UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-9397
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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 77027-5177
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 439-8600
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------------------------ ----------------------------
Common Stock, $1 Par Value Per Share New York Stock Exchange
Pacific Exchange
Swiss Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). YES [X] NO [ ]
The aggregate market value of the Common Stock as of the last business day
of the registrant's most recently completed second fiscal quarter (based on the
closing price on June 28, 2002 reported by the New York Stock Exchange) held by
non-affiliates was approximately $11,216,304,824.
At February 28, 2003, the registrant has outstanding 336,896,319 shares of
Common Stock, $1 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 2002 Proxy Statement for the Annual Meeting of
Stockholders to be held April 23, 2003 are incorporated by reference into Parts
II and III.
PART I
ITEM 1. BUSINESS
Baker Hughes Incorporated ("Baker Hughes" or the "Company") is a Delaware
corporation engaged primarily in the oilfield services industry. 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 participates in the continuous process industry
where it manufactures and markets a broad range of continuous and batch
centrifuges and specialty filters. The Company conducts certain of its
operations through subsidiaries, affiliates, ventures, partnerships or
alliances.
The Company was formed in April 1987 in connection with the combination of
Baker International Corporation and Hughes Tool Company. The Company acquired
Western Atlas Inc. in a merger completed on August 10, 1998.
As used herein, the Company may refer to Baker Hughes Incorporated or its
subsidiaries. The use of the terms Company and Baker Hughes are not intended to
connote any particular corporate status or relationships.
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 are made
available free of charge on the Company's internet website at
www.bakerhughes.com as soon as reasonably practicable after the Company has
electronically filed such material with, or furnished it to, the Securities and
Exchange Commission.
For additional industry segment information for the three years ended
December 31, 2002, see Note 13 of the Notes to Consolidated Financial Statements
in Item 8 herein.
OILFIELD
The Oilfield segment of the Company consists of six operating divisions:
Baker Atlas, Baker Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen
and INTEQ. The Company, through its Oilfield segment, is a major supplier of
wellbore related products, technology services and systems to the oil and gas
industry on a worldwide basis and provides equipment, products and services for
drilling, formation evaluation, completion and production of oil and gas wells.
These divisions 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. The
principal markets for this segment include all major oil and gas producing
regions of the world, including North America, South America, Europe, Africa,
the Middle East and the Far East. The Oilfield segment also includes the
Company's investment in the WesternGeco venture.
Baker Atlas. The Company, through its Baker Atlas division, is a premier
provider of a complete range of downhole well logging technology and services,
including advanced formation evaluation, production and reservoir engineering,
downhole seismic and petrophysical and geophysical data acquisition services. In
addition, Baker Atlas provides perforation and completion technologies, pipe
recovery and data management, processing and analysis. This diverse range of
services covers the life cycle of a reservoir - initially, in support of the
drilling process, continuing through the prospect evaluation and appraisal phase
and finally, to production and reservoir management. In performing well logging
services, electronic instrumentation and sensor packages are placed into the
borehole by means of an electrical wireline, drill pipe, coiled tubing or well
tractor. The surface-controlled instrumentation gathers measurements, collects
samples and performs experiments downhole. The measurements are recorded
digitally and can be displayed on a continuous graph, or well log, against depth
or time. These well logs are processed, analyzed and interpreted to determine
physical attributes of the well, which can indicate the volume of hydrocarbons
present and the extent and producibility of the reservoir.
Perforating services are offered by both Baker Atlas and the Company's Baker
Oil Tools division and provide a pathway through the casing and cement sheath in
wells so that the hydrocarbon fluids (gas or oil) can enter the wellbore from
the formation. These services and the information that these divisions provide
allow oil and gas companies to define, reduce and manage their risk. Baker
Atlas' largest competitors in the downhole logging and perforating markets
include Halliburton Company ("Halliburton"), Schlumberger Limited
("Schlumberger") and Precision Drilling Corp.
Baker Oil Tools. The Company, through its Baker Oil Tools division, is a
premier provider of downhole completion, workover and fishing equipment and
services. Downhole completion product lines include packers, flow control
equipment, subsurface safety valves, liner hangers and sand control systems.
Packers are used in the wellbore to seal the space between the production tubing
and the casing, to protect the casing from reservoir pressures and corrosive
formation fluids and to maintain the separation of production
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zones. Casing is steel pipe used to line the wellbore to keep the wall of the
drilled hole from caving in, to prevent fluids from moving from one formation to
another and to improve the efficiency of extracting oil and gas from producing
wells. Production tubing is the pipe through which the oil and gas flow from the
producing zone under the ground to the surface of the well. Flow control
equipment provides additional means to control and adjust the flow of downhole
fluids from producing zones, whether done in the traditional mechanical way or
as Intelligent Completions(R), while subsurface safety valves shut off all flow
of fluids to the surface in the event of an emergency. Baker Oil Tools is a
major worldwide manufacturer and provider of packers, flow control and safety
valve equipment. Its principal competitors in this area are Halliburton,
Schlumberger and Weatherford International Ltd. ("Weatherford").
Baker Oil Tools also manufactures and sells liner hanger systems which its
customers use to suspend and set strings of casing pipe in wells. Baker Oil
Tools technology developments in this area include multi-lateral completion
systems, which allow multiple downhole casing pipes to be tied to one main
wellbore casing pipe while maintaining the pressure seal integrity. Baker Oil
Tools is a leading worldwide producer of liner hangers and multi-lateral
systems. Its primary competitors in this area are Halliburton and Weatherford.
Baker Oil Tools offers sand control equipment (gravel pack tools, screens,
fluids and pumping) and services that prevent sand from entering the wellbore
and reducing productivity. Baker Oil Tools has expanded its marine vessel, high
pressure, "frac-pack" service capabilities. The frac-pack service involves
injecting fluids and propants into the formation to expand the formation and
increase the rate of production. Propants are spherical-shaped particles
(generally made of a silicant) that, when forced into fissures in the formation,
expand the fissures and maintain the expansion. Baker Oil Tools technology
developments in this area include the expansion of tubulars such as sand
screens. By expanding pipe and screen downhole, the internal flow areas are
increased, which, in turn, allows for enhanced production. Baker Oil Tools is a
leading provider of sand control equipment and services. Its primary competitors
are BJ Services Company, Halliburton, Schlumberger and Weatherford.
For the workover segment of the market, Baker Oil Tools provides mechanical
service tools and inflatable packers. The inflatable products enable thru-tubing
remedial operations that utilize coiled tubing rigs. The inflatable packers are
also used in the open-hole environment for testing the potential of a well
during the drilling phase prior to the installation of casing. The inflatable
packers also become an integral part of the casing (external casing packer) to
provide zone separation. Baker Oil Tools' primary competitors for these product
lines are Halliburton, Schlumberger and Weatherford.
Baker Oil Tools is a leading provider of fishing services and furnishes
fishing equipment and services using specialized tools to locate, dislodge and
retrieve twisted off, dropped or damaged pipe, tools or other objects from
inside the wellbore, potentially thousands of feet below the surface. In
addition, milling, cutting and whipstock services are offered to clean out
wellbores or mill windows in the casing to drill a sidetrack or multi-lateral
well. Baker Oil Tools fishing services are also offered in a thru-tubing product
line, making it compatible with coiled tubing workover operations. Baker Oil
Tools technology in this area includes the Wellbore Custodian Cleanout System
which cleans the inside diameter of the well casing by collecting debris,
brushing the wellbore wall and filtering fluid all at one time. Its major
competitors are Smith International, Inc. ("Smith") and Weatherford.
Baker Oil Tools also provides other completion, remedial and production
products and services, including control systems for surface and subsurface
safety valves and surface flow lines and flow regulators and packers used in
secondary recovery waterflood projects. Baker Oil Tools' primary competitors are
Halliburton and Schlumberger.
Baker Petrolite. The Company, through its Baker Petrolite division, is a
premier provider of specialty chemicals to a number of industries, primarily oil
and gas production, but also including refining, pipeline operation and
maintenance, petrochemical, agriculture and iron and steel manufacturing. Baker
Petrolite also produces drilling fluid and stimulation additives that are
designed to enhance the functionality and the cost performance of oilfield
drilling fluids, oil and gas well oxidizing, fracturing and cementing
applications, and bioprocess production processes.
In oil and gas production, Baker Petrolite specialty chemicals include
inhibitors, corrosion control products, bactericides and microbiocides, emulsion
breakers and gas hydrate controllers. The Baker Petrolite FATHOM(TM) line of
products controls corrosion and prevents formation of scale, paraffin,
asphaltenes and hydrates that could interrupt production and require expensive
maintenance in deepwater operations. The corrosion control and prevention of
scale formation provide flow assurance for deepwater development wells,
facilities and flowlines.
In the refining industry, Baker Petrolite has developed various process
treatment, finished fuel additive and water treatment programs, including
problematic crude desalting strategies and environmentally friendly cleaners
that decontaminate refinery and petrochemical vessels at a lower cost than other
methods.
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For pipeline operation and maintenance, Baker Petrolite technology includes
pipeline boosters, pipeline cleaning programs, in-line inspection (tethered)
technology and internal corrosion assessment. The FLO(R) family of pipeline
boosters consists of high molecular weight polymers designed to reduce the
friction pressure loss in pipelines that transport crude oil, refined fuel and
water. The SurfSweep pipeline cleaning program is a systematic approach to
cleaning pipelines which starts with a solids screening and chemical analysis of
a pipeline in order to develop the chemical and mechanical design of the
specific cleaning application. The In-Line Inspection tool utilizes high
resolution Magnetic Flux Leakage ("MFL") technology to quantify the metal loss,
wall-thickness measurement and cracking associated with pipeline integrity
management programs. Internal Corrosion Direct Assessment utilizes flow-modeling
capabilities to identify high-risk segments of a pipeline to ensure proper
mitigation programs are in place.
In 2002, the Company formed the Pipeline Management Group ("PMG"), an
internal organization, to provide integrated pipeline management by coordinating
the services of Baker Hughes' divisions. The integrated services provided by PMG
include hazard assessment, consequence analysis, integrity planning, mitigation
activities, verification and in-line inspection (utilizing the Baker Atlas
developed MFL technology), reassessment and evaluation. PMG has close
operational links to Baker Petrolite and uses some of the Baker Petrolite
products in the provision of its services.
Baker Petrolite also provides chemical technology solutions to other
industrial markets throughout the world including petrochemicals, fuel
additives, plastics, imaging, adhesives, steel and crop protection. Its primary
competitors are GE Betz and Ondeo Nalco Energy Services, L.P.
Centrilift. The Company, through its Centrilift division, is a market leader
for oilfield electric submersible pumping ("ESP") systems. ESP systems are a
form of artificial lift used to pump high quantities of water and oil from wells
which are unable to flow under their own pressure. Centrilift manufactures the
complete ESP system including the downhole components (centrifugal pump,
electric motor and gauges), the power cables that connect the downhole
components to the surface and the surface control systems. Centrilift also
manufactures and markets progressing cavity pump ("PCP") systems for use in
lower volume, sandier and/or more viscous applications. PCPs can be driven by
submersible electric motors or rods driven from a surface power source. Both
systems are installed in oil and gas wells near the production zone to lift
fluids to the surface. The major competitors for Centrilift are John Wood Group,
PLC, Schlumberger and Weatherford.
Hughes Christensen. The Company, through its Hughes Christensen division, is
a leading manufacturer and marketer of Tricone(R) rolling cone drill bits and
fixed cutter diamond drill bits for the worldwide oil, gas, mining and
geothermal industries. Tricone bits include milled steel tooth cutting
structures and tungsten carbide compact cutting structures. Tricone bits are
designed to drill a wide range of formations and applications in a wide range of
sizes. Fixed cutter diamond bits include polycrystalline diamond compact bits,
natural diamond bits and impregnated diamond bits. Genesis bits incorporate new
cutter technology, hydraulic technology, improved bit stability and a new design
process focused on the application to be drilled. Genesis bits can reduce
drilling costs through longer runs and high rates of penetration. Hughes
Christensen also manufactures and markets a complete line of ream-while-drilling
tools designed for hole-opening applications. Hughes Christensen's principal
competitors in the drill bit market are Halliburton, Grant Prideco, Inc. and
Smith for oil and gas applications, and Sandvik Smith AB and Varel
International, Inc. for other applications.
INTEQ. The Company, through its INTEQ division, is a major supplier of
real-time drilling and evaluation services to the oil and gas industry. These
services include directional and horizontal drilling technologies,
logging-while-drilling ("LWD"), measurement-while-drilling, coring and
subsurface surveying. INTEQ provides high-end technology solutions that oil and
gas companies require to drill complex wells in challenging reservoir
environments. INTEQ is an industry leader in the design and planning of wells
that incorporate complex trajectories that are set to intercept multiple
reservoir targets. As exploration and development is increasingly conducted in
the costlier offshore deepwater areas, there is an increased demand for INTEQ
drilling technology to reduce cost through optimized performance. In the upper
hole sections of an oil and gas well, INTEQ survey services and high performance
drilling motors can help to provide safe and efficient drilling of the
formations. In the directional portion of the well, INTEQ rotary steering
technology is combined with LWD technology to allow clients to drill
three-dimensional well trajectories while taking measurements to evaluate the
formations drilled. The measurements are transmitted to the surface through the
use of pulse telemetry, a system where differential pressure patterns are
transmitted through a fluid column to the surface for decoding. INTEQ
visualization technology at the surface allows this real-time data to be
overlaid on images of the reservoir, permitting engineers to steer the well
while watching graphical representation of the drilling assembly moving through
the reservoir. These technologies allow access to, and the efficient drilling
of, reservoirs that could not have been developed effectively five years ago.
INTEQ competes principally with Halliburton and Schlumberger in these products
and services.
The Company, through its INTEQ division, also produces and markets drilling
and completion fluids (muds/brines), mud logging and specialty chemicals and
provides technical services for the use of the muds/brines and chemicals in oil
and gas well drilling. Drilling fluids typically contain barite or bentonite and
may use a water or an oil base. The main purpose of the drilling fluid is to
provide stability within the wellbore by cleaning the bottom of a hole as it
removes cuttings and transports them to the surface, by
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cooling the bit and drill string, by controlling formation pressures and by
sealing porous well formations. To provide optimized stability and future oil
production, a fluid is often customized for a wellbore as the well-site engineer
monitors the interaction between the drilling fluid and the formation. INTEQ
also furnishes on-site laboratory analysis and examination of circulated and
drilling fluids and recovered drill cuttings to detect the presence of
hydrocarbons and identify the formations penetrated by the drill bit. INTEQ also
provides equipment and services to separate the drill cuttings from the drilling
fluids and re-inject the processed cuttings in a specially prepared well, or
transport and dispose of the cuttings by other means. INTEQ also provides
drilling and completion additives to non-oilfield applications. These
applications are generally referred to as industrial drilling applications. The
principal competitors for INTEQ's products and services are Halliburton and M-I
LLC.
WesternGeco. The Company owns a 30% interest in the WesternGeco venture,
which was formed in late 2000. Schlumberger owns the remaining 70%. WesternGeco
is a provider of seismic data acquisition and processing services to assist oil
and gas companies in evaluating the producing potential of sedimentary basins
and in locating productive hydrocarbon zones. Seismic data is acquired by
producing sound waves which move through the ground and are recorded by audio
instruments. The recordings are then analyzed to determine the characteristics
of the geologic formations through which the sound waves moved and the extent
that oil and gas may be trapped in or moving through those formations. This
analysis is known as a seismic survey. WesternGeco conducts seismic surveys on
land, in deep water and across shallow-water transition zones worldwide. These
seismic surveys encompass high-resolution, two-dimensional and three-dimensional
surveys for delineating exploration targets. WesternGeco also conducts
time-lapse, four-dimensional seismic surveys for monitoring reservoir fluid
movement over time. Seismic information can reduce field development and
production costs by reducing turnaround time, lowering drilling risks and
minimizing the number of wells necessary to explore and develop reservoirs.
WesternGeco's major competitors in providing these services are Compagnie
Generale de Geophysique, Veritas DGC, Inc. and Petroleum Geo-Services ASA.
PROCESS
The Process segment of the Company consists of one operating division, BIRD
Machine, and the Company's investment in the Petreco venture.
BIRD Machine. The Company, through its BIRD Machine division, manufactures a
broad range of continuous and batch centrifuges and specialty filters, which are
each widely used in the municipal, industrial, chemical, coatings, minerals and
pharmaceutical markets to separate, dewater or classify process and waste
streams. BIRD Machine also provides aftermarket parts, repairs and services for
its installed equipment base through a global network of personnel and service
centers. BIRD Machines' principal competitors in its continuous centrifuge
product line are Alfa-Laval/Sharples Tomoe, Westfalia, Andritz and Flottweg.
There are numerous small and large companies that compete in the batch
centrifuge and filter product lines.
Petreco. The Company has a 49% interest in the voting power of Petreco, an
entity created by the Company and Sequel Holdings, Inc. Petreco was formed in
October 2001, and the Company contributed $16.6 million of net assets of the
refining and production product line of its Process segment for the Petreco
formation. Petreco sells process equipment (including electrostatic de-salters
and hydrocyclones) used in oil and gas production and refining applications.
MARKETING, COMPETITION AND ECONOMIC CONDITIONS
The Company markets its products and services on a product line basis
primarily through the Company's own sales organizations, although certain of its
products and services are marketed through supply stores, independent
distributors or sales representatives. The Company ordinarily provides technical
and advisory services to assist in its customers' use of the Company's products
and services. Stock points and service centers for oilfield products and
services are located in areas of drilling and production activity throughout the
world. The Company markets process products and services worldwide. In certain
areas outside the United States, the Company utilizes licensees, sales
representatives and distributors.
The Company's products and services are sold in highly competitive markets,
and its revenues and earnings can be affected by changes in competitive prices,
fluctuations in the level of activity in major markets, general economic
conditions, foreign exchange fluctuations and governmental regulation. The
Company competes with the oil and gas industry's largest integrated oilfield
service providers as well as many small companies. The Company believes that the
principal competitive factors in the industries that it serves are product and
service quality; availability and reliability; health, safety and environmental
standards; technical proficiency and price.
Further information concerning marketing, competition and economic
conditions is contained under the caption "Business Environment" in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
4
INTERNATIONAL OPERATIONS
The Company operates in over 70 countries worldwide, and its operations are
subject to the risks inherent in doing business in multiple countries with
various laws and differing political structures and situations. These risks
include, but are not limited to, war, boycotts, political and economic changes,
terrorism, expropriation, foreign currency controls, taxes and changes in
currency exchange rates. Although it is impossible to predict the likelihood of
such occurrences or their effect on the Company, management believes these risks
to be acceptable. However, there can be no assurance that an occurrence of any
one or more of these events would not have a material adverse effect on the
Company's operations.
RESEARCH AND DEVELOPMENT; PATENTS
The Company is engaged in research and development activities directed
primarily toward the improvement of existing products and services, the design
of specialized products to meet specific customer needs and the development of
new products, processes and services. For information regarding the amounts of
research and development expense in each of the three years ended December 31,
2002, see Note 17 of the Notes to Consolidated Financial Statements in Item 8
herein.
The Company has followed a policy of seeking patent and trademark protection
both inside and outside the United States for products and methods that appear
to have commercial significance. The Company believes its patents and trademarks
to be adequate for the conduct of its business, and the Company aggressively
pursues protection of its patents against patent infringement worldwide. While
it regards patent and trademark protection important to its business and future
prospects, it considers its established reputation, the reliability and quality
of its products and the technical skills of its personnel to be more important.
No single patent or trademark is considered to be of a critical nature to the
Company's business.
BUSINESS DEVELOPMENTS
OILFIELD
In December 2002, in the initial step of a two-part transaction, the Company
acquired certain assets and the intellectual property of the borehole seismic
data acquisition business of Compagnie Generale de Geophysique ("CGG"). The
second part to the transaction was completed in February of 2003 and consisted
of the transfer by CGG of employees and contracts to the Company and the
formation of a jointly owned venture entity to handle the processing and
interpretation of borehole seismic data. The Company holds a 51% interest in the
venture entity.
PROCESS
In November 2002, the Company sold its EIMCO Process Equipment ("EIMCO")
unit to Groupe Laperriere & Verreaul, Inc. of Montreal, Canada. The Company
received proceeds of $48.9 million, of which $4.9 million is held in escrow
until the completion of final adjustments to the purchase price are made.
EXPLORATION AND PRODUCTION ACTIVITIES
In December 2002, the Company entered into exclusive negotiations for the
sale of the Company's interest in its oil producing operations in West Africa
and received $10.0 million as a deposit. The sale is subject to the execution of
a definitive sale agreement and is expected to close in the first quarter of
2003.
EMPLOYEES
At December 31, 2002, the Company had approximately 26,500 employees, as
compared with approximately 26,800 employees at December 31, 2001, of which
approximately 700 employees were attributable to EIMCO. Approximately 1,870
employees at December 31, 2002, were represented under collective bargaining
agreements that terminate at various times through May 1, 2005. The Company
believes that its relations with its employees are satisfactory.
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EXECUTIVE OFFICERS
The following table shows as of March 5, 2003, the name of each executive
officer of the Company, together with his age and all offices presently held
with the Company.
NAME AGE
Michael E. Wiley 52 Chairman of the Board, President and Chief Executive Officer of the
Company since August 2000. Employed by Atlantic Richfield Company as
President and Chief Operating Officer from 1998 to 2000 and as Executive
Vice President from 1997 to 1998. Employed by Vastar Resources, Inc. as
President and Chief Executive Officer from 1994 to 1997 and served as
Chairman of the Board from 1997 to 2000. Employed by the Company in 2000.
Andrew J. Szescila 55 Senior Vice President and Chief Operating Officer of the Company since
2000. Employed as President of Baker Hughes Oilfield Operations from
January to October 2000. Served as Senior Vice President of the Company
since 1997 and Vice President of the Company from 1995 to 1997. Employed
as President of Hughes Christensen Company from 1989 to 1997 and President
of Baker Service Tools from 1988 to 1989. Served as President of BJ
Services International from 1987 to 1988. Employed by the Company in 1973.
G. Stephen Finley 52 Senior Vice President - Finance and Administration and Chief Financial
Officer of the Company since 1999. Employed as Senior Vice President and
Chief Administrative Officer of the Company from 1995 to 1999, Controller
from 1987 to 1993 and Vice President from 1990 to 1995. Served as Chief
Financial Officer of Baker Hughes Oilfield Operations from 1993 to 1995.
Employed by the Company in 1982.
Alan R. Crain, Jr. 51 Vice President and General Counsel of the Company since October 2000.
Executive Vice President, General Counsel and Secretary of Crown, Cork &
Seal Company, Inc. from 1999 to 2000. Vice President and General Counsel,
1996 to 1999, and Assistant General Counsel, 1988 to 1996, of Union Texas
Petroleum Holding, Inc. Employed by the Company in 2000.
Greg Nakanishi 51 Vice President, Human Resources of the Company since November 2000.
Employed as President of GN Resources from 1989 to 2000. Employed by the
Company in 2000.
Alan J. Keifer 48 Vice President and Controller of the Company since July 1999. Employed as
Western Hemisphere Controller of Baker Oil Tools from 1997 to 1999 and
Director of Corporate Audit for the Company from 1990 to 1996. Employed by
the Company in 1990.
John A. O'Donnell 54 Vice President of the Company since 2000. Employed as Vice President,
Business Process Development, of the Company from 1998 to 2002; Vice
President, Manufacturing, of Baker Oil Tools from 1990 to 1998 and Plant
Manager of Hughes Tool Company from 1975 to 1990. Employed by the Company
in 1975.
Ray Ballantyne 53 Vice President of the Company since 1998 and President, INTEQ since 1999.
Employed as Vice President, Marketing, Technology and Business
Development, of the Company from 1998 to 1999; Vice President, Worldwide
Marketing, of Baker Oil Tools from 1992 to 1998 and Vice President,
International Operations, of Baker Service Tools, from 1989 to 1992.
Employed by the Company in 1975.
David H. Barr 53 Vice President of the Company and President of Baker Atlas since 2000.
Employed as Vice President, Supply Chain Management, of Cooper Cameron
from 1999 to 2000. Mr. Barr also held the following positions with the
Company: Vice President, Business Process Development, from 1997 to 1998
and the following positions with Hughes Tool Company/Hughes Christensen:
Vice President, Production and Technology, from 1994 to 1997; Vice
President, Diamond Products, from 1993 to 1994; Vice President, Eastern
Hemisphere Operations, from 1990 to 1993 and Vice President, North
American Operations, from 1988 to 1990. Employed by the Company in 1972.
