1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9397
BAKER HUGHES INCORPORATED
(a Delaware Corporation)
76-0207995
3900 Essex Lane
Houston, Texas 77027
Registrant's telephone number, including area code: (713) 439-8600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 5, 2001
Common Stock, $1.00 par value per share 335,646,991 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 ended
March 31, 2001 and 2000 2
Consolidated Condensed Balance Sheets - March 31, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Cash Flows - Three months ended
March 31, 2001 and 2000 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 17
PART II - OTHER INFORMATION 18
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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 March 31,
----------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
Revenues $ 1,228.5 $ 1,240.8
- -----------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 890.0 988.7
Selling, general and administrative 203.2 192.2
Unusual charge, net 7.0 --
- -----------------------------------------------------------------------------------------------------------
Total 1,100.2 1,180.9
- -----------------------------------------------------------------------------------------------------------
Operating income 128.3 59.9
Equity in income of affiliates 10.5 --
Interest expense (34.1) (44.2)
Interest income 1.4 0.5
Gain on trading securities -- 7.1
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting change 106.1 23.3
Income taxes (35.8) (7.9)
- -----------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 70.3 15.4
Cumulative effect of accounting change (net of $0.5 income tax expense) 0.8 --
- -----------------------------------------------------------------------------------------------------------
Net income $ 71.1 $ 15.4
===========================================================================================================
Basic earnings per share:
Income before cumulative effect of accounting change $ 0.21 $ 0.04
Cumulative effect of accounting change -- --
- -----------------------------------------------------------------------------------------------------------
Net income $ 0.21 $ 0.04
===========================================================================================================
Diluted earnings per share:
Income before cumulative effect of accounting change $ 0.21 $ 0.04
Cumulative effect of accounting change -- --
- -----------------------------------------------------------------------------------------------------------
Net income $ 0.21 $ 0.04
===========================================================================================================
Cash dividends per share $ 0.115 $ 0.115
===========================================================================================================
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
(Unaudited)
March 31, December 31,
2001 2000
- ------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35.5 $ 34.6
Accounts receivable, net 1,257.0 1,310.4
Inventories 972.3 898.5
Other current assets 221.6 243.1
- ------------------------------------------------------------------------------------------------
Total current assets 2,486.4 2,486.6
- ------------------------------------------------------------------------------------------------
Investment in affiliates 878.2 869.3
Property, net 1,339.2 1,378.7
Goodwill and other intangibles, net 1,481.1 1,498.1
Other assets 274.5 220.0
- ------------------------------------------------------------------------------------------------
Total assets $6,459.4 $6,452.7
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 467.8 $ 469.3
Short-term borrowings and current portion of long-term debt 12.0 13.3
Accrued employee compensation 201.0 250.6
Other current liabilities 307.8 254.6
- ------------------------------------------------------------------------------------------------
Total current liabilities 988.6 987.8
- ------------------------------------------------------------------------------------------------
Long-term debt 2,022.5 2,049.6
Deferred income taxes 152.0 158.6
Other long-term liabilities 208.9 210.0
Stockholders' equity:
Common stock 335.6 333.7
Capital in excess of par value 3,104.3 3,065.7
Accumulated deficit (68.7) (101.3)
Accumulated other comprehensive loss (283.8) (251.4)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 3,087.4 3,046.7
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,459.4 $6,452.7
================================================================================================
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended March 31,
----------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 71.1 $ 15.4
Adjustments to reconcile net income to net cash flow from operating
activities:
Depreciation, depletion and amortization 87.3 168.1
Provision (benefit) for deferred income taxes 3.8 (7.1)
Gain on disposal of assets (6.4) (17.7)
Loss on sale of product line 1.0 --
Gain on trading securities -- (7.1)
Equity in income of affiliates (10.5) --
Change in accounts receivable 51.0 (58.8)
Change in inventories (77.2) (12.8)
Change in accounts payable 2.2 (26.9)
Change in accrued employee compensation and other current liabilities 1.4 (6.8)
Change in deferred revenue and other long-term liabilities (1.1) 15.1
Changes in other assets and liabilities (59.0) 29.6
- ---------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 63.6 91.0
