1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 May 1, 2000
Common Stock, $1.00 par value per share 330,211,170 shares
2
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - Three months ended
March 31, 2000 and 1999 2
Consolidated Condensed Statements of Financial Position - March 31, 2000
and December 31, 1999 3
Consolidated Condensed Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION 18
3
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,
------------------------------
2000 1999
------------ ------------
Revenues $ 1,157.3 $ 1,214.4
------------ ------------
Costs and expenses:
Costs of revenues 920.6 937.1
Selling, general and administrative 174.4 171.6
------------ ------------
Total 1,095.0 1,108.7
------------ ------------
Operating income 62.3 105.7
Interest expense (42.1) (38.7)
Interest income 0.5 2.2
Gain on trading securities 7.1 --
------------ ------------
Income from continuing operations before income taxes 27.8 69.2
Income taxes (9.4) (23.4)
------------ ------------
Income from continuing operations 18.4 45.8
Loss from discontinued operations, net of tax -- (1.4)
------------ ------------
Net income $ 18.4 $ 44.4
============ ============
Basic earnings per share:
Income from continuing operations $ 0.06 $ 0.14
Discontinued operations, net of tax -- --
------------ ------------
Net income $ 0.06 $ 0.14
============ ============
Diluted earnings per share:
Income from continuing operations $ 0.06 $ 0.14
Discontinued operations, net of tax -- --
------------ ------------
Net income $ 0.06 $ 0.14
============ ============
Cash dividends per share $ 0.115 $ 0.115
============ ============
See accompanying notes to consolidated condensed financial statements.
2
4
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30.4 $ 16.9
Accounts receivable, net 1,085.7 1,011.4
Inventories 804.3 800.0
Net assets of discontinued operations 275.8 278.3
Other current assets 218.1 223.2
------------ ------------
Total current assets 2,414.3 2,329.8
Property, net 2,050.8 2,010.2
Goodwill and other intangibles, net 1,679.0 1,694.9
Multiclient seismic data and other assets 971.1 1,004.9
------------ ------------
Total assets $ 7,115.2 $ 7,039.8
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 368.8 $ 380.9
Short-term borrowings and current portion of long-term debt 113.2 108.1
Accrued employee compensation 182.5 165.5
Other current liabilities 323.7 345.7
------------ ------------
Total current liabilities 988.2 1,000.2
------------ ------------
Long-term debt 2,795.1 2,706.0
------------ ------------
Deferred income taxes 51.4 35.1
------------ ------------
Deferred revenue and other long-term liabilities 239.0 227.4
------------ ------------
Stockholders' equity:
Common stock 330.1 329.8
Capital in excess of par value 2,986.7 2,981.1
Accumulated deficit (71.1) (51.5)
Accumulated other comprehensive loss (204.2) (188.3)
------------ ------------
Total stockholders' equity 3,041.5 3,071.1
------------ ------------
Total liabilities and stockholders' equity $ 7,115.2 $ 7,039.8
============ ============
See accompanying notes to consolidated condensed financial statements.
3
5
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended March 31,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 18.4 $ 45.8
Adjustments to reconcile income from continuing operations to net
cash flow from operating activities:
Depreciation, depletion and amortization 165.0 200.6
(Benefit) provision for deferred income taxes (7.1) 10.5
(Gain) loss on disposal of assets (17.7) 13.2
Gain on trading securities (7.1) --
Change in accounts receivable (75.6) 117.4
Change in inventories (5.6) 65.4
Change in accounts payable (15.0) (96.2)
Change in accrued employee compensation and other current
liabilities (5.2) (148.0)
Change in deferred revenue and other long-term liabilities 12.1 (16.8)
Changes in other assets and liabilities 25.3 (47.8)
------------ ------------
Net cash flows from continuing operations 87.5 144.1
Net cash flows from discontinued operations 1.2 1.8
------------ ------------
Net cash flows from operating activities 88.7 145.9
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (195.7) (221.3)
Proceeds from disposal of assets 28.6 5.0
Proceeds from sale of trading securities 34.3 --
------------ ------------
Net cash flows from continuing operations (132.8) (216.3)
Net cash flows from discontinued operations (.7) (1.3)
------------ ------------
Net cash flows from investing activities (133.5) (217.6)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) from commercial paper,
revolving credit facilities and short-term debt 94.8 (740.6)
Repayment of matured indebtedness -- (150.0)
Net proceeds from issuance of notes -- 1,010.7
Proceeds from issuance of common stock 4.4 2.8
Dividends (38.0) (37.6)
------------ ------------
Net cash flows from continuing operations 61.2 85.3
Net cash flows from discontinued operations (.5) --
------------ ------------
Net cash flows from financing activities 60.7 85.3
------------ ------------
Effect of exchange rate changes on cash (2.4) (3.3)
------------ ------------
Increase in cash and cash equivalents 13.5 10.3
Cash and cash equivalents, beginning of period 16.9 19.5
------------ ------------
Cash and cash equivalents, end of period $ 30.4 $ 29.8
============ ============
Income taxes paid $ 23.4 $ 35.5
Interest paid $ 52.0 $ 29.8
See accompanying notes to consolidated condensed financial statements.