6
James R. Clark 52 Vice President of the Company and President of Baker Petrolite Corporation
since 2001. President and Chief Executive Officer of Consolidated
Equipment Companies, Inc. from 2000 to 2001 and President of Sperry-Sun
from 1996 to 1999. Employed by the Company in 2001.
William P. Faubel 47 Vice President of the Company and President of Centrilift since 2001. Vice
President, Marketing, of Hughes Christensen from 1994 to 2001 and served
as Region Manager for various Hughes Christensen areas (both domestic and
international) from 1986 to 1994. Employed by a predecessor of the
Company, Hughes Tool Company, in 1977.
Edwin C. Howell 55 Vice President of the Company since 1995 and President of Baker Oil Tools
since 1992. Employed as President of Baker Service Tools from 1989 to 1992
and Vice President - General Manager of Baker Performance Chemicals (the
predecessor of Baker Petrolite) from 1984 to 1989. Employed by the Company
in 1975.
Douglas J. Wall 50 Vice President of the Company and President of Hughes Christensen since
1997. Served as President and Chief Executive Officer of Western Rock Bit
Company Limited, Hughes Christensen's former distributor in Canada, from
1991 to 1997. Previously employed as General Manager of Century Valve
Company from 1989 to 1991 and Vice President, Contracts and Marketing, of
Adeco Drilling & Engineering from 1980 to 1989. Employed by the Company in
1997.
There are no family relationships among the executive officers of the
Company.
ENVIRONMENTAL MATTERS
The Company's operations are subject to domestic (including U. S. federal,
state and local) and international regulations with regard to air and water
quality and other environmental matters. The Company believes that it is in
substantial compliance with these regulations. Regulation in this area continues
to evolve and changes in standards of enforcement of existing regulations, as
well as the enactment and enforcement of new legislation, may require the
Company and its customers to modify, supplement or replace equipment or
facilities or to change or discontinue present methods of operation.
Remediation costs are accrued based on estimates of known environmental
remediation exposure using currently available facts, existing environmental
permits and technology and presently enacted laws and regulations. For sites
where the Company is primarily responsible for the remediation, the Company's
estimates of costs are developed based on internal evaluations and are not
discounted. Such accruals are recorded when it is probable that the Company will
be obligated to pay amounts for environmental site evaluation, remediation or
related costs, and such amounts can be reasonably estimated. If the obligation
can only be estimated within a range, the Company accrues the minimum amount in
the range. Such accruals are recorded even if significant uncertainties exist
over the ultimate cost of the remediation. Ongoing environmental compliance
costs, such as obtaining environmental permits, installation of pollution
control equipment and waste disposal, are expensed as incurred. Where the
Company has been identified as a potentially responsible party in a United
States federal or state "Superfund" site, the Company accrues its share of the
estimated remediation costs of the site based on the ratio of the estimated
volume of waste contributed to the site by the Company to the total volume of
waste at the site.
During the year ended December 31, 2002, the Company spent approximately
$21.6 million to comply with domestic and international standards regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment (collectively, "Environmental Regulations"). In
2003, the Company expects to spend approximately $23.5 million to comply with
Environmental Regulations. Based upon current information, the Company believes
that its compliance with Environmental Regulations will not have a material
adverse effect upon the capital expenditures, earnings and competitive position
of the Company because the Company has either made adequate reserves for such
compliance expenditures or the cost to the Company for such compliance is
expected to be small in comparison with the Company's overall net worth.
The Company estimates that it will incur approximately $5.8 million and $5.0
million in capital expenditures for environmental control equipment during the
years ending December 31, 2003 and 2004, respectively. The Company believes that
capital expenditures for environmental control equipment for these years will
not have a material adverse effect upon the financial condition of the Company
because the aggregate amount of these expenditures is expected to be small in
comparison with the Company's overall net worth.
7
The Comprehensive Environmental Response, Compensation and Liability Act
(known as "Superfund" or "CERCLA") imposes liability for the release of a
"hazardous substance" into the environment. Superfund liability is imposed
without regard to fault and even if the waste disposal was in compliance with
the then current laws and regulations. With the joint and several liability
imposed under Superfund, a potentially responsible party ("PRP") may be required
to pay more than its proportional share of such costs. The Company and several
of its subsidiaries and divisions have been identified as PRPs at various sites
discussed below. The United States Environmental Protection Agency (the "EPA")
and appropriate state agencies are supervising investigative and cleanup
activities at these sites. For the sites detailed below, the Company estimates
total remediation costs of approximately $5.9 million, of which the Company has
expended $1.6 million as of December 31, 2002. When used in the descriptions of
the sites below, the word de minimis means less than a 1% contribution rate.
(a) Baker Petrolite, Hughes Christensen, an INTEQ predecessor entity, Baker
Oil Tools and a former subsidiary were named in April 1984 as PRPs at
the Sheridan Superfund Site located in Hempstead, Texas. The Texas
Commission on Environmental Quality ("TCEQ") is overseeing the remedial
work at this site. The Sheridan Site Trust was formed to manage the site
remediation and the Company participates as a member of the Sheridan
Site Trust. Sheridan Site Trust officials estimate the total remedial
and administrative costs to be approximately $30 million, of which the
Company's estimated contribution is approximately 2%.
(b) In December 1987, a former subsidiary of the Company was named a
respondent in an EPA Administrative Order for Remedial Design and
Remedial Action associated with the Middlefield-Ellis-Whisman (known as
"MEW") Study Area, an eight square mile soil and groundwater
contamination site located in Mountain View, California. Several PRPs
for the site have estimated the total cost of remediation to be
approximately $80 million. The conclusion of extensive investigations is
that the activities of the former subsidiary's operating facility in the
MEW Study Area could not have been the source of any contamination in
the soil or groundwater within the MEW Study Area. As a result of the
Company's environmental investigations and a resulting report delivered
to the EPA in September 1991, the EPA has informed the Company that no
further work needs to be performed on the former subsidiary's site, and
further, the EPA has indicated that it does not believe there is a
contaminant source on the property. Although the Company's former
subsidiary continues to be named in the EPA's Administrative Order, the
Company believes the Administrative Order is not valid with respect to
the Company's former subsidiary and is seeking the withdrawal of the
Administrative Order with respect to that subsidiary.
(c) In July 1997, Baker Petrolite was named by the EPA as a PRP at the Shore
Refinery Site, Kilgore, Texas. According to Baker Petrolite's records,
it did not arrange for the disposal, treatment or transportation of
hazardous substances or used oil in relation to the site, and to date,
the EPA has not produced any documentation linking the Company or any of
its subsidiaries or divisions to the environmental conditions at the
site. The Company does not believe that it has any liability for
contamination at this site.
(d) In 1997, Baker Hughes and Prudential Insurance Company ("Prudential")
entered into a settlement agreement regarding cost recovery for the San
Fernando Valley - Glendale Superfund. A Baker Hughes predecessor
operated on Prudential property in Glendale. Prudential was identified
as a PRP for the Glendale Superfund. Prudential instituted legal
proceedings against Baker Hughes for cost recovery under CERCLA. Without
any admission of liability, Baker Hughes agreed to pay 40% of the cost,
which is limited to $260,000 under the Company's agreement with
Prudential, attributed to the cleanup of the site. The first phase of
groundwater investigation and the interim remedy have been presented to
the EPA.
(e) In June 1999, the EPA named a Hughes Christensen predecessor as a PRP at
the Li Tungsten Site in Glen Cove, New York. The Company believes that
it has contributed a de minimis amount of hazardous substance to the
site and has responded to the EPA's inquiry. Investigative studies will
be conducted at the site to determine a suitable remedial action plan,
as well as the total estimated cost for remediation.
(f) In January 1999, Baker Oil Tools, Baker Petrolite and predecessor
entities of Baker Petrolite were named as PRPs by the State of
California's Department of Toxic Substances Control for the Gibson site
in Bakersfield, California. The cost estimate for remediation of the
site is approximately $14 million. The combined volume that Baker Hughes
companies contributed to the site is estimated to be less than 0.5%.
(g) In December 2000, the EPA named Baker Petrolite as a PRP at the Casmalia
Disposal Site, Santa Barbara County, California. The EPA has estimated
the total cost of remediation to range from $225 million to $290
million. Baker Petrolite is considered a de minimis contributor and is
negotiating a settlement.
(h) In 2001, a Hughes Christensen predecessor, Baker Oil Tools, INTEQ and a
former subsidiary of the Company were named as PRPs in the Force Road
State Superfund Site located in Brazoria County, Texas. The TCEQ is
overseeing the investigation
8
and remediation at the Force Road State Site. Although the investigation
of the site is incomplete, preliminary cost estimates for the closure of
the site are approximately $3 million, with the total contribution from
the Company estimated to be in the range of 50% to 60% of that cost.
(i) In 2002, Baker Petrolite predecessors, Hughes Christensen predecessors
and former Company subsidiaries, Western Geophysical and Baker Tubular
Services, were identified as PRPs for the Malone site located on
Campbell Bayou Road in Texas City, Texas. The EPA is overseeing the
investigation and remediation of the Malone site. The EPA has engaged in
some emergency removal actions at the site. A PRP group has been formed
and is evaluating the next steps for the site. Although the
investigation has not been completed, the initial estimate for cleanup
at the Malone site is $82 million. Total contribution from the Company
is estimated at approximately 1.8%.
(j) In August 2002, predecessor companies of Baker Oil Tools, Baker
Petrolite and INTEQ were identified as PRPs for the Environmental
Protection Corporation site in Bakersfield, California. The California
Department of Toxic Substances Control is overseeing the investigation
and subsequent environmental cleanup at this site. The Baker Hughes PRPs
have agreed with Chevron Corporation, the majority PRP, to settle their
liability for the amount of the Baker Hughes PRPs' contributions
(approximately $20,000). It is expected that the settlement will be paid
by the end of the first quarter of 2003.
(k) In November 2002, Baker Petrolite was identified as a PRP in a superfund
site located in Jackson, Mississippi. Baker Petrolite is considered a de
minimis contributor to this site. The EPA is managing this site and has
already removed wastes under an emergency order. The EPA is attempting
to recover the costs of the waste removal. The remedial investigation
has not been completed, and therefore, there is no available estimate of
cleanup costs.
(l) In January 2003, Western Atlas International, Inc. and predecessor
companies and Baker Hughes Oilfield Operations, Inc. were identified as
PRPs in the Gulf Nuclear Superfund site in Odessa, Texas. The EPA
conducted an emergency removal from the site in 2000. The EPA has
estimated total investigation and cleanup costs to be $15 million. At
this time, there is insufficient information to estimate the Company's
potential contribution to the investigation and cleanup costs at this
site.
There are three sites for which the remedial work has been completed and
which are in the groundwater recovery and monitoring phase. This phase of the
remediation is expected to continue for a period of 3 to 28 years, and the
Company's aggregate cost for these sites is estimated to be approximately
$100,000 over this period of time.
While PRPs in Superfund actions have joint and several liability for all
costs of remediation, it is not possible at this time to quantify the Company's
ultimate exposure because some of the projects are either in the investigative
or early remediation stage. Based upon current information, the Company does not
believe that probable or reasonably possible expenditures in connection with the
sites described above are likely to have a material adverse effect on the
Company's financial condition because:
(1) the Company has established adequate reserves to cover the estimate the
Company presently believes will be its ultimate liability with respect
to the matter,
(2) other PRPs involved in the sites have substantial assets and may
reasonably be expected to pay their share of the cost of remediation,
(3) the Company has adequate resources and, in some circumstances, insurance
coverage or contractual indemnities from third parties to cover the
ultimate liability, and
(4) the Company believes that its ultimate liability is small compared with
the Company's overall net worth.
The Company is subject to various other governmental proceedings and
regulations, including foreign regulations, relating to environmental matters,
but the Company does not believe that any of these matters is likely to have a
material adverse effect on its financial condition or results of operation.
"Environmental Matters" contains 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. The words "will,"
"believe," "to be," "expects" and similar expressions are intended to identify
forward-looking statements. The Company's expectations regarding its compliance
with Environmental Regulations and its expenditures to comply with Environmental
Regulations, including (without limitation) its capital expenditures on
environmental control equipment, are only its forecasts regarding these matters.
These forecasts may be substantially different from actual results, which may be
affected by the following factors: changes in Environmental Regulations;
unexpected, adverse outcomes with respect to sites where the Company has been
named as a PRP, including (without limitation) the sites
9
described above; the discovery of new sites of which the Company is not aware
and where additional expenditures may be required to comply with Environmental
Regulations; an unexpected discharge of hazardous materials in the course of the
Company's business or operations; an acquisition of one or more new businesses;
a catastrophic event causing discharges into the environment of hydrocarbons;
and a material change in the allocation to the Company of the volume of
discharge and a resulting change in the Company's liability as a PRP with
respect to a site.
ITEM 2. PROPERTIES
The Company is headquartered in Houston, Texas and operates 44 principal
manufacturing plants, ranging in size from approximately 4,600 to 300,000 square
feet of manufacturing space. The total area of the plants is more than 3.6
million square feet, of which approximately 2.4 million square feet (66%) are
located in the United States, 0.3 million square feet (10%) are located in
Canada and South America, 0.9 million square feet (24%) are located in Europe
and a minimal amount of space is located in the Far East. These manufacturing
plants by industry segment and geographic area appear in the table below. The
Company's principal manufacturing plants are located as follows: United States -
Houston, Texas; Tulsa, Oklahoma; Lafayette, Louisiana; Europe - Aberdeen and
East Kilbride, Scotland; Kirkby, England; Celle, Germany; Belfast, Ireland;
South America - Venezuela, Argentina. The Company also owns or leases and
operates numerous customer service centers, shops and sales and administrative
offices throughout the geographic areas in which it operates.
CANADA
AND SOUTH
UNITED STATES AMERICA EUROPE FAR EAST TOTAL
- ------------------------------------------------------------------------
Oilfield 26 5 7 1 39
Process 3 1 1 - 5
The Company believes that its manufacturing facilities are well maintained
and suitable for their intended purposes. The Company also has a significant
investment in service vehicles, rental tools and manufacturing and other
equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation or proceedings
that have arisen in the Company's ordinary business activities. The Company
insures against these risks to the extent deemed prudent by its management, but
no assurance can be given that the nature and amount of such insurance will be
sufficient to fully indemnify the Company against liabilities arising out of
pending and future legal proceedings. Many of these insurance policies contain
deductibles or self-insured retentions in amounts the Company deems prudent. In
determining the amount of self-insurance, it is the Company's policy to
self-insure those losses that are predictable, measurable and recurring in
nature, such as automobile liability claims, general liability and workers
compensation claims. The Company records accruals for the uninsured portion of
losses related to these types of claims. The accruals for losses are calculated
by estimating losses for claims using historical claim data, specific loss
development factors and other information as necessary.
On September 12, 2001, the Company, without admitting or denying the factual
allegations contained in the Order, consented with the Securities and Exchange
Commission ("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 Reports 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
10
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. The state court case has been stayed pending the
outcome of the federal suit. Discovery in the federal suit 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.
The Company's ongoing internal investigation has identified apparent
deficiencies with respect to certain operations in Nigeria in its books and
records and internal controls, and potential liabilities to governmental
authorities in Nigeria. The investigation was 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.
See also "Item 1. Business - Environmental Matters".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock, $1.00 par value per share (the "Common Stock"), of the
Company is principally traded on The New York Stock Exchange. The Common Stock
is also traded on the Pacific Exchange and the Swiss Exchange. At March 5, 2003,
there were approximately 71,500 stockholders and approximately 23,516
stockholders of record.
For information regarding quarterly high and low sales prices on the New
York Stock Exchange for the Common Stock during the two years ended December 31,
2002 and information regarding dividends declared on the Common Stock during the
two years ended December 31, 2002, see Note 18 of the Notes to Consolidated
Financial Statements in Item 8 herein.
Information concerning securities authorized for issuance under equity
compensation plans is set forth in the section entitled "Equity Compensation
Plan Information" in the Proxy Statement of the Company for the Annual Meeting
of Stockholders to be held on April 23, 2003, which section is incorporated
herein by reference.
11
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with "Item 8. Financial Statements and Supplementary Data"
herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
(In millions, except per share amounts) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Revenues $ 5,020.4 $ 5,139.6 $ 4,942.1 $ 4,854.8 $ 6,310.6
Costs and expenses:
Cost of revenues 3,625.7 3,655.9 3,823.4 3,957.1 5,138.4
Selling, general and administrative 840.6 781.7 721.3 752.2 876.3
Merger related costs - - - (1.6) 219.1
Restructuring charges (1.9) 1.8 7.0 44.3 215.8
(Gain) loss on disposal of assets - (2.4) 67.9 (54.8) -
- ----------------------------------------------------------------------------------------------------------------
Total 4,464.4 4,437.0 4,619.6 4,697.2 6,449.6
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) 556.0 702.6 322.5 157.6 (139.0)
Equity in income (loss) of affiliates (69.7) 45.8 (4.6) 7.0 6.7
Interest expense (111.2) (126.4) (179.9) (167.0) (149.0)
Interest income 5.3 11.9 4.4 5.1 3.6
Gain on trading securities - - 14.1 31.5 -
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 380.4 633.9 156.5 34.2 (277.7)
Income taxes (156.7) (215.8) (94.8) (9.4) (18.4)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 223.7 418.1 61.7 24.8 (296.1)
Income (loss) from discontinued operations,
net of tax (12.3) 20.6 40.6 8.5 -
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss and
cumulative effect of accounting change 211.4 438.7 102.3 33.3 (296.1)
Extraordinary loss, net of tax - (1.5) - - -
Cumulative effect of accounting change, net
of tax (42.5) 0.8 - - -
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 168.9 $ 438.0 $ 102.3 $ 33.3 $ (296.1)
================================================================================================================
Per share of common stock:
Income (loss) from continuing operations
Basic $ 0.66 $ 1.25 $ 0.19 $ 0.08 $ (0.92)
Diluted 0.66 1.24 0.19 0.08 (0.92)
Dividends 0.46 0.46 0.46 0.46 0.46
Financial Position:
Working capital $ 1,475.4 $ 1,588.1 $ 1,624.6 $ 1,280.4 $ 1,472.6
Total assets 6,400.8 6,676.2 6,489.1 7,182.1 7,788.3
Long-term debt 1,424.3 1,682.4 2,049.6 2,706.0 2,726.3
Stockholders' equity 3,397.2 3,327.8 3,046.7 3,071.1 3,165.1
NOTES TO SELECTED FINANCIAL DATA
(1) The selected financial data has been reclassified to reflect EIMCO Process
Equipment ("EIMCO") and the Company's oil producing operations in West
Africa as discontinued operations. The results of operations for EIMCO are
not reflected as discontinued operations for 1999 and 1998 as data is not
available for those years because EIMCO was a component of a larger
operating unit during those years. See Note 2 of the Notes to Consolidated
Financial Statements in Item 8 herein for additional information regarding
discontinued operations.
(2) See Note 8 of the Notes to Consolidated Financial Statements in Item 8
herein for a description of the WesternGeco venture formed by the Company in
November 2000.
(3) During 1998, the Company acquired WEDGE DIA-LOG, Inc. and 3-D Geophysical,
Inc. for $218.5 million in cash and $117.5 million in cash, respectively.
The Company also made several smaller acquisitions with an aggregate
purchase price of $121.6 million. The purchase method of accounting was used
to record these acquisitions.
12
(4) In August 1998, the Company completed a merger with Western Atlas Inc.
("Western Atlas") accounted for using the pooling of interests method. In
connection with the merger, the Company recorded merger related costs of
$219.1 million for transaction costs, employee related costs, integration
costs, the write-off of the carrying value of a product line and the
triggering of change in control rights contained in certain stock options
plans of Western Atlas and the Company.
(5) See Note 4 of the Notes to Consolidated Financial Statements in Item 8
herein for a description of the restructuring charges and (gain) loss on
disposal of assets in 2002, 2001 and 2000. During 1999, the Company recorded
a restructuring charge of $122.8 million primarily related to its seismic
operations, of which $72.1 million was recorded in cost of revenues. The
major actions included in this restructuring were a reduction in workforce,
terminating leases on certain vessels, the impairment of property and sale
or abandonment of certain vessels. The Company also recorded a reversal of
$11.4 million of restructuring charges recorded in prior years, of which
$5.0 million was recorded in selling, general and administrative expense.
The Company recorded gains on disposal of assets of $54.8 million relating
to the sale of two large excess real estate properties and the sale of
certain assets related to its previous divestiture of a joint venture. The
restructuring charge in 1998 consisted of charges for severance benefits,
charges to combine operations and consolidate facilities, environmental and
litigation reserves, charges for impairment of inventory and rental tools,
the write-down of a former consolidated joint venture, the write-off and
write-down of certain assets, a ceiling test charge for the Company's oil
and gas properties and a write-down of real estate held for sale. In 1998,
the charges reflected in cost of revenues, selling, general and
administrative expense and restructuring charges were $305.0 million, $68.7
million and $215.8 million, respectively.
(6) See Note 10 and Note 1 of the Notes to Consolidated Financial Statements in
Item 8 herein for descriptions of the cumulative effect of accounting change
in 2002 and 2001, respectively.
13
ITEM 7. 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 consolidated
financial statements of the Company for the years ended December 31, 2002, 2001
and 2000 and the related Notes to Consolidated Financial Statements contained in
Item 8 herein.
FORWARD-LOOKING STATEMENTS
MD&A and certain statements in the Notes to Consolidated 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 regarding 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; the Company's ability to retain or increase its market share; the
Company's completion of its proposed West Africa disposition; world economic
conditions; the price of, and the demand for, crude oil and natural gas;
drilling activity; weather conditions that affect the demand for energy and
severe weather conditions that affect exploration and production activities; the
legislative and regulatory environment in the U.S. and other countries in which
the Company operates; Organization of Petroleum Exporting Countries ("OPEC")
policy and the adherence by OPEC nations to their OPEC production quotas; war or
extended period of international conflict involving the U.S., the Middle East
and other major petroleum-producing or consuming regions; acts of war or
terrorism; civil unrest or in-country security concerns where the Company
operates; the development of technology by Baker Hughes or its competitors 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 as a result of the financial deterioration and bankruptcies of large
U.S. entities; labor-related actions, including strikes, slowdowns and facility
occupations; the condition of the capital and equity markets in general; adverse
foreign exchange fluctuations and adverse changes in the capital markets in
international locations where the Company operates; 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.
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 Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen and INTEQ -
that manufacture and sell products and provide services used in the oil and gas
exploration industry, including drilling, formation evaluation, completion and
production of oil and gas wells. The Oilfield segment also includes the
Company's investment in the WesternGeco venture. For the year ended December 31,
2002, revenues from the Oilfield segment accounted for 97.6% of total revenues.
The Process segment consists of one operating division, BIRD Machine, 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.
14
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 ("E&P")
of oil and gas reserves. These expenditures are influenced strongly by
expectations about the supply and demand for crude oil and natural gas products
and by the energy price environment.
The Company does business in approximately 70 countries. According to
Transparency International's annual Corruption Perceptions Index ("CPI") survey,
a high degree of corruption is perceived to exist in many of these countries.
For example, the Company does business in about one-half of the 30 countries
having the worst scores in Transparency International's CPI survey for 2002. The
Company devotes significant resources to the development, maintenance and
enforcement of its Business Code of Conduct policy, its Foreign Corrupt
Practices Act (the "FCPA") policy, its internal control processes and
procedures, as well as other compliance related policies. Notwithstanding the
devotion of such resources, and in part as a consequence thereof, the Company,
from time to time, discovers or receives information alleging potential
violations of the FCPA and the Company's policies, processes and procedures. The
Company conducts internal investigations of these potential violations. The
Company anticipates that the devotion of significant resources to compliance
related issues, including the necessity for such internal investigations, will
continue to be an aspect of doing business in a number of the countries in which
oil and gas exploration, development and production take place and the Company
is requested to conduct operations.
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 decrease or increase supply and support their targeted oil price
while meeting their market share objectives. Key measures of production control
include actual production levels compared with target or quota production
levels, oil price compared with targeted oil price and changes in each country's
market share.
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 a U.S. economic recovery. Key measures
include U.S. and global economic activity, global energy demand and forecasts of
future demand by governments and private organizations.
Oil and gas storage inventory levels - a measure of the balance between
supply and demand. A key measure of U.S. natural gas inventories is the storage
level reported weekly by the U.S. Department of Energy compared with historic
levels. Key measures for oil inventories include U.S. inventory levels reported
by the U.S. Department of Energy and American Petroleum Institute and worldwide
estimates reported by the International Energy Agency, again compared with
historic levels.
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 and production
from existing wells. 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 cost. Also
key are the overall levels of research and engineering spending and the pace at
which new technology is introduced commercially and accepted by customers.
Maturity of the resource base - of known hydrocarbon reserves in the North
Sea, U.S., Canada and Latin America.