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (52.7) (196.5)
Proceeds from disposal of assets 13.9 28.6
Proceeds from sale of product line 1.4 --
Proceeds from sale of trading securities -- 34.3
- ---------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (37.4) (133.6)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) from commercial paper, revolving credit
facilities and short-term debt (27.3) 94.3
Proceeds from issuance of common stock 42.2 4.4
Dividends (38.5) (38.0)
- ---------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (23.6) 60.7
- ---------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (1.7) (2.4)
- ---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 0.9 15.7
Cash and cash equivalents, beginning of period 34.6 15.6
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 35.5 $ 31.3
=========================================================================================================
Income taxes paid $ 16.1 $ 23.4
Interest paid $ 36.8 $ 52.0
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements of Baker Hughes
Incorporated and its subsidiaries (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, 2000. 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 (LOSS)
Comprehensive income (loss) 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 (loss), net of related tax, are
as follows:
Three Months Ended
March 31,
------------------
2001 2000
- -------------------------------------------------------------------------------
Net income $71.1 $15.4
Other comprehensive income (loss):
Foreign currency translation adjustments (32.6) (15.9)
Net gain on derivative instruments 0.2 --
- -------------------------------------------------------------------------------
Total comprehensive income (loss) $38.7 $(0.5)
===============================================================================
Total accumulated other comprehensive loss consisted of the following:
March 31, December 31,
---------------------------
2001 2000
- --------------------------------------------------------------------------------
Foreign currency translation adjustments $(277.7) $(245.1)
Pension adjustment (6.3) (6.3)
Net gain on derivative instruments 0.2 --
- --------------------------------------------------------------------------------
Total accumulated other comprehensive loss $(283.8) $(251.4)
================================================================================
NOTE 3. DERIVATIVE INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and SFAS No. 138. 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
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
derivative and its effectiveness, 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 adoption of SFAS No. 133 on January 1, 2001 resulted
in a gain of $0.8 million, net of tax, recorded as the cumulative effect of an
accounting change in the consolidated condensed statement of operations and a
gain of $1.2 million, net of tax, recorded in accumulated other comprehensive
income.
The Company monitors its exposure to various business risks including
commodity price, foreign exchange rate and interest rate risks and occasionally
uses derivative financial instruments to manage the impact of certain of these
risks. The Company's policies do not permit the use of derivative financial
instruments for speculative purposes. The Company uses forward exchange
contracts and currency swaps to hedge certain firm commitments and transactions
denominated in foreign currencies. The Company uses interest rate swaps to
manage interest rate risk. The Company also uses crude oil swaps and collars to
hedge price risk associated with the Company's crude oil production.
At the inception of any new derivatives, the Company designates the
derivative as a cash flow hedge or fair value hedge. The Company documents all
relationships between hedging instruments and the hedged items, as well as its
risk management objectives and strategy for undertaking various hedge
transactions. The Company assesses whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows of
the hedged item at both the inception of the hedge and on an ongoing basis.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or a hedge of the net investment in foreign
operations. A fair value hedge is a hedge of a recognized asset or liability on
an unrecognized firm commitment. Both the effective and ineffective portions of
the changes in the fair value of the derivative, along with the gain or loss on
the hedged item, are recorded in earnings and reported in the consolidated
condensed statements of operations on the same line as the hedged item. A cash
flow hedge is a hedge of a forecasted transaction or the variability of cash
flows to be received or paid in the future related to a recognized asset or
liability. The effective portion of the changes in the fair value of the
derivative is recorded in accumulated other comprehensive income. When the
hedged item is realized, the gain or loss included in accumulated other
comprehensive income is reported on the same line in the consolidated condensed
statements of operations as the hedged item. In addition, both the fair value
changes excluded from the Company's effectiveness assessments and the
ineffective portion of the changes in the fair value of derivatives used as cash
flow hedges are immediately recognized in earnings. The Company does not hedge
any of its net investments in foreign operations.
