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, 2002
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
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0207995
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
3900 ESSEX LANE, SUITE 1200, HOUSTON, TEXAS
(Address of Principal Executive Offices)
77027
(Zip Code)
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 1, 2002
Common Stock, $1.00 par value per share 335,688,629, shares
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - Three months and nine months ended
September 30, 2002 and 2001 2
Consolidated Condensed Balance Sheets - September 30, 2002 and December 31, 2001 3
Consolidated Condensed Statements of Cash Flows - Nine months ended
September 30, 2002 and 2001 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2002 2001 2002 2001
==================================================================================================================================
Revenues $ 1,288.1 $ 1,384.4 $ 3,762.7 $ 3,872.6
- ----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 915.7 967.9 2,709.8 2,752.9
Selling, general and administrative 214.7 205.3 637.8 589.1
Restructuring charge - - (1.9) 6.0
Gain on disposal of assets - (3.4) - (2.4)
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,130.4 1,169.8 3,345.7 3,345.6
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 157.7 214.6 417.0 527.0
Equity in income of affiliates 1.5 19.6 20.5 38.9
Interest expense (27.2) (30.4) (83.0) (96.7)
Interest income 1.5 1.0 3.8 2.8
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 133.5 204.8 358.3 472.0
Income taxes (46.0) (68.4) (123.6) (158.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 87.5 136.4 234.7 313.8
Income (loss) from discontinued operations, net of tax (22.8) 0.7 (21.8) (1.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and cumulative effect of
accounting change 64.7 137.1 212.9 312.7
Extraordinary loss, net of tax - - - (1.5)
Cumulative effect of accounting change, net of tax - - (42.5) 0.8
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 64.7 $ 137.1 $ 170.4 $ 312.0
==================================================================================================================================
Basic earnings per share:
Income from continuing operations $ 0.26 $ 0.41 $ 0.70 $ 0.93
Income (loss) from discontinued operations (0.07) - (0.06) -
Extraordinary loss - - - -
Cumulative effect of accounting change - - (0.13) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.19 $ 0.41 $ 0.51 $ 0.93
==================================================================================================================================
Diluted earnings per share:
Income from continuing operations $ 0.26 $ 0.41 $ 0.69 $ 0.92
Income (loss) from discontinued operations (0.07) - (0.06) -
Extraordinary loss - - - -
Cumulative effect of accounting change - - (0.13) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.19 $ 0.41 $ 0.50 $ 0.92
==================================================================================================================================
Cash dividends per share $ 0.115 $ 0.115 $ 0.345 $ 0.345
==================================================================================================================================
See accompanying notes to consolidated condensed financial statements.
2
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
September 30,
2002 December 31,
(Unaudited) 2001
===============================================================================================================================
ASSETS
Current Assets:
Cash and cash equivalents $ 81.6 $ 45.4
Accounts receivable, net 1,204.3 1,302.3
Inventories 1,047.1 1,032.8
Other current assets 222.9 236.5
Assets of discontinued operations 94.3 118.6
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 2,650.2 2,735.6
- -------------------------------------------------------------------------------------------------------------------------------
Investment in affiliates 956.8 929.0
Property, net 1,363.0 1,362.5
Goodwill 1,229.1 1,248.3
Intangible assets, net 133.4 136.5
Other assets 250.3 264.3
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 6,582.8 $ 6,676.2
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 531.0 $ 540.5
Short-term borrowings and current portion of long-term debt 101.8 12.2
Accrued employee compensation 243.6 312.4
Other current liabilities 325.4 297.2
Liabilities of discontinued operations 42.1 50.4
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,243.9 1,212.7
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,446.3 1,682.4
Deferred income taxes 178.7 210.3
Other long-term liabilities 264.1 243.0
Stockholders' equity:
Common stock 336.1 336.0
Capital in excess of par value 3,120.0 3,119.3
Retained earnings 236.3 182.3
Accumulated other comprehensive loss (242.6) (309.8)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,449.8 3,327.8
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 6,582.8 $ 6,676.2
===============================================================================================================================
See accompanying notes to consolidated condensed financial statements.
3
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended September 30,
--------------------------------------
2002 2001
=================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 192.2 $ 313.1
Adjustments to reconcile income from continuing operations to net cash flows
from operating activities:
Depreciation, depletion and amortization 237.1 248.0
Provision for deferred income taxes 3.2 60.9
Loss on extinguishment of debt - 2.3
Cumulative effect of accounting change 42.5 0.8
Gain on disposal of assets (42.7) (21.1)
Equity in income of affiliates (20.5) (38.9)
Change in accounts receivable 128.1 (102.6)
Change in inventories 11.4 (181.7)
Change in accounts payable (42.4) 112.5
Change in accrued employee compensation and other current liabilities (59.6) 90.0
Change in other long-term liabilities 6.8 (13.4)
Changes in other assets and liabilities 46.8 (17.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from continuing operations 502.9 452.4
Net cash flows from discontinued operations 2.6 4.5
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 505.5 456.9
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets (210.8) (203.6)
Acquisition of businesses, net of cash acquired (39.7) -
Investment in affiliate (15.0) -
Proceeds from disposal of assets 63.1 55.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from continuing operations (202.4) (147.7)
Net cash flows from discontinued operations (0.8) (1.1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (203.2) (148.8)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of commercial paper and other short-term debt (161.6) 72.1
Repayment of indebtedness - (301.8)
Proceeds from termination of interest rate swap agreements 15.8 -
Proceeds from issuance of common stock 26.0 45.1
Repurchase of common stock (25.8) -
Dividends (116.4) (115.7)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from continuing operations (262.0) (300.3)
Net cash flows from discontinued operations - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (262.0) (300.3)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (4.1) (5.2)
- ---------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 36.2 2.6
Cash and cash equivalents, beginning of period 45.4 34.6
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 81.6 $ 37.2
=================================================================================================================================
Income taxes paid $ 82.0 $ 63.2
Interest paid $ 88.7 $ 98.6
See accompanying notes to consolidated condensed financial statements.
4
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. GENERAL
Nature of Operations
Baker Hughes Incorporated ("Baker Hughes") is engaged in the oilfield
services and continuous process industries. Baker Hughes is a major supplier of
wellbore related products, technology services and systems to the oil and gas
industry on a worldwide basis and provides products and services for drilling,
formation evaluation, completion and production of oil and gas wells. Baker
Hughes also manufactures, markets and services process equipment for separating
solids from liquids and liquids from liquids through filtration, sedimentation,
centrifugation and flotation processes to a wide range of markets.
Basis of Presentation
The unaudited consolidated condensed financial statements of Baker
Hughes 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, 2001. 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 July 2002, the Company signed a letter of intent for the sale of
EIMCO Process Equipment ("EIMCO"), a division of the Process segment. The
Company subsequently sold EIMCO in November 2002. Accordingly, all prior period
consolidated condensed financial statements and related notes thereto have been
restated to present the operations of EIMCO as a discontinued operation.
