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 September 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 October 27, 2000
Common Stock, $1.00 par value per share 332,022,934 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 nine
months ended September 30, 2000 and 1999 2
Consolidated Condensed Statements of Financial Position - September 30,
2000 and December 31, 1999 3
Consolidated Condensed Statements of Cash Flows - Nine months ended
September 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 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II - OTHER INFORMATION 22
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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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues $ 1,273.6 $ 1,117.6 $ 3,605.3 $ 3,442.8
---------- ---------- ---------- ----------
Costs and expenses:
Costs of revenues 955.7 896.4 2,781.0 2,703.8
Selling, general and administrative 170.6 162.6 511.7 485.3
Unusual credit (1.7) (6.2) (20.1) (39.5)
---------- ---------- ---------- ----------
Total 1,124.6 1,052.8 3,272.6 3,149.6
---------- ---------- ---------- ----------
Operating income 149.0 64.8 332.7 293.2
Interest expense (42.0) (40.1) (126.0) (119.0)
Interest income 0.9 1.2 1.9 4.7
Gain (loss) on trading securities (3.1) - 14.1 -
---------- ---------- ---------- ----------
Income from continuing operations before
income taxes 104.8 25.9 222.7 178.9
Income taxes (38.1) (9.3) (76.7) (45.1)
---------- ---------- ---------- ----------
Income from continuing operations 66.7 16.6 146.0 133.8
Loss from discontinued operations, net of tax - (3.4) - (7.7)
---------- ---------- ---------- ----------
Net income $ 66.7 $ 13.2 $ 146.0 $ 126.1
========== ========== ========== ==========
Basic earnings per share:
Income from continuing operations $ 0.20 $ 0.05 $ 0.44 $ 0.41
Discontinued operations, net of tax - (0.01) - (0.02)
---------- ---------- ---------- ----------
Net income $ 0.20 $ 0.04 $ 0.44 $ 0.39
========== ========== ========== ==========
Diluted earnings per share:
Income from continuing operations $ 0.20 $ 0.05 $ 0.44 $ 0.41
Discontinued operations, net of tax - (0.01) - (0.02)
---------- ---------- ---------- ----------
Net income $ 0.20 $ 0.04 $ 0.44 $ 0.39
========== ========== ========== ==========
Cash dividends per share $ 0.115 $ 0.115 $ 0.345 $ 0.345
========== ========== ========== ==========
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
(Unaudited)
September 30, December 31,
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 53.2 $ 16.9
Accounts receivable, net 1,128.4 1,011.4
Inventories 833.0 800.0
Net assets of discontinued operations 218.1 278.3
Other current assets 212.5 223.2
------------- -------------
Total current assets 2,445.2 2,329.8
Property, net 1,909.6 2,010.2
Goodwill and other intangibles, net 1,641.4 1,694.9
Multiclient seismic data and other assets 1,005.9 1,004.9
------------- -------------
Total assets $ 7,002.1 $ 7,039.8
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 399.1 $ 380.9
Short-term borrowings and current portion of long-term debt 8.9 108.1
Accrued employee compensation 261.4 165.5
Other current liabilities 275.0 345.7
------------- -------------
Total current liabilities 944.4 1,000.2
------------- -------------
Long-term debt 2,640.6 2,706.0
------------- -------------
Deferred income taxes 73.1 35.1
------------- -------------
Deferred revenue and other long-term liabilities 268.0 227.4
------------- -------------
Stockholders' equity:
Common stock 331.9 329.8
Capital in excess of par value 3,025.0 2,981.1
Accumulated deficit (19.5) (51.5)
Accumulated other comprehensive loss (261.4) (188.3)
------------- -------------
Total stockholders' equity 3,076.0 3,071.1
------------- -------------
Total liabilities and stockholders' equity $ 7,002.1 $ 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)
Nine Months Ended
September 30,
---------------------------------------
2000 1999
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 146.0 $ 133.8
Adjustments to reconcile income from continuing operations to net
cash flow from operating activities:
Depreciation, depletion and amortization 465.6 600.6
Provision (benefit) for deferred income taxes 42.8 (9.6)
Noncash portion of nonrecurring items - 3.2
Gain on disposal of assets (34.2) (41.0)
Gain on sale of MPD and Norward units (7.6) -
Gain on trading securities (14.1) -
Change in accounts receivable (131.0) 205.3
Change in inventories (52.2) 157.1
Change in accounts payable 25.5 (137.2)