At March 31, 2001, the Company had one interest rate swap that qualified as a
fair value hedge. It was fully effective, resulting in no net gain or loss
recorded in the consolidated condensed statement of operations.
At March 31, 2001, the Company had one remaining crude oil contract (costless
collar) and two foreign currency forward contracts. These contracts qualified as
cash flow hedges. During the first quarter of 2001, the Company recorded a loss
of $1.5 million ($1.0 million after tax) in accumulated other comprehensive
income to recognize the effective portion of its cash flow hedges. In addition,
the Company recorded a loss of $0.8 million ($0.5 million after tax) in revenue
in the consolidated condensed statement of operations to recognize the
ineffective portion of its cash flow hedges. The gain of $0.2 million recorded
in accumulated other comprehensive income as of March 31, 2001 will be
reclassified into earnings in the second quarter of 2001 upon maturity of all
three of these contracts.
NOTE 4. UNUSUAL ITEMS
During the first quarter of 2001, the Company recorded unusual charges of
$7.0 million summarized below:
Severance for approximately 100 employees $6.0
Loss on sale of a product line 1.0
-----------------------------------------------------
Total $7.0
=====================================================
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
The severance relates to the restructuring of the Baker Process operations in
Germany. The employee groups to be terminated will be marketing, manufacturing,
engineering, field service and support personnel. The amount accrued for
severance is based upon the positions eliminated and the Company's written
severance policy or applicable legal requirements and does not include any
portion of the employees' salary through their severance dates. No payments were
made during the first quarter of 2001. Based on current estimates, the Company
expects that all of the accrued severance will be paid during 2001.
During the first quarter of 2000, the Company recorded a pre-tax gain of $7.1
million, including $2.7 million of unrealized gains, related to its holdings in
Varco International, Inc.
NOTE 5. EARNINGS PER SHARE ("EPS")
A reconciliation of the number of shares used for the basic and diluted EPS
calculation is as follows:
Three Months Ended
March 31,
------------------
2001 2000
- ---------------------------------------------------------------------------------------------
Weighted average common shares outstanding for basic EPS 335.0 329.9
Effect of dilutive securities - stock plans 2.6 0.7
- ---------------------------------------------------------------------------------------------
Adjusted weighted average common shares outstanding for diluted EPS 337.6 330.6
=============================================================================================
Anti-dilutive shares excluded from diluted EPS:
Options with option price greater than market price 2.3 3.6
Liquid Yield Options Notes convertible into common stock 7.2 7.2
NOTE 6. INVENTORIES
Inventories are comprised of the following:
March 31, December 31,
2001 2000
- --------------------------------------------------------------------------------
Finished goods $771.6 $706.0
Work in process 88.4 82.0
Raw materials 112.3 110.5
- --------------------------------------------------------------------------------
Total $972.3 $898.5
================================================================================
NOTE 7. SEGMENT AND RELATED INFORMATION
The Company has eight divisions that have separate management teams and
infrastructures that offer different products and services. The divisions have
been aggregated into two reportable segments, "Oilfield" and "Process".
The Oilfield segment consists of six divisions - Baker Atlas, Baker Hughes
INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes Christensen -
that manufacture and sell equipment and provide services used in the drilling,
completion, production and maintenance of oil and gas wells and in reservoir
measurement and evaluation. They have been aggregated because the long-term
financial performance of these divisions is affected by similar economic
conditions and the consolidated results are evaluated regularly by the chief
operating decision makers in deciding how to
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
allocate resources and in assessing performance. The principal markets for this
segment include all major oil and gas producing regions of the world including
North America, Latin America, Europe, Africa, the Middle East and the Far East.
Customers include major multi-national, independent and national oil companies.