Certain reclassifications have been made to the prior periods'
consolidated condensed financial statements to conform with the current period
presentation, including reclassification of unusual charges to restructuring
charges or gain/loss on disposal of assets.
In the Notes to Consolidated Condensed Financial Statements, all dollar
and share amounts in tabulations are in millions of dollars and shares,
respectively, unless otherwise indicated.
5
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. DISCONTINUED OPERATIONS AND SUBSEQUENT EVENT
In November, the Company sold EIMCO, a division of the Process segment
and received total proceeds of $48.9 million, of which $4.9 million is held in
escrow pending completion of final adjustments of the purchase price. The
Company has restated the consolidated condensed financial statements for all
prior periods to present the operations of EIMCO as a discontinued operation.
Summarized financial information from the operations of EIMCO is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
==============================================================================================================================
Revenues $ 36.1 $ 51.6 $ 124.2 $ 133.9
==============================================================================================================================
Income (loss) before income taxes $ (2.4) $ 1.1 $ (0.8) $ (1.6)
Income tax benefit (provision) 0.8 (0.4) 0.2 0.5
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations of EIMCO (1.6) 0.7 (0.6) (1.1)
Loss on disposal:
Loss on write-down to fair value, net of
income taxes of $0.5 million (0.9) - (0.9) -
Recognition of cumulative foreign currency
translation adjustments in earnings (20.3) - (20.3) -
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ (22.8) $ 0.7 $ (21.8) $ (1.1)
==============================================================================================================================
Assets and liabilities of discontinued operations are as follows:
September 30, December 31,
2002 2001
===========================================================================================================
Accounts receivable, net $ 53.2 $ 63.0
Inventories 18.3 17.0
Other current assets 0.5 0.2
Property, net 5.6 8.8
Intangible assets, net 16.7 29.6
- -----------------------------------------------------------------------------------------------------------
Assets of discontinued operations $ 94.3 $ 118.6
===========================================================================================================
Accounts payable $ 25.7 $ 32.5
Accrued employee compensation 5.8 6.3
Other current liabilities 10.3 11.2
Other long-term liabilities 0.3 0.4
- -----------------------------------------------------------------------------------------------------------
Liabilities of discontinued operations $ 42.1 $ 50.4
===========================================================================================================
NOTE 3. ACQUISITIONS
In the first quarter of 2002, the Company acquired three businesses
within its Oilfield segment having an aggregate purchase price of $51.7
million, net of cash acquired. As a result of these acquisitions, the Company
recorded approximately $31.3 million of goodwill. The purchase prices were
allocated based on estimated fair values at the date of acquisition and may be
subject to change based on the final determination of the purchase price
allocations. Pro forma results of operations have not been presented because
the effects of these acquisitions were not material to the Company's
consolidated financial statements on either an individual or aggregate basis.
6
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
==============================================================================================================
Net income $ 64.7 $ 137.1 $ 170.4 $ 312.0
Other comprehensive income (loss):
Foreign currency translation adjustments:
Translation adjustments during period 35.2 16.1 87.5 (23.2)
Reclassifications included in net income due (20.3) - (20.3) -
to sale of EIMCO
Adoption of derivative accounting standard - - - 1.2
Loss on derivative instruments - - - (1.2)
- --------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 79.6 $ 153.2 $ 237.6 $ 288.8
==============================================================================================================
Total accumulated other comprehensive loss consisted of the following:
September 30, December 31,
2002 2001
==========================================================================================================
Foreign currency translation adjustments $ (230.4) $ (297.6)
Pension adjustment (12.2) (12.2)
- ----------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive loss $ (242.6) $ (309.8)
==========================================================================================================
NOTE 5. FINANCIAL INSTRUMENTS
The Company had two interest rate swap agreements that had been
designated and had qualified as fair value hedging instruments. During the
quarter ended September 30, 2002, the Company terminated the two agreements and
received payments totaling $15.8 million upon cancellation. The gains of $4.8
million and $11.0 million on the agreements will be amortized as a reduction of
interest expense over the remaining lives of the underlying debts, which mature
in June 2004 and January 2009, respectively.
At September 30, 2002, the Company had entered into two crude oil
contracts to mitigate price risk associated with production from the Company's
interest in an oil producing property in West Africa. The fair value of the
contracts at September 30, 2002, was a liability of $0.4 million recognized in
the consolidated condensed balance sheet.
At September 30, 2002, the Company had entered into foreign currency
forward contracts with notional amounts of $15.0 million and $0.3 million to
hedge exposure to currency fluctuations in the British Pound Sterling and
Japanese Yen, respectively. These contracts are cash flow hedges. Based on
quoted market prices as of September 30, 2002 for contracts with similar terms
and maturity dates, the fair value of the contracts was a $0.3 million asset
recognized in the consolidated condensed balance sheet.
7
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. RESTRUCTURING CHARGE
In 2001, the Company initiated a restructuring of its German operations
of BIRD Machine, a division of the Process segment. The restructuring consisted
of downsizing its German operations from a full manufacturing facility to an
assembly and repair facility. As a result, the Company recorded a charge of $6.0
million relating to severance for approximately 100 employees. The employee
groups that were terminated were comprised of engineering, field service and
support personnel. The amount accrued for severance was based upon the positions
eliminated and the Company's specific or statutory severance plans in place for
these operations and did not include any portion of the employees' salary
through their severance dates. The Company terminated 67 employees and paid $4.1
million of accrued severance. The remaining accrual of $1.9 million was reversed
during the second quarter of 2002 due to unanticipated voluntary terminations
and more favorable separation payments than had been originally estimated.
NOTE 7. EXTRAORDINARY LOSS
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. 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 8. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and
diluted earnings per share ("EPS") calculation is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
===========================================================================================================
Weighted average common shares outstanding for 337.3 335.8 337.1 335.5
basic EPS
Effect of dilutive securities - stock plans 0.8 1.5 1.2 2.0
- -----------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares outstanding for 338.1 337.3 338.3 337.5
diluted EPS
===========================================================================================================
Shares excluded from diluted EPS:
Options with option price greater than market price 6.1 5.1 5.0 4.6
===========================================================================================================
NOTE 9. INVENTORIES
Inventories are comprised of the following:
September 30, December 31,
2002 2001
================================================================================
Finished goods $ 838.4 $ 847.0
Work in process 102.2 74.9
Raw materials 106.5 110.9
- -------------------------------------------------------------------------------
Total $ 1,047.1 $ 1,032.8
===============================================================================
8
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("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 tested for
potential impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable. Goodwill, including goodwill
associated with equity method investments, and intangible assets with
indefinite lives are not to be amortized. Goodwill and intangible assets with
indefinite lives will be tested for impairment annually or more frequently if
circumstances indicate that impairment may exist.
The adoption of SFAS No. 142 required the Company to perform a
transitional impairment test of goodwill in each of its reporting units as of
January 1, 2002. The Company's reporting units were based on its organizational
and reporting structure. Corporate and other assets and liabilities were
allocated to the reporting units to the extent that they related to the
operations of those reporting units. Valuations of the reporting units were
performed by an independent third party.