Change in accrued employee compensation and other current
liabilities 18.2 (218.4)
Change in deferred revenue and other long-term liabilities (16.9) (142.5)
Changes in other assets and liabilities (29.1) (167.0)
------------- --------------
Net cash flows from continuing operations 413.0 384.3
Net cash flows from discontinued operations (8.5) 2.6
------------- --------------
Net cash flows from operating activities 404.5 386.9
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (450.2) (525.5)
Net proceeds from disposal of assets 93.2 120.2
Net proceeds from sale of MPD and Norward units 34.4 -
Net proceeds from sale of trading securities 72.7 -
------------- --------------
Net cash flows from continuing operations (249.9) (405.3)
Net cash flows from discontinued operations 11.8 (6.0)
------------- --------------
Net cash flows from investing activities (238.1) (411.3)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) from commercial paper, revolving credit
facilities and short-term debt (163.7) (750.4)
Net proceeds from sale/leaseback 117.7 -
Repayment of matured indebtedness - (150.0)
Net proceeds from issuance of notes - 1,010.7
Proceeds from issuance of common stock 35.7 38.2
Dividends (114.0) (113.1)
------------- --------------
Net cash flows from continuing operations (124.3) 35.4
Net cash flows from discontinued operations (3.3) 3.4
------------- --------------
Net cash flows from financing activities (127.6) 38.8
------------- --------------
Effect of exchange rate changes on cash (2.5) 0.9
------------- --------------
Increase in cash and cash equivalents 36.3 15.3
Cash and cash equivalents, beginning of period 16.9 19.5
------------- --------------
Cash and cash equivalents, end of period $ 53.2 $ 34.8
============= =============
Income taxes paid $ 84.8 $ 92.5
Interest paid $ 141.9 $ 114.6
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 Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ----------
Net income $ 66.7 $ 13.2 $ 146.0 $ 126.1
Other comprehensive loss:
Foreign currency translation adjustments (30.3) (0.6) (73.1) (18.4)
Unrealized gains (loss) on securities - (7.8) - 11.7
--------- --------- --------- ----------
Total comprehensive income $ 36.4 $ 4.8 $ 72.9 $ 119.4
========= ========= ========= =========
NOTE 3. INVENTORIES
Inventories are comprised of the following:
September 30, December 31,
2000 1999
---------------- ----------------
Finished goods $ 669.8 $ 651.0
Work in process 66.1 62.3
Raw materials 97.1 86.7
------------- -------------
Total $ 833.0 $ 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
September 30, 2000 September 30, 1999
-------------------------------------- -------------------------------------
Income From Weighted Income From Weighted
Continuing Average Continuing Average
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
------------- ------------ ------------- ------------
Basic $ 66.7 331.2 $ 16.6 328.8
Effect of dilutive securities:
Stock plans - 2.6 - 2.7
------------- ------------ ------------- -----------
Diluted $ 66.7 333.8 $ 16.6 331.5
============= ============ ============= ===========
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------------------------ --------------------------------------
Income From Weighted Income From Weighted
Continuing Average Continuing Average
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
------------- ------------- ------------- -------------
Basic $ 146.0 330.5 $ 133.8 327.8
Effect of dilutive securities:
Stock plans - 1.9 - 1.7
------------- ------------ ------------- -----------
Diluted $ 146.0 332.4 $ 133.8 329.5
============= ============ ============= ===========
Securities excluded from the computation of diluted EPS that could have
a potentially dilutive effect on basic EPS in the future were employee stock
options, whose exercise price is above the current market price of the Company's
common stock, to purchase 3.6 million shares and 3.7 million shares for the
three and nine months ended September 30, 2000, respectively, and Liquid Yield
Option Notes convertible into 7.1 million shares for both the three and nine
months ended September 30, 2000. Such securities were excluded, as they would be
anti-dilutive to EPS for the periods presented.
NOTE 5. UNUSUAL AND OTHER NONRECURRING CREDITS
During the third quarter of 2000 the Company recognized a pre-tax gain
of $1.7 million on the sale of the Norward unit of Baker Atlas. The Company
received net proceeds of $11.2 million that were used to repay outstanding
indebtedness.