Pace of new investment - access to capital and the reinvestment of available
cash flow into existing and emerging markets. Key measures of access to capital
include cash flow, interest rates, analysis of oil and gas company leverage and
equity offering activity. Access to capital is particularly important for
smaller independent oil and gas companies.
Energy prices and price volatility - the impact of widely fluctuating
commodity prices on the stability of the market and subsequent impact on
customer spending. Sustained higher energy prices can be an impediment to
economic growth. While current energy prices are important contributors to
positive cash flow at E&P companies, expectations for future prices are more
important for determining future E&P 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.
15
Weather - the impact of variations in temperatures as compared with normal
weather patterns and the related effect on demand for oil and natural gas. A key
measure of the impact of weather on energy demand is population-weighted heating
and cooling degree days as reported by the U.S. Department of Energy and
forecasts of warmer than normal or cooler than normal temperatures.
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. West
Texas Intermediate ("WTI") 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.
2002 2001 2000
- ------------------------------------------------------------------------------
WTI crude oil ($/bbl) $ 26.17 $ 25.96 $ 30.37
U.S. Spot Natural Gas ($/MMBtu) 3.37 3.96 4.30
WTI crude oil prices averaged $26.17/bbl in 2002, rising from a low of
$17.97/bbl in January to a high of $32.72/bbl in December. Production cuts by
both OPEC and non-OPEC producers late in 2001 were carried into the beginning of
2002 and averted a substantial price decline driven by rising inventories early
in the year. Over the course of the year, however, oil prices rose above what
the historical relationship between prices and inventories would suggest was
appropriate, driven primarily by concerns of a possible supply disruption
resulting from a military campaign in Iraq. This "war premium" fluctuated in a
range estimated to be between $2/bbl to $6/bbl for the first three quarters of
2002. In the fourth quarter, prices softened briefly on concerns the market
would be oversupplied due to rising OPEC production rates before strengthening
again in December on renewed supply concerns amidst a general strike in
Venezuela and ongoing uncertainty regarding the possibility of a military
conflict in Iraq.
During 2002, natural gas prices averaged $3.37/MMBtu. While lower than the
2001 average of $3.96/MMBtu, prices generally rose over the course of 2002,
similar to oil prices. From a low of $1.98/MMBtu in January, prices rose as high
as $5.29/MMBtu in December. The rise in natural gas prices over the course of
the year was driven primarily by tightening supply. The year over year gas
storage surplus continued its decline from a December 2001 peak. The first week
of November 2002 marked the start of the withdrawal season, some five weeks
earlier than in 2001, as well as the first time storage levels showed a year
over year deficit since May 2001. This tightening of the gas market was driven
primarily by accelerating declines in gas production as North American drilling
activity in 2002 trended downward to be well below 2001 levels.
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 many of
the products and services provided 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 generally 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 its 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. North American
rigs are counted as active if the well being drilled has been started and
drilling has not been completed on the day the count is taken. For an
international rig to be counted as active 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
2002 2001 2000
- --------------------------------------------------------------------------
U.S. - Land 717 1,003 778
U.S. - Offshore 113 153 140
Canada 263 341 345
- --------------------------------------------------------------------------
North America 1,093 1,497 1,263
- --------------------------------------------------------------------------
Latin America 214 262 227
North Sea 52 56 45
Other Europe 36 39 38
Africa 58 53 46
Middle East 201 179 156
Asia Pacific 171 157 140
- --------------------------------------------------------------------------
Outside North America 732 746 652
- --------------------------------------------------------------------------
Worldwide 1,825 2,243 1,915
==========================================================================
U.S. Workover Rigs 1,010 1,211 1,056
==========================================================================
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 - The balance between oil supply and oil demand is tight as 2003 begins.
The ongoing turmoil in Venezuela has disrupted supplies and resulted in
extremely low oil inventory levels in the U.S. OPEC has decided to increase
production to offset the loss of approximately 2 million barrels per day of
Venezuelan production; however, crude oil from the Middle East generally takes
over one month to arrive in the U.S. due to longer transit times. Complicating
the situation is the uncertainty associated with the possibility and timing of
military action in the Middle East and any additional disruptions in supply. As
a result, oil prices are expected to average between $30/bbl and $35/bbl in the
first quarter of 2003. In 2003, prices could trade in a much broader range
depending on the nature, duration and outcome of any potential military action
in Iraq, the duration and resolution of the strike in Venezuela, the willingness
and the ability of OPEC nations and other key nations to manage production
levels to stabilize prices and the pace of worldwide economic activity.
North America Natural Gas - In 2003, prices are expected to trade between
$3.50/MMBtu and $4.50/MMBtu. Natural gas could trade at the top of this range in
2003 if weather is colder than expected, if the U.S. economy, particularly the
industrial sector, exhibits growth and if continued levels of customer spending
result 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, its review of published industry reports and the Company's outlook
for oil and gas prices described above, the anticipated customer spending trends
are as follows:
- North America - Spending in North America, primarily towards developing
natural gas supplies, is expected to increase approximately 10% to 15%
in 2003 compared with 2002.
- Outside North America - Customer spending, primarily directed at
developing oil supplies, is expected to be flat to up by 5% in 2003
compared with 2002.
- Total spending is expected to be up 4% to 6% in 2003 compared with 2002.
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 increase approximately 8% to
10% in 2003 compared with 2002. The U.S. rig count is expected to rise
throughout the year and end the year at approximately 950 to 1,100 rigs.
- Drilling activity outside of North America, excluding Venezuela, is
expected to remain steady in 2003 and is expected to increase as much as
3% to 5% compared with 2002.
17
COMPANY OUTLOOK
The Company expects that 2003 will be stronger than 2002, with revenues
expected to increase by approximately 4% to 6% as compared with 2002, with
related improvements in operating results, primarily in the second half of the
year. Activity is expected to improve in the second half of 2003 as a result of
increased drilling activity in the U.S., primarily due to relatively higher
commodity prices. Activity outside of the U.S. is also expected to increase as a
result of the relatively high crude oil prices. The Company expects the first
quarter of 2003 activity to be down compared with the fourth quarter of 2002 due
to the impact of reduced business activity levels in Venezuela, reduced export
sales and downward pricing pressures on the Company's products and services.
On December 2, 2002, PdVSA, the national oil company of Venezuela, initiated
a strike intended to force Venezuelan President Hugo Chavez to resign from
office and call new elections. The strike effectively shut down activity in the
Venezuelan energy industry and led to a general strike which had a severe impact
on the Venezuelan economy. By the end of December 2002, exploration and
development activity was at less than 25% of its pre-strike levels. The nature
and timing of a resolution is uncertain. Even if there is a quick resolution to
the crisis, it is expected to take several months for activity levels in
Venezuela to return to normal. The Company has implemented a cost reduction
effort in Venezuela and has reduced new investments of capital in the country.
The strike has significantly impacted the Company's Venezuelan operations and it
is expected to have a lingering impact after it is resolved until activity
returns to pre-strike levels. Revenues for Venezuela for the years ended
December 31, 2002, 2001 and 2000 totaled $143.7 million, $232.7 million and
$277.4 million, respectively. At December 31, 2002 and 2001, net property in
Venezuela totaled $26.6 million and $37.4 million, respectively.
In Argentina, the weakening peso and related economic issues did not
materially impact the Company's business during 2002. This impact did, however,
include devaluation losses, delays and losses associated with collecting
outstanding accounts receivable and reduced demand for the Company's products
and services. Although the economic environment had stabilized by the end 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 continue to
negatively impact the exploration and production spending plans of the Company's
customers for 2003. 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 December 31, 2002, net property in Argentina totaled $9.4 million. Revenues
for Argentina for the year ended December 31, 2002 totaled $69.7 million.
Aspects of the U.S.-Iraqi conflict and the war on terrorism are likely to
have an impact on 2003 results. Currently, expectations of military activity and
potential supply disruptions have resulted in a "war premium" for crude oil and
strong cash flows for our customers. Should military action take place and be
resolved quickly, resulting in an increase in oil production from Iraq, oil
prices could fall significantly. However, should military action not be resolved
quickly, resulting in extended supply disruptions, oil prices could be sustained
at higher prices. The Company cannot predict the extent of the impact that any
such events may have on the Company.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results
of operations is based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The Company's significant accounting policies are
described in the Notes to Consolidated Financial Statements. The preparation of
the consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures about contingent assets and liabilities. The
Company bases its estimates and judgments on historical experience and on
various other assumptions and information that are believed to be reasonable
under the circumstances. Estimates and assumptions about future events and their
effects cannot be perceived with certainty and accordingly, these estimates may
change as new events occur, as more experience is acquired, as additional
information is obtained and as the Company's operating environment changes.
The Company has defined a critical accounting policy as one that is both
important to the understanding of the Company's financial condition and results
of operations and requires the management of the Company to make difficult,
subjective or complex judgments or estimates. The Company believes the following
are the critical accounting polices used in the preparation of the Company's
consolidated financial statements as well as the significant judgments and
uncertainties affecting the application of these policies.
18
REVENUE RECOGNITION
Inherent in the Company's revenue recognition policy is the determination of
the collectibility of amounts due from its customers, which requires the Company
to use estimates and exercise judgment. The Company routinely monitors its
customers' payment history and current credit worthiness to determine that
collectibility is reasonably assured. This requires the Company to make frequent
judgments and estimates in order to determine the appropriate period to
recognize a sale to a customer and the amount of valuation allowances required
for doubtful accounts. The Company records provisions for doubtful accounts when
it becomes evident that the customer will not be able to make the required
payments either at contractual due dates or in the future. Changes in the
financial condition of the Company's customers, either adverse or positive,
could impact the amount and timing of any additional provisions for doubtful
accounts that may be required.
INVENTORIES
The Company's inventory is a significant component of current assets and is
stated at the lower of cost or market. The Company regularly reviews inventory
quantities on hand and records provisions for excess or obsolete inventory based
primarily on its estimated forecast of product demand, market conditions,
production requirements and technological developments. Significant or
unanticipated changes to the Company's forecasts of these items, either adverse
or positive, could impact the amount and timing of any additional provisions for
excess or obsolete inventory that may be required.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which include property, goodwill, intangible assets and
certain other assets, comprise a significant amount of the Company's total
assets. The Company makes judgments and estimates in conjunction with the
carrying value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the
carrying values of these assets are periodically reviewed for impairment or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review. These forecasts require assumptions about demand
for the Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period.
INCOME TAXES
The Company uses the liability method for determining income taxes, under
which current and deferred tax liabilities and assets are recorded in accordance
with enacted tax laws and rates. Under this method, the amounts of deferred tax
liabilities and assets at the end of each period are determined using the tax
rate expected to be in effect when taxes are actually paid or recovered.
Valuation allowances are established to reduce deferred tax assets when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. While the Company has considered estimated future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowances, changes in these estimates and assumptions
could require the Company to adjust the valuation allowances for its deferred
tax assets.
The Company operates in more than 70 countries under many legal forms. As a
result, the Company is subject to numerous domestic and foreign tax
jurisdictions and tax agreements and treaties among the various taxing
authorities. The Company's operations in these different jurisdictions are taxed
on various bases: income before taxes, deemed profits (which is generally
determined using a percentage of revenues rather than profits) and withholding
taxes based on revenue. Determination of taxable income in any jurisdiction
requires the interpretation of the related tax laws and regulations and the use
of estimates and assumptions regarding significant future events. Changes in tax
laws, regulations, agreements and treaties, foreign currency exchange
restrictions or the Company's level of operations or profitability in each
taxing jurisdiction could have an impact upon the amount of income taxes that
the Company provides during any given year.
The Company's and its subsidiaries' tax filings for various periods are
subjected to audit by tax authorities in most jurisdictions where they conduct
business. These audits may result in assessments of additional taxes that are
resolved with the authorities or potentially through the courts. The Company
believes that these assessments may occasionally be based on erroneous and even
arbitrary interpretations of local tax law. In these situations, the Company
provides only for the amounts the Company believes will ultimately result from
these proceedings.
19
WESTERNGECO
On November 30, 2000, the Company and Schlumberger and certain wholly owned
subsidiaries of Schlumberger created a venture by transferring the seismic
fleets, data processing assets, exclusive and nonexclusive multiclient surveys
and other assets of the Company's Western Geophysical division and
Schlumberger's Geco-Prakla business unit. The venture operates under the name of
WesternGeco. The Company and Schlumberger own 30% and 70% of the venture,
respectively. The Company accounts for this investment using the equity method
of accounting. In conjunction with the transaction, the Company received $493.4
million in cash from Schlumberger in exchange for the transfer of a portion of
the Company's ownership in WesternGeco. The Company also contributed $15.0
million in working capital to WesternGeco. The Company did not recognize any
gain or loss resulting from the initial formation of the venture due to the
Company's material continued involvement in the operations of WesternGeco. In
addition, as soon as practicable after November 30, 2004, the Company or
Schlumberger will make a cash true-up payment to the other party based on a
formula comparing the ratio of the net present value of sales revenue from each
party's contributed multiclient seismic libraries during the four-year period
ending November 30, 2004 and the ratio of the net book value of those libraries
as of November 30, 2000. The maximum payment that either party will be required
to make as a result of this adjustment is $100.0 million. In the event that
future sales from the contributed libraries continue in the same relative
percentages incurred through December 31, 2002, any payment made by either party
is not expected to be significant. Any payment to be received or paid by the
Company will be recorded as an adjustment to the carrying value of its
investment in WesternGeco.
Summarized financial information for Western Geophysical for the eleven
months ended November 30, 2000, the effective date of the close, included in the
Company's consolidated financial statements is as follows for the year ended
December 31 (in millions):
2000
- -----------------------------------------------------------------------------
Revenues $ 723.7
Income before income taxes(1) 56.9
Expenditures for capital assets and multiclient seismic data 309.6
(1) Includes restructuring charges and corporate allocations excluding interest.
DISCONTINUED OPERATIONS
In November 2002, the Company sold EIMCO Process Equipment ("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. In December 2002, the Company entered into exclusive
negotiations for the sale of the Company's interest in its oil producing
operations in West Africa and received $10.0 million as a deposit. The sale is
subject to the execution of a definitive sale agreement and is expected to close
in the first quarter of 2003. In accordance with generally accepted accounting
principles, the Company has reclassified the consolidated financial statements
for all prior periods to present both of these operations as discontinued.
20
Summarized financial information from discontinued operations is as follows
for the years ended December 31 (in millions):
2002 2001 2000
- -------------------------------------------------------------------------------
Revenues:
EIMCO $ 138.0 $ 181.1 $ 165.4
Oil producing operations 49.1 61.5 126.3
- -------------------------------------------------------------------------------
Total $ 187.1 $ 242.6 $ 291.7
===============================================================================
Income (loss) before income taxes:
EIMCO $ (1.5) $ - $ 8.7
Oil producing operations 19.7 27.8 70.8
- -------------------------------------------------------------------------------
Total 18.2 27.8 79.5
- -------------------------------------------------------------------------------
Income taxes:
EIMCO 0.5 - (3.0)
Oil producing operations (8.7) (7.2) (35.9)
- -------------------------------------------------------------------------------
Total (8.2) (7.2) (38.9)
- -------------------------------------------------------------------------------
Income (loss) before loss
on disposal:
EIMCO (1.0) - 5.7
Oil producing operations 11.0 20.6 34.9
- -------------------------------------------------------------------------------
Total 10.0 20.6 40.6
Loss on disposal of EIMCO:
Loss on write-down to fair value,
net of tax of $1.2 (2.3) - -
Recognition of cumulative foreign
currency translation adjustments
in earnings (20.0) - -
- -------------------------------------------------------------------------------
Income (loss) from discontinued
operations $ (12.3) $ 20.6 $ 40.6
===============================================================================
RESULTS OF OPERATIONS
The Company is engaged primarily in the oilfield service industry, which
accounted for 97.6%, 97.3% and 96.8% of total revenues in 2002, 2001 and 2000,
respectively. As a result, the discussion regarding the consolidated results of
operations is primarily focused on the Company's Oilfield segment.
REVENUES
Revenues for 2002 were $5,020.4 million, a decrease of 2.3% compared with
2001. Oilfield revenues were $4,901.5 million, a decrease of 2.0% compared with
2001. Oilfield revenues in North America, which accounted for 40.1% of total
Oilfield revenues, decreased 12.9% compared with 2001. This decrease reflects
lower activity in the U.S. land and offshore operations and Canada, as evidenced
by a 27.0% decrease in the North American rig count. Inclement weather in the
Gulf of Mexico, including Tropical Storm Isidore and Hurricane Lili, also
contributed to the decline. Outside North America, Oilfield revenues increased
6.9% compared with 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.
Revenues for 2001 were $5,139.6 million, an increase of 4.0% compared with
2000. Oilfield revenues were $5,001.9 million, an increase of 4.5% compared with
2000. Oilfield revenues in North America, which accounted for 45.1% of total
Oilfield revenues, increased 4.4% compared with 2000. This increase reflects the
increased drilling activity in this area, as evidenced by a 18.5% increase in
the North American rig count, and improved pricing for the Company's products
and services. Outside North America, Oilfield revenues increased 4.7% compared
with 2000. This increase reflects the improvement in international drilling
activity, particularly in the North Sea, Latin America and the Middle East.
GROSS MARGIN
Gross margin was 27.8%, 28.9% and 21.3% for 2002, 2001 and 2000,
respectively. The decrease in gross margin for 2002 compared with 2001 is the
result of the Company's current strategy not to significantly reduce its work
force to match current activity levels, pricing pressures and a change in the
geographic and product mix from the sale of the Company's products and services.
The increase in gross margin for 2001 compared with 2000 was primarily the
result of pricing improvements for the Company's products and services,
primarily in North America, higher utilization of the Company's assets and
continued cost management measures throughout the Company.
21
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses for 2002 were $840.6
million, an increase of 7.5% compared with 2001. SG&A expenses as a percentage
of revenues for 2002 and 2001 were 16.7% and 15.2%, respectively. These
increases were primarily due to the impact of the weakening U.S. dollar and the
resulting foreign exchange losses; increased depreciation of the cost associated
with the now substantially completed 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 market activity levels.
SG&A expenses for 2001 were $781.7 million, an increase of 8.4% compared
with 2000. SG&A expenses as a percentage of consolidated revenues for 2001 and
2000 were 15.2% and 14.6%, respectively. These increases were primarily due to
increased costs to support the higher revenue level, increased employee
incentive costs and decreased foreign exchange gains.
RESTRUCTURING CHARGES
Restructuring charges are comprised of the following for the years ended
December 31 (in millions):
2002 2001 2000
- -------------------------------------------------------------------------------
German operations of BIRD Machine $ (1.9) $ 6.0 $ -
Oil and gas exploration business - (4.2) 29.5
WesternGeco formation - - 6.0
Seismic operations and other - - (28.5)
- -------------------------------------------------------------------------------
Restructuring charges $ (1.9) $ 1.8 $ 7.0
===============================================================================
GERMAN OPERATIONS OF BIRD MACHINE
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 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.
OIL AND GAS EXPLORATION BUSINESS
In October 2000, the Company's Board of Directors approved the Company's
plan to substantially exit the oil and gas exploration business. The Company's
oil and gas exploration business included various small producing working
interests and undeveloped properties around the world and a working interest in
West Africa that accounted for substantially all of the Company's revenue from
oil and gas operations, which interest is now reflected as a discontinued
operation. The Company had determined that future capital requirements were more
than the Company was willing to commit and that this business was not consistent
with its long-term plans. As a result, the Company recorded restructuring
charges of $29.5 million, consisting of $5.5 million of severance, $7.8 million
for costs to settle contractual obligations and a $16.2 million loss for the
write-off of the Company's undeveloped exploration properties in certain foreign
jurisdictions.
The severance charges were for approximately 50 employees, of which 24
employees have been terminated as of December 31, 2002. The Company has paid
$2.6 million of this accrued severance through 2002. Based on current estimates,
the Company expects that the remainder of the accrued severance will be paid
during 2003 or as the employees leave the Company.
Included in the costs to settle contractual obligations was $4.5 million for
the minimum amount of the Company's share of project costs relating to the
Company's interest in an oil and gas property in Colombia. After unsuccessful
attempts to negotiate a settlement with its joint venture partner, the Company
decided to abandon further involvement in this project. Subsequently, in 2001, a
third party approached the Company and agreed to assume the remaining
obligations in exchange for the Company's interest in the project. Accordingly,
the Company reversed $4.2 million related to this obligation. The Company has
paid $2.7 million of accrued contractual obligations through 2002. The remaining
contractual obligations will be paid as the Company settles with the various
counterparties.
WESTERNGECO FORMATION
In 2000, the Company recorded an expense of $6.0 million in connection with
the restructuring of its seismic operations through the formation of
WesternGeco. This consisted of compensation cost of $3.0 million for stock
options retained by certain employees
22
who became employees of WesternGeco and $3.0 million for vacation costs accrued
as part of its agreement with the Company's venture partner. The compensation
cost of the options was measured using the intrinsic value method.
SEISMIC OPERATIONS AND OTHER
In October 1999, the Company recorded a restructuring charge of $115.0
million related to the downsizing of its seismic operations. During the ensuing
six months, the seismic industry continued to deteriorate, resulting in further
consolidations in the industry. In May 2000, the Company announced the formation
of WesternGeco. As a result of this venture formation, the original
restructuring plan was modified, which resulted in a $17.6 million reversal of
the original charge. Such reversal included $7.5 million from the retention by
the venture of approximately 400 employees that had been identified for
termination and lower than expected moving and derigging costs of certain marine
vessels. The reversal also included $9.0 million related to the Company's
successful negotiation of more favorable terms related to the final termination
of 10 marine vessel leases during May and June 2000.
The reversals in 2000 also included $10.9 million, which primarily related
to a $4.0 million recovery from a receivable written off as a restructuring
charge in 1998 and $4.2 million from favorable settlements related to litigation
originally accrued for as restructuring charges in 1998 and 1997.
(GAIN) LOSS ON DISPOSAL OF ASSETS
During 2001, the Company recognized a gain of $3.4 million on the
disposition of its interest in a joint venture within the Oilfield segment and
received net proceeds of $6.0 million from this transaction. The Company also
recognized a loss of $1.0 million on the sale of a product line within the
Oilfield segment.
During 2000, in conjunction with the Company's plan to substantially exit
the oil and gas exploration business, the Company sold its interests in its
China, Gulf of Mexico and Gabon oil and gas properties and recorded a loss of
$75.5 million on the sale of these properties. Net proceeds from these sales
were $53.4 million and were used to repay outstanding indebtedness. In addition,
the Company recognized gains of $7.6 million on the sale of various product
lines within the Oilfield segment.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income (loss) of affiliates relates to the Company's share of the
income (loss) of affiliates accounted for using the equity method of accounting.
Included in equity in income (loss) of affiliates for the year ended December
31, 2001 and 2000 is $7.9 million and $1.9 million, respectively, related to the
amortization of goodwill associated with equity method investments. In
conjunction with the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, the Company discontinued
the amortization of goodwill associated with equity method investments effective
January 1, 2002.
Equity in income (loss) of affiliates for 2002 was $(69.7) million, a
decrease of $115.5 million compared with 2001. 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. As a result of this weakness, WesternGeco
recorded a restructuring charge of $300.7 million for impairment of its
multiclient library, reductions in workforce, closing land-based seismic
operations in the U.S. lower 48 states and Canada and reducing its marine
seismic fleet. The Company's portion of the charge was $90.2 million and is
recorded in equity in income (loss) of affiliates.
Equity in income (loss) of affiliates for 2001 was $45.8 million, an
increase of $50.4 million compared with 2000. The increase in equity in income
(loss) of affiliates for 2001 compared with 2000 is primarily due to the
inclusion of a full year of the Company's share of the net income of
WesternGeco, offset by a $10.3 million charge related to the write-off of
certain assets associated with WesternGeco.
INTEREST EXPENSE
Interest expense for 2002 decreased $15.2 million compared with 2001. The
decrease was 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
weighted average interest rate on short-term debt and commercial paper was 1.8%
for 2002 compared with 4.0% for 2001.
Interest expense for 2001 decreased $53.5 million compared with 2000. The
decrease was primarily due to lower total debt levels coupled with lower average
interest rates on short-term debt and commercial paper. Average short-term debt
and commercial paper
23
for 2001 was $259.7 million compared with $929.0 million for 2000. The
approximate average interest rate on short-term debt and commercial paper was
4.0% for 2001 compared with 6.3% for 2000.
INTEREST INCOME
Interest income primarily relates to income earned on cash and cash
equivalents, except for 2001, when interest income also included $5.4 million
from a settlement with the Internal Revenue Service ("IRS") related to an
examination of certain 1994 through 1997 pre-acquisition tax returns and related
refund claims of Western Atlas Inc. ("Western Atlas").