The goodwill in both of the operating divisions of the Company's
Process segment - EIMCO and BIRD Machine - was determined to be impaired using
a combination of a market value and discounted cash flows approach to estimate
fair value. Accordingly, the Company recognized transitional impairment losses
of $33.6 million, net of income taxes of $17.2 million, for BIRD Machine and
$8.9 million, net of income taxes of $3.2 million, for EIMCO. The transitional
impairment losses were recorded in the first quarter of 2002 as the cumulative
effect of accounting change in the consolidated condensed statements of
operations.
The changes in the carrying amount of goodwill (net of accumulated
amortization) for the nine months ended September 30, 2002 are as follows:
Oilfield Process Total
===============================================================================================
Balance as of December 31, 2001 $ 1,197.5 $ 50.8 $ 1,248.3
Goodwill acquired during the period 31.3 - 31.3
Transitional impairment loss - (50.8) (50.8)
Translation adjustments and other 0.3 - 0.3
- -----------------------------------------------------------------------------------------------
Balance as of September 30, 2002 $ 1,229.1 $ - $ 1,229.1
===============================================================================================
Intangible assets, which continue to be amortized, are comprised of
the following:
September 30, 2002 December 31, 2001
-------------------------------------------- --------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
===========================================================================================================================
Technology-based $ 164.1 $ (35.1) $ 129.0 $ 164.1 $ (30.3) $ 133.8
Marketing-related 5.7 (4.7) 1.0 5.8 (4.6) 1.2
Contract-based 9.4 (6.9) 2.5 7.2 (6.4) 0.8
Other 3.5 (2.6) 0.9 3.1 (2.4) 0.7
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 182.7 $ (49.3) $ 133.4 $ 180.2 $ (43.7) $ 136.5
===========================================================================================================================
The adoption of SFAS No. 142 also required the Company to re-evaluate
the remaining useful lives of its intangible assets to determine whether the
remaining useful lives were appropriate. The Company also re-evaluated the
amortization methods of its intangible assets to determine whether the
amortization reflects the pattern in which the economic benefits of the
intangible assets are consumed. In performing these evaluations, the Company
reduced the remaining life of one of its marketing-related intangibles and
changed the method of amortization of one of its technology-based intangibles.
9
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
Amortization expense for intangible assets for the three months and
nine months ended September 30, 2002 was $2.9 million and $7.2 million,
respectively, and is estimated to be $10.3 million for fiscal year 2002.
Estimated amortization expense for each of the subsequent four fiscal years is
expected to be within the range of $11.2 million to $12.5 million.
In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill and goodwill associated with equity method investments
effective January 1, 2002. The pro forma results of operations of the Company,
giving effect to SFAS No. 142 as if it were adopted on January 1, 2001, are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
========================================================================================================================
Net income:
As reported $ 64.7 $ 137.1 $ 170.4 $ 312.0
Goodwill amortization - 11.0 - 33.3
Transitional impairment loss - - 42.5 -
- ------------------------------------------------------------------------------------------------------------------------
As adjusted $ 64.7 $ 148.1 $ 212.9 $ 345.3
========================================================================================================================
Basic earnings per share:
As reported $ 0.19 $ 0.41 $ 0.51 $ 0.93
Goodwill amortization - 0.03 - 0.10
Transitional impairment loss - - 0.13 -
- ------------------------------------------------------------------------------------------------------------------------
As adjusted $ 0.19 $ 0.44 $ 0.64 $ 1.03
========================================================================================================================
Diluted earnings per share:
As reported $ 0.19 $ 0.41 $ 0.50 $ 0.92
Goodwill amortization - 0.03 - 0.10
Transitional impairment loss - - 0.13 -
- ------------------------------------------------------------------------------------------------------------------------
As adjusted $ 0.19 $ 0.44 $ 0.63 $ 1.02
========================================================================================================================
NOTE 11. SEGMENT AND RELATED INFORMATION
The Company currently has seven operating divisions that have separate
management teams and are engaged in the oilfield services and continuous process
industries. The divisions have been aggregated into two reportable segments,
"Oilfield" and "Process". The consolidated results for these segments are
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The Oilfield segment consists of six operating divisions - Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen. They have been aggregated into one reportable segment because they
have similar economic characteristics and because the long-term financial
performance of these divisions is affected by similar economic conditions. These
six operating divisions manufacture and sell products and provide services used
in the oil and gas exploration industry, including drilling, completion,
production and maintenance of oil and gas wells, and in reservoir measurement
and evaluation, and operate in the same markets and have substantially the same
customers. 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 or state-owned oil companies. The
Oilfield segment also includes the Company's interest in an oil and gas property
in West Africa and its investment in the WesternGeco seismic venture.
10
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
The Process segment currently consists of the BIRD Machine division and
the Company's investment in the Petreco venture. BIRD Machine manufactures and
sells a broad range of continuous and batch centrifuges and specialty filters
for separating, dewatering or classifying process and waste streams. The
principal markets for this segment include all regions of the world where there
are significant industrial, municipal and chemical wastewater applications.
Customers include municipalities, contractors, pharmaceuticals and industrial
companies.
The Company evaluates the performance of its segments based on income
before income taxes, accounting changes, restructuring charges and interest
income and expense. Intersegment sales and transfers are not significant.
Summarized financial information is shown in the following table. The
"Other" column includes corporate-related items, results of insignificant
operations and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments. The "Other" column also includes assets of
discontinued operations.
Oilfield Process Other Total
===================================================================================================================
Revenues
- -------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2002 $ 1,259.0 $ 29.1 $ - $ 1,288.1
Three months ended September 30, 2001 $ 1,348.8 $ 35.6 $ - $ 1,384.4
Nine months ended September 30, 2002 $ 3,673.4 $ 89.3 $ - $ 3,762.7
Nine months ended September 30, 2001 $ 3,762.8 $ 109.8 $ - $ 3,872.6
Segment profit (loss)
- -------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2002 $ 197.1 $ (3.4) $ (60.2) $ 133.5
Three months ended September 30, 2001 $ 263.2 $ (3.7) $ (54.7) $ 204.8
Nine months ended September 30, 2002 $ 549.1 $ (7.7) $ (183.1) $ 358.3
Nine months ended September 30, 2001 $ 669.8 $ (8.3) $ (189.5) $ 472.0
Total assets
- -------------------------------------------------------------------------------------------------------------------
As of September 30, 2002 $ 5,832.5 $ 146.7 $ 603.6 $ 6,582.8
As of December 31, 2001 $ 5,807.6 $ 177.4 $ 691.2 $ 6,676.2
The following table presents the details of "Other" segment loss:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
2002 2001 2002 2001
======================================================================================================================
Corporate expenses $ (34.5) $ (28.7) $ (105.8) $ (92.0)
Interest, net (25.7) (29.4) (79.2) (93.9)
Restructuring charge - - 1.9 (6.0)
Gain on disposal of assets - 3.4 - 2.4
- ----------------------------------------------------------------------------------------------------------------------
Total $ (60.2) $ (54.7) $ (183.1) $ (189.5)
======================================================================================================================
11
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
NOTE 12. NEW ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets. 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 adoption of SFAS No. 144 by the
Company did not have an impact on the consolidated financial statements of the
Company.
