<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9397
BAKER HUGHES INCORPORATED
(a Delaware Corporation)
76-0207995
3900 Essex Lane
Houston, Texas 77027
Registrant's telephone number, including area code: (713) 439-8600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 1, 2000
Common Stock, $1.00 par value per share 330,122,441 shares
<PAGE> 2
BAKER HUGHES INCORPORATED
Baker Hughes Incorporated hereby amends Items 1 and 2 of Part 1 of its
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999
as originally filed on November 15, 1999.
RESTATEMENT
In December 1999, based on an internal review, the Company became aware of
several accounting misstatements at one of its operating divisions, Baker Hughes
INTEQ ("INTEQ"). A subsequent analysis determined that these misstatements
amounted to $31.0 million, net of taxes. As a result, the Company restated its
previously issued consolidated financial statements to reflect the adjustments
required to correct these misstatements. The adjustments relate to uncollectible
accounts receivable, inventory shortages, the recognition of inventory pricing
adjustments, the impairment of various other current and long-lived assets and
the recognition of certain previously unrecorded liabilities, including trade
accounts payable and employee compensation and benefits payable.
As a result of the above, the Company's unaudited consolidated condensed
financial statements and related disclosures as of September 30, 1999 and for
the three and nine months ended September 30, 1999 and 1998 have been restated
from amounts previously reported. The principal effects of these adjustments on
the accompanying financial statements are set forth in Note 9 of the Notes to
Condensed Consolidated Financial Statements.
For purposes of this Form 10-Q/A, and in accordance with Rule 12B-15 under
the Securities Exchange Act of 1934, as amended, each item of the 1999 third
quarter Form 10-Q as originally filed on November 15, 1999 that was affected by
the restatement has been amended and restated in its entirety. No attempt has
been made in this Form 10-Q/A to modify or update other disclosures as presented
in the original Form 10-Q except as required to reflect the effects of the
restatement and the effects of accounting for the Company's Baker Process
division as a discontinued operation. In particular, and without limitation, in
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the captions "Business Environment", "Results of
Operations - Merger Related Charges", "Results of Operations - Unusual and
Nonrecurring Charges", "Capital Resources and Liquidity - Investing Activities",
"Year 2000 Issue" and "Euro Conversion", the Company has given certain
information about the business environment applicable to the Company, the
business outlook and certain forward looking information. This information has
not been revised from the information provided in the Form 10-Q for the quarter
ended September 30, 1999 because it was not affected by the restatement. For
current information regarding the Company's business environment, outlook and
this forward looking information, see the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1999.
1
<PAGE> 3
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - Three months and nine
months ended September 30, 1999 and 1998 3
Consolidated Condensed Statements of Financial Position - September 30, 1999
and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II - OTHER INFORMATION
Item 6. Listing of Exhibits and Reports on Form 8-K 32
</TABLE>
2
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(As Restated - See Note 9)
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,117.6 $ 1,457.0 $ 3,442.8 $ 4,513.3
---------- ---------- ---------- ----------
Costs and expenses:
Costs of revenues 896.4 1,410.9 2,703.8 3,714.7
Selling, general and administrative 162.6 262.3 485.3 614.6
Merger related costs 200.3 200.3
Unusual charge (credit) (6.2) 156.9 (39.5) 156.9
---------- ---------- ---------- ----------
Total costs and expenses 1,052.8 2,030.4 3,149.6 4,686.5
---------- ---------- ---------- ----------
Operating income (loss) 64.8 (573.4) 293.2 (173.2)
Interest expense (40.1) (38.8) (119.0) (103.9)
Interest income 1.2 1.0 4.7 3.0
---------- ---------- ---------- ----------
Income (loss) before income taxes 25.9 (611.2) 178.9 (274.1)
Income taxes (9.3) 103.3 (45.1) (14.7)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 16.6 (507.9) 133.8 (288.8)
Loss from discontinued operations, net of tax (3.4) (25.7) (7.7) (14.6)
---------- ---------- ---------- ----------
Net income (loss) $ 13.2 $ (533.6) $ 126.1 $ (303.4)
========== ========== ========== ==========
Basic earnings per share:
Income (loss) from continuing operations $ 0.05 $ (1.57) $ 0.41 $ (0.90)
Discontinued operations, net of tax (0.01) (0.08) (0.02) (0.05)
---------- ---------- ---------- ----------
Net income (loss) $ 0.04 $ (1.65) $ 0.39 $ (0.95)
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) from continuing operations $ 0.05 $ (1.57) $ 0.41 $ (0.90)
Discontinued operations, net of tax (0.01) (0.08) (0.02) (0.05)
---------- ---------- ---------- ----------
Net income (loss) $ 0.04 $ (1.65) $ 0.39 $ (0.95)
========== ========== ========== ==========
Cash dividends per share of common stock $ 0.115 $ 0.115 $ 0.345 $ 0.345
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 5
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
(As Restated -
ASSETS See Note 9)
--------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 34.8 $ 19.5
Accounts receivable, net 1,009.7 1,258.2
Inventories 841.1 994.3
Net assets of discontinued operations 298.7 267.9
Other current assets 187.8 213.3
-------- --------
Total current assets 2,372.1 2,753.2
Property, net 2,139.8 2,240.7
Goodwill and other intangibles, net 1,713.8 1,744.3
Multiclient seismic data and other assets 1,011.5 894.7
-------- --------
Total assets $7,237.2 $7,632.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 343.6 $ 487.9
Short-term borrowings and current portion of long-term debt 109.2 44.4
Accrued employee compensation 168.8 272.2
Other current liabilities 260.1 378.8
-------- --------
Total current liabilities 881.7 1,183.3
-------- --------
Long-term debt 2,776.6 2,726.3
-------- --------
Deferred income taxes 110.0 152.9
-------- --------
Deferred revenue and other long-term liabilities 259.2 405.3
-------- --------
Stockholders' equity:
Common stock 329.2 327.1
Capital in excess of par value 2,968.0 2,931.8
Retained earnings 79.1 66.1
Accumulated other comprehensive (loss) (166.6) (159.9)
-------- --------
Total stockholders' equity 3,209.7 3,165.1
-------- --------
Total liabilities and stockholders' equity $7,237.2 $7,632.9
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 6
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
(As Restated - See Note 9)
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 133.8 $ (288.8)
Adjustments to reconcile income (loss) from continuing operations to net cash
flows from operating activities
Depreciation, depletion and amortization 600.6 545.6
Provision (benefit) for deferred income taxes (9.6) 38.7
Noncash portion of nonrecurring items 3.2 475.2
Gain on disposal of assets (41.0) (32.2)
Change in accounts receivable 205.3 42.4
Change in inventories 157.1 (77.2)
Change in accounts payable (137.2) (29.2)
Change in accrued employee compensation and other current liabilities (218.4) (70.0)
Change in deferred revenue and other long-term liabilities (142.5) 15.8
Changes in other assets and liabilities (167.0) (130.4)
-------- --------
Net cash flows from continuing operations 384.3 489.9
Net cash flows from discontinued operations 2.6 14.1
-------- --------
Net cash flows from operating activities 386.9 504.0
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient seismic data (525.5) (959.6)
Proceeds from disposal of assets 120.2 74.6
Acquisition of businesses, net of cash acquired (426.7)
-------- --------
Net cash flows from continuing operations (405.3) (1,311.7)
Net cash flows from discontinued operations (6.0) (14.1)
-------- --------
Net cash flows from investing activities (411.3) (1,325.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings from commercial paper, revolving credit facilities
and short-term debt (750.4) 931.2
Repayment of matured indebtedness (150.0) (103.5)
Net proceeds from issuance of notes 1,010.7
Proceeds from issuance of common stock 38.2 35.8
Dividends (113.1) (58.7)
-------- --------
Net cash flows from continuing operations 35.4 804.8
Net cash flows from discontinued operations 3.4
-------- --------
Net cash flows from financing activities 38.8 804.8
-------- --------
Effect of exchange rate changes on cash 0.9 2.3
-------- --------
Increase (decrease) in cash and cash equivalents 15.3 (14.7)
Cash and cash equivalents, beginning of period 19.5 43.1
-------- --------
Cash and cash equivalents, end of period $ 34.8 $ 28.4
======== ========
Income taxes paid $ 92.5 $ 121.8
Interest paid $ 114.6 $ 109.6
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 7
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
RESTATEMENT
As more fully described in Note 9 "Restatement", the consolidated condensed
financial statements and related disclosures as of September 30, 1999 and for
the three and nine months ended September 30, 1999 and 1998 have been restated
to correct accounting errors identified in the Company's accounting records.
DISCONTINUED OPERATIONS
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division. Accordingly, all
prior period consolidated financial statements and related notes thereto have
been restated to present the operations of Baker Process (which were separately
accounted for as a segment) as a discontinued operation. See Note 10.