The Oilfield segment also includes the Company's interest in an oil and gas
property in Nigeria and equity in income of affiliates.
The Process segment consists of two divisions - Bird Machine Company and
EIMCO Process Equipment - that manufacture and sell process equipment for
separating solids from liquids and liquids from liquids through filtration,
sedimentation, centrifugation and flotation processes. The principal markets for
this segment include all regions of the world where there are significant
industrial, chemical, and municipal wastewater applications and base metals
activity. Customers include municipalities, contractors, engineering companies
and pulp and paper, minerals, industrial and oil and gas producers. The Process
segment also includes a refining and production product line.
The Company evaluates the performance of its segments based on income before
income taxes, accounting changes, unusual items and interest income and expense.
Intersegment sales and transfers are not significant.
Summarized segment financial information is shown in the following table. The
"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.
Oilfield Process Other Total
- -----------------------------------------------------------------------------------------------
REVENUES
- -----------------------------------------------------------------------------------------------
Three months ended March 31, 2001 $1,156.2 $ 72.3 $ -- $1,228.5
Three months ended March 31, 2000 $1,157.4 $ 83.4 $ -- $1,240.8
SEGMENT PROFIT (LOSS)
- -----------------------------------------------------------------------------------------------
Three months ended March 31, 2001 $ 183.1 $ (5.4) $ (71.6) $ 106.1
Three months ended March 31, 2000 $ 91.7 $ (2.5) $ (65.9) $ 23.3
TOTAL ASSETS
- -----------------------------------------------------------------------------------------------
As of March 31, 2001 $5,635.4 $ 316.3 $ 507.7 $6,459.4
As of December 31, 2000 $5,597.9 $ 332.3 $ 522.5 $6,452.7
The following table presents the details of " Other" segment loss:
Three Months Ended
March 31,
------------------
2001 2000
- -------------------------------------------------------------------------------
Corporate expenses $(31.9) $(29.3)
Interest, net (32.7) (43.7)
Unusual charge, net (7.0) --
Gain on trading securities -- 7.1
- -------------------------------------------------------------------------------
Total $(71.6) $(65.9)
===============================================================================
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 8. SUBSEQUENT EVENT
On April 26, 2001, the Company announced that it was calling its outstanding
Liquid Yield Options Notes ("LYONS") due 2008 for redemption on May 28, 2001, at
a redemption price of $786.13 per $1,000 principal amount at maturity. As of the
redemption date, if all of the outstanding LYONS are redeemed, the total amount
that the Company would pay to the holders of the LYONS would be $302.9 million.
Prior to the redemption date, holders of the LYONS have the right to convert
each $1,000 principal amount at maturity of the LYONS into 18.599 shares of the
Company's common stock. If all of the holders of the LYONS converted their LYONS
into shares of the Company's common stock prior to the redemption date, the
Company would issue 7.2 million shares. The Company intends to fund the cash it
needs for the redemption through the issuance of commercial paper.
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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 each with separate management teams and
infrastructures that offer different products and services. The divisions have
been aggregated into two reportable segments - "Oilfield" and "Process".
The Oilfield segment currently consists of six divisions - Baker Atlas, Baker
Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen - that manufacture and sell equipment and provide related services
used in exploring for, developing and producing hydrocarbon reserves. The
Oilfield segment also includes the Company's interest in an oil and gas property
in Nigeria.
The Process segment consists of two divisions - Bird Machine Company and
EIMCO Process Equipment - that manufacture and sell process equipment for
separating solids from liquids and liquids from liquids through filtration,
sedimentation, centrifugation and flotation processes. The Process segment also
includes a refining and production product line.
The business environment for the Company's Oilfield segment 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.
Additionally, 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 markets
are:
- - Production control: 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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- - Global economic growth: particularly the impact of a slowing U.S. economy on
economic activity in Japan, China, South Korea and the developing areas of
Asia where the correlation between energy demand and economic growth is
strong.