In June 2001, the Financial Accounting Standards Board ("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
its fiscal year beginning January 1, 2003.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The Company will adopt SFAS No. 146 for all exit or disposal activities
initiated after December 31, 2002.
12
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 and certain statements in the Notes to Consolidated Condensed
Financial Statements include 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," "suggest," "likely"
and similar expressions, and the negative thereof, are intended to identify
forward-looking statements. Baker Hughes' expectations about its business
outlook, customer spending, oil and gas prices and the business environment for
the Company and the industry in general are only its forecasts regarding these
matters. These forecasts may be substantially different from actual results,
which are affected by the following risk factors: the level of petroleum
industry exploration and production expenditures; drilling rig and oil and gas
industry manpower and equipment availability; the Company's ability to implement
and effect price increases for its products and services; the Company's ability
to control its costs; the availability of sufficient manufacturing capacity and
subcontracting capacity at forecasted costs to meet the Company's revenue goals;
the ability of the Company to introduce new technology on its forecasted
schedule and at its forecasted cost; the ability of the Company's competitors to
capture market share; world economic conditions; the price of, and the demand
for, crude oil and natural gas; drilling activity; weather; the legislative and
regulatory environment in the United States and other countries in which the
Company operates; Organization of Petroleum Exporting Countries ("OPEC") policy;
war or extended period of conflict involving the United States, 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; new laws and regulations, that could have a significant
impact on the future operations and conduct of all businesses; labor-related
actions, including strikes, slowdowns and facility occupations; the condition of
the capital and equity markets; and the timing of any of the foregoing. See
"Business Environment" for a more detailed discussion of certain of these risk
factors.
Baker Hughes' expectations regarding its level of capital expenditures
described in "Liquidity and Capital Resources " 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.
13
DISCONTINUED OPERATIONS AND SUBSEQUENT EVENT
In November 2002, the Company sold EIMCO, a division of the Process
segment and received total proceeds of $48.9 million, of which $4.9 million is
held in escrow pending completion of final adjustments of the purchase price.
The Company has restated the consolidated condensed financial statements and
related notes thereto for all prior periods presented to reflect the operations
of EIMCO as a discontinued operation. Summarized financial information from the
operations of EIMCO is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2002 2001 2002 2001
=============================================================================================================
Revenues $ 36.1 $ 51.6 $ 124.2 $ 133.9
=============================================================================================================
Income (loss) before income taxes $ (2.4) $ 1.1 $ (0.8) $ (1.6)
Income tax benefit (provision) 0.8 (0.4) 0.2 0.5
- -------------------------------------------------------------------------------------------------------------
Income (loss) from operations of EIMCO (1.6) 0.7 (0.6) (1.1)
Loss on disposal:
Loss on write-down to fair value, net of
income taxes of $0.5 million (0.9) - (0.9) -
Recognition of cumulative foreign currency
translation adjustments in earnings (20.3) - (20.3) -
- -------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ (22.8) $ 0.7 $ (21.8) $ (1.1)
=============================================================================================================
BUSINESS ENVIRONMENT
The Company currently has seven operating divisions each with separate
management teams that are engaged in the oilfield services and continuous
process industries. The divisions have been aggregated into two reportable
segments - "Oilfield" and "Process".
The Oilfield segment consists of six operating divisions - Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen - that manufacture and sell products and provide services used in
the oil and gas exploration industry, including drilling, completion, production
and maintenance of oil and gas wells, and in reservoir measurement and
evaluation. The Oilfield segment also includes the Company's interest in an oil
and gas property in West Africa and its investment in WesternGeco. For the nine
months ended September 30, 2002, revenues from the Oilfield segment accounted
for 97.6% of total revenues.
The Process segment currently consists of the BIRD Machine division and
the Company's investment in the Petreco venture. BIRD Machine manufactures and
sells a broad range of continuous and batch centrifuges and specialty filters
for separating, dewatering or classifying process and waste streams.
The business environment for the Company's Oilfield segment and its
corresponding operating results can be significantly affected by the level of
energy 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 risk factors currently influencing the worldwide crude oil and gas
markets are:
Production control - the degree to which individual OPEC nations and
other large oil and gas producing countries, including, but not limited to,
Mexico, Norway and Russia, are willing and able to control production and
exports of crude oil to reduce supply and support their targeted oil price while
meeting their market share objectives.
14
Global economic growth - particularly the impact of the U.S. and
Western European economies and the economic activity in Japan, China, South
Korea and the developing areas of Asia where the correlation between energy
demand and economic growth is strong. An important factor in the global economic
growth in 2003 will be the strength and timing of the U.S. economic recovery.
Oil and gas storage inventories - relative to historic levels.
Inventory levels offer a measure of the balance between supply and demand.
- U.S. natural gas inventory levels are measured by the U.S.
Department of Energy. At the beginning of the summer 2002
injection season, inventory levels were significantly above
historic normal levels and significantly above the levels
measured in the prior year. The year over year surplus
declined significantly during the 2002 summer injection
season as production declined due to lower drilling
activity that has not been sufficient to maintain
production. The decline in drilling activity and natural
gas production suggests that the year over year storage
surplus is likely to become a deficit in the fourth
quarter, assuming normal winter temperatures.
- U.S. inventories of crude oil, residual fuel oil and motor
gasoline have declined since mid-July 2002 and are
approaching the bottom of the 5-year historic range.
Falling inventories are indicative of a tightening
supply-demand balance for oil.
Ability to produce natural gas - the amount of natural gas that can be
produced is a function of the number of new wells drilled, completed and
connected to pipelines as well as the rate of reservoir depletion. Advanced
technologies, such as horizontal drilling, result in improved total recovery but
also result in a more rapid production decline.
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, recover more hydrocarbons and to do so at lower costs.
Maturity of the resource base - of known hydrocarbon reserves in 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.
Possible supply disruptions - from key oil exporting countries,
including, but not limited to, Iraq, Saudi Arabia and other Middle Eastern
countries and Venezuela, due to political instability or military activity. In
addition, adverse weather such as hurricanes could impact production facilities,
causing supply disruptions.
Weather - the impact of variations in temperatures as compared with
normal weather patterns and the related effect on demand for oil and natural
gas.
15
OIL AND GAS PRICES
Generally, customers' expectations about their prospects from oil and
gas sales and customers' 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.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
=========================================================================================================================
West Texas Intermediate Crude ($/bbl) $ 28.30 $ 27.07 $ 25.46 $ 27.92
U.S. Spot Natural Gas ($/MMBtu) 3.20 2.69 3.05 4.43
Oil prices averaged $28.30/bbl for the three months ended September 30, 2002,
ranging from a low of $26.07/bbl to a high of $30.77/bbl. Oil prices rose
steadily throughout the quarter even though concerns about supply disruptions
due to possible military action in Iraq lessened near the end of the quarter. A
tightening of U.S. crude oil inventories served to keep oil prices firm, even
with the reduced concerns over supply disruptions. Rising prices were tempered
somewhat by continued concern regarding the timing of a recovery in the U.S. and
world economies and a corresponding increase in global oil demand.
