Baker Hughes 2002 Annual Report Download

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Performance
2002 Annual Report

Table of contents

  • Page 1
    2002 Annual Report Performance

  • Page 2
    ... Learning. Baker Hughes has introduced programs to encourage, recognize and reward Flawless Execution at the rig site. We support field performance with a worldwide operations network organized around specific product lines to enable best-in-class planning, logistics, equipment repair and technical...

  • Page 3
    ... compliant fluid, a new drilling waste management service, and completion fluids products to become a full-service drilling fluids supplier. Baker Atlas Wireline-conveyed well logging and data analysis for formation evaluation, production, and reservoir management. New Baker Atlas technologies...

  • Page 4
    ...with well systems that include safety valves, liner hangers, packers, flow control equipment, and sand control screens. Baker Atlas provides wireline and tubing-conveyed perforating services. Baker Oil Tools' sand control services include gravel packing and frac packing pumping services. Innovations...

  • Page 5
    ... Average during year Income (loss) from continuing operations Nonoperating items, net of tax (3) Operating profit after tax(4) Per share of common stock: Operating profit after tax Basic Diluted Working capital Total assets Total debt Stockholders' equity Total debt/equity ratio Number of employees...

  • Page 6
    ...A Baker Atlas wireline unit logs a well in Indonesia. During 2002, Baker Hughes companies scored successes in the Asia Pacific region by introducing expandable completions and rotary steerable systems, and by winning major contracts to supply electric submersible pump systems. This Annual Report to...

  • Page 7
    ... consist of six strong product line divisions that focus on key areas of the oilfield service business. With this organization, our divisional engineering and manufacturing teams can focus on developing and providing best-in-class products, and our field operations managers can focus on delivering...

  • Page 8
    ... programs for legal education and financial controls, BHI employees worldwide have a more thorough understanding of the Baker Hughes Business Code of Conduct, the requirements of our Foreign Corrupt Practices Act policy, and our system of internal controls. In October 2002, Standard and Poors ranked...

  • Page 9
    ... offer OASIS high performance drilling services, and Baker Atlas and Baker Petrolite have joined forces in our Pipeline Management Group. Learning is the Core Value that helps us grow as individuals and as a company. In 2002, we increased both our non-technical and technical training programs. More...

  • Page 10
    ...Genesis process combines new technical REVENUE PER EMPLOYEE 2000-2002, by Quarter (In thousands) $55 $50 $45 $40 $35 $30 2000 2001 2002 Baker Oil Tools also created value for deepwater operators with High PressureHigh Temperature (HPHT) completions, Neptuneâ„¢ subsurface safety valves, and remotely...

  • Page 11
    ... into new products or services. The new Pipeline Management Group is one example. It builds on Baker Atlas' experience in performing tethered pipeline inspections and Baker Petrolite's expertise at assessing pipeline system integrity and controlling corrosion with chemical programs. The timing is...

  • Page 12
    ... of the Baker Hughes culture throughout the organization. We conduct quarterly performance reviews with each division to discuss financial results, the market environment, Greg Nakanishi, Vice President, Human Resources; Steve Finley, Senior Vice President and Chief Financial Officer; Alan R. Crain...

  • Page 13
    ... or Organization) 3900 Essex Lane, Suite 1200, Houston, Texas (Address of Principal Executive Offices) 76-0207995 (IRS Employer Identification No.) 77027-5177 (Zip Code) Registrant's Telephone Number, Including Area Code: (713) 439-8600 Securities Registered Pursuant to Section 12(b) of the Act...

  • Page 14
    .... Baker Oil Tools. The Company, through its Baker Oil Tools division, is a premier provider of downhole completion, workover and fishing equipment and services. Downhole completion product lines include packers, flow control equipment, subsurface safety valves, liner hangers and sand control systems...

  • Page 15
    ... the expansion of tubulars such as sand screens. By expanding pipe and screen downhole, the internal flow areas are increased, which, in turn, allows for enhanced production. Baker Oil Tools is a leading provider of sand control equipment and services. Its primary competitors are BJ Services Company...

  • Page 16
    ...submersible electric motors or rods driven from a surface power source. Both systems are installed in oil and gas wells near the production zone to lift fluids to the surface. The major competitors for Centrilift are John Wood Group, PLC, Schlumberger and Weatherford. Hughes Christensen. The Company...

  • Page 17
    ... reservoir fluid movement over time. Seismic information can reduce field development and production costs by reducing turnaround time, lowering drilling risks and minimizing the number of wells necessary to explore and develop reservoirs. WesternGeco's major competitors in providing these services...

  • Page 18
    ..., Business Process Development, of the Company from 1998 to 2002; Vice President, Manufacturing, of Baker Oil Tools from 1990 to 1998 and Plant Manager of Hughes Tool Company from 1975 to 1990. Employed by the Company in 1975. Ray Ballantyne 53 Senior Vice President and Chief Operating Officer of...