GENERAL
In the opinion of Baker Hughes Incorporated ("Baker Hughes" or the
"Company"), the unaudited consolidated condensed financial statements include
all adjustments of a normal recurring nature necessary for a fair presentation
of the Company's consolidated financial position as of September 30, 1999, its
consolidated results of operations for the three and nine months ended September
30, 1999 and 1998, and its consolidated cash flows for the nine months ended
September 30, 1999 and 1998. Although the Company believes that the disclosures
in these financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (see the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 for the most recent
annual financial statements prepared in accordance with generally accepted
accounting principles). The results of operations for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results to be
expected for the full year. On August 10, 1998, Baker Hughes merged with Western
Atlas Inc. Certain amounts have been reclassified to conform the reporting
practices of Baker Hughes and Western Atlas Inc.
In the notes to consolidated condensed financial statements, all dollar and
share amounts in tabulations are in millions of dollars and shares,
respectively, unless otherwise indicated.
6
<PAGE> 8
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 2. COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period except
those resulting from investments by and distributions to owners. The Company's
total comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- ------ ------ --------
(As Restated - See Note 9)
---------------------------------------
<S> <C> <C> <C> <C>
Net income(loss) $ 13.2 $(533.6) $126.1 $(303.4)
Other comprehensive income(loss):
Foreign currency translation adjustment, net of
tax (.6) 16.0 (18.4) 13.8
Unrealized gain(loss) on securities available
for sale, net of tax (7.8) (33.0) 11.7 (32.5)
------ ------- ------ -------
Total comprehensive income(loss) $ 4.8 $(550.6) $119.4 $(322.3)
====== ======= ====== =======
</TABLE>
NOTE 3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(As Restated -
See Note 9)
-------------
<S> <C> <C>
Finished goods $688.8 $808.6
Work in process 60.0 67.9
Raw materials 92.3 117.8
------ ------
Total $841.1 $994.3
====== ======
</TABLE>
7
<PAGE> 9
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 4. EARNINGS PER SHARE ("EPS")
Reconciliation of the numerators and denominators of the basic and diluted
EPS computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
----------------------------- ------------------------------
Income from Loss from
Continuing Continuing
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
------------- ------------- ------------- -------------
(As Restated - (As Restated -
See Note 9) See Note 9)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic EPS $ 16.6 328.8 $ (507.9) 323.0
Effect of dilutive securities:
Stock plans 2.7
------------- ------------- ------------- -------------
Diluted EPS $ 16.6 331.5 $ (507.9) 323.0
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
----------------------------- -----------------------------
Income from Loss from
Continuing Continuing
Operations Shares Operations Shares
(Numerator) (Denominator) (Numerator) (Denominator)
-------------- ------------- ------------- -------------
(As Restated - (As Restated -
See Note 9) See Note 9)
-------------- --------------
<S> <C> <C> <C> <C>
Basic EPS $ 133.8 327.8 $ (288.8) 319.4
Effect of dilutive securities:
Stock plans 1.7
---------- ---------- ---------- ----------
Diluted EPS $ 133.8 329.5 $ (288.8) 319.4
========== ========== ========== ==========
</TABLE>
Securities excluded from the computation of diluted EPS that could have
potentially diluted basic EPS in the future were options to purchase 3.6 million
shares and 6.8 million shares for the three and nine months ended September 30,
1999, respectively, and Liquid Yield Option Notes convertible into 7.2 million
shares for both the three and nine months ended September 30, 1999. Such
securities were excluded as they would be anti-dilutive to basic EPS.
NOTE 5. SEGMENT AND RELATED INFORMATION
The Company's eight business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into one reportable segment - oilfield.
Oilfield consists of the following business units - Baker Atlas, Baker
Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions,
Hughes Christensen and Western Geophysical - that manufacture and sell equipment
and provide services used in the drilling, completion, production and
maintenance of oil
8
<PAGE> 10
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
and gas wells and in reservoir measurement and evaluation. The principal markets
for this segment include all major oil and gas producing regions of the world
including North America, Latin America, Europe, Africa, the Middle East and the
Far East. Customers include major multi-national, independent and national or
state-owned oil companies.
Segment profit (loss) is based on income before income taxes, accounting
changes, nonrecurring items and interest income and expense. Intersegment sales
and transfers are not significant.
Summarized financial information concerning the Company's reportable
segments 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. Net assets of discontinued operations, which are excluded from total
assets in the following table, totaled $298.7 million and $267.9 million at
September 30, 1999 and December 31, 1998, respectively.
<TABLE>
<CAPTION>
Oilfield Other Total
-------- -------- --------
(As Restated - See Note 9)
-----------------------------------
<S> <C> <C> <C>
REVENUES
- -----------------------------------------------------------------------------
Three months ended September 30, 1999 $1,117.6 $1,117.6
Three months ended September 30, 1998 $1,450.9 $ 6.1 $1,457.0
Nine months ended September 30, 1999 $3,442.8 $3,442.8
Nine months ended September 30, 1998 $4,493.3 $ 20.0 $4,513.3
SEGMENT PROFIT (LOSS)
- -----------------------------------------------------------------------------
Three months ended September 30, 1999 $ 81.6 $ (55.7) $ 25.9
Three months ended September 30, 1998 $ 160.1 $ (771.3) $ (611.2)
Nine months ended September 30, 1999 $ 309.7 $ (130.8) $ 178.9
Nine months ended September 30, 1998 $ 603.5 $ (877.6) $ (274.1)
TOTAL ASSETS
- -----------------------------------------------------------------------------
As of September 30, 1999 $6,502.8 $ 435.7 $6,938.5
As of December 31, 1998 $6,946.8 $ 418.2 $7,365.0
</TABLE>
The following table presents the details of "Other" segment profit (loss):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(As Restated - See Note 9)
------------------------------------------
<S> <C> <C>
Corporate expenses $ (23.0) $ (21.0)
Interest - net (38.9) (37.8)
Unusual (charge) credit 6.2 (156.9)
Nonrecurring items reflected in costs of revenues
and SG&A (355.3)
Merger related costs (200.3)
---------- ----------
Total $ (55.7) $ (771.3)
========== ==========
</TABLE>
9
<PAGE> 11
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
----------------------------------------
(As Restated - See Note 9)
----------------------------------------
<S> <C> <C>
Corporate expenses $ (71.3) $ (64.2)
Interest - net (114.3) (100.9)
Unusual (charge) credit 39.5 (156.9)
Nonrecurring items reflected in costs of revenues
and SG&A 15.3 (355.3)
Merger related costs (200.3)
------------------ ------------------
Total $ (130.8) $ (877.6)
================== ==================
</TABLE>
NOTE 6. DEBT
During January and February 1999, the Company issued $400.0 million of
6.875% Notes due January 2029, $325.0 million of 6.25% Notes due January 2009,
$200.0 million of 6.0% Notes due February 2009 and $100.0 million of 5.8% Notes
due February 2003 with effective interest rates of 7.07%, 6.36%, 6.09% and
6.01%, respectively. The net proceeds of $1,010.7 million were used to repay
$150.0 million of the 7.625% Notes due February 1999, commercial paper and other
short-term borrowings.
In October 1999, the Company completed a shelf registration statement
on Form S-3/A, as amended, to issue up to $1,000.0 million in debt securities,
preferred or common stock, warrants or any combination thereof. The shelf is
available for use at the Company's discretion for general corporate purposes
including acquisitions, working capital, capital expenditures, debt repayment or
repurchases or redemptions of securities.
NOTE 7. UNUSUAL AND OTHER NONRECURRING ITEMS
1999
In August 1999, the Company completed the sale of a property in Las
Colinas, Texas and recognized a net gain of $6.2 million recorded as an unusual
credit in the statement of operations. The Company received net proceeds of
$19.9 million.
In June 1999, the Company completed the sale of a property in Houston,
Texas and recognized a net gain of $33.3 million recorded as an unusual credit
in the statement of operations. Such property was considered a duplicate
facility after the merger with Western Atlas Inc. The Company received net
proceeds of $48.2 million.
During 1998, the Company sold its interest in a joint venture and
recorded a write-down to the estimated fair value of the assets received which
was reflected in selling, general and administrative ("SG&A") expenses. During
the quarter ended June 30, 1999, certain assets obtained as part of the
consideration from the sale were sold. The net proceeds from the sale were $18.9
million and were received in July 1999. Certain other assets relating to these
operations were written-off and will be scrapped. The net gain from these items
totaled $15.3 million and is reflected in SG&A expenses.
The proceeds from these transactions were used to repay outstanding
indebtedness.
10
<PAGE> 12
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion about additional nonrecurring charges
expected to be recorded during the quarter ended December 31, 1999.
