Back to GetFilings.com
1
Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------
Commission File Number 1-9397
---------------
Baker Hughes Incorporated
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0207995
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
3900 Essex Lane, Houston, Texas 77027-5177
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 439-8600
---------------
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 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. [ ]
---------------
At March 7, 2001, the registrant has outstanding 334,811,940 shares of
Common Stock, $1 par value. The aggregate market value of the Common Stock on
such date (based on the closing price on March 6, 2001 reported by the New York
Stock Exchange) held by nonaffiliates was approximately $14,430,394,000.
---------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 2000 Proxy Statement for the Annual Meeting of
Stockholders to be held April 25, 2001 are incorporated by reference into Part
III.
1
2
PART I
ITEM 1. BUSINESS
Baker Hughes Incorporated (the "Company") is a Delaware corporation engaged
in the oilfield and process industries. In addition, the Company manufactures
and sells other products and provides services to industries that are not
related to the oilfield or continuous process industries. The Company conducts
certain of its operations through joint ventures, partnerships or alliances.
The Company was formed in connection with the combination of Baker
International Corporation and Hughes Tool Company that was consummated on April
3, 1987. The Company acquired Western Atlas Inc. ("Western Atlas") in a merger
completed on August 10, 1998. As used herein, the "Company" refers to Baker
Hughes Incorporated and its subsidiaries, unless the context clearly indicates
otherwise.
On November 30, 2000, the Company, Schlumberger Limited, a Netherlands
Antilles corporation ("Schlumberger"), and certain wholly owned subsidiaries of
Schlumberger consummated the transactions contemplated by the Master Formation
Agreement dated September 6, 2000. Under the terms of the Master Formation
Agreement, the Company and Schlumberger created a venture by transferring the
seismic fleets, data processing assets, exclusive and nonexclusive multi-client
surveys and other assets of the Company's Western Geophysical division and
Schlumberger's Geco-Prakla division. The Company and Schlumberger respectively
own 30% and 70% of the venture, which will operate under the name Western GECO.
For additional industry segment information for the three years ended
December 31, 2000, see Note 11 of the Notes to Consolidated Financial Statements
in Item 8 herein.
OILFIELD
The Oilfield segment consists of six operating divisions: Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen.
The Company is a leading supplier of wellbore related products, services and
systems to the worldwide oil and gas industry. Through its six oilfield service
divisions, the Company provides equipment, products and services for drilling,
formation evaluation, completion and production of oil and gas wells.
Baker Atlas. The Company, through its Baker Atlas division, is a leading
provider of a complete range of downhole well logging services, including
advanced formation evaluation, production and reservoir engineering,
petrophysical and geophysical data acquisition services. In addition, the
Company provides perforating and completion technologies, pipe recovery, data
management, processing and analysis. This diverse range of services is
applicable through the life cycle of a reservoir - in support of the drilling
process, through prospect evaluation and appraisal, to production and reservoir
management. The services and information allow oil and gas companies to define,
reduce and manage their risk. In performing well logging services the Company
conveys electronic instrumentation and sensor packages 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 hydrocarbon present,
the extent of the reservoir, and its producibility. Perforating services are
offered by 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
can enter the well bore from the formation. The Company's largest competitors in
the downhole logging and perforating markets include Schlumberger and
Halliburton Company ("Halliburton").
Baker Hughes INTEQ. The Company, through its Baker Hughes INTEQ division,
believes that it is a leading supplier of real time drilling and evaluation
services to the oil and gas industry. These services include directional and
horizontal drilling services, drilling fluid systems, logging-while-drilling,
measurement-while-drilling, mud logging, coring and subsurface surveying. The
Company is particularly well positioned to provide the high end technology
solutions that oil and gas companies require to drill complex wells in
challenging reservoir environments. Baker Hughes INTEQ is an industry leader in
the design and planning of wells that incorporate complex trajectories set to
intercept multiple reservoir targets. As exploration and development moves
increasingly to deepwater, clients desire to utilize the Company's drilling
technology to reduce cost through optimized performance. In the upper hole
sections of an oil and gas well, the Company's 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 the Company's rotary
steering technology is combined with logging while
2
3
drilling technology to allow clients to drill three dimensional well
trajectories while taking measurements that allow evaluation of the formations
drilled. This information is transmitted back to the surface through the use of
pulse telemetry, a system where differential pressure patterns are transmitted
through a fluid column back to the surface where they are decoded. The Company's
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. Such tools allow access to, and the efficient drilling of,
reservoirs that could not have been developed efficiently five years ago. With
regard to these products and services, the Company competes principally with
Halliburton and Schlumberger.
The Company, through its Baker Hughes INTEQ division, also produces and
markets drilling fluids (muds) and specialty chemicals and provides technical
services for their use in oil and gas well drilling. Drilling fluids are
typically contain barite or bentonite and may use a water or oil base. The main
purpose of the fluid is to provide stability within the wellbore, to clean the
bottom of a hole by removing cuttings and transporting them to the surface, to
cool the bit and drill string, to control formation pressures and to seal 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 drilling fluid and formation. The Company also furnishes
on-site, around-the-clock laboratory analysis and examination of circulated and
recovered drilling fluids and recovered drill cuttings to detect the presence of
hydrocarbons and identify the formations penetrated by the drill bit. The
Company's principal competitors with regard to these products and services are
Smith International, Inc. ("Smith") and Halliburton.
Baker Oil Tools. The Company, through its Baker Oil Tools division, is a
leading provider of downhole completion, workover and fishing equipment and
services. Completion product lines include packers, flow control equipment,
subsurface safety valves, liner hangers and sand control systems. Packers are
used in the well bore 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 zones. Casing is steel pipe
used to line the well bore 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 flows from the producing zone under the
ground to the surface of the well. Flow control equipment provides additional
means to control and adjust flow downhole from producing zones while safety
valves shut off all flow to the surface in the event of an emergency. New
technology developments in this area include intelligent completion systems,
which can provide lower customer operating costs through remote actuation and
the opportunity for enhanced production by controlling selective zone production
based on real time reservoir data. The Company believes that it is a leading
worldwide manufacturer and provider of packers, flow control and safety valve
equipment and that its principal competitors are Halliburton, Schlumberger and
Weatherford International Inc. ("Weatherford").
The Company also manufactures and sells liner hanger systems. The Company's
customers use these tools to suspend and set strings of casing pipe in wells.
New technology developments in this area include multi-lateral completions
systems, which provide multiple downhole casing pipes to be tied to one main
well bore casing pipe ("junction") with pressure seal integrity. The Company
believes that it is a leading worldwide producer of liner hangers and
multi-lateral systems with its primary competitors in this area being
Halliburton and Weatherford.
The Company offers sand control equipment (gravel pack tools, screens,
fluids and pumping) and services that prevent sand from entering the well bore
and reducing productivity. Most recently, the Company has expanded its marine
vessel, high pressure, "frac-pack" services capabilities. The Company believes
it is a leading provider of sand control services and its primary competitors
are Halliburton, Schlumberger and BJ Services Company.
The Company provides mechanical services tools and inflatable packers for
the workover segment of the market. 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 and as an integral
part of the casing (external casing packer) to provide zone separation. The
Company's primary competitors for these product lines are Halliburton,
Schlumberger and Weatherford.
The Company also provides 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 well bore, potentially hundreds or
thousands of feet under the ground. In addition, milling, cutting and whipstock
services are offered to clean out well bores or mill windows in the casing to
drill a sidetrack or multi-lateral well. The Company's fishing services are also
offered in a thru-tubing producer line making it compatible with coiled tubing
workover operations. The Company believes that it is a leading provider of
fishing services with its major competitors being Weatherford and Smith.
3
4
The Company 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. The Company's primary competitors for these
products and services are Halliburton and Schlumberger.
Baker Petrolite. The Company, through its Baker Petrolite division, is a
leading provider of oilfield specialty chemicals and integrated chemical
technology solutions for petroleum production, transportation and refining.
Chemicals that the Company provides include specialty chemicals that production
segments of the petroleum industry use, as well as industrial chemicals that
customers use in refining, wastewater treatment and cooling and boiler water
processes. The Company also provides chemical technology solutions to other
industrial markets throughout the world including petrochemicals, fuel
additives, plastics, imaging, adhesives, steel and crop protection. The Company
believes that its primary competitors are Nalco-Exxon Energy Chemicals LP and
the Betz Dearborn division of Hercules, Inc.
Centrilift. The Company, through its Centrilift division, is a leader in
technology for oilfield electric submersible pumping ("ESP") systems, which help
raise oil to the surface. These pumping systems consist of an electric
submersible pump placed inside the oil well near the productive formation, power
and control cables between the pump and the surface, and a surface control
system. The Company manufactures the critical components of the systems,
including variable speed motor controllers and specialty armored power cables
designed for oilfield use. The Company has recently offered its customers new
technology, including downhole hydrocyclone oil/water separation systems. Its
major competition in ESPs is Schlumberger.
Hughes Christensen. The Company believes that, through its Hughes
Christensen division, it is a leading manufacturer and marketer of Tricone(R)
roller cone drill bits and polycrystalline diamond compact (PDC) fixed cutter
bits for the worldwide oil, gas, mining and geothermal industries. The Company
believes that its principal competitors in this area are Smith, Halliburton and
Schlumberger for oil and gas applications, and Smith and Sandvik for other
applications.
PROCESS
In February 2000, the Company's Board of Directors approved a plan, in
principle, to sell its Baker Process division. As of February 2001, the Company
was not able to divest its Baker Process division as an entire business unit on
terms it found acceptable. Future marketing efforts will focus on individual
product lines. The Company's intent to dispose of its interest in the Baker
Process product lines is only its present intent with respect to this matter.
The Company's intent could change in the future depending on the relative value
of a product line or the value and viability of an offer of a third party with
respect to a proposed transaction regarding the product line.
The Company, through its Baker Process division, provides a broad range of
separation equipment and systems to concentrate product or separate and remove
waste material in the mineral, industrial, pulp and paper and municipal
industries. The Company's product lines include vacuum filters (drum, disc and
horizontal belt), pressure filters (filter presses and belt presses),
sedimentation products (granular media filters, thickeners, clarifiers),
flotation cells and aeration equipment. The Company's principal competitors for
sales for mineral and industrial applications are Krauss Maffei, Outokumpu and
Svedala; the Company's principal competitors for sales for municipal
applications are Vivendi through its U.S. Filter companies, and Walker Process;
and the Company's principal competitor for sales for pulp and paper applications
is Ahlstrom.
The Company designs and manufactures process solutions for the oilfield and
refinery markets. These solutions include equipment for the processing and
conditioning of seawater for injection, desalting oil streams and separating oil
from water in oil production streams, with products consisting of fine filters,
coarse filters, nutshell filters, flotation units, hydrocyclones, coalescers,
deaeration towers, electrochlorinators and electrostatic desalters. The primary
competitors in this area are Kvaerner, Serck Baker and Vivendi.
The Company manufactures a broad range of continuous and batch centrifuges
and specialty filters which are each widely used in the municipal, industrial,
chemical, minerals and pharmaceutical markets to dewater or classify process and
waste streams. The Company's principal competitors in its continuous centrifuge
product line are Alfa-Laval/Sharples, Tomoe and Flottweg. There are numerous
small and large companies that compete in the batch centrifuge and filter
product lines.
The Company provides parts and service for all of its process equipment
product lines through a global network of personnel and facilities strategically
located to serve the customer community. The Company also offers facilities
operation services for processes that utilize many of the Company's process
equipment product and service lines.
4
5
WESTERN GECO
On November 30, 2000, the Company, Schlumberger Limited, a Netherlands
Antilles corporation ("Schlumberger"), and certain wholly owned subsidiaries of
Schlumberger consummated the transactions contemplated by the Master Formation
Agreement dated September 6, 2000. Under the terms of the Master Formation
Agreement, the Company and Schlumberger created a venture by transferring the
seismic fleets, data processing assets, exclusive and nonexclusive multi-client
surveys and other assets of the Company's Western Geophysical division and
Schlumberger's Geco-Prakla division. The Company and Schlumberger respectively
own 30% and 70% of the venture, which will operate under the name Western GECO.
The Company, through its interest in Western GECO, is a leading 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 zones. Seismic data are acquired by producing a sound wave. The sound
wave moves through the ground and is recorded by audio instruments. The sound
waves on the recordings are then analyzed to determine the characteristics of
the geologic formations through which they 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. Western GECO conducts seismic surveys on land, in deep waters
and across shallow-water transition zones worldwide. These seismic surveys
encompass high-resolution two-dimensional and three-dimensional surveys for
delineating exploration targets. Western GECO 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. Western GECO's major
competitors in providing these services are Compagnie Generale de Geophysique,
Veritas DGC, Inc. and Petroleum Geo-Services ASA.
EXPLORATION AND PRODUCTION ACTIVITIES
The Company, through E&P Solutions, acquired equity positions in oil and gas
properties and functions as the operator of some of these properties. The
Company acquired many of these oil and gas interests, at the request of its
customers, in connection with providing its customers products and services. The
Company has a strategy to substantially exit the oil and gas exploration
business and its oil production business, except for its OPL-230 project in
Nigeria. In connection with this strategy, the Company sold its interest during
2000 in its China and U.S. Gulf of Mexico oil and gas properties as well as a
number of smaller interests in other properties. The Company intends to retain
its interest in its OPL-230 property in Nigeria; however, its intent to hold or
divest of this project could change in the future depending on the relative
value of the project and the viability of an offer of a third party with respect
to a proposed transaction regarding the project. The Company's oilfield services
customers also operate oil and gas wells.
MARKETING, COMPETITION AND ECONOMIC CONDITIONS
The Company markets the products of each of its principal industry segments
primarily through the Company's own sales organizations on a product line basis,
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 customer's
use of the Company's products and services. Stockpoints and service centers for
oilfield products and services are located in areas of drilling and production
activity throughout the world. The Company markets its oilfield products and
services in nearly all of the oil producing countries. Stockpoints and service
centers for process products and services are located near the Company's
customers' operations, and the Company markets process products and services
throughout the world. In certain areas outside the United States where direct
product sales efforts are not practicable, the Company utilizes licensees, sales
representatives and distributors.
The products of each of the Company's principal industry segments 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 and governmental regulation. The Company
competes effectively with the oil and gas industry's largest integrated oilfield
service providers. 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".
INTERNATIONAL OPERATIONS
The Company's operations are subject to the risks inherent in doing business
in multiple countries with various legal and political policies. These risks
include war, boycotts, political changes, expropriation, currency restrictions,
taxes and changes in currency
5
6
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
of these events would not have a material adverse effect on its operations.
RESEARCH AND DEVELOPMENT; PATENTS
The Company is engaged in research and development activities directed
primarily toward improvement of existing products and services, design of
specialized products to meet specific customer needs and development of new
products and processes. For information regarding the amounts of research and
development expense in each of the three years ended December 31, 2000, see Note
15 of the Notes to Consolidated Financial Statements in Item 8 herein.
The Company has followed a policy of seeking patent 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 while it regards patent and
trademark protection important to its business and future prospects, it
considers its established reputation, the reliability of its products and the
technical skills of its personnel to be more important. The Company aggressively
pursues protection of its patents against patent infringement worldwide.
BUSINESS DEVELOPMENTS
OILFIELD
In November 2000, the Company consummated the formation of the Western GECO
seismic venture with Schlumberger Limited. Western GECO is owned 70% by
Schlumberger and 30% by the Company. Western GECO is comprised of the seismic
fleets, data processing assets, exclusive and nonexclusive multi-client surveys,
and other assets of the Western Geophysical division of the Company and
Schlumberger's Geco-Prakla division.
In October 2000, the Company's Board of Directors approved the Company's
plan to substantially exit the oil and gas exploration business. As a result,
the company sold its Gulf of Mexico and China oil and gas properties and certain
remaining undeveloped oil and gas properties. The Company intends to retain its
interest in the OPL-230 property in Nigeria. However, this intent is only the
Company's present intent with respect to this matter. The Company's intent to
hold or divest of this project could change in the future depending on the
relative value of the project or the value and viability of an offer of a third
party with respect to a proposed transaction regarding the project.
PROCESS
During the year 2000 the Company actively marketed the Baker Process
division with the intent of selling the entire unit. The Company has not been
successful in securing an acceptable offer for the entire division. Future
marketing efforts will focus on individual product lines.
EMPLOYEES
At December 31, 2000, the Company had a total of approximately 24,500
employees, as compared to approximately 27,300 employees at December 31, 1999
and a 1998 peak of approximately 36,500 employees in May 1998. Approximately
1,781 employees at December 31, 2000, were represented under collective
bargaining agreements that terminate at various times through April 1, 2003. The
Company believes that its relations with its employees are satisfactory.
EXECUTIVE OFFICERS
The following table shows as of March 7, 2001, 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 50 Chairman of the Board, President and Chief
Executive Officer of the Company since
August 2000. President and Chief Operating
Officer from 1997 to 2000 and Executive Vice
President from 1997 to 1998 of Atlantic
Richfield Company; Chairman of the Board
from 1994 to 2000 and President and Chief
Executive Officer from 1996 to 1997 of
Vastar Resources, Inc. Employed 2000.
6
7
Andrew J. Szescila 53 Senior Vice President and Chief Operating
Officer of the Company since 2000 and
President, Baker Hughes Oilfield Operations
from January 2000 to October 2000. Senior
Vice President of the Company since 1997.
Vice President of the Company from 1995 to
1997; and President of Hughes Christensen
Company from 1989 to 1997. President, BJ
Services International, from 1987 to 1988;
and President, Baker Service Tools, from
1988 to 1989. Employed 1973.
George S. Finley 50 Senior Vice President - Finance and
Administration and Chief Financial Officer
of the Company since 1999; Senior Vice
President and Chief Administrative Officer
from 1995 to 1999; Controller from 1987 to
1993; and Vice President from 1990 to 1995
of the Company. Chief Financial Officer of
Baker Hughes Oilfield Operations from 1993
to 1995. Employed 1982.
Alan R. Crain, Jr. 49 Vice President and General Counsel of the
Company since October 2000. Vice President,
General Counsel and Secretary of Crown Cork
& Seal Company, Inc. from 1999 to 2000; Vice
President and General Counsel from 1996 to
1999, and Assistant General Counsel from
1988 to 1996 of Union Texas Petroleum
Holding, Inc. Employed 2000.
Greg Nakanishi 49 Vice President, Human Resources of the
Company since November 2000. President GN
Resources from 1989 to 2000. Employed 2000.
Alan J. Keifer 46 Vice President and Controller of the Company
since July 1999; Western Hemisphere
Controller of Baker Oil Tools from 1997 to
1999. Director of Corporate Audit from 1990
to 1996. Employed 1990.
There are no family relationships among the executive officers of the
Company.
ENVIRONMENTAL MATTERS
The Company is subject to U.S. federal, state and local 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 is in the process of development, and changes in standards of
enforcement of existing regulations as well as the enactment and enforcement of
new legislation may require the Company, as well as its customers, to modify,
supplement or replace equipment or facilities or to change or discontinue
present methods of operation.
During the fiscal year ending December 31, 2000, the Company spent
approximately $23.5 million to enable the Company to comply with U.S. federal,
state and local provisions that have been enacted or adopted regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment (collectively, "Environmental Regulations"). In
the upcoming fiscal year which will end December 31, 2001, the Company expects
to spend a total of $18.7 million to comply with such regulations relating to
environmental protection. 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 adequate reserves for such compliance
expenditures or the cost to the Company for such compliance is likely to be
small when compared to the Company's overall net worth.
Based upon current information, the Company will incur $2.3 million in
capital expenditures for environmental control equipment during the fiscal year
ending December 31, 2001 and $5 million in capital expenditures in 2002. Based
upon current information, the Company believes that capital expenditures for
environmental control equipment for the 2000 and 2001 fiscal years will not have
a material adverse effect upon the financial condition of the Company because
the aggregate amount of these expenditures for those periods is or is expected
to be small when compared to the Company's overall net worth.
"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 are
affected by the following factors: changes in Environmental Regulations;
unexpected, adverse outcomes with respect to sites in which the Company has been
named a potentially responsible party ("PRP"), including (without limitation)
the sites listed below; the discovery of new sites of which the Company is not
aware where additional expenditures must be
7
8
spent to comply with Environmental Regulations; an unexpected discharge of
hazardous materials in the course of the Company's business or operations; an
unplanned acquisition of one or more new businesses; a catastrophic event
causing discharges into the environment of hydrocarbons; and the allocation to
the Company of liability as a PRP with respect to a site differs from the amount
of volume of discharge allocated to the Company with respect to the site.
The Company and certain of its subsidiaries and divisions have been
identified as a PRP as a result of substances which may have been released in
the past at various sites more fully discussed below. The United States
Environmental Protection Agency (the "EPA") and appropriate state agencies are
supervising investigative and clean-up activities at these sites.
(a) Baker Petrolite Corporation ("BPC"), a subsidiary of the Company,
and Hughes Christensen Company ("HC"), Milpark Drilling Fluids ("Milpark")
(now known as INTEQ), and Baker Oil Tools ("BOT"), each divisions of Baker
Hughes Oilfield Operations, Inc. ("BHOO"), have been named as PRPs in the
Sheridan Superfund Site, located in Hempstead, Texas. The remedial work at
this site is being overseen by the Texas Natural Resource Conservation
Commission ("TNRCC"). A trust (the "Sheridan Site Trust") was formed to
manage the site remediation and administrative details of the project. The
Company participates as a member of the Sheridan Site Trust. Total remedial
and administrative costs are estimated by Sheridan Site Trust officials to
total approximately $30,000,000. Contribution of the Company's subsidiaries
and divisions (including Baker Hughes Tubular Services, Inc. ("BHTS"), which
was sold to ICO on September 30, 1992), is estimated to be 1.81% of those
costs.
(b) Spectrace Instruments, Inc. ("Spectrace"), the assets of which were
sold to Thermo-Electron Corporation on March 15, 1994, is a named respondent
to an EPA Administrative Order associated with the MEW Study Area, an eight
square mile soil and groundwater contamination site located in Mountain
View, California. A group of PRPs estimates that the total cost of
remediation will be approximately $80 million. The Company's environmental
consultants have conducted extensive investigations of Spectrace's operating
facility located within the MEW Study Area and have concluded that
Spectrace's activities could not have been the source of any contamination
in the soil or groundwater at and around the MEW Study Area. The EPA has
informed the Company that no further work needs to be performed on
Spectrace's site and indicated that the EPA does not believe there is a
contaminant source on the property. However, the Company continues to be
named in the EPA's Administrative Order. The Company continues to believe
the EPA's Administrative Order for Remedial Design and Remedial Action is
not valid with respect to the Company's subsidiary and is seeking the
withdrawal of the Administrative Order with respect to the Company's
subsidiary.
(c) In May 1987, Baker Performance Chemicals Incorporated (now known as
BPC) entered into an Agreed Administrative Order with the then Texas Water
Commission, now known as the TNRCC, with respect to soil and groundwater
contamination at the Odessa - Hillmont site located in Odessa, Texas. This
site was previously used by BPC as a chemical blending plant. The
contaminated soil has been removed, and the site continues in the
groundwater recovery/treatment phase at an annual cost to the Company of
approximately $25,000.
(d) In January 1996, Petrolite Corporation (now known as BPC) was named
as a PRP by the TNRCC at the McBay Oil and Gas State Superfund Site in
Grapevine, Texas. The Company has disputed its involvement in the site based
on the fact that it has no knowledge of transporting waste to the site.
However, the Company has transacted product sales to McBay Oil and Gas
Company. Documentation of product sales has been sent to the TNRCC. Based on
available information, the Company does not believe that it has any
liability for contamination at this site.
(e) In July 1997, Petrolite Corporation (now known as BPC), was named by
the EPA as a PRP at the Shore Refinery Site, Kilgore, Gregg County, Texas.
The Company has completed a thorough search of its documents and records.
The Company has concluded that it has not arranged for the disposal,
treatment, or transportation of hazardous substances or used oil at the
site. To date, the EPA has not produced any substantive, hazardous substance
treatment, disposal or transportation 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 the site.
(f) In June 1999, Hughes Tool Company (now known as Hughes Christensen)
was named as a PRP at the Li Tungsten Site in Glen Cove, New York. This site
was used to reprocess tungsten, a strategic metal used in the manufacture of
drill bits. The Company has responded to the EPA's inquiry and believes that
it has contributed only a de minimus amount of hazardous substances to the
site. The site is now undergoing investigative studies to determine a
suitable remedial action plan as well as a total estimated cost for
remediation.
(g) In December 2000, Baker Petrolite Corporation was named as a PRP by
the EPA at the Casmalia Disposal Site, Santa Barbara County, California. Due
to the uncertainties associated with remedial project costs, the total cost
to the Company has not been finalized. However, the Company's volumetric
portion of the waste that was placed at the site was estimated by the EPA
and
8
9
confirmed by Company records to be less than one-tenth of one percent (0.1%)
of the total material transported and placed at the site by the Teir Group
of PRPs that the EPA has assigned the Company. The total cost of remediation
has been estimated by the EPA to range from $225 million to $290 million.
While PRPs in Superfund actions have joint and several liability for all
costs of remediation in many of the sites described above, it is not possible at
this time to quantify the Company's ultimate exposure because the project is
either in its early investigative or remediation stage. Based upon current
information, the Company does not believe that probable and reasonably possible
expenditures in connection with any of the sites described above are likely to
have a material adverse effect on the Company's financial condition because:
(i) the Company has established adequate reserves to cover what
the Company presently believes will be its ultimate liability
with respect to the matter,
(ii) the Company and its subsidiaries have only limited involvement
in the sites based upon a volumetric calculation, as described
above,
(iii) there are other PRPs that have greater involvement on a
volumetric calculation basis who have substantial assets and
who may reasonably be expected to pay their share of the cost
of remediation,
(iv) where discussed above, the Company has insurance coverage or
contractual indemnities from third parties to cover the
ultimate liability, and
(v) the Company's ultimate liability, based upon current
information, is small compared to the Company's overall net
worth.
The Company is subject to various other governmental proceedings 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.
ITEM 2. PROPERTIES
The Company operates 77 manufacturing plants, almost all of which are owned,
ranging in size from approximately 1,500 square feet to approximately 316,000
square feet of manufacturing space and totaling more than 3,685,200 square feet.
Of such total, approximately 2,339,600 square feet (63%) are located in the
United States, 288,200 square feet (8%) are located in the Western Hemisphere
exclusive of the United States, 888,000 square feet (24%) are located in Europe,
and 169,400 square feet (5%) are located in the Eastern Hemisphere exclusive of
Europe. These manufacturing plants by industry segment and geographic area
appear in the table below. The Company also owns or leases and operates various
customer service centers and shops, and sales and administrative offices
throughout the geographic areas in which it operates.
OTHER OTHER
UNITED WESTERN EASTERN
STATES HEMISPHERE EUROPE HEMISPHERE TOTAL
------- ----------- ------- ----------- ------
Oilfield 35 10 9 11 65
Process 6 2 3 1 12
The Company believes that its manufacturing facilities are well maintained.
The Company also has a significant investment in service vehicles, rental tools
and equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is sometimes named as a defendant in litigation relating to the
products and services it provides. 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 in every case fully indemnify the
Company against liabilities arising out of pending and future legal proceedings
relating to its ordinary business activities. Many of these policies contain
self insured retentions in amounts the Company deems prudent.
9
10
The Company has been named as a defendant in a number of shareholder class
action suits filed by purported shareholders shortly after the Company's
announcement on December 8, 1999 regarding the accounting issues it discovered
at its INTEQ division. These suits, which seek unspecified monetary damages,
have been consolidated into one lawsuit in federal district court for the
Southern District of Texas pursuant to the Private Securities Litigation Reform
Act of 1995. The Company believes the allegations in these suits are without
merit, and the Company intends to vigorously defend these lawsuits. Even so, an
adverse outcome in this class action litigation could have an 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 7, 2001,
there were approximately 93,000 stockholders and approximately 30,700
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,
2000 and information regarding dividends declared on the Common Stock during the
two years ended December 31, 2000, see Note 16 of the Notes to Consolidated
Financial Statements in Item 8 herein.
10
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 THREE MONTHS YEAR ENDED
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- DECEMBER 31, -------------
(In millions, except per share amounts) 2000 1999 1998 1997 1997 1996
- --------------------------------------- ---- ---- ---- ---- ---- ----
Revenues $ 5,233.8 $ 4,936.5 $ 6,310.6 $ 1,572.8 $ 5,343.6 $ 4,445.8
Costs and expenses:
Cost of revenues 4,009.6 4,009.8 5,138.4 1,156.3 4,188.2 3,487.4
Selling, general and administrative 759.6 741.9 876.3 215.7 538.8 469.9
Merger related costs -- (1.6) 219.1 -- -- --
Unusual charge, net 69.6 4.8 215.8 -- 52.1 39.6
Acquired in-process research and
development -- -- -- -- 118.0 --
--------- --------- --------- --------- --------- ---------
Total 4,838.8 4,754.9 6,449.6 1,372.0 4,897.1 3,996.9
--------- --------- --------- --------- --------- ---------
Operating income (loss) 395.0 181.6 (139.0) 200.8 446.5 448.9
Equity in income (loss) of affiliates (4.6) 7.0 6.7 1.9 2.8 0.8
Interest expense (173.3) (167.0) (149.0) (24.5) (91.4) (87.9)
Interest income 4.8 5.1 3.6 1.2 3.6 4.9
Gain on sale of trading securities 14.1 31.5 -- -- -- 44.3
Spin-off related costs -- -- -- -- (8.4) --
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and cumulative effect
of accounting change 236.0 58.2 (277.7) 179.4 353.1 411.0
Income tax provision (133.7) (24.9) (18.4) (68.0) (160.7) (167.4)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before cumulative effect of accounting
change 102.3 33.3 (296.1) 111.4 192.4 243.6
Cumulative effect of accounting change for
the impairment of long-lived assets held
for disposal -- -- -- -- (12.1) --
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations 102.3 33.3 (296.1) 111.4 180.3 243.6
Income (loss) from discontinued operations
of UNOVA, Inc., net of tax -- -- -- 2.8 (154.9) 55.7
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 102.3 $ 33.3 $ (296.1) $ 114.2 $ 25.4 $ 299.3
========= ========= ========= ========= ========= =========
Per share of common stock:
Income (loss) from continuing operations
Basic $ 0.31 $ 0.10 $ (0.92) $ 0.35 $ 0.64 $ 0.85
Diluted 0.31 0.10 (0.92) 0.34 0.63 0.84
Dividends 0.46 0.46 0.46 0.12 0.46 0.46
Financial Position:
Working capital $ 1,498.8 $ 1,158.2 $ 1,381.2 $ 1,466.8 $ 1,433.8 $ 1,829.4
Total assets 6,452.7 7,182.1 7,788.3 7,208.3 7,064.8 5,784.3
Long-term debt 2,049.6 2,706.0 2,726.3 1,605.3 1,473.3 1,124.2
Stockholders' equity 3,046.7 3,071.1 3,165.1 3,483.4 3,455.7 3,163.6
NOTES TO SELECTED FINANCIAL DATA
1) On August 27, 1998, the Board of Directors of the Company approved a change
in the fiscal year end of the Company from September 30 to December 31,
effective with the calendar year beginning January 1, 1998. A three-month
transition period from October 1, 1997 through December 31, 1997 precedes
the start of the 1998 fiscal year.
2) See Note 2 of the Notes to Consolidated Financial Statements in Item 8
herein for a description of acquisitions made in 1998.
11
12
During the year ended September 30, 1997, the Company acquired Petrolite
Corporation ("Petrolite") for 19.3 million shares of the Company's common
stock and the assumption of Petrolite's outstanding vested and unvested
employee stock options, resulting in total consideration of $751.2 million,
and acquired Drilex International Inc. ("Drilex") for 2.7 million shares of
the Company's common stock. The Petrolite acquisition was accounted for as
a purchase, and the Drilex acquisition was accounted for as a pooling. In
connection with the Petrolite acquisition, the Company wrote-off $118.0
million of in-process research and development because the technological
feasibility of the projects in-process had not been established, and there
was no alternative future use at that date.
3) See Note 3 of the Notes to Consolidated Financial Statements in Item 8
herein for a description of the unusual items and merger related costs in
the years ended December 31, 2000, 1999 and 1998. The unusual charge in the
year ended September 30, 1997 consisted of charges in connection with
certain 1997 acquisitions to combine the acquired operations with those of
the Company, the write-down of a low margin product line and the write-down
of the Company's investment in a subsidiary held for sale to its net
realizable value. The unusual charge in 1996 consisted of the restructuring
and reorganization of certain oilfield divisions, write-off of certain
oilfield patents and an impairment of a Latin America joint venture.
12
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, 2000, 1999
and 1998 and the related Notes to Consolidated Financial Statements contained in
Item 8 herein.
FORWARD-LOOKING STATEMENTS
MD&A includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, (each a "Forward-Looking Statement"). The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "forecasts," "will," "could," "may" and similar expressions, and the
negative thereof, are intended to identify forward-looking statements. Baker
Hughes' expectations about its business outlook, customer spending, oil and gas
prices and the business environment for the Company and the industry in general,
are only its forecasts regarding these matters. These forecasts may be
substantially different from actual results, which are affected by the following
factors: the effect of competition; 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 sub contracting
capacity at forecasted costs to meet the Company's revenue goals; the ability of
the Company to introduce new technology on its forecasted schedule and at its
forecasted cost; the ability of the Company's competitors to capture market
share; world economic conditions; price 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; the condition of
the capital and equity markets and the timing of any of the foregoing. See
"-Business Environment" for a more detailed discussion of certain of these
factors.
Baker Hughes' expectations regarding its level of capital expenditures and
its capital expenditures on Project Renaissance 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; the need to replace any unanticipated losses in capital
assets; and the factors listed in "Item 1. Business-Environmental Matters".
BASIS OF PRESENTATION
In February 2000, the Company's Board of Directors approved a plan, in
principle, to sell its Baker Process division, which was separately accounted
for as a segment. Accordingly, in the Company's consolidated financial
statements and related notes thereto for the year ended December 31, 1999, this
segment was accounted for as a discontinued operation for all periods presented
therein. As of February 2001, the Company was not able to divest its Baker
Process division as an entire business unit on terms it found acceptable and, in
accordance with generally accepted accounting principles, the Company has
reclassified its consolidated financial statements and related notes herein for
all periods presented as if Baker Process had not been a discontinued operation.
Future marketing efforts will focus on individual product lines. The Company's
intent to dispose of its interest in the Baker Process product lines is only its
present intent with respect to this matter. The Company's intent could change in
the future depending on the relative value of a product line or the value and
viability of an offer of a third party with respect to a proposed transaction
regarding the product line.
BUSINESS ENVIRONMENT
The Company currently has seven divisions each with separate management
teams and infrastructures that offer different products and services. The
divisions have been aggregated into two reportable segments - "Oilfield" and
"Process".
The Oilfield segment currently consists of six divisions - Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen - that manufacture and sell equipment and provide related services
used in exploring for, developing and producing hydrocarbon reserves. The
Oilfield segment also includes the Company's interest in an oil and gas property
in Nigeria.
The Process segment consists of one division - Baker Process - that
manufactures and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes.
13
14
The business environment for the Company's Oilfield segment and its
corresponding operating results can be significantly affected by the level of
industry capital expenditures for the exploration and production of oil and gas
reserves. These expenditures are influenced strongly by oil company expectations
about the supply and demand for crude oil and natural gas products and by the
energy price environment that results from supply and demand imbalances.
Additionally, the Company's largest customers have consolidated and are using
their global size and market power to seek economies of scale and pricing
concessions.
Key factors currently influencing the worldwide crude oil and gas market
are:
- Production Control: the degree to which OPEC nations and other large
producing countries are willing and able to restrict production and
exports of crude oil.
- Global Economic Growth: particularly in Japan, China, South Korea and
the developing areas of Asia where the correlation between energy demand
and economic growth is strong.
- Oil and Gas Storage Inventories: relative to historic levels.
- Technological Progress: in the design and application of new products
that allow oil and gas companies to drill fewer wells and to drill,
complete and produce wells faster and at lower cost.
- Maturity of the Resource Base: of known hydrocarbon reserves in the
maturing provinces of the North Sea, U.S., Canada and Latin America.
- The Pace of New Investment: access to capital and the reinvestment of
available cash flow into existing and emerging markets.
- Price Volatility: the impact of widely fluctuating commodity prices on
the stability of the market and subsequent impact on customer spending.
- Weather: the impact of variations in temperatures as compared with
normal weather patterns and the related effect on demand for oil and
natural gas.
OIL AND GAS PRICES
Generally, customer expectations about their prospects from oil and gas
sales and customer expenditures to explore for or produce oil and gas rise or
fall with corresponding changes in the prices of oil or gas. Accordingly,
changes in these expenditures will normally result in increased or decreased
demand for the Company's products and services. Crude oil and natural gas prices
are summarized in the table below as averages of the daily closing prices during
each of the three years ended December 31, 2000. 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.
2000 1999 1998
------- ------- -------
West Texas Intermediate Crude ($/bbl) $ 30.37 $ 19.37 $ 14.41
U.S. Spot Natural Gas ($/mmbtu) 4.30 2.19 2.01
Oil prices averaged $30.37 per barrel for the year, ranging from a low of
$23.90 per barrel to a high of $37.21 per barrel. Oil prices increased due to a
resurgence in worldwide demand led by a recovery of Asian markets, coupled with
lower production levels from non-OPEC countries. The resulting decrease in
global oil inventories, particularly in North America, provided stronger price
support and increased stability in the market.
U.S. natural gas prices increased in 2000 compared with 1999, averaging
$4.30/mmbtu and ranging from a low of $2.14/mmbtu to a high of $10.50/mmbtu. The
increase is due to a reduction in available gas supply brought about by the
sustained slow down in gas directed drilling in the U.S. experienced from
January 1998 to June 1999. The price increase was sustained by concerns that the
natural gas industry would be in short supply for the winter of 2000/2001.
ROTARY RIG COUNT
The Company is engaged in the oilfield service industry providing products
and services that are used in exploring for, developing
14
15
and producing oil and gas reservoirs. When drilling or workover rigs are active,
they consume the products and services produced by the oilfield service
industry. The active rig count acts as a leading indicator of consumption of
products and services used in drilling, completing, producing and processing
hydrocarbons.
Rig count trends are governed by the exploration and development spending by
oil and gas companies, which in turn is influenced by current and future price
expectations for oil and natural gas. Rig counts therefore reflect the relative
strength and stability of energy prices. The Company's rotary rig counts are
summarized in the table below as averages for each of the three years ended
December 31, 2000 and are based on weekly rig counts for the U.S. and Canada and
monthly rig counts for all other areas.
2000 1999 1998
----- ----- -----
U.S. - Land 778 519 703
U.S. - Offshore 140 106 123
Canada 345 245 259
Latin America 227 186 243
----- ----- -----
Western Hemisphere 1,490 1,056 1,328
----- ----- -----
North Sea 45 39 52
Other Europe 38 42 46
Africa 46 42 74
Middle East 156 140 166
Asia Pacific 140 139 173
----- ----- -----
Eastern Hemisphere 425 402 511
----- ----- -----
Worldwide 1,915 1,458 1,839
===== ===== =====
U.S. Workover Rigs 1,056 835 1,088
===== ===== =====
OUTLOOK
While reading the Company's outlook set forth below, caution is advised that
the factors described above in "-Forward Looking Statements" and "-Business
Environment" could negatively impact the Company's expectations for oil demand,
oil and gas prices and drilling activity.
Oil - Through the balance of 2001, oil prices are expected to be influenced
by worldwide economic growth, changes in non-OPEC oil supply, weather and OPEC's
willingness and ability to control production to achieve its price targets.
Possible scenarios include:
- A combination of a colder-than-normal winter and insufficient supply or
aggressive production restraint from OPEC could result in oil prices
exceeding $30 per barrel in the first half of 2001 for an extended
period. Such high oil prices could contribute to a global economic
slowdown in the second half of 2001, which could result in reduced
demand and prices that could fall below $20 per barrel by the end of
2001.
- If OPEC is willing and able to control production and can adjust
production to meet its price targets, then oil prices could moderate
from $28 to $32 per barrel through the winter of 2000/2001 and trade
between $25 and $27 per barrel for the balance of 2001.
- If OPEC is unwilling or unable to decrease production in 2001, prices
could moderate from $28 to $32 per barrel through the winter of
2000/2001 and trade between $22 and $25 per barrel throughout the
balance of 2001, particularly if non-OPEC production increases
significantly.
Natural Gas - U. S. natural gas prices are expected to remain strong
throughout 2001, averaging between $4.00/mmbtu and $8.00/mmbtu because of
continued low storage levels, increased demand and reduced supply throughout the
winter of 2000/2001, the 2001 injection season, and through the winter of
2001/2002.
Customer Spending - Based upon the Company's discussions with its major
customers, customer spending directed at developing North American natural gas
is expected to increase 10-15% in 2001 as compared with 2000, but is likely to
be limited by the availability of drilling rigs, crews and oilfield services in
North America. Outside North America, customer spending directed at developing
oil supplies is expected to increase 15-20%, primarily outside of North America.
15
16
VENTURE FORMATION
On November 30, 2000, the Company and Schlumberger Limited, a Netherlands
Antilles corporation ("Schlumberger"), and certain wholly owned subsidiaries of
Schlumberger created a venture by transferring the seismic fleets, data
processing assets, exclusive and nonexclusive multi-client surveys and other
assets of the Company's Western Geophysical division and Schlumberger's
Geco-Prakla. The venture operates under the name of Western GECO. 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 Western GECO. The Company contributed $15.0 million in working
capital to Western GECO. 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 Western GECO. 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.
Summarized financial information for Western Geophysical included in the
Company's consolidated financial statements are as follows for the years ended
December 31 (in millions):
2000 (1) 1999 1998
-------- --------- --------
Revenues $ 723.7 $ 946.7 $1,420.9
Income (loss) before income taxes (2) 56.9 (75.3) 179.7
Expenditures for capital assets and
multiclient seismic data 309.6 319.5 669.8
1) Financial information for the eleven months ended November 30, 2000, the
effective close date of the transaction.
2) Includes unusual items and corporate allocations excluding interest.
RESULTS OF OPERATIONS
REVENUES
Revenues for 2000 increased 6.0% to $5,233.8 million compared with $4,936.5
million for 1999. This increase reflects increased drilling activity, as
evidenced by the 31.3% increase in the average worldwide rig count, increased
oil and natural gas prices and improved pricing for the Company's products and
services offset by the ongoing weakness in the seismic market. Excluding
revenues from the Company's seismic division, Western Geophysical, revenues
increased 13.0% for 2000 compared with 1999. Approximately 55.6% of the
Company's 2000 revenues were derived from sources outside North America.
Revenues from production of crude oil increased to $132.1 million in 2000 from
$68.2 million in 1999.
Revenues for 1999 totaled $4,936.5 million, as compared with $6,310.6
million for 1998, a decrease of 21.8%. The decrease was due to continued
depressed activity levels that started in the second half of 1998 and continued
throughout 1999. Although oil and gas prices improved during 1999, the average
worldwide rig count fell 20.7% when compared with 1998. Substantially all areas
of the world experienced revenue declines in 1999 as compared with 1998.
Approximately 57.3% of the Company's 1999 revenues were derived from sources
outside North America. Revenues from production of crude oil increased from $5.9
million in 1998 to $68.2 million in 1999 as certain projects previously in
development stage began production.
Revenues for 1998 were $6,310.6 million, an increase of 18.1% over 1997
revenues of $5,343.6 million. The increase was due to various acquisitions made
by the Company in 1998 and in the latter part of 1997, offset by activity level
declines as the average worldwide rig count in 1998 fell 18.3% when compared
with 1997. These activity declines were brought about by the significant drop in
the price of oil and natural gas in the second half of 1998 and the resultant
decrease in customer spending. The impact on the Company's business was most
dramatic in North America land based activity and in Venezuela. Approximately
61.1% of the Company's 1998 revenues were derived from activities outside North
America.
GROSS MARGIN
Gross margins for 2000, 1999 and 1998 were 23.4%, 18.8% and 18.6%,
respectively. As discussed in "Unusual Charges", during 1999 and 1998 the
Company recorded unusual charges in cost of revenues of $72.1 million and
$305.0 million, respectively. Excluding these charges, gross margins for 1999
and 1998 were 20.2% and 23.4%, respectively. The improvement in the gross margin
16
17
for 2000 compared with 1999 is the result of pricing improvements for the
Company's products and services, primarily in North America; significantly
higher production levels and related pricing from oil production; continued cost
management measures throughout the Company and higher utilization of the
Company's assets, including rental tool fleets and manufacturing capacity. Gross
margin in 1999 compared with 1998 was adversely impacted by significant activity
declines and the resulting pricing pressure on the Company's products and
services.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense as a percentage of
revenues for 2000, 1999 and 1998 was 14.5%, 15.0% and 13.9%, respectively. As
discussed in "Unusual Charges", during 1999 and 1998, the Company recorded an
unusual credit of $20.3 million and an unusual charge of $68.7 million in SG&A
expense, respectively. Excluding these unusual items, SG&A expense as a
percentage of revenues for 1999 and 1998 was 15.4% and 12.8%, respectively. The
decrease in SG&A expenses as a percentage of revenues for 2000 compared with
1999 is primarily due to a higher revenue base and increased net foreign
exchange gains offset by increases in incentive and other compensation expenses.
The increase in SG&A expense as a percentage of revenues for 1999 compared with
1998 is primarily due to increased spending for Project Renaissance and Year
2000 computer issue preparations, a lower revenue base and the fact that SG&A
expenses are generally more fixed in nature.
MERGER RELATED COSTS
In August 1998, the Company completed a merger with Western Atlas, Inc.
("Western Atlas"). In connection with the merger, the Company recorded merger
related costs of $219.1 million.
The cash portion of the charge was $160.9 million and consisted of
transaction costs, including banking, legal and printing fees; employee related
costs, consisting of payments made to certain officers of Western Atlas and
severance benefits paid to terminated employees whose responsibilities were
deemed redundant; and integration costs, including changing legal registrations,
terminating a joint venture as a result of the merger, and changing signs and
logos. As of December 31, 2000, $148.7 million of cash has been spent and net
reductions of $1.7 million have been made to reflect the current estimates of
remaining expenditures. The remaining balance of $10.5 million primarily relates
to retirement benefits of certain employees that will be paid, in accordance
with the terms of their agreements, over the lives of the covered employees.
The noncash portion of the charge was $58.2 million and consisted of charges
related to the triggering of change in control rights contained in certain
Western Atlas and Baker Hughes employee stock option plans and charges to record
the write-off of the carrying value of a product line that was discontinued as a
result of the merger.
UNUSUAL CHARGES
2000
In October 2000, the Company's Board of Directors approved the Company's
plan to substantially exit the oil and gas exploration business. In connection
with this decision, in the fourth quarter the Company recorded unusual charges
totaling $105.0 million. The cash portion of the charge was $13.3 million and
consisted of severance costs for approximately 50 employees and other
contractual obligations. The Company paid $0.6 million of accrued severance in
2000. Based on current estimates, the Company expects that $10.7 million of the
accrued severance and contractual obligations will be paid during 2001. The
charge also consisted of losses on the sale of its oil and gas exploration
properties in China, Gabon and the Gulf of Mexico of $75.5 million. The noncash
portion of the charge was $16.2 million for the write-off of its remaining
undeveloped oil and gas exploration properties.
The Company intends to retain its interest in an oil and gas property in
Nigeria. During the third quarter of 2000, the Company reached the cost recovery
threshold in its operating agreement with the operator, which will reduce future
pre-tax earnings to the Company by approximately $12 million per quarter at
current commodity pricing and production levels. The Company's intent to
maintain its interest in its Nigerian oil and gas project is only its present
intent with respect to this matter. The Company's intent to hold or divest this
project could change in the future depending on the relative value of the
project or the value and viability of an offer of a third party with respect to
a proposed transaction regarding the project.
The Company also recorded a noncash unusual charge of $6.0 million for
employee related obligations resulting from the Western GECO formation.
The Company recorded unusual credits of $41.4 million related to net
reductions to unusual charge accruals from prior years of
17
18
$28.5 million and pre-tax gains of $12.9 million on the sale of various product
lines within the Oilfield and Process segments.
1999
As a result of continuing low activity levels, predominantly for the
Company's seismic products and services, the Company recorded charges during the
fourth quarter of 1999 of $122.8 million. The cash portion of the charge was
$50.7 million and consisted of severance benefits, expected costs to settle
contractual obligations and terminate leases on certain marine vessels and other
cash charges. As of December 31, 2000, all activities have been completed and
the related accruals fully utilized through cash payments or adjustments. The
noncash portion of the charge was $72.1 million and related to the write-off and
write-down of certain assets utilized in the Company's seismic business.
During 1999 the Company realized unusual gains totaling $54.8 million. The
Company sold two large excess real estate properties and realized net gains
totaling $39.5 million. The Company received net proceeds of $68.1 million. In
addition, the Company sold certain assets related to its previous divestiture of
a joint venture and realized a net gain of $15.3 million.
During 1999 the Company reviewed the remaining balances of the accruals for
cash charges recorded in 1998 and prior years and made $11.4 million of net
reductions to reflect the current estimates of remaining expenditures. These net
reductions included reversals of previously recorded accruals that will not be
utilized and related primarily to severance accruals and lease obligations. In
addition, for accruals related to certain terminated lease obligations,
revisions were made to increase previously recorded amounts based on current
information and estimates of expected cash flows related to these leases.
These items were reflected in the following captions of the consolidated
statement of operations for the year ended December 31, 1999 (in millions):
CHARGES CREDITS ADJUSTMENTS TOTAL
--------- ---------- ----------- ----------
Cost of revenues $ 72.1 $ -- $ -- $ 72.1
Selling, general and administrative -- (15.3) (5.0) (20.3)
Unusual charge 50.7 (39.5) (6.4) 4.8
--------- ---------- ---------- ----------
Total $ 122.8 $ (54.8) $ (11.4) $ 56.6
========= ========= ========= =========
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 $589.5 million. The cash
portion of the charge was $134.5 million and consisted of severance benefits
paid to approximately 5,300 employees, charges to combine operations and
consolidate facilities, environmental reserves and other cash costs including
litigation reserves. As of December 31, 2000, $118.5 million of cash has been
spent and $9.3 million of net reductions have been made to accruals to reflect
the current estimates of remaining expenditures. The remaining balance as of
December 31, 2000 of $6.7 million primarily relates to abandoned leases of $3.7
million that will be spent according to the lease terms and $3.0 million for
contractual obligations and anticipated legal settlements. The noncash portion
of the charge was $455.0 million and consisted of an impairment charge of $173.2
million related to inventory and rental tools; an $83.2 million write-down of a
former consolidated joint venture; a charge of $118.6 million related to the
write-off or write-down of certain assets; a $69.3 million ceiling test charge
for the Company's oil and gas properties; and a $17.0 million write-down of real
estate held for sale.
These items were reflected in the following captions of the consolidated
statement of operations for the year ended December 31, 1998 (in millions):
Cost of revenues $ 305.0
Selling, general and administrative 68.7
Unusual charge 215.8
---------
Total $ 589.5
=========
INTEREST EXPENSE
Interest expense for 2000 totaled $173.3 million, an increase of $6.3
million compared with interest expense of $167.0 million for 1999. The increase
in interest expense was primarily due to higher average interest rates on the
Company's short-term debt. The approximate average interest rate on short-term
debt was 6.3% for 2000 compared with 5.2% for 1999.
18
19
Interest expense in 1999 increased $18.0 million compared with 1998 interest
expense of $149.0 million. Interest expense in 1998 increased $57.6 million
compared with 1997. These increases were due to higher debt levels needed to
fund acquisitions, capital expenditures and working capital needs.
GAIN ON TRADING SECURITIES
In the fourth quarter of 1999, the Company announced its intention to sell
its holdings in Tuboscope, Inc., now known as Varco International, Inc.
("Varco"), and reclassified these from available for sale securities to trading
securities. As a result of this decision, the Company recognized a pre-tax gain
of $31.5 million in the fourth quarter of 1999. During 2000, the Company
disposed of these holdings and recorded additional pre-tax gains of $14.1
million.
INCOME TAXES
The effective income tax rates before merger related costs and unusual items
were 33.5%, 37.2% and 35.6% for the years ended December 31, 2000, 1999 and
1998, respectively. These rates vary primarily due to fluctuations in taxes from
international operations.
In 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
Western GECO venture in December 2000. The formation of the venture also reduces
the expected amount of foreign source income against which to use the 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.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Net cash inflows from operating activities were $563.5 million, $543.2
million and $809.9 million in 2000, 1999 and 1998, respectively. The slight
increase in cash flow from 1999 to 2000 relates to higher net income. The
reduction in cash flow from 1998 to 1999 is due to lower net income, after
including the noncash portion of unusual items, payments on accruals for merger
and unusual related items of $73.0 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 were $313.5 million, $486.2
million and $1,675.8 million in 2000, 1999 and 1998, respectively.
Expenditures for capital assets and multiclient seismic data totaled $599.2
million, $640.4 million and $1,318.2 million for 2000, 1999 and 1998,
respectively. Property additions in 2000 and 1999 were substantially less than
1998 as the Company responded to the depressed market conditions for its
products and services. The Company currently expects 2001 capital expenditures
to be between $300.0 million and $360.0 million, excluding acquisitions. 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 $171.3 million in 2000,
$154.2 million in 1999 and $100.0 million in 1998. Proceeds from the sale of
various product lines and the sale of the Company's Varco holdings generated
$41.7 million and $72.7 million, respectively, in 2000.
In 1998, the Company used short-term borrowings to purchase various
businesses including WEDGE DIA-LOG, Inc. for $218.5 million, 3-D Geophysical,
Inc. for $117.5 million and several smaller acquisitions with an aggregate
purchase price of $121.6 million.
In 1997, the Company began a multi-year initiative to redesign certain of
its business processes and to develop and implement an enterprise-wide software
system. The initiative, named "Project Renaissance," utilizes SAP R/3 as its
software platform across all significant operations of the Company and is
expected to cost in excess of $300 million over a four year period of which
$260.3 million has been spent as of December 31, 2000.
The words "expected" and "expects" are intended to identify Forward-Looking
Statements in "-Investing Activities". See "-Forward-Looking Statements" and
"-Business Environment" above for a description of risk factors related to these
Forward-Looking
19
20
Statements.
FINANCING ACTIVITIES
Net cash (outflows) inflows from financing activities were $(223.2) million,
$(58.6) million and $838.6 million in 2000, 1999 and 1998, respectively.
In 2000, commercial paper and short-term borrowings were reduced by $753.1
million primarily due to cash flow from operations, $117.7 million in proceeds
from the sale/leaseback transaction and $493.4 million in proceeds from the sale
of a portion of the Company's interest in Western GECO. As a result of the net
payments, total debt outstanding decreased from $2,818.6 million at December 31,
1999 to $2,062.9 million at December 31, 2000. The debt to equity ratio was 0.68
at December 31, 2000 compared with 0.92 at December 31, 1999.
In 1999, the Company borrowed $1,010.7 million from the public debt market.
The proceeds were used to repay commercial paper and short-term borrowings of
$816.0 million as well as $150.0 million in long-term debt. As a result of the
net payments and borrowings on long term debt, total debt outstanding increased
from $2,770.7 million at December 31, 1998 to $2,818.6 million at December 31,
1999.
At December 31, 2000, the Company had $1,228.5 million of credit facilities
with commercial banks, of which $750.5 million was committed. These facilities
are subject to normal banking terms and conditions that do not significantly
restrict the Company's activities.
ACCOUNTING STANDARDS
DERIVATIVE AND HEDGE ACCOUNTING
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). The Company adopted SFAS No. 133 effective January 1, 2001. 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.
Based on the Company's derivative positions at December 31, 2000, the Company
will report a gain from the cumulative effect of adoption of $0.9 million, net
of tax, and a gain in accumulated other comprehensive income of $1.2 million,
net of tax, as of January 1, 2001.
EURO CONVERSION
A single European currency (the "Euro") was introduced on January 1, 1999,
at which time the conversion rates between the old, or legacy, currencies and
the Euro were set for participating member countries. However, the legacy
currencies in those countries will continue to be used as legal tender through
January 1, 2002. Thereafter, the legacy currencies will be canceled, and Euro
bills and coins will be used in 12 participating countries.
Most of the Company's products and services are essentially priced with
reference to the U.S. dollar. As a result, the Company does not believe that it
will be subject to a significant increase in pricing transparency due to the
introduction of the Euro. The Company's customers may require billing in two or
more currencies. Until the Company's financial computer systems are modified or
replaced to handle Euro-denominated transactions, the Company will, in most
cases, need to apply a methodology whereby legacy currencies are first converted
into Euros according to the legally prescribed fixed exchange ratio and then,
when the customer requires, converted from Euros to a second national currency.
The Company does not believe that this conversion will materially affect its
contracts. Most of the Company's contracts are either bids in response to
requests for tenders or purchase orders, both of which are short-term in nature.
Longer term contracts are sufficiently flexible to permit pricing in multiple
currencies. The Euro conversion period is longer than most of the pricing
features of these contracts, thus permitting a pricing conversion to the Euro as
new orders are issued. The same is true with most of the Company's contracts
with vendors.
During 1997, the Company began a multi-year initiative designed to develop
and implement an enterprise-wide software system. The initiative, named "Project
Renaissance," utilizes SAP R/3 as its software platform across all significant
operations of the Company. SAP R/3 is programmed to process in Euros for most of
the Company's accounting, financial and operational functions, and the Company
expects that the implementation of this system will address its Euro issues in
these areas. Because the Company has engaged in this implementation for
operational purposes and not solely to address Euro issues, the Company has not
separately
20
21
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. Alternatively, the Company may make certain modifications to its legacy
computer systems, or replace them, to address certain Euro conversion issues,
pending full implementation of SAP R/3. The Company began converting certain
legacy currency based financial records to the Euro beginning in January 2001
with all significant records expected to be converted by September 30, 2001.
The Company continues to assess the impact of the Euro on its operations and
financial, accounting and operational systems. The Company does not presently
anticipate that the transition to the Euro will have a significant impact on its
results of operations, financial position or cash flows.
The words "anticipate", "will", "may", and "expects" are intended to
identify a Forward-Looking Statement in "-Euro Conversion." The Company's
anticipation regarding the lack of significance of the Euro introduction on the
Company's operations is only its forecast regarding this matter. This forecast
may be substantially different from actual results, which are affected by
factors such as the following: unforeseen difficulties in remediating specific
computer systems to accommodate the Euro due to the complexity of hardware and
software, the failure of the Company to implement SAP R/3 or another Euro
compliant computer system in a geographic location that prices in Euros, the
inability of third parties to adequately address their own Euro systems issues,
including vendors, contractors, financial institutions, U.S. and foreign
governments and customers, the delay in completion of a phase of the Company's
remediation of a computer system to accommodate the Euro necessary to begin a
later phase, the discovery of a greater number of hardware and software systems
or technologies with material Euro issues than the Company presently
anticipates, and the lack of alternatives that the Company previously believed
existed.
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; that is, 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 and the amount
required to retire that debt today will increase, as interest rates fall and the
fair market value 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.
21
22
At December 31, 2000, the Company had fixed rate debt aggregating $1.8
billion and variable rate debt aggregating $0.3 billion. The following table
sets forth, as of December 31, 2000 and 1999, the Company's principal cash flows
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 interest rates of the Company's interest
rate swaps by expected maturity (dollar amounts in millions).
2000 2001 2002 2003 2004 2005 Thereafter TOTAL
---- ---- ---- ---- ---- ---- ---------- -----
As of December 31, 2000:
Long-term debt (1) $ -- $ 1.8 $ 1.0 $ 100.0 $ 350.0 $ -- $ 1,459.1(4) $ 1,911.9
Weighted average
Interest rates 13.69% 8.00% 6.04% 8.12% 5.99% 6.39%
Fixed to variable swaps (2) $ 325.0
Pay rate 6.01%(5)
Receive rate 6.25%
As of December 31, 1999:
Long-term debt (1) $ 99.1 $ 0.7 $ 1.0 $ 100.0 $ 350.0 $ -- $ 1,460.1(4) $ 2,010.9
Weighted average
Interest rates 8.94% 10.31% 8.00% 6.04% 8.12% 5.90% 6.71%
Fixed to variable swaps (2) $ 93.0 $ 325.0
Pay rate 7.64%(3) 4.69%(5)
Receive rate 8.59% 6.25%
(1) Fair market value of long-term debt is $1,874.3 million and $1,801.5 million
at December 31, 2000 and 1999, respectively.
(2) Fair market value of the interest rate swaps is a $9.6 million liability and
a $13.8 million liability at December 31, 2000 and 1999, respectively.
(3) Six-month LIBOR plus 2.01% settled semi-annually. This swap matured in
January 2000.
(4) Includes the Liquid Yield Option Notes with an accreted value of $296.2
million and $285.7 million at December 31, 2000 and 1999, respectively.
(5) Average six-month LIBOR for the Japanese Yen, Euro and the Swiss Franc plus
3.16%.
Included in the table above in the "Thereafter" column is the Company's
Liquid Yield Option Notes ("LYONS"), which are convertible into the Company's
common stock. At the option of the holder, the LYONS may be redeemed for cash on
May 5, 2003, for a redemption price equal to the issue price plus accrued
original issue discount through the date of redemption. The Company does not
expect that the holders will redeem the LYONS for cash in May 2003 as long as
the Company's common stock trades at levels above the conversion price. The
market price of the Company's common stock at December 31, 2000 of $41.56 was
below the LYONS conversion price of $41.80.
INVESTMENTS
During 2000, the Company sold its investment in common stock and common
stock warrants of Varco, at an average price of $18.70 per share. Total proceeds
from the sale of the Company's investment in the common stock and the warrants
were $72.7 million.
CRUDE OIL HEDGES
On September 15, 2000, the Company entered into two crude oil contracts
(costless collars) to hedge price risk associated with the Company's interest in
an oil producing property in Nigeria. The contracts, which use WTI-Nymex as the
reference commodity, establish a cap of $35.00 and a floor of $27.00 for the
three month period ending March 31, 2001, and a cap of $33.00 and a floor of
$27.00 for the three month period ending June 30, 2001, respectively. The fair
value of these contracts at December 31, 2000 results in a $3.1 million asset.
FOREIGN CURRENCY
The Company's operations are conducted in a number of different countries
around the world. 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 - the primary
currencies in which the Company conducts its business in various jurisdictions.
22
23
At December 31, 2000, the Company had entered into a foreign currency
forward contract with a notional amount of $50.0 million to hedge exposure to
currency fluctuations in the British Pound. At December 31, 2000, the fair
market value of this forward contract, based on year-end quoted market prices
for contracts with similar terms and maturity dates, was a $1.5 million asset.
Foreign currency gains and losses for hedges against exposure to currency
fluctuations are marked to market and changes to the fair value are included in
current period income.
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 and, in management's opinion,
present no significant credit risk to the Company. 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 spot rate differential.
Certain borrowings of the Company are denominated in currencies other than
its functional currency. At December 31, 2000, these nonfunctional currency
borrowings totaled $7.4 million with exposures between the U.S. Dollar and the
British Pound, the Saudi Riyal and the Malaysian Ringgit. A 10% movement of the
U.S. Dollar against these currencies would not have a significant effect on the
future earnings of the Company.
23
24
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. Management
believes that, as of December 31, 2000, 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 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 Standards of Conduct which are
distributed throughout the Company. Management maintains a systematic program to
assess compliance with the policies included in the standards.
The Board of Directors, through its Audit/Ethics Committee composed solely
of nonemployee directors, reviews the Company's financial reporting, accounting
and ethical practices. The Audit/Ethics Committee recommends to the Board of
Directors the selection of independent public accountants and reviews 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
24
25
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, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, 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, present fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 14, 2001
25
26
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
REVENUES $ 5,233.8 $ 4,936.5 $ 6,310.6
--------- --------- ---------
COSTS AND EXPENSES:
Cost of revenues 4,009.6 4,009.8 5,138.4
Selling, general and administrative 759.6 741.9 876.3
Merger related costs -- (1.6) 219.1
Unusual charge, net 69.6 4.8 215.8
--------- --------- ---------
Total 4,838.8 4,754.9 6,449.6
--------- --------- ---------
Operating income (loss) 395.0 181.6 (139.0)
Equity in income (loss) of affiliates (4.6) 7.0 6.7
Interest expense (173.3) (167.0) (149.0)
Interest income 4.8 5.1 3.6
Gain on trading securities 14.1 31.5 --
--------- --------- ---------
Income (loss) before income taxes 236.0 58.2 (277.7)
Income taxes (133.7) (24.9) (18.4)
--------- --------- ---------
Net income (loss) $ 102.3 $ 33.3 $ (296.1)
========= ========= =========
Basic earnings (loss) per share $ 0.31 $ 0.10 $ (0.92)
========= ========= =========
Diluted earnings (loss) per share $ 0.31 $ 0.10 $ (0.92)
========= ========= =========
See Notes to Consolidated Financial Statements
26
27
BAKER HUGHES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE)
DECEMBER 31,
------------
2000 1999
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 34.6 $ 15.6
Accounts receivable - less allowance for doubtful accounts:
December 31, 2000, $81.8; December 31, 1999, $56.2 1,310.4 1,184.3
Inventories 898.5 861.5
Other current assets 243.1 225.0
-------- --------
Total current assets 2,486.6 2,286.4
Investment in affiliates 869.3 40.2
Property - net 1,378.7 2,053.7
Goodwill and other intangibles - less accumulated amortization:
December 31, 2000, $362.5; December 31, 1999, $339.7 1,498.1 1,836.8
Multiclient seismic data and other assets 220.0 965.0
-------- --------
Total assets $6,452.7 $7,182.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 469.3 $ 474.6
Short-term borrowings and current portion of long-term debt 13.3 112.6
Accrued employee compensation 250.6 176.3
Other accrued liabilities 254.6 364.7
-------- --------
Total current liabilities 987.8 1,128.2
Long-term debt 2,049.6 2,706.0
Deferred income taxes 158.6 35.1
Deferred revenue and other long-term liabilities 210.0 241.7
Commitments and contingencies
Stockholders' equity:
Common stock, one dollar par value (shares authorized - 750.0;
outstanding 333.7 at December 31, 2000 and 329.8 at
December 31, 1999) 333.7 329.8
Capital in excess of par value 3,065.7 2,981.1
Accumulated deficit (101.3) (51.5)
Accumulated other comprehensive loss (251.4) (188.3)
-------- --------
Total stockholders' equity 3,046.7 3,071.1
-------- --------
Total liabilities and stockholders' equity $6,452.7 $7,182.1
======== ========
See Notes to Consolidated Financial Statements
27
28
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
------------------------------------
UNREALIZED
GAIN (LOSS)
CAPITAL RETAINED FOREIGN ON
IN EXCESS EARNINGS CURRENCY SECURITIES PENSION
COMMON OF (ACCUMULATED TRANSLATION AVAILABLE LIABILIT
STOCK PAR VALUE DEFICIT) ADJUSTMENT FOR SALE ADJUSTMENT TOTAL
------ --------- ------------ ----------- ---------- ---------- --------
Balance, December 31, 1997 $316.8 $2,834.0 $ 458.5 $(160.5) $38.1 $(3.5) $3,483.4
Comprehensive income:
Net loss (296.1)
Other comprehensive income
(loss) (net of tax of $0.5,
$22.5 and $0.5, respectively) 5.1 (38.2) (0.9)
Total comprehensive loss (330.1)
Cash dividends ($.46 per share) (96.3) (96.3)
Stock issued pursuant to
employee stock plans 10.3 97.8 108.1
------ -------- ------- ------- ----- ----- --------
Balance, December 31, 1998 327.1 2,931.8 66.1 (155.4) (0.1) (4.4) 3,165.1
Comprehensive income:
Net income 33.3
Other comprehensive income
(loss) (net of tax of $2.0,
$0.04 and $0.9,
respectively) (30.2) 0.1 1.7
Total comprehensive income 4.9
Cash dividends ($.46 per share) (150.9) (150.9)
Stock issued pursuant to
employee stock plans 2.7 49.3 52.0
------ -------- ------- ------- ----- ----- --------
Balance, December 31, 1999 329.8 2,981.1 (51.5) (185.6) -- (2.7) 3,071.1
Comprehensive income:
Net income 102.3
Other comprehensive income
(loss) (net of tax of $0.7
and $2.0, respectively (59.5) (3.6)
Total comprehensive income 39.2
Cash dividends ($.46 per share) (152.1) (152.1)
Stock issued pursuant to
employee stock plans 3.9 84.6 88.5
------ -------- ------- ------- ----- ----- --------
Balance, December 31, 2000 $333.7 $3,065.7 $(101.3) $(245.1) $ -- $(6.3) $3,046.7
====== ======== ======= ======= ===== ===== ========
See Notes to Consolidated Financial Statements
28
29
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 102.3 $ 33.3 $ (296.1)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation, depletion and amortization 611.5 790.7 758.3
Provision (benefit) for deferred income taxes 49.0 (47.2) (107.0)
Noncash portion of unusual charges 22.2 72.1 513.2
Gain on trading securities (14.1) (31.5) --
(Gain) loss on disposal of assets 40.8 (47.8) (32.0)
Gain on sale of product lines (12.9) -- --
Equity in (income) loss of affiliates 4.6 (7.0) (6.7)
Change in operating accounts (239.9) (219.4) (19.8)
--------- --------- ---------
Net cash flows from operating activities 563.5 543.2 809.9
Cash flows from investing activities:
Expenditures for capital assets and multiclient
seismic data (599.2) (640.4) (1,318.2)
Proceeds from disposal of assets 171.3 154.2 100.0
Acquisition of businesses, net of cash acquired -- -- (457.6)
Proceeds from sale of product lines 41.7 -- --
Proceeds from sale of trading securities 72.7 -- --
--------- --------- ---------
Net cash flows from investing activities (313.5) (486.2) (1,675.8)
Cash flows from financing activities:
Net borrowings (payments) from commercial paper and
revolving credit facilities (753.1) (816.0) 1,282.3
Repayment of indebtedness -- (150.0) (374.5)
Borrowings of long-term debt -- 1,010.7 --
Proceeds from sale of interest in affiliate 493.4 -- --
Proceeds from sale/leaseback 117.7 -- --
Proceeds from issuance of common stock 70.9 47.6 27.1
Dividends (152.1) (150.9) (96.3)
--------- --------- ---------
Net cash flows from financing activities (223.2) (58.6) 838.6
Effect of foreign exchange rate changes on cash (7.8) 1.0 2.2
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 19.0 (0.6) (25.1)
Cash and cash equivalents, beginning of year 15.6 16.2 41.3
--------- --------- ---------
Cash and cash equivalents, end of year $ 34.6 $ 15.6 $ 16.2
========= ========= =========
See Notes to Consolidated Financial Statements
29
30
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Baker Hughes
Incorporated 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. 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.
In February 2000, the Company's Board of Directors approved a plan, in
principle, to sell its Baker Process division, which was separately accounted
for as a segment. Accordingly, in the Company's consolidated financial
statements and related notes thereto for the year ended December 31, 1999, this
segment was accounted for as a discontinued operation for all periods presented
therein. As of February 2001, the Company was not able to divest its Baker
Process division as an entire business unit on terms it found acceptable and, in
accordance with generally accepted accounting principles, the Company has
reclassified its consolidated financial statements and related notes herein for
all periods presented as if Baker Process had not been a discontinued operation.
Future marketing efforts will focus on individual product lines. Net assets of
Baker Process totaled $224.0 million at December 31, 2000 and $278.3 million at
December 31, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
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 are rendered and only when
collectibility is reasonably assured. Certain revenues from the Company's Baker
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 primarily at the lower of average cost or market.
PROPERTY
Property is stated at cost less accumulated depreciation, which is generally
provided by using the straight-line method over the estimated useful lives of
individual items. The Company manufactures a substantial portion of its rental
tools and equipment, and the cost of these items includes direct and indirect
manufacturing costs. The Company is developing and implementing SAP R/3 as an
enterprise-wide software system. External direct costs of consulting services
and payroll-related cost of employees who work full-time on implementation of
the enterprise-wide software system are capitalized. Costs associated with
business process reengineering are expensed as incurred.
The Company uses the full-cost method of accounting for its investment in
oil and gas properties. Under this method, the Company capitalizes all
acquisition, exploration, and development costs incurred for the purpose of
finding oil and gas reserves. Depreciation, depletion, and amortization of oil
and gas properties are computed using the unit-of-production method based upon
production and
30
31
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimates of proved reserves.
GOODWILL AND OTHER INTANGIBLES
Goodwill arising from acquisitions is amortized using the straight-line
method over the lesser of its expected useful life or 40 years. Other
intangibles are stated at cost and are amortized on a straight-line basis over
the asset's estimated useful life.
MULTICLIENT SEISMIC DATA
Costs incurred in the creation of Company owned multiclient seismic data
were capitalized and amortized over the estimated life of the revenue stream
that the Company expects to receive from the licensing of such data. Cash
prepayments received from customers for specific contracts are included in
deferred revenue until earned.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, goodwill and other intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. For long-lived assets, if the fair
value, as determined by a discounted cash flow analysis, is less than the
carrying value of the asset, a loss is recognized for the difference. The
determination of recoverability of goodwill and other intangibles is made based
upon the estimated undiscounted future net cash flows, excluding interest
expense, of the division to which the goodwill or other intangibles relate. An
impairment loss is recorded in the period in which it is determined that the
carrying amount is not recoverable.
INCOME TAXES
Deferred income taxes are determined utilizing an asset and liability
approach. This method gives consideration to the future tax consequences
associated with differences between the financial accounting and tax bases of
assets and liabilities.
ENVIRONMENTAL MATTERS
Remediation costs are accrued based on estimates of known environmental
remediation exposure. Such accruals are recorded even if significant
uncertainties exist over the ultimate cost of the remediation. Ongoing
environmental compliance costs, including maintenance and monitoring costs, are
expensed as incurred. Where the Company has been identified as a potentially
responsible party in a United States federal 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.
STOCK BASED COMPENSATION
The intrinsic value method of accounting is used for stock based employee
compensation. Under this method, no compensation expense is recognized when the
exercise price of an employee stock option is equal to or greater than the
market price of the Company's common stock on the grant date.
FOREIGN CURRENCY TRANSLATION
Gains and losses resulting from balance sheet translation of foreign
operations where a foreign currency is the functional currency are included as a
separate component of accumulated other comprehensive income within
stockholders' equity. Gains and losses resulting from balance sheet translation
of foreign operations where the U.S. dollar is the functional currency are
included in the consolidated statements of operations as incurred.
FINANCIAL INSTRUMENTS
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. Gains and losses on forward contracts are
deferred and offset against foreign exchange gains or losses on the underlying
hedged item. The Company uses interest rate swaps to manage interest rate risk.
The net amount paid or received on interest rate swaps is recognized as an
adjustment to interest expense. The Company also uses crude oil swaps and
collars to hedge price risk associated with the Company's crude oil production.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and
31
32
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Hedging Activities ("SFAS No. 133"). The Company adopted SFAS No. 133 effective
January 1, 2001. The statement 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. Based on the Company's derivative
positions at December 31, 2000, the Company will report a gain from the
cumulative effect of adoption of $0.9 million, net of tax, and a gain in
accumulated other comprehensive income of $1.2 million, net of tax, as of
January 1, 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
NOTE 2. VENTURE FORMATION AND ACQUISITIONS
VENTURE FORMATION
On November 30, 2000, the Company and Schlumberger Limited ("Schlumberger"),
and certain wholly owned subsidiaries of Schlumberger signed an agreement for
the purpose of creating a venture to operate under the name of Western GECO. 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. In addition, the Company contributed $15.0 million in working
capital to Western GECO.
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 Western GECO. 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.
The Company owns 30% of Western GECO and accounts for its ownership in
Western GECO using the equity method. 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 Western GECO. 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 an unusual charge in
the Company's consolidated statement of operations.
ACQUISITIONS
No significant acquisitions were made during 2000 or 1999. In April 1998,
the Company acquired all the outstanding stock of WEDGE DIA-LOG, Inc. ("WEDGE")
and 3-D Geophysical, Inc. ("3-D") for $218.5 million in cash and $117.5 million
in cash, respectively. WEDGE specializes in cased-hole logging and pipe recovery
services and 3-D is a supplier of primarily land-based seismic data acquisition
services. In 1998, 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. The operating results of these
acquisitions are included in the consolidated statement of operations from their
respective acquisition dates. Pro forma results of the WEDGE and 3-D and the
other acquisitions made in 1998 have not been presented as the pro forma
revenue, net income and earnings per share would not be materially different
from the Company's actual results.
32
33
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. UNUSUAL ITEMS AND MERGER RELATED COSTS
2000
During 2000, the Company incurred items resulting in a net unusual charge of
$69.6 million. Unusual items included charges of $111.0 million offset by
credits of $41.4 million. The table set forth below summarizes these
transactions:
Cash charges:
Severance for approximately 50 employees $ 5.5
Other contractual obligations 7.8
---------
Subtotal cash charges 13.3
---------
Noncash charges:
Write-off of undeveloped oil and gas properties 16.2
Western GECO formation expenses 6.0
---------
Subtotal noncash charges 22.2
---------
Total cash and noncash charges 35.5
Loss on sale of oil and gas properties 75.5
Unusual credits (41.4)
---------
Total unusual charge, net $ 69.6
=========
In October 2000, the Company's Board of Directors approved the Company's
plan to substantially exit the oil and gas exploration business, resulting in an
unusual charge totaling $105.0 million recorded in the fourth quarter. The
Company sold its interests in its China, Gulf of Mexico and Gabon oil and gas
properties and recorded a pre-tax loss on the sale of these properties of $75.5
million. Net proceeds from these sales were $53.4 million and were used to repay
outstanding indebtedness. The Company also wrote-off its remaining undeveloped
exploration properties in other foreign jurisdictions resulting in a pre-tax
loss of $16.2 million. The Company accrued cash charges of $13.3 million for
costs resulting from exiting the business including severance and other
employee-related costs and costs to settle contractual obligations. The employee
groups to be terminated will be executive, engineering, field service and
support personnel. The amount accrued for severance is based upon the positions
eliminated and the Company's written severance policy and does not include any
portion of the employees' salary through their severance dates. The Company paid
$0.6 million of accrued severance in 2000. Based on current estimates, the
Company expects that $2.9 million of the accrued severance will be paid during
2001 when the employees leave the Company. The Company also expects that all of
the contractual obligations will be paid during 2001.
During 2000 the Company recorded an unusual credit of $28.5 million as net
reductions to unusual charge accruals recorded in 1999 and prior years to
reflect the current estimates of remaining expenditures. The net reductions
primarily related to severance accruals, legal accruals and accruals for lease
obligations. These items are reflected as unusual credits in the consolidated
statement of operations.
The Company recognized pre-tax gains of $12.9 million on the sale of various
product lines within the Oilfield and Process segments recorded as unusual
credits. The Company received net proceeds from these sales of $41.7 million.
33
34
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999
As a result of continuing low activity levels, predominantly for the
Company's seismic products and services, the Company recorded charges during the
fourth quarter of 1999 totaling $122.8 million as summarized below:
ACCRUED
BALANCE AT
TOTAL DECEMBER 31,
CHARGE PAYMENTS ADJUSTMENTS 2000
---------- ---------- ----------- ------------
CASH CHARGES:
Severance for approximately 800 employees $ 12.5 $ (8.8) $ (3.7) $ --
Lease termination and other contractual
obligations 36.0 (21.4) (14.6) --
Other cash charges 2.2 (0.7) (1.5) --
-------- --------- --------- -------
Subtotal cash charges 50.7 $ (30.9) $ (19.8) $ --
========= ========= =======
Noncash charges - impairment of property and
equipment 72.1
--------
Total cash and noncash charges $ 122.8
========
The employee groups to be terminated were executive, marketing, field
service and support personnel of which substantially all were either terminated
by the Company or transferred to Western GECO as of December 31, 2000. The
amount accrued for severance is based upon the positions eliminated and the
Company's written severance policy and does not include any portion of the
employees' salary through their severance dates.
The Company accrued $36.0 million related to expected costs to settle
contractual obligations based upon management's decision to reduce or abandon
certain operations and based on the terms of the applicable agreements. These
costs consist primarily of the cost of terminating leases on certain marine
vessels that are being taken out of service and removed from the fleet.
The impairment of property includes the write-off or write-down of certain
assets utilized in the Company's seismic business. These assets were scrapped or
otherwise being disposed of and consist of $51.1 million of land and marine
recording equipment, $1.4 million of data processing equipment and $19.6 million
of marine vessels to be sold or otherwise abandoned. Write down amounts were
generally determined by use of internal appraisal techniques to assess the
estimated fair value to be realized upon disposal.
During 1999 the Company realized unusual gains totaling $54.8 million. The
Company sold two large excess real estate properties and realized net gains
totaling $39.5 million. The Company received net proceeds of $68.1 million. In
addition, the Company sold certain assets related to its previous divestiture of
a joint venture and realized a net gain of $15.3 million.
During 1999 the Company reviewed the remaining balances of the accruals for
merger and unusual cash charges recorded in 1998 and prior years and made $13.0
million of net reductions to reflect the current estimates of remaining
expenditures. These net reductions included reversals of previously recorded
accruals that will not be utilized that relate primarily to severance accruals
and lease obligations. In addition, for accruals related to certain terminated
lease obligations, revisions were made to increase previously recorded amounts
based on current information and estimates of expected cash flows related to
these leases.
These items were reflected in the following captions of the consolidated
statement of operations for the year ended December 31, 1999:
CHARGES CREDITS ADJUSTMENTS TOTAL
--------- --------- ----------- ---------
Cost of revenues $ 72.1 $ -- $ -- $ 72.1
Selling, general and administrative -- (15.3) (5.0) (20.3)
Merger related costs -- -- (1.6) (1.6)
Unusual charge, net 50.7 (39.5) (6.4) 4.8
--------- -------- --------- --------
Total $ 122.8 $ (54.8) $ (13.0) $ 55.0
========= ======== ========= ========
34
35
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $589.5 million during 1998 as summarized
below.
ACCRUED
BALANCE AT
TOTAL DECEMBER 31,
CHARGE PAYMENTS ADJUSTMENTS 2000
---------- ---------- ----------- -------------
Cash charges
Severance for approximately 5,300 employees $ 64.3 $ (61.6) $ (2.7) $ --
Integration costs, abandoned leases and other
contractual obligations 40.0 (35.0) (1.3) 3.7
Environmental reserves 8.8 (8.8) -- --
Other cash costs 21.4 (13.1) (5.3) 3.0
--------- --------- ---------- ----------
Subtotal cash charges 134.5 $ (118.5) $ (9.3) $ 6.7
========= ========== ==========
Noncash charges - impairment of certain assets 455.0
---------
Total cash and noncash charges $ 589.5
=========
The employee groups terminated were marketing, manufacturing, field service
personnel, engineering and administrative support. All employees were terminated
as of December 31, 2000. The amount accrued for severance is based upon the
Company's written severance policy and the positions eliminated. The accrued
severance does not include any portion of the employees' salaries through their
severance dates.
The Company accrued $40.0 million to combine operations and consolidate
facilities. Such accrual includes costs to settle leases on idled facilities
based upon lease agreements; to shut-down oil and gas operations in certain
countries based upon management's decision to abandon the operations; to
terminate a rig contract based upon the terms of the agreement; and other
collocation costs based upon the estimated exit costs for approved plans. The
accrual does not include any portion of the costs before actual abandonment of
the facilities or ceasing of the operations. The remaining accrual of $3.7
million relates to abandoned leases and will be spent according to the lease
terms.
The accrual for environmental reserves relates to additional costs to
remediate properties obtained in the July 1997 Petrolite acquisition. The
Company completed the remediation in 2000.
Other cash costs of $21.4 million include $10.9 million to settle certain
litigation, $2.9 million to settle contractual obligations and $2.9 million of
costs to dispose of obsolete inventory. The remaining accrual of $3.0 million
relates to contractual obligations and anticipated legal settlements.
An impairment of inventory and rental tool assets of $173.2 million was
recorded due to advances in technology that have obsoleted certain product
lines, as well as a decline in market demand that has resulted in an excess
supply of certain products.
In the third quarter of 1998, the Company recorded an $83.2 million
write-down of PetroAlliance Services Company Limited ("PAS"), a former
consolidated joint venture operating in the former Soviet Union. The write-down
of the joint venture was based upon the Company's estimated value of assets
ultimately received in consideration of the sale of the PAS investment in
November 1998. As consideration for the sale of PAS, the Company received a
seismic vessel, other seismic and well-logging assets, certain PAS assets in
Kazakhstan and Turkmenistan, certain customer receivables and a $33.0 million
note from the purchasers. The write-down included $10.7 million for equipment,
$22.0 million of goodwill, and $50.5 million of net current assets.
An impairment of property and other assets of $80.1 million was recorded and
includes an $18.1 million write-down to reduce the carrying value of a portion
of the Company's drilling equipment; a $12.6 million write-off of obsolete solid
and oil-filled streamer sections used on seismic vessels; a $14.9 million
write-down of surplus well-logging equipment; a $9.5 million write-off of
prepaid royalties on an abandoned product line; and $25.0 million of assets
written down to fair market value.
35
36
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A write-off of intangible assets of $21.5 million was recorded and includes
$2.7 million for capitalized software costs for product lines abandoned as a
result of recent acquisitions; $5.3 million for capitalized development costs
for software systems that are being replaced by the Company's implementation of
SAP R/3; and $13.5 million for goodwill associated with a discontinued business
and a subsidiary held for sale.
A $69.3 million charge was recorded related to the Company's oil and gas
properties ceiling test. This charge consisted of $25.8 million related to
properties in the United States and $7.7 million related to properties in
Argentina. The remaining $35.8 million resulted from the write-off of unproven
reserves in other foreign jurisdictions in which management of the Company plans
to reduce the amount of future exploration capital.
A write-down of real estate held for sale of $17.0 million was recorded for
a specific property and the charge reduces the carrying value to the property's
appraised value.
A $10.7 million charge was taken to write-off investments in joint ventures
in both Russia and Indonesia due to the deteriorating market and economic
conditions in these two countries. The write-off represents the entire amount of
the Company's investment in these two joint ventures. The charge also includes a
$2.8 million loss on the sale of Tracor Europa, a discontinued subsidiary. The
above charges were reflected in the following captions of the consolidated
statement of operations for the year ended December 31, 1998:
Cost of revenues $ 305.0
Selling, general and administrative 68.7
Unusual charge 215.8
---------
Total $ 589.5
=========
MERGER RELATED COSTS
In 1998, the Company completed a merger with Western Atlas Inc. ("Western
Atlas"). In connection with the merger, the Company recorded merger related
costs of $219.1 million as summarized below:
ACCRUED
BALANCE AT
TOTAL DECEMBER 31,
CHARGE PAYMENTS ADJUSTMENTS 2000
-------- ---------- ----------- ------------
Cash costs
Transaction costs $ 51.5 $ (50.7) $ (0.1) $ 0.7
Employee costs 87.7 (79.2) (0.2) 8.3
Other merger integration costs 21.7 (18.8) (1.4) 1.5
------- --------- -------- ----------
Subtotal cash costs 160.9 $ (148.7) $ (1.7) $ 10.5
========= ======== ==========
Noncash 58.2
-------
Total $ 219.1
=======
Transaction costs of $51.5 million include banking, legal and printing fees
and other costs directly related to the merger.
Employee related costs of $87.7 million primarily consist of $60.3 million
of payments made to certain officers of Western Atlas and Baker Hughes pursuant
to change in control provisions and $15.4 million of severance benefits paid to
terminated employees whose responsibilities were deemed redundant as a result of
the merger. The remaining accrued employee costs of $8.3 million represent
retirement benefits of certain employees that will be paid, in accordance with
the terms of their agreements, over the lives of the covered employees.
Other integration costs include the costs of changing legal registrations in
various jurisdictions, terminating a joint venture as a result of the merger,
changing signs and logos at the Company's major facilities around the world and
other integration costs.
The noncash charge of $58.2 million consists of a charge of $45.3 million
related to the triggering of change of control rights contained in certain
Western Atlas employee stock option plans that were not converted to Baker
Hughes options concurrent with the merger; a charge of $3.9 million for the
issuance of the Company's common stock pursuant to certain stock plans as a
result of the change in control and a $9.0 million charge recorded to write-off
the carrying value of a product line that was discontinued as a result of the
merger.
36
37
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INCOME TAXES
The provision for income taxes is comprised of the following for the years
ended December 31:
2000 1999 1998
---------- ---------- ----------
Current:
United States $ 2.1 $ 3.0 $ 31.1
Foreign 82.7 71.8 81.1
-------- -------- --------
Total current 84.8 74.8 112.2
-------- -------- --------
Deferred:
United States 18.5 (30.4) (73.6)
Foreign 30.4 (19.5) (20.2)
-------- -------- --------
Total deferred 48.9 (49.9) (93.8)
-------- -------- --------
Provision for income taxes $ 133.7 $ 24.9 $ 18.4
======== ======== ========
The geographic sources of income (loss) before income taxes are as follows
for the years ended December 31:
2000 1999 1998
---------- ---------- ----------
United States $ (12.0) $ 76.0 $ (288.7)
Foreign 248.0 (17.8) 11.0
-------- -------- --------
Total $ 236.0 $ 58.2 $ (277.7)
======== ======== ========
Tax benefits of $5.8 million, $4.2 million and $16.1 million associated with
the exercise of employee stock options were allocated to equity in the years
ended December 31, 2000, 1999 and 1998, respectively.
The provision for income taxes differs from the amount computed by applying
the U.S. statutory income tax rate to income before income taxes for the years
ended December 31 for the reasons set forth below:
2000 1999 1998
---------- ---------- ----------
Statutory income tax at 35% $ 82.6 $ 20.4 $ (97.2)
Formation-related taxes for Western GECO 45.0 -- --
Incremental effect of foreign operations (13.7) (39.4) 25.3
Net tax charge related to foreign losses 11.7 52.0 36.0
Nondeductible goodwill amortization 8.2 9.3 12.4
State income taxes - net of U.S. tax 1.3 2.0 4.0
benefit
IRS audit agreement and refund claims -- (18.1) (18.4)
Merger and acquisition related costs -- -- 55.8
Other-net (1.4) (1.3) 0.5
-------- -------- --------
Provision for income taxes $ 133.7 $ 24.9 $ 18.4
======== ======== ========
As a result of the repatriation of the proceeds from the formation of the
Western GECO venture in December 2000, 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 reduces 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 Western GECO."
The effective tax rates before merger related costs and unusual items were
33.5%, 37.2% and 35.6% for the years ended December 31, 2000, 1999 and 1998,
respectively.
37
38
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:
2000 1999
---------- ----------
Deferred tax assets:
Receivables $ 16.5 $ 15.9
Inventory 97.2 101.3
Employee benefits 17.2 17.6
Other accrued expenses 64.1 71.1
Operating loss carryforwards 146.9 258.0
Tax credit carryforwards 178.5 145.0
Other 57.8 30.5
-------- --------
Subtotal 578.2 639.4
Valuation allowances (56.4) (81.7)
-------- --------
Total 521.8 557.7
-------- --------
Deferred tax liabilities:
Property 114.2 141.0
Other assets 126.1 110.3
Goodwill 107.3 122.9
Undistributed earnings of foreign subsidiaries 74.9 39.3
Other 66.1 36.4
-------- --------
Total 488.6 449.9
-------- --------
Net deferred tax asset $ 33.2 $ 107.8
======== ========
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. 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 permanently 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, 2000, the Company had approximately $115.3 million of
foreign tax credits and $53.5 million of general business credits available to
offset future payments of federal income taxes, expiring in varying amounts
between 2004 and 2021. The Company's $9.7 million alternative minimum tax
credits carryforward 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 5. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted
earnings per share ("EPS") computations is as follows for the years ended
December 31:
2000 1999 1998
-------- -------- --------
Denominator:
Weighted average common shares outstanding for basic EPS 330.9 328.2 321.7
Effect of dilutive securities - stock plans 2.0 1.7 -
------- ------ ------
Adjusted weighted average common shares outstanding for diluted EPS 332.9 329.9 321.7
======= ====== ======
Anti-dilutive securities excluded from diluted EPS:
Options with option price greater than market price 3.6 10.2 13.3
Liquid Yield Options Notes convertible in common stock 7.2 7.2 7.2
38
39
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INVENTORIES
Inventories are comprised of the following at December 31:
2000 1999
---------- ----------
Finished goods $ 706.0 $ 690.1
Work in process 82.0 76.3
Raw materials 110.5 95.1
--------- ---------
Total $ 898.5 $ 861.5
========= =========
NOTE 7. INVESTMENTS IN AFFILIATES
The Company has investments in affiliates that are accounted for using the
equity method. The most significant of these affiliates is Western GECO, which
is 30% owned. Included in the caption "Equity in income (losses) of affiliates"
in the Company's consolidated statement of operations for 2000 was $9.5 million
for restructuring and integration charges associated with Western GECO. At
December 31, 2000, net accounts receivable from affiliates totaled $11.4
million. Net accounts receivable from affiliates at December 31, 1999 were not
significant. As of December 31, 2000, the excess of the Company's investment
over the Company's equity in affiliates is $267.4 million. This amount is being
amortized over 40 years and the amortization is included in the Company's equity
in income (losses) of affiliates.
Summarized unaudited combined financial information for affiliates, which
includes one month of activity for Western GECO, is as follows as of December
31:
2000 1999
------------ ------------
Combined operating results:
Revenues $ 228.6 $ 123.0
========== ==========
Operating income (loss) (14.9) 18.4
========== ==========
Net income (loss) (21.4) 14.4
========== ==========
Combined financial position:
Current assets $ 1,565.5 $ 48.5
Noncurrent assets 945.1 7.5
---------- ----------
Total assets $ 2,510.6 $ 56.0
========== ==========
Current liabilities $ 690.1 $ 18.1
Noncurrent liabilities 12.5 1.5
Stockholders' equity 1,808.0 36.4
---------- ----------
Total liabilities and stockholders' equity $ 2,510.6 $ 56.0
========== ==========
NOTE 8. PROPERTY, GOODWILL AND OTHER INTANGIBLES
Property, plant and equipment is comprised of the following at December 31:
AMORTIZATION
PERIOD 2000 1999
------------ ---------- ----------
Land $ 40.0 $ 69.8
Buildings and improvements 5 - 40 years 517.1 559.9
Machinery and equipment 2 - 15 years 1,412.2 2,142.4
Rental tools and equipment 1 - 10 years 811.2 848.6
Oil and gas properties, full cost method 116.2 270.3
---------- ----------
Total property 2,896.7 3,891.0
Accumulated depreciation and depletion (1,518.0) (1,837.3)
---------- ----------
Property - net $ 1,378.7 $ 2,053.7
========== ==========
39
40
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill and other intangibles are as follows at December 31:
AMORTIZATION
PERIOD 2000 1999
------------ ---------- ----------
Goodwill 5 - 40 years $ 1,583.2 $ 1,812.5
Other intangible assets 3 - 30 years 277.4 364.0
---------- ----------
Total goodwill and other intangibles 1,860.6 2,176.5
Accumulated amortization (362.5) (339.7)
---------- ----------
Goodwill and other intangibles - net $ 1,498.1 $ 1,836.8
========== ==========
40
41
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INDEBTEDNESS
Total debt consisted of the following at December 31:
2000 1999
---------- ----------
Short-term debt with a weighted average interest rate of 7.43% at
December 31, 2000 (6.29% at December 31, 1999) $ 42.1 $ 166.5
Commercial Paper with a weighted average interest rate of 6.51% at
December 31, 2000 (5.81% at December 31, 1999) 215.0 760.0
Debentures with an effective interest rate of 8.59%, due January 2000 -- 93.0
5.8% Notes due February 2003 with an effective interest rate of 6.04%,
net of unamortized discount of $0.4 at December 31, 2000 ($0.7 at
December 31, 1999) 99.6 99.3
8% Notes due May 2004 with an effective interest rate of 8.08%, net of
unamortized discount of $0.5 at December 31, 2000 ($0.6 at December
31, 1999) 99.5 99.4
7.875% Notes due June 2004 with an effective interest rate of 8.13%,
net of unamortized discount of $1.4 at December 31, 2000 ($1.8 at
December 31, 1999) 248.6 248.2
Liquid Yield Option Notes due May 2008 with a yield to maturity of 3.5% per
annum, net of unamortized discount of $88.9 at December 31,
2000 ($99.4 at December 31, 1999) 296.2 285.7
6.25% Notes due January 2009 with an effective interest rate of 6.38%,
net of unamortized discount of $2.5 at December 31, 2000 ($2.8 at
December 31, 1999) 322.5 322.2
6% Notes due February 2009 with an effective interest rate of 6.11%,
net of unamortized discount of $1.3 at December 31, 2000 ($1.5 at
December 31, 1999) 198.7 198.5
8.55% Debentures due June 2024 with an effective interest rate of 8.80%, net of
unamortized discount of $2.6 at December 31, 2000
($2.7 at December 31, 1999) 147.4 147.3
6.875% Notes due January 2029 with an effective interest rate of 7.08%, net of
unamortized discount of $9.6 at December 31, 2000
($9.9 at December 31, 1999) 390.4 390.1
Other debt 2.9 8.4
--------- ---------
Total debt 2,062.9 2,818.6
Less short-term debt and current maturities 13.3 112.6
--------- ---------
Long-term debt $ 2,049.6 $ 2,706.0
========= =========
At December 31, 2000, the Company had $1,228.5 million of credit facilities
with commercial banks, of which $750.5 million was committed. The committed
facilities mature as follows: $212.5 million in 2002 and $538.0 million in 2003.
The Company's policy is to classify commercial paper and short-term borrowings
as long-term debt to the extent of its committed facilities because the Company
has the ability under these credit agreements and the intent to maintain these
obligations for longer than one year.
The Liquid Yield Option Notes ("LYONS") are convertible into the Company's
common stock at a conversion price of $41.80 per share, calculated as of
December 31, 2000, which increases at an annual rate of 3.5%. At the option of
the Company, the LYONS may be redeemed for cash at a redemption price equal to
the issue price plus accrued original issue discount through the date of
redemption.
41
42
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At the option of the holder, the LYONS may be redeemed for cash on May 5, 2003,
for a redemption price equal to the issue price plus accrued original issue
discount through the date of redemption.
Maturities of debt at December 31, 2000 are as follows: 2001 - $13.3
million; 2002 - $1.0 million; 2003 - $345.2 million; 2004 - $348.2 million; 2005
- - $0.0 million and $1,355.2 million thereafter.
NOTE 10. 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 swaps and foreign
currency contracts. Except as described below, the estimated fair value of such
financial instruments at December 31, 2000 and 1999 approximate their carrying
value as reflected in the consolidated balance sheets. The fair value of the
Company's debt, interest rate swaps, crude oil hedges and foreign currency
contracts has been estimated based on quoted market prices.
The estimated fair value of the Company's debt at December 31, 2000 and 1999
was $2,131.5 million and $2,728.4 million, respectively, which differs from the
carrying amounts of $2,062.9 million and $2,818.6 million, respectively,
included in the consolidated balance sheets.
INTEREST RATE SWAPS
At December 31, 2000, the Company was party to an interest rate swap
agreement for a notional amount of $325.0 million. The Company receives interest
at a rate of 6.25% and pays interest at a rate equal to the average of 6-month
LIBOR for the Yen, Euro and Swiss Franc plus a 3.16% spread. The interest rate
swap settles semi-annually and terminates in January 2009. In the unlikely event
that the counterparty fails to meet the terms of the interest rate swap
agreement, the Company's exposure is limited to the interest rate differential.
At December 31, 1999, the Company was party to an interest rate swap
agreement for a notional amount of $93.0 million on which the Company paid
interest at a rate of LIBOR plus 2.01% and received interest at a rate of 8.59%.
The interest rate swap settled semi-annually and terminated on January 27, 2000.
The fair value of these contracts at December 31, 2000 and 1999 was a $9.6
million liability and a $13.8 million liability, respectively.
CRUDE OIL HEDGES
On September 15, 2000, the Company entered into two crude oil contracts
(costless collars) to hedge price risk associated with the Company's interest in
an oil producing property in Nigeria. The contracts, which use WTI-Nymex as the
reference commodity, establish a cap of $35.00 and a floor of $27.00 for the
three month period ending March 31, 2001, and a cap of $33.00 and a floor of
$27.00 for the three month period ending June 30, 2001, respectively. The fair
value of these contracts at December 31, 2000 was a $3.1 million asset.
FOREIGN CURRENCY FORWARD CONTRACTS
At December 31, 2000, the Company had entered into a foreign currency
forward contract with a notional amount of $50.0 million to hedge exposure to
currency fluctuations in the British Pound. Foreign currency gains and losses
for hedges against exposure to currency fluctuations are marked to market and
changes to the fair value are included in current period income. 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 and, in management's opinion,
present no significant credit risk to the Company.
At December 31, 1999, the Company had entered into foreign currency forward
contracts with notional amounts of $39.5 million to hedge the commitment to
purchase a seismic vessel, $7.1 million to hedge equipment purchases under a
long-term purchase agreement and $0.7 million to hedge an expected collection
under a long-term sales agreement.
The fair value of these contracts at December 31, 2000 and 1999 was a $1.5
million asset and a $0.7 million asset, respectively.
42
43
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company sells its products and services to various 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 receivables. 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 11. SEGMENT AND RELATED INFORMATION
The Company currently has seven divisions that have separate management
teams and infrastructures that offer different products and services. The
divisions have been aggregated into two reportable segments, "Oilfield" and
"Process".
The Oilfield segment currently consists of six divisions - Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, and Hughes
Christensen - that manufacture and sell equipment and provide services used in
the drilling, completion, production and maintenance of oil and gas wells and in
reservoir measurement and evaluation. They have been aggregated because the
long-term financial performance of these divisions is affected by similar
economic conditions and the consolidated results are evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The principal markets for this segment include all major
oil and gas producing regions of the world including North America, Latin
America, Europe, Africa, the Middle East and the Far East. Customers include
major multi-national, independent and national or state-owned oil companies. The
Oilfield segment also includes the Company's interest in an oil and gas property
in Nigeria.
The Process segment consists of one division - Baker Process - that
manufactures and sells process equipment for separating solids from liquids and
liquids from liquids through filtration, sedimentation, centrifugation and
flotation processes. The principal markets for this segment include all regions
of the world where there are significant industrial and municipal wastewater
applications and base metals activity. Customers include municipalities,
contractors, engineering companies and pulp and paper, minerals, industrial and
oil and gas producers.
The 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 segments based on income before income taxes, accounting
changes, unusual items and interest income and expense.
43
44
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.
OILFIELD PROCESS OTHER TOTAL
---------- --------- --------- ---------
2000
Revenues $ 4,910.8 $ 323.0 $ -- $ 5,233.8
Equity in income (loss) of affiliates 4.9 -- (9.5) (4.6)
Segment profit (loss) 573.9 (5.2) (332.7) 236.0
Total assets 5,597.9 332.3 522.5 6,452.7
Investment in affiliates 869.3 -- -- 869.3
Capital expenditures 565.0 2.5 31.7 599.2
Depreciation, depletion and amortization 591.3 11.9 8.3 611.5
1999
Revenues $ 4,546.7 $ 389.8 $ -- $ 4,936.5
Equity in income of affiliates 7.0 -- -- 7.0
Segment profit (loss) 360.8 (22.3) (280.3) 58.2
Total assets 6,297.7 420.7 463.7 7,182.1
Investment in affiliates 40.2 -- -- 40.2
Capital expenditures 572.1 6.6 61.7 640.4
Depreciation, depletion and amortization 769.5 12.3 8.9 790.7
1998
Revenues $ 5,800.6 $ 490.0 $ 20.0 $ 6,310.6
Equity in income of affiliates 6.7 -- - 6.7
Segment profit (loss) 741.0 24.1 (1,042.8) (277.7)
Total assets 6,946.7 425.4 416.2 7,788.3
Investment in affiliates 38.5 -- -- 38.5
Capital expenditures 1,258.5 17.2 42.5 1,318.2
Depreciation, depletion and amortization 729.7 12.9 15.7 758.3
For the years ended December 31, 2000 and 1999, there were no Oilfield
revenues attributable to one customer for more than 10% of total Oilfield
revenues. For the year ended December 31, 1998, Oilfield revenues attributable
to one customer totaled $629.8 million or 10.9%.
The following table presents the details of "Other" segment loss for the
years ended December 31:
2000 1999 1998
---------- ---------- ----------
Corporate expenses $ (99.2) $ (94.9) $ (88.8)
Interest - net (168.5) (161.9) (145.4)
Unusual charge - net (69.6) (4.8) (215.8)
Unusual charges to cost of revenues and selling,
general and administrative -- (51.8) (373.7)
Gain on sale of securities 14.1 31.5 --
Unusual charge related to equity method investments (9.5) -- --
Merger related costs -- 1.6 (219.1)
--------- --------- ---------
Total $ (332.7) $ (280.3) $(1,042.8)
========= ========= =========
44
45
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 product or service for the years ended December 31:
2000 1999 1998
---------- ---------- ----------
United States $ 2,034.9 $ 1,874.2 $ 2,196.3
United Kingdom 349.0 411.4 572.2
Canada 289.7 234.5 257.8
Norway 279.2 274.1 269.7
Venezuela 277.4 228.3 349.3
Other countries (approximately 65 countries) 2,003.6 1,914.0 2,665.3
---------- --------- ----------
Total $ 5,233.8 $ 4,936.5 $ 6,310.6
========== ========= ==========
The following table presents net property by country based on the location
of the asset at December 31:
2000 1999 1998
---------- ---------- ----------
United States $ 758.0 $ 947.4 $ 926.9
United Kingdom 133.7 183.4 242.0
Nigeria 78.6 91.9 86.9
Venezuela 45.4 53.6 69.5
Norway 37.3 43.0 50.0
Other countries 325.7 365.4 366.4
Western Geophysical mobile assets * -- 369.0 546.4
---------- ---------- ----------
Total $ 1,378.7 $ 2,053.7 $ 2,288.1
========== ========== ==========
* These assets represent marine seismic vessels, land crews and related
equipment that are mobile and move frequently between countries. Data
processing centers, land and buildings have been included in the countries
where these assets are located.
NOTE 12. EMPLOYEE STOCK PLANS
The Company has stock option plans that provide for granting of options for
the purchase of common stock to officers and other key employees. These stock
options may be granted subject to terms ranging from one to ten years at a price
equal to or greater than the fair market value of the stock at the date of
grant.
Stock option activity for the Company was as follows (shares in thousands):
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES Per Share
--------- --------------
Outstanding at December 31, 1997 19,226 $ 21.66
Granted 6,233 21.29
Exercised (1,661) 10.90
Forfeited (655) 28.30
Change in control rights converted (9,811) --
-------- ----------
Outstanding at December 31, 1998 13,332 27.24
Granted 557 22.07
Exercised (1,096) 17.42
Forfeited (1,058) 33.03
-------- ----------
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
======== ==========
At December 31, 2000, 6.7 million shares were available for future option
grants.
45
46
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information for stock options outstanding at
December 31, 2000 (shares in thousands):
OUTSTANDING EXERCISABLE
---------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE (IN YEARS) PRICE SHARES PRICE
----------------- ------ --------------- --------- ------ --------
$ 0.61 $ 13.68 275 4.77 $ 10.38 232 $ 10.20
$ 16.74 $ 20.50 476 4.48 19.12 474 19.13
$ 21.00 $ 26.07 6,180 7.76 21.51 2,834 21.22
$ 28.25 $ 40.25 1,381 7.59 36.27 678 35.65
$ 43.63 $ 47.81 2,340 6.77 47.80 2,335 47.81
------- ------ --------- ------- --------
Total 10,652 7.29 $ 28.80 6,553 $ 31.64
======= ====== ========= ======= ========
The following table summarizes pro forma disclosures assuming the Company
had used the fair value method of accounting for its stock based compensation
plans.
2000 1999 1998
---------- ---------- ----------
Pro forma net income (loss) $ 81.6 $ 6.2 $ (316.7)
Pro forma EPS - basic 0.25 0.02 (0.98)
Pro forma EPS - diluted 0.25 0.02 (0.98)
The effects of applying the fair market value method of accounting in the
above pro forma disclosure 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.
The fair market value of the options granted in 2000, 1999 and 1998 was
determined using the Black-Scholes option-pricing model. The assumptions and
resulting fair market values are as follows:
ASSUMPTIONS
-------------------------------------------------------- FAIR MARKET
RISK-FREE EXPECTED VALUE OF
DIVIDEND EXPECTED INTEREST LIFE OPTIONS
YIELD VOLATILITY RATE (IN YEARS) GRANTED
-------- ---------- --------- ---------- -----------
2000 1.7% 59.6% 5.0% 3.2 $ 11.15
1999 2.2% 55.4% 6.5% 5.0 $ 11.77
1998 2.2% 49.4% 4.2% 4.3 $ 7.79
NOTE 13. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has various noncontributory defined benefit pension plans
covering various domestic and foreign employees. Generally, the Company makes
annual contributions to the plans in amounts necessary to meet minimum
governmental funding requirements. The Company provides certain postretirement
health care and life insurance benefits other than pensions ("Postretirement
Benefits") to substantially all U.S. employees who retire having met certain age
and service requirements.
46
47
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
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 210.0 $ 217.8 $ 113.7 $ 123.7
Service cost 6.2 6.2 1.7 2.0
Interest cost 14.2 13.7 8.3 8.1
Plan participants' contributions 1.1 1.3 -- --
Amendments -- 0.5 -- (1.7)
Actuarial (gain)/loss 7.1 (13.3) 11.6 (8.2)
Settlement/curtailment gain -- (1.0) (1.6) --
Benefits paid (10.3) (10.3) (13.3) (10.2)
Exchange rate adjustment (7.5) (4.9) -- --
-------- -------- -------- --------
Benefits obligation at end of year 220.8 210.0 120.4 113.7
-------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of
year 299.0 262.2 -- --
Actual return on plan assets 35.2 45.9 -- --
Employer contribution 4.8 3.4 -- --
Settlement -- (1.0) -- --
Plan participants' contributions 1.1 1.3 -- --
Benefits paid (10.3) (10.3) -- --
Exchange rate adjustment (6.0) (2.5) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year 323.8 299.0 -- --
-------- -------- -------- --------
Funded status 103.0 89.0 (120.4) (113.7)
Unrecognized actuarial (gain)/loss (8.0) (2.2) 0.7 (11.9)
Unrecognized prior service cost 1.0 0.7 (3.0) (3.6)
-------- -------- -------- --------
Net amount recognized 96.0 87.5 (122.7) (129.2)
Benefits paid - October to December 0.7 0.1 3.5 2.5
-------- -------- -------- --------
Net amount recognized $ 96.7 $ 87.6 $ (119.2) $ (126.7)
======== ======== ======== ========
Amounts recognized in the consolidated balance sheet are as follows at
December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Prepaid benefit cost $ 128.8 $ 115.9 $ -- $ --
Accrued benefit liability (42.2) (32.7) (119.2) (126.7)
Intangible asset 0.4 0.3 -- --
Accumulated other comprehensive income 9.7 4.1 -- --
-------- -------- -------- --------
Net amount recognized $ 96.7 $ 87.6 $ (119.2) $ (126.7)
======== ======== ======== ========
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
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------
Discount rate 6.96% 6.95% 6.54% 7.75% 7.50% 6.75%
Expected return on plan assets 8.69% 8.68% 8.68%
Rate of compensation increase 3.98% 3.92% 3.95%
47
48
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
-------------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Service cost $ 6.2 $ 6.2 $ 5.0 $ 1.7 $ 2.0 $ 1.6
Interest cost 14.2 13.7 13.3 8.3 8.1 8.4
Expected return on plan assets (25.4) (22.5) (22.5) -- -- --
Amortization of prior service cost -- -- -- (0.5) (0.4) --
Recognized actuarial (gain) loss 0.2 0.5 (0.1) (0.1) -- 0.3
-------- -------- -------- -------- -------- --------
Net periodic benefit cost (4.8) (2.1) (4.3) 9.4 9.7 10.3
Curtailment effect recognized -- (0.2) 2.5 -- -- --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ (4.8) $ (2.3) $ (1.8) $ 9.4 $ 9.7 $ 10.3
======== ======== ======== ======== ======== ========
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 $109.3 million, $99.9 million and $66.8 million as
of December 31, 2000, and $36.6 million, $32.3 million and $7.5 million as of
December 31, 1999. 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 2000. As of December 31, 2000, the
health care cost trend rate was 7.6% for employees under age 65 and 8.8% for
participants over age 65 with each declining gradually each successive year
until it reaches 5.4% for employees under age 65 and 5.2% for employees over age
65 in 2007. A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total service and interest cost components $ 0.3 $ (0.3)
Effect on postretirement benefit obligation 7.8 (6.9)
DEFINED CONTRIBUTION PLANS
During the periods reported, generally all the Company's U.S. employees
(other than (1) those employees that Western Atlas employed prior to the merger
and (2) those who were covered under one of Baker Hughes' pension plans) were
eligible to participate in the Company sponsored Thrift Plan. Prior to 1999,
those employees that Western Atlas employed prior to the merger were eligible to
participate in a separate Western Atlas defined contribution plan. In 1999,
those employees that Western Atlas employed prior to
the merger who worked for any of the Company's divisions, other than Western
Geophysical, became eligible to participate in the Company sponsored Thrift Plan
rather than the Western Atlas defined contribution plan.
The Company sponsored Thrift Plan allows eligible employees to elect to
contribute from 1% to 15% of their salaries to an investment trust. Employee
contributions are matched 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. In addition, the Company contributes for all
eligible employees between 2% and 5% of their salary depending on the employee's
age as of January 1 each year. Such contributions become fully vested to the
employee after five years of employment. The Company's contribution to the
Thrift Plan and other defined contribution plans amounted to $56.7 million,
$57.5 million and $51.0 million in 2000, 1999 and 1998, respectively.
With respect to the Western Atlas defined contribution plan, the Company
contributed an amount based on its consolidated pretax earnings of the
participating businesses in accordance with the provisions of such plan. This
plan includes a voluntary savings feature that is intended to qualify under
Section 401(k) of the Internal Revenue Code and is designed to enhance the
retirement programs of participating employees. Under this feature, the Company
matches up to 67% of a certain portion of participants' contributions. The
contributions to this plan in 2000 and 1998 were $2.3 million and $31.4 million,
respectively. There were no employer contributions to this plan in 1999.
48
49
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POST EMPLOYMENT BENEFITS
During the periods reported, the Company provided certain postemployment
disability and medical benefits to substantially all qualifying former or
inactive U.S. employees (other than those employed at the time by Western Atlas)
following employment but before retirement. Starting on January 1, 1999, these
same benefits were provided to substantially all qualified and former and active
Western Atlas employees. Disability income benefits ("Disability Benefits"),
available at the date of hire, are provided through a qualified plan which has
been funded by contributions from the Company and employees. The primary asset
of the plan is a guaranteed insurance contract with an insurance company. The
asset currently earns interest at 5.9%. The actuarially determined obligation is
calculated at a discount rate of 7.75%. Disability Benefits expense was $0.4
million, $1.3 million and $2.9 million in 2000, 1999 and 1998, respectively. The
continuation of medical, life insurance and Thrift Plan benefits while on
disability and the service related salary continuance benefits ("Continuation
Benefits") are also provided through a qualified plan. Expense for Continuation
Benefits, which is primarily interest cost on the projected benefit obligation,
was $2.6 million, $5.9 million and $3.8 million, for 2000, 1999 and 1998,
respectively. During 2000, the Company changed its salary continuance benefits
to a non-service related plan.
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets for Disability Benefits and
Continuation Benefits at December 31:
2000 1999
---------- ----------
Actuarial present value of accumulated benefit obligation $ (42.1) $ (40.8)
Plan assets at fair value 15.0 14.9
---------- ---------
Accumulated benefit obligation in excess of plan assets (27.1) (25.9)
Prior service costs (0.6) (2.5)
Unrecognized net gain (0.9) (0.6)
---------- ---------
Postemployment liability $ (28.6) $ (29.0)
========== =========
Health care cost assumptions used to measure the Continuation Benefits
obligation are similar to the assumptions used in determining the obligation for
postretirement health care benefits. Additional assumptions used in the
accounting for Continuation Benefits were a discount rate of 7.25% in 2000 and
1999, and increases in compensation of 5% for all periods presented.
NOTE 14. COMMITMENTS AND CONTINGENCIES
LEASES
At December 31, 2000, the Company had long-term operating leases covering
certain facilities and equipment. The minimum annual rental commitments for each
of the five years in the period ending December 31, 2005 are $56.1 million,
$49.7 million, $39.9 million, $29.4 million and $21.1 million, respectively, and
$152.3 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 proceeds were used to repay outstanding indebtedness. The
facilities were leased back from the purchaser over a period of 15 years at
current market rates.
LITIGATION
The Company is sometimes named as a defendant in litigation relating to the
products and services it provides. 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 in every case fully indemnify the
Company against liabilities arising out of pending and future legal proceedings
relating to its ordinary business activities. Many of these policies contain
self insured retentions in amounts the Company deems prudent.
The Company has been named as a defendant in a number of shareholder class
action securities fraud suits filed by purported shareholders shortly after the
Company's announcement on December 8, 1999 regarding the accounting issues it
discovered at its Baker Hughes INTEQ division. These suits, which seek
unspecified monetary damages, have been consolidated into one lawsuit in federal
district court for the Southern District of Texas pursuant to the Private
Securities Litigation Reform Act of 1995. The Company believes the allegations
in these suits are without merit, and the Company intends to vigorously defend
the suits. Even so, an adverse outcome in this class action litigation could
have an adverse effect on the Company's results of operations or financial
condition.
49
50
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL MATTERS
The Company's past and present operations include activities which are
subject to extensive federal and state environmental regulations.
The Company has been identified as a potentially responsible party ("PRP")
in remedial activities related to various "Superfund" sites. 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. Generally, the Company has
estimated its share of such total cost based on the ratio that the number of
gallons of waste estimated to have been contributed to the site by the Company
bears to the total number of gallons of waste estimated to have been disposed at
the site. The Company has accrued what it believes to have been its pro rata
share of the total cost of remediation of these Superfund sites based upon such
a volumetric calculation. No accrual has been made under the joint and several
liability concept 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. In some cases, the
Company has insurance coverage or contractual indemnities from third parties to
cover the ultimate liability.
At December 31, 2000 and 1999, the Company had accrued $14.1 million and
$22.9 million, respectively, for remediation costs, including the Superfund
sites referred to above. 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
financial guarantees totaling approximately $194.0 million at December 31, 2000.
In addition, at December 31, 2000, the Company has guaranteed debt of third
parties totaling $57.8 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 15. OTHER SUPPLEMENTAL INFORMATION
Supplemental consolidated statement of operations information is as follows for
the years ended December 31:
2000 1999 1998
---------- ---------- ----------
Rental expense (generally transportation equipment
and warehouse facilities) $ 138.1 $ 169.1 $ 190.4
Research and development 118.0 99.8 128.4
Supplemental consolidated statement of cash flows information is as follows
for the years ended December 31:
2000 1999 1998
---------- ---------- ----------
Sources (uses) of cash in:
Accounts receivable $ (138.8) $ 219.3 $ 97.7
Inventories (54.5) 190.3 (38.8)
Accounts payable (27.2) (88.3) (59.8)
Accrued employee compensation and other current
liabilities (7.9) (179.0) 47.6
Deferred revenue and other long-term liabilities (11.8) (175.3) 13.4
Other assets and liabilities 0.3 (186.4) (79.9)
--------- --------- ---------
Net effect of change in operating accounts $ (239.9) $ (219.4) $ (19.8)
========= ========= =========
Income taxes paid $ 116.0 $ 118.7 $ 134.5
Interest paid 172.6 148.8 150.3
50
51
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The formation of Western GECO included the following cash and noncash
amounts for the year ended December 31:
2000
---------
Assets (liabilities) reclassified:
Working capital - net $ 15.6
Property - net 416.0
Goodwill and other intangibles 259.8
Multiclient seismic data and other assets 707.4
Long-term liabilities (77.6)
- ----------------------------------------------------------------------------------------
Noncash assets and liabilities reclassified to investment in affiliates 1,321.2
Less proceeds from sale of interest in affiliate (493.4)
- ----------------------------------------------------------------------------------------
Net investment in Western GECO at formation $ 827.8
========================================================================================
NOTE 16. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
2000 *
Revenues $ 1,240.8 $ 1,255.5 $ 1,353.7 $ 1,383.8 $ 5,233.8
Gross profit ** 252.1 286.9 334.2 351.0 1,224.2
Net income (loss) 15.4 62.7 65.2 (41.0) 102.3
Basic earnings (loss) per share 0.04 0.19 0.20 (0.12) 0.31
Diluted earnings (loss) per share 0.04 0.19 0.20 (0.12) 0.31
Dividends per share $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.46
Common stock market prices:
High $ 30.25 $ 37.88 $ 39.31 $ 42.94
Low $ 20.25 $ 26.00 $ 30.38 $ 32.44
1999 *
Revenues $ 1,325.3 $ 1,211.0 $ 1,207.6 $ 1,192.6 $ 4,936.5
Gross profit ** 298.3 258.6 237.6 132.2 926.7
Net income (loss) 44.4 68.5 13.2 (92.8) 33.3
Basic earnings (loss) per share 0.14 0.21 0.04 (0.28) 0.10
Diluted earnings (loss) per share 0.14 0.21 0.04 (0.28) 0.10
Dividends per share $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.46
Common stock market prices:
High $ 25.50 $ 35.00 $ 36.25 $ 30.00
Low $ 15.75 $ 22.00 $ 27.00 $ 15.00
* See Note 3 for unusual charges.
** Represents revenues less costs of revenues.
51
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 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 25, 2001, 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 25, 2001, which section is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information for this item is set forth in the section entitled "Executive
Compensation" in the Proxy Statement of the Company for the Annual Meeting of
Stockholders to be held April 25, 2001, which section is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 25, 2001, 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 25, 2001, which section is incorporated
herein by reference.
PART IV
ITEM 14. 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
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 incorporated herein by reference).
3.2 By-Laws (filed as Exhibit 3.2 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
52
53
3.3 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 and incorporated
herein by reference).
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 incorporated herein by reference).
4.3 By-Laws (filed as Exhibit 3.2 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
4.4 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 and incorporated
herein by reference).
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 and incorporated herein by reference).
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 and incorporated herein by reference).
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 and incorporated herein by reference).
10.3 Severance Agreement between Baker Hughes Incorporated and G. Stephen
Finley dated as of July 23, 1997 (filed as Exhibit 10.6 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997 and incorporated herein by reference).
10.4 Severance Agreement between Baker Hughes Incorporated and Andrew J.
Szescila dated as of July 23, 1997 (filed as Exhibit 10.13 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997 and incorporated herein by reference).
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 and incorporated herein by reference).
10.6 Severance Agreement between Baker Hughes Incorporated and Alan R.
Crain, Jr. dated as of October 25, 2000.
10.7 Severance Agreement between Baker Hughes Incorporated and Greg
Nakanishi dated as of November 1, 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.
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.
10.10 Amended and Restated 1991 Employee Stock Bonus Plan of Baker Hughes
Incorporated (filed as Exhibit 10.15 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1997 and incorporated herein by reference).
53
54
10.11 Amendment No. 1997-1 to the Amended and Restated 1991 Employee Stock
Bonus Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended September 30, 1997 and
incorporated herein by reference).
10.12 Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock
Bonus Plan (filed as Exhibit 10.11 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference).
10.13 Restated 1987 Stock Option Plan of Baker Hughes Incorporated
(amended as of October 24, 1990) (filed as Exhibit 10.17 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997 and incorporated herein by reference).
10.14 Baker Hughes Incorporated Supplemental Retirement Plan (filed as
Exhibit 10.14 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997 and incorporated herein
by reference).
10.15 Amendment No. 1997-1 to the Baker Hughes Incorporated Supplemental
Retirement Plan (filed as Exhibit 10.20 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1997 and incorporated herein by reference).
10.16 Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental
Retirement Plan (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference).
10.17 Executive Severance Policy (filed as Exhibit 10.12 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.18 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended December
31, 1998 and incorporated herein by reference).
10.19 Amendment No. 1997-1 to the 1993 Stock Option Plan (filed as Exhibit
10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended September 30, 1997 and incorporated herein by
reference).
10.20 Amendment No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference).
10.21 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
10.22 Amendment No. 1997-1 to the 1993 Employee Stock Bonus Plan (filed as
Exhibit 10.25 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997 and incorporated herein
by reference).
10.23 Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan (filed as
Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference).
10.24 Amended and Restated Director Compensation Deferral Plan (filed as
Exhibit 10.24 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference).
10.25 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
10.26 Amendment No. 1997-1 to the 1995 Employee Annual Incentive
Compensation Plan (filed as Exhibit 10.25 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1997 and incorporated herein by reference).
10.27 Amendment No. 1999-1 to the 1995 Employee Annual Incentive
Compensation Plan (filed as Exhibit 10.27 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference).
54
55
10.28 Long Term Incentive Plan (filed as Exhibit 10.31 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended September
30, 1997 and incorporated herein by reference).
10.29 Amendment No. 1999-1 to Long Term Incentive Plan (filed as Exhibit
10.32 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference).
10.30 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 and incorporated herein by reference).
10.31 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 and incorporated herein by
reference).
10.32 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 and incorporated herein by reference).
10.33 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 and incorporated herein by reference).
10.34 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 and incorporated herein by reference).
10.35 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.
10.36 Form of Stock Option Agreement for executives effective January 26,
2000.
10.37 Form of Stock Option Agreement for executive officers effective
October 1, 1998.
10.38 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 and incorporated herein by reference).
10.39 Form of Nonqualified Stock Option Agreement for directors effective
October 25, 1998.
10.40 Form of Nonqualified Stock Option Agreement for directors effective
October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1996 and incorporated herein by reference).
10.41 Form of Nonqualified Stock Option Agreement for employees effective
October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1996 and incorporated herein by reference).
10.42 Form of Incentive Stock Option Agreement for employees effective
October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1996 and incorporated herein by reference).
10.43 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.
10.44 Agreement regarding restricted stock award issued to Greg Nakaniski
on November 1, 2000 in the amount of 5,000 shares of Company Common
Stock.
55
56
10.45 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.
10.46 Agreement and Plan of Merger among Baker Hughes Incorporated, Baker
Hughes Missouri, Inc., Baker Hughes Delaware, Inc., Petrolite
Corporation and Wm. S. Barnickel & Company, dated as of February 25,
1997 (filed as Exhibit 2.1 to Form 8-K dated March 5, 1997 and
incorporated herein by reference).
10.47 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 and
incorporated herein by reference).
10.48 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 and incorporated
herein by reference).
10.49 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 and
incorporated herein by reference).
10.50 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 and incorporated herein by reference).
10.51 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 and incorproated herein by reference).
10.52 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 and incorporated herein by reference).
21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 14, 2000, as amended on Form
8-K/A dated February 12, 2001, reporting that the Company had consummated
the transactions contemplated by the Master Formation Agreement dated
September 6, 2000 among the Company, Schlumberger Limited, and certain
wholly-owned subsidiaries of Schlumberger Limited.
56
57
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
12th day of March, 2001.
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, March 12, 2001
- ------------------------------- President and Chief
(Michael E. Wiley) Executive Officer
(principal executive
officer)
/s/ G. S. FINLEY Senior Vice President - March 12, 2001
- ------------------------------- Finance and Administration
(G. S. Finley) and Chief Financial Officer
(principal financial
officer)
/s/ ALAN J. KEIFER Vice President and March 12, 2001
- ------------------------------- Controller
(Alan J. Keifer) (principal accounting
officer)
/s/ LESTER M. ALBERTHAL, JR. Director March 12, 2001
- -------------------------------
(Lester M. Alberthal, Jr.)
/s/ VICTOR G. BEGHINI Director March 12, 2001
- -------------------------------
(Victor G. Beghini)
/s/ JOSEPH T. CASEY Director March 12, 2001
- -------------------------------
(Joseph T. Casey)
Director March , 2001
- -------------------------------
(Eunice M. Filter)
Director March , 2001
- -------------------------------
(Joe B. Foster)
/s/ CLAIRE W. GARGALLI Director March 12, 2001
- -------------------------------
(Claire W. Gargalli)
/s/ RICHARD D. KINDER Director March 12, 2001
- -------------------------------
(Richard D. Kinder)
/s/ JAMES F. MCCALL Director March 12, 2001
- -------------------------------
(James F. McCall)
/s/ H. JOHN RILEY, JR. Director March 12, 2001
- -------------------------------
(H. John Riley, Jr.)
57
58
/s/ CHARLES L. WATSON Director March 12, 2001
- -------------------------------
(Charles L. Watson)
/s/ MAX P. WATSON, JR. Director March 12, 2001
- -------------------------------
(Max P. Watson, Jr.)
58
59
BAKER HUGHES INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Cost and End of
(In millions) of Period Expenses Deductions Period
---------- ---------- ---------- ----------
Year ended December 31, 2000:
Reserve for doubtful accounts receivable $56.2 $38.2 $ (12.6) $ 81.8
Reserve for inventories 175.3 68.9 (48.7) 195.5
Year ended December 31, 1999:
Reserve for doubtful accounts receivable 50.1 23.5 (17.4) 56.2
Reserve for inventories 229.6 31.2 (85.5) 175.3
Year ended December 31, 1998:
Reserve for doubtful accounts receivable 54.4 14.6 (18.9) 50.1
Reserve for inventories 146.6 174.7 (91.7) 229.6
59
60
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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 incorporated herein by reference).
3.2 By-Laws (filed as Exhibit 3.2 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
3.3 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 and incorporated
herein by reference).
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 incorporated herein by reference).
4.3 By-Laws (filed as Exhibit 3.2 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
4.4 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 and incorporated
herein by reference).
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 and incorporated herein by reference).
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 and incorporated herein by reference).
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 and incorporated herein by reference).
10.3 Severance Agreement between Baker Hughes Incorporated and G. Stephen
Finley dated as of July 23, 1997 (filed as Exhibit 10.6 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997 and incorporated herein by reference).
10.4 Severance Agreement between Baker Hughes Incorporated and Andrew J.
Szescila dated as of July 23, 1997 (filed as Exhibit 10.13 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997 and incorporated herein by reference).
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 and incorporated herein by reference).
10.6 Severance Agreement between Baker Hughes Incorporated and Alan R.
Crain, Jr. dated as of October 25, 2000.
10.7 Severance Agreement between Baker Hughes Incorporated and Greg
Nakanishi dated as of November 1, 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.
61
Exhibit No. Description
- ----------- -----------
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.
10.10 Amended and Restated 1991 Employee Stock Bonus Plan of Baker Hughes
Incorporated (filed as Exhibit 10.15 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1997 and incorporated herein by reference).
10.11 Amendment No. 1997-1 to the Amended and Restated 1991 Employee Stock
Bonus Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended September 30, 1997 and
incorporated herein by reference).
10.12 Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock
Bonus Plan (filed as Exhibit 10.11 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference).
10.13 Restated 1987 Stock Option Plan of Baker Hughes Incorporated
(amended as of October 24, 1990) (filed as Exhibit 10.17 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997 and incorporated herein by reference).
10.14 Baker Hughes Incorporated Supplemental Retirement Plan (filed as
Exhibit 10.14 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997 and incorporated herein
by reference).
10.15 Amendment No. 1997-1 to the Baker Hughes Incorporated Supplemental
Retirement Plan (filed as Exhibit 10.20 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1997 and incorporated herein by reference).
10.16 Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental
Retirement Plan (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference).
10.17 Executive Severance Policy (filed as Exhibit 10.12 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference).
10.18 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended December
31, 1998 and incorporated herein by reference).
10.19 Amendment No. 1997-1 to the 1993 Stock Option Plan (filed as Exhibit
10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended September 30, 1997 and incorporated herein by
reference).
10.20 Amendment No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference).
10.21 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
10.22 Amendment No. 1997-1 to the 1993 Employee Stock Bonus Plan (filed as
Exhibit 10.25 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997 and incorporated herein
by reference).
10.23 Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan (filed as
Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference).
10.24 Amended and Restated Director Compensation Deferral Plan (filed as
Exhibit 10.24 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference).
10.25 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
62
Exhibit No. Description
- ----------- -----------
10.26 Amendment No. 1997-1 to the 1995 Employee Annual Incentive
Compensation Plan (filed as Exhibit 10.25 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1997 and incorporated herein by reference).
10.27 Amendment No. 1999-1 to the 1995 Employee Annual Incentive
Compensation Plan (filed as Exhibit 10.27 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference).
10.28 Long Term Incentive Plan (filed as Exhibit 10.31 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended September
30, 1997 and incorporated herein by reference).
10.29 Amendment No. 1999-1 to Long Term Incentive Plan (filed as Exhibit
10.32 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference).
10.30 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 and incorporated herein by reference).
10.31 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 and incorporated herein by
reference).
10.32 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 and incorporated herein by reference).
10.33 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 and incorporated herein by reference).
10.34 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 and incorporated herein by reference).
10.35 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.
10.36 Form of Stock Option Agreement for executives effective January 26,
2000.
10.37 Form of Stock Option Agreement for executive officers effective
October 1, 1998.
10.38 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 and incorporated herein by reference).
10.39 Form of Nonqualified Stock Option Agreement for directors effective
October 25, 1998.
10.40 Form of Nonqualified Stock Option Agreement for directors effective
October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1996 and incorporated herein by reference).
10.41 Form of Nonqualified Stock Option Agreement for employees effective
October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1996 and incorporated herein by reference).
10.42 Form of Incentive Stock Option Agreement for employees effective
October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended September 30,
1996 and incorporated herein by reference).
63
Exhibit No. Description
- ----------- -----------
10.43 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.
10.44 Agreement regarding restricted stock award issued to Greg Nakaniski
on November 1, 2000 in the amount of 5,000 shares of Company Common
Stock.
10.45 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.
10.46 Agreement and Plan of Merger among Baker Hughes Incorporated, Baker
Hughes Missouri, Inc., Baker Hughes Delaware, Inc., Petrolite
Corporation and Wm. S. Barnickel & Company, dated as of February 25,
1997 (filed as Exhibit 2.1 to Form 8-K dated March 5, 1997 and
incorporated herein by reference).
10.47 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 and
incorporated herein by reference).
10.48 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 and incorporated
herein by reference).
10.49 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 and
incorporated herein by reference).
10.50 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 and incorporated herein by reference).
10.51 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 and incorproated herein by reference).
10.52 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 and incorporated herein by reference).
21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.