- - Oil and gas storage inventories: relative to historic levels.
- - 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.
- - Maturity of the resource base: of known hydrocarbon reserves in the maturing
provinces of the North Sea, U.S., Canada and Latin America.
- - The pace of new investment: access to capital and the reinvestment of
available cash flow into existing and emerging markets.
- - Price volatility: the impact of widely fluctuating commodity prices on the
stability of the market and subsequent impact on customer spending.
- - Weather: the impact of variations in temperatures as compared with normal
weather patterns and the related effect on demand for oil and natural gas.
OIL AND GAS PRICES
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 gas. Accordingly, changes in
these expenditures will normally result in increased or decreased demand for the
Company's products and services in its Oilfield segment. Crude oil and natural
gas prices are summarized in the table below as averages of the daily closing
prices during each of 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 and gas demand, oil and gas prices and
drilling activity.
Three Months Ended
March 31,
------------------
2001 2000
- --------------------------------------------------------------------------------
Crude Oil, US Spot Prices, WTI, Cushing ($/Bbl) $28.75 $28.85
Natural Gas, US Spot Prices, Henry Hub ($/MMBtu) 6.45 2.53
During the three months ended March 31, 2001, oil prices averaged $28.75 per
barrel, ranging from a low of $25.96 per barrel to a high of $32.19 per barrel.
Oil prices were unchanged compared with the first quarter of 2000 as a
resurgence in worldwide demand led by a recovery of Asian markets, coupled with
lower production levels from non-OPEC countries, led to continued low global
inventory levels. The resulting low global oil inventories, particularly in
North America, provided stronger price support and increased stability in the
market.
U.S. natural gas prices increased in the three months ended March 31, 2001
compared with the three months ended March 31, 2000, averaging $6.45/MMBtu and
ranging from a low of $4.92/MMBtu to a high of $10.20/MMBtu. The increase in
average price and volatility is due to a reduction in available gas supply
brought about by the low levels of gas directed drilling in the U.S. during the
mid and late 1990's and an increase in demand for natural gas from continued
economic growth and the seasonally cold winter of 2000/2001. The price increase
was sustained by concerns that natural gas would be in short supply through the
2001 summer injection season and that target storage levels for the beginning of
the winter 2001/2002 withdrawal season would not be met.
ROTARY RIG COUNT
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
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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. The Company's rotary rig counts are
summarized in the table below as averages for each of the periods indicated and
are based on weekly rig counts for the U.S. and Canada and monthly rig counts
for all other areas.
Three Months Ended
March 31,
------------------
2001 2000
--------------------------------------------------------
U.S. - Land 974 647
U.S. - Offshore 167 124
Canada 510 473
--------------------------------------------------------
North America 1,651 1,244
--------------------------------------------------------
Latin America 261 189
North Sea 51 37
Other Europe 36 36
Africa 52 41
Middle East 172 143
Asia Pacific 149 130
--------------------------------------------------------
Outside North America 721 576
--------------------------------------------------------
Worldwide 2,372 1,820
--------------------------------------------------------
U.S. Workover Rigs 1,191 1,000
========================================================
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
primarily by expectations for U.S. economic growth and OPEC's willingness and
ability to control production to achieve its price targets. Other factors that
could influence prices include worldwide economic growth, changes in non-OPEC
oil supply and weather. Oil prices are expected to decrease slightly throughout
the year, trading between $25 and $28/Bbl. If OPEC is willing and able to act
aggressively to maintain prices, oil prices could be sustained between $29 and
$33/Bbl for the balance of the year. On the other hand, if OPEC experiences
difficulty in controlling production, oil prices could fall to $22/Bbl by the
end of 2001.
Natural Gas - U. S. natural gas prices are expected to remain strong
throughout 2001, averaging between $4.50/MMBtu and $6.00/MMBtu with price spikes
above this range caused by weather driven demand. Prices are expected to remain
strong because of continued low storage levels, increased demand and reduced
supply throughout the 2001 injection season and through the winter of 2001/2002.
Customer Spending - Based upon the Company's discussions with its major
customers and review of published industry surveys and reports, anticipated
customer spending trends are as follows:
- North America - customer spending directed at developing natural gas is
expected to increase 10-15% in 2001 as compared with 2000, but is likely
to be limited by the availability of drilling rigs, crews and oilfield
services in North America.
- Outside North America - customer spending directed at developing oil
supplies is expected to increase 15-20%.
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RESULTS OF OPERATIONS
REVENUES
Revenues for the three months ended March 31, 2001 decreased 1.0% to $1,228.5
million compared with revenues of $1,240.8 million for the three months ended
March 31, 2000. Excluding revenues from Western Geophysical, the Company's
seismic division that was contributed to a joint venture in November 2000,
revenues increased 19.7% for the three months ended March 31, 2001 compared with
the three months ended March 31, 2000.
Oilfield revenues, excluding Western Geophysical, increased 22.7% to $1,156.2
million for the three months ended March 31, 2001 compared with revenues of
$942.6 million for the three months ended March 31, 2000. Geographically,
revenues in North America, which account for 45.8% of total Oilfield revenues,
increased 31.9% for the three months ended March 31, 2001 compared with the
three months ended March 31, 2000. This increase reflects the increased drilling
activity in this area, as evidenced by a 32.7% increase in the North American
rig count, and improved pricing for the Company's products and services. Outside
North America, Oilfield revenues increased 15.8% for the three months ended
March 31, 2001 compared with the three months ended March 31, 2000. This
increase reflects the ongoing improvement in international drilling activity,
particularly in Latin America, the North Sea, the Middle East and Asia Pacific.
Process revenues decreased 13.5% to $72.3 million for the three months ended
March 31, 2001 compared with revenues of $83.4 million for the three months
ended March 31, 2000. The decrease is primarily due to decreased customer
spending as customers, fearing a potential economic slowdown, delayed
maintenance spending and reduced purchases of spare part inventories.
GROSS MARGIN
Gross margin for the three months ended March 31, 2001 and 2000 was 27.6% and
20.3%, respectively. Excluding Western Geophysical, gross margins for the three
months ended March 31, 2001 and 2000 were 27.6% and 24.1%, respectively. The
improvement in gross margin is the result of pricing improvements for the
Company's products and services, primarily in North America, continued cost
management measures throughout the Company and higher utilization of the
Company's assets, including rental tool fleets and manufacturing capacity.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense as a percentage of
consolidated revenues for the three months ended March 31, 2001 and 2000, was
16.5% and 15.5%, respectively. Excluding Western Geophysical, SG&A expense as a
percentage of consolidated revenues was 16.5% and 18.4%, respectively, for the
three months ended March 31, 2001 and 2000. This decrease in SG&A expense as a
percentage of consolidated revenues is primarily due to a higher revenue base
while general and administrative expenses remained flat and selling expenses
increased due to increased activity levels.
UNUSUAL CHARGES
2001
During the first quarter of 2001, the Company recorded unusual charges of
$7.0 million as summarized below:
Severance for approximately 100 employees $6.0
Loss on sale of a product line 1.0
-----------------------------------------------------------
Total $7.0
===========================================================
The severance relates to the restructuring of the Baker Process operations in
Germany. The employee groups to be terminated will be marketing, manufacturing,
engineering, field service and support personnel. The amount accrued for
severance is based upon the positions eliminated and the Company's written
severance policy or applicable legal requirements and does not include any
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portion of the employees' salary through their severance dates. No payments were
made during the first quarter of 2001. Based on current estimates, the Company
expects that all of the accrued severance will be paid during 2001.
2000
In October 2000, the Company's Board of Directors approved the Company's plan
to substantially exit the oil and gas exploration business, resulting in an
unusual charge of $105.0 million. The cash provision of the charge totaled $13.3
million and consisted of $5.5 million of severance costs for approximately 50
employees and $7.8 million for other contractual obligations. Of the total cash
charge of $13.3 million, $0.6 million was paid as of December 31, 2000. No
payments were made during the first quarter of 2001. Based on current estimates,
the Company expects that the majority of the remaining $12.7 million accrual
will be paid in 2001.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2001 totaled $34.1
million, a decrease of $10.1 million compared with the three months ended March
31, 2000. The decrease was primarily due to lower debt levels. Average
commercial paper and money market borrowings for the three months ended March
31, 2001 was $189.2 million compared with $1,082.0 million for the three months
ended March 31, 2000. The reduction in commercial paper and money market
borrowings was primarily due to the cash proceeds received from the formation of
Western GECO in November 2000.
GAIN ON TRADING SECURITIES
In the fourth quarter of 1999, the Company announced its intention to sell
its holdings of Varco International, Inc. ("Varco"), and reclassified these
holdings from available for sale securities to trading securities. During the
first quarter of 2000, the Company recorded pre-tax gains of $7.1 million,
including unrealized gains of $2.7 million, related to these holdings.
INCOME TAXES
The effective income tax rate for the three months ended March 31, 2001 and
2000 was 33.7%, and 33.9%, respectively. These rates differ from the statutory
income tax rate of 35.0% due to lower taxes from international operations
partially offset by the non-deductibility of certain goodwill amortization.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Net cash inflows from operating activities were $63.6 million and $91.0
million for the three months ended March 31, 2001 and 2000, respectively. The
reduction in cash flow is due to an increase in working capital due to increased
activity levels.
INVESTING ACTIVITIES
Net cash outflows from investing activities were $37.4 million and $133.6
million for the three months ended March 31, 2001 and 2000.
Expenditures for capital assets totaled $52.7 million and $196.5 million for
the three months ended March 31, 2001 and 2000, respectively. Excluding Western
Geophysical, expenditures for capital assets were $52.7 million and $91.7
million for the three months ended March 31, 2001 and 2000, respectively. The
decrease is primarily due to reduced expenditures for oil and gas properties as
a result of the Company's decision in 2000 to substantially exit the oil and gas
exploration business. The Company currently expects 2001 capital expenditures to
be between $300.0 million to $360.0 million excluding any acquisitions. Funds
provided from operations and outstanding lines of credit are expected to be
adequate to meet future capital expenditure requirements.
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Proceeds from the disposal of assets generated $13.9 million and $28.6
million for the three months ended March 31, 2001 and 2000, respectively.
Proceeds from the sale of the Company's Varco holdings generated $34.3 million
in the three months ended March 31, 2000.
The words "expected" and "expects" are intended to identify Forward-Looking
Statements in "Investing Activities". See "-Forward-Looking Statements" and
"-Business Environment" above for a description of risk factors related to these
Forward-Looking Statements.
FINANCING ACTIVITIES
Net cash (outflows) inflows from financing activities were $(23.6) million
and $60.7 million for the three months ended March 31, 2001 and 2000,
respectively. The decrease in cash flow is primarily due to the Company repaying
$27.3 million in commercial paper and short-term debt during the three months
ended March 31, 2001 compared with borrowing $94.3 million in commercial paper
and short-term debt during the three months ended March 31, 2000.
Total debt outstanding at March 31, 2001 was $2,034.5 million compared with
$2,062.9 million at December 31, 2000. The decrease in debt is primarily due to
payments on the Company's commercial paper and short-term borrowings with cash
flow from operations and $15.3 million in proceeds from the disposal of assets
and the sale of a product line. The debt to equity ratio was 0.66 at March 31,
2001 compared with 0.68 at December 31, 2000.
At March 31, 2001, the Company had $1,246.1 million of credit facilities with
commercial banks, of which $750.5 million was committed. These facilities are
subject to normal banking terms and conditions that do not significantly
restrict the Company's activities.
DERIVATIVE AND HEDGE ACCOUNTING
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and SFAS No. 138. 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 and its effectiveness, 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 adoption of SFAS No. 133 on January 1, 2001 resulted
in a gain of $0.8 million, net of tax, recorded as the cumulative effect of an
accounting change in the consolidated condensed statement of operations and a
gain of $1.2 million, net of tax, recorded in accumulated other comprehensive
income.
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 participating member countries. However, the legacy currencies
in those countries will continue to be used as legal tender through December 31,
2001. Thereafter, the legacy currencies will be canceled, and Euro bills and
coins will be used in the participating countries.
Most of the Company's products and services are essentially priced with
reference to the U.S. dollar. As a result, 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, both of which are short term in nature.
Longer term contracts 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 1997, the Company began a multi-year initiative designed to develop
and implement an enterprise-wide software system. The initiative, named "Project
Renaissance," utilizes SAP R/3 as its software platform across all
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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
December 31, 2001. Alternatively, 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. The Company began converting
certain legacy currency based financial records to the Euro beginning in January
2001 with all significant records expected to be converted by September 30,
2001.
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 words "anticipate", "will", "may", and "expects" are 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 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
On September 15, 2000, the Company entered into two crude oil contracts
(costless collars) to hedge price risk associated with the Company's interest in
an oil producing property in Nigeria. One crude oil contract matured on March
31, 2001. The remaining contract, which uses WTI-Nymex as the reference
commodity, establishes a cap of $33.00 and a floor of $27.00 for the three month
period ending June 30, 2001. The fair market value of these contracts at March
31, 2001 was a $0.8 million asset.
At March 31, 2001, the Company had entered into foreign currency forward
contracts with notional amounts of $20.0 million and $7.3 million to hedge
exposure to currency fluctuations in the British Pound and Canadian dollar,
respectively. At March 31, 2001, the fair market value of these forward
contracts, based on quoted market prices for contracts with similar terms and
maturity dates, was a $0.7 million liability.
Certain borrowings of the Company are denominated in currencies other than
its functional currency. At March 31, 2001, these nonfunctional currency
borrowings totaled $12.1 million with exposures between the U.S. Dollar and the
British Pound, the Saudi Riyal, the United Arab Emirates Dirham 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 that purported stockholders of the Company filed
shortly after the Company's announcement on December 8, 1999 regarding the
accounting issues that the Company discovered at its Baker Hughes INTEQ
division. These suits were consolidated into one lawsuit in the federal district
court for the Southern District of Texas pursuant to the Private Securities
Litigation Reform Act of 1995. The court has dismissed this suit, and the
plaintiffs have filed a notice of appeal with respect to the dismissal in the
Fifth Circuit Court of Appeals. The Company believes the allegations in this
suit are without merit and that the plaintiffs will be unsuccessful in their
appeal. The Company intends to vigorously contest the appeal and defend the suit
if the plaintiffs are successful on appeal. Even so, an adverse outcome on
appeal and in any subsequent litigation could have an adverse impact 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:
3.1 By-Laws, as amended on April 25, 2001
4.1 By-Laws (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001).
(b) Reports on Form 8-K:
A Current Report on Form 8-K/A was filed with the Commission on February
12, 2001, as an amendment to the Current Report on Form 8-K filed with the
Commission on December 14, 2000, amending the unaudited pro forma consolidated
condensed financial statements to reflect the formation of the venture.
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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: May 15, 2001 By: /s/G. STEPHEN FINLEY
------------------------------------------
Sr. Vice President - Finance and
Administration and Chief Financial Officer
Date: May 15, 2001 By: /s/ALAN J. KEIFER
------------------------------------------
Vice President and Controller
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- --------------------------
3.1 By-Laws, as amended on April 25, 2001
4.1 By-Laws (filed as Exhibit 3.1 to the Quarterly
Report on Form 10-Q for the quarterly period
ended March 31, 2001).