  • Page 19
    ... Baker Atlas since 2000. Employed as Vice President, Supply Chain Management, of Cooper Cameron from 1999 to 2000. Mr. Barr also held the following positions with the Company: Vice President, Business Process Development, from 1997 to 1998 and the following positions with Hughes Tool Company/Hughes...

  • Page 20
    ... rate. (a) Baker Petrolite, Hughes Christensen, an INTEQ predecessor entity, Baker Oil Tools and a former subsidiary were named in April 1984 as PRPs at the Sheridan Superfund Site located in Hempstead, Texas. The Texas Commission on Environmental Quality ("TCEQ") is overseeing the remedial work...

  • Page 21
    ... has not been completed, and therefore, there is no available estimate of cleanup costs. (l) In January 2003, Western Atlas International, Inc. and predecessor companies and Baker Hughes Oilfield Operations, Inc. were identified as PRPs in the Gulf Nuclear Superfund site in Odessa, Texas. The EPA...

  • Page 22
    ...; Celle, Germany; Belfast, Ireland; South America - Venezuela, Argentina. The Company also owns or leases and operates numerous customer service centers, shops and sales and administrative offices throughout the geographic areas in which it operates. Canada and South America United States Europe...

  • Page 23
    ...under the FCPA regarding anti-bribery, books and records and internal controls, and the DOJ has asked to interview current and former employees. Prior to the filing of the former employee's complaint, the Company had independently initiated an investigation regarding its operations in Nigeria, which...

  • Page 24
    ... of tax Cumulative effect of accounting change, net of tax Net income (loss) Per share of common stock: Income (loss) from continuing operations Basic Diluted Dividends Financial Position: Working capital Total assets Long-term debt Stockholders' equity $ 5,020.4 3,625.7 840.6 - (1.9) - 4,464.4 556...

  • Page 25
    ...merger, the Company recorded merger related costs of $219.1 million for transaction costs, employee related costs, integration costs, the write-off of the carrying value of a product line and the triggering of change in control rights contained in certain stock options plans of Western Atlas and the...

  • Page 26
    ... its Foreign Corrupt Practices Act (the "FCPA") policy, its internal control processes and procedures, as well as other compliance related policies. Notwithstanding the devotion of such resources, and in part as a consequence thereof, the Company, from time to time, discovers or receives information...

  • Page 27
    ...aspect of doing business in a number of the countries in which oil and gas exploration, development and production take place and the Company is requested to conduct operations. Key risk factors currently influencing the worldwide crude oil and gas markets are: • Production control - the degree to...

  • Page 28
    ... 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...

  • Page 29
    ... export sales and downward pricing pressures on the Company's products and services. On December 2, 2002, PdVSA, the national oil company of Venezuela, initiated a strike intended to force Venezuelan President Hugo Chavez to resign from office and call new elections. The strike effectively shut down...

  • Page 30
    ... may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company's operating environment changes. The Company has defined a critical accounting policy as one that is both important to the understanding of the Company's financial condition and...

  • Page 31
    ...of Schlumberger created a venture by transferring the seismic fleets, data processing assets, exclusive and nonexclusive multiclient surveys and other assets of the Company's Western Geophysical division and Schlumberger's Geco-Prakla business unit. The venture operates under the name of WesternGeco...

  • Page 32
    ... resulting foreign exchange losses; increased depreciation of the cost associated with the now substantially completed implementation of SAP R/3, an enterprise-wide accounting and business application software system; and the Company's current strategy not to significantly reduce its work force to...

  • Page 33
    ... and received net proceeds of $6.0 million from this transaction. The Company also recognized a loss of $1.0 million on the sale of a product line within the Oilfield segment. During 2000, in conjunction with the Company's plan to substantially exit the oil and gas exploration business, the Company...

  • Page 34
    Baker Hughes Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Interest Expense Interest expense for 2002 decreased $15.2 million compared with 2001. The decrease was primarily due to lower total debt levels resulting from cash flow from ...

  • Page 35
    ... of product lines, the sale of the Company's interests in its China, Gulf of Mexico and Gabon oil and gas properties, and the sale of real estate held for sale. During 2002, the Company's Oilfield segment made three small acquisitions having an aggregate cash purchase price of $39.7 million, net of...

  • Page 36
    .... The Company believes that cash flow from continuing operations, combined with existing credit facilities, will provide the Company with sufficient capital resources and liquidity to manage its operations, meet debt obligations and fund projected capital expenditures. The Company currently expects...