INCOME TAXES
The Company's effective tax rates differ from the statutory income tax rate
of 35% due to lower effective rates on international operations offset by higher
taxes within the WesternGeco venture. During 2002, the Company recognized an
incremental effect of $40.2 million of additional taxes attributable to its
portion of the operations of WesternGeco. Of this amount, $28.2 million related
to the Company's portion of the restructuring charge for which there was no tax
benefit. The remaining $12.0 million arose from operations of the venture 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 profit, 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. In
2001 and 2000, the amount of additional taxes resulting from operations of the
venture was $14.8 million and $2.2 million, respectively.
Also during 2002, a current year benefit of $14.4 million was recognized as
the result of the settlement of an IRS examination related to the Company's
September 30, 1996 through September 30, 1998 tax years. In 2001, a benefit of
$23.5 million was recognized as a result of the settlement of the IRS
examination of certain 1994 through 1997 pre-acquisition tax returns and related
refund claims of Western Atlas.
During 2000, the Company provided $9.4 million of foreign and additional
U.S. taxes as a result of the repatriation of the proceeds from the formation of
the WesternGeco venture. The formation of the venture also reduced the expected
amount of foreign source income against which to use the Company's foreign tax
credit carryover; therefore, the Company provided $35.6 million for additional
U.S. taxes with respect to future repatriation of earnings necessary to utilize
the foreign tax credit carryover.
The Company's and its subsidiaries' tax filings for various periods are
subjected to audit by tax authorities in most jurisdictions where they conduct
business. These audits may result in assessments of additional taxes that are
resolved with the authorities or potentially through the courts. The Company
believes that these assessments may occasionally be based on erroneous and even
arbitrary interpretations of local tax law. The Company has received tax
assessments from various taxing authorities and is currently at varying stages
of appeals and /or litigation regarding these matters. The Company believes it
has substantial defenses to the questions being raised and will pursue all
legal remedies should an unfavorable outcome result. The Company has provided
for the amounts it believes will ultimately result from these proceedings.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and
138 (collectively referred to as SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at fair value. Depending on the intended use of the
derivative and its effectiveness, changes in its fair value will be reported in
the period of change as either a component of earnings or a component of
accumulated other comprehensive loss. The adoption of SFAS No. 133 on January 1,
2001 resulted in a gain of $0.8 million, net of tax, recorded as the cumulative
effect of an accounting change in the consolidated statement of operations and a
gain of $1.2 million, net of tax, recorded in accumulated other comprehensive
loss. During 2001, all of the $1.2 million gain was reclassified into earnings
upon maturity of the contracts.
On January 1, 2002, the Company adopted 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, but 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
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
24
and liabilities were allocated to the reporting units to the extent that they
related to the operations of these 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 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 tax of $20.4
million. The transitional impairment loss was recorded in the first quarter of
2002 as the cumulative effect of accounting change in the consolidated statement
of operations.
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.
In 2002, net cash inflows from operating activities of continuing operations
totaled $590.4 million, a decrease of $25.0 million compared with 2001. This
decrease was primarily due to reduced profitability. Net cash inflows from
operating activities of continuing operations in 2001 increased $100.7 million
compared with 2000. This increase primarily related to higher net income.
Expenditures for capital assets totaled $316.7 million, $303.5 million and
$597.9 million for 2002, 2001 and 2000, respectively. The majority of these
expenditures was for machinery and equipment and rental tools. Expenditures for
capital assets in 2000 included $199.5 million for multiclient seismic data
related to the Company's previously owned seismic division, Western Geophysical.
The Company receives proceeds from the disposal of assets in either the
normal course of its business (for example, reimbursement from customers for
rental tools not recoverable or damaged during drilling) or from non-recurring
asset sales, which are those transactions that are infrequent, significant in
amount or unusual in nature (such as large excess real estate sales). During
2002, the Company received $77.7 million of proceeds from the disposal of
assets. There were no significant non-recurring asset sales in 2002. During
2001, the Company received total proceeds of $77.7 million, which included
non-recurring asset sales of $7.4 million related to the sale of a product line
and the disposition of the Company's interest in a joint venture. During 2000,
the Company received total proceeds of $213.0 million. Non-recurring asset sales
totaled $124.5 million and included sales of product lines, the sale of the
Company's interests in its China, Gulf of Mexico and Gabon oil and gas
properties, and the sale of real estate held for sale.
During 2002, the Company's Oilfield segment made three small acquisitions
having an aggregate cash purchase price of $39.7 million, net of cash acquired.
As a result of these acquisitions, the Company recorded approximately $28.4
million of goodwill. The purchase prices are allocated based on fair values of
the acquisitions and may be subject to change based on the final determination
of the purchase price allocations. In addition, during 2002, the Company
invested $16.5 million in Luna Energy, L.L.C. ("Luna Energy"), a venture formed
to develop, manufacture, commercialize, sell, market and distribute downhole
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 and accounts for this investment using the equity method
of accounting.
During 2002, the Company sold its EIMCO division for $48.9 million. The
Company received $44.0 million, with the remainder of the sales price held in
escrow pending completion of final adjustments of the purchase price.
During 2002, the Company's Board of Directors authorized the Company to
repurchase up to $275.0 million of its common stock. As of December 31, 2002,
the Company has repurchased 1.8 million shares at an average price of $27.52 per
share, for a total of $49.1 million. Upon repurchase, the shares were retired.
The Company has authorization remaining to repurchase up to $225.9 million in
common stock.
The Company had two interest rate swap agreements that had been designated
and had qualified as fair value hedging instruments. During 2002, the Company
terminated the two agreements and received payments totaling $15.8 million upon
cancellation. The deferred gains of $4.8 million and $11.0 million on the
agreements are being amortized as a reduction of interest expense over the
remaining lives of the underlying debt securities, which mature in June 2004 and
January 2009, respectively.
In 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). In 2002 and 2001,
commercial paper and short-term borrowings were reduced by $163.7 million and
$67.9 million, respectively, primarily due to cash
25
flow from operations. During 2000, commercial paper and short-term borrowings
were reduced by $753.1 million primarily due to $117.7 million in proceeds from
a sale/leaseback transaction and $493.4 million in proceeds from the formation
of WesternGeco.
Total debt outstanding at December 31, 2002 was $1,547.8 million, a decrease
of $146.8 million compared with December 31, 2001. Debt was repaid primarily
using cash flow from operations. The debt to equity ratio was 0.46 at December
31, 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 December 31, 2002, the Company had $966.2 million of credit facilities
with commercial banks, of which $594.0 million was committed. The committed
facilities expire in September 2003 ($56 million) and October 2003 ($538
million). There were no direct borrowings under these facilities during the
years ended December 31, 2002 and 2001; however, to the extent the Company has
outstanding commercial paper, available borrowings under the committed credit
facilities are reduced. At December 31, 2002, the Company had no outstanding
commercial paper. At December 31, 2001, the Company had $95.0 million in
commercial paper outstanding under this program, with a weighted average
interest rate of 2.0%.
Cash flow from continuing operations is expected to be the principal source
of liquidity in 2003. The Company believes that cash flow from continuing
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 2003 capital expenditures to be between $330.0 million and $350.0
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.
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.
The following table summarizes the Company's contractual obligations as of
December 31, 2002 (in millions):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
LESS THAN 1 - 3 3 - 5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
- --------------------------------------------------------------------------------
Total debt $ 1,547.8 $ 123.5 $ 353.5 $ 0.2 $ 1,070.6
Operating
leases 293.3 61.8 84.0 37.2 110.3
Purchase
obligations 148.1 107.3 27.2 13.6 -
- --------------------------------------------------------------------------------
Total $ 1,989.2 $ 292.6 $ 464.7 $ 51.0 $ 1,180.9
================================================================================
In the normal course of business with customers, vendors and others, the
Company is contingently liable for performance under letters of credit and other
bank issued guarantees totaling approximately $193.5 million at December 31,
2002. In addition, at December 31, 2002, the Company has guaranteed debt and
other obligations of third parties totaling $126.3 million, which includes $92.7
million described below in Related Party Transactions.
RELATED PARTY TRANSACTIONS
In conjunction with the formation of WesternGeco, the Company transferred to
the venture a lease on a seismic vessel. The Company is the sole guarantor of
this lease obligation; however, Schlumberger has indemnified the Company for 70%
of the total lease obligation. At December 31, 2002, the remaining commitment
under this lease is $92.7 million. The lease expires in 2003, with an option to
renew for an additional year.
As soon as practicable after November 30, 2004, the Company or Schlumberger
will make a cash true-up payment to the other party based on a formula comparing
the ratio of the net present value of sales revenue from each party's
contributed multiclient seismic libraries during the four-year period ending
November 30, 2004 and the ratio of the net book value of those libraries as of
November 30, 2000. The maximum payment that either party will be required to
make as a result of this adjustment is $100.0 million. In the event that future
sales from the contributed libraries continue in the same relative percentages
incurred through
26
December 31, 2002, any payment made by either party is not expected to be
significant. Any payment to be received or paid by the Company will be recorded
as an adjustment to the carrying value of its investment in WesternGeco.
In November 2000, the Company entered into an agreement with WesternGeco
whereby WesternGeco subleased a facility from the Company for a period of ten
years at then current market rates. During 2002 and 2001, the Company recorded
$5.2 million and $5.9 million, respectively, of rental income from WesternGeco
related to this lease.
At December 31, 2002 and 2001, net accounts receivable from affiliates
totaled $16.1 million and $33.5 million, respectively. There were no other
significant related party transactions.
ACCOUNTING STANDARDS TO BE ADOPTED IN 2003
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 will adopt SFAS
No. 143 for its fiscal year beginning January 1, 2003. The Company has not fully
completed its analysis of the impact of the adoption of SFAS No. 143 but does
not expect the adoption to have a significant impact on the Company's financial
position or results of operations.
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 provisions of
SFAS No. 146 will apply to any exit or disposal activities initiated by the
Company after December 31, 2002.
In November 2002, the FASB issued FASB interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on required
disclosures by a guarantor in its financial statements about obligations under
certain guarantees that it has issued and requires a guarantor to recognize, at
the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company is reviewing the
provisions of FIN 45 relating to initial recognition and measurement of
guarantor liabilities, which are effective for qualifying guarantees entered
into or modified after December 31, 2002, but does not expect the adoption to
have a material impact on the consolidated financial statements. The Company
adopted the new disclosure requirements for its fiscal year ended December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, Stock-Based Compensation -
Transition and Disclosure, which amended SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require revised disclosure in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company adopted the new
disclosure requirements for its fiscal year ended December 31, 2002.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks that are inherent in the
Company's financial instruments that arise in the normal course of business. The
Company may enter into derivative financial instrument transactions to manage or
reduce market risk. The Company does not enter into derivative financial
instrument transactions for speculative purposes. A discussion of the Company's
primary market risk exposure in financial instruments is presented below.
LONG-TERM DEBT
The Company is subject to interest rate risk on its long-term fixed interest
rate debt. Commercial paper borrowings, other short-term borrowings and variable
rate long-term debt do not give rise to significant interest rate risk because
these borrowings either have maturities of less than three months or have
variable interest rates. All other things being equal, the fair market value of
the Company's debt with a fixed interest rate will increase as interest rates
fall and will decrease as interest rates rise. This exposure to interest rate
risk is managed by borrowing money that has a variable interest rate or using
interest rate swaps to change fixed interest rate borrowings to variable
interest rate borrowings.
At December 31, 2002, the Company had fixed rate debt aggregating $1,524.6
million and variable rate debt aggregating $23.2 million. The following table
sets forth, as of December 31, 2002 and 2001, the Company's principal cash flow
requirements for its long-term debt obligations, which bear a fixed rate of
interest and are denominated in U.S. Dollars, and the related weighted average
effective interest rates by expected maturity dates. Additionally, the table
sets forth the notional amounts and weighted average effective interest rates of
the Company's interest rate swaps by expected maturity (dollar amounts in
millions).
2002 2003 2004 2005 2006 2007 THEREAFTER TOTAL
-------- ----------- ----------- ---------- ----------- -------- ------------- ---------
As of December 31, 2002:
Long-term debt(1) $ - $ 100.3 $ 353.4 $ 0.1 $ 0.2 $ - $ 1,070.6 $ 1,524.6
Weighted average
effective interest rates 6.08% 8.11% 4.15% 4.40% 6.92% 7.14%
As of December 31, 2001:
Long-term debt(1) $ 0.7 $ 100.1 $ 350.0 $ 0.1 $ - $ - $ 1,074.0 $ 1,524.9
Weighted average
effective interest rates 10.26% 6.04% 8.12% 8.00% 6.93% 7.14%
Fixed to variable swaps:(2)
Notional amount $ 100.0 $ 325.0
Pay rate 5.74%(3) 5.73%(4)
Receive rate 7.88% 6.25%
(1) Fair market value of long-term debt was $1,679.9 million at December 31,
2002 and $1,576.9 million at December 31, 2001.
(2) Fair market value of the interest rate swaps was a $1.3 million asset at
December 31, 2001.
(3) Three-month LIBOR plus 2.7625%.
(4) Average six-month LIBOR for the Japanese Yen, the Euro and the Swiss Franc
plus 3.16%.
INTEREST RATE SWAP AGREEMENTS
The Company had two interest rate swap agreements that had been designated
and had qualified as fair value hedging instruments. Due to the Company's
outlook for interest rates, the Company terminated the two agreements and
received payments totaling $15.8 million upon cancellation in 2002. The deferred
gains of $4.8 million and $11.0 million on the agreements are being amortized as
a reduction of interest expense over the remaining lives of the underlying debt
securities, which mature in June 2004 and January 2009, respectively.
CRUDE OIL CONTRACTS
During the year ended December 31, 2002, the Company 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. No gain or loss
was recognized on the contracts. These contracts expired on December 31, 2002.
28
During the year ended December 31, 2001, the Company entered into two crude
oil contracts to mitigate price risk associated with production from the West
African oil property. Based on the Company's outlook for crude oil prices, the
Company elected to terminate these contracts prior to their maturity dates.
Accordingly, the contracts were terminated on October 3, 2001, and the Company
received a cash payment of $4.4 million. The net gain recognized in earnings in
2001 from all crude oil contracts was $3.1 million and was reported as part of
discontinued operations in the consolidated statements of operations.
FOREIGN CURRENCY AND FOREIGN CURRENCY FORWARD CONTRACTS
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 change due to changes in foreign currency
exchange rates when transactions are denominated in currencies other than the
Company's functional currencies. To minimize the need for foreign currency
contracts, the Company's objective 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 December 31, 2002, the Company had entered into a foreign currency hedge
with a notional amount of $20.0 million to hedge exposure to fluctuations in the
British Pound Sterling. The contract is a cash flow hedge. Based on year-end
quoted market prices for contracts with similar terms and maturity dates, no
asset or liability was recorded as the forward price was substantially the same
as the contract price.
At December 31, 2001, the Company had entered into foreign currency forward
contracts with notional amounts of $8.5 million, $1.0 million and $0.7 million
to hedge exposure to currency fluctuations in the Canadian Dollar, the
Indonesian Rupiah and the Euro, respectively. These contracts were cash flow
hedges. Based on year-end quoted market prices for contracts with similar terms
and maturity dates, no asset or liability was recorded as the forward prices
were substantially the same as the contract prices.
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.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT OF FINANCIAL RESPONSIBILITIES
The management of Baker Hughes Incorporated is responsible for the
preparation and integrity of the accompanying consolidated financial statements
and all other information contained in this Annual Report. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and include amounts that are based on management's
informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial
information, management maintains and relies on the Company's system of internal
control. This system includes written policies, an organizational structure
providing division of responsibilities, the selection and training of qualified
personnel and a program of financial and operational reviews by a professional
staff of corporate auditors. The system is designed to provide reasonable
assurance that assets are safeguarded, transactions are executed in accordance
with management's authorization and accounting records are reliable as a basis
for the preparation of the consolidated financial statements. The concept of
reasonable assurance is based on the recognition that there are inherent
limitations in all systems of internal control, and that the cost of such
systems should not exceed the benefits to be derived there from. Management
believes that, as of December 31, 2002, the Company's internal control system
provides reasonable assurance that material errors or irregularities will be
prevented or detected within a timely period and is cost effective.
Management has also established and maintains a system of disclosure
controls designed to provide reasonable assurance that information required to
be disclosed is accumulated and reported in an accurate and timely manner. A
Disclosure Control and Internal Control Committee is in place to oversee this
process and management believes that these controls are effective.
Management recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's Business Code of Conduct which is
distributed throughout the Company. Management maintains a systematic program to
assess compliance with the policies included in the Business Code of Conduct.
The Board of Directors, through its Audit/Ethics Committee composed solely
of nonemployee directors, reviews the Company's financial reporting, accounting
and ethical practices. In 2002, the Audit/Ethics Committee approved the
selection of the Company's independent public accountants, Deloitte and Touche
LLP, and their fee arrangements. It meets periodically with the independent
public accountants, management and the corporate auditors to review the work of
each and the propriety of the discharge of their responsibilities. The
independent public accountants and the corporate auditors have full and free
access to the Audit/Ethics Committee, without management present, to discuss
auditing and financial reporting matters.
/s/ MICHAEL E. WILEY /s/ G. STEPHEN FINLEY /s/ ALAN J. KEIFER
Michael E. Wiley G. Stephen Finley Alan J. Keifer
Chairman, President and Senior Vice President - Vice President and
Chief Executive Officer Finance and Administration, Controller
and Chief Financial Officer
30
INDEPENDENT AUDITORS' REPORT
Stockholders of Baker Hughes Incorporated:
We have audited the accompanying consolidated balance sheets of Baker Hughes
Incorporated and its subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule II, valuation and
qualifying accounts. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Baker Hughes Incorporated and
its subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Note 1 to the consolidated financial statements: effective
as of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, which established new accounting and reporting standards for
the recording, amortization and impairment of goodwill and other intangibles;
and effective as of January 1, 2001, the Company adopted Statement of Financial
Accounting Standards Nos. 133, 137 and 138, which established new accounting and
reporting standards for derivative instruments and hedging activities.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 12, 2003
31
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------
Revenues $ 5,020.4 $5,139.6 $ 4,942.1
- ------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 3,625.7 3,655.9 3,823.4
Selling, general and administrative 840.6 781.7 721.3
Restructuring charges (1.9) 1.8 7.0
(Gain) loss on disposal of assets - (2.4) 67.9
- ------------------------------------------------------------------------------
Total 4,464.4 4,437.0 4,619.6
- ------------------------------------------------------------------------------
Operating income 556.0 702.6 322.5
Equity in income (loss) of affiliates (69.7) 45.8 (4.6)
Interest expense (111.2) (126.4) (179.9)
Interest income 5.3 11.9 4.4
Gain on trading securities - - 14.1
- ------------------------------------------------------------------------------
Income from continuing operations before
income taxes 380.4 633.9 156.5
Income taxes (156.7) (215.8) (94.8)
- ------------------------------------------------------------------------------
Income from continuing operations 223.7 418.1 61.7
Income (loss) from discontinued
operations, net of tax (12.3) 20.6 40.6
- ------------------------------------------------------------------------------
Income before extraordinary loss and
cumulative effect of accounting change 211.4 438.7 102.3
Extraordinary loss, net of tax - (1.5) -
Cumulative effect of accounting change,
net of tax (42.5) 0.8 -
- ------------------------------------------------------------------------------
Net income $ 168.9 $ 438.0 $ 102.3
==============================================================================
Basic earnings per share:
Income from continuing operations $ 0.66 $ 1.25 $ 0.19
Income (loss) from discontinued
operations (0.04) 0.06 0.12
Extraordinary loss - - -
Cumulative effect of accounting change (0.12) - -
- ------------------------------------------------------------------------------
Net income 0.50 $ 1.31 $ 0.31
==============================================================================
Diluted earnings per share:
Income from continuing operations $ 0.66 $ 1.24 $ 0.19
Income (loss) from discontinued
operations (0.04) 0.06 0.12
Extraordinary loss - - -
Cumulative effect of accounting change (0.12) - -
- ------------------------------------------------------------------------------
Net income $ 0.50 $ 1.30 $ 0.31
==============================================================================
See Notes to Consolidated Financial Statements
32
BAKER HUGHES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE)
DECEMBER 31,
----------------------------
2002 2001
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 143.9 $ 38.7
Accounts receivable - less allowance for
doubtful accounts:
December 31, 2002, $67.3; December 31,
2001, $66.5 1,110.6 1,268.8
Inventories 1,032.0 1,031.9
Other current assets 204.7 235.4
Assets of discontinued operations 64.3 231.9
- --------------------------------------------------------------------------------
Total current assets 2,555.5 2,806.7
Investment in affiliates 872.0 929.0
Property - less accumulated depreciation:
December 31, 2002, $1,909.2; December 31,
2001, $1,739.0 1,354.7 1,297.0
Goodwill 1,226.6 1,248.3
Intangible assets - less accumulated
amortization:
December 31, 2002, $53.4; December 31,
2001, $43.7 136.8 136.5
Other assets 255.2 258.7
- --------------------------------------------------------------------------------
Total assets $ 6,400.8 $ 6,676.2
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 389.2 $ 537.2
Short-term borrowings and current portion
of long-term debt 123.5 12.2
Accrued employee compensation 254.0 311.4
Other accrued liabilities 267.4 272.2
Liabilities of discontinued operations 46.0 85.6
- --------------------------------------------------------------------------------
Total current liabilities 1,080.1 1,218.6
Long-term debt 1,424.3 1,682.4
Deferred income taxes 166.7 204.4
Other long-term liabilities 332.5 243.0
Commitments and contingencies
Stockholders' equity:
Common stock, one dollar par value (shares
authorized - 750.0; outstanding -335.8
at December 31, 2002 and 336.0 at
December 31, 2001) 335.8 336.0
Capital in excess of par value 3,111.6 3,119.3
Retained earnings 196.3 182.3
Accumulated other comprehensive loss (246.5) (309.8)
- --------------------------------------------------------------------------------
Total stockholders' equity 3,397.2 3,327.8
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 6,400.8 $ 6,676.2
================================================================================
See Notes to Consolidated Financial Statements
33
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CAPITAL RETAINED
IN EXCESS EARNINGS
COMMON OF (ACCUMULATED
STOCK PAR VALUE DEFICIT)
- ---------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 329.8 $ 2,981.1 $ (51.5)
Comprehensive income:
Net income 102.3
Other comprehensive loss (net
of tax of $0.7 and $2.0, respectively)
Total comprehensive income
Cash dividends ($0.46 per share) (152.1)
Stock issued pursuant to employee stock plans 3.9 84.6
- --------------------------------------------------------------------------------------------------
Balance, December 31, 2000 333.7 3,065.7 (101.3)
Comprehensive income:
Net income 438.0
Other comprehensive loss (net
of tax of $(0.2) and $3.2, respectively)
Total comprehensive income
Cash dividends ($0.46 per share) (154.4)
Stock issued pursuant to employee stock plans 2.3 53.6
- --------------------------------------------------------------------------------------------------
Balance, December 31, 2001 336.0 3,119.3 182.3
Comprehensive income:
Net income 168.9
Reclassifications included in net income due to
sale of business
Other comprehensive income (net
of tax of $(0.2) and $15.7, respectively)
Total comprehensive income
Cash dividends ($0.46 per share) (154.9)
Stock issued pursuant to employee stock plans 1.6 39.6
Repurchase of common stock (1.8) (47.3)
- --------------------------------------------------------------------------------------------------
Balance, December 31,2002 $ 335.8 $ 3,111.6 $ 196.3
==================================================================================================
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
-----------------------
FOREIGN
CURRENCY PENSION
TRANSLATION LIABILITY
ADJUSTMENT ADJUSTMENT TOTAL
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ (185.6) $ (2.7) $ 3,071.1
Comprehensive income:
Net income
Other comprehensive loss (net
of tax of $0.7 and $2.0, respectively) (59.5) (3.6)
Total comprehensive income 39.2
Cash dividends ($0.46 per share) (152.1)
Stock issued pursuant to employee stock plans 88.5
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2000 (245.1) (6.3) 3,046.7
Comprehensive income:
Net income
Other comprehensive loss (net
of tax of $(0.2) and $3.2, respectively) (52.5) (5.9)
Total comprehensive income 379.6
Cash dividends ($0.46 per share) (154.4)
Stock issued pursuant to employee stock plans 55.9
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2001 (297.6) (12.2) 3,327.8
Comprehensive income:
Net income
Reclassifications included in net income due to
sale of business 20.0
Other comprehensive income (net
of tax of $(0.2) and $15.7, respectively) 74.5 (31.2)
Total comprehensive income 232.2
Cash dividends ($0.46 per share) (154.9)
Stock issued pursuant to employee stock plans 41.2
Repurchase of common stock (49.1)
- ------------------------------------------------------------------------------------------------
Balance, December 31,2002 $ (203.1) $ (43.4) $ 3,397.2
================================================================================================
See Notes to Consolidated Financial Statements
34
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 223.7 $ 418.1 $ 61.7
Adjustments to reconcile income from continuing
operations to net cash flows from
operating activities:
Depreciation, depletion and amortization 301.6 322.1 582.8
Provision (benefit) for deferred income taxes (0.7) 77.8 47.8
Noncash portion of restructuring charge - - 22.2
Gain on trading securities - - (14.1)
(Gain) loss on disposal of assets (45.6) (34.6) 27.9
Equity in (income) loss of affiliates 69.7 (45.8) 4.6
Change in operating accounts 41.7 (122.2) (218.2)
- -----------------------------------------------------------------------------------------
Net cash flows from continuing operations 590.4 615.4 514.7
Net cash flows from discontinued operations 86.1 108.9 42.5
- -----------------------------------------------------------------------------------------
Net cash flows from operating activities 676.5 724.3 557.2
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Expenditures for capital assets and multiclient
seismic data (316.7) (303.5) (597.9)
Acquisition of businesses, net of cash acquired (39.7) - -
Investment in affiliate (16.5) - -
Proceeds from sale of business 44.0 - -
Proceeds from disposal of assets 77.7 77.7 213.0
Proceeds from sale of trading securities - - 72.7
- -----------------------------------------------------------------------------------------
Net cash flows from continuing operations (251.2) (225.8) (312.2)
Net cash flows from discontinued operations (0.7) (15.5) (1.3)
- -----------------------------------------------------------------------------------------
Net cash flows from investing activities (251.9) (241.3) (313.5)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayments of commercial paper and other
short-term debt (163.7) (67.9) (753.1)
Repayment of indebtedness - (301.8) -
Proceeds from termination of interest rate swap
agreements 15.8 - -
Proceeds from sale of interest in affiliate - 9.0 493.4
Proceeds from sale/leaseback - - 117.7
Proceeds from issuance of common stock 38.3 50.1 70.9
Repurchase of common stock (49.1) - -
Dividends (154.9) (154.4) (152.1)
- -----------------------------------------------------------------------------------------
Net cash flows from continuing operations (313.6) (465.0) (223.2)
Net cash flows from discontinued operations - - -
- -----------------------------------------------------------------------------------------
Net cash flows from financing activities (313.6) (465.0) (223.2)
- -----------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (5.8) (3.7) (7.8)
- -----------------------------------------------------------------------------------------
Increase in cash and cash equivalents 105.2 14.3 12.7
Cash and cash equivalents, beginning of year 38.7 24.4 11.7
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 143.9 $ 38.7 $ 24.4
=========================================================================================
See Notes to Consolidated Financial Statements
35
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Baker Hughes Incorporated ("Baker Hughes") is engaged primarily in the
oilfield services industry. 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
participates in the continuous process industry where it manufactures and
markets a broad range of continuous and batch centrifuges and specialty filters.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Baker Hughes
and all majority owned subsidiaries (the "Company"). Investments in which the
Company owns 20% to 50% and exercises significant influence over operating and
financial policies are accounted for using the equity method of accounting. All
significant intercompany accounts and transactions have been eliminated in
consolidation. In the Notes to Consolidated Financial Statements, all dollar and
share amounts in tabulations are in millions of dollars and shares,
respectively, unless otherwise indicated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates and
judgments on historical experience and on various other assumptions and
information that are believed to be reasonable under the circumstances.