During the three months ended September 30, 2002, U.S. natural gas
prices averaged $3.20/MMBtu. Prices ranged from a low of $2.73/MMBtu to a high
of $4.07/MMBtu. The rise in natural gas prices during the quarter was driven by
concerns about possible supply disruptions in the Gulf of Mexico due to Tropical
Storm Isidore and Hurricane Lili and improving market fundamentals. The year
over year gas storage surplus continued its decline from a December 2001 peak of
1.4 trillion cubic feet to just under 0.12 trillion cubic feet at September 30,
2002, driven primarily by accelerating declines in gas production. Expectations
of a recovery in gas demand driven by an improving U.S. economy and a return to
normal weather, combined with further production declines resulting from lower
rig activity, have fueled expectations that the supply/demand balance will
tighten further during the 2002/2003 winter.
RIG COUNTS
The Company is engaged in the oilfield service industry providing
products and services that are used in exploring for, developing and producing
oil and gas reservoirs. When drilling or workover rigs are active, they consume
the products and services produced by the oilfield service industry. The rig
counts act 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 has been
providing rig counts to the public since 1944. The Company gathers all relevant
data through their field service personnel worldwide who routinely visit the
various rigs operating in their areas. This data is then compiled and
distributed to various wire services and trade associations and is published on
the Company's website. Rig counts are compiled weekly for the U.S. and Canada
and monthly for all international and workover rigs. For a rig to be counted
internationally on a monthly basis, drilling operations must comprise at least
15 days during the month. Published international rig counts do not include rigs
drilling in Russia or China because this information is extremely difficult to
obtain. The Company's rig counts are summarized in the table below as averages
for each of the periods indicated.
16
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
2002 2001 2002 2001
==========================================================================================================================
U.S. - Land 740 1,093 712 1,046
U.S. - Offshore 112 149 113 161
Canada 249 323 257 363
- --------------------------------------------------------------------------------------------------------------------------
North America 1,101 1,565 1,082 1,570
- --------------------------------------------------------------------------------------------------------------------------
Latin America 204 264 211 265
North Sea 46 57 52 55
Other Europe 34 39 37 38
Africa 59 53 57 54
Middle East 203 186 198 177
Asia Pacific 172 158 169 155
- --------------------------------------------------------------------------------------------------------------------------
Outside North America 718 757 724 744
- --------------------------------------------------------------------------------------------------------------------------
Worldwide 1,819 2,322 1,806 2,314
==========================================================================================================================
U.S. Workover Rigs 1,023 1,227 1,003 1,233
==========================================================================================================================
INDUSTRY OUTLOOK
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.
Oil - Oil prices are expected to average between $25/bbl and $30/bbl
for the remainder of 2002. In 2003, prices could trade in a much broader range
depending on the pace of worldwide economic activity, the willingness and the
ability of OPEC nations and other key nations to control production, and the
nature, duration and outcome of any potential military action in Iraq.
North America Natural Gas - U.S. natural gas prices are expected to
average between $3.80/MMBtu and $4.15/MMBtu for the remainder of 2002. In 2003,
prices are expected to trade between $3.50/MMBtu and $4.40/MMBtu. Natural gas
could trade at the top of this range in 2003 if the U.S. economy, particularly
the industrial sector, exhibits growth and if lower customer spending in 2002
results in further natural gas production declines. Prices could move to the
bottom of this range if the U.S. economic recovery is delayed or weaker than
expected or if weather is milder than expected.
Customer Spending - Based upon the Company's discussions with its major
customers and its review of published industry surveys and reports and the
Company's outlook for oil and gas prices described above, the anticipated
customer spending trends are as follows:
17
- North America - Spending in North America, primarily towards
developing natural gas supplies, is expected to be down 15% to
20% in 2002 compared with 2001.
- Outside North America - Customer spending, primarily directed
at developing oil supplies, is expected to be flat to up 5%
in 2002 compared with 2001.
- Total spending is expected to be down 5% to 7% in 2002
compared with 2001.
Drilling Activity - Based upon the Company's outlooks for oil and
natural gas prices and customer spending described above the Company's outlook
for drilling activity, as measured by the Baker Hughes rig count, is as follows:
- The North American rig count is expected to decline between
25% to 28% in 2002 compared with 2001.
- Drilling activity outside of North America is expected to
decrease 2% to 4% in 2002 compared with 2001.
COMPANY OUTLOOK
The trends as described above relating to declining rig counts,
decreased customer spending and low oil and gas prices began in late 2001 and
have continued in 2002. As a result, the Company expects that 2002 will not be
as strong as 2001, with revenues expected to decline by approximately 2% to 3%
as compared with 2001, with related declines in operating results. The Company
expects fourth quarter activity to remain relatively flat compared to the third
quarter.
In Argentina, the Company recorded losses of $7.9 million related to
the weakening peso and the inability of the Company to collect its outstanding
receivables during the six months ended June 30, 2002. Although the economic
environment stabilized during the third quarter of 2002, there could be
additional losses if there were to be additional currency devaluations or if the
Company's customers encounter additional financial difficulty, thereby impacting
their ability to pay amounts due to the Company. In addition, the economic
environment in Argentina will likely negatively impact the exploration and
production spending plans of the Company's customers for the remainder of 2002
and into 2003, thus reducing the demand for the Company's products. The Company
has responded to this situation in a number of ways, including renegotiating
with its customers for acceptable payment terms, increasing the use of U.S.
dollar based invoicing (or U.S. dollar equivalent pricing and invoicing),
adjusting pricing and contracts to reflect the changes in Argentina's currency,
and shipping products to Argentina directly from outside the country with
payment made offshore in U.S. dollars or equivalent currency. At September 30,
2002 and December 31, 2001, net property in Argentina totaled $9.2 million and
$11.0 million, respectively. Revenues for Argentina for the nine months ended
September 30, 2002 and 2001 totaled $49.6 million and $88.6 million,
respectively.
Venezuela also continues to experience political and economic
uncertainties, including a continued devaluation of the bolivar. This creates
additional uncertainties for the business environment and market for the
Company's products and services. The Company continues to closely monitor the
economic situation in Venezuela and is taking appropriate actions to minimize
its exposure to these risks, including increasing the use of U.S. dollar based
transactions, monitoring the exchange rate, inflation and interest rates and the
consideration of the use of foreign currency hedges. At September 30, 2002 and
December 31, 2001, net property in Venezuela totaled $27.8 million and $37.4
million, respectively. Revenues for Venezuela for the nine months ended
September 30, 2002 and 2001 totaled $112.9 million and $178.4 million,
respectively.