  • Page 37
    ... and 2001, the Company's principal cash flow requirements for its long-term debt obligations, which bear a fixed rate of interest and are denominated in U.S. Dollars, and the related weighted average effective interest rates by expected maturity dates. Additionally, the table sets forth the notional...

  • Page 38
    Baker Hughes Incorporated Interest Rate Swap Agreements The Company had two interest rate swap agreements that had been designated and had qualified as fair value hedging instruments. Due to the Company's outlook for interest rates, the Company terminated the two agreements and received payments ...

  • Page 39
    ...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...

  • Page 40
    ... AUDITORS' REPORT Stockholders of Baker Hughes Incorporated: We have audited the accompanying consolidated balance sheets of Baker Hughes Incorporated and its subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows...

  • Page 41
    ... and Expenses: Cost of revenues Selling, general and administrative Restructuring charges (Gain) loss on disposal of assets Total Operating income Equity in income (loss) of affiliates Interest expense Interest income Gain on trading securities Income from continuing operations before income taxes...

  • Page 42
    Baker Hughes Incorporated CONSOLIDATED BALANCE SHEETS December 31, (In millions, except par value) 2002 2001 Assets Current Assets: Cash and cash equivalents Accounts receivable - less allowance for doubtful accounts: December 31, 2002, $67.3; December 31, 2001, $66.5 Inventories Other current ...

  • Page 43
    ...to sale of business Other comprehensive income (net of tax of $(0.2) and $15.7, respectively) Total comprehensive income Cash dividends ($0.46 per share) Stock issued pursuant to employee stock plans Repurchase of common stock Balance, December 31, 2002 See Notes to Consolidated Financial Statements...

  • Page 44
    ... in affiliate Proceeds from sale/leaseback Proceeds from issuance of common stock Repurchase of common stock Dividends Net cash flows from continuing operations Net cash flows from discontinued operations Net cash flows from financing activities Effect of foreign exchange rate changes on cash...

  • Page 45
    ... enterprise-wide software system. External direct costs of consulting services and payroll-related cost of employees who worked full-time on the implementation of the system were capitalized and classified in machinery and equipment. Costs associated with business process reengineering were expensed...

  • Page 46
    Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) for the purpose of finding oil and gas reserves. In accordance with full cost accounting rules, the Company performs a ceiling test on the carrying value of its oil and gas properties. During 2001, the Company recorded...

  • Page 47
    ...Company monitors its exposure to various business risks including commodity price, foreign exchange rate and interest rate risks and occasionally uses derivative financial instruments to manage the impact of certain of these risks. The Company's policies do not permit the use of derivative financial...

  • Page 48
    ...is held in escrow pending completion of final adjustments of the purchase price. In December 2002, the Company entered into exclusive negotiations for the sale of the Company's interest in its oil producing operations in West Africa and received $10.0 million as a deposit. The sale is subject to the...

  • Page 49
    ...German operations from a full manufacturing facility to an assembly and repair facility. As a result, the Company recorded a charge of $6.0 million relating to severance for approximately 100 employees. The employee groups that were terminated were comprised of engineering, field service and support...

  • Page 50
    ... and received net proceeds of $6.0 million from this transaction. The Company also recognized a loss of $1.0 million on the sale of a product line within the Oilfield segment. During 2000, in conjunction with the Company's plan to substantially exit the oil and gas exploration business, the Company...

  • Page 51
    ... 2000 United States Foreign Total $ 49.2 331.2 $ 216.5 417.4 $ 633.9 $ (15.2) 171.7 $ 380.4 $ 156.5 Tax benefits of $1.4 million, $5.5 million and $5.8 million associated with the exercise of employee stock options were allocated to equity and recorded in capital in excess of par value in...

  • Page 52
    Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL ...Company contributed certain assets of its Western Geophysical division with a net book value of $1.1 billion, consisting primarily of multiclient seismic data and property and $15.0 million in working capital to WesternGeco. The Company...

  • Page 53
    ...") created an entity to operate under the name of Petreco International ("Petreco"). The Company contributed $16.6 million of net assets of the refining and production product line of its Process segment to Petreco consisting primarily of intangible assets, accounts receivable and inventories. In...

  • Page 54
    Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 10. Goodwill and Intangible Assets The adoption of SFAS No. 142 required the Company to perform a transitional impairment test of goodwill in each of its reporting units as of January 1, 2002. The Company's ...

  • Page 55
    ... 6.875% Notes due January 2029 with an effective interest rate of 7.08%, net of unamortized discount of $9.2 at December 31, 2002 ($9.4 at December 31, 2001) Other debt Total debt Less short-term debt and current maturities Long-term debt $ 23.2 - 100.0 99.8 253.3 333.6 199.0 147.3 390.8 0.8 1,547...