Estimates and assumptions about future events and their effects cannot be
perceived with certainty and, accordingly, these estimates may change as new
events occur, as more experience is acquired, as additional information is
obtained and as the Company's operating environment changes. While management
believes that the estimates and assumptions used in the preparation of the
consolidated financial statements are appropriate, actual results could differ
from those estimates. Estimates are used for, but are not limited to,
determining the following: allowance for doubtful accounts and inventory
valuation reserves, recoverability of long-lived assets, useful lives used in
depreciation and amortization, income taxes and related valuation allowances,
and insurance, environmental, legal and restructuring accruals.
REVENUE RECOGNITION
The Company's products and services are generally sold based upon purchase
orders or contracts with the customer that include fixed or determinable prices
and that do not include right of return or other similar provisions or other
significant post delivery obligations. Revenue is recognized for products upon
delivery and when title passes or when services and tool rentals are rendered
and only when collectibility is reasonably assured. Certain revenues from the
Company's Process segment are reported on the percentage of completion method of
accounting using measurements of progress towards completion appropriate for the
products and services being provided. Provisions for estimated warranty returns
or similar types of items are made at the time the related revenue is
recognized.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined on the average cost method and includes the cost of materials, labor
and manufacturing overhead.
PROPERTY AND DEPRECIATION
Property is stated at cost less accumulated depreciation, which is generally
provided by using the straight-line method over the estimated useful lives of
the individual assets. The Company manufactures a substantial portion of its
rental tools and equipment, and the cost of these items, which includes direct
and indirect manufacturing costs, are capitalized and carried in inventory until
the tool is
36
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
completed and transferred into the rental tool fleet. Significant improvements
and betterments are capitalized if they extend the useful life of the asset.
In 2001, the Company substantially completed its development and
implementation of SAP R/3 as an enterprise-wide software system. External direct
costs of consulting services and payroll-related cost of employees who worked
full-time on the implementation of the system were capitalized and classified in
machinery and equipment. Costs associated with business process reengineering
were expensed as incurred. Amortization of a pro-rata amount of the capitalized
costs began as the system was implemented at each of the Company's operations.
The Company currently has an interest in an oil producing property in West
Africa that is classified as a discontinued operation. The Company uses the
full-cost method of accounting for this property. Under this method, the Company
capitalizes all acquisition, exploration and development costs incurred for the
purpose of finding oil and gas reserves. In accordance with full cost accounting
rules, the Company performs a ceiling test on the carrying value of its oil and
gas properties. During 2001, the Company recorded a charge of $2.2 million
related to the ceiling test. During 2002 and 2000, there were no ceiling test
charges recorded. Depreciation, depletion and amortization of oil and gas
properties are computed using the unit-of-production method based upon
production and estimates of proved reserves and totaled $16.6 million, $16.5
million and $25.7 million in 2002, 2001 and 2000, respectively. No costs were
excluded from the full cost amortization pool. At December 31, 2002 and 2001,
the Company's only cost center related to these properties in West Africa.
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. Goodwill,
including goodwill associated with equity method investments, and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually or more frequently if circumstances indicate that impairment may exist.
Intangible assets with finite useful lives are amortized either on a
straight-line basis over the asset's estimated useful life or on a basis that
reflects the pattern in which the economic benefits of the intangible assets are
consumed.
In 2001 and 2000, goodwill was amortized using the straight-line method over
the lesser of its expected useful life or 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which includes property, intangible assets and certain
other assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recorded in the period in which it is determined that the
carrying amount is not recoverable. The determination of recoverability is made
based upon the estimated undiscounted future net cash flows, excluding interest
expense. The impairment loss is determined by comparing the fair value, as
determined by a discounted cash flow analysis, with the carrying value of the
related assets.
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets and replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets and modifies the accounting and
reporting of discontinued operations. The adoption of SFAS No. 144 resulted in
the Company reflecting EIMCO Process Equipment ("EIMCO") and the Company's oil
producing operations in West Africa as discontinued operations for each of the
years presented.
INCOME TAXES
The Company uses the liability method for reporting income taxes, under
which current and deferred tax liabilities and assets are recorded in accordance
with enacted tax laws and rates. Under this method, the amounts of deferred tax
liabilities and assets at the end of each period are determined using the tax
rate expected to be in effect when taxes are actually paid or recovered. Future
tax benefits are recognized to the extent that realization of such benefits is
more likely than not.
Deferred income taxes are provided for the estimated income tax effect of
temporary differences between financial and tax bases in assets and liabilities.
Deferred tax assets are also provided for certain tax credit carryforwards. A
valuation allowance to reduce deferred tax assets is established when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
37
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company intends to indefinitely reinvest earnings of certain non-U.S.
subsidiaries in operations outside the United States; accordingly, the Company
does not provide U.S. income taxes for such earnings.
The Company operates in more than 70 countries under many legal forms. As a
result, the Company is subject to many domestic and foreign tax jurisdictions
and to many tax agreements and treaties among the various taxing authorities.
The Company's operations in these different jurisdictions are taxed on various
bases: income before taxes, deemed profits (which generally is determined using
a percentage of revenues rather than profits) and withholding taxes based on
revenue. Determination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the use of estimates
and assumptions regarding significant future events. Changes in tax laws,
regulations, agreements and treaties, foreign currency exchange restrictions or
the Company's level of operations or profitability in each taxing jurisdiction
could have an impact upon the amount of income taxes that the Company provides
during any given year.
The Company's and its subsidiaries' tax filings for various periods are
subjected to audit by tax authorities in most jurisdictions where they conduct
business. These audits may result in assessments of additional taxes that are
resolved with the authorities or potentially through the courts. The Company
believes that these assessments may occasionally be based on erroneous and even
arbitrary interpretations of local tax law. In these situations, the Company
provides only for the amounts the Company believes will ultimately result from
these proceedings.
PRODUCT WARRANTIES
The Company sells certain of its products to customers with a product
warranty that provides that customers can return a defective product during a
specified warranty period following the purchase in exchange for a replacement
product, repair at no cost to the customer or the issuance of a credit to the
customer. The Company accrues its estimated exposure to warranty claims based
upon both current and historical product sales data and warranty costs incurred.
ENVIRONMENTAL MATTERS
Remediation costs are accrued based on estimates of known environmental
remediation exposure using currently available facts, existing environmental
permits and technology and presently enacted laws and regulations. For sites
where the Company is primarily responsible for the remediation, the Company's
estimates of costs are developed based on internal evaluations and are not
discounted. Such accruals are recorded when it is probable that the Company will
be obligated to pay amounts for environmental site evaluation, remediation or
related costs, and such amounts can be reasonably estimated. If the obligation
can only be estimated within a range, the Company accrues the minimum amount in
the range. Such accruals are recorded even if significant uncertainties exist
over the ultimate cost of the remediation. Ongoing environmental compliance
costs, such as obtaining environmental permits, installation of pollution
control equipment and waste disposal, are expensed as incurred. Where the
Company has been identified as a potentially responsible party in a United
States federal or state "Superfund" site, the Company accrues its share of the
estimated remediation costs of the site based on the ratio of the estimated
volume of waste contributed to the site by the Company to the total volume of
waste at the site.
FOREIGN CURRENCY TRANSLATION
The majority of the Company's significant foreign subsidiaries have
designated the local currency as their functional currency and, as such, gains
and losses resulting from balance sheet translation of foreign operations are
included as a separate component of accumulated other comprehensive loss within
stockholders' equity. For those foreign subsidiaries that have designated the
U.S. Dollar as the functional currency, gains and losses resulting from balance
sheet translation of foreign operations are included in the consolidated
statements of operations as incurred.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company monitors its exposure to various business risks including
commodity price, foreign exchange rate and interest rate risks and occasionally
uses derivative financial instruments to manage the impact of certain of these
risks. The Company's policies do not permit the use of derivative financial
instruments for speculative purposes. The Company uses forward exchange
contracts and currency swaps to hedge certain firm commitments and transactions
denominated in foreign currencies. The Company uses interest rate swaps to
manage interest rate risk. The Company also used crude oil swaps and collars to
hedge price risk associated with the Company's crude oil production in West
Africa.
38
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and
138 (collectively referred to as SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at fair value. Depending on the intended use of the
derivative and its effectiveness, changes in its fair value will be reported in
the period of change as either a component of earnings or a component of
accumulated other comprehensive loss. The adoption of SFAS No. 133 on January 1,
2001 resulted in a gain of $0.8 million, net of tax, recorded as the cumulative
effect of an accounting change in the consolidated statement of operations and a
gain of $1.2 million, net of tax, recorded in accumulated other comprehensive
loss. During 2001, all of the $1.2 million gain was reclassified into earnings
upon maturity of the contracts.
At the inception of any new derivative, the Company designates the
derivative as a cash flow hedge or fair value hedge. The Company documents all
relationships between hedging instruments and the hedged items, as well as its
risk management objectives and strategy for undertaking various hedge
transactions. The Company assesses whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows of
the hedged item at both the inception of the hedge and on an ongoing basis.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation using
the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under
this method, no compensation expense is recognized when the number of shares
granted is known and the exercise price of the stock option is equal to or
greater than the market price of the Company's common stock on the grant date.
The Company has no stock-based compensation associated with stock options
reflected in its consolidated statements of operations.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require revised disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company has adopted the new
disclosure requirements for its fiscal year ended December 31, 2002 as reflected
below.
Under SFAS No. 123, the fair value of stock-based awards is calculated
through the use of option pricing models. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions:
ASSUMPTIONS
---------------------------------------------------------------
RISK-FREE EXPECTED
DIVIDEND EXPECTED INTEREST LIFE
YIELD VOLATILITY RATE (IN YEARS)
- -------------------------------------------------------------------------------
2002 1.4% 45.0% 3.5% 3.8
2001 1.1% 53.0% 3.4% 3.1
2000 1.7% 59.6% 5.0% 3.2
The weighted average fair values of options granted in 2002, 2001 and 2000
were $10.24, $15.04 and $11.15 per share, respectively.
39
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If the Company had recognized compensation expense as if the fair value
based method had been applied to all awards as provided for under SFAS No. 123,
the Company's pro forma net income, earnings per share ("EPS") and stock-based
compensation cost would have been as follows:
2002 2001 2000
- -----------------------------------------------------------------------------
Net income, as reported $ 168.9 $ 438.0 $ 102.3
Add: Stock-based compensation included
in reported net income, net of tax 2.1 1.5 0.8
Deduct: Stock-based compensation
determined under the fair value method,
net of tax (23.3) (21.2) (19.0)
- -----------------------------------------------------------------------------
Pro forma net income $ 147.7 $ 418.3 $ 84.1
=============================================================================
Basic EPS
As reported $ 0.50 $ 1.31 $ 0.31
Pro forma 0.44 1.25 0.25
Diluted EPS
As reported $ 0.50 $ 1.30 $ 0.31
Pro forma 0.44 1.24 0.25
These pro forma calculations may not be indicative of future amounts since
the pro forma disclosure does not apply to options granted prior to 1996 and
additional awards in future years are anticipated.
ACCOUNTING STANDARDS TO BE ADOPTED IN 2003
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
The Company will adopt SFAS No. 143 for its fiscal year beginning January 1,
2003. The Company has not fully completed its analysis of the impact of the
adoption of SFAS No. 143 but does not expect the adoption to have a significant
impact on the Company's financial position or results of operations.
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 commitment to an exit or disposal plan. The provisions of
SFAS No. 146 will apply to any exit or disposal activities initiated by the
Company after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on required
disclosures by a guarantor in its financial statements about obligations under
certain guarantees that it has issued and requires a guarantor to recognize, at
the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company is reviewing the
provisions of FIN 45 relating to initial recognition and measurement of
guarantor liabilities, which are effective for qualifying guarantees entered
into or modified after December 31, 2002, but does not expect the adoption to
have a material impact on the consolidated financial statements. The Company
adopted the new disclosure requirements for its fiscal year ended December 31,
2002.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
NOTE 2. DISCONTINUED OPERATIONS
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. In
December 2002, the Company entered into exclusive negotiations for the sale of
the Company's interest in its oil producing operations in West Africa and
received
40
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$10.0 million as a deposit. The sale is subject to the execution of a definitive
sale agreement and is expected to close in the first quarter of 2003. In
accordance with generally accepted accounting principles, the Company has
reclassified the consolidated financial statements for all prior periods to
present these operations as discontinued.
Summarized financial information from discontinued operations is as follows
for the years ended December 31:
2002 2001 2000
- --------------------------------------------------------------------------------
Revenues:
EIMCO $ 138.0 $ 181.1 $ 165.4
Oil producing operations 49.1 61.5 126.3
- --------------------------------------------------------------------------------
Total $ 187.1 $ 242.6 $ 291.7
================================================================================
Income (loss) before income taxes:
EIMCO $ (1.5) $ - $ 8.7
Oil producing operations 19.7 27.8 70.8
- --------------------------------------------------------------------------------
Total 18.2 27.8 79.5
- --------------------------------------------------------------------------------
Income taxes:
EIMCO 0.5 - (3.0)
Oil producing operations (8.7) (7.2) (35.9)
- --------------------------------------------------------------------------------
Total (8.2) (7.2) (38.9)
- --------------------------------------------------------------------------------
Income (loss) before loss on disposal:
EIMCO (1.0) - 5.7
Oil producing operations 11.0 20.6 34.9
- --------------------------------------------------------------------------------
Total 10.0 20.6 40.6
Loss on disposal of EIMCO:
Loss on write-down to fair value, net of
tax of $1.2 (2.3) - -
Recognition of cumulative foreign currency
translation adjustments in earnings (20.0) - -
- --------------------------------------------------------------------------------
Income (loss) from discontinued operations $ (12.3) $ 20.6 $ 40.6
================================================================================
Assets and liabilities of discontinued operations are as follows for the
years ended December 31:
2002 2001
- -----------------------------------------------------------------------
Cash and cash equivalents $ 3.2 $ 6.7
Accounts receivable - net 9.0 96.5
Inventories 2.1 17.9
Other current assets 1.2 1.4
Property - net 48.8 74.3
Goodwill - 12.0
Intangible assets - net - 17.5
Other assets - 5.6
- -----------------------------------------------------------------------
Assets of discontinued operations $ 64.3 $ 231.9
=======================================================================
Accounts payable $ 2.7 $ 35.9
Accrued employee compensation 2.9 7.3
Other accrued liabilities 17.1 36.2
Deferred income taxes 20.3 5.8
Other long-term liabilities 3.0 0.4
- -----------------------------------------------------------------------
Liabilities of discontinued operations $ 46.0 $ 85.6
=======================================================================
NOTE 3. ACQUISITIONS
In 2002, the Company made three small acquisitions within its Oilfield
segment having an aggregate cash purchase price of $39.7 million, net of cash
acquired. As a result of these acquisitions, the Company recorded approximately
$28.4 million of goodwill. The purchase prices are allocated based on fair
values of the acquisitions and may be subject to change based on the final
determination of
41
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 4. RESTRUCTURING CHARGES AND OTHER ITEMS
Restructuring charges are comprised of the following for the years ended
December 31:
2002 2001 2000
- ---------------------------------------------------------------------------------
German operations of BIRD Machine $ (1.9) $ 6.0 $ -
Oil and gas exploration business - (4.2) 29.5
WesternGeco formation - - 6.0
Seismic operations and other - - (28.5)
- ---------------------------------------------------------------------------------
Restructuring charges $ (1.9) $ 1.8 $ 7.0
=================================================================================
GERMAN OPERATIONS OF BIRD MACHINE
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.
OIL AND GAS EXPLORATION BUSINESS
In October 2000, the Company's Board of Directors approved the Company's
plan to substantially exit the oil and gas exploration business. The Company's
oil and gas exploration business then included various small producing working
interests and undeveloped properties around the world. It also included a
working interest in West Africa that accounted for substantially all of the
Company's revenue from oil and gas operations, which interest is now reflected
as a discontinued operation. The Company had determined that future capital
requirements were more than the Company was willing to commit and that this
business was not consistent with its long-term plans. As a result, the Company
recorded restructuring charges of $29.5 million, consisting of $5.5 million of
severance, $7.8 million for costs to settle contractual obligations and a $16.2
million loss for the write-off of the Company's undeveloped exploration
properties in certain foreign jurisdictions.
The severance charges were for approximately 50 employees, of which 24
employees have been terminated as of December 31, 2002. The employee groups
being terminated are executive, engineering, field service and support
personnel. The amount accrued for severance was based upon the positions
eliminated and the Company's specific or statutory plans in place for these
operations and did not include any portion of the employees' salary through
their severance dates. The Company has paid $2.6 million of this accrued
severance through 2002. Based on current estimates, the Company expects that the
remainder of the accrued severance will be paid during 2003 or as the employees
leave the Company.
Included in the costs to settle contractual obligations was $4.5 million for
the minimum amount of the Company's share of project costs relating to the
Company's interest in an oil and gas property in Colombia. After unsuccessful
attempts to negotiate a settlement with its joint venture partner, the Company
decided to abandon further involvement in this project. Subsequently, in 2001, a
third party approached the Company and agreed to assume the remaining
obligations in exchange for the Company's interest in the project. Accordingly,
the Company reversed $4.2 million related to this obligation. The Company has
paid $2.5 million of accrued contractual obligations through 2002. The remaining
contractual obligations will be paid as the Company settles with the various
counterparties.
WESTERNGECO FORMATION
In 2000, the Company recorded an expense of $6.0 million in connection with
the formation of WesternGeco. This consisted of compensation cost of $3.0
million for stock options retained by certain employees who became employees of
WesternGeco and $3.0 million for vacation costs accrued as part of its agreement
with the Company's venture partner. The compensation cost of the options was
measured using the intrinsic value method.
42
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEISMIC OPERATIONS AND OTHER
In 1999, as a result of the decline in oil prices, the seismic industry
experienced low activity levels in the marine and land acquisition markets;
however, a build-up in marine acquisition capacity continued. Several of the
Company's competitors in the seismic industry also upgraded their existing
fleets, resulting in significant excess operational capacity in the seismic
market. The Company determined that market activity levels for the seismic
industry would be depressed for an extended period of time. The Company
recognized the need to address the over capacity problem in this industry and
developed a plan to downsize its seismic operations. Accordingly, the Company
recorded a restructuring charge during the fourth quarter of 1999 totaling
$115.0 million. During the ensuing six months, the seismic industry continued to
deteriorate, resulting in further consolidations in the industry. In May 2000,
the Company announced the formation of WesternGeco. As a result of this venture
formation, the original restructuring plan was modified, which resulted in a
$17.6 million reversal of the original charge. Such reversal included $7.5
million from the retention by the venture of approximately 400 employees that
had been identified for termination and lower than expected moving and derigging
costs of certain marine vessels. The reversal also included $9.0 million related
to the Company's successful negotiation of more favorable terms related to the
final termination of 10 marine vessel leases during May and June 2000.
The reversals in 2000 also included $10.9 million, which primarily related
to a $4.0 million recovery from a receivable originally written off as a
restructuring charge in 1998 and $4.2 million from favorable settlements related
to litigation originally accrued for as restructuring charges in 1998 and 1997.
(GAIN) LOSS ON DISPOSAL OF ASSETS
During 2001, the Company recognized a gain of $3.4 million on the
disposition of its interest in a joint venture within the Oilfield segment and
received net proceeds of $6.0 million from this transaction. The Company also
recognized a loss of $1.0 million on the sale of a product line within the
Oilfield segment.
During 2000, in conjunction with the Company's plan to substantially exit
the oil and gas exploration business, the Company sold its interests in its
China, Gulf of Mexico and Gabon oil and gas properties and recorded a loss of
$75.5 million on the sale of these properties. Net proceeds from these sales
were $53.4 million and were used to repay outstanding indebtedness. In addition,
the Company recognized gains of $7.6 million on the sale of various product
lines within the Oilfield segment.
NOTE 5. INCOME TAXES
The provision for income taxes is comprised of the following for the years
ended December 31:
2002 2001 2000
- ----------------------------------------------------------------------------------------
Current:
United States $ 16.0 $ 1.9 $ 2.1
Foreign 141.4 136.1 44.9
- ----------------------------------------------------------------------------------------
Total current 157.4 138.0 47.0
- ----------------------------------------------------------------------------------------
Deferred:
United States 8.9 77.5 17.4
Foreign (9.6) 0.3 30.4
- ----------------------------------------------------------------------------------------
Total deferred (0.7) 77.8 47.8
- ----------------------------------------------------------------------------------------
Provision for income taxes $ 156.7 $ 215.8 $ 94.8
========================================================================================
The geographic sources of income from continuing operations before income
taxes are as follows for the years ended December 31:
2002 2001 2000
- ----------------------------------------------------------------------------------------
United States $ 49.2 $ 216.5 $ (15.2)
Foreign 331.2 417.4 171.7
- ----------------------------------------------------------------------------------------
Total $ 380.4 $ 633.9 $ 156.5
========================================================================================
Tax benefits of $1.4 million, $5.5 million and $5.8 million associated with
the exercise of employee stock options were allocated to equity and recorded in
capital in excess of par value in the years ended December 31, 2002, 2001 and
2000, respectively.
43
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the U.S. statutory income tax rate to income from continuing operations before
income taxes for the reasons set forth below for the years ended December 31:
2002 2001 2000
- ----------------------------------------------------------------------------
Statutory income tax at 35% $ 133.1 $ 221.9 $ 54.8
Formation-related taxes for WesternGeco - - 45.0
Effect of WesternGeco operations 40.2 14.8 2.2
Effect of foreign operations (14.4) - (24.8)
Net tax (benefit) charge related to
foreign losses 10.0 (7.4) 11.7
Nondeductible goodwill amortization - 8.5 6.7
State income taxes - net of U.S. tax
benefit 2.7 2.7 1.3
IRS audit agreement and refund claims (14.4) (23.5) -
Other - net (0.5) (1.2) (2.1)
- ----------------------------------------------------------------------------
Provision for income taxes $ 156.7 $ 215.8 $ 94.8
============================================================================
During 2002, the Company recognized an incremental effect of $40.2 million
of additional taxes attributable to its portion of the operations of
WesternGeco. Of this amount, $28.2 million related to the Company's portion of
the restructuring charge for which there was no tax benefit. The remaining $12.0
million arose from operations of the venture 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 profits, 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. In 2001 and 2000, the amount of
additional taxes resulting from operations of the venture was $14.8 million and
$2.2 million, respectively.
Also during 2002, the Company recognized a current year benefit of $14.4
million as the result of the settlement of an Internal Revenue Service ("IRS")
examination related to the Company's September 30, 1996 through September 30,
1998 tax years. In 2001, a benefit of $23.5 million was recognized as a result
of the settlement of the IRS examination of certain 1994 through 1997
pre-acquisition tax returns and related refund claims of Western Atlas Inc.
The Company has received tax assessments from various taxing authorities and
is currently at varying stages of appeals and /or litigation regarding these
matters. The Company believes it has substantial defenses to the questions being
raised and will pursue all legal defenses should an unfavorable outcome result.
The Company has provided for the amounts it believes will ultimately result from
these proceedings.
During 2000, as a result of the repatriation of the proceeds from the
formation of the WesternGeco venture, the Company incurred $3.4 million of
foreign withholdings and other taxes and provided $6.0 million of additional
U.S. taxes. In addition, the formation of the venture reduced the expected
amount of foreign source income available in the future to utilize the Company's
foreign tax credit carryover; accordingly, the Company provided $35.6 million
for additional U.S. taxes with respect to future repatriation of earnings
necessary to utilize the foreign tax credit carryover. Such amounts, aggregating
$45.0 million, are presented in the above income tax rate reconciliation table
under the caption "Formation-related taxes for WesternGeco."
44
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. The tax effects of the Company's temporary
differences and carryforwards are as follows at December 31:
2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets:
Receivables $ 9.4 $ 15.8
Inventory 106.9 100.7
Employee benefits 27.5 20.3
Other accrued expenses 43.0 47.0
Operating loss carryforwards 69.4 59.3
Tax credit carryforwards 95.8 186.9
Other 59.1 61.7
- --------------------------------------------------------------------------------
Subtotal 411.1 491.7
Valuation allowances (45.9) (45.4)
- --------------------------------------------------------------------------------
Total 365.2 446.3
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Property 151.6 141.0
Other assets 78.3 97.5
Goodwill 85.7 108.7
Undistributed earnings of foreign subsidiaries 24.0 74.9
Other 57.1 30.4
- --------------------------------------------------------------------------------
Total 396.7 452.5
- --------------------------------------------------------------------------------
Net deferred tax liability $ 31.5 $ 6.2
================================================================================
A valuation allowance is recorded when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets depends on the ability to generate
sufficient taxable income of the appropriate character in the future and in the
appropriate taxing jurisdictions. The Company has provided a valuation allowance
for operating loss carryforwards in certain non-U.S. jurisdictions where its
operations have decreased, currently ceased or the Company has withdrawn
entirely.
Provision has been made for U.S. and additional foreign taxes for the
anticipated repatriation of certain earnings of foreign subsidiaries of the
Company. The Company considers the undistributed earnings of its foreign
subsidiaries above the amount already provided to be indefinitely reinvested.
These additional foreign earnings could become subject to additional tax if
remitted, or deemed remitted, as a dividend; however, the additional amount of
taxes payable is not practicable to estimate.
At December 31, 2002, the Company had approximately $8.7 million of foreign
tax credits and $61.5 million of general business credits available to offset
future payments of federal income taxes, expiring in varying amounts between
2005 and 2023. The Company's $25.6 million alternative minimum tax credits may
be carried forward indefinitely under current U.S. law. The operating loss
carryforwards without a valuation allowance will expire in varying amounts over
the next twenty years.
NOTE 6. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted EPS
computations is as follows for the years ended December 31:
2002 2001 2000
- -------------------------------------------------------------------------------
Weighted average common shares
outstanding for basic EPS 336.8 335.6 330.9
Effect of dilutive securities - stock plans 1.1 1.8 2.0
- -------------------------------------------------------------------------------
Adjusted weighted average common shares
outstanding for diluted EPS 337.9 337.4 332.9
===============================================================================
Future potentially anti-dilutive shares
excluded from diluted EPS:
Options with option price greater than
market price 5.0 4.6 3.6
Liquid Yield Options Notes ("LYONS")
convertible into common stock - - 7.2
45
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INVENTORIES
Inventories are comprised of the following at December 31:
2002 2001
- ----------------------------------------------------------------------------------
Finished goods $ 842.7 $ 847.0
Work in process 96.7 89.0
Raw materials 92.6 95.9
- ----------------------------------------------------------------------------------
Total $ 1,032.0 $ 1,031.9
==================================================================================
NOTE 8. INVESTMENTS IN AFFILIATES
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The most significant of these affiliates is
WesternGeco, a seismic venture formed on November 30, 2000 between the Company
and Schlumberger Limited ("Schlumberger"). The Company and Schlumberger own 30%
and 70% of the venture, respectively. The Company contributed certain assets of
its Western Geophysical division with a net book value of $1.1 billion,
consisting primarily of multiclient seismic data and property and $15.0 million
in working capital to WesternGeco. The Company did not recognize any gain or
loss resulting from the initial formation of the venture due to the Company's
material continued involvement in the operations of WesternGeco. The Company
incurred fees and expenses of approximately $16.6 million in connection with the
transaction. Of this total, $10.6 million of direct costs were capitalized to
the Company's investment and $6.0 million were recorded as a restructuring
charge in the Company's consolidated statement of operations for the year ended
December 31, 2000. In conjunction with the transaction, the Company received
$493.4 million in cash from Schlumberger in exchange for the transfer of a
portion of the Company's ownership in WesternGeco.
Additionally, as soon as practicable after November 30, 2004, the Company or
Schlumberger will make a cash true-up payment to the other party based on a
formula comparing the ratio of the net present value of sales revenue from each
party's contributed multiclient seismic data libraries during the four-year
period ending November 30, 2004 and the ratio of the net book value of those
libraries as of November 30, 2000. The maximum payment that either party will be
required to make as a result of this adjustment is $100.0 million. In the event
that future sales from the contributed libraries continue in the same relative
percentages incurred through December 31, 2002, any payment made by either party
is not expected to be significant. Any payment to be received or paid by the
Company will be recorded as an adjustment to the carrying value of its
investment in WesternGeco.
In conjunction with the formation of WesternGeco, the Company transferred to
the venture a lease on a seismic vessel. The Company is the sole guarantor of
this lease obligation; however, Schlumberger has indemnified the Company for 70%
of the total lease obligation. At December 31, 2002, the remaining commitment
under this lease is $92.7 million. In November 2000, the Company also entered
into an agreement with WesternGeco whereby WesternGeco subleased a facility from
the Company for a period of ten years at then current market rates. During 2002
and 2001, the Company recorded $5.2 million and $5.9 million, respectively, of
rental income from WesternGeco.
Included in the caption "Equity in income (loss) of affiliates" in the
Company's consolidated statement of operations for 2002 was $90.2 million for
the Company's share of a $300.7 million restructuring charge taken by
WesternGeco. The charge related to the impairment of WesternGeco's multiclient
library, as well as reducing the WesternGeco workforce, closing the land-based
seismic operations in the U.S. lower 48 states and Canada, and reducing the
marine seismic fleet. Included in the caption "Equity in income (loss) of
affiliates" for 2001 and 2000 are $10.3 million for asset impairment charges and
$9.5 million for restructuring and integration charges, respectively, both
associated with WesternGeco.
On October 30, 2001, the Company and Sequel Holdings, Inc. ("Sequel")
created an entity to operate under the name of Petreco International
("Petreco"). The Company contributed $16.6 million of net assets of the refining
and production product line of its Process segment to Petreco consisting
primarily of intangible assets, accounts receivable and inventories. In
conjunction with the transaction, the Company received $9.0 million in cash and
two promissory notes totaling $10.0 million, which were subsequently exchanged
for preferred stock of Petreco during 2002. Profits are shared by the Company
and Sequel in 49% and 51% interests, respectively. Sequel is entitled to a
liquidation preference upon the liquidation or sale of Petreco. The Company
accounts for its ownership in Petreco using the equity method of accounting and
did not recognize any gain or loss from the initial formation of the entity due
to the Company's material continued involvement in the operations of Petreco.
46
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 2002, the Company invested $16.5 million for a 40% interest 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.
Summarized unaudited combined financial information for all equity method
affiliates is as follows as of December 31:
2002 2001
- ----------------------------------------------------------------------------
Combined operating results:
Revenues $ 1,550.6 $ 1,752.9
Operating income (loss) (228.9) 226.1
Net income (loss) (320.2) 118.2
Combined financial position:
Current assets $ 589.2 $ 1,016.9
Noncurrent assets 1,968.3 2,072.0
- ----------------------------------------------------------------------------
Total assets $ 2,557.5 $ 3,088.9
============================================================================
Current liabilities $ 765.5 $ 961.2
Noncurrent liabilities 125.8 130.2
Stockholders' equity 1,666.2 1,997.5
- ----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 2,557.5 $ 3,088.9
============================================================================
At December 31, 2002 and 2001, net accounts receivable from unconsolidated
affiliates totaled $16.1 million and $33.5 million, respectively. As of December
31, 2002 and 2001, the excess of the Company's investment over the Company's
equity in affiliates is $310.2 million and $294.4 million, respectively. In
conjunction with the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill associated with equity method investments effective
January 1, 2002. Amortization expense for the years ended December 31, 2001 and
2000 of $7.9 million and $1.9 million, respectively, is included in the
Company's equity in income (loss) of affiliates.
NOTE 9. PROPERTY
Property is comprised of the following at December 31:
DEPRECIATION
PERIOD 2002 2001
- -------------------------------------------------------------------------------
Land $ 39.6 $ 38.6
Buildings and improvements 5 - 40 years 565.2 524.5
Machinery and equipment 2 - 15 years 1,719.9 1,624.4
Rental tools and equipment 1 - 10 years 939.2 848.5
- -------------------------------------------------------------------------------
Total property 3,263.9 3,036.0
Accumulated depreciation (1,909.2) (1,739.0)
- -------------------------------------------------------------------------------
Property - net $ 1,354.7 $ 1,297.0
===============================================================================
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
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 the EIMCO and BIRD Machine operating divisions 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 transitional impairment losses of $42.5
million, net of income taxes of $20.4 million. The transitional
47
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
impairment losses were recorded in the first quarter of 2002 as the cumulative
effect of accounting change in the consolidated statement of operations. The
Company has elected to perform its annual impairment test as of October 1. There
were no impairments in 2002 related to this annual impairment test.
Goodwill of $12.1 million associated with EIMCO is included in assets of
discontinued operations at December 31, 2001.
The changes in the carrying amount of goodwill (net of accumulated
amortization) for the year ended December 31, 2002 are as follows:
OILFIELD PROCESS TOTAL
- ------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 1,197.5 $ 50.8 $ 1,248.3
Transitional impairment loss -
BIRD Machine - (50.8) (50.8)
Goodwill acquired during the period 28.4 - 28.4
Translation adjustments and other 0.7 - 0.7
- ------------------------------------------------------------------------------
Balance as of December 31, 2002 $ 1,226.6 $ - $ 1,226.6
==============================================================================
Intangible assets, which continue to be amortized, are comprised of the
following for the years ended December 31:
2002 2001
------------------------------- --------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
- ------------------------------------------------------------------------------------
Technology-based $ 169.4 $ (38.6) $130.8 $ 164.1 $ (30.3) $133.8
Marketing-related 5.7 (4.8) 0.9 5.8 (4.6) 1.2
Contract-based 10.3 (7.2) 3.1 7.2 (6.4) 0.8
Customer-based 0.6 (0.1) 0.5 - - -
Other 4.2 (2.7) 1.5 3.1 (2.4) 0.7
- ------------------------------------------------------------------------------------
Total $ 190.2 $ (53.4) $136.8 $ 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.
Amortization expense for the years ended December 31, 2002, 2001 and 2000
was $10.0 million, $54.3 million and $62.3 million, respectively. Estimated
amortization expense for each of the subsequent five fiscal years is expected to
be within the range of $8.0 million to $13.1 million.
48
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000, are as follows
for the years ended December 31:
2002 2001 2000
- ------------------------------------------------------------------------------------------
Net income:
As reported $ 168.9 $ 438.0 $ 102.3
Goodwill amortization - 46.8 45.8
Intangible asset amortization - 0.4 0.4
- ------------------------------------------------------------------------------------------
Pro forma $ 168.9 $ 485.2 $ 148.5
==========================================================================================
Basic earnings per share:
As reported $ 0.50 $ 1.31 $ 0.31
Goodwill amortization - 0.14 0.14
Intangible asset amortization - - -
- ------------------------------------------------------------------------------------------
Pro forma $ 0.50 $ 1.45 $ 0.45
==========================================================================================
Diluted earnings per share:
As reported $ 0.50 $ 1.30 $ 0.31
Goodwill amortization - 0.14 0.14
Intangible asset amortization - - -
- ------------------------------------------------------------------------------------------
Pro forma $ 0.50 $ 1.44 $ 0.45
==========================================================================================
49
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INDEBTEDNESS
Total debt consisted of the following at December 31:
2002 2001
- -----------------------------------------------------------------------------
Short-term debt with a weighted average interest
rate of 2.25% at December 31, 2002 (4.90% at
December 31, 2001) $ 23.2 $ 89.1
Commercial Paper with a weighted average interest
rate of 2.00% at December 31, 2001 - 95.0
5.8% Notes due February 2003 with an effective
interest rate of 6.04%, net of unamortized
discount of $0.1 at December 31, 2001 100.0 99.9
8% Notes due May 2004 with an effective interest
rate of 8.08%, net of unamortized discount of
$0.2 at December 31, 2002 ($0.3 at
December 31, 2001) 99.8 99.7
7.875% Notes due June 2004 with an effective
interest rate of 8.13%, net of unamortized
discount of $0.7 at December 31, 2002 ($1.0
at December 31, 2001) 253.3 251.2
6.25% Notes due January 2009 with an effective
interest rate of 6.38%, net of unamortized
discount of $1.9 at December 31, 2002 ($2.2 at
December 31, 2001) 333.6 321.9
6% Notes due February 2009 with an effective
interest rate of 6.11%, net of unamortized
discount of $1.0 at December 31, 2002 ($1.2 at
December 31, 2001) 199.0 198.8
8.55% Debentures due June 2024 with an effective
interest rate of 8.80%, net of unamortized
discount of $2.7 at December 31, 2002 ($2.5 at
December 31, 2001) 147.3 147.5
6.875% Notes due January 2029 with an effective
interest rate of 7.08%, net of unamortized
discount of $9.2 at December 31, 2002 ($9.4
at December 31, 2001) 390.8 390.6
Other debt 0.8 0.9
- -----------------------------------------------------------------------------
Total debt 1,547.8 1,694.6
Less short-term debt and current maturities 123.5 12.2
- -----------------------------------------------------------------------------
Long-term debt $ 1,424.3 $ 1,682.4
=============================================================================
At December 31, 2002, the Company had $966.2 million of credit facilities
with commercial banks, of which $594.0 million were committed. The committed
facilities expire in September 2003 ($56 million) and October 2003 ($538
million). In 2001, the Company classified commercial paper and short-term debt
as long-term debt to the extent of its committed facilities because the Company
had the ability under these credit agreements and the intent to maintain these
obligations for longer than one year. There were no direct borrowings under
these credit facilities during 2002 and 2001.
The Company had two interest rate swap agreements that had been designated
and had qualified as fair value hedging instruments. Due to the Company's
outlook for interest rates, the Company terminated the two agreements and
received payments totaling $15.8 million upon cancellation in 2002. The deferred
gains of $4.8 million and $11.0 million on the agreements are being amortized as
a reduction of interest expense over the remaining lives of the underlying debt
securities, which mature in June 2004 and January 2009, respectively.
On May 25, 2001, the Company redeemed its outstanding LYONS at a redemption
price of $786.13 per $1,000 principal amount, for a total of $301.8 million. The
redemption was funded through the issuance of commercial paper. In connection
with the early extinguishment of debt, the Company recorded an extraordinary
loss of $2.3 million ($1.5 million after tax) which represents the write-off of
the remaining debt issuance costs.
50
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities of debt at December 31, 2002 are as follows: 2003 - $123.5
million; 2004 - $353.4 million; 2005 - $0.1 million; 2006 - $0.2 million; 2007 -
$0.0 million and $1,070.6 million thereafter.
NOTE 12. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and short-term investments,
receivables, payables, debt, interest rate swaps, crude oil contracts and
foreign currency contracts. Except as described below, the estimated fair value
of such financial instruments at December 31, 2002 and 2001 approximate their
carrying value as reflected in the consolidated balance sheets. The fair value
of the Company's debt, interest rate swaps, crude oil contracts and foreign
currency contracts has been estimated based on year-end quoted market prices.
The estimated fair value of the Company's debt at December 31, 2002 and 2001
was $1,703.0 million and $1,761.7 million, respectively, which differs from the
carrying amounts of $1,547.8 million and $1,694.6 million, respectively,
included in the consolidated balance sheets.
INTEREST RATE SWAPS
The Company entered into an interest rate swap agreement in February 1999
for a notional amount of $325.0 million. Under this agreement, the Company
received interest at a rate of 6.25% and paid interest at a rate equal to the
average of six-month LIBOR for the Yen, Euro and Swiss Franc plus a 3.16%
spread. The interest rate swap settled semi-annually and was scheduled to
terminate in January 2009. Due to the Company's outlook for interest rates, the
Company terminated this swap position in September 2002 and received proceeds of
$11.0 million upon cancellation. This deferred gain is being amortized as a
reduction of interest expense over the remaining life of the underlying debt
security.
The Company entered into a second interest rate swap agreement in June 2001
for a notional amount of $100.0 million on which the Company received interest
at a rate of 7.875% and paid interest at a rate of three-month LIBOR plus a
spread of 2.7625%. The interest rate swap settled semi-annually and was
scheduled to terminate in June 2004. Due to the Company's outlook for interest
rates, the Company terminated this swap position in September 2002 and received
proceeds of $4.8 million upon cancellation. This deferred gain is being
amortized as a reduction of interest expense over the remaining life of the
underlying debt security.
These two interest rate swap agreements were designated and qualified as
fair value hedging instruments. They were fully effective, resulting in no net
gain or loss recorded in the consolidated statement of operations. The fair
value of these contracts at December 31, 2001 was a $1.3 million recognized
asset.
CRUDE OIL CONTRACTS
During the year ended December 31, 2002, the Company entered into two crude
oil contracts to mitigate price risk associated with its oil operations in West
Africa. No gain or loss was recognized on the contracts. These contracts expired
on December 31, 2002.
During the year ended December 31, 2001, the Company entered into two crude
oil contracts to mitigate price risk associated with production from the West
African oil property. Based on the Company's outlook for crude oil prices, the
Company elected to terminate these contracts prior to their maturity dates.
Accordingly, the contracts were terminated on October 3, 2001, and the Company
received a cash payment of $4.4 million. The net gain recognized in earnings in
2001 from all crude oil contracts was $3.1 million and was reported as part of
discontinued operations in the consolidated statements of operations.
FOREIGN CURRENCY FORWARD CONTRACTS
At December 31, 2002, the Company had entered into a foreign currency
forward contract with a notional amount of $20.0 million to hedge exposure to
currency fluctuations in the British Pound Sterling. This contract is a cash
flow hedge. Based on year-end quoted market prices for a contract with similar
terms and maturity date, no asset or liability was recorded as the forward price
was substantially the same as the contract price.
51
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2001, the Company had entered into foreign currency forward
contracts with notional amounts of $8.5 million, $1.0 million and $0.7 million
to hedge exposure to currency fluctuations in the Canadian Dollar, the
Indonesian Rupiah and the Euro, respectively. These contracts are cash flow
hedges. Based on year-end quoted market prices for contracts with similar terms
and maturity dates, no asset or liability was recorded as the forward prices
were substantially the same as the contract price.
During 2002 and 2001, the Company entered into foreign currency contracts to
hedge exposure to currency fluctuations for specific transactions or balances.
The impact on the consolidated statements of operations was not significant for
these contracts either individually or in the aggregate.
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.
CONCENTRATION OF CREDIT RISK
The Company sells its products and services to numerous companies in the oil
and gas industry. Although this concentration could affect the Company's overall
exposure to credit risk, management believes that the Company is exposed to
minimal risk since the majority of its business is conducted with major
companies within the industry. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require collateral
for its accounts receivable. In some cases, the Company will require payment in
advance or security in the form of a letter of credit or bank guarantee.
The Company maintains cash deposits with major banks that from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.
NOTE 13. 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 Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen and INTEQ. 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.
They also 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, South 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 investment in the WesternGeco venture.
The Process segment consists of one operating division, BIRD Machine, 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 accounting policies of each segment are the same as those described in
Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the
performance of its Oilfield and Process segments based on income before the
following: income taxes, accounting changes, restructuring charges and interest
income and expense. Intersegment sales and transfers are not significant.
52
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
- -----------------------------------------------------------------------------------
2002
Revenues $4,901.5 $118.9 $ - $5,020.4
Equity in income (loss) of affiliates 18.5 2.0 (90.2) (69.7)
Segment profit (loss) 730.4 (12.0) (338.0) 380.4
Total assets 5,648.1 163.0 589.7 6,400.8
Investment in affiliates 843.5 28.5 - 872.0
Capital expenditures 310.4 1.5 4.8 316.7
Depreciation, depletion and amortization 271.4 3.2 27.0 301.6
2001
Revenues $5,001.9 $137.7 $ - $5,139.6
Equity in income (loss) of affiliates 56.0 0.1 (10.3) 45.8
Segment profit (loss) 902.9 (15.1) (253.9) 633.9
Total assets 5,692.8 186.5 796.9 6,676.2
Investment in affiliates 902.8 26.2 - 929.0
Capital expenditures 280.0 1.3 22.2 303.5
Depreciation, depletion and amortization 302.5 7.2 12.4 322.1
2000
Revenues $4,784.4 $157.7 $ - $4,942.1
Equity in income (loss) of affiliates 4.9 - (9.5) (4.6)
Segment profit (loss) 510.3 (9.3) (344.5) 156.5
Total assets 5,445.3 195.4 848.4 6,489.1
Investment in affiliates 869.3 - - 869.3
Capital expenditures 564.9 1.3 31.7 597.9
Depreciation, depletion and amortization 569.9 4.7 8.2 582.8
For the years ended December 31, 2002, 2001 and 2000, there were no revenues
attributable to one customer that accounted for more than 10% of total revenues
for the Oilfield segment. For the year ended December 31, 2002, Process revenues
attributable to one customer totaled $19.5 million, or 16.5%.