1998
The Company had experienced high growth levels for its products and
services from 1994 through the second quarter of 1998. During the third and
fourth quarters of 1998, the Company experienced a decline in demand for its
products and services as a result of a significant decrease in the price of oil
and natural gas. The decline in customer demand materialized quickly from the
previous high growth rates. As a result of this sharp decline in demand and to
adjust to the lower level of activity, the Company assessed its overall
operations and recorded charges of $512.2 million in the September 1998 quarter
and $39.7 million in the December 1998 quarter as summarized below.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended 1998
September 30, December 31, Total
1998 1998 Charge
------------- ------------- -------------
<S> <C> <C> <C>
Cash Costs:
Severance $ 35.5 $ 22.5 $ 58.0
Integration costs, abandoned leases, etc. 20.5 9.3 29.8
Other cash costs (including environmental) 30.2 30.2
------------- ------------- -------------
Subtotal cash charges $ 86.2 $ 31.8 $ 118.0
------------- ------------- -------------
Noncash Costs:
Inventory and rental tools 160.2 160.2
PetroAlliance Services Company Limited 83.2 83.2
Oil and gas properties (ceiling test) 69.3 69.3
Property and other assets 113.3 7.9 121.2
------------- ------------- -------------
Subtotal noncash charges 426.0 7.9 433.9
------------- ------------- -------------
Total cash and noncash charges $ 512.2 $ 39.7 $ 551.9
============= ============= =============
</TABLE>
The table set forth below is a reconciliation of the charges taken in
the respective quarters to the following captions of the consolidated statement
of operations (in millions):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended 1998
September 30, December 31, Total
1998 1998 Charge
------------- ------------- -------------
<S> <C> <C> <C>
Cost of revenues $ 286.6 $ 286.6
SG&A 68.7 68.7
Unusual charge 156.9 $ 39.7 196.6
------------- ------------- -------------
Total $ 512.2 $ 39.7 $ 551.9
============= ============= =============
</TABLE>
11
<PAGE> 13
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
NOTE 8. MERGER RELATED COSTS
In connection with the merger with Western Atlas Inc. (the "Merger"),
in August 1998, the Company recorded merger related costs of $200.3 million in
the September 1998 quarter and $17.2 million in the December 1998 quarter which
consisted of the following:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended 1998
September 30, December 31, Total
1998 1998 Charge
------------- ------------- -------------
<S> <C> <C> <C>
Cash costs:
Transaction costs (banking, legal, printing, etc.) $ 51.5 $ 51.5
Employee costs 81.0 $ 6.2 87.2
Other Merger integration costs 18.6 2.0 20.6
------------- ------------- -------------
Total cash costs 151.1 8.2 159.3
------------- ------------- -------------
Noncash costs 49.2 9.0 58.2
------------- ------------- -------------
Total charge $ 200.3 17.2 $ 217.5
============= ============= =============
</TABLE>
NOTE 9. RESTATEMENT
In December 1999, based on an internal review, the Company became aware
of several accounting misstatements at one of its operating divisions, Baker
Hughes INTEQ. A subsequent analysis determined these misstatements amounted to
$31.0 million, net of taxes, and related to multiple years. As a result, the
Company restated its previously issued consolidated financial statements to
reflect the adjustments required to correct these misstatements. The adjustments
relate to uncollectible accounts receivable, inventory shortages, the
recognition of inventory pricing adjustments, the impairment of various other
current and long-lived assets and the recognition of certain previously
unrecorded liabilities, including trade accounts payable and employee
compensation and benefits payable.
As a result of the above, the Company's unaudited consolidated
condensed financial statements and related disclosures as of September 30, 1999
and for the three and nine months ended September 30, 1999 and 1998 have been
restated from amounts previously reported. The principal effects of these
adjustments on the consolidated statements of operations for the three and nine
months ended September 30, 1999 and 1998 and the consolidated statement of
financial position as of September 30, 1999 are set forth below. See the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 for
the effects of these adjustments on the consolidated statement of financial
position as of December 31, 1998. As described in Note 1, Basis of Presentation,
the Company plans to dispose of Baker Process, which is presented in the
consolidated financial statements as "Discontinued Operations." The caption "As
Previously Reported" in the following summarized financial information reflects
Baker Process as a discontinued operation for all periods presented.
12
<PAGE> 14
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
September 30, 1999 September 30, 1998
------------------------ ------------------------
As As
As Previously As Previously
(In millions, except per share amounts) Restated Reported Restated Reported
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 1,117.6 $ 1,117.9 $ 1,457.0 $ 1,457.3
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Costs of revenues 896.4 897.4 1,410.9 1,412.2
Selling, general and administrative 162.6 162.1 262.3 262.6
Merger related costs 200.3 200.3
Unusual charge (credit) (6.2) (6.2) 156.9 156.9
---------- ---------- ---------- ----------
Total 1,052.8 1,053.3 2,030.4 2,032.0
---------- ---------- ---------- ----------
Operating income (loss) 64.8 64.6 (573.4) (574.7)
Interest expense (40.1) (40.1) (38.8) (38.8)
Interest income 1.2 1.2 1.0 1.0
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 25.9 25.7 (611.2) (612.5)
Income taxes (9.3) (9.2) 103.3 103.7
---------- ---------- ---------- ----------
Income (loss) from continuing operations 16.6 16.5 (507.9) (508.8)
Loss from discontinued operations, net of tax (3.4) (3.4) (25.7) (25.7)
---------- ---------- ---------- ----------
Net income (loss) $ 13.2 $ 13.1 $ (533.6) $ (534.5)
========== ========== ========== ==========
Basic earnings per share:
Income (loss) from continuing operations $ 0.05 $ 0.05 $ (1.57) $ (1.58)
Discontinued operations, net of tax (0.01) (0.01) (0.08) (0.08)
---------- ---------- ---------- ----------
Net income (loss) $ 0.04 $ 0.04 $ (1.65) $ (1.66)
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) from continuing operations $ 0.05 $ 0.05 $ (1.57) $ (1.58)
Discontinued operations, net of tax (0.01) (0.01) (0.08) (0.08)
---------- ---------- ---------- ----------
Net income (loss) $ 0.04 $ 0.04 $ (1.65) $ (1.66)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------------------
September 30, 1999 September 30, 1998
------------------------ ------------------------
As As
As Previously As Previously
(In millions, except per share amounts) Restated Reported Restated Reported
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 3,442.8 $ 3,443.1 $ 4,513.3 $ 4,514.3
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Costs of revenues 2,703.8 2,709.9 3,714.7 3,715.8
Selling, general and administrative 485.3 484.2 614.6 615.1
Merger related costs 200.3 200.3
Unusual charge (credit) (39.5) (39.5) 156.9 156.9
---------- ---------- ---------- ----------
Total 3,149.6 3,154.6 4,686.5 4,688.1
---------- ---------- ---------- ----------
Operating income (loss) 293.2 288.5 (173.2) (173.8)
Interest expense (119.0) (119.0) (103.9) (103.9)
Interest income 4.7 4.7 3.0 3.0
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 178.9 174.2 (274.1) (274.7)
Income taxes (45.1) (43.7) (14.7) (14.2)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 133.8 130.5 (288.8) (288.9)
Loss from discontinued operations, net of tax (7.7) (7.7) (14.6) (14.6)
---------- ---------- ---------- ----------
Net income (loss) $ 126.1 $ 122.8 $ (303.4) $ (303.5)
========== ========== ========== ==========
Basic earnings per share:
Income (loss) from continuing operations $ 0.41 $ 0.40 $ (0.90) $ (0.90)
Discontinued operations, net of tax (0.02) (0.02) (0.05) (0.05)
---------- ---------- ---------- ----------
Net income (loss) $ 0.39 $ 0.38 $ (0.95) $ (0.95)
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) from continuing operations $ 0.41 $ 0.40 $ (0.90) $ (0.90)
Discontinued operations, net of tax (0.02) (0.02) (0.05) (0.05)
---------- ---------- ---------- ----------
Net income (loss) $ 0.39 $ 0.38 $ (0.95) $ (0.95)
========== ========== ========== ==========
</TABLE>
13
<PAGE> 15
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
As Previously
(In millions) As Restated Reported
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34.8 $ 35.5
Accounts receivable, net 1,009.7 1,013.8
Inventories 841.1 845.9
Net assets of discontinued operations 298.7 298.7
Other current assets 187.8 192.6
------------- -------------
Total current assets 2,372.1 2,386.5
Property, net 2,139.8 2,143.7
Goodwill and other intangibles net 1,713.8 1,713.8
Multiclient seismic data and other assets 1,011.5 1,011.5
------------- -------------
Total assets $ 7,237.2 $ 7,255.5
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 343.6 $ 332.7
Short-term borrowings and current portion of long-term debt 109.2 109.2
Accrued employee compensation 168.8 165.3
Other accrued liabilities 260.1 259.7
------------- -------------
Total current liabilities 881.7 866.9
------------- -------------
Long-term debt 2,776.6 2,776.6
------------- -------------
Deferred income taxes 110.0 112.1
------------- -------------
Deferred revenue and other long-term liabilities 259.2 259.2
------------- -------------
Stockholders' equity:
Common stock 329.2 329.2
Capital in excess of par value 2,968.0 2,968.0
Retained earnings 79.1 110.1
Accumulated other comprehensive (loss) (166.6) (166.6)
------------- -------------
Total stockholders' equity 3,209.7 3,240.7
------------- -------------
Total liabilities and stockholders' equity $ 7,237.2 $ 7,255.5
============= =============
</TABLE>
NOTE 10. DISCONTINUED OPERATIONS
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division. Baker Process
manufacturers and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes. Accordingly, the Company's consolidated condensed financial
statements and related notes thereto have been restated to present the
operations of Baker Process (which were separately accounted for as a segment)
as a discontinued operation. The Company has retained an investment-banking firm
to manage the sale process. Income (loss) from discontinued operations for all
respective periods presented includes interest expense allocated on the basis of
the net assets of Baker Process compared to the Company's stockholders' equity
and consolidated debt. Corporate, general and administrative costs of the
Company were not allocated to Baker Process for any of the periods presented.
14
<PAGE> 16
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Certain information with respect to discontinued operations of Baker
Process is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $ 90.1 $ 127.6 $ 301.1 $ 378.4
------- ------- ------- -------
Allocated interest expense (1.9) (1.7) (5.7) (4.5)
------- ------- ------- -------
Loss before income taxes (5.3) (37.5) (11.4) (20.8)
Benefit for income taxes 1.9 11.8 3.7 6.2
------- ------- ------- -------
Loss from discontinued operations of
Baker Process $ (3.4) $ (25.7) $ (7.7) $ (14.6)
======= ======= ======= =======
</TABLE>
Loss before income taxes from discontinued operations for the three and
nine months ended September 30, 1998 includes merger, unusual and nonrecurring
charges of $38.4 million. This amount consists of integration costs of $10.2
million, severance of $6.3 million, impairment of inventory of $13.0 million,
impairment of property, equipment and other assets of $7.3 million and merger
related costs of $1.6 million.
Net assets of Baker Process are as follows:
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
------------- -------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets $ 227.5 $ 221.3
Noncurrent assets 194.0 202.1
------------- -------------
Total assets 421.5 423.4
------------- -------------
Current liabilities 112.5 142.0
Noncurrent liabilities 10.3 13.5
------------- -------------
Total liabilities 122.8 155.5
------------- -------------
Net assets of Baker Process $ 298.7 $ 267.9
============= =============
</TABLE>
15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with the Company's
consolidated condensed financial statements and the related notes thereto.
FORWARD-LOOKING STATEMENTS
MD&A includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, (each a "Forward-Looking Statement"). The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "forecasts," "will," "could," "may" and similar expressions are
intended to identify forward-looking statements. No assurance can be given that
actual results may not differ materially from those in the forward-looking
statements herein for reasons including the effects of competition, the level of
petroleum industry exploration and production expenditures, world economic
conditions, prices of, and the demand for, crude oil and natural gas, drilling
activity, weather, the legislative environment in the United States and other
countries, OPEC policy, conflict in the Middle East and other major petroleum
producing or consuming regions, the development of technology that lowers
overall finding and development costs and the condition of the capital and
equity markets.
The Company's expectations regarding its level of capital expenditures
described in "Investing Activities" below are only its forecasts regarding these
matters. In addition to the factors described in the previous paragraph and in
"Business Environment," these forecasts may be substantially different from
actual results, which are affected by the following factors: the accuracy of the
Company's estimates regarding its spending requirements; regulatory, legal and
contractual impediments to spending reduction measures; the occurrence of any
unanticipated acquisition or research and development opportunities; changes in
the Company's strategic direction; and the need to replace any unanticipated
losses in capital assets.
RESTATEMENT
In December 1999, based on an internal review, the Company became aware
of several accounting misstatements at one of its operating divisions, Baker
Hughes INTEQ ("INTEQ"). A subsequent analysis determined that these
misstatements amounted to $31.0 million, net of taxes, and related to multiple
years. As a result, the Company restated its previously issued consolidated
financial statements to reflect the adjustments required to correct these
misstatements. The adjustments relate to uncollectible accounts receivable,
inventory shortages, the recognition of inventory pricing adjustments, the
impairment of various other current and long-lived assets and the recognition of
certain previously unrecorded liabilities, including trade accounts payable and
employee compensation and benefits payable. Although the amounts were
attributable to several of the INTEQ division locations, $24.2 million, net of
tax, was related to INTEQ's Venezuela operations. Of the amounts pertaining to
locations other than Venezuela, no one location accounted for more than $2.7
million on an after tax basis.
16
<PAGE> 18
As a result of the analysis of these amounts, the Company determined
that the specific years affected and the applicable amounts, net of tax, are as
follows:
<TABLE>
<CAPTION>
Increase (decrease)
(In millions) to Net Income
-------------------
<S> <C>
1999
Third quarter $ 0.1
Second quarter 1.5
First quarter 1.7
1998
Fourth quarter 1.2
Third quarter 0.9
Second quarter 0.2
First quarter (1.0)
Transition Period 0.2
1997 (8.5)
1996 (2.8)
1995 (0.6)
Periods prior to 1995 (23.9)
-------------------
Total $ (31.0)
===================
</TABLE>
As a result of the above, the Company's financial statements for the
interim periods in 1999 and 1998, the year ended December 31, 1998, the three
months ended December 31, 1997, and the years ended September 30, 1997, 1996 and
1995 have been restated from amounts previously reported.
Management believes the misstatements were primarily the result of
noncompliance with the Company's accounting and operating procedures and that
such noncompliance was isolated primarily to INTEQ's operations in Venezuela.
The Company is in the process of reviewing the administrative, accounting and
operational policies and procedures for its foreign units, and compliance
therewith, to identify potential areas where revisions may be warranted. To the
extent that changes to current procedures are warranted, they will be
implemented as quickly as practicable.
DISCONTINUED OPERATIONS
On February 16, 2000, the Company's Board of Directors approved, in
principle, a plan to sell the Company's Baker Process division, which
manufacturers and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes. Accordingly, the Company's consolidated financial
statements and related notes thereto have been restated to present the
operations of Baker Process (which were separately accounted for as a segment)
as discontinued operations.
BUSINESS ENVIRONMENT
In "Business Environment", the Company has given certain information
about the business environment applicable to the Company, the business outlook
and certain forward looking information. This information has not been revised
from the information provided in the Form 10-Q for the quarter ended September
30, 1999 because it was not affected by the restatement. For current information
regarding the Company's business environment, outlook and this forward looking
information, see the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1999.
17
<PAGE> 19
The Company is primarily engaged in the oilfield service industry and
currently consists of eight business units - Baker Atlas, Baker Hughes INTEQ,
Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions, Hughes Christensen
and Western Geophysical - that manufacture and sell equipment and provide
related services used in the drilling, completion, production and maintenance of
oil and gas wells and in reservoir measurement and evaluation. The business
environment for the Company and its corresponding operating results are affected
significantly by the oil and gas industry exploration and production
expenditures. These expenditures are influenced strongly by oil company
expectations about the supply and demand for crude oil and natural gas, energy
prices, and finding and development costs. Oil and gas supply and demand,
pricing, and finding and development costs, in turn, are influenced by numerous
factors including, but not limited to, those described above in "Forward-Looking
Statements."
Key factors that currently influence the worldwide crude oil market and
therefore current and future expenditures for exploration and development by the
Company's customers are:
o The degree to which certain large producing countries, in
particular Saudi Arabia, UAE, Kuwait, Iran, Venezuela and Mexico,
are willing and able to restrict production and exports of crude
oil.
o The increasing rate of depletion of known hydrocarbon reserves.
Technological advances are resulting in accelerated decline rates
and shorter well lives. In general, accelerated decline rates
require additional customer spending to maintain production levels.
o The level of economic growth in certain key areas of the world,
particularly Japan, China and South Korea, as well as developing
areas in Asia where the correlation between energy demand and
economic growth is particularly strong.
o The amount of crude oil in storage relative to historic levels.
o Technology: Advances in the design and application of more
technologically advanced products and services allow oil and gas
companies to drill fewer wells, place the wells they drill more
precisely in the higher yielding or more easily produced
hydrocarbon zones of the reservoir, and allow operators to drill,
complete, and operate wells at lower overall costs.
o Price Volatility: Changes in hydrocarbon markets create uncertainty
in the future price of hydrocarbons and therefore create
uncertainty about the aggregate level of customer spending.
Multi-year projects, such as deep-water exploration and drilling,
are the least likely to be impacted by price volatility. Projects
with relatively short payback periods or low profit margins, such
as workover activity or the extraction of heavy oil, are more
likely to be impacted.
Crude oil and natural gas prices and the Baker Hughes rotary rig count
are summarized in the tables below as averages for the periods indicated and are
followed by the Company's outlook. While reading the Company's outlook set forth
below, caution is advised that the factors described above in "Forward-Looking
Statements" and "Business Environment" could negatively impact the Company's
expectations for oil demand, oil and gas prices, and drilling activity.
18
<PAGE> 20
OIL AND GAS PRICES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
West Texas Intermediate Crude ($/bbl) $ 21.43 $ 14.08 $ 17.28 $ 14.91
U.S. Spot Natural Gas ($/mcf) $ 2.48 $ 1.93 $ 2.10 $ 2.06
</TABLE>
WTI crude oil price averaged $21.43/bbl in the September 1999 quarter,
with prices ranging from $19.20/bbl to $24.87/bbl. The improvement in prices was
attributable to improved sentiment regarding OPEC's ability and willingness to
control production, improvements in the outlook for the world economy and
declining inventories driven largely by market expectations that an Asian
economic recovery could occur earlier than previously anticipated. U.S. natural
gas prices averaged $2.48/mcf in the September 1999 quarter, with prices ranging
from $2.08/mcf to $2.92/mcf. The increase in U.S. natural gas prices compared to
the same quarter of 1998 was due to the impact of a warmer summer on consumption
and storage injections as well as concern for the industry's ability to meet
storage targets by the end of the injection season, which is typically in
November.
ROTARY RIG COUNT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. - Land 533 676 469 747
U.S. - Offshore 104 119 102 129
Canada 250 206 213 280
-------- -------- -------- --------
North America 887 1,001 784 1,156
-------- -------- -------- --------
Latin America 185 229 183 254
North Sea 37 48 41 54
Other Europe 40 45 43 47
Africa 38 65 44 77
Middle East 136 170 141 167
Asia Pacific 129 169 142 179
-------- -------- -------- --------
International 565 726 594 778
-------- -------- -------- --------
Worldwide 1,452 1,727 1,378 1,934
======== ======== ======== ========
U.S. Workover 849 1,000 784 1,140
======== ======== ======== ========
</TABLE>
Generally, as oil and gas prices decline, expectations of the Company's
customers about their prospects from oil and gas sales decline. Consequently,
customer expenditures to explore for or produce oil and gas decline. These
expenditures include decreased spending on the use of oil and gas rigs.
Accordingly, large reductions in rig count generally correspond to reductions in
customer spending, which, in turn, correspond to decreased activity levels and
decreased revenues to the Company. The reverse is generally true for increases
in rig count. Marginal reductions or increases in rig count may or may not have
a significant impact on revenues. There is often a lag between increases or
decreases in oil and gas prices and changes in rig count and an additional lag
between changes in rig count and the impact on the Company's revenues.
19
<PAGE> 21
OUTLOOK
Oil prices improved in the September 1999 quarter, trading above
$20/bbl. Sustaining prices at this level will require continuing adherence by
OPEC members to quotas and continued movement towards economic recovery in Asia.
Prices are expected to trade between $20/bbl and $23/bbl for the remainder of
the year. The Company believes that if OPEC quota adherence falls below 70% then
oil could trade below this range. North American natural gas is expected to
remain strong for the remainder of the year, trading above $2.25/mcf.
In response to the improving commodity prices, customer spending in
North America is expected to improve modestly through the end of the year. The
strength of the recovery in 2000 will depend on improved customer cash flow,
long-term forecasts of commodity prices and weather.
Outside North America, customer spending is expected to remain at
depressed levels in the fourth quarter, and is expected to increase in 2000
following the customers' annual budget cycle.
During its normal quarterly planning process in October 1999, it became
evident to the Company that certain assets of its seismic business might be
impaired due to excess capacity, continued consolidation of its customer base
and lower exploration activities within the oil and gas industry. The Company is
currently in the process of completing an analysis of these factors; however,
all indications are that the decline in seismic activity has resulted in a
permanent impairment of certain assets associated with this business.
Consequently, the Company expects to initiate a plan during the fourth quarter
of 1999 to sever employees, abandon certain leases and eliminate certain
operating assets. Based upon preliminary estimates, such actions would result in
a nonrecurring charge during the fourth quarter of between $130 and $140
million.
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues for the three months ended September 30, 1999
decreased 23% to $1,117.6 million compared to revenues of $1,457.0 million in
the three months ended September 30, 1998. Outside North America, revenues for
the three months ended September 30, 1999 were 56% of consolidated revenues
compared to 63% for the three months ended September 30, 1998. Revenues for the
nine months ended September 30, 1999 were $3,442.8 million, a decrease of 24%
over the same period in 1998. Outside North America, revenues for the nine
months ended September 30, 1999 were 58% of consolidated revenues compared to
61% for the nine months ended September 30, 1998.
Worldwide drilling activity, which is measured by the rotary rig count,
dropped 11%. Outside North America, revenues for the three and nine months ended
September 30, 1999 were down 32% and 27%, respectively, compared to the same
periods in 1998, while the rotary rig count outside North America declined 22%.
Oilfield revenues were impacted by lower activity due to reduced customer
spending, as evidenced in the rig count declines, and by lower prices for the
Company's products and services, particularly in international and offshore
markets.
Revenues of all eight oilfield business units declined in the three
months ended September 30, 1999 compared to the same period in 1998, except one
- - E&P Solutions ("E&P"). E&P revenues from production of oil and gas wells
increased over 1998 as certain projects previously in development stage began
production during 1999. Oil and gas revenues for the three months ended
September 30, 1999 and 1998 were $21.0 million and $.5 million, respectively.
For the nine months ended September 30, 1999 and 1998 oil and gas revenues were
$35.9 million and $3.0 million, respectively.
20
<PAGE> 22
GROSS MARGIN
Excluding unusual and nonrecurring items, gross margins for the three
months ended September 30, 1999 and 1998 were 19.8% and 22.8%, respectively, and
for the nine months ended September 30, 1999 and 1998, 21.5% and 24.1%,
respectively. The decrease is due primarily to costs associated with excess
manufacturing capacity; depreciation, depletion and amortization being fixed in
nature; low utilization of seismic assets and pricing pressure, partially offset
by cost reductions.
SELLING, GENERAL AND ADMINISTRATIVE
Excluding unusual and nonrecurring items, selling, general and
administrative ("SG&A") expenses as a percentage of consolidated revenues for
the three months ended September 30, 1999 and 1998 were 14.6% and 13.3%,
respectively, and for the nine months ended September 30, 1999 and 1998, 14.5%
and 12.1%, respectively. While these costs are down on an absolute basis, the
increase as a percentage of consolidated revenues is due primarily to these
costs being more fixed in nature producing a slower rate of decline than
consolidated revenues.
UNUSUAL AND OTHER NONRECURRING ITEMS
1999
In August 1999, the Company completed the sale of a property in Las
Colinas, Texas and recognized a net gain of $6.2 million recorded as an unusual
credit in the statement of operations.
In June 1999, the Company completed the sale of a property in Houston,
Texas and recognized a net gain of $33.3 million recorded as an unusual credit
in the statement of operations. Such property was considered a duplicate
facility after the merger with Western Atlas Inc. The Company received net
proceeds of $48.2 million.
During 1998, the Company sold its interest in a joint venture and
recorded a write-down to the estimated fair value of the assets received which
was reflected in SG&A expenses. During the quarter ended June 30, 1999, certain
assets obtained as part of the consideration from the sale were sold. The
proceeds from the sale were $18.9 million and were received in July 1999.
Certain other assets relating to these operations were written-off and will be
scrapped. The net gain from these items totaled $15.3 million and is reflected
in SG&A expenses.
21
<PAGE> 23
1998
In 1998, as a result of a sharp decline in the demand for the Company's
products and services, and to adjust to the lower level of activity, the Company
assessed its overall operations and recorded charges of $551.9 million. Cash
provisions of the charges totaled $118.0 million. The categories of costs
incurred, the actual cash payments and the accrued balances at September 30,
1999 are summarized below:
<TABLE>
<CAPTION>
Accrued
Total Balance at
Cash Paid in Paid in September 30,
Provisions 1998 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash costs
Severance for approximately 5,200
employees $ 58.0 $ (24.2) $ (29.8) $ 4.0
Integration costs, abandoned leases
and other contractual obligations 29.8 (12.0) (9.4) 8.4
Environmental accruals 8.8 (4.3) (2.3) 2.2
Other cash costs (includes litigation
accruals) 21.4 (4.7) (5.5) 11.2
------------- ------------- ------------- -------------
Total $ 118.0 $ (45.2) $ (47.0) $ 25.8
============= ============= ============= =============
</TABLE>
The Company expects that, of the $25.8 million accrual at September 30,
1999, $5.2 million will be spent by December 31, 1999, with the remaining
accrual relating to contractual obligations, anticipated legal settlements and
environmental remediation to be spent during 2000 and after.
MERGER RELATED CHARGES - 1998
In connection with the merger with Western Atlas Inc. (the "Merger"),
in 1998 the Company recorded Merger related costs of $217.5 million. Cash
provisions of the Merger related costs totaled $159.3 million. The categories of
costs incurred, the actual cash payments made and the accrued balances at
September 30, 1999 are summarized below:
<TABLE>
<CAPTION>
Accrued
Total Balance at
Cash Paid in Paid in September 30,
Provisions 1998 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash costs
Transaction costs $ 51.5 $ (46.9) $ (2.9) $ 1.7
Employee costs 87.2 (66.2) (9.3) 11.7
Other merger integration costs 20.6 (9.0) (6.4) 5.2
------------- ------------- ------------- -------------
Total $ 159.3 $ (122.1) $ (18.6) $ 18.6
============= ============= ============= =============
</TABLE>
The Company expects that, of the $18.6 million accrual at September 30,
1999, $5.2 million will be spent by December 31, 1999 and $2.4 million will be
spent by December 31, 2000, with the remaining accrual being spent over the
remaining life of the related contractual obligations.
INTEREST EXPENSE
Interest expense for the three and nine months ended September 30, 1999
increased $1.3 million and $15.1 million, respectively, compared to the
corresponding periods in 1998. These increases were due to higher debt levels
that funded capital expenditures and working capital.
22
<PAGE> 24
INCOME TAXES
Excluding unusual and nonrecurring items, the effective tax rate for
the three and nine months ended September 30, 1999 was 35%.
During the quarter ended June 30, 1999, the Company reached an
agreement with the Internal Revenue Service regarding the audit of its 1994 and
1995 U.S. consolidated income tax returns. As a result of the agreement, the
Company recognized a tax benefit through the reversal of deferred income taxes
previously provided of $19.9 million, less related interest expense of $1.8
million, for a net benefit of $18.1 million.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Net cash inflows from operating activities of continuing operations
were $384.3 million and $489.9 million for the nine months ended September 30,
1999 and 1998, respectively. The reduction in cash flow from operations is due
to lower net income, after including the noncash portion of nonrecurring items,
payments on accruals for merger and nonrecurring related items of $65.6 million
and decreases in accounts payable and other accrued liabilities caused by lower
business levels. This was offset by reductions in receivables and inventory
resulting from activity declines and additional management focus.
INVESTING ACTIVITIES
Net cash outflows from investing activities of continuing operations
were $405.3 million and $1,311.7 million for the nine months ended September 30,
1999 and 1998, respectively.
Property additions in 1999 decreased as the Company adjusted to softer
market conditions. The Company currently expects 1999 capital expenditures to be
approximately $650.0 million (excluding acquisitions), a significant reduction
from 1998 capital spending levels. Funds provided from operations and
outstanding lines of credit are expected to be adequate to meet future capital
expenditure requirements.
Proceeds from the disposal of assets generated $120.2 million during
the nine months ended September 30, 1999 and $74.6 million during the nine
months ended September 30, 1998.
During the nine months ended September 30, 1998, the Company used
short-term borrowings to purchase various businesses including WEDGE DIA-Log,
Inc. for $218.5 million, net of cash acquired; 3-D Geophysical, Inc. for $117.5
million; and Western Rock Bit Company Limited for $31.4 million.
The words "expected" and "expects" are intended to identify
Forward-Looking Statements in "Investing Activities." See "Forward-Looking
Statements" and "Business Environment" above for a description of risk factors
related to these Forward-Looking Statements.
FINANCING ACTIVITIES
Net cash inflows from financing activities of continuing operations
were $35.4 million and $804.8 million for the nine months ended September 30,
1999 and 1998, respectively. Total debt outstanding at September 30, 1999 was
$2,885.8 million, compared to $2,770.7 million at December 31, 1998. The debt to
equity ratio was 0.90 at September 30, 1999 compared to 0.88 at December 31,
1998.
23
<PAGE> 25
During January and February 1999, the Company issued $400.0 million of
6.875% Notes due January 2029, $325.0 million of 6.25% Notes due January 2009,
$200.0 million of 6.0% Notes due February 2009 and $100.0 million of 5.8% Notes
due February 2003 with effective interest rates of 7.07%, 6.36%, 6.09% and
6.01%, respectively. The net proceeds of $1,010.7 million were used to repay
$150.0 million of the 7.625% Notes due February 1999, commercial paper and other
short-term borrowings.
Cash dividends in 1999 increased due to the increase in the number of
shares of common stock outstanding after the Merger. On an annualized basis the
cash dividend of $0.46 per share of common stock will require approximately
$150.0 million of cash which compares to an annual requirement of approximately
$80.0 million before the Merger.
At September 30, 1999, the Company had $1,516.4 million of credit
facilities with commercial banks, of which $1,000.0 million was committed. These
facilities are subject to normal banking terms and conditions that do not
significantly restrict the Company's activities.
ACCOUNTING STANDARDS
DERIVATIVE AND HEDGE ACCOUNTING
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. 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, changes in its
fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income. The Company will adopt
the standard in the first quarter of 2001. The Company has not quantified the
impact of the adoption of SFAS No. 133 on its consolidated financial statements.
YEAR 2000 ISSUE
In "Year 2000 Issue", the Company has given certain forward looking
information. This information has not been revised from the information provided
in the Form 10-Q for the quarter ended September 30, 1999 because it was not
affected by the restatement. For current information regarding the Year 2000
Issue, see "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations - Year 2000 Issue" in the Company's Annual Report on
Form 10-K for its fiscal year ended December 31, 1999.
FORWARD-LOOKING STATEMENTS REGARDING THE YEAR 2000 ISSUE
The words "expect," "believe," "will," "estimate," "target" and similar
expressions are intended to identify Forward-Looking Statements in "Year 2000
Issue." Although the Company expects that it will complete various phases of its
Year 2000 Program Plan (the "Program Plan") as described below, including
(without limitation) the specific remedial and corrective aspects of the program
or the contingency plans described below, there can be no assurance that the
Company will be successful in completing each and every aspect of the Program
Plan and, if successful, within the expected schedules described below. Factors
that could affect the Company's implementation of its Program Plan include
unforeseen difficulties in remediating a specific problem due to the complexity
of hardware and software, the inability of third parties to adequately address
their own year 2000 issues, including vendors, contractors, financial
institutions, U.S. and foreign governments and customers, the delay in
completion of a phase of the Program Plan necessary to begin a later phase, the
discovery of a greater number of hardware and software systems or technologies
with material year 2000 issues than the Company presently anticipates, and the
lack of alternatives that the Company previously believed existed.
24
<PAGE> 26
OVERVIEW
Many computer hardware and software products have not been engineered
with internal calendars or date-processing logic capable of accommodating dates
after December 31, 1999. In most cases, the problem is due to the hardware or
software application storing the year as a two-digit field. In applications
where this year 2000 ("Y2K") problem exists, the year 2000 will appear as 00,
and current applications could interpret the year as 1900 or some date other
than 2000. The same error may exist for years later than 2000 because the
application cannot distinguish which century the date represents. These errors
could negatively affect the Company's business application systems,
manufacturing, engineering and process control systems, products sold to
customers, equipment used in providing services, facilities equipment and
information technology ("IT") infrastructure. Additionally, Y2K issues impacting
suppliers and customers could have an indirect negative impact on the Company.
YEAR 2000 PROGRAM PLAN
The Company has substantially completed its Year 2000 Program Plan for
identifying, assessing and correcting its Y2K problems. This Program Plan is
intended to achieve a consistent approach to the Y2K issue throughout the
Company. The Program Plan includes the following aspects: program management,
inventory and risk assessment, remediation, testing and implementation,
contingency planning, and quality assurance.
The Company has adopted the British Standards Institute Year 2000
Conformity Guidelines as a reasonable standard for determining whether software
and hardware are not materially affected by Y2K problems. When meeting these
guidelines, the Company has deemed that hardware or software are not materially
affected by Y2K problems and, thus, are "in Y2K compliance."
The Company completed an inventory of all hardware and software that
the Company incorporates in its products or utilizes to support its operations
or provide services to its customers. The inventoried items in the Company's
database have been assessed for Y2K compliance. Remediation has been
substantially completed for the mission critical items that were impacted by Y2K
to the extent that those items could be remediated. Both Company employees and
outside vendors have performed this work. For those mission critical processes,
high-risk suppliers and areas that represent a potential health, safety or
environmental risk that have not been remediated, the Company has developed
contingency plans.
The Company is unable to reasonably estimate the absolute dollar effect
on the Company's results of operations, liquidity or financial condition if
significant portions of its remediation efforts are unsuccessful, although the
Company believes the effect would be material.
The Company has completed a review of its program management effort.
This review was performed by external resources who are engaged in the practice
of performing these reviews for other companies. The review generally confirmed
that the Company's Year 2000 Program Plan was adequate, and recommendations from
the review were incorporated into the Company's plan and processes to address
its Y2K issues.
YEAR 2000 PROGRAM COSTS
The Company has approximately 100 full time equivalent employees
("FTEs") involved in the Y2K effort, which the Company estimates has an
associated annual cost of approximately $7.0 million. Generally, these FTEs are
full-time employees who are devoting some portion of their schedule to the Y2K
effort.
25
<PAGE> 27
In addition to the payroll and payroll-related costs, Baker Hughes
estimates spending approximately $42.0 million in the Y2K compliance effort, of
which, the Company has spent approximately $38.0 million through September 30,
1999. The Company has funded, and expects to continue to fund, these
expenditures from cash that it generates from operating activities or existing
credit facilities.
THIRD PARTY ISSUES
The failure of third parties, which have a material relationship with
the Company, to address their Y2K problems could negatively and materially
impact the Company. To address this risk, the Company has assessed the effect of
Y2K on key vendor and contractor relationships and key customer relationships.
This assessment included key relationships with parties with which the Company
interfaces electronically and with which the Company has entered into strategic
alliances.
The Company has evaluated substantially all of the vendors and
contractors that the Company believes are material to its operations and
assessed the business risk of Y2K noncompliance on their part. Based upon this
assessment, the Company has sought to obtain written confirmation from these
vendors and contractors that they are adequately addressing their Y2K issues.
Additionally, the Company has sought to review the Y2K statements of these
vendors and contractors to the extent they exist. Where the Company was not able
to obtain satisfactory confirmation from these vendors, the purchasing
departments of each operating division of the Company have identified alternate
sources, if available, for vendors if those sources are needed because of an
inability to perform due to Y2K noncompliance. As part of this evaluation, the
Company has also sent surveys to certain of its vendors, including all of the
vendors that the Company believes are critical to its success. Approximately 70%
of the vendors that have been surveyed have responded. Based upon the responses
and, in some cases, follow-up discussions with vendors, the Company believes
that approximately 20% of the vendors responding appear to have a high risk of
Y2K noncompliance. For these vendors and vendors who have not responded, the
Company is completing the remaining contingency plans, which includes
identifying sourcing alternatives.
Assurances from vendors that have been obtained may take the form of
written or oral assurances or contractual assurances, depending on the vendor.
Depending upon the facts and circumstances of each case, the Company may or may
not have effective legal remedies if a vendor fails in its Y2K compliance
obligations to the Company. Factors that affect each case would include: the
assurances received from each vendor, the vendor's ability to correct any Y2K
noncompliance, the vendor's wherewithal to pay any damages that are assessed
against the vendor in any legal proceeding or settlement of a claim, the extent
to which a vendor is insured for such damages, the existence of any contractual
provisions or laws that may be adopted that liquidate a vendor's damages or
limit its damages and other facts and circumstances that affect the Company's
ability to obtain redress from the vendor's failure to perform its Y2K
compliance obligations for the Company's benefit.
KNOWN MATERIAL Y2K NON-COMPLIANT HARDWARE AND SOFTWARE
The Company has previously disclosed the following hardware and
software that are material to the Company's business that were not Y2K
compliant. The failure to remediate any of this hardware or software or develop
an appropriate contingency plan could have a material adverse effect on the
Company's business.
Two of the Company's operating divisions, INTEQ and Baker Oil Tools,
are implementing SAP R/3 for domestic operations during 1999. INTEQ has delayed
remediation of its existing payroll system, and Baker Oil Tools has delayed
implementation of certain of its business applications systems that SAP R/3 will
replace, pending the implementation of SAP R/3. Contingencies for these
operational areas are being evaluated, and the Company expects to implement a
contingency plan if the SAP implementation is not timely. INTEQ expects to
complete full implementation of the payroll system by year-end. Baker Oil Tools
has replaced its non-compliant system.
26
<PAGE> 28
Earlier in 1999, older versions of INTEQ's PC-based surface data
acquisition systems were not Y2K compliant. INTEQ has released for distribution
Y2K compliant products for its well planning and surface logging products. INTEQ
has also released a Y2K compliant version of its MSS Surface software that
supports its measurement while drilling, surface logging system and RigLink
products and services. This re-mediation began in 1997 with the replacement of
nonY2K compliant personal computers and is expected to be completed by late
1999. Finally, INTEQ has released a Y2K compliant version of its Survey product
line (SSP). All of the Y2K compliant versions of these products are expected to
be fully deployed by year-end. To the extent that these products are not fully
deployed, INTEQ has developed a contingency plan to prevent field personnel from
becoming confused by incorrect dates on reports generated by these products.
The Company's Western Geophysical operating division relies heavily
upon Global Positioning System ("GPS") equipment that the U.S. Navy operates.
The noncompliance of this equipment was a known problem outside the control of
the Company that affected other businesses, the government, the military
services and individuals that rely upon GPS services, including most of the
Company's competitors. Based upon information obtained from the U.S. government,
this system was remediated during early 1999. The Company is not aware of any
contingency system that its GPS receivers can utilize if the government's
remediation efforts were somehow unsuccessful. A failure to correct the Y2K
problems of this equipment could have a material adverse impact on the Company's
results of operations. The Company has addressed its known GPS concerns and did
not experience any operational disruption due to GPS failure during the
government's GPS week-number rollover, which occurred on August 21, 1999.
Western Geophysical uses a seismic acquisition synchronizer as part of
its marine seismic data acquisition services. This product was not Y2K
compliant. The Y2K-compliant version of this 3rd-party provided product has been
delivered to the Company, where it has been tested prior to deployment. The
Y2K-compliant version has been installed on two of the Company's vessels. The
Company plans to complete upgrades to this equipment in November 1999 on most of
the division's other seismic vessels that utilize this equipment.
Western Geophysical has discovered two seismic data acquisition systems
used on its marine vessels that have components that are not Y2K compliant. One
system is used on nine vessels, and the other system is used on eight vessels. A
single third party manufacturer makes both systems. The manufacturer has created
a Y2K compliant version of the first of these systems, a 3-D seismic system.
Western Geophysical has successfully tested this system and installed it on two
vessels. Western Geo expects to install the Y2K-compliant version of the system
on the other vessels that utilize this equipment in November 1999. The
manufacturer has advised Western Geophysical that it will not bring the second
of these two, a 2-D seismic system, into Y2K compliance. Western Geophysical is
continuing to negotiate with the manufacturer to license the source code to this
second system for Western Geophysical to remediate this system itself at the
earliest by the first quarter of 2000. The Y2K-error in this systems involves
the system placing an incorrect date in one data header but the correct date in
another. Western Geo has developed a contingency plan to correctly label the
data from the system and point out which of the two date headers must be
utilized.
Baker Process is implementing a new business application system to
replace its existing systems, which are not Y2K compliant. This system includes
financial, purchasing, inventory management, and manufacturing functionality.
Baker Process' North American operations are now utilizing this new system. The
Company expects Baker Process to complete the implementation of the new system
outside of North America by late 1999. Baker Process has developed a contingency
plan to use alternative Y2K compliant systems in use by other divisions if its
new business application system is not installed outside of North America in
time.
27
<PAGE> 29
The Baker Process operating division provides mechanical equipment
that, in some cases, has been customized at the request of the customer to
include control panels and circuit boards. The Company obtained these control
panels and circuit boards from third-party vendors at the request of various
customers. The Company researches the Y2K compliance status of these boards when
its customers request it to do so. The Y2K status of these boards is often
dependent upon the purchase date and serial number of the product. The
warranties from the Company or its subcontractors have, in many instances,
lapsed with respect to these panels and circuit boards; and therefore, the
Company may not be responsible to bring these panels and boards into Y2K
compliance.
Baker Petrolite had been unable to obtain assurances from its payroll
service provider that certain custom processing services will be Y2K compliant.
The Company has performed testing with this vendor to determine whether the
vendor's services as applicable to the Company will be Y2K compliant. The
Company has completed testing, and this system is now compliant.
E&P Solutions' oil and gas accounting system was not Y2K compliant. E&P
Solutions has substantially completed the implementation of the compliant
version of this system.
E&P Solutions obtains oil and gas interpretation systems from third
party vendors. E&P Solutions has completed implementation of compliant versions
of this software at the majority of its locations.
The Company's customers ordinarily contract for helicopter and
fixed-wing air transport services to transport Company personnel and equipment
to customer oil and gas operations sites. Often these services are provided by
smaller aircraft operators. The Company believes that many of these operators
have not yet adequately addressed their Y2K compliance needs. If a material
number of these operators experience flight disruptions because of Y2K
non-compliance, the Company's customers could have difficulties in obtaining
transport services, which in turn, could delay the Company in providing its
products and services to its customers. The Company has identified the air
transport services that it believes are Y2K compliant and will seek to utilize
these services as its sources of service.
Certain of the Company's divisions and corporate operations are in the
process of upgrading their network and personal computer based hardware and
software, including hardware and software of general application, to be Y2K
compliant. Likewise, certain of the Company's divisions and corporate operations
are in the process of upgrading hardware and software that operate facilities,
particularly foreign facilities, to be Y2K compliant. While the Company does not
believe that the failure of any one of these systems alone would materially and
adversely affect the Company's operations, a failure to upgrade a substantial
number of these systems would have a material adverse effect on the Company. The
Company expects that it will have upgraded the vast majority of these systems by
the end of 1999.
Based upon the status of the Company's Y2K compliance effort to date
and those facts and circumstances known to the Company, the Company believes
that the most reasonably likely worst case scenario as a result of Y2K
noncompliance would be as follows:
o the Company's INTEQ division is unable to complete deployment of
Y2K compliant data acquisition systems by December 31, 1999;
o Baker Process is unable to complete implementation of Y2K compliant
business systems by the end of the fourth quarter of 1999;
o the infrastructure in certain international locations such as
countries in Latin America, the Middle and Far East and Africa,
would experience failures in utility service because the utility
service providers are not Y2K compliant; and
28
<PAGE> 30
o critical vendors of the Company fail to perform because they are
not Y2K compliant.
The occurrence of any or all of these events could have a material
adverse effect on the Company's results of operations, liquidity or financial
position. Although the occurrence of these events is what the Company believes
is the most reasonably likely worst case scenario, these events may or may not
occur, and the Company cannot predict what will actually occur. Other events
might occur that also could have a material adverse effect on the Company's
results of operations, liquidity or financial position.
EMERGENCY OPERATIONS DURING CRITICAL Y2K PERIODS
The Company monitored its operations that rely upon the Global
Positioning System ("GPS") during the GPS week-number rollover which occurred on
August 21, 1999. The company experienced four incidents with receivers that were
warranted as compliant by the manufacturer. These incidents did not disrupt
operations or result in any lost seismic data or survey time.
The Company also monitored its operations during the September 1st and
September 9th dates. Only minor incidents were reported, and these did not
materially affect operations. These incidents were the type of incidents that
are reported during normal operations and were not Y2K-related.
The Company plans to monitor operations during the year-end rollover
beginning December 30, 1999 and continuing through January 7th on a 24-hour
basis. Monitoring will continue through January 31st on a limited basis.
The Company performed a drill to test its emergency operations
procedures during October 1999. The drill confirmed the communications
infrastructure and field locations awareness of the procedures for initiating
contingency plans and communicating incident information.
EURO CONVERSION
In "Euro Conversion", the Company has given certain forward looking
information. This information has not been revised from the information provided
in the Form 10-Q for the quarter ended September 30, 1999 because it was not
affected by the restatement. For current information regarding the Year 2000
Issue, see "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations - Euro Conversion" in the Company's Annual Report on
Form 10-K for its fiscal year ended December 31, 1999.
A single European currency (the "Euro") was introduced on January 1,
1999, at which time the conversion rates between the old, or legacy, currencies
and the Euro were set for 11 participating member countries. However, the legacy
currencies in those countries will continue to be used as legal tender through
January 1, 2002. Thereafter, the legacy currencies will be canceled, and Euro
bills and coins will be used in the 11 participating countries.
Most of the Company's products and services are essentially priced with
reference to U.S. dollar-denominated prices. Because of this, the Company does
not believe that it will be subject to a significant increase in pricing
transparency due to the introduction of the Euro. The Company's customers may
require billing in two or more currencies. Until the Company's financial
computer systems are modified or replaced to handle Euro-denominated
transactions, the Company will, in most cases, need to apply a methodology
whereby legacy currencies are first converted into Euros according to a legally
prescribed fixed exchange ratio and then, when the customer requires, converted
from Euros to a second national currency. The Company does not believe that this
conversion will materially affect its contracts. Most of the Company's contracts
are either bids in response to requests for tenders or purchase orders. These
contracts are either priced in purchase and sales orders, which are short term
in nature, or in longer term contracts that are sufficiently
29
<PAGE> 31
flexible to permit pricing in multiple currencies. The Euro conversion period is
longer than most of the pricing features of these contracts, thus permitting a
pricing conversion to the Euro as new orders are issued. The same is true with
most of the Company's contracts with vendors.
During the June 1997 quarter, the Company began a multi-year initiative
designed to develop and implement an enterprise-wide software system. The
initiative, named "Project Renaissance," will utilize SAP R/3 as its software
platform across the entire Company and is expected to cost in excess of $300
million over a four-year period. SAP R/3 is programmed to process in Euros for
most of the Company's accounting, financial and operational functions, and the
Company expects that the implementation of this system will address its Euro
issues in these areas. Because the Company has engaged in this implementation
for operational purposes and not solely to address Euro issues, the Company has
not separately determined the cost of converting these systems for use with the
Euro. These Euro conversion costs are embedded in the cost of Project
Renaissance and are not susceptible to separate quantification. The Company has
scheduled implementation of SAP R/3 in its major European operations prior to
January 1, 2002.
The Company may make certain modifications to its legacy computer
systems to address certain Euro conversion issues, pending full implementation
of SAP R/3. The Company is presently assessing these conversion modifications
and their costs.
In connection with an internal reorganization of the structure of the
Company's subsidiaries and cash management procedures, the Company has
instituted a new cash management system that the Company believes is able to
process transactions in Euros. The Company does not presently have any interest
rate or currency swaps that are denominated in Euro legacy currencies.
The Company has appointed coordinators to address Euro conversion
issues in France, Germany, Italy, The Netherlands, Denmark, Norway and the
United Kingdom, the major centers of the Company's European operations that
could be affected by the Euro conversion. The Company continues to assess the
impact of the Euro on its operations and financial, accounting and operational
systems. The Company does not presently anticipate that the transition to the
Euro will have a significant impact on its results of operations, financial
position or cash flows.
The word "anticipate" is intended to identify a Forward-Looking
Statement in "Euro Conversion." The Company's anticipation regarding the lack of
significance of the Euro introduction on the Company's operations is only its
forecast regarding this matter. This forecast may be substantially different
from actual results, which are affected by factors substantially similar to
those described in "Year 2000 Issue - Forward-Looking Statements Regarding the
Year 2000 Issue" above.
30
<PAGE> 32
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
At September 30, 1999, the Company had Norwegian Krone denominated
commitments of $39.3 million to purchase a seismic vessel and Australian Dollar
denominated commitments of $13.9 million to purchase seismic vessel equipment at
various times through June 2000. The Company has entered into forward exchange
contracts to purchase the required amount of Norwegian Krone and Australian
Dollars for $43.6 million and $12.8 million, respectively. The Company has also
entered into a forward exchange contract to sell $.7 million of Japanese Yen as
a hedge to certain Japanese Yen denominated assets.
31
<PAGE> 33
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(3.1) Restated Certificate of Incorporation (filed as Exhibit 3.1 to
the Annual Report of the Company on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
(3.2) Certificate of Amendment to Restated Certificate of Incorporation
of the Company (filed as Exhibit 4.2 to the Registration Statement of
the Company on Form S-3 (Registration No. 333-87829) and incorporated
herein by reference).
(4.1) Restated Certificate of Incorporation (filed as Exhibit 3.1 to
the Annual Report of the Company on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
(4.2) Certificate of Amendment to Restated Certificate of Incorporation
of the Company (filed as Exhibit 4.2 to the Registration Statement of
the Company on Form S-3 (Registration No. 333-87829) and incorporated
herein by reference).
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
Items 1, 2, 3, 4, and 5 are not applicable and have been omitted.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAKER HUGHES INCORPORATED
(REGISTRANT)
Date: April 10, 2000 By /s/ G. STEPHEN FINLEY
------------------------------------------
Sr. Vice President - Finance and
Administration and Chief Financial Officer
Date: April 10, 2000 By /s/ ALAN J. KEIFER
------------------------------------------
Vice President and Controller
33
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
(3.1) Restated Certificate of Incorporation (filed as Exhibit 3.1 to
the Annual Report of the Company on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference).
(3.2) Certificate of Amendment to Restated Certificate of
Incorporation of the Company (filed as Exhibit 4.2 to the
Registration Statement of the Company on Form S-3
(Registration No. 333-87829) and incorporated herein by
reference).
(4.1) Restated Certificate of Incorporation (filed as Exhibit 3.1 to
the Annual Report of the Company on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference).
(4.2) Certificate of Amendment to Restated Certificate of
Incorporation of the Company (filed as Exhibit 4.2 to the
Registration Statement of the Company on Form S-3
(Registration No. 333-87829) and incorporated herein by
reference).
(27) Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 34,800
<SECURITIES> 0
<RECEIVABLES> 1,009,700
<ALLOWANCES> 59,200
<INVENTORY> 841,100
<CURRENT-ASSETS> 2,372,100
<PP&E> 2,139,800
<DEPRECIATION> 1,857,400
<TOTAL-ASSETS> 7,237,200
<CURRENT-LIABILITIES> 881,700
<BONDS> 2,776,600
0
0
<COMMON> 329,200
<OTHER-SE> 2,880,500
<TOTAL-LIABILITY-AND-EQUITY> 7,237,200
<SALES> 3,442,800
<TOTAL-REVENUES> 3,442,800
<CGS> 2,703,800
<TOTAL-COSTS> 2,703,800
<OTHER-EXPENSES> 445,800
<LOSS-PROVISION> 15,600
<INTEREST-EXPENSE> 119,000
<INCOME-PRETAX> 178,900
<INCOME-TAX> 45,100
<INCOME-CONTINUING> 133,800
<DISCONTINUED> (7,700)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,100
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
</TABLE>