  • Page 56
    ... below, the estimated fair value of such financial instruments at December 31, 2002 and 2001 approximate their carrying value as reflected in the consolidated balance sheets. The fair value of the Company's debt, interest rate swaps, crude oil contracts and foreign currency contracts has been...

  • Page 57
    ... by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Oilfield segment consists of six operating divisions - Baker Atlas, Baker Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen and INTEQ. They have been aggregated into one reportable...

  • Page 58
    ...column includes corporate-related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments. The "Other" column also includes assets of discontinued operations. Oilfield Process Other Total 2002 Revenues Equity in...

  • Page 59
    ... for future option grants. The following table summarizes the activity for the Company's stock option plans: Weighted Average Exercise Price Per Share United States United Kingdom Norway Canada Venezuela Other countries (approx. 65 countries) Total $ 1,769.8 364.6 303.2 256.9 143.7 $ 2,010...

  • Page 60
    Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company also has an employee stock purchase plan whereby eligible employees may purchase shares of the Company's common stock at a price equal to 85% of the lower of the closing price of the Company's common stock ...

  • Page 61
    ... the years ended December 31: Pension Benefits 2002 2001 2000 2002 Postretirement Benefits 2001 2000 Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized actuarial (gain) loss Net periodic benefit cost $ 17.8 18.9 (27.7) 0.5 3.6 13.1 $ 4.9 17...

  • Page 62
    .... The SEC has issued a formal order of investigation into possible violations of provisions under the Foreign Corrupt Practices Act ("FCPA") regarding anti-bribery, books and records and internal controls, and the DOJ has asked to interview current and former employees. Prior to the filing of the...

  • Page 63
    ..., treatment equipment costs and costs associated with long-term maintenance and monitoring of a remediation project. The Company has also been identified as a potentially responsible party ("PRP") in remedial activities related to various Superfund sites. The Company participates in the process set...

  • Page 64
    Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Supplemental consolidated statement of cash flows information is as follows for the years ended December 31: 2002 2001 2000 The changes in the aggregate product warranty liability are as follows for the year ended ...

  • Page 65
    ... earnings per share Income from continuing operations Net income Diluted earnings per share Income from continuing operations Net income Dividends per share Common stock market prices: High Low * See Note 4 for restructuring charges. ** Represents revenues less cost of revenues. $ 1,203.0 327.8 70...

  • Page 66
    Baker Hughes Incorporated ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions with management is set forth in the ...

  • Page 67
    ... the amount of 83,000 shares of Company Common Stock (filed as Exhibit 10.9 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.10* Amended and Restated 1991 Employee Stock Bonus Plan of Baker Hughes Incorporated, as amended by Amendment No. 1997-1 to...

  • Page 68
    ... of 25,000 shares of Company Common Stock (filed as Exhibit 10.45 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.32 Agreement and Plan of Merger among Baker Hughes Incorporated, Baker Hughes Delaware I, Inc. and Western Atlas Inc. dated as of May...

  • Page 69
    ...Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2001). 10.46* Form of Baker Hughes Incorporated Stock Option Award Agreements, dated July 24, 2002, with Terms and Conditions for employees and for directors and officers. 10.47*+ Form of Baker Hughes Incorporated Stock...

  • Page 70
    ... Chairman of the Board, President and Chief Executive Officer (principal executive officer) Senior Vice President - Finance and Administration and Chief Financial Officer (principal financial officer) Vice President and Controller (principal accounting officer) Director Date March 6, 2003 March...

  • Page 71
    ... the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in...

  • Page 72
    ... the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in...

  • Page 73
    ... Deductions Balance at Beginning of Period Additions Charged to Cost and Expenses Reversal of Prior Deductions Charged to Other Accounts Balance at End of Period (In millions) Write-offs (a) Year ended December 31, 2002: Reserve for doubtful accounts receivable Reserve for inventories Year ended...

  • Page 74
    ... used by the company and reviews their performance; • reviews financial reporting and disclosure issues with management, the corporate auditors and independent auditors; • establishes guidelines with respect to earnings news releases and the financial information and earnings guidance provided...

  • Page 75
    ... policy.htm. The Finance Committee is comprised of five independent non-employee directors. The Finance Committee is responsible for reviewing and monitoring the financial planning and actions taken that are related to the financial structure of our company. Additional information about the Finance...

  • Page 76
    ...Texas 77027 Telephone: (713) 439-8600 P.O. Box 4740 Houston, Texas 77210-4740 Web Site www.bakerhughes.com Baker Hughes Information Systems (888) 408-4244 Design: Savage Design Group, Inc., Houston, Texas Not pictured Michael E. Wiley Chairman, President and Chief Executive Officer, Baker Hughes...

  • Page 77
    3900 Essex Lane Houston, TX 77027 P.O. Box 4740 Houston, TX 77210-4740 713-439-8600 www.bakerhughes.com