4
6
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
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, 2000, its
consolidated results of operations for the three months ended March 31, 2000 and
1999 and its consolidated cash flows for the three months ended March 31, 2000
and 1999. 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, 2000
are not necessarily indicative of the results to be expected for the full year.
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.
NOTE 2. 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,
------------------------------
2000 1999
------------ ------------
Net income $ 18.4 $ 44.4
Other comprehensive loss (15.9) (15.2)
------------ ------------
Total comprehensive income $ 2.5 $ 29.2
============ ============
NOTE 3. INVENTORIES
Inventories are comprised of the following:
March 31, December 31,
2000 1999
------------ ------------
Finished goods $ 637.0 $ 651.0
Work in process 69.6 62.3
Raw materials 97.7 86.7
------------ ------------
Total $ 804.3 $ 800.0
============ ============
5
7
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 4. EARNINGS PER SHARE ("EPS")
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations for income from continuing operations is as follows:
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
----------------------------- -----------------------------
Income From Income From
Continuing Continuing
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
------------ ------------ ------------ ------------
Basic $ 18.4 329.9 $ 45.8 327.2
Effect of dilutive securities:
Stock plans .7 .3
------------ ------------ ------------ ------------
Diluted $ 18.4 330.6 $ 45.8 327.5
============ ============ ============ ============
Securities excluded from the computation of diluted EPS for the three
months ended March 31, 2000 that could have a potentially dilutive effect on
basic EPS in the future were options to purchase 3.6 million shares and Liquid
Yield Option Notes convertible into 7.2 million shares. Such dilutive securities
were excluded as they would be anti-dilutive to basic EPS.
NOTE 5. SEGMENT AND RELATED INFORMATION
The Company's eight divisions have separate management teams and
infrastructures that offer different products and services. For segment
reporting, these divisions have been aggregated into one segment - oilfield. The
eight divisions - Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker
Petrolite, Centrilift, E&P Solutions, Hughes Christensen and Western Geophysical
- - 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 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 segment financial information is shown in the following
table. The "Corporate and Other" column includes corporate-related items, net
interest expense and, as it relates to segment profit(loss), income and expense
items not allocated to reportable segments. Net assets of discontinued
operations, which are excluded from total assets in the following table, totaled
$275.8 million and $278.3 million at March 31, 2000 and December 31, 1999,
respectively.
6
8
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Corporate and
Oilfield Other Total
------------ ------------- ------------
REVENUES
- --------------------------------------------------------------------------------------------
Three months ended March 31, 2000 $ 1,157.3 $ -- $ 1,157.3
Three months ended March 31, 1999 $ 1,214.4 $ -- $ 1,214.4
SEGMENT PROFIT (LOSS)
- --------------------------------------------------------------------------------------------
Three months ended March 31, 2000 $ 91.6 $ (63.8) $ 27.8
Three months ended March 31, 1999 $ 129.3 $ (60.1) $ 69.2
TOTAL ASSETS
- --------------------------------------------------------------------------------------------
As of March 31, 2000 $ 6,351.9 $ 487.5 $ 6,839.4
As of December 31, 1999 $ 6,297.7 $ 463.8 $ 6,761.5
The following table presents the details of "Corporate and Other"
segment profit(loss):
Three Months Ended
March 31,
------------------------------
2000 1999
------------ ------------
Corporate expenses $ (29.3) $ (23.6)
Interest-net (41.6) (36.5)
Gain on trading securities 7.1 --
------------ ------------
Total $ (63.8) $ (60.1)
============ ============
NOTE 6. 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 operations of Baker Process (which were
previously accounted for as a segment) are reflected as discontinued operations.
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.
Certain information with respect to discontinued operations of Baker
Process is as follows:
Three Months Ended
March 31,
-----------------------------
2000 1999
------------ ------------
Revenue $ 83.5 $ 110.8
============ ============
Allocated interest expense 2.1 1.8
============ ============
Loss before income taxes -- (2.1)
Benefits for income taxes -- .7
------------ ------------
Loss from discontinued operations of Baker Process $ -- $ (1.4)
============ ============
7
9
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Net assets of Baker Process are as follows:
As of As of
March 31, December 31,
------------ ------------
2000 1999
------------ ------------
Current assets $ 226.7 $ 234.9
Noncurrent assets 179.8 185.8
------------ ------------
Total assets 406.5 420.7
------------ ------------
Current liabilities 117.3 132.0
Noncurrent liabilities 13.4 10.4
------------ ------------
Total liabilities 130.7 142.4
------------ ------------
Net assets of Baker Process $ 275.8 $ 278.3
============ ============
8
10
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. See
"-Business Environment" for a more detailed discussion of certain of these
factors.
Baker Hughes' expectations regarding its level of capital expenditures
described in "--Capital Resources and Liquidity -- 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.
BUSINESS ENVIRONMENT
Oilfield operations consist of eight divisions - Baker Atlas, Baker
Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions,
Hughes Christensen and Western Geophysical. These companies manufacture and sell
equipment and provide related services used in exploring for, developing and
producing hydrocarbon reserves. In addition, E&P Solutions explores for, and
produces, oil and natural gas.
The business environment for the Company and its corresponding
operating results can be significantly affected by the level of industry capital
expenditures for the exploration and production of oil and gas reserves. These
expenditures are influenced strongly by oil company expectations about the
supply and demand for crude oil and natural gas products and by the energy price
environment that results from supply and demand imbalances. These expenditures
are further influenced by a fundamental change in the Company's customer base
and in their approaches toward relationships with suppliers. The Company's
largest customers have consolidated and are using their global size and market
power to seek economies of scale and pricing concessions.
Key factors currently influencing the worldwide crude oil and gas market
are:
o PRODUCTION RESTRAINT: the degree to which OPEC nations and other large
producing countries are willing and able to restrict production and exports
of crude oil.
o GLOBAL ECONOMIC GROWTH: in particular in Japan, China and South Korea, and
the developing areas of Asia where the correlation between energy demand
and economic growth is strong.
9
11
o OIL AND GAS STORAGE INVENTORIES: relative to historic levels.
o TECHNOLOGICAL PROGRESS: in the design and application of new products that
allow oil and gas companies to drill fewer wells and to drill, complete and
produce wells faster and at lower cost.
o MATURITY OF THE RESOURCE BASE: of known hydrocarbon reserves in the
maturing provinces of the North Sea, U.S., Canada and Latin America.
o THE PACE OF NEW INVESTMENT: access to capital and the reinvestment of
available cash flow into existing and emerging markets.
o PRICE VOLATILITY: the impact of widely fluctuating commodity prices on the
stability of the market and subsequent impact on customer spending.
OIL AND GAS PRICES
Crude oil and natural gas prices are summarized in the table below as
averages for the periods indicated. 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.
Generally, customer expectations about their prospects from oil and gas
sales and customer expenditures to explore for or produce oil and gas rise or
fall with corresponding changes in the prices of oil or natural gas.
Accordingly, changes in these expenditures will normally result in increased or
decreased demand for the Company's products and services.
Three Months Ended
March 31,
-----------------------------
2000 1999
------------ ------------
West Texas Intermediate Crude ($/bbl) $ 28.85 $ 12.95
U.S. Spot Natural Gas ($/mcf) $ 2.53 $ 1.71
In the three months ended March 31, 2000 oil prices averaged
$28.85/bbl, ranging from a low of $24.87/bbl to a high of $31.21/bbl. Oil prices
increased from prior year levels due to sustained adherence to agreements to
reduce production in both OPEC and non-OPEC countries coupled with a resurgence
of worldwide demand growth led by a recovery of certain Asian markets and a
return to colder winter weather. The resulting decrease in global oil
inventories (particularly in North America) provided increased stability in the
market and stronger price support.
U.S. natural gas prices strengthened in the three months ended March
31, 2000 compared to the three months ended March 31, 1999, averaging $2.53/mcf
and ranging from a low of $2.11/mcf to a high of $2.82/mcf. The increase is due
to an apparent reduction in available gas supply brought about by the sustained
reduction in gas directed drilling in the U.S. experienced from January 1998 to
June 1999.
ROTARY RIG COUNTS
The Baker Hughes rotary rig counts are summarized in the table below as
averages for the periods indicated. 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.
10
12
The Company is engaged in the oilfield service industry providing
products and services that are used in exploring for, developing and producing
oil and gas reservoirs. When drilling or workover rigs are active, they consume
the products and services produced by the oilfield service industry. The active
rig count acts as a leading indicator of consumption of products and services
used in drilling, completing, producing and processing hydrocarbons.
Rig count trends are governed by the exploration and development
spending by oil and gas companies, which in turn is influenced by current and
future price expectations for oil and natural gas. Rig counts therefore reflect
the relative strength and stability of energy prices.
Three Months Ended
-------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
U.S. - Land 647 448
U.S. - Offshore 124 103
Canada 473 290
------------ ------------
North America 1,244 841
------------ ------------
Latin America 189 180
North Sea 37 45
Other Europe 36 42
Africa 41 53
Middle East 143 147
Asia pacific 130 152
------------ ------------
International 576 619
------------ ------------
Worldwide 1,820 1,460
============ ============
U.S. Workover 1,000 718
============ ============
OUTLOOK
Oil prices are expected to continue to moderate throughout 2000 from
their highs in late 1999 as the OPEC production cuts agreed to in 1999 expire
and additional oil supply becomes available to the market. Prices for benchmark
West Texas Intermediate Oil are expected to move in the range of $22 to $27/bbl
during 2000.
U.S. natural gas prices are expected to remain strong throughout 2000
averaging between $2.20 and $3.20 per mcf as lower storage levels, increased
demand and reduced supply pressure the market in the coming injection season.
In response to the increased stability of the market, customer spending
is expected to strengthen in 2000 with current estimates indicating increased
global spending in the oil and gas industry in excess of 10% over 1999 levels.
North American spending is expected to continue to increase throughout the year
with both natural gas and oil as drivers of increased drilling and production
activity. Outside North America, customer spending is expected to improve
modestly in the second quarter and show accelerated improvement thereafter.
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
floatation processes. Accordingly, the operations of Baker Process are reflected
as discontinued operations. For further discussion see Note 6 of the Notes to
Consolidated Financial Statements.
11
13
RESULTS OF CONTINUING OPERATIONS
REVENUES
Revenues for the three months ended March 31, 2000 decreased 4.7% to
$1,157.3 million compared to revenues of $1,214.4 million for the three months
ended March 31, 1999. Revenues in North America for the three months ended March
31, 2000 increased 1.0% compared to the three months ended March 31, 1999. The
slight increase in the North American revenues is reflective of the increased
drilling activity in this area, as evidenced by a 48% increase in the rig count,
and improved pricing for the Company's products and services offset by the
ongoing weakness of the seismic market. Excluding revenues from the Company's
seismic division, Western Geophysical, revenues in North America for the first
quarter of 2000 were up 13% compared to the first quarter of 1999. Total
revenues from North America for the three months ended March 31, 2000 account
for 44% of total consolidated revenues.
Outside North America, revenues for the three months ended March 31,
2000 decreased 8.7% compared to the three months ended March 31, 1999. This
decline is reflective of the continued weakness in international drilling
activity as evidenced by the 6.9% drop in the rotary rig counts outside North
America.
GROSS MARGIN
Gross margin for the three months ended March 31, 2000 and 1999 was
20.5% and 22.8%, respectively. The decrease is due primarily to continued
weakness in the seismic market which has a higher fixed cost base than other
product lines.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense as a percent of
consolidated revenues for the three months ended March 31, 2000 and 1999, was
15.1% and 14.1%, respectively. Despite cost reduction efforts during 1999, SG&A
did not decline as a percentage of revenue due to several factors. These factors
include nonrecurring severance expense during the three months ended March 31,
2000 and the fact that SG&A expenses are generally more fixed in nature.
MERGER RELATED COSTS
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, adjustments to the accruals and
the accrued balances at March 31, 2000 are summarized below:
Accrued
Total Amounts Amounts Adjustments Amounts Balance at
Cash Paid in Paid in in Paid in March 31,
Provisions 1998 1999 1999 2000 2000
---------- ---------- ---------- ----------- ---------- ----------
Cash costs
Transaction costs $ 51.5 $ (46.9) $ (3.3) $ (0.1) $ 1.2
Employee costs 87.2 (66.2) (10.0) $ (0.2) (0.1) 10.7
Other merger integration costs 20.6 (9.0) (7.5) (1.4) (0.5) 2.2
---------- ---------- ---------- ---------- ---------- ----------
Total $ 159.3 $ (122.1) $ (20.8) $ (1.6) $ (0.7) $ 14.1
========== ========== ========== ========== ========== ==========
The Company expects that, of the $14.1 million accrual at March 31,
2000, $3.6 million will be spent by December 31, 2000 with the remaining
accrual being spent over the remaining life of the related contractual
obligations.
12
14
UNUSUAL AND OTHER NONRECURRING CHARGES
1999
As a result of continuing low activity levels, predominantly for the
Company's seismic products and services, the Company recorded charges during the
fourth quarter of 1999 totaling $122.8 million. Cash provisions of the charges
totaled $50.7 million. The categories of costs incurred, the actual cash
payments and the accrued balances at March 31, 2000 are summarized below:
Accrued
Total Amounts Amounts Balance at
Cash Paid in Paid in March 31,
Provisions 1999 2000 2000
------------ ------------ ------------ ------------
Cash charges
Severance for approximately 800 employees $ 12.5 $ (2.2) $ (5.0) $ 5.3
Lease termination and other contractual obligations 36.0 (1.5) (4.3) 30.2
Other cash charges 2.2 -- (0.1) 2.1
------------ ------------ ------------ ------------
Total $ 50.7 $ (3.7) $ (9.4) $ 37.6
============ ============ ============ ============
The Company expects that all of the $37.6 million accrual will be spent
by December 31, 2000.
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 March 31, 2000
are summarized below:
Accrued
Total Amounts Amounts Adjustments Amounts Balance at
Cash Paid in Paid in in Paid in March 31,
Provisions 1998 1999 1999 2000 2000
---------- ---------- ---------- ----------- ---------- ----------
Cash costs
Severance for approximately
5,200 employees $ 58.0 $ (24.2) $ (31.2) $ (1.3) $ (0.4) $ 0.9
Integration costs, abandoned leases
and other contractual obligations 29.8 (12.0) (11.9) -- (0.8) 5.1
Environmental accruals 8.8 (4.3) (3.6) -- (0.9) --
Other cash costs (includes litigation
accruals) 21.4 (4.7) (5.5) (1.1) -- 10.1
---------- ---------- ---------- ---------- ---------- ----------
Total $ 118.0 $ (45.2) $ (52.2) $ (2.4) $ (2.1) $ 16.1
========== ========== ========== ========== ========== ==========
The Company expects that, of the $16.1 million accrual at March 31,
2000, $6.6 million will be spent by December 31, 2000, with the remaining
accrual relating to contractual obligations and anticipated legal settlements to
be spent thereafter.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2000 increased
$3.4 million compared to 1999. These increases were due to higher debt levels
that funded capital expenditures and working capital.
13
15
GAIN ON TRADING SECURITIES
The Company currently holds equity securities of Tuboscope, Inc. In the
fourth quarter of 1999, the Company announced its intention to sell its holdings
of Tuboscope, Inc. and reclassified these holdings from available for sale
securities to trading securities. During the first quarter of 2000, the Company
recorded gains of $7.1 million including $2.7 million of unrealized gains
related to these holdings.
INCOME TAXES
The effective income tax rate is 33.8% for both the three months ended
March 31, 2000 and 1999.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Net cash inflows from operating activities of continuing operations
were $87.5 million and $144.1 million for the three months ended March 31, 2000
and 1999, respectively. The reduction in cash flow is due to lower net income
and an increase in working capital due to increased activity levels.
INVESTING ACTIVITIES
Net cash outflows from investing activities of continuing operations
were $132.8 million and $216.3 million for the three months ended March 31, 2000
and 1999. The decrease is due primarily to reduced expenditures for capital
assets.
The Company currently expects 2000 capital expenditures to be between
$600.0 million to $650.0 million excluding any acquisitions. 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 $28.6 million and $5.0
million for the three months ended March 31, 2000 and 1999, respectively.
Proceeds from the sale of Tuboscope, Inc. common stock generated $34.3 million
in the three months ended March 31, 2000.
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 $61.2 million and $85.3 million for the three months ended March 31, 2000
and 1999, respectively.
Total debt outstanding at March 31, 2000 was $2,908.3 million, compared
to $2,814.1 million at December 31, 1999. The increase in debt is primarily due
to increased borrowings from commercial paper and revolving credit facilities
that funded capital expenditures, dividends and increases in working capital.
The debt to equity ratio was 0.96 at March 31, 2000 compared to 0.92 at December
31, 1999.
At December 31, 1999, the Company had $1,458.3 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.
14
16
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, as amended, for all quarters of 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.
EURO CONVERSION
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.
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, or replace them, to address certain Euro conversion issues, pending
full implementation of SAP R/3.
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.
15
17
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." The Company's anticipation regarding the lack of
significance of the Euro introduction on the Company's operations is only its
forecast regarding this matter. This forecast may be substantially different
from actual results, which are affected by factors such as the following:
unforeseen difficulties in remediating specific computer systems to accommodate
the Euro due to the complexity of hardware and software, the inability of third
parties to adequately address their own Euro systems issues, including vendors,
contractors, financial institutions, U.S. and foreign governments and customers,
the delay in completion of a phase of the Company's remediation of a computer
system to accommodate the Euro necessary to begin a later phase, the discovery
of a greater number of hardware and software systems or technologies with
material Euro issues than the Company presently anticipates, and the lack of
alternatives that the Company previously believed existed.
16
18
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
At March 31, 2000, the Company had outstanding two crude oil swap
agreements designated as hedges against price risk associated with production in
its E&P Solutions division. Under these agreements, the Company pays the West
Texas Intermediate price quoted on the Nymex futures exchange and receives a
fixed price. Notional volumes hedged were 150,000 bbl/month for March to June
2000, 225,000 bbl/month for July to September 2000, and 225,000 bbl/month for
October to December 2000, with average swap prices of $29.11, $25.74 and $24.74,
respectively. At March 31, 2000, the contracts had a fair market value of $1.6
million. These contracts have been designated as hedges, and any gains or losses
resulting from market changes will be offset by gains or losses on the hedged
production.
At March 31, 2000, the Company had Australian Dollar denominated
commitments of $2.5 million primarily related to the purchase of seismic
equipment. The Company entered into forward exchange contracts with notional
amounts of $2.5 million as a hedge to these commitments. At March 31, 2000, the
Company also held Japanese Yen denominated accounts receivable of $0.7 million
related to a sales agreement. The Company entered into a forward exchange
contract as a hedge for substantially all of this receivable. At March 31, 2000,
the fair market values of these contracts were $2.4 million and $0.8 million,
respectively.
Certain borrowings of the Company are denominated in currencies other
than its functional currency. At March 31, 2000, these nonfunctional currency
borrowings totaled $0.7 million with primary exposures between the U.S. Dollar
and the Brazilian Real, and between the U.S. Dollar and the British Pound. A 10%
appreciation of the U.S. Dollar against these currencies would not have a
significant effect on the future earnings of the Company.
17
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in a number of shareholder
class action securities fraud suits following the Company's announcement on
December 8, 1999 regarding accounting issues it discovered at its INTEQ
division. The Company previously restated in a Form 10-K for its year ended
December 31, 1999 and in Forms 10-Q/A for each of the three month periods ended
March 31, June 30 and September 30, 1999 certain of its prior period financial
statements as a result of these issues. These suits will be consolidated into
one lawsuit pursuant to the Private Securities Litigation Reform Act of 1995.
The Company believes the allegations in these suits are without merit, and the
Company intends to vigorously defend the suits. Even so, an adverse outcome in
this class action litigation could have an adverse effect on the Company's
results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 8K was filed with the Commission on February 2,
2000, reporting the resignation of Max L. Lukens who held the
positions of Chairman of the Board, President and Chief Executive
officer. Joe B. Foster, a director of the Company, has been
appointed interim Chairman, President and Chief Executive Officer
until a new Chief Executive is selected. The Company also reported
the resignation of Thomas R. Bates, Jr., Senior Vice President.
18
20
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: May 11, 2000 By /s/ G. STEPHEN FINLEY
-----------------------------------
Sr. Vice President - Finance and
Administration and Chief
Financial Officer
Date: May 11, 2000 By /s/ ALAN J. KEIFER
-----------------------------------
Vice President and Controller
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule