical vendors of the Company fail to perform because they
are not Y2K compliant.
The occurrence of any or all of these events could have a material
adverse effect on the Company's results of operations, liquidity or financial
position. Although the occurrence of these events is what the Company believes
is the most reasonably likely worst case scenario, these events may or may not
occur, and the Company cannot predict what will actually occur. Other events
might occur that also could have a material adverse effect on the Company's
results of operations, liquidity or financial position.
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 for the quarter ended June 30, 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 the old, or 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.
Most of the Company's products and services are essentially priced with
reference to U.S. dollar-denominated prices. Because of this, the Company does
not believe that it will be subject to a significant increase in pricing
transparency due to the introduction of the Euro. The Company's customers may
require billing in two or more currencies. Until the Company's financial
computer systems are modified or replaced to handle Euro-denominated
transactions, the Company will, in most cases, need to apply a methodology
whereby legacy currencies are first converted into Euros according to a legally
prescribed fixed exchange ratio and then, when the customer requires, converted
from Euros to a second national currency. The Company does not believe that this
conversion will materially affect its contracts. Most of the Company's contracts
are either bids in response to requests for tenders or purchase orders. These
contracts are either priced in purchase and sales orders, which are short term
in nature, or in longer term contracts that are sufficiently flexible to permit
pricing in multiple currencies. The Euro conversion period is longer than most
of the pricing features of these contracts, thus permitting a pricing conversion
to the Euro as new orders are issued. The same is true with most of the
Company's contracts with vendors.
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During the June 1997 quarter, the Company began a multi-year initiative
designed to develop and implement an enterprise-wide software system. The
initiative, named "Project Renaissance," will utilize SAP R/3 as its software
platform across the entire Company and is expected to cost in excess of $300
million over a four-year period. SAP R/3 is programmed to process in Euros for
most of the Company's accounting, financial and operational functions, and the
Company expects that the implementation of this system will address its Euro
issues in these areas. Because the Company has engaged in this implementation
for operational purposes and not solely to address Euro issues, the Company has
not separately determined the cost of converting these systems for use with the
Euro. These Euro conversion costs are embedded in the cost of Project
Renaissance and are not susceptible to separate quantification. The Company has
scheduled implementation of SAP R/3 in its major European operations prior to
January 1, 2002.
The Company may make certain modifications to its legacy computer
systems to address certain Euro conversion issues, pending full implementation
of SAP R/3. The Company is presently assessing these conversion modifications
and their costs.
In connection with an internal reorganization of the structure of the
Company's subsidiaries and cash management procedures, the Company has
instituted a new cash management system that the Company believes is able to
process transactions in Euros. The Company does not presently have any interest
rate or currency swaps that are denominated in Euro legacy currencies.
The Company has appointed coordinators to address Euro conversion
issues in France, Germany, Italy, The Netherlands, Denmark, Norway and the
United Kingdom, the major centers of the Company's European operations that
could be affected by the Euro conversion. The Company continues to assess the
impact of the Euro on its operations and financial, accounting and operational
systems. 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.
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 June 30, 1999, the Company had Norwegian Krone denominated
commitments of $43.6 million to purchase a seismic vessel and Australian Dollar
denominated commitments of $17.0 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 $14.8 million, respectively. The
Company has also entered into forward exchange contracts to sell $12.0 million
of Indonesian Rupiah and to purchase $5.0 million of Singapore Dollars as a
hedge to certain Indonesian Rupiah denominated assets and certain Singapore
Dollar denominated commitments, 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
The Company's Annual Meeting of Stockholders was held on April 28,
1999, (1) to elect four Class II members of the Board of Directors, (2) to
approve an amendment to the Restated Certificate of Incorporation to increase
the number of authorized shares of Common Stock of the Company from 400,000,000
to 750,000,000, (3) to approve an amendment to the 1987 Employee Stock Purchase
Plan to increase the number of authorized shares purchasable under the Plan from
5,500,000 to 9,500,000, (4) to consider a stockholder proposal to implement or
increase activity on the MacBride Principles with respect to the Company's
operations in Northern Ireland and (5) to consider a stockholder proposal to
review and develop guidelines for country selection.
The four Class II directors who were so elected are: Lester M.
Alberthal, Jr., Joseph T. Casey, Joe B. Foster and Richard D. Kinder. The
directors whose term of office continued after the Annual Meeting are: Victor G.
Beghini, Alton J. Brann, Eunice M. Filter, Claire W. Gargalli, Max L. Lukens,
James F. McCall, H. John Riley, Jr., John R. Russell, Charles L. Watson and Max
P. Watson, Jr. The number of affirmative votes and the number of votes withheld
for the four Class II directors so elected were:
Number of Number of Votes
Affirmative Votes Withheld
------------------ ------------------
Lester M. Alberthal, Jr. 287,188,303 2,237,324
Joseph T. Casey 287,163,649 2,261,978
Joe B. Foster 287,268,548 2,157,079
Richard D. Kinder 287,299,032 2,126,595
The number of affirmative votes, the number of negative votes, the
number of abstentions and the number of broker nonvotes with respect to the
approval of the amendment to the Restated Certificate of Incorporation, the
amendment to the 1987 Employee Stock Purchase Plan and the stockholder proposals
were as follows:
Number of Number of
Affirmative Votes Negative Votes Abstentions Broker Nonvotes
------------------ ------------------ ------------------- -----------------
Approval of Amendment to Restated Certificate
of Incorporation 233,072,401 55,785,437 567,789 0
Approval of Amendment to 1987 Employee Stock
Purchase Plan 284,236,002 4,326,986 860,188 2,451
Proposal Regarding Northern Ireland 56,579,637 190,106,059 14,747,116 27,992,815
Proposal Regarding Country Selection 12,388,992 232,000,280 17,043,538 27,992,817
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PART II - OTHER INFORMATION CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Commission on May 21, 1999,
reporting the resignation of the Sr. Vice President and Chief Financial Officer
and the Vice President-Tax and Controller. It also reported that the Company
appointed G. Stephen Finley as Sr. Vice President Finance & Administration and
Chief Financial Officer.
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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
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EXHIBIT INDEX
Exhibit
No. Description
-------- -----------
(27) Financial Data Schedule