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, 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 November 2, 2001
Common Stock, $1.00 par value per share 335,874,634 shares
INDEX
<Table>
<Caption>
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - Three months and nine months ended
September 30, 2001 and 2000 2
Consolidated Condensed Balance Sheets - September 30, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Cash Flows - Nine months ended
September 30, 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION 19
</Table>
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues $ 1,436.0 $ 1,353.7 $ 4,006.5 $ 3,850.0
------------ ------------ ------------ ------------
Costs and expenses:
Cost of revenues 1,008.8 1,019.5 2,860.6 2,976.8
Selling, general and administrative 214.9 188.1 616.8 565.9
Unusual charge (credit) (3.4) (1.7) 3.6 (25.4)
------------ ------------ ------------ ------------
Total 1,220.3 1,205.9 3,481.0 3,517.3
------------ ------------ ------------ ------------
Operating income 215.7 147.8 525.5 332.7
Equity in income of affiliates 19.6 0.6 38.9 1.9
Interest expense (30.5) (43.8) (96.9) (132.0)
Interest income 1.1 0.9 2.9 1.9
Gain (loss) on trading securities -- (3.1) -- 14.1
------------ ------------ ------------ ------------
Income before income taxes, extraordinary loss 205.9 102.4 470.4 218.6
and cumulative effect of accounting change
Income taxes (68.8) (37.2) (157.7) (75.3)
------------ ------------ ------------ ------------
Income before extraordinary loss and cumulative 137.1 65.2 312.7 143.3
effect of accounting change
Extraordinary loss (net of $0.8 income tax benefit) -- -- (1.5) --
Cumulative effect of accounting change (net of $0.5
income tax expense) -- -- 0.8 --
------------ ------------ ------------ ------------
Net income $ 137.1 $ 65.2 $ 312.0 $ 143.3
============ ============ ============ ============
Basic earnings per share:
Income before extraordinary loss and cumulative
effect of accounting change $ 0.41 $ 0.20 $ 0.93 $ 0.43
Extraordinary loss -- -- -- --
Cumulative effect of accounting change -- -- -- --
------------ ------------ ------------ ------------
Net income $ 0.41 $ 0.20 $ 0.93 $ 0.43
============ ============ ============ ============
Diluted earnings per share:
Income before extraordinary loss and cumulative
effect on accounting change $ 0.41 $ 0.20 $ 0.92 $ 0.43
Extraordinary loss -- -- -- --
Cumulative effect of accounting change -- -- -- --
------------ ------------ ------------ ------------
Net income $ 0.41 $ 0.20 $ 0.92 $ 0.43
============ ============ ============ ============
Cash dividends per share $ 0.115 $ 0.115 $ 0.345 $ 0.345
============ ============ ============ ============
</Table>
See accompanying notes to consolidated condensed financial statements.
2
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
<Table>
<Caption>
September 30, December 31,
2001 2000
------------- -------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 37.2 $ 34.6
Accounts receivable, net 1,415.8 1,310.4
Inventories 1,073.8 898.5
Other current assets 261.5 243.1
------------- -------------
Total current assets 2,788.3 2,486.6
------------- -------------
Investment in affiliates 897.8 869.3
Property, net 1,340.3 1,378.7
Goodwill and other intangibles, net 1,461.8 1,498.1
Other assets 233.8 220.0
------------- -------------
Total assets $ 6,722.0 $ 6,452.7
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 589.1 $ 469.3
Short-term borrowings and current portion of long-term debt 12.8 13.3
Accrued employee compensation 282.8 250.6
Other current liabilities 307.6 254.6
------------- -------------
Total current liabilities 1,192.3 987.8
------------- -------------
Long-term debt 1,822.1 2,049.6
Deferred income taxes 245.5 158.6
Other long-term liabilities 197.1 210.0
Stockholders' equity:
Common stock 335.8 333.7
Capital in excess of par value 3,108.8 3,065.7
Retained earnings (accumulated deficit) 95.0 (101.3)
Accumulated other comprehensive loss (274.6) (251.4)
------------- -------------
Total stockholders' equity 3,265.0 3,046.7
------------- -------------
Total liabilities and stockholders' equity $ 6,722.0 $ 6,452.7
============= =============
</Table>
See accompanying notes to consolidated condensed financial statements.
3
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<Table>
<Caption>
Nine Months Ended
September 30,
-------------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 312.0 $ 143.3
Adjustments to reconcile net income to net cash flow from operating
activities:
Depreciation, depletion and amortization 251.2 474.8
Provision for deferred income taxes 60.9 42.8
Loss on extinguishment of debt 2.3 --
Gain on disposal or sale of assets (21.1) (48.9)
Gain on trading securities -- (14.1)
Equity in income of affiliates (38.9) (1.9)
Change in accounts receivable (115.5) (78.0)
Change in inventories (177.4) (53.0)
Change in accounts payable 116.6 2.8
Change in accrued employee compensation and other current liabilities 93.6 22.3
Change in deferred revenue and other long-term liabilities (13.5) (14.5)
Changes in other assets and liabilities (13.3) (76.5)
---------- ----------
Net cash flows from operating activities 456.9 399.1
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (204.7) (452.2)
Proceeds from disposal or sale of assets 55.9 141.3
Proceeds from sale of trading securities -- 72.7
---------- ----------
Net cash flows from investing activities (148.8) (238.2)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) from commercial paper and short-term debt 72.1 (167.0)
Net proceeds from sale/leaseback -- 117.7
Repayment of indebtedness (301.8) --
Proceeds from issuance of common stock 45.1 35.7
Dividends (115.7) (114.0)
---------- ----------
Net cash flows from financing activities (300.3) (127.6)
---------- ----------
Effect of foreign exchange rate changes on cash (5.2) (2.5)
---------- ----------
Increase in cash and cash equivalents 2.6 30.8
Cash and cash equivalents, beginning of period 34.6 15.6
---------- ----------
Cash and cash equivalents, end of period $ 37.2 $ 46.4
========== ==========
Income taxes paid $ 63.2 $ 84.8
Interest paid $ 98.6 $ 141.9
</Table>
See accompanying notes to consolidated condensed financial statements.
4
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. 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
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 or
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
5
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
the fair value of derivatives used as cash flow hedges are immediately
recognized in earnings. The Company is not currently hedging any of its net
investments in foreign operations.
During the three months ended September 30, 2001, the Company had two
interest rate swaps that qualified as fair value hedges. They were fully
effective, resulting in no net gain or loss recorded in the consolidated
condensed statement of operations.
During the three months ended September 30, 2001, the Company entered into
two crude oil contracts (costless collars) and several foreign currency forward
contracts. During the three months ended September 30, 2001, the Company
recorded a gain of $3.8 million ($2.5 million after tax) in revenue in the
consolidated condensed statement of operations to recognize the effect of
recording the two crude oil contracts at fair value.
NOTE 3. 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:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income $ 137.1 $ 65.2 $ 312.0 $ 143.3
Other comprehensive income (loss):
Foreign currency translation adjustments 16.1 (30.3) (23.2) (73.1)
Adoption of SFAS No. 133 -- -- 1.2 --
Loss on derivative instruments -- -- (1.2) --
------------ ------------ ------------ ------------
Total comprehensive income $ 153.2 $ 34.9 $ 288.8 $ 70.2
============ ============ ============ ============
</Table>
Total accumulated other comprehensive loss consisted of the following:
<Table>
<Caption>
September 30, December 31,
2001 2000
------------- -------------
Foreign currency translation adjustments $ (268.3) $ (245.1)
Pension adjustment (6.3) (6.3)
------------- -------------
Total accumulated other comprehensive loss $ (274.6) $ (251.4)
============= =============
</Table>
NOTE 4. UNUSUAL ITEMS
During the third quarter of 2001, the Company recognized a pre-tax gain of
$3.4 million on the disposition of its interest in a joint venture. The Company
received net proceeds of $6.0 million that were used to repay outstanding
indebtedness.
During the first quarter of 2001, the Company recorded an unusual charge of
$7.0 million. The cash portion of the charge was $6.0 million and consisted of
severance for approximately 100 employees relating to the restructuring of the
Baker Process operations in Germany. No payments were made during the first
quarter of 2001, $0.3 million was paid during the second quarter of 2001 and
$0.4 million was paid during the third quarter of 2001. Based on current
estimates, the Company expects that $0.6 million of the accrued severance will
be paid during the fourth quarter of 2001, with the remainder paid during 2002
as the employees leave the Company.
During the third quarter of 2000, the Company recognized a pre-tax gain of
$1.7 million on the sale of a product line. The Company received net proceeds of
$11.2 million that were used to repay outstanding indebtedness.
6
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
During the second quarter of 2000, the Company recognized a pre-tax gain of
$11.2 million on the sale of two product lines. The Company received net
proceeds of $31.4 million that were used to repay outstanding indebtedness. The
Company also recorded an unusual credit of $12.5 million from net reductions to
unusual charge accruals recorded in 1999 and prior years to reflect the current
estimates of remaining expenditures. The net reductions primarily related to
severance accruals and accruals for lease obligations. These items are reflected
as unusual credits in the consolidated condensed statement of operations.
During the three and nine months ended September 30, 2000, the Company
recorded pre-tax gains (losses) of $(3.1) million and $14.1 million,
respectively, related to its holdings in Varco International, Inc. ("Varco"). As
of September 30, 2000, the Company had disposed of all of its Varco holdings.
NOTE 5. EXTRAORDINARY LOSS
On May 28, 2001, the Company redeemed its outstanding Liquid Yield Options
Notes ("LYONS") at a redemption price of $786.13 per $1,000 principal amount,
for a total of $301.8 million. The redemption was funded through the issuance of
commercial paper. In connection with the early extinguishment of debt, the
Company recorded an extraordinary loss of $2.3 million ($1.5 million after tax)
which represents the write-off of the remaining debt issuance costs.
NOTE 6. EARNINGS PER SHARE ("EPS")
A reconciliation of the number of shares used for the basic and diluted EPS
calculation is as follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Weighted average common shares outstanding for basic
EPS 335.8 331.2 335.5 330.5
Effect of dilutive securities - stock plans 1.5 2.6 2.0 1.9
------------ ------------ ------------ ------------
Adjusted weighted average common shares outstanding for
diluted EPS 337.3 333.8 337.5 332.4
============ ============ ============ ============
Future potentially anti-dilutive shares excluded from diluted EPS:
Options with option price greater than market price 5.1 3.6 4.6 3.7
LYONS convertible into common stock -- 7.2 -- 7.2
</Table>
NOTE 7. INVENTORIES
Inventories are comprised of the following:
<Table>
<Caption>
September 30, December 31,
2001 2000
------------- ------------
Finished goods $ 857.2 $ 706.0
Work in process 95.1 82.0
Raw materials 121.5 110.5
------------ ------------
Total $ 1,073.8 $ 898.5
============ ============
</Table>
7
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. 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 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
its investments in 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. On October 30,
2001, the Company contributed certain assets and liabilities of this product
line to a new entity in exchange for cash, notes receivable and an ownership
interest in the new entity.
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.
<Table>
<Caption>
Oilfield Process Other Total
------------ ------------ ------------ ------------
REVENUES
Three months ended September 30, 2001 $ 1,348.8 $ 87.2 $ -- $ 1,436.0
Three months ended September 30, 2000 $ 1,273.5 $ 80.2 $ -- $ 1,353.7
Nine months ended September 30, 2001 $ 3,762.8 $ 243.7 $ -- $ 4,006.5
Nine months ended September 30, 2000 $ 3,605.3 $ 244.7 $ -- $ 3,850.0
SEGMENT PROFIT (LOSS)
Three months ended September 30, 2001 $ 263.2 $ (2.6) $ (54.7) $ 205.9
Three months ended September 30, 2000 $ 167.6 $ (0.6) $ (64.6) $ 102.4
Nine months ended September 30, 2001 $ 669.8 $ (9.9) $ (189.5) $ 470.4
Nine months ended September 30, 2000 $ 388.4 $ (3.5) $ (166.3) $ 218.6
TOTAL ASSETS
As of September 30, 2001 $ 5,842.0 $ 337.3 $ 542.7 $ 6,722.0
As of December 31, 2000 $ 5,597.9 $ 332.3 $ 522.5 $ 6,452.7
</Table>
8
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the details of "Other" segment loss:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Corporate expenses $ (28.7) $ (20.3) $ (91.9) $ (75.7)
Interest, net (29.4) (42.9) (94.0) (130.1)
Unusual (charge) credit 3.4 1.7 (3.6) 25.4
Gain (loss) on trading securities -- (3.1) -- 14.1
------------ ------------ ------------ ------------
Total $ (54.7) $ (64.6) $ (189.5) $ (166.3)
============ ============ ============ ============
</Table>
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. Business
combinations accounted for under the pooling of interest method prior to June
30, 2001 will not be changed. The adoption of SFAS No. 141 by the Company will
not have an impact on the balance sheet, statement of operations or cash flows
of the Company.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired in a business combination and the accounting for
goodwill and other intangible assets subsequent to their acquisition. SFAS No.
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment. SFAS No. 142 requires that a
transitional impairment test be performed within six months of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle. The Company has not completed its analysis of
the impact of the adoption of SFAS No. 142 on its consolidated financial
statements. The Company will adopt SFAS No. 142 for its fiscal year beginning
January 1, 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS No. 143 on its consolidated financial statements. The Company
will adopt SFAS No. 143 for it fiscal year beginning January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets and modifies the accounting and
reporting of discontinued operations. The Company currently expects there to be
no impact on the Company's consolidated financial statements upon adoption of
SFAS No. 144. The Company will adopt SFAS No. 144 for its fiscal year beginning
January 1, 2002.
9
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SUBSEQUENT EVENT
On October 30, 2001, the Company and Sequel Holdings, Inc. ("Sequel")
created an entity to operate under the name of Petreco, Inc. ("Petreco"). The
Company contributed approximately $19.0 million of net assets of the refining
and production product line of its Baker Process segment to Petreco. In
conjunction with the transaction, the Company received $9.0 million in cash, two
promissory notes totaling $10.0 million, and an ownership interest consisting of
100% of the common stock of Petreco, which represents 49% of the voting power of
Petreco. Sequel has an ownership interest in Petreco consisting of 100% of the
Series A Preferred Stock, which represents 51% of the voting power of Petreco.
Petreco profits would be shared by the Company and Sequel in 49% and 51%
interests, respectively. Sequel is entitled to a liquidation preference upon the
liquidation or sale of Petreco. The amount of the promissory notes is subject to
adjustment resulting from achieving certain financial targets in 2001. The
Company will account for its ownership in Petreco using the equity method and
does not expect to recognize any gain or loss from the initial formation of the
entity due to the Company's material continued involvement in the operations of
Petreco.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the Company's
consolidated condensed financial statements and the related notes thereto.
FORWARD-LOOKING STATEMENTS
MD&A includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (each a "Forward-Looking Statement"). The words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"forecasts," "will," "could," "may" and similar expressions, 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, acts of war or
terrorism, 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. On October 30, 2001, the
Company contributed certain assets and liabilities of this product line to a new
entity in exchange for cash, notes receivable and an ownership interest in the
new entity.
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.
Key factors currently influencing the worldwide crude oil and gas markets
are:
o Production control: the degree to which OPEC nations and other large
producing countries, such as Mexico, Norway, and Russia, are willing and
able to control production and exports of crude oil.
11
o Global economic growth: particularly the impact of the U.S. and Western
European economies and economic activity in Japan, China, South Korea and
the developing areas of Asia where the correlation between energy demand
and economic growth is strong.
o Oil and gas storage inventories: relative to historic levels.
o Technological progress: in the design and application of new products that
allow oil and gas companies to drill fewer wells and to drill, complete and
produce wells faster and at lower cost.
o Maturity of the resource base: of known hydrocarbon reserves in the
maturing provinces of the North Sea, U.S., Canada and Latin America.
o The pace of new investment: access to capital and the reinvestment of
available cash flow into existing and emerging markets.
o Price volatility: the impact of widely fluctuating commodity prices on the
stability of the market and subsequent impact on customer spending.
o The potential for supply disruption: from key oil exporting countries,
including, but not limited to, Iraq, Saudi Arabia, and other Middle Eastern
countries, due to political or military activity.
o Weather: the impact of variations in temperatures as compared with normal
weather patterns and the related effect on demand for oil and natural gas.
o Acts of Terrorism: the recent terrorist attacks on the United States have
had a variety of adverse effects on business, financial and general
economic conditions in the U.S. and elsewhere. In addition, the complete
U.S. response to these attacks is unknown. At this time, the Company is not
able to predict the nature, extent and duration of these effects, if any,
on the Company's business and finances.
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.
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Crude Oil, US Spot Prices, WTI, Cushing ($/Bbl) $ 27.07 $ 31.65 $ 27.92 $ 29.83
Natural Gas, US Spot Prices, Henry Hub ($/MMBtu) $ 2.69 $ 4.49 $ 4.43 $ 3.57
</Table>
During the three months ended September 30, 2001, oil prices averaged $27.07
per barrel, ranging from a weekly low of $23.43 per barrel to a high of $29.89
per barrel. Slower economic growth and higher OPEC production levels contributed
to an increase in inventories and a moderation in oil prices. Although oil
prices fell in the three months ended September 30, 2001 compared with the three
months ended September 30, 2000, prices were generally above OPEC's
self-declared target zone.
During the three months ended September 30, 2001, natural gas prices
averaged $2.69/MMBtu, down significantly compared with the $4.49/MMBtu average
price for the three months ended September 30, 2000. Weekly prices during the
third quarter of 2001 ranged from a high of $3.23/MMBtu to a low of $1.82/MMBtu.
The decline in natural gas prices was driven by a decline in demand for natural
gas, slowing U.S. economic growth and reduced storage injection demand, offset
only partially by increased demand from fuel switching back to natural gas. A
modest increase in production also
12
contributed to the decline in prices. By the end of the quarter, it became
apparent that natural gas storage levels at the beginning of the winter
2001/2002 withdrawal season would likely approach historic highs.
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 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.
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
U.S. - Land 1,093 829 1,046 728
U.S. - Offshore 149 154 161 137
Canada 323 313 363 335
----------- ----------- ----------- -----------
North America 1,565 1,296 1,570 1,200
----------- ----------- ----------- -----------
Latin America 264 247 265 216
North Sea 57 51 55 44
Other Europe 39 39 38 38
Africa 53 47 54 44
Middle East 186 161 177 153
Asia Pacific 158 149 155 137
----------- ----------- ----------- -----------
Outside North America 757 694 744 632
----------- ----------- ----------- -----------
Worldwide 2,322 1,990 2,314 1,832
=========== =========== =========== ===========
U.S. Workover Rigs 1,227 1,027 1,233 1,034
=========== =========== =========== ===========
</Table>
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 fourth quarter of 2001, oil prices are expected to be
influenced primarily by expectations for U.S. and world economies and OPEC's
willingness and ability to control production to achieve its price targets.
Other factors that could influence prices include changes in non-OPEC oil
supply, exports of oil from Iraq, political- or military-based supply
disruptions, and weather. Oil prices are expected to weaken throughout the
fourth quarter of 2001 and into the first half of 2002. If OPEC is willing and
able to act aggressively to support prices and if the U.S. and world economies
do not weaken significantly, the decline is likely to be more modest. On the
other hand, if OPEC is unwilling or unable to act aggressively to support prices
and if the U.S. and world economies weaken, oil prices could weaken
significantly.
Natural Gas - U. S. natural gas prices are expected to average between
$2.50-$3.30/MMBtu in the fourth quarter of 2001 with possible weather-driven
price spikes above or below this range. In the fourth quarter of 2001 and
throughout 2002, prices are expected to be influenced by U.S. economic activity,
particularly in those industrial segments of the U.S. economy that consume
natural gas; demands for electricity; deviations of the weather from normal
patterns; the natural gas storage levels at the end of the winter 2001/2002
withdrawal season; and expectations regarding the ability of the industry to
inject enough gas during the summer of 2002 to meet demands during the winter of
2002/2003. Lower natural gas prices in the second half of 2002 are expected to
result in decreased North American natural gas-directed drilling activity in the
fourth quarter of 2001 and into the first half of 2002, which is, in turn,
expected to result in reduced North American natural gas production capacity.
13
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:
o North America - In the fourth quarter of 2001, customer spending is
expected to decrease from the third quarter of 2001. Spending in North
America is expected to be down 15-20% in 2002 compared with 2001.
o Outside North America - Customer spending directed at developing oil
supplies is expected to continue to increase modestly through the fourth
quarter of 2001 and into the first half of 2002.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three months ended September 30, 2001 increased 6.1% to
$1,436.0 million compared with revenues of $1,353.7 million for the three months
ended September 30, 2000. Excluding revenues from Western Geophysical, the
Company's seismic division that was contributed to a venture in November 2000,
revenues increased 22.4% for the three months ended September 30, 2001 compared
with the three months ended September 30, 2000.
Oilfield revenues, excluding Western Geophysical, increased 23.4% to
$1,348.8 million for the three months ended September 30, 2001 compared with
revenues of $1,092.6 million for the three months ended September 30, 2000.
Geographically, Oilfield revenues in North America, which account for 45.5% of
total Oilfield revenues, increased 35.0% for the three months ended September
30, 2001 compared with the three months ended September 30, 2000. This increase
reflects the increased drilling activity in this area, as evidenced by a 20.8%
increase in the North American rig count, and improved pricing for the Company's
products and services. Outside North America, Oilfield revenues increased 15.2%
for the three months ended September 30, 2001 compared with the three months
ended September 30, 2000. This increase reflects the ongoing improvement in
international drilling activity, particularly in Latin America, the North Sea,
the Middle East and Asia Pacific.
Revenues for the nine months ended September 30, 2001 increased 4.1% to
$4,006.5 million compared with revenues of $3,850.0 million for the nine months
ended September 30, 2001. Excluding revenues from Western Geophysical, revenues
increased 22.4% for the nine months ended September 30, 2001 compared with the
nine months ended September 30, 2000. Revenues were impacted by significantly
higher drilling activity levels worldwide and improved pricing for the Company's
products and services.
GROSS MARGIN
Gross margin for the three months ended September 30, 2001 and 2000 was
29.7% and 24.7%, respectively. Excluding Western Geophysical, gross margin for
the three months ended September 30, 2001 and 2000 was 29.7% and 26.1%,
respectively. Gross margin for the nine months ended September 30, 2001 and 2000
was 28.6% and 22.7%, respectively. Excluding Western Geophysical, gross margin
for the nine months ended September 30, 2001 and 2000 was 28.6% and 25.0%,
respectively. The improvements in gross margin are primarily the result of
pricing improvements for the Company's products and services, primarily in North
America, and higher utilization of the Company's assets. In addition,
productivity gains at every Oilfield division and continued cost management
measures throughout the Company contributed to the improvement.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense as a percentage of
consolidated revenues was 15.0% and 13.9%, for the three months ended September
30, 2001 and 2000, respectively. Excluding Western Geophysical, SG&A expense as
a percentage of consolidated revenues for the three months ended September 30,
2001 and 2000 was 15.0% and 15.1%, respectively. SG&A expense as a percentage of
consolidated revenues for the nine months ended September 30, 2001 and 2000 was
15.4% and 14.7%, respectively. Excluding Western Geophysical, SG&A expense as a
percentage of consolidated revenues for the nine months ended September 30, 2001
and 2000 was 15.4% and 16.6%, respectively. These decreases in SG&A expense as a
percentage of consolidated revenues are primarily due to a higher revenue base
and the fact that SG&A expenses are generally more fixed in nature.
14
UNUSUAL CHARGES
2001
During the third quarter of 2001, the Company recognized a pre-tax gain of
$3.4 million on the disposition of its interest in a joint venture. The Company
received net proceeds of $6.0 million that were used to repay outstanding
indebtedness.
During the first quarter of 2001, the Company recorded an unusual charge of
$7.0 million. The cash provision of the charge totaled $6.0 million and
consisted of severance costs for approximately 100 employees relating to the
restructuring of the Baker Process operations in Germany. No payments were made
during the first quarter of 2001, $0.3 million was paid in the second quarter of
2001, and $0.4 million was paid in the third quarter of 2001. Based on current
estimates, the Company expects that $0.6 million of the accrued severance will
be paid during the fourth quarter of 2001, with the remainder paid during 2002
as the employees leave the Company.
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, $5.2 million has been paid through September 30, 2001.
The remaining accrual will be paid out as the employees leave the Company or
according to the contractual obligations.
INTEREST EXPENSE
Interest expense for the three and nine months ended September 30, 2001
decreased $13.3 million and $35.1 million, respectively, compared with the three
and nine months ended September 30, 2000. These decreases were primarily due to
lower debt levels. Average commercial paper and money market borrowings for the
three and nine months ended September 30, 2001 were $365.8 million and $283.3
million, respectively, compared with average commercial paper and money market
borrowings for the three and nine months ended September 30, 2000 of $988.9
million and $1,042.5 million, respectively. The reduction in commercial paper
and money market borrowings from corresponding prior year periods was primarily
due to the cash proceeds received from the formation of Western GECO in November
2000 and cash flow from operations.
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
three and nine months ended September 30, 2000, the Company recorded pre-tax
gains (losses) of $(3.1) million and $14.1 million, respectively. As of
September 30, 2000, the Company had disposed of all of its Varco holdings.
INCOME TAXES
The effective income tax rate for the three months ended September 30, 2001
and 2000 was 33.4% and 36.3%, respectively. The effective income tax rate for
the nine months ended September 30, 2001 and 2000 was 33.5% and 34.4%,
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 $456.9 million and $399.1
million for the nine months ended September 30, 2001 and 2000, respectively. The
increase in cash flow is primarily due to increased profitability and improved
balance sheet management.
15
INVESTING ACTIVITIES
Net cash outflows from investing activities were $148.8 million and $238.2
million for the nine months ended September 30, 2001 and 2000, respectively.
Expenditures for capital assets totaled $204.7 million and $452.2 million
for the nine months ended September 30, 2001 and 2000, respectively. Excluding
Western Geophysical, expenditures for capital assets were $204.7 million and
$205.7 million for the nine months ended September 30, 2001 and 2000,
respectively. The Company currently expects 2001 capital expenditures to be
between $300.0 million to $315.0 million excluding any acquisitions. Funds
provided from operations and available lines of credit are expected to be
adequate to meet future capital expenditure requirements.
Proceeds from the disposal or sale of assets generated $55.9 million and
$141.3 million for the nine months ended September 30, 2001 and 2000,
respectively. Proceeds from the sale of the Company's Varco holdings generated
$72.7 million in the nine months ended September 30, 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 from financing activities were $300.3 million and $127.6
million for the nine months ended September 30, 2001 and 2000, respectively.
On May 28, 2001, the Company redeemed its outstanding Liquid Yield Options
Notes at a redemption price of $786.13 per $1,000 principal amount, for a total
of $301.8 million. The redemption was funded through the issuance of commercial
paper. The Company anticipates that the redemption will not have a significant
impact on interest expense in future periods.
Total debt outstanding at September 30, 2001 was $1,834.9 million compared
with $2,062.9 million at December 31, 2000. Debt was repaid using cash flow from
operations and $55.9 million in proceeds from the disposal or sale of assets.
The debt to equity ratio was 0.56 at September 30, 2001 compared with 0.68 at
December 31, 2000.
At September 30, 2001, the Company had $1,278.3 million of credit facilities
with commercial banks, of which $800.5 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.
16
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 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
completed or will complete implementation of SAP R/3 in its major European
operations prior to December 31, 2001. In operations where SAP R/3 will not be
implemented, the Company will make certain modifications to its legacy computer
systems, or replace them, to address certain Euro conversion issues. The Company
began converting certain legacy currency based financial records to the Euro
beginning in January 2001, and as of October 31, 2001, had completed a
conversion of all significant operations. The financial records of the remaining
operations are expected to be converted by December 15, 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.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
During the quarter, the Company entered into two crude oil contracts
(costless collars) to mitigate price risk associated with the Company's interest
in an oil producing property in Nigeria. Both contracts used Dated Brent as the
reference commodity. The Company entered into the first contract on August 2,
2001. This contract established a cap of $27.00 and a floor of $23.25 for the
five-month period ending December 31, 2001. The Company entered into the second
contract on September 14, 2001. This contract established a cap of $27.50 and a
floor of $23.50 for the six-month period ending June 30, 2002. The fair market
value of these contracts at September 30, 2001 resulted in an asset of $1.1
million and an asset $2.7 million, respectively. Due to the value of the
contracts and the Company's opinion that current oil prices would not be
sustainable, the Company elected to terminate these contracts prior to their
maturity date. Accordingly, both contracts were terminated on October 3, 2001,
and the Company received a cash payment of $4.4 million.
At September 30, 2001, the Company had entered into foreign currency forward
contracts with notional amounts of $0.4 million, $5.1 million and $0.8 million
to hedge exposure to currency fluctuations in the Euro, Canadian Dollar and
Indonesian Rupiah, respectively. At September 30, 2001, the fair market value of
these forward contracts, based on quoted market prices for contracts with
similar terms and maturity dates, was a $0.2 million liability.
Certain borrowings of the Company are denominated in currencies other than
its functional currency. At September 30, 2001, these nonfunctional currency
borrowings totaled $14.7 million with exposures primarily between the U.S.
Dollar and the Euro, the Saudi Riyal, the Brazilian Real and the Thai Baht. A
10% appreciation of the U.S. Dollar against these currencies would not have a
significant effect on the future earnings of the Company.
18
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 dismissed this suit in March 2001, and
the plaintiffs filed an appeal with respect to the dismissal in April 2001 in
the U.S. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.2 Bylaws, as amended on October 25, 2001.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed with the Commission on July 6,
2001, reporting the issuance of a press release whereby the Company had
offered to consent to the entry of a cease-and-desist order with the U.S.
Securities and Exchange Commission.
A Current Report on Form 8-K was filed with the Commission on September
12, 2001, reporting the issuance by the Commission of the order in the
Administrative Proceeding related to the matter reported in the Current
Report on Form 8-K filed on July 6, 2001.
19
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, 2001 By: /s/ G. STEPHEN FINLEY
------------------------------------------
Sr. Vice President - Finance and
Administration and Chief Financial Officer
(principal financial officer)
Date: November 13, 2001 By: /s/ ALAN J. KEIFER
------------------------------------------
Vice President and Controller
(principal accounting officer)
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.2 Bylaws, as amended on October 25, 2001.