The following table presents the details of "Other" segment loss for the
years ended December 31:
2002 2001 2000
- ------------------------------------------------------------------------------
Corporate expenses $ (143.8) $ (129.7) $ (98.7)
Interest - net (105.9) (114.5) (175.5)
Restructuring charge 1.9 (1.8) (7.0)
Gain (loss) on disposal of assets - 2.4 (67.9)
Gain on sale of securities - - 14.1
Restructuring charge related to
equity method investments (90.2) (10.3) (9.5)
- ------------------------------------------------------------------------------
Total $ (338.0) $ (253.9) $ (344.5)
==============================================================================
The following table presents the details of "Other" total assets at December
31:
2002 2001 2000
- ----------------------------------------------------------------------------
Current deferred tax asset $ 133.5 $ 181.3 $ 190.5
Property - net 153.5 176.3 170.9
Accounts receivable 4.3 44.0 34.9
Other tangible assets 88.8 85.6 85.6
Assets of discontinued operations 64.3 231.9 290.8
Cash and other assets 145.3 77.8 75.7
- ----------------------------------------------------------------------------
Total $ 589.7 $ 796.9 $ 848.4
============================================================================
53
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents consolidated revenues by country based on the
location of the use of the products or services for the years ended December 31:
2002 2001 2000
- ------------------------------------------------------------------------------------------
United States $ 1,769.8 $ 2,010.0 $ 1,943.7
United Kingdom 364.6 328.5 345.7
Norway 303.2 312.2 279.2
Canada 256.9 295.6 281.6
Venezuela 143.7 232.7 277.4
Other countries (approximately 65 countries) 2,182.2 1,960.6 1,814.5
- ------------------------------------------------------------------------------------------
Total $ 5,020.4 $ 5,139.6 $ 4,942.1
==========================================================================================
The following table presents net property by country based on the location
of the asset at December 31:
2002 2001 2000
- ------------------------------------------------------------------------------------------
United States $ 790.8 $ 788.7 $ 743.8
United Kingdom 130.1 108.6 133.7
Norway 52.7 48.1 39.3
Canada 39.7 35.6 38.0
Germany 36.0 23.1 18.0
Venezuela 26.6 37.4 45.4
Other countries 278.8 255.5 276.8
- ------------------------------------------------------------------------------------------
Total $ 1,354.7 $ 1,297.0 $ 1,295.0
==========================================================================================
NOTE 14. EMPLOYEE STOCK PLANS
The Company has stock option plans that provide for the issuance of
incentive and non-qualified stock options to directors, officers and other key
employees at an exercise price equal to or greater than the fair market value of
the stock at the date of grant. These stock options generally vest over three
years. Vested options are exercisable in part or in full at any time prior to
the expiration date of ten years from the date of grant. As of December 31,
2002, 22.1 million shares were available for future option grants.
The following table summarizes the activity for the Company's stock option
plans (shares in thousands):
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
- ------------------------------------------------------------------------------
Outstanding at December 31, 1999 11,735 $ 27.39
Granted 2,154 27.40
Exercised (2,471) 21.16
Forfeited (766) 27.79
- ------------------------------------------------------------------------------
Outstanding at December 31, 2000 10,652 28.80
Granted 1,850 40.97
Exercised (2,291) 22.05
Forfeited (344) 30.01
- ------------------------------------------------------------------------------
Outstanding at December 31, 2001 9,867 32.61
Granted 2,064 28.80
Exercised (876) 21.35
Forfeited (187) 39.50
- ------------------------------------------------------------------------------
Outstanding at December 31, 2002 10,868 $ 32.68
==============================================================================
54
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information for stock options outstanding at
December 31, 2002 (shares in thousands):
OUTSTANDING EXERCISABLE
-------------------------------- -------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
LIFE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE
- ---------------------------------------------------------------------------------
$ 8.80 - $ 14.86 114 2.93 $ 10.69 97 $ 9.96
16.81 - 21.00 2,563 4.40 20.84 2,291 20.83
21.06 - 26.07 2,123 7.58 23.84 737 22.82
28.25 - 40.25 2,126 7.04 34.57 914 36.10
43.63 - 47.81 3,942 5.65 44.75 2,763 46.31
- ---------------------------------------------------------------------------------
Total 10,868 5.98 $ 32.68 6,802 $ 33.29
=================================================================================
The Company also has an employee stock purchase plan whereby eligible
employees may purchase shares of the Company's common stock at a price equal to
85% of the lower of the closing price of the Company's common stock on the first
or last trading day of the Company's fiscal year. A total of 0.7 million shares
are remaining for issuance under the plan. Employees purchased 0.8 million
shares in 2002, 0.6 million shares in 2001 and 1.1 million shares in 2000.
NOTE 15. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has various noncontributory defined benefit pension plans
("Pension Benefits") covering various domestic and foreign employees, including
a new qualified defined benefit pension plan (the "Pension Plan") for
substantially all U.S. employees, which was effective January 1, 2002.
Generally, the Company makes annual contributions to the plans in amounts
necessary to meet or exceed minimum governmental funding requirements. The
Company also provides certain postretirement health care and life insurance
benefits other than pensions ("Postretirement Benefits") to substantially all
U.S. employees who retire and have met certain age and service requirements.
During 2001, the Company approved amendments to the Postretirement Benefits plan
for certain employees to enhance their health care benefits, which were
effective January 1, 2002. The measurements of plan assets and obligations for
both Pension and Postretirement Benefits are as of October 1 of each year
presented.
55
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of the beginning and ending balances of benefit
obligations and fair value of plan assets, and the funded status of the plans
are as follows for the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ -----------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning
of year $ 276.4 $ 264.3 $ 143.7 $ 120.4
Service cost 17.8 4.9 4.4 1.6
Interest cost 18.9 17.4 9.5 8.9
Plan participants' contributions - 0.6 - -
Amendments - - - 12.2
Actuarial loss 23.9 19.7 14.9 16.3
Settlement/curtailment gain - (13.5) - -
Benefits paid (11.5) (10.8) (13.8) (15.7)
Exchange rate adjustment 19.1 (6.2) - -
- -----------------------------------------------------------------------------------
Benefit obligation at end of year 344.6 276.4 158.7 143.7
- -----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year 314.8 367.7 - -
Actual loss on plan assets (40.5) (46.2) - -
Employer contribution 8.6 8.0 - -
Plan participants' contributions - 0.6 - -
Benefits paid (11.1) (10.8) - -
Exchange rate adjustment 15.3 (4.5) - -
- -----------------------------------------------------------------------------------
Fair value of plan assets at
end of year 287.1 314.8 - -
- -----------------------------------------------------------------------------------
Funded status - over (under) (57.5) 38.4 (158.7) (143.7)
Unrecognized actuarial loss 160.0 76.0 31.7 16.9
Unrecognized prior service cost 0.7 0.5 9.1 9.7
- -----------------------------------------------------------------------------------
Net amount recognized 103.2 114.9 (117.9) (117.1)
Benefits paid - October to December 0.7 1.1 3.0 4.1
- -----------------------------------------------------------------------------------
Net amount recognized $ 103.9 $ 116.0 $ (114.9) $ (113.0)
===================================================================================
The Company reports prepaid benefit cost in other assets and accrued benefit
and minimum liabilities in other long-term liabilities in the consolidated
balance sheet. The amounts recognized in the consolidated balance sheet are as
follows at December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 153.6 $ 146.4 $ - $ -
Accrued benefit liability (49.7) (30.4) (114.9) (113.0)
Minimum liability (67.3) (19.3) - -
Intangible asset 0.5 0.5 - -
Accumulated other
comprehensive income 66.8 18.8 - -
- --------------------------------------------------------------------------------
Net amount recognized $ 103.9 $ 116.0 $ (114.9) $ (113.0)
================================================================================
Actuarial assumptions used to determine costs and benefit obligation for
these plans are as follows for the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------- -----------------------
2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------
Discount rate 6.19% 6.53% 6.96% 6.75% 7.00% 7.75%
Expected return on plan assets 8.07% 8.68% 8.69%
Rate of compensation increase 3.47% 3.75% 3.98%
56
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net pension and postretirement costs are as follows for
the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- --------------------------
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------
Service cost $ 17.8 $ 4.9 $ 6.2 $ 4.4 $ 1.6 $ 1.7
Interest cost 18.9 17.4 14.2 9.5 8.9 8.3
Expected return on plan
assets (27.7) (30.8) (25.4) - - -
Amortization of prior
service cost 0.5 - - 0.6 (0.5) (0.5)
Recognized actuarial
(gain) loss 3.6 0.4 0.2 0.2 - (0.1)
- -----------------------------------------------------------------------------------
Net periodic benefit cost $ 13.1 $ (8.1) $ (4.8) $ 14.7 $ 10.0 $ 9.4
===================================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $232.3 million, $218.2 million and $104.0 million,
respectively, as of December 31, 2002, and $164.0 million, $159.1 million and
$109.0 million, respectively, as of December 31, 2001. The Company's
postretirement benefit plan is not funded.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the Postretirement Benefits plan. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
Postretirement Benefits was adjusted in 2002 and in 2000. As of December 31,
2002, the health care cost trend rate was 9.1% for employees under age 65 and
14.3% for participants over age 65 with each declining gradually each successive
year until it reaches 5.0% for both employees under age 65 and over age 65 in
2008. A one percentage point change in assumed health care cost trend rates
would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
- ------------------------------------------------------------------------------
Effect on total of service and interest
cost components $ 0.7 $ (0.7)
Effect on postretirement benefit obligation 10.7 (9.4)
DEFINED CONTRIBUTION PLANS
During the periods reported, generally all of the Company's U.S. employees
were eligible to participate in the Company sponsored Thrift Plan, which is a
401(k) plan under the Internal Revenue Code of 1986, as amended. The Thrift Plan
allows eligible employees to elect to contribute from 1% to 50% of their
salaries to an investment trust. Employee contributions are matched in cash by
the Company at the rate of $1.00 per $1.00 employee contribution for the first
3% and $0.50 per $1.00 employee contribution for the next 2% of the employee's
salary. Such contributions vest immediately. In addition, the Company makes a
cash contribution for all eligible employees between 2% and 5% of their salary
depending on the employee's age. Such contributions become fully vested to the
employee after five years of employment. The Thrift Plan provides for nine
different investment options, for which the employee has sole discretion in
determining how both the employer and employee contributions are invested. The
Company's contributions to the Thrift Plan and several other non-U.S. defined
contribution plans amounted to $62.8 million, $63.7 million and $57.5 million in
2002, 2001 and 2000, respectively.
For certain non-U.S. employees who are not eligible to participate in the
Thrift Plan, the Company provides a non-qualified defined contribution plan that
provides basically the same benefits as the Thrift Plan. In addition, the
Company provides a non-qualified supplemental retirement plan ("SRP") for
certain officers and employees whose benefits under both the Thrift Plan and the
Pension Plan are limited by federal tax law. The SRP also allows the eligible
employees to defer a portion of their eligible compensation and provides for
employer matching and base contributions pursuant to limitations. Both
non-qualified plans are fully funded and invested through trusts, the assets of
which are included in the Company's consolidated balance sheet. The Company's
contributions to these non-qualified plans were $6.0 million, $4.2 million and
$2.4 million for 2002, 2001 and 2000, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment disability income, medical and
other benefits to substantially all qualifying former or inactive U.S.
employees. During 2001 and part of 2002, income benefits for long-term
disability ("Disability Benefits") were provided through a qualified
self-insured plan which was funded by contributions from the Company and
employees. Effective July 1, 2002, the Company converted to a fully-insured plan
for all future long-term Disability Benefits. The Disability Benefits for
employees who were disabled as of July 1, 2002, were sold to a disability
insurance company. The continuation of medical and life
57
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
insurance benefits while on disability ("Continuation Benefits") are provided
through a qualified self-insured plan. The accrued postemployment liability for
Continuation Benefits at December 31, 2002 and 2001 was $30.3 million and $29.5
million, respectively, and are included in other long-term liabilities in the
consolidated balance sheet.
NOTE 16. COMMITMENTS AND CONTINGENCIES
LEASES
At December 31, 2002, the Company had long-term non-cancelable operating
leases covering certain facilities and equipment. The minimum annual rental
commitments, net of amounts due under subleases, for each of the five years in
the period ending December 31, 2007 are $61.8 million, $47.9 million, $36.1
million, $23.9 million and $13.3 million, respectively, and $110.3 million in
the aggregate thereafter. The Company has not entered into any significant
capital leases.
In September 2000, the Company sold four facilities for approximately $117.7
million. The facilities were leased back from the purchaser over a period of 15
years at then current market rates. In November 2000, one of these facilities
was subsequently subleased to WesternGeco at then current market rates for a
period of 10 years, in conjunction with the formation of the venture.
LITIGATION
The Company and its subsidiaries are involved in litigation or proceedings
that have arisen in the Company's ordinary business activities. The Company
insures against these risks to the extent deemed prudent by its management, but
no assurance can be given that the nature and amount of such insurance will be
sufficient to fully indemnify the Company against liabilities arising out of
pending and future legal proceedings. Many of these insurance policies contain
deductibles or self-insured retentions in amounts the Company deems prudent. In
determining the amount of self-insurance, it is the Company's policy to
self-insure those losses that are predictable, measurable and recurring in
nature, such as automobile liability claims, general liability and workers
compensation claims. The Company records accruals for the uninsured portion of
losses related to these types of claims. The accruals for losses are calculated
by estimating losses for claims using historical claim data, specific loss
development factors and other information as necessary.
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
Securities and Exchange Commission ("SEC") and the Department of Justice ("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 Foreign Corrupt
Practices Act ("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.
The Company's ongoing internal investigation has identified apparent
deficiencies with respect to certain operations in Nigeria in its books and
records and internal controls, and potential liabilities to governmental
authorities in Nigeria. The investigation was 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.
ENVIRONMENTAL MATTERS
The Company's past and present operations include activities which are
subject to domestic (including U.S. federal, state and local) and international
extensive federal and state environmental regulations. The Company's
environmental policies and practices are designed to ensure compliance with
existing laws and regulations and to minimize the possibility of significant
environmental damage.
58
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is involved in voluntary remediation projects at some of its
present and former manufacturing facilities, the majority of which are due to
acquisitions made by the Company or sites the Company no longer actively uses in
its operations. The estimate of remediation costs for these voluntary
remediation projects is developed using currently available facts, existing
permits and technology and presently enacted laws and regulations. Remediation
cost estimates include direct costs related to the investigation, external
consulting costs, governmental oversight fees, treatment equipment costs and
costs associated with long-term maintenance and monitoring of a remediation
project.
The Company has also been identified as a potentially responsible party
("PRP") in remedial activities related to various Superfund sites. The Company
participates in the process set out in the Joint Participation and Defense
Agreement to negotiate with government agencies, identify other PRPs, determine
each PRP's allocation and estimate remediation costs. The Company has accrued
what it believes to have been its pro rata share of the total estimated cost of
remediation of these Superfund sites based upon the ratio that the estimated
volume of waste contributed to the site by the Company bears to the total
estimated volume of waste disposed at the site. Applicable United States federal
law imposes joint and several liability on each PRP for the cleanup of these
sites leaving the Company with the uncertainty that it may be responsible for
the remediation cost attributable to other PRPs who are unable to pay their
share of the remediation costs. No accrual has been made under the joint and
several liability concept for those Superfund sites where the Company's
participation is minor since the Company believes that the probability that it
will have to pay material costs above its volumetric share is remote. The
Company believes there are other PRPs who have greater involvement on a
volumetric calculation basis, who have substantial assets and who may be
reasonably expected to pay their share of the cost of remediation. For those
Superfund sites where the Company is a major PRP, remediation costs are
estimated to include recalcitrant parties. In some cases, the Company has
insurance coverage or contractual indemnities from third parties to cover the
ultimate liability.
At December 31, 2002 and 2001, the Company's total accrual for environmental
remediation was $17.7 million and $17.6 million, respectively, including $4.3
million and $3.8 million, respectively, for remediation costs for the various
Superfund sites. The measurement of the accruals for remediation costs is
subject to uncertainty, including the evolving nature of environmental
regulations and the difficulty in estimating the extent and type of remediation
activity that will be utilized. The Company believes that the likelihood of
material losses in excess of those amounts recorded is remote.
OTHER
In the normal course of business with customers, vendors and others, the
Company is contingently liable for performance under letters of credit and other
bank issued guarantees totaling approximately $193.5 million at December 31,
2002. The Company also had commitments outstanding for purchase obligations
related to capital expenditures and inventory under purchase orders and
contracts of approximately $148.1 million at December 31, 2002. In conjunction
with the formation of WesternGeco, the Company transferred to the venture a
lease on a seismic vessel. The Company is the sole guarantor of this lease
obligation; however, Schlumberger has indemnified the Company for 70% of the
total lease obligation. At December 31, 2002, the remaining commitment under
this lease is $92.7 million. In addition, at December 31, 2002, the Company has
guaranteed debt of third parties totaling $33.6 million. It is not practicable
to estimate the fair value of these financial instruments and management does
not expect any material losses from these financial instruments.
NOTE 17. OTHER SUPPLEMENTAL INFORMATION
Supplemental consolidated statement of operations information is as follows
for the years ended December 31:
2002 2001 2000
- ---------------------------------------------------------------------------------
Rental expense (generally transportation
equipment and warehouse facilities) $ 100.4 $ 87.3 $ 128.9
Research and development 165.5 128.1 115.7
59
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplemental consolidated statement of cash flows information is as follows
for the years ended December 31:
2002 2001 2000
- ---------------------------------------------------------------------------------
Sources (uses) of cash in:
Accounts receivable $ 189.1 $ (95.2) $ (80.7)
Inventories 15.6 (155.6) (62.0)
Accounts payable (154.6) 106.3 (21.5)
Accrued employee compensation and other
current liabilities (78.1) 104.1 (25.0)
Other long-term liabilities 72.7 (8.0) (11.7)
Other assets and liabilities (3.0) (73.8) (17.3)
- ---------------------------------------------------------------------------------
Net effect of change in operating accounts $ 41.7 $ (122.2) $ (218.2)
=================================================================================
Income taxes paid $ 128.7 $ 97.7 $ 116.0
Interest paid 111.8 122.2 172.6
The formation of Petreco in 2001 and WesternGeco in 2000 included the
following cash and noncash amounts for the years ended December 31:
2001 2000
- -----------------------------------------------------------------------------
Assets (liabilities) reclassified:
Working capital - net $ 1.8 $ 15.6
Property - net 1.3 416.0
Goodwill and other intangibles 33.5 259.8
Multiclient seismic data and other assets (1.0) 707.4
Long-term liabilities (0.5) (77.6)
- -----------------------------------------------------------------------------
Noncash assets and liabilities reclassified to
investment in affiliates 35.1 1,321.2
Less proceeds from sale of interest in affiliate (9.0) (493.4)
- -----------------------------------------------------------------------------
Net investment in venture at formation $ 26.1 $ 827.8
=============================================================================
The changes in the aggregate product warranty liability are as follows for
the year ended December 31:
2002
- -----------------------------------------------------------------------------
Balance as of December 31, 2001 $ 10.1
Claims paid during 2002 (10.4)
Additional warranties issued during 2002 11.5
Revisions in estimates for previously issued warranties 0.6
Other 0.4
- -----------------------------------------------------------------------------
Balance as of December 31, 2002 $ 12.2
=============================================================================
60
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
- -------------------------------------------------------------------------------------------------------------
2002 *
Revenues $ 1,203.0 $ 1,245.1 $ 1,280.2 $ 1,292.1 $ 5,020.4
Gross profit ** 327.8 343.9 371.0 352.0 1,394.7
Income from continuing operations 70.6 68.6 86.8 (2.3) 223.7
Net income 33.3 72.4 64.7 (1.5) 168.9
Basic earnings per share
Income from continuing operations 0.21 0.20 0.26 (0.01) 0.66
Net income 0.10 0.21 0.19 (0.01) 0.50
Diluted earnings per share
Income from continuing operations 0.21 0.20 0.26 (0.01) 0.66
Net income 0.10 0.21 0.19 (0.01) 0.50
Dividends per share 0.11 0.12 0.11 0.12 0.46
Common stock market prices:
High 39.42 38.84 32.51 33.91
Low 30.98 33.48 22.80 26.51
2001 *
Revenues $ 1,175.4 $ 1,278.8 $ 1,369.9 $ 1,315.5 $ 5,139.6
Gross profit ** 323.2 362.3 410.3 387.9 1,483.7
Income from continuing operations 68.9 101.6 131.8 115.8 418.1
Net income 71.1 103.8 137.1 126.0 438.0
Basic earnings per share
Income from continuing operations 0.21 0.30 0.39 0.34 1.25
Net income 0.21 0.31 0.41 0.37 1.31
Diluted earnings per share
Income from continuing operations 0.21 0.30 0.39 0.34 1.24
Net income 0.21 0.31 0.41 0.37 1.30
Dividends per share 0.11 0.12 0.11 0.12 0.46
Common stock market prices:
High 44.99 41.50 36.17 37.70
Low 36.31 32.85 26.29 28.60
* See Note 4 for restructuring charges.
** Represents revenues less cost of revenues.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is set forth in the
section entitled "Election of Directors" in the Proxy Statement of the Company
for the Annual Meeting of Stockholders to be held April 23, 2003, which section
is incorporated herein by reference. For information regarding executive
officers of the Company, see "Item 1. Business - Executive Officers." Additional
information regarding compliance by directors and executive officers with
Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth
under the section entitled "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on April 23, 2003, which section is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information for this item is set forth in the section entitled "Equity
Compensation Plan Information" in the Proxy Statement of the Company for the
Annual Meeting of Stockholders to be held April 23, 2003, which section is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and
management is set forth in the sections entitled "Voting Securities" and
"Security Ownership of Management" in the Proxy Statement of the Company for the
Annual Meeting of Stockholders to be held April 23, 2003, which sections are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
management is set forth in the section entitled "Certain Relationships and
Related Transactions" in the Proxy Statement of the Company for the Annual
Meeting of Stockholders to be held April 23, 2003, which section is incorporated
herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing of this Annual Report on Form 10-K,
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, as amended (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 deficiencies 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 Annual Report, is recorded, processed, summarized and
reported, within the time periods specified in the SEC's 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.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
All financial statements of the Registrant as set forth under Item 8
of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
(3) Exhibits
Each exhibit identified below is filed as a part of this report.
Exhibits designated with an "*" are filed as an exhibit to this
Annual Report on Form 10-K. Exhibits designated with a "+" are
identified as management contracts or compensatory plans or
arrangements. Exhibits previously filed as indicated below are
incorporated by reference.
3.1 Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 1998) and Certificate of Amendment to Restated
Certificate of Incorporation (filed as Exhibit 4.2 to
Baker Hughes Incorporated Registration Statement on
Form S-3 dated September 27, 1999).
3.2 Bylaws of Baker Hughes Incorporated restated as of
January 30, 2002 (filed as Exhibit 3.2 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
4.1 Rights of Holders of the Company's Long-Term Debt.
The Company has no long-term debt instrument with
regard to which the securities authorized thereunder
equal or exceed 10% of the total assets of the
Company and its subsidiaries on a consolidated basis.
The Company agrees to furnish a copy of its long-term
debt instruments to the SEC upon request.
4.2 Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 1998) and Certificate of Amendment to Restated
Certificate of Incorporation (filed as Exhibit 4.2 to
Baker Hughes Incorporated Registration Statement on
Form S-3 dated September 27, 1999).
4.3 Bylaws of Baker Hughes Incorporated restated as of
January 30, 2002 (filed as Exhibit 3.2 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
4.5 Indenture dated as of May 15, 1994 between Western
Atlas Inc. and The Bank of New York, Trustee,
providing for the issuance of securities in series
(filed as Exhibit 4.6 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 1999).
10.1+ Employment Agreement by and between Baker Hughes
Incorporated and Michael E. Wiley dated as of July
17, 2000 (filed as Exhibit 10.1 to Quarterly Report
of Baker Hughes Incorporated on Form 10-Q for the
quarter ended June 30, 2000).
10.2+ Severance Agreement between Baker Hughes Incorporated
and Michael E. Wiley dated as of July 17, 2000 (filed
as Exhibit 10.2 to Quarterly Report of Baker Hughes
Incorporated on Form 10-Q for the quarter ended June
30, 2000).
10.3*+ Severance Agreement between Baker Hughes Incorporated
and G. Stephen Finley dated as of July 23, 1997.
10.4*+ Severance Agreement between Baker Hughes Incorporated
and Andrew J. Szescila dated as of July 23, 1997.
10.5+ Form of Amendment 1 to Severance Agreement between
Baker Hughes Incorporated and each of G. Stephen
Finley and Andrew J. Szescila effective November 11,
1998 (filed as Exhibit 10.7 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 1998).
63
10.6+ Severance Agreement between Baker Hughes Incorporated
and Alan R. Crain, Jr. dated as of October 25, 2000
(filed as Exhibit 10.6 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.7+ Severance Agreement between Baker Hughes Incorporated
and Greg Nakanishi dated as of November 1, 2000
(filed as Exhibit 10.7 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.8+ Agreement regarding restricted stock award issued to
Michael E. Wiley on August 15, 2000 in the amount of
150,000 shares of Company Common Stock (filed as
Exhibit 10.8 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.9+ Agreement regarding supplemental restricted stock
award issued to Michael E. Wiley on August 15, 2000
in the amount of 83,000 shares of Company Common
Stock (filed as Exhibit 10.9 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
10.10* Amended and Restated 1991 Employee Stock Bonus Plan
of Baker Hughes Incorporated, as amended by Amendment
No. 1997-1 to the Amended and Restated 1991 Employee
Stock Bonus Plan and as amended by Amendment No.
1999-1 to the Amended and Restated 1991 Employee
Stock Bonus Plan.
10.11* Restated 1987 Stock Option Plan of Baker Hughes
Incorporated, amended as of October 24, 1990.
10.12* Baker Hughes Incorporated Supplemental Retirement
Plan, as amended and restated effective as of January
1, 2003.
10.13*+ Baker Hughes Incorporated Executive Severance Plan.
10.14* 1993 Stock Option Plan, as amended by Amendment No.
1997-1 to the 1993 Stock Option Plan and as amended
by Amendment No. 1999-1 to the 1993 Stock Option
Plan.
10.15* 1993 Employee Stock Bonus Plan, as amended by
Amendment No. 1997-1 to the 1993 Employee Stock Bonus
Plan and as amended by Amendment No. 1999-1 to the
1993 Employee Stock Bonus Plan.
10.16*+ Baker Hughes Incorporated Director Compensation
Deferral Plan, as amended and restated effective as
of July 24, 2002.
10.17* 1995 Employee Annual Incentive Compensation Plan, as
amended by Amendment No. 1997-1 to the 1995 Employee
Annual Incentive Compensation Plan and as amended by
Amendment No. 1999-1 to the 1995 Employee Annual
Incentive Compensation Plan.
10.18* Long Term Incentive Plan, as amended by Amendment No.
1999-1 to Long Term Incentive Plan.
10.19 1998 Employee Stock Option Plan (filed as Exhibit
10.33 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 1998),
as amended by Amendment No. 1999-1 to 1998 Employee
Stock Option Plan (filed as Exhibit 10.34 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.20 Form of Credit Agreement, dated as of October 1,
1998, among Baker Hughes Incorporated and fourteen
banks for $750,000,000, in the aggregate for all
banks (filed as Exhibit 10.35 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.21 Form of Credit Agreement dated as of October 1, 1998
among Baker Hughes Incorporated and fourteen banks
for $250,000,000, in the aggregate for all banks
(filed as Exhibit 10.36 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 1998), as amended by Form of First
Amendment of Credit Agreement dated as of September
29, 1999 among Baker Hughes Incorporated and fourteen
banks for $250,000,000, in the aggregate for all
banks (filed as Exhibit 10.29 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1999), as amended by Form of
Second Amendment of Credit Agreement dated as of
September 25, 2000 among Baker Hughes Incorporated
and fourteen banks for $250,000,000, in the aggregate
for all banks (filed as Exhibit 10.35 to Annual
Report of Baker Hughes Incorporated
64
on Form 10-K for the year ended December 31, 2000)
and as amended by Form of Amendment to Credit
Agreement dated as of September 27, 2002 (filed as
Exhibit 10.1 to Quarterly Report of Baker Hughes
Incorporated on Form 10-Q for the quarter ended
September 30, 2002).
10.22+ Form of Stock Option Agreement for executives
effective January 26, 2000 (filed as Exhibit 10.36 to
Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2000).
10.23+ Form of Stock Option Agreement for executive officers
effective October 1, 1998 (filed as Exhibit 10.37 to
Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2000).
10.24 Form of Nonqualified Stock Option Agreement for
employees effective October 1, 1998 (filed as Exhibit
10.39 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 1998).
10.25+ Form of Nonqualified Stock Option Agreement for
directors effective October 25, 1998 (filed as
Exhibit 10.39 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.26+ Form of Nonqualified Stock Option Agreement for
directors effective October 25, 1995 (filed as
Exhibit 10.26 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.27 Form of Nonqualified Stock Option Agreement for
employees effective October 25, 1995, (filed as
Exhibit 10.27 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.28 Form of Incentive Stock Option Agreement for
employees effective October 25, 1995, (filed as
Exhibit 10.28 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.29+ Agreement regarding restricted stock award issued to
Alan R. Crain, Jr. on October 25, 2000 in the amount
of 7,500 shares of Company Common Stock (filed as
Exhibit 10.43 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.30+ Agreement regarding restricted stock award issued to
Greg Nakanishi on November 1, 2000 in the amount of
5,000 shares of Company Common Stock (filed as
Exhibit 10.44 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.31+ Agreement regarding restricted stock award issued to
Andrew J. Szescila on January 24, 2001 in the amount
of 25,000 shares of Company Common Stock (filed as
Exhibit 10.45 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.32 Agreement and Plan of Merger among Baker Hughes
Incorporated, Baker Hughes Delaware I, Inc. and
Western Atlas Inc. dated as of May 10, 1998 (filed as
Exhibit 2.1 to Form 8-K dated May 20, 1998).
10.33 Tax Sharing Agreement dated October 31, 1997, between
Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit
10.19 to Western Atlas Inc.'s Form 10-Q for the
quarter ended September 30, 1997).
10.34 Employee Benefits Agreement dated October 31, 1997,
between Western Atlas Inc. and UNOVA, Inc. (filed as
Exhibit 10.21 to Western Atlas Inc.'s Form 10-Q for
the quarter ended September 30, 1997).
10.35 Master Formation Agreement by and among the Company,
Schlumberger Limited and certain wholly owned
subsidiaries of Schlumberger Limited dated as of
September 6, 2000 (filed as Exhibit 2.1 to Form 8-K
dated September 7, 2000).
10.36 Shareholders' Agreement by and among Schlumberger
Limited, Baker Hughes Incorporated and other parties
listed on the signature pages thereto dated November
30, 2000 (filed as Exhibit 10.1 to Form 8-K dated
November 30, 2000).
10.37 Corporate Executive Loan Program (filed as Exhibit
10.50 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 1998).
65
10.38+ Amendment 1 to Employment Agreement, effective April
25, 2001, by and between Baker Hughes Incorporated
and Michael E. Wiley; Amendment 2 to Employment
Agreement, effective December 5, 2001, by and between
Baker Hughes Incorporated and Michael E. Wiley and
Amendment 3 to Employment Agreement, effective
December 5, 2001, by and between Baker Hughes
Incorporated and Michael E. Wiley (filed as Exhibit
10.38 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 2001).
10.39+ Severance Agreement, dated as of July 23, 1997, by
and between Baker Hughes Incorporated and Edwin C.
Howell, as amended by Amendment 1 to Severance
Agreement, effective November 11, 1998 (filed as
Exhibit 10.39 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.40+ Severance Agreement, dated as of December 3, 1997, by
and between Baker Hughes Incorporated and Douglas J.
Wall, as amended by Amendment 1 to Severance
Agreement, effective November 11, 1998 (filed as
Exhibit 10.40 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.41+ Form of Baker Hughes Incorporated Nonqualified Stock
Option Agreement for executive officers, dated
January 24, 2001 (filed as Exhibit 10.41 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
10.42+ Form of Severance Agreement, dated as of March 1,
2001, by and between Baker Hughes Incorporated and
certain executives, executed by James R. Clark (dated
March 1, 2001) and William P. Faubel (dated May 29,
2001) (filed as Exhibit 10.42 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2001).
10.43 Form of Baker Hughes Incorporated Nonqualified Stock
Option Agreement for employees, dated January 30,
2002 (filed as Exhibit 10.43 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2001).
10.44 Form of Baker Hughes Incorporated Incentive Stock
Option Agreement for employees, dated January 30,
2002 (filed as Exhibit 10.44 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2001).
10.45+ Form of Stock Matching Agreement, executed on March
1, 2001, by and between Baker Hughes Incorporated and
James Roderick Clark, as amended by Amendment 1 to
Stock Matching Agreement, with the Amendment
effective March 6, 2002 (filed as Exhibit 10.45 to
Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2001).
10.46* Form of Baker Hughes Incorporated Stock Option Award
Agreements, dated July 24, 2002, with Terms and
Conditions for employees and for directors and
officers.
10.47*+ Form of Baker Hughes Incorporated Stock Option Award
Agreements, dated January 29, 2003, with Terms and
Conditions for employees and for directors and
officers.
10.48* Form of Baker Hughes Incorporated Performance Award
Agreements, dated January 29, 2003, for executive
officers.
10.49* Amendment 1 to Stock Matching Agreement between Baker
Hughes Incorporated and James Roderick Clark,
effective March 6, 2002.
10.50* Form of Amendment to Credit Agreement dated as of
September 27, 2002 to the Credit Agreement (filed as
Exhibit 10.35 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 1998) among Baker Hughes Incorporated and several
institutions.
10.51* Baker Hughes Incorporated Pension Plan effective as
of January 1, 2002, as amended by First Amendment,
effective January 1, 2002.
21.1* Subsidiaries of Registrant.
23.1* Consent of Deloitte & Touche LLP.
66
99.1 Administrative Proceeding, File No. 3-10572, dated
September 12, 2001, as issued by the Securities and
Exchange Commission (filed as Exhibit 99.1 to the
Current Report on Form 8-K filed on September 12,
2001).
99.2* Statement of Michael E. Wiley, Chief Executive
Officer, and G. Stephen Finley, Chief Financial
Officer, dated March 7, 2003 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 December 13, 2002, reporting that the
Company expects to record charges totaling
approximately $91.0 million before tax in the fourth
quarter of 2002.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the 6th
day of March, 2003.
BAKER HUGHES INCORPORATED
By /s/MICHAEL E. WILEY
-----------------------------------
(Michael E. Wiley, Chairman of the Board, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- --------------------------------------------------------- ---------------------
/s/MICHAEL E. WILEY Chairman of the Board, President and March 6, 2003
- --------------------------------
(Michael E. Wiley) Chief Executive Officer (principal executive officer)
/s/G. STEPHEN FINLEY Senior Vice President - Finance and Administration March 6, 2003
- --------------------------------
(G. Stephen Finley) and Chief Financial Officer (principal financial officer)
/s/ALAN J. KEIFER Vice President and Controller March 6, 2003
- --------------------------------
(Alan J. Keifer) (principal accounting officer)
/s/CLARENCE P. CAZALOT, JR. Director March 6, 2003
- --------------------------------
(Clarence P. Cazalot, Jr.)
/s/EDWARD P. DJEREJIAN Director March 6, 2003
- --------------------------------
(Edward P. Djerejian)
/s/ANTHONY G. FERNANDES Director March 6, 2003
- --------------------------------
(Anthony G. Fernandes)
/s/CLAIRE W. GARGALLI Director March 6, 2003
- --------------------------------
(Claire W. Gargalli)
/s/RICHARD D. KINDER Director March 6, 2003
- --------------------------------
(Richard D. Kinder)
/s/JAMES A. LASH Director March 6, 2003
- --------------------------------
(James A. Lash)
/s/JAMES F. MCCALL Director March 6, 2003
- --------------------------------
(James F. McCall)
Director
- --------------------------------
(J. Larry Nichols)
/s/H. JOHN RILEY, JR. Director March 6, 2003
- --------------------------------
(H. John Riley, Jr.)
/s/CHARLES L. WATSON Director March 6, 2003
- --------------------------------
(Charles L. Watson)
68
CERTIFICATIONS
I, Michael E. Wiley, certify that:
1. I have reviewed this annual report on Form 10-K of Baker Hughes Incorporated;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 6, 2003 By: /s/ MICHAEL E. WILEY
----------------------------------------
Michael E. Wiley
Chairman of the Board, President and
Chief Executive Officer
69
I, G. Stephen Finley, certify that:
1. I have reviewed this annual report on Form 10-K of Baker Hughes Incorporated;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 6, 2003 By: /s/ G. STEPHEN FINLEY
------------------------------------------
G. Stephen Finley
Sr. Vice President - Finance and
Administration and Chief Financial Officer
70
BAKER HUGHES INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Deductions
Additions ------------------------------------
Balance at Charged to Reversals Charged to Balance at
Beginning Cost and of Prior Other End of
(In millions) of Period Expenses Accruals Write-offs Accounts Period
- ---------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Year ended December 31, 2002:
Reserve for doubtful accounts receivable $ 66.5 $ 23.0 $ (3.4) $ (19.5) $ 0.7 $ 67.3
Reserve for inventories 229.9 44.1 - (54.3) 1.0 220.7
Year ended December 31, 2001:
Reserve for doubtful accounts receivable 68.3 19.0 (0.8) (18.7) (1.3) 66.5
Reserve for inventories 209.4 47.8 - (23.7) (3.6) 229.9
Year ended December 31, 2000:
Reserve for doubtful accounts receivable 52.1 27.0 (1.6) (8.7) (0.5) 68.3
Reserve for inventories 185.3 50.7 - (19.7) (6.9) 209.4
(a) Represents the reversals of prior accruals as receivables collected.
(b) Represents the elimination of accounts receivable and inventory deemed
uncollectible or worthless.
(c) Represents reclasses, currency translation adjustments and
divestitures.
71
INDEX TO EXHIBITS
Each exhibit identified below is filed as a part of this report.
Exhibits designated with an "*" are filed as an exhibit to this
Annual Report on Form 10-K. Exhibits designated with a "+" are
identified as management contracts or compensatory plans or
arrangements. Exhibits previously filed as indicated below are
incorporated by reference.
3.1 Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 1998) and Certificate of Amendment to Restated
Certificate of Incorporation (filed as Exhibit 4.2 to
Baker Hughes Incorporated Registration Statement on
Form S-3 dated September 27, 1999).
3.2 Bylaws of Baker Hughes Incorporated restated as of
January 30, 2002 (filed as Exhibit 3.2 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
4.1 Rights of Holders of the Company's Long-Term Debt.
The Company has no long-term debt instrument with
regard to which the securities authorized thereunder
equal or exceed 10% of the total assets of the
Company and its subsidiaries on a consolidated basis.
The Company agrees to furnish a copy of its long-term
debt instruments to the SEC upon request.
4.2 Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 1998) and Certificate of Amendment to Restated
Certificate of Incorporation (filed as Exhibit 4.2 to
Baker Hughes Incorporated Registration Statement on
Form S-3 dated September 27, 1999).
4.3 Bylaws of Baker Hughes Incorporated restated as of
January 30, 2002 (filed as Exhibit 3.2 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
4.5 Indenture dated as of May 15, 1994 between Western
Atlas Inc. and The Bank of New York, Trustee,
providing for the issuance of securities in series
(filed as Exhibit 4.6 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 1999).
10.1+ Employment Agreement by and between Baker Hughes
Incorporated and Michael E. Wiley dated as of July
17, 2000 (filed as Exhibit 10.1 to Quarterly Report
of Baker Hughes Incorporated on Form 10-Q for the
quarter ended June 30, 2000).
10.2+ Severance Agreement between Baker Hughes Incorporated
and Michael E. Wiley dated as of July 17, 2000 (filed
as Exhibit 10.2 to Quarterly Report of Baker Hughes
Incorporated on Form 10-Q for the quarter ended June
30, 2000).
10.3*+ Severance Agreement between Baker Hughes Incorporated
and G. Stephen Finley dated as of July 23, 1997.
10.4*+ Severance Agreement between Baker Hughes Incorporated
and Andrew J. Szescila dated as of July 23, 1997.
10.5+ Form of Amendment 1 to Severance Agreement between
Baker Hughes Incorporated and each of G. Stephen
Finley and Andrew J. Szescila effective November 11,
1998 (filed as Exhibit 10.7 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 1998).
10.6+ Severance Agreement between Baker Hughes Incorporated
and Alan R. Crain, Jr. dated as of October 25, 2000
(filed as Exhibit 10.6 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.7+ Severance Agreement between Baker Hughes Incorporated
and Greg Nakanishi dated as of November 1, 2000
(filed as Exhibit 10.7 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.8+ Agreement regarding restricted stock award issued to
Michael E. Wiley on August 15, 2000 in the amount of
150,000 shares of Company Common Stock (filed as
Exhibit 10.8 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.9+ Agreement regarding supplemental restricted stock
award issued to Michael E. Wiley on August 15, 2000
in the amount of 83,000 shares of Company Common
Stock (filed as Exhibit 10.9 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
10.10* Amended and Restated 1991 Employee Stock Bonus Plan
of Baker Hughes Incorporated, as amended by Amendment
No. 1997-1 to the Amended and Restated 1991 Employee
Stock Bonus Plan and as amended by Amendment No.
1999-1 to the Amended and Restated 1991 Employee
Stock Bonus Plan.
10.11* Restated 1987 Stock Option Plan of Baker Hughes
Incorporated, amended as of October 24, 1990.
10.12* Baker Hughes Incorporated Supplemental Retirement
Plan, as amended and restated effective as of January
1, 2003.
10.13*+ Baker Hughes Incorporated Executive Severance Plan
(effective November 1, 2002).
10.14* 1993 Stock Option Plan, as amended by Amendment No.
1997-1 to the 1993 Stock Option Plan and as amended
by Amendment No. 1999-1 to the 1993 Stock Option
Plan.
10.15* 1993 Employee Stock Bonus Plan, as amended by
Amendment No. 1997-1 to the 1993 Employee Stock Bonus
Plan and as amended by Amendment No. 1999-1 to the
1993 Employee Stock Bonus Plan.
10.16*+ Baker Hughes Incorporated Director Compensation
Deferral Plan, as amended and restated effective as
of July 24, 2002.
10.17* 1995 Employee Annual Incentive Compensation Plan, as
amended by Amendment No. 1997-1 to the 1995 Employee
Annual Incentive Compensation Plan and as amended by
Amendment No. 1999-1 to the 1995 Employee Annual
Incentive Compensation Plan.
10.18* Long Term Incentive Plan, as amended by Amendment No.
1999-1 to Long Term Incentive Plan.
10.19 1998 Employee Stock Option Plan (filed as Exhibit
10.33 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 1998),
as amended by Amendment No. 1999-1 to 1998 Employee
Stock Option Plan (filed as Exhibit 10.34 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.20 Form of Credit Agreement, dated as of October 1,
1998, among Baker Hughes Incorporated and fourteen
banks for $750,000,000, in the aggregate for all
banks (filed as Exhibit 10.35 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.21 Form of Credit Agreement dated as of October 1, 1998
among Baker Hughes Incorporated and fourteen banks
for $250,000,000, in the aggregate for all banks
(filed as Exhibit 10.36 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
December 31, 1998), as amended by Form of First
Amendment of Credit Agreement dated as of September
29, 1999 among Baker Hughes Incorporated and fourteen
banks for $250,000,000, in the aggregate for all
banks (filed as Exhibit 10.29 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1999), as amended by Form of
Second Amendment of Credit Agreement dated as of
September 25, 2000 among Baker Hughes Incorporated
and fourteen banks for $250,000,000, in the aggregate
for all banks (filed as Exhibit 10.35 to Annual
Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 2000)
and as amended by Form of Amendment to Credit
Agreement dated as of September 27, 2002 (filed as
Exhibit 10.1 to Quarterly Report of Baker Hughes
Incorporated on Form 10-Q for the quarter ended
September 30, 2002).
10.22+ Form of Stock Option Agreement for executives
effective January 26, 2000 (filed as Exhibit 10.36 to
Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2000).
10.23+ Form of Stock Option Agreement for executive officers
effective October 1, 1998 (filed as Exhibit 10.37 to
Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2000).
10.24 Form of Nonqualified Stock Option Agreement for
employees effective October 1, 1998 (filed as Exhibit
10.39 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 1998).
10.25+ Form of Nonqualified Stock Option Agreement for
directors effective October 25, 1998 (filed as
Exhibit 10.39 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.26+ Form of Nonqualified Stock Option Agreement for
directors effective October 25, 1995 (filed as
Exhibit 10.26 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.27 Form of Nonqualified Stock Option Agreement for
employees effective October 25, 1995, (filed as
Exhibit 10.27 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.28 Form of Incentive Stock Option Agreement for
employees effective October 25, 1995, (filed as
Exhibit 10.28 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.29+ Agreement regarding restricted stock award issued to
Alan R. Crain, Jr. on October 25, 2000 in the amount
of 7,500 shares of Company Common Stock (filed as
Exhibit 10.43 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.30+ Agreement regarding restricted stock award issued to
Greg Nakanishi on November 1, 2000 in the amount of
5,000 shares of Company Common Stock (filed as
Exhibit 10.44 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.31+ Agreement regarding restricted stock award issued to
Andrew J. Szescila on January 24, 2001 in the amount
of 25,000 shares of Company Common Stock (filed as
Exhibit 10.45 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2000).
10.32 Agreement and Plan of Merger among Baker Hughes
Incorporated, Baker Hughes Delaware I, Inc. and
Western Atlas Inc. dated as of May 10, 1998 (filed as
Exhibit 2.1 to Form 8-K dated May 20, 1998).
10.33 Tax Sharing Agreement dated October 31, 1997, between
Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit
10.19 to Western Atlas Inc.'s Form 10-Q for the
quarter ended September 30, 1997).
10.34 Employee Benefits Agreement dated October 31, 1997,
between Western Atlas Inc. and UNOVA, Inc. (filed as
Exhibit 10.21 to Western Atlas Inc.'s Form 10-Q for
the quarter ended September 30, 1997).
10.35 Master Formation Agreement by and among the Company,
Schlumberger Limited and certain wholly owned
subsidiaries of Schlumberger Limited dated as of
September 6, 2000 (filed as Exhibit 2.1 to Form 8-K
dated September 7, 2000).
10.36 Shareholders' Agreement by and among Schlumberger
Limited, Baker Hughes Incorporated and other parties
listed on the signature pages thereto dated November
30, 2000 (filed as Exhibit 10.1 to Form 8-K dated
November 30, 2000).
10.37 Corporate Executive Loan Program (filed as Exhibit
10.50 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 1998).
10.38+ Amendment 1 to Employment Agreement, effective April
25, 2001, by and between Baker Hughes Incorporated
and Michael E. Wiley; Amendment 2 to Employment
Agreement, effective December 5, 2001, by and between
Baker Hughes Incorporated and Michael E. Wiley and
Amendment 3 to Employment Agreement, effective
December 5, 2001, by and between Baker Hughes
Incorporated and Michael E. Wiley (filed as Exhibit
10.38 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 2001).
10.39+ Severance Agreement, dated as of July 23, 1997, by
and between Baker Hughes Incorporated and Edwin C.
Howell, as amended by Amendment 1 to Severance
Agreement, effective November 11, 1998 (filed as
Exhibit 10.39 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.40+ Severance Agreement, dated as of December 3, 1997, by
and between Baker Hughes Incorporated and Douglas J.
Wall, as amended by Amendment 1 to Severance
Agreement, effective November 11, 1998 (filed as
Exhibit 10.40 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 2001).
10.41+ Form of Baker Hughes Incorporated Nonqualified Stock
Option Agreement for executive officers, dated
January 24, 2001 (filed as Exhibit 10.41 to Annual
Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
10.42+ Form of Severance Agreement, dated as of March 1,
2001, by and between Baker Hughes Incorporated and
certain executives, executed by James R. Clark (dated
March 1, 2001) and William P. Faubel (dated May 29,
2001) (filed as Exhibit 10.42 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2001).
10.43 Form of Baker Hughes Incorporated Nonqualified Stock
Option Agreement for employees, dated January 30,
2002 (filed as Exhibit 10.43 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2001).
10.44 Form of Baker Hughes Incorporated Incentive Stock
Option Agreement for employees, dated January 30,
2002 (filed as Exhibit 10.44 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2001).
10.45+ Form of Stock Matching Agreement, executed on March
1, 2001, by and between Baker Hughes Incorporated and
James Roderick Clark, as amended by Amendment 1 to
Stock Matching Agreement, with the Amendment
effective March 6, 2002 (filed as Exhibit 10.45 to
Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2001).
10.46* Form of Baker Hughes Incorporated Stock Option Award
Agreements, dated July 24, 2002, with Terms and
Conditions for employees and for directors and
officers.
10.47*+ Form of Baker Hughes Incorporated Stock Option Award
Agreements, dated January 29, 2003, with Terms and
Conditions for employees and for directors and
officers.
10.48* Form of Baker Hughes Incorporated Performance Award
Agreements, dated January 29, 2003, for executive
officers.
10.49* Amendment 1 to Stock Matching Agreement between Baker
Hughes Incorporated and James Roderick Clark,
effective March 6, 2002.
10.50* Form of Amendment to Credit Agreement dated as of
September 27, 2002 to the Credit Agreement (filed as
Exhibit 10.35 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December
31, 1998) among Baker Hughes Incorporated and several
institutions.
10.51* Baker Hughes Incorporated Pension Plan effective as
of January 1, 2002, as amended by First Amendment,
effective January 1, 2002.
21.1* Subsidiaries of Registrant.
23.1* Consent of Deloitte & Touche LLP.
99.1 Administrative Proceeding, File No. 3-10572, dated
September 12, 2001, as issued by the Securities and
Exchange Commission (filed as Exhibit 99.1 to the
Current Report on Form 8-K filed on September 12,
2001).
99.2* Statement of Michael E. Wiley, Chief Executive
Officer, and G. Stephen Finley, Chief Financial
Officer, dated March 7, 2003 pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.