During the second quarter of 2000 the Company recognized a pre-tax gain
of $5.9 million on the sale of the MPD unit of Hughes Christensen. The Company
received net proceeds from the sale of $23.2 million that were used to repay
outstanding indebtedness. In the second quarter of 2000, 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.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In August 1999, the Company completed the sale of a property in Las
Colinas, Texas and recognized a pre-tax gain of $6.2 million recorded as an
unusual credit in the statement of operations. The Company received net proceeds
from the sale of $19.9 million that were used to repay outstanding indebtedness.
In June 1999, the Company completed the sale of a property in Houston,
Texas and recognized a pre-tax gain of $33.3 million recorded as an unusual
credit in the statement of operations. This property was considered a duplicate
facility after the merger with Western Atlas Inc. The Company received net
proceeds from the sale of $48.2 million that were used to repay outstanding
indebtedness.
During 1998, the Company sold its interest in a joint venture and
recorded a write-down to the estimated fair value of the assets received which
was reflected in selling, general and administrative ("SG&A") expenses. During
the second quarter of 1999, certain assets obtained as part of the consideration
from the sale were sold. The proceeds from the sale of these assets were $18.9
million and were received in July 1999. Certain other assets relating to these
operations were written-off and scrapped. The pre-tax gain from these items
totaled $15.3 million and was reflected in SG&A expenses.
NOTE 6. SEGMENT AND RELATED INFORMATION
The Company has eight divisions that, for segment reporting, 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.
The Company evaluates the performance of its oilfield segment based on
income before income taxes, accounting changes, nonrecurring items and interest
income and expense. Intersegment sales and transfers are not significant. 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.
Summarized segment financial information is shown in the following
table. Net assets of discontinued operations, which are excluded from total
assets in the following table, totaled $218.1 million and $278.3 million at
September 30, 2000 and December 31, 1999, respectively.
Corporate and
Oilfield Other Total
------------- -------------- --------------
Revenues
Three months ended September 30, 2000 $ 1,273.6 $ - $ 1,273.6
Three months ended September 30, 1999 $ 1,117.6 $ - $ 1,117.6
Nine months ended September 30, 2000 $ 3,605.3 $ - $ 3,605.3
Nine months ended September 30, 1999 $ 3,442.8 $ - $ 3,442.8
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Corporate and
Oilfield Other Total
------------- -------------- --------------
Segment profit (loss)
Three months ended September 30, 2000 $ 167.6 $ (62.8) $ 104.8
Three months ended September 30, 1999 $ 81.6 $ (55.7) $ 25.9
Nine months ended September 30, 2000 $ 388.4 $ (165.7) $ 222.7
Nine months ended September 30, 1999 $ 309.7 $ (130.8) $ 178.9
Total assets
As of September 30, 2000 $ 6,332.2 $ 408.9 $ 6,741.1
As of December 31, 1999 $ 6,297.7 $ 463.8 $ 6,761.5
The components of the "Corporate and Other" segment profit (loss) are
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- ------- -------
Corporate expenses $ (20.3) $ (23.0) $ (75.8) $ (71.3)
Interest-net (41.1) (38.9) (124.1) (114.3)
Unusual credit 1.7 6.2 20.1 39.5
Gain (loss) on trading securities (3.1) - 14.1 -
Nonrecurring item reflected in SG&A - - - 15.3
------- ------- ------- -------
Total $ (62.8) $ (55.7) $(165.7) $(130.8)
======= ======= ======= =======
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.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Certain information with respect to the discontinued operations of
Baker Process is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
Revenue $ 80.2 $ 90.1 $ 244.8 $ 301.1
=========== ========== ========== ==========
Allocated interest expense (1.6) (1.9) (5.7) (5.7)
=========== ========== ========== ==========
Loss before income taxes - (5.3) - (11.4)
Benefits for income taxes - 1.9 - 3.7
----------- ---------- ---------- ----------
Loss from discontinued operations of Baker Process $ - $ (3.4) $ - $ (7.7)
=========== ========== ========== ==========
As of As of
September 30, December 31,
------------- ------------
2000 1999
------------- ------------
Current assets $ 176.3 $ 234.9
Noncurrent assets 159.2 185.8
----------- -----------
Total assets 335.5 420.7
----------- -----------
Current liabilities 104.6 132.0
Noncurrent liabilities 12.8 10.4
----------- -----------
Total liabilities 117.4 142.4
----------- -----------
Net assets of Baker Process $ 218.1 $ 278.3
=========== ===========
NOTE 8. SALE/LEASEBACK TRANSACTION
In September 2000, the Company sold four facilities and realized net
proceeds of approximately $117.7 million. The proceeds were used to repay
outstanding indebtedness. The facilities were leased back from the purchaser
over a period of 15 years at current market rates. The resulting gain on the
sale was deferred and is being amortized over the life of the lease.
NOTE 9. WESTERN GECO VENTURE
On September 6, 2000, the Company announced the signing of a definitive
agreement with Schlumberger Limited ("Schlumberger") for the purpose of creating
a 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. On October 30, 2000, the Company announced that the waiting
period with respect to the formation of the venture provided by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, was
terminated.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 10. SUBSEQUENT EVENTS
In October 2000, the Company's Board of Directors approved, in
principle, the Company's plan to substantially exit the oil and gas exploration
business. The Company subsequently announced that it has sold its interests in
its China oil and gas properties, has signed an agreement to sell its Gulf of
Mexico properties and is negotiating the sale of an additional property. The
proceeds from these sales are expected to be approximately $53 million and will
be used to repay outstanding indebtedness. The Company will also write off its
remaining undeveloped exploration properties. As a result of these sales and
write-offs, the Company expects to record an after-tax loss of approximately $75
million in the fourth quarter of 2000. The Company intends to retain its
interest in the OPL-230 property in Nigeria.
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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
The Company has eight divisions that, for segment reporting, 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 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 CONTROL: the degree to which OPEC nations and other
large producing countries are willing and able to increase or
restrict production and exports of crude oil.
o GLOBAL ECONOMIC GROWTH: particularly in Japan, China, South Korea
and the developing areas of Asia where the correlation between
energy demand and economic growth is strong.
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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.
o WEATHER: demand for oil and natural gas is impacted by variations
in temperatures as compared with normal weather patterns.
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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---------- ----------- ---------- ----------
West Texas Intermediate Crude ($/bbl) $ 31.65 $ 21.43 $ 29.83 $ 17.28
U.S. Spot Natural Gas ($/mcf) $ 4.49 $ 2.48 $ 3.57 $ 2.10
During the three months ended September 30, 2000 oil prices averaged
$31.65/bbl, ranging from a low of $27.43/bbl to a high of $37.21/bbl. Oil prices
increased from prior year levels due to a resurgence of worldwide demand growth
led by a recovery of certain Asian markets coupled with lower production from
non-OPEC countries. The resulting decrease in global oil inventories
(particularly in North America) provided stronger price support.
U.S. natural gas prices strengthened in the three months ended
September 30, 2000 compared with the three months ended September 30, 1999,
averaging $4.49/mcf and ranging from a low of $3.58/mcf to a high of $5.33/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 September 1999. The price increase was
sustained by concerns that the industry would not be able to fill storage to
historic average levels by the end of the normal injection season and that
natural gas would be in short supply for the winter of 2000/2001.
Rotary Rig Counts
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
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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. The Baker Hughes rotary
rig counts are summarized in the table below as averages for the periods
indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
-------------- ------------- ------------ ----------
U.S. - Land 829 533 728 469
U.S. - Offshore 154 104 137 102
Canada 313 250 335 213
Latin America 247 185 216 183
----- ----- ----- -----
Western Hemisphere 1,543 1,072 1,416 967
----- ----- ----- -----
North Sea 51 37 44 41
Other Europe 39 40 38 43
Africa 47 38 44 44
Middle East 161 136 153 141
Asia Pacific 149 129 137 142
----- ----- ----- -----
Eastern Hemisphere 447 380 416 411
----- ----- ----- -----
Worldwide 1,990 1,452 1,832 1,378
===== ===== ===== =====
U.S. Workover 1,027 849 1,034 784
===== ===== ===== =====
Outlook
While reading the Company's outlook set forth below, caution is advised
that the factors described above in "-Forward-Looking Statements" and "-Business
Environment" could negatively impact the Company's expectations for oil demand,
oil and gas prices, and drilling activity.
Oil - Through the balance of 2001, oil prices are expected to be influenced by
winter weather and OPEC's willingness and ability to control production to
achieve its price targets. Possible scenarios include:
o A combination of a colder-than-normal winter and insufficient
supply from OPEC could result in oil prices exceeding $35 per
barrel in the fourth quarter of 2000 and first quarter of 2001.
Such high oil prices could contribute to a global economic
slowdown in the second half of 2001, which could result in reduced
demand and prices that could fall below $20 per barrel by the end
of 2001.
o If OPEC is willing and able to control production and can adjust
production to meet its price targets, then oil prices could
moderate from $28 to $32 per barrel through the winter of
2000/2001 and trade between $25 and $27 per barrel for the balance
of 2001.
o If OPEC increases production in the winter of 2000/2001 but is
unwilling or unable to decrease production in 2001, prices
could moderate from $28 to $32 per barrel through the winter of
2000/2001 and trade between $22 and $25 per barrel throughout the
balance of 2001.
Natural Gas - U. S. natural gas prices are expected to remain strong throughout
2000 and into 2001 averaging between $3.75/mcf and $5.50/mcf because of
continued low storage levels, increased demand and reduced supply throughout the
winter of 2000/2001 and into the 2001 injection season.
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Customer Spending - Based upon the Company's discussions with its major
customers, customer spending directed at developing North American natural gas
is expected to increase 10-15% in 2001 as compared with 2000, but will be
limited by the availability of drilling rigs, crews and oilfield services in
North America; and customer spending directed at developing oil supplies is
expected to increase 15-20%, primarily outside of North America.
CERTAIN TRANSACTIONS
The words "expects", "expected", "intends", "will" and similar words
in "Certain Transactions" are intended to identify Forward-Looking Statements.
The Company's expectation regarding the time of its divesture of its
Baker Process division is only its expectation regarding this matter. The actual
time may differ materially from the stated expectation and is dependent on a
number of factors including the following: the receipt of bids from potential
purchasers that the Company deems adequate in terms and value for the division
or parts thereof; the conclusion of definitive agreements with any potential
bidders for the business; the satisfaction or waiver of all conditions to
closing contained in any such agreements; the results of operations of the
division and the division's financial condition; and the decision on whether to
sell the entire division as one business or to sell portions of the business to
multiple bidders.
The Company's expectation that the closing of the formation of its
Western GECO venture with Schlumberger Limited will be in the fourth quarter of
2000 is only its forecast regarding this matter. This forecasted date may be
different from the actual date of closing, which is dependent on the following
events: the attainment of all requisite regulatory approvals under applicable
foreign law for the transaction to be completed; the lapse of all regulatory
waiting periods under applicable foreign law for the transaction to close;
execution by both parties of a definitive agreement with respect to certain
employee matters; and the satisfaction or waiver of all conditions to closing
contained in the Master Formation Agreement dated September 6, 2000, between the
Company, Schlumberger Limited and certain of their respective affiliates.
The Company's expectations regarding the amount of proceeds that it
will receive from sales of certain of its exploration and production properties
and the size of the after tax loss that the Company may incur as a result of the
sales and the write-off of the residual value of certain other of the properties
are only its estimates of these amounts. These forecasts may be substantially
different from actual results, which are affected by the following matters: the
successful satisfaction or waiver of all conditions to closing of the sale of
the Company's Gulf of Mexico properties to Pioneer and the completion of that
sale; the negotiation of a definitive agreement to sell certain of the
properties to a third party and the successful completion of the sale to that
party; and the successful resolution or satisfaction of any claims of third
party preferential rights to purchase, or bid for, the interests that the
Company is selling.
The Company's intent to maintain its interest in its Nigerion oil and
gas project is only its present intent with respect to this matter. The
Company's intent to hold or divest of this project could change in the future
depending on the relative value of the project or the value and viability of an
offer of a third party with respect to a proposed transaction regarding the
project.
Discontinued Operations
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division, which
manufacturers and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes. Accordingly, the net assets and operations of Baker Process
are reflected as discontinued operations. The Company has retained an
investment-banking firm to manage the sale process. The Company expects to
divest of Baker Process early in the year 2001. For further discussion see Note
7 of the Notes to Consolidated Condensed Financial Statements.
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Western GECO Venture
On September 6, 2000, the Company announced the signing of a definitive
agreement with Schlumberger Limited ("Schlumberger") for the purpose of creating
a 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. On October 30, 2000, the Company announced that the waiting
period with respect to the formation of the venture provided by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, was
terminated. The transaction is expected to close before the end of 2000.
Oil and Gas Properties
In October 2000, the Company's Board of Directors approved, in
principle, the Company's plan to substantially exit the oil and gas exploration
business. The Company subsequently announced that it has sold its interests in
its China oil and gas properties, has signed an agreement to sell its Gulf of
Mexico properties and is negotiating the sale of an additional property. The
proceeds from these sales are expected to be approximately $53 million and will
be used to repay outstanding indebtedness. The Company will also write off its
remaining undeveloped exploration properties. As a result of these sales and
write-offs, the Company expects to record an after-tax loss of approximately $75
million in the fourth quarter of 2000.
The Company intends to retain its interest in the OPL-230 property in
Nigeria. During the third quarter of 2000, the Company reached the cost recovery
threshold in its operating agreement with the operator, which will reduce future
pre-tax earnings to the Company by approximately $12 million per quarter at
current commodity pricing and production levels.
RESULTS OF CONTINUING OPERATIONS
Revenues
Revenues for the three months ended September 30, 2000 increased 14.0%
to $1,273.6 million compared with revenues of $1,117.6 million for the three
months ended September 30, 1999. Geographically, revenues in the Western
Hemisphere, which account for 56.8% of total consolidated revenues, and revenues
in the Eastern Hemisphere increased 14.0% and 13.9%, respectively, for the three
months ended September 30, 2000 compared with the three months ended September
30, 1999. These increases reflect the increased drilling activity in these
areas, as evidenced by a 43.9% increase in the Western Hemisphere rig count and
a 17.6% increase in the Eastern Hemisphere 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 and the Eastern Hemisphere
increased 31.1% and 15.5%, respectively, for the third quarter of 2000 compared
with the third quarter of 1999.
Revenues for the nine months ended September 30, 2000 of $3,605.3
million increased 4.7% compared with revenues of $3,442.8 million for the nine
months ended September 30, 1999. Revenues were impacted by the continuing
improvement in drilling activity levels, as evidenced by a 32.9% increase in the
rig count, offset by the ongoing weakness of the seismic market. Excluding
revenues from Western Geophysical, revenues for the nine months ended September
30, 2000 increased 12.3% compared with the nine months ended September 30, 1999.
Gross Margin
Gross margin for the three months ended September 30, 2000 and 1999 was
25.0% and 19.8%, respectively. Gross margin for the nine months ended September
30, 2000 and 1999 was 22.9% and 21.5%, respectively. The improvement in gross
margin percentages is the result of several factors, including pricing
improvements for the Company's products and services, primarily in North
America; significantly higher production levels and related pricing from oil
production; continued cost management measures throughout the Company and higher
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utilization of the Company's assets, including rental tool fleets and
manufacturing capacity. These improvements were offset somewhat by continued
weakness in the seismic business.
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 nine
months ended September 30, 2000 was 13.4% and 14.2%, respectively, compared with
14.5% and 14.1%, respectively, for the three and nine months ended September 30,
1999. Included in SG&A expense for the nine months ended September 30, 1999 is a
nonrecurring credit of $15.3 million related to the sale of certain net assets.
In addition, SG&A expense for the nine months ended September 30, 2000 includes
nonrecurring severance expense of $4.1 million in connection with the departure
of the Company's former chief executive officer. Excluding these items, SG&A
expense as a percentage of revenues for the nine months ended September 30, 2000
and 1999 was 14.1% and 14.5%, respectively. The decrease in SG&A expenses as a
percentage of consolidated revenues is primarily due to a higher revenue base
and increased net foreign exchange gains offset by increases in incentive and
other compensation expenses.
Merger Related Costs
In connection with the merger with Western Atlas Inc. in 1998, the
Company recorded merger related costs of $217.5 million. Cash provisions of the
merger related costs totaled $159.3 million. The actual cash payments made and
the remaining accrued balances at September 30, 2000 are summarized below:
Accrued Accrued
Balance at Amounts Balance at
December 31, Paid in September 30,
1999 2000 2000
--------------- -------------- --------------
Cash costs:
Transaction costs $ 1.3 $ (0.4) $ 0.9
Employee costs 10.8 (3.0) 7.8
Other merger integration costs 2.7 (0.7) 2.0
------------- ------------- -------------
Total $ 14.8 $ (4.1) $ 10.7
============= ============= =============
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 made, adjustments made
to the accruals during 2000 and the remaining accrued balances at September 30,
2000 are summarized below:
Accrued Accrued
Balance at Amounts Adjustments Balance at
December 31, Paid in in September 30,
1999 2000 2000 2000
------------- ------------ -------------- -------------
Cash charges:
Severance for approximately
800 employees $ 10.3 $ (6.5) $ (1.1) $ 2.7
Lease termination and other
contractual obligations 34.5 (18.3) (7.2) 9.0
Other cash charges 2.2 (0.6) - 1.6
------------- ------------- ------------- -------------
Total $ 47.0 $ (25.4) $ (8.3) $ 13.3
============= ============= ============= =============
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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,
adjustments to the accruals during 2000 and the remaining accrued balances at
September 30, 2000 are summarized below:
Accrued Accrued
Balance at Amounts Adjustments Balance at
December 31, Paid in in September 30,
1999 2000 2000 2000
------------- ------------ -------------- -------------
Cash costs:
Severance for approximately
5,200 employees $ 1.3 $ (0.9) $ - $ 0.4
Integration costs, abandoned leases
and other contractual obligations 5.9 (2.3) - 3.6
Environmental accruals 0.9 (0.9) - -
Other cash costs (includes litigation
accruals) 10.1 (2.5) (4.2) 3.4
------------- ------------- ------------- ----------
Total $ 18.2 $ (6.6) $ (4.2) $ 7.4
============= ============= ============= ==========
Interest Expense
Interest expense for the three months ended September 30, 2000
increased $1.9 million compared with the three months ended September 30, 1999.
This increase was due to slightly higher weighted average interest rates offset
by lower average debt levels.
Interest expense for the nine months ended September 30, 2000 increased
$7.0 million compared with the nine months ended September 30, 1999. This
increase was due to higher average 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 nine months ended September 30, 2000,
the Company recorded gains (losses) of $(3.1) million and $14.1 million,
respectively, related to these holdings. As of September 30, 2000, the Company
has disposed of all of its Varco holdings.
Income Taxes
The effective income tax rate for the three months ended September 30,
2000 and 1999 was 36.4% and 35.9%, respectively. The increase in the effective
income tax rate is related to higher taxes from nonrecurring items.
The effective income tax rate for the nine months ended September 30,
2000 and 1999 was 34.4% and 25.2%, respectively. 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 net tax benefit of $18.1
million. Excluding this nonrecurring item, the effective income tax rate for the
nine months ended September 30, 1999 was 35.3%.
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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 $413.0 million and $384.3 million for the nine months ended September 30,
2000 and 1999, respectively. The increase in cash flow is due to increased
activity levels.
Investing Activities
Net cash outflows from investing activities of continuing operations
were $249.9 million and $405.3 million for the nine months ended September 30,
2000 and 1999, respectively. The decrease is due to reduced expenditures for
capital assets of $75.3 million and proceeds of $72.7 million from the sale of
the Company's Varco holdings. Additionally, proceeds from the disposal of assets
generated $93.2 million and $120.2 million for the nine months ended September
30, 2000 and 1999, respectively. Proceeds from the sale of the MPD unit at
Hughes Christensen and the Norward unit at Baker Atlas generated $34.4 million
in the nine months ended September 30, 2000.
The Company currently expects 2000 capital expenditures to be
approximately $640.0 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 (outflows) from financing activities of continuing
operations were $(124.3) million and $35.4 million for the nine months ended
September 30, 2000 and 1999, respectively. The reduction in cash flow is due to
the decrease in total debt outstanding from $2,814.1 million at December 31,
1999 to $2,649.5 million at September 30, 2000. The decrease in debt is
primarily due to the repayment of $163.7 million in indebtedness with the
proceeds from the sale of various assets as described above in "Investing
Activities" and the $117.7 million in proceeds from the sale/leaseback
transaction that occurred in September 2000. The Company sold and subsequently
leased back four facilities for a period of 15 years. The resulting gain was
deferred and is being amortized over the life of the lease.