The Company's most significant equity method investment is its 30%
interest in the WesternGeco seismic venture. The operating results of
WesternGeco have been adversely affected by the continuing overall weakness in
the seismic industry, which is expected to continue through the remainder of
2002 and into 2003, and by losses incurred by WesternGeco in the third quarter
on specific contracts in Mexico and India. In light of the disappointing third
quarter results for WesternGeco, the business outlook for the next several years
is being reviewed. As a result, the venture expects a charge in the fourth
quarter of 2002 to downsize its operation in line with the expected market
conditions.
18
Subsequent to the end of the third quarter of 2002, the International
Court of Justice awarded sovereignty over most of the Bakassi peninsula to the
country of Cameroon. It is unknown if either Nigeria or Cameroon will ultimately
accept this judgment and although the judgment is final it may be open to
interpretation or revision for a considerable period of time. A portion of the
Company's oil and gas production operations are conducted in this disputed area
and currently such operations have not been interrupted. The Company is in the
process of assessing the potential impact to its operations as a result of this
ruling and the continuing dispute between the two countries.
NEW ACCOUNTING STANDARDS
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("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 tested for
potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Goodwill, including goodwill associated with
equity method investments, and intangible assets with indefinite lives are not
to be amortized. Goodwill and intangible assets with indefinite lives will be
tested for impairment annually or more frequently if circumstances indicate that
impairment may exist.
The adoption of SFAS No. 142 required the Company to perform a
transitional impairment test of goodwill in each of its reporting units as of
January 1, 2002. The Company's reporting units were based on its organizational
and reporting structure. Corporate and other assets and liabilities were
allocated to the reporting units to the extent that they related the operations
of those reporting units. Valuations of the reporting units were performed by an
independent third party. The goodwill of the Company's Process segment was
determined to be impaired using a combination of a market value and discounted
cash flows approach to estimate fair value. Accordingly, the Company recognized
a transitional impairment loss of $42.5 million, net of income taxes of $20.4
million, recorded as the cumulative effect of accounting change in the
consolidated condensed statement of operations.
The adoption of SFAS No. 142 required the Company to re-evaluate the
remaining useful lives of its intangible assets to determine whether the
remaining useful lives are appropriate. The Company also re-evaluated the
amortization methods of its intangible assets to determine whether the
amortization reflects the pattern in which the economic benefits of the
intangible assets are consumed. In performing these evaluations, the Company
reduced the remaining life of one of its marketing-related intangibles and
changed the method of amortization of one of its technology-based intangibles.
In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill and goodwill associated with equity method investments
effective January 1, 2002. Amortization of goodwill and goodwill associated with
equity method investments included in the Company's consolidated condensed
statements of operations for the three months ended September 30, 2001 was $10.4
million and $1.9 million, respectively, and $31.5 million and $5.9 million,
respectively, for the nine months ended September 30, 2001.
In June 2001, the Financial Accounting Standards Board 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
its fiscal year beginning January 1, 2003.
19
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets. 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 adoption of SFAS No. 144 by the
Company did not have an impact on the consolidated financial statements of the
Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The Company will adopt SFAS No. 146 for all exit or disposal activities
initiated after December 31, 2002.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three months ended September 30, 2002 were $1,288.1
million, a decrease of 7.0% compared with the three months ended September 30,
2001. Oilfield revenues were $1,259.0 million, a decrease of 6.7% compared with
the three months ended September 30, 2001. Oilfield revenues in North America,
which account for 40.4% of total oilfield revenues, decreased 17.2% for the
three months ended September 30, 2002 compared with the three months ended
September 30, 2001. This decrease reflects lower activity in U.S. land and
offshore operations and Canada, as evidenced by a 29.6% decrease in the North
American rig count. Inclement weather in the Gulf of Mexico due to Tropical
Storm Isidore and Hurricane Lili also contributed to the decline. Outside North
America, Oilfield revenues increased 2.2% for the three months ended September
30, 2002 compared with the three months ended September 30, 2001. This increase
reflects the improvement in international drilling activity, particularly in the
Middle East and Asia Pacific, partially offset by weaker revenues in Latin
America due to the political and economic environments in Argentina and
Venezuela and the impact of a labor strike in Norway.
Process revenues for the three months ended September 30, 2002 were
$29.1 million, an 18.3% decrease compared with the three months ended September
30, 2001. The decrease is due to the contribution of the Company's refining and
production product line to a venture in October 2001, partially offset by
increases at Bird Machine.
Revenues for the nine months ended September 30, 2002 were $3,762.7
million, a decrease of 2.8% compared with the nine months ended September 30,
2001. Revenues were impacted by the lower activity in North America and
decreased revenues in Latin America due to the political and economic
environments in Argentina and Venezuela, partially offset by the continuing
improvement in activity in other international locations.
GROSS MARGIN
Gross margin for the three months ended September 30, 2002 and 2001 was
28.9% and 30.1%, respectively. Gross margin for the nine months ended September
30, 2002 and 2001 was 28.0% and 28.9%, respectively. The decreases in gross
margin are the result of the Company's strategy not to significantly reduce its
work force to match current activity levels, pricing pressures and from a change
in the geographic and product mix from the sale of the Company's products and
services.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses for the three
months ended September 30, 2002 were $214.7 million, an increase of 4.6%
compared with the three months ended September 30, 2001. SG&A expenses as a
percentage of consolidated revenues for the three months ended September 30,
2002 and 2001 were 16.7% and 14.8%, respectively. SG&A expenses for the nine
months ended September 30, 2002 were $637.8 million, an increase of 8.3%
compared with the nine months ended September 30, 2001. SG&A expense as a
percentage of consolidated revenues for the nine months
20
ended September 30, 2002 and 2001 were 17.0% and 15.2%, respectively. These
increases in SG&A expense as a percentage of consolidated revenues were
primarily due to the impact of the weakening U.S. dollar and the resulting
foreign exchange losses; increased depreciation of the costs associated with the
implementation of SAP R/3, an enterprise-wide accounting and business
application software system; and the Company's current strategy not to
significantly reduce its work force to match current activity levels.
RESTRUCTURING CHARGE
In 2001, the Company initiated a restructuring of the German operations
of BIRD Machine, a division of the Process segment. The restructuring consisted
of downsizing its German operations from a full manufacturing facility to an
assembly and repair facility. As a result, the Company recorded a charge of $6.0
million relating to severance for approximately 100 employees. The Company
terminated 67 employees and paid $4.1 million of this accrued severance. The
remaining accrual of $1.9 million was reversed during the second quarter of 2002
due to unanticipated voluntary terminations and more favorable separation
payments than had been originally estimated.
INTEREST EXPENSE
Interest expense for the three and nine months ended September 30, 2002
decreased $3.2 million and $13.7 million, respectively, compared with the three
and nine months ended September 30, 2001. These decreases were primarily due to
lower total debt levels resulting from cash flow from operations coupled with
lower average interest rates on the Company's short-term debt, commercial paper
and interest rate swaps. The approximate average interest rate on short-term
debt and commercial paper was 1.8% for the three and nine months ended September
30, 2002 compared with 3.7% and 4.4% for the three and nine months ended
September 30, 2001, respectively.
EQUITY IN INCOME OF AFFILIATES
Equity in income of affiliates for the three and nine months ended
September 30, 2002 decreased $19.0 million and $19.3 million, respectively,
compared with the three and nine months ended September 30, 2001. Included in
equity in income of affiliates for the three and nine months ended September 30,
2001, is $1.9 million and $5.9 million, respectively, of amortization of
goodwill associated with equity method investments. In accordance with SFAS No.
142, the Company discontinued this amortization effective January 1, 2002. The
Company's most significant equity method investment is its 30% interest in
WesternGeco. The operating results of WesternGeco have been adversely affected
by the continuing overall weakness in the seismic industry and by losses
incurred by WesternGeco in the third quarter on specific contracts in Mexico and
India.
INCOME TAXES
The Company's effective tax rate differs from the statutory income tax
rate of 35% due to lower effective rates on international operations offset by
higher taxes within the WesternGeco venture. The additional taxes arose due to:
(i) the venture being taxed in certain foreign jurisdictions based on a deemed
profit basis, which is a percentage of revenues, rather than on income before
income taxes, and (ii) unbenefitted foreign losses of the venture, which are
operating losses in certain foreign jurisdictions where there was no current tax
benefit and where a deferred tax asset was not recorded due to the uncertainty
of realization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally related to working
capital needs, payment of dividends and capital expenditures. These requirements
have primarily been met through internally generated funds.
21
In the nine months ended September 30, 2002, net cash inflows from
operating activities totaled $505.5 million, an increase of $48.6 million
compared with the nine months ended September 30, 2001. This increase was
primarily due to a decrease in working capital, partially offset by lower income
from continuing operations.
Expenditures for capital assets totaled $210.8 million and $203.6
million for the nine months ended September 30, 2002 and 2001, respectively. The
majority of these expenditures were for rental tools. During the nine months
ended September 30, 2002 and 2001, the Company received proceeds of $63.1
million and $55.9 million, respectively, from the disposal of assets.
During the nine months ended September 30, 2002, the Company's Oilfield
segment acquired three businesses having an aggregate purchase price of $51.7
million, net of cash acquired. As a result of these acquisitions, the Company
recorded approximately $31.3 million of goodwill. The purchase prices were
allocated based on estimated fair values at the date of acquisition and may be
subject to change based on the final determination of the purchase price
allocations. In addition, during the nine months ended September 30, 2002, the
Company invested $15.0 million in Luna Energy, L.L.C. ("Luna Energy"), a venture
formed to develop, manufacture, commercialize, sell, market and distribute down
hole fiber optic and other sensors for oil and gas exploration, production,
transportation and refining applications. The Company has a 40% ownership
interest in Luna Energy.
On September 10, 2002, the Company's Board of Directors authorized the
Company to repurchase up to $275.0 million of its common stock. As of September
30, 2002, the Company has repurchased 1.3 million shares at an average price of
$27.07. The Company has made payments of $25.8 million for repurchases that have
been settled and has accrued a $9.9 million liability as of September 30, 2002
for the remainder of the unsettled repurchases. Upon repurchase, the shares were
retired.
The Company had two interest rate swap agreements that had been
designated and had qualified as fair value hedging instruments. During the
quarter ended September 30, 2002, the Company terminated the two agreements and
received payments totaling $15.8 million upon cancellation. The gains of $4.8
million and $11.0 million on the agreements will be amortized as a reduction of
interest expense over the remaining lives of the underlying debts, which mature
in June 2004 and January 2009, respectively.
Total debt outstanding at September 30, 2002 was $1,548.1 million, a
decrease of $146.5 million compared with December 31, 2001. Debt was repaid
using cash flows from operations, proceeds from the disposal of assets and
proceeds from the issuance of common stock. The debt to equity ratio was 0.45 at
September 30, 2002 compared with 0.51 at December 31, 2001. The Company's
long-term objective is to maintain a debt to equity ratio between 0.40 and 0.60.
At September 30, 2002, the Company had $994.1 million of credit
facilities with commercial banks, of which $594.0 million was committed. The
committed facilities expire in September ($56 million) and October ($538
million) 2003. There were no direct borrowings under these facilities during
the nine months ended September 30, 2002; however, to the extent the Company has
outstanding commercial paper, available borrowings under the committed credit
facilities are reduced. At September 30, 2002, the Company had no outstanding
commercial paper.
Cash flows from operations and borrowings from short-term debt and
commercial paper are expected to be the principal sources of liquidity in 2002.
The Company believes that cash flows from operations, combined with existing
credit facilities, will provide the Company with sufficient capital resources
and liquidity to manage its operations, meet debt obligations and fund projected
capital expenditures. The Company currently expects 2002 capital expenditures to
be between $290.0 million and $300.0 million, excluding acquisitions. The
expenditures are expected to be used primarily for normal, recurring items
necessary to support the growth and operations of the Company.
22
If the Company incurred a reduction in its debt ratings or stock price,
there are no provisions in the Company's debt or lease agreements that would
accelerate their repayment, require collateral or require material changes in
terms. Other than normal operating leases, the Company does not have any
off-balance sheet financing arrangements such as securitization agreements,
liquidity trust vehicles or special purpose entities. As such, the Company is
not materially exposed to any financing, liquidity, market or credit risk that
could arise if the Company had engaged in such financing arrangements.
The words "believes," "will," "may," "expected" and "expects" are
intended to identify Forward-Looking Statements in "Liquidity and Capital
Resources". See "Forward-Looking Statements" and "Business Environment" above
for a description of risk factors related to these Forward-Looking Statements.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are conducted around the world in a number of
different currencies. The majority of the Company's significant foreign
subsidiaries have designated the local currency as their functional currency. As
such, future earnings are subject to fluctuations due to changes in foreign
currency exchange rates when transactions are denominated in currencies other
than the subsidiary's respective functional currency. To minimize the need for
foreign currency contracts, the Company's goal is to manage its foreign currency
exposure by maintaining a minimal consolidated net asset or net liability
position in a currency other than the functional currency.
At September 30, 2002, the Company had entered into foreign currency
forward contracts with notional amounts of $15.0 million and $0.3 million to
hedge exposure to currency fluctuations in the British Pound Sterling and the
Japanese Yen, respectively. These contracts are cash flow hedges. Based on
quoted market prices as of September 30, 2002 for contracts with similar terms
and maturity dates, the fair value of the contracts was a $0.3 million asset
recognized in the consolidated condensed balance sheet.
The counterparties to the Company's forward contracts are major
financial institutions. The credit ratings and concentration of risk of these
financial institutions are monitored on a continuing basis. In the unlikely
event that the counterparties fail to meet the terms of a foreign currency
contract, the Company's exposure is limited to the foreign currency rate
differential.
Certain borrowings of the Company are denominated in currencies other
than its functional currency. At September 30, 2002, these nonfunctional
currency borrowings totaled $9.5 million, with exposures between the U.S. Dollar
and the British Pound Sterling, the United Arab Emirate Dirham, the Thai Baht
and the Singapore Dollar. A 10% change in value of the U.S. Dollar against any
one of these foreign currency borrowings would not have a material adverse
effect on the future earnings of the Company.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing of this Quarterly Report on Form
10-Q, the Company has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 (the "Exchange Act"). This evaluation was carried out under
the supervision and with the participation of the Company's management,
including its principal executive officer and principal financial officer. Based
on this evaluation, these officers have concluded that the design and operation
of the Company's disclosure controls and procedures are effective. There were no
significant changes to the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation. No significant deficiences or material weaknesses in the internal
controls were identified during the evaluation and, as a consequence, no
corrective action is required to be taken.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported, within the time periods specified in the U.S. Securities and
Exchange Commission's ("SEC") rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that the Company files under the Exchange Act is accumulated and communicated to
the Company's management, including its principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as a defendant in a number of shareholder class
action suits filed by purported shareholders shortly after the Company's
December 8, 1999 announcement regarding the accounting issues that the Company
discovered at its Baker Hughes INTEQ division. These suits, which sought
unspecified monetary damages, were consolidated in the federal district court
for the Southern District of Texas pursuant to the Private Securities Litigation
Reform Act of 1995. The Company filed Motions to Dismiss in both the shareholder
derivative suit and the class action. The federal district court granted the
Company's Motions on both actions. No appeal was filed in the shareholder
derivative suit, but the class action case was appealed to the U.S. Fifth
Circuit Court of Appeals, which upheld the lower court's dismissal in May 2002.
On September 12, 2001, the Company, without admitting or denying the
factual allegations contained in the Order, consented with the SEC to the entry
of an Order making Findings and Imposing a Cease-and-Desist Order (the "Order")
for violations of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange
Act. Among the findings included in the Order were the following. In 1999, the
Company discovered that certain of its officers had authorized an improper
$75,000 payment to an Indonesian tax official, after which the Company embarked
on a corrective course of conduct, including voluntarily and promptly disclosing
the misconduct to the SEC and the Department of Justice (the "DOJ"). In the
course of the Company's investigation of the Indonesia matter, the Company
learned that it had made payments in the amount of $15,000 and $10,000 in India
and Brazil, respectively, to the Company's agents, without taking adequate steps
to ensure that none of the payments would be passed on to foreign government
officials. The Order found that the foregoing payments violated Section
13(b)(2)(A). The Order also found the Company in violation of Section
13(b)(2)(B) because it did not have a system of internal controls to determine
if payments violated the Foreign Corrupt Practices Act ("FCPA"). The FCPA makes
it unlawful for U.S. issuers, including the Company, or anyone acting on their
behalf, to make improper payments to any foreign official in order to obtain or
retain business. In addition, the FCPA establishes accounting control
requirements for issuers subject to either the registration or reporting
provisions of the Exchange Act. The Company cooperated with the SEC's
investigation.
By the Order, dated September 12, 2001 (previously disclosed by the Company
in its prior Quarterly Report on Form 10-Q and a Current Report on Form 8-K),
the Company agreed to cease and desist from committing or causing any violation
and any future violation of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the
Exchange Act. Such Sections of the Exchange Act require issuers to (x) make and
keep books, records, and accounts, which, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the issuer and
(y) devise and maintain a system of internal accounting controls sufficient to
provide reasonable assurances that: (i) transactions are executed in accordance
with management's general or specific authorization; and (ii) transactions are
recorded as necessary: (I) to permit preparation of financial statements in
conformity with generally accepted accounting principles or any other criteria
applicable to such statements, and (II) to maintain accountability for assets.
On March 25, 2002, a former employee alleging improper activities
relating to Nigeria filed a civil complaint against the Company in the 281st
District Court in Harris County, Texas, seeking back pay and damages, including
future lost wages. On August 2, 2002, the same former employee filed
substantially the same complaint against the Company in the federal district
court for the Southern District of Texas. Discovery in the civil suits is in the
preliminary stages.
On March 29, 2002, the Company announced that it had been advised that
the SEC and the DOJ are conducting investigations into allegations of violations
of law relating to Nigeria and other related matters. The SEC has issued a
formal order of investigation into possible violations of provisions under the
FCPA regarding anti-bribery, books and records and internal controls, and the
DOJ has asked to interview current and former employees. Prior to the filing of
the former employee's complaint, the Company had independently initiated an
investigation regarding its operations in Nigeria, which is ongoing. The Company
is providing documents to and cooperating fully with the SEC and the DOJ.
25
The Company's ongoing internal investigation has identified apparent
deficiencies with respect to certain operations in Nigeria, including in its
books and records and internal controls, which may uncover additional
liabilities to governmental authorities in Nigeria. The Company is working to
conclude its investigation as quickly as practicable. While no completion date
can be guaranteed, the Company believes that the investigation will be
substantially completed during the first quarter of 2003. Based upon current
information, the Company does not expect that any such potential liabilities
will have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On November 13, 2002, each of the Chief Executive Officer, Michael E.
Wiley, and the Chief Financial Officer, G. Stephen Finley, submitted to the SEC
a joint written statement pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. A copy of this statement is attached hereto as an Exhibit 99.1.
In conjunction with the SEC's announced plans to review public
disclosure filings, the Company received and responded to comments from the SEC
regarding its Annual Report on Form 10-K for the year ended December 31, 2001
and its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
2002 and June 30, 2002. The Company believes that none of such Reports contains
an untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading as of the end of the period covered by such
Reports. These matters are subject to interpretation and the SEC may have
additional comments after reviewing the Company's responses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Form of Amendment dated as of September 27, 2002 to
the Credit Agreement, as amended, among Baker Hughes
Incorporated and several institutions for $56,000,000,
in the aggregate (filed as Exhibit 10.21 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
99.1 Statement of Michael E. Wiley, Chief Executive
Officer, and G. Stephen Finley, Chief Financial
Officer, dated November 13, 2002 pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed with the Commission on September
11, 2002, reporting that the Company's Board of Directors has authorized the
Company to repurchase from time to time up to $275 million of its common stock.
26
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, 2002 By: /s/G. STEPHEN FINLEY
-----------------------------------
G. Stephen Finley
Sr. Vice President - Finance and
Administration and Chief Financial Officer
Date: November 13, 2002 By: /s/ALAN J. KEIFER
-----------------------------------
Alan J. Keifer
Vice President and Controller
27
CERTIFICATIONS
I, Michael E. Wiley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/MICHAEL E. WILEY
--------------------------------------------
Michael E. Wiley
Chairman of the Board, President and
Chief Executive Officer
28
I, G. Stephen Finley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/G. STEPHEN FINLEY
-----------------------------------------------
G. Stephen Finley
Sr. Vice President - Finance and
Administration and Chief Financial Officer
29
EXHIBIT INDEX
10.1 Form of Amendment dated as of September 27, 2002 to the Credit
Agreement, as amended, among Baker Hughes Incorporated and
several institutions for $56,000,000, in the aggregate (filed
as Exhibit 10.21 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 2001).
99.1 Statement of Michael E. Wiley, Chief Executive Officer, and
G. Stephen Finley, Chief Financial Officer, dated November
13, 2002 pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.