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 June 30, 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 July 28, 2000
Common Stock, $1.00 par value per share 330,708,012 shares
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INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - Three months and six months
ended June 30, 2000 and 1999 2
Consolidated Condensed Statements of Financial Position - June 30, 2000
and December 31, 1999 3
Consolidated Condensed Statements of Cash Flows - Six months ended
June 30, 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION 20
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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,
------------------------ ----------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
Revenues $ 1,174.5 $ 1,110.8 $ 2,331.7 $ 2,325.2
---------- ---------- --------- ---------
Costs and expenses:
Costs of revenues 904.7 870.3 1,825.3 1,807.4
Selling, general and administrative 166.8 151.1 341.1 322.7
Unusual credit (18.4) (33.3) (18.4) (33.3)
---------- ---------- --------- ---------
Total 1,053.1 988.1 2,148.0 2,096.8
---------- ---------- --------- ---------
Operating income 121.4 122.7 183.7 228.4
Interest expense (41.9) (40.2) (84.0) (78.9)
Interest income 0.5 1.3 1.0 3.5
Gain on trading securities 10.1 -- 17.2 --
---------- ---------- --------- ---------
Income from continuing operations before income
taxes 90.1 83.8 117.9 153.0
Income taxes (29.2) (12.4) (38.6) (35.8)
---------- ---------- --------- ---------
Income from continuing operations 60.9 71.4 79.3 117.2
Loss from discontinued operations, net of tax -- (2.9) -- (4.3)
---------- ---------- --------- ---------
Net income $ 60.9 $ 68.5 $ 79.3 $ 112.9
========== ========== ========= =========
Basic earnings per share:
Income from continuing operations $ 0.18 $ 0.22 $ 0.24 $ 0.36
Discontinued operations, net of tax -- (0.01) -- (0.02)
---------- ---------- --------- ---------
Net income $ 0.18 $ 0.21 $ 0.24 $ 0.34
========== ========== ========= =========
Diluted earnings per share:
Income from continuing operations $ 0.18 $ 0.22 $ 0.24 $ 0.36
Discontinued operations, net of tax -- (0.01) -- (0.02)
---------- ---------- --------- ---------
Net income $ 0.18 $ 0.21 $ 0.24 $ 0.34
========== ========== ========= =========
Cash dividends per share $ 0.115 $ 0.115 $ 0.23 $ 0.23
========== ========== ========= =========
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
(Unaudited)
June 30, December 31,
2000 1999
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 56.1 $ 16.9
Accounts receivable, net 1,055.7 1,011.4
Inventories 808.3 800.0
Net assets of discontinued operations 245.5 278.3
Other current assets 226.6 223.2
---------- ------------
Total current assets 2,392.2 2,329.8
Property, net 2,001.0 2,010.2
Goodwill and other intangibles, net 1,663.9 1,694.9
Multiclient seismic data and other assets 990.3 1,004.9
---------- ------------
Total assets $ 7,047.4 $ 7,039.8
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 335.9 $ 380.9
Short-term borrowings and current portion of long-term debt 90.4 108.1
Accrued employee compensation 194.0 165.5
Other current liabilities 262.4 345.7
---------- ------------
Total current liabilities 882.7 1,000.2
---------- ------------
Long-term debt 2,798.1 2,706.0
---------- ------------
Deferred income taxes 99.7 35.1
---------- ------------
Deferred revenue and other long-term liabilities 218.3 227.4
---------- ------------
Stockholders' equity:
Common stock 330.7 329.8
Capital in excess of par value 2,997.2 2,981.1
Accumulated deficit (48.2) (51.5)
Accumulated other comprehensive loss (231.1) (188.3)
---------- ------------
Total stockholders' equity 3,048.6 3,071.1
---------- ------------
Total liabilities and stockholders' equity $ 7,047.4 $ 7,039.8
========== ============
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,
------------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 79.3 $ 117.2
Adjustments to reconcile income from continuing operations to net
cash flow from operating activities:
Depreciation, depletion and amortization 305.2 398.6
Provision (benefit) for deferred income taxes 34.4 (13.3)
Noncash portion of nonrecurring items -- 3.2
Gain on disposal of assets (25.6) (42.7)
Gain on sale of MPD unit (5.9) --
Gain on trading securities (17.2) --
Change in accounts receivable (46.9) 190.8
Change in inventories (24.3) 120.6
Change in accounts payable (43.1) (121.9)
Change in accrued employee compensation and other current
liabilities (53.6) (190.7)
Change in deferred revenue and other long-term liabilities (8.7) (91.7)
Changes in other assets and liabilities 4.7 (103.6)
---------- ----------
Net cash flows from continuing operations 198.3 266.5
Net cash flows from discontinued operations (8.4) 4.7
---------- ----------
Net cash flows from operating activities 189.9 271.2
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (316.4) (382.1)
Proceeds from disposal of assets 64.3 79.9
Proceeds from sale of MPD unit 23.2 --
Proceeds from sale of trading securities 58.6 --
---------- ----------
Net cash flows from continuing operations (170.3) (302.2)
Net cash flows from discontinued operations 12.0 (4.7)
---------- ----------
Net cash flows from investing activities (158.3) (306.9)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) from commercial paper, revolving credit
facilities and short-term debt 74.3 (751.9)
Repayment of matured indebtedness -- (150.0)
Net proceeds from issuance of notes -- 1,010.7
Proceeds from issuance of common stock 15.1 9.3
Dividends (75.9) (75.3)
---------- ----------
Net cash flows from continuing operations 13.5 42.8
Net cash flows from discontinued operations (3.6) --
---------- ----------
Net cash flows from financing activities 9.9 42.8
---------- ----------
Effect of exchange rate changes on cash (2.3) (1.6)
---------- ----------
Increase in cash and cash equivalents 39.2 5.5
Cash and cash equivalents, beginning of period 16.9 19.5
---------- ----------
Cash and cash equivalents, end of period $ 56.1 $ 25.0
========== ==========
Income taxes paid $ 58.8 $ 86.0
Interest paid $ 91.1 $ 74.7
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
The unaudited consolidated condensed financial statements of Baker
Hughes Incorporated and its subsidiaries ("Baker Hughes" or the "Company"),
included herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes that the presentations and disclosures herein are adequate
to make the information not misleading. The unaudited consolidated condensed
financial statements reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the interim periods. These
unaudited consolidated condensed financial statements should be read in
conjunction with the Company's audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended December 31, 1999.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the full year.
In the notes to the unaudited 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
components of the Company's comprehensive income, net of related tax, are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income $ 60.9 $ 68.5 $ 79.3 $ 112.9
Other comprehensive loss:
Foreign currency translation adjustments (26.9) (0.8) (42.8) (17.8)
Unrealized gains on securities -- 17.7 -- 19.5
-------- -------- -------- --------
Total comprehensive income $ 34.0 $ 85.4 $ 36.5 $ 114.6
======== ======== ======== ========
NOTE 3. INVENTORIES
Inventories are comprised of the following:
June 30, December 31,
2000 1999
-------- ------------
Finished goods $ 647.2 $ 651.0
Work in process 67.5 62.3
Raw materials 93.6 86.7
-------- -------
Total $ 808.3 $ 800.0
======== =======
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
June 30, 2000 June 30, 1999
--------------------------------------- ---------------------------------------
Income From Income From
Continuing Continuing
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
--------------- --------------- --------------- ---------------
Basic $ 60.9 330.5 $ 71.4 327.5
Effect of dilutive securities:
Stock plans -- 2.3 -- 2.1
------ ------ ------ ------
Diluted $ 60.9 332.8 $ 71.4 329.6
====== ====== ====== ======
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
--------------------------------------- ---------------------------------------
Income From Income From
Continuing Continuing
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
--------------- --------------- --------------- ---------------
Basic $ 79.3 330.2 $ 117.2 327.4
Effect of dilutive securities:
Stock plans -- 1.5 -- 1.2
------ ------ ------- ------
Diluted $ 79.3 331.7 $ 117.2 328.6
====== ====== ======= ======
Securities excluded from the computation of diluted EPS that could have
a potentially dilutive effect on basic EPS in the future were options to
purchase 3.3 million shares and 3.4 million shares for the three and six months
ended June 30, 2000, respectively, and Liquid Yield Option Notes convertible
into 7.2 million shares for both the three and six months ended June 30, 2000.
Such securities were excluded as they would be anti-dilutive to EPS.
NOTE 5. UNUSUAL AND OTHER NONRECURRING CHARGES
During the second quarter of 2000 the Company recognized a gain of $5.9
million on the sale of the MPD unit of Hughes Christensen. The Company received
net proceeds of $23.2 million that were used to repay outstanding indebtedness.
The Company also recorded net adjustments to nonrecurring charge accruals from
prior years of $12.5 million to reflect the current estimates of remaining
expenditures. The adjustments related primarily to severance accruals and
accruals for lease obligations that will not be utilized. These items are
reflected as unusual credits in the statement of operations.
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.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 scrapped. The net gain from these items totaled
$15.3 million and was reflected in SG&A expenses.
NOTE 6. 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. In addition, E&P Solutions explores for, and
produces, oil and natural gas. 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
$245.5 million and $278.3 million at June 30, 2000 and December 31, 1999,
respectively.
Corporate
Oilfield and Other Total
------------ ---------- ------------
REVENUES
Three months ended June 30, 2000 $ 1,174.5 $ -- $ 1,174.5
Three months ended June 30, 1999 $ 1,110.8 $ -- $ 1,110.8
Six months ended June 30, 2000 $ 2,331.7 $ -- $ 2,331.7
Six months ended June 30, 1999 $ 2,325.2 $ -- $ 2,325.2
SEGMENT PROFIT (LOSS)
Three months ended June 30, 2000 $ 129.1 $ (39.0) $ 90.1
Three months ended June 30, 1999 $ 98.9 $ (15.1) $ 83.8
Six months ended June 30, 2000 $ 220.7 $ (102.8) $ 117.9
Six months ended June 30, 1999 $ 228.2 $ (75.2) $ 153.0
TOTAL ASSETS
As of June 30, 2000 $ 6,297.4 $ 504.5 $ 6,801.9
As of December 31, 1999 $ 6,297.7 $ 463.8 $ 6,761.5
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the "Corporate and Other" segment profit (loss) are
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Corporate expenses $ (26.1) $ (24.8) $ (55.4) $ (48.4)
Interest-net (41.4) (38.9) (83.0) (75.4)
Unusual credit 18.4 33.3 18.4 33.3
Gain on trading securities 10.1 -- 17.2 --
Nonrecurring item reflected in SG&A -- 15.3 -- 15.3
-------- -------- -------- --------
Total $ (39.0) $ (15.1) $ (102.8) $ (75.2)
======== ======== ======== ========
NOTE 7. DISCONTINUED OPERATIONS
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division. Baker Process
manufacturers and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes. Accordingly, the net assets and 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. Loss from discontinued operations for all respective periods
presented includes an allocation of interest expense based on 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 the discontinued operations of
Baker Process is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue $ 81.1 $ 100.2 $ 164.6 $ 211.0
-------- -------- -------- --------
Allocated interest expense 2.0 1.9 4.1 3.7
-------- -------- -------- --------
Loss before income taxes -- (4.0) -- (6.1)
Benefits for income taxes -- 1.1 -- 1.8
-------- -------- -------- --------
Loss from discontinued operations of Baker
Process $ -- $ (2.9) $ -- $ (4.3)
======== ======== ======== ========
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As of As of
June 30, December 31,
-------- ------------
2000 1999
-------- -------
Current assets $ 196.3 $ 234.9
Noncurrent assets 166.4 185.8
-------- -------
Total assets 362.7 420.7
-------- -------
Current liabilities 104.1 132.0
Noncurrent liabilities 13.1 10.4
-------- -------
Total liabilities 117.2 142.4
-------- -------
Net assets of Baker Process $ 245.5 $ 278.3
======== =======
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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, and the negative
thereof, 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.
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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.
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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
West Texas Intermediate Crude ($/bbl) $ 28.93 $ 17.56 $ 28.89 $ 15.20
U.S. Spot Natural Gas ($/mcf) $ 3.58 $ 2.12 $ 3.06 $ 1.92
During the three months ended June 30, 2000 oil prices averaged
$28.93/bbl, ranging from a low of $23.90/bbl to a high of $34.65/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 June 30,
2000 compared to the three months ended June 30, 1999, averaging $3.58/mcf and
ranging from a low of $2.77/mcf to a high of $4.41/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.
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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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
U.S. - Land 694 421 679 437
U.S. - Offshore 131 100 129 102
Canada 265 101 344 194
Latin America 213 185 201 183
-------- -------- -------- --------
Western Hemisphere 1,303 807 1,353 916
-------- -------- -------- --------
North Sea 44 42 40 44
Other Europe 38 45 37 43
Africa 45 40 43 46
Middle East 156 140 150 144
Asia Pacific 133 145 131 149
-------- -------- -------- --------
Eastern Hemisphere 416 412 401 426
-------- -------- -------- --------
Worldwide 1,719 1,219 1,754 1,342
-------- -------- -------- --------
U.S. Workover 1,075 785 1,037 752
======== ======== ======== ========
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 expired,
new OPEC production levels went into effect and additional oil supply is
becoming available to the market. Prices for benchmark West Texas Intermediate
Oil are expected to average between $24/bbl to $30/bbl during the remainder
of 2000.
U. S. natural gas prices are expected to remain strong throughout 2000
averaging between $3.20 per mcf and $4.00 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 increased modestly in the
second quarter and is expected to show continued improvement throughout the
balance of the year.
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
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from liquids and liquids from liquids through filtration, sedimentation,
centrifugation and flotation processes. Accordingly, the net assets and
operations of Baker Process are reflected as discontinued operations. For
further discussion see Note 7 of the Notes to Consolidated Condensed Financial
Statements.
WESTERN GECO JOINT VENTURE
On May 31, 2000, the Company's Board of Directors announced the signing
of a Memorandum of Understanding with Schlumberger Limited ("Schlumberger") for
the purpose of creating a joint venture to be called Western GECO. The Company
will contribute the seismic acquisition assets, data processing assets,
multi-client seismic libraries and other assets of Western Geophysical to the
venture. In addition, the Company will receive approximately $500 million in
cash from Schlumberger and will own 30% of the venture. The transaction is
expected to close before the end of the year and is subject to the signing of a
definitive agreement and to regulatory and board approvals.
RESULTS OF CONTINUING OPERATIONS
REVENUES
Revenues for the three months ended June 30, 2000 increased 5.7% to
$1,174.5 million compared with revenues of $1,110.8 million for the three months
ended June 30, 1999. Geographically, revenues in the Western Hemisphere, which
account for 57.1% of total consolidated revenues, increased 11.8% for the three
months ended June 30, 2000 compared with the three months ended June 30, 1999.
The increase in the Western Hemisphere revenues reflects the increased drilling
activity in this area, as evidenced by a 56.2% 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 the Western Hemisphere for the second
quarter of 2000 increased 23.2% compared with the second quarter of 1999.
Outside the Western Hemisphere, revenues for the three months ended June 30,
2000 decreased 1.3% compared with the three months ended June 30, 1999. This
decline reflects the continued weakness in international drilling activity,
particularly in Europe and in the Asia Pacific region.
Revenues for the six months ended June 30, 2000 of $2,331.7 million
were relatively unchanged when compared with revenues of $2,325.2 million for
the six months ended June 30, 1999. Revenues were impacted by significantly
higher drilling activity levels in the Western Hemisphere offset by slightly
lower drilling activity levels in the Eastern Hemisphere and a 22.7% revenue
decline in the Company's seismic business.
GROSS MARGIN
Gross margin for the three months ended June 30, 2000 and 1999 was
23.0% and 21.7%, respectively. Gross margin for the six months ended June 30,
2000 and 1999 was 21.7% and 22.3%, respectively. The weakness in the seismic
market, which has a higher fixed cost base than other product lines, and
increased spending for research and engineering offset the margin improvement in
the Company's other product lines. In addition, as a result of the Company's
normal quarterly evaluation of its multi-client seismic library in June 2000,
the Company increased its estimate of projected sales for a large Gulf of Mexico
survey. The increase in projected sales was a direct result of increased demand
and sales of such data during the period. Since the Company's accounting policy
is to amortize the cost of its multi-client seismic library over the estimated
sales of such data, the change in estimate had the effect of reducing the costs
of sales for multi-client seismic data for the three months ended June 30, 2000
by $15.6 million. This change is not expected to have a significant effect on
future periods. Excluding the effect of this change in estimate, gross margin
for the three months ended June 30, 2000 would have been 21.6% and consistent
with 1999.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses are generally
more fixed in nature and therefore may not correlate to changes in revenues.
SG&A expense as a percentage of consolidated revenues for the three and six
months ended June 30, 2000 was 14.2% and 14.6%, respectively, compared with
13.6% and 13.9%, respectively, for the three and six months ended June 30, 1999.
Included in SG&A expense for the three months ended June 30, 1999 is a
nonrecurring credit of $15.3 million related to the sale of certain net assets.
Excluding this credit, SG&A expense as a percentage of revenues for the three
and six months ended June 30, 1999 was 15.0% and 14.5%, respectively. In
addition, SG&A expense for the six months ended June 30, 2000 includes
nonrecurring severance expense of $4.1 million in connection with the departure
of the Company's former chief executive officer.
MERGER RELATED COSTS
In connection with the merger with Western Atlas Inc. in 1998, the
Company recorded merger related costs of $217.5 million. The cash provision of
the Merger related costs totaled $159.3 million. The actual cash payments made
and adjustments to the accruals during 2000 and the remaining accrued balances
at June 30, 2000 are summarized below:
Accrued Accrued
Balance at Amounts Balance at
December 31, Paid in June 30,
1999 2000 2000
------------ ------- ----------
Cash costs
Transaction costs $ 1.3 $ (0.4) $ 0.9
Employee costs 10.8 (1.5) 9.3
Other merger integration costs 2.7 (0.5) 2.2
------- ------- ------
Total $ 14.8 $ (2.4) $ 12.4
======= ======= ======
The Company expects that, of the $12.4 million accrual at June 30,
2000, $2.7 million will be spent by December 31, 2000, with the remaining
accrual being spent over the remaining life of the related contractual
obligations.
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. The cash provision of the
charges totaled $50.7 million. The actual cash payments and adjustments to the
accruals during 2000 and the remaining accrued balances at June 30, 2000 are
summarized below:
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16
Accrued Accrued
Balance at Amounts Adjustments Balance at
December 31, Paid in in June 30,
1999 2000 2000 2000
------------ ------- ----------- ----------
Cash charges
Severance for approximately 800 employees $ 10.3 $ (5.4) $ (1.1) $ 3.8
Lease termination and other contractual
obligations 34.5 (17.7) (7.2) 9.6
Other cash charges 2.2 (0.4) -- 1.8
------ ------- ------ ------
Total $ 47.0 $ (23.5) $ (8.3) $ 15.2
====== ======= ====== ======
The Company expects that all of the $15.2 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 actual cash payments and
adjustments to the accruals during 2000 and the remaining accrued balances at
June 30, 2000 are summarized below:
Accrued Accrued
Balance at Amounts Adjustments Balance at
December 31, Paid in in June 30,
1999 2000 2000 2000
------------ ------- ----------- ----------
Cash costs
Severance for approximately 5,200 employees $ 1.3 $ (0.5) $ -- $ 0.8
Integration costs, abandoned leases and
other contractual obligations 5.9 (1.4) -- 4.5
Environmental accruals 0.9 (0.9) -- --
Other cash costs (includes litigation accruals) 10.1 (1.1) (4.2) 4.8
------ ------- ------ ------
Total $ 18.2 $ (3.9) $ (4.2) $ 10.1
====== ======= ====== ======
The Company expects that, of the $10.1 million accrual at June 30,
2000, $4.3 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 and six months ended June 30, 2000
increased $1.7 million and $5.1 million, respectively, compared with the three
and six months ended June 30, 1999. These increases were due to higher debt
levels needed to fund capital expenditures and working capital needs coupled
with slightly higher weighted average interest rates.
GAIN ON TRADING SECURITIES
In the fourth quarter of 1999, the Company announced its intention to
sell its holdings of Tuboscope, Inc., now known as Varco International, Inc.
("Varco"), and reclassified these holdings from available for sale securities to
trading securities. During the three and six months ended June 30, 2000, the
Company recorded gains of $10.1 million and $17.2 million, respectively,
including $7.9 million and $10.6 million of unrealized
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17
gains, respectively, related to these holdings. Subsequent to June 30, 2000, the
Company disposed of its remaining Varco holdings. These sales resulted in a net
loss of $3.1 million that will be recorded during the three months ending
September 30, 2000 as a result of a decline in the price of Varco common stock
from June 30, 2000 through the date of sale. Total gains realized during FY 2000
from the disposition of the Company's Varco holdings will be approximately $14.1
million.
INCOME TAXES
During the quarter ended June 30, 1999, the Company reached an
agreement with the Internal Revenue Service 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.
Excluding the effects of the tax benefit of $18.1 million, the
effective income tax rate for the three months ended June 30, 2000 and 1999 was
32.4% and 36.4%, respectively. The decrease in the effective income tax rate is
related to lower taxes from international operations.
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements have principally related to capital
expenditures and working capital needs. These requirements have been met through
a combination of bank debt and internally generated funds.
OPERATING ACTIVITIES
Net cash inflows from operating activities of continuing operations
were $198.3 million and $266.5 million for the six months ended June 30, 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 $170.3 million and $302.2 million for the six months ended June 30, 2000
and 1999. The decrease is primarily due to reduced expenditures for capital
assets and proceeds of $58.6 million from the sale of the Company's holdings of
Varco. Proceeds from the disposal of assets generated $64.3 million and $79.9
million for the six months ended June 30, 2000 and 1999, respectively. Proceeds
from the sale of the MPD unit at Hughes Christensen generated $23.2 million in
the six months ended June 30, 2000.
The Company currently expects 2000 capital expenditures to be between
$600.0 million to $660.0 million excluding any acquisitions. The planned capital
expenditures for 2000 are normal recurring items necessary to support business
expansion. The Company expects to fund the capital expenditures primarily out of
funds provided from operations and outstanding lines of credit.
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 $13.5 million and $42.8 million for the six months ended June 30, 2000 and
1999, respectively.
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Total debt outstanding at June 30, 2000 was $2,888.5 million, compared
with $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 to fund capital expenditures, dividends and working capital needs.
The debt to equity ratio was 0.95 at June 30, 2000 compared with 0.92 at
December 31, 1999.
At June 30, 2000, the Company had $1,506.9 million of credit facilities
with commercial banks, of which $1,000.0 million was committed. These facilities
are subject to normal banking terms and conditions that do not significantly
restrict the Company's activities.
ACCOUNTING STANDARDS
DERIVATIVE AND HEDGE ACCOUNTING
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at fair value. Depending on the intended use of the derivative, changes in its
fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income.
SFAS No. 133 is effective, 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 all significant operations of the Company. 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,
17
19
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 addition, the Company has substantially completed the implementation
of 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 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.
18
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ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
At June 30, 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 225,000 bbl/month for July to
September 2000, and 225,000 bbl/month for October to December 2000, with average
swap prices of $25.74 and $24.74, respectively. At June 30, 2000, the contracts
had a fair market value resulting in a liability of $6.2 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 June 30, 2000, the Company had Australian Dollar denominated
commitments of $12.5 million primarily related to the purchase of seismic
equipment. The Company entered into forward exchange contracts with notional
amounts of $12.5 million as a hedge to these commitments. At June 30, 2000, the
fair market value of these contracts was $12.6 million.
As of June 30, 2000, the Company had hedged a portion of its holdings
of Varco by executing short sales of Varco common stock. As of August 8, 2000,
the Company had disposed of all remaining Varco holdings and had settled all
related short positions. These sales resulted in a net loss of $3.1 million that
will be recorded during the three months ended September 30, 2000 as a result of
a decline in the price of Varco common stock from June 30, 2000 through the date
of sale. Total gains realized during 2000 from the disposition of the Company's
Varco holdings will be approximately $14.1 million.
Certain borrowings of the Company are denominated in currencies other
than its functional currency. At June 30, 2000, these nonfunctional currency
borrowings totaled $1.7 million with primary exposures between the U.S. Dollar
and the Euro, and between the U.S. Dollar and the Malaysian Ringgit. A 10%
appreciation of the U.S. Dollar against these currencies would not have a
significant effect on the future earnings of the Company.
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21
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 have been 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
The Company's Annual Meeting of Stockholders was held on April 26, 2000
(1) to elect four Class III members of the Board of Directors to serve for
three-year terms and to elect two Class II members of the Board of Directors to
serve for two-year terms, (2) 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 (3) to consider a stockholder proposal
requesting that the Board of Directors be declassified.
The four Class III directors who were so elected are Victor G. Beghini,
Eunice M. Filter, Claire W. Gargalli and James F. McCall. The two Class II
directors who were so elected are Lester M. Alberthal, Jr. and Joe B. Foster.
The directors whose term of office continued after the Annual Meeting are Joseph
T. Casey, Richard D. Kinder, H. John Riley, Jr., Charles L. Watson and Max P.
Watson, Jr. The number of affirmative votes and the number of votes withheld for
the directors so elected were:
Number of Number of Votes
Name Affirmative Votes Withheld
------------------------------------ ------------------ ---------------
Victor G. Beghini 271,486,737 3,144,578
Eunice M. Filter 271,621,975 3,009,340
Claire W. Gargalli 271,630,552 3,000,763
James F. McCall 271,509,372 3,121,943
Lester M. Alberthal, Jr. 271,544,346 3,086,969
Joe B. Foster 271,611,263 3,020,052
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 stockholder proposals were as follows:
Number of Number of
Affirmative Votes Negative Votes Abstentions Broker Nonvotes
----------------- -------------- ----------- ---------------
Proposal regarding Northern Ireland 56,836,429 183,317,343 9,119,603 25,357,940
Proposal regarding classified board 194,273,151 53,729,693 2,278,135 25,350,336
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(10.1) Employment Agreement by and between Baker Hughes
Incorporated and Michael E. Wiley dated July 17, 2000.
(10.2) Severance Agreement by and between Baker Hughes
Incorporated and Michael E. Wiley dated July 17, 2000.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Commission on May 9, 2000,
reporting the results of the Company's Annual Meeting of
Stockholders election of certain members of the Board of Directors
and stockholder proposals.
A report on Form 8-K was filed with the Commission on June 12,
2000, reporting that the Company had signed a Memorandum of
Understanding with Schlumberger Limited for the purpose of
creating a seismic venture.
A report on Form 8-K was filed with the Commission on July 25,
2000, reporting the election of Michael E. Wiley as the Company's
Chairman of the Board, President and Chief Executive Officer
effective as of August 14, 2000.
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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: August 14, 2000 By /s/ G. STEPHEN FINLEY
-------------------------------------------
Sr. Vice President - Finance and
Administration and Chief Financial Officer
Date: August 14, 2000 By /s/ ALAN J. KEIFER
-------------------------------------------
Vice President and Controller
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Employment Agreement by and between Baker Hughes Incorporated and
Michael E. Wiley dated July 17, 2000.
10.2 Severance Agreement by and between Baker Hughes Incorporated and
Michael E. Wiley dated July 17, 2000.
27 Financial Data Schedule