At September 30, 2000, the Company had $1,465.2 million of credit
facilities with commercial banks, of which $962.5 million was committed. These
facilities are subject to normal banking terms and conditions that do not
significantly restrict the Company's activities. The debt to equity ratio was
0.86 at September 30, 2000 compared with 0.92 at December 31, 1999.
ACCOUNTING STANDARDS
Derivative and Hedge Accounting
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). The Statement, as amended, is required to be adopted in years beginning
after June 15, 2000. The Company will adopt the new Statement effective January
1, 2001. The statement establishes accounting and reporting standards for
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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. The Company has substantially completed
a review of its contracts that may be derivatives or that may include embedded
derivatives. Based on this review, the Company has identified a limited number
of these contracts that may have to be accounted for under SFAS No. 133.
Additionally, the Company has minimal use of traditional derivative instruments.
Based on these factors, management does not anticipate that the adoption of the
new Statement will have a significant effect on the Company's results of
operations or its financial position.
Revenue Recognition
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes the SEC Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Based upon
a review of its sales process, the Company noted that its products and services
are generally sold based upon an authorized purchase order or contract with the
buyer, which is consistent with industry practices. The purchase orders and
contracts contain fixed or determinable prices and generally do not include any
rights of return, cancellation or other similar clauses. Revenue is recognized
when the products are delivered, title passes or the services have been rendered
and when collectibility is reasonably assured based upon the Company's normal
credit terms. The Company believes that its revenue recognition policy is
substantially in compliance with SAB101, and that the adoption of the provisions
of SAB 101 in the fourth quarter of 2000 will not have a material impact on the
Company's results of operations or its financial position.
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, 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. Alternatively, the Company may
make certain modifications to its legacy computer systems, or replace them, to
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address certain Euro conversion issues, pending full implementation of SAP R/3.
The Company currently expects to begin converting its legacy currency based
financial records to the Euro beginning in January 2001 with all significant
records converted by September 30, 2001.
In addition, the Company has substantially completed the implementation
of a new cash management system that 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", "will", "may" , and "expects" are intended to
identify Forward-Looking Statements 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 failure of the Company to implement SAP R/3 or another Euro
compliant computer system in a geographic location that prices in Euros, 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
At September 30, 2000, the Company had outstanding a crude oil swap
agreement and two crude oil collar agreements to hedge against price risk
associated with production in its E&P Solutions division. As designated hedges,
gains or losses on these derivatives will offset gains or losses on crude oil
production resulting from market changes.
Under the swap agreement, 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 October to December 2000, with an
average swap price of $24.74. If the Company were to settle the contract at
September 30, 2000, the Company would incur a loss of $3.9 million. The
agreement expires in December 2000.
The two collar agreements will settle monthly based upon the average of
the closing settlement price for the first nearby month futures contract for
West Texas Intermediate crude oil on the NYMEX on each trading day during the
month. The notional volume hedged was 200,000 bbl/month for January to March
2001, with a ceiling of $35.00 and a floor of $27.00. For April to June 2001,
the notional volume hedged was 200,000 bbl/month, with a ceiling of $33.00 and a
floor of $27.00. At September 30, 2000 these contracts had a fair market value
of $0.3 million.
At September 30, 2000, the Company had Australian Dollar denominated
commitments of $6.1 million primarily related to the purchase of seismic
equipment. The Company entered into forward exchange contracts with notional
amounts of $6.1 million as a hedge to these commitments. At September 30, 2000,
the fair market value of these contracts was $5.8 million.
Certain borrowings of the Company are denominated in currencies other
than its functional currency. At September 30, 2000, these nonfunctional
currency borrowings totaled $4.4 million with exposures between the U.S. Dollar
and the Euro, the British Pound, the Saudi Riyal, 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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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 Baker Hughes
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
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 From 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.
A report on Form 8-K was filed with the Commission on September 7,
2000, reporting that the Company had signed a definitive Master
Formation Agreement with Schlumberger Limited for the purpose of
creating a seismic venture to be called Western GECO.
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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: November 13, 2000 By /s/ G. STEPHEN FINLEY
------------------------------------------
Sr. Vice President - Finance and
Administration and Chief Financial Officer
Date: November 13, 2000 By /s/ ALAN J. KEIFER
------------------------------------------
Vice President and Controller
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule