BHI Completes Review of Accounting Issues at INTEQ, Announces Intent to Sell Baker Process, Reports Fourth Quarter Results

HOUSTON--(BUSINESS WIRE)--Feb. 17, 2000--Baker Hughes Incorporated (NYSE:BHI)(PCX:BHI)(EBS:BHI) announced today that it has completed its review of the accounting issues previously identified at its INTEQ division and will restate prior period results by $31.0 million on a cumulative after-tax basis ($33.1 million pre-tax) to address these issues. Completion of the review revealed that these misstatements occurred over a number of years, with approximately $24.0 million (after-tax) of the adjustments relating to periods prior to 1995. All adjustments have been made to income from continuing operations. Although the amounts were attributable to several INTEQ locations, $24.2 million of the after-tax amount was related to INTEQ's Venezuelan operations. Additional information on the INTEQ accounting issues can be found in Attachment 1.

"I am glad to be able to tell you that we have looked at these issues closely and have quantified them with certainty," said Joe B. Foster, interim chairman, president and CEO of Baker Hughes. "While the adjustments did not involve the loss of cash to the company, it is a serious matter that these misstatements and lapses in control occurred. We are now confident that we have the systems and controls in place to avoid similar accounting surprises in the future. This permits us to more intensely focus on issues and actions that will lead to improved growth and profitability for Baker Hughes."

Baker Hughes Announces Intent to Sell Baker Process

The company announced that it intends to sell its Baker Process division and that it will be seeking a buyer for the business and has therefore classified Baker Process as a discontinued operation. The decision was based on the company's objective of focusing on its oilfield operations. The company has retained the investment-banking firm of Credit Suisse First Boston to manage the sale process.

Baker Process is a leader in process and separation technologies serving the mining, pulp and paper and industrial and municipal water and wastewater industries. Baker Process revenues for the twelve months ended December 31, 1999 were $389.8 million. Additional information on Baker Process can be found in Attachment 2.

Mr. Foster commented, "The sale of Baker Process, which is an excellent business, will permit Baker Hughes to reduce its debt and focus more intensely on what it does best, provide high quality products and services to the oil and gas industry."

Results of Operations -- 1999 and Fourth Quarter

Baker Hughes' net income for the twelve months ended December 31, 1999 was $0.10 per share (diluted), as compared to a net loss of $(0.92) per share (diluted) for the twelve months ended December 31, 1998. The net loss for the three months ended December 31, 1999 was $(0.28) per share (diluted), as compared to net income of $0.02 per share (diluted) for the three months ended December 31, 1998. All current and prior period results have been restated for the effect of the INTEQ accounting issues and to treat Baker Process as a discontinued operation.

Operating results, excluding the impact of non-recurring items, were $0.22 per share (diluted) for the twelve months ended December 31, 1999, as compared to $1.03 per share (diluted) in the twelve months ended December 31, 1998. Operating results, excluding the impact of non-recurring items, for the three months ended December 31, 1999 were $(.03) per share (diluted), as compared to $0.14 per share (diluted) for the three months ended December 31, 1998. Revenues for the twelve months ended December 31, 1999, were $4.547 billion, down 22% from the twelve months ended December 31, 1998. For the three months ended December 31, 1999, revenues were $1.104 billion, down 16% from the three months ended December 31, 1998.

Commenting on the outlook for the year 2000, Mr. Foster added, "My challenge to the Baker Hughes organization for 2000 is to double the 1999 operational earnings. This is consistent with my vow to define an achievable goal that will still stretch us. Our ability to meet this goal - or exceed it - is, of course, subject to a lot of factors beyond our control. Capital spending by our customers needs to increase during the year, and there needs to be a recovery in drilling activity in the eastern hemisphere. During the first quarter of 2000, we expect to be almost breakeven, so it is clear we are counting on an improved business outlook - as well as improved performance on the cost and productivity side - during the remainder of the year to meet our objectives."

Search Committee Report

Victor G. Beghini, chairman of the board's committee to select a new chief executive officer, announced that the firm of Spencer Stuart has been selected to assist the search committee.

Attachments

-- Attachment 1 - Additional Information on the INTEQ Accounting

Issues

-- Attachment 2 - Additional Information on Baker Process

-- Attachment 3 - Operational Highlights

-- Attachment 4 - Division Highlights

-- Attachment 5 - Geographic Highlights

-- Attachment 6 - Impact of Non-recurring Items

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Financial Information

A table of comparative results follows:

(In millions, except            Three Months Ended  Twelve Months Ended
 per share amounts)                December 31,        December 31,
UNAUDITED                         1999     1998(1)    1999     1998(1)
                                --------  --------  --------  --------

Revenues                        $1,103.9  $1,307.3  $4,546.7  $5,820.6
                                --------  --------  --------  --------

Costs of revenues                  974.0   1,031.0   3,677.7   4,745.7
Selling, general and
 administrative                    171.4     163.4     662.2     778.0
Merger related costs                          17.2               217.5
Unusual charge, net                 46.7      39.7       7.2     196.6
                                --------  --------  --------  --------
Total costs and expenses         1,192.1   1,251.3   4,347.1   5,937.8
                                --------  --------  --------  --------
Operating income (loss)            (88.2)     56.0     199.6    (117.2)
Interest expense                   (40.0)    (38.8)   (159.0)   (142.7)
Interest income                      2.1       0.7      12.2       3.7
Realized gain on trading
 securities                         31.5                31.5
                                --------  --------  --------  --------
Income (loss) from continuing
 operations before income taxes    (94.6)     17.9      84.3    (256.2)
Income tax benefit (provision)      13.1     (10.0)    (32.0)    (24.7)
                                --------  --------  --------  --------
Income (loss) from continuing
 operations                        (81.5)      7.9      52.3    (280.9)
Income (loss) from discontinued
 operations, net of tax            (11.3)     (0.6)    (19.0)    (15.2)
                                --------  --------  --------  --------
Net income (loss)               $  (92.8) $    7.3  $   33.3  $ (296.1)
                                --------  --------  --------  --------

Basic earnings per share:
 Income (loss) from
  continuing operations         $  (0.25) $   0.02  $   0.16  $  (0.87)
 Income (loss) from
  discontinued operations          (0.03)     -        (0.06)    (0.05)
                                --------  --------  --------  --------
 Net income (loss)              $  (0.28) $   0.02  $   0.10  $  (0.92)
                                ========  ========  ========  ========
Diluted earnings per share:
 Income (loss) from
  continuing operations         $  (0.25) $   0.02  $   0.16  $  (0.87)
 Income (loss) from
  discontinued operations          (0.03)     -        (0.06)    (0.05)
                                --------  --------  --------  --------
 Net income (loss)              $  (0.28) $   0.02  $   0.10  $  (0.92)
                                ========  ========  ========  ========

Depreciation, depletion
 and amortization expense       $  177.8  $  199.9  $  778.4  $  745.4

Capital expenditures            $  108.3  $  341.4  $  633.8  $1,301.0

Earnings before interest
 expense and taxes (EBIT)(2)    $   27.7  $  113.6  $  270.8  $  655.9

Earnings before interest
 expense, taxes, depreciation,
 depletion and amortization
 (EBITDA)(2)                    $  205.5  $  313.5  $1,049.2  $1,401.3

(1)  Restated for the effect of resolution of the INTEQ accounting
     issues and to treat Baker Process as a discontinued operation.
(2)  Computed excluding non-operational items.


Reconciliation  of the  Numerators and  Denominators
of the Basic and Diluted EPS Computations

                                     For The Three Months Ended
                              December 31, 1999    December 31, 1998
(In millions)                Income     Shares       Income     Shares
UNAUDITED                (numerator)(denominator)(numerator)(denominator)
                          ---------  -----------  ---------  -----------
Basic EPS
Income (loss) from continuing
 operations                   $  (81.5)    329.2    $    7.9     326.9
Effect of dilutive securities:
 Stock plans                                                        .4
                              --------  --------    --------  --------
Diluted EPS                   $  (81.5)    329.2    $    7.9     327.3
                              ========  ========    ========  ========

                                    For The Twelve Months Ended
                              December 31, 1999    December 31, 1998
(In millions)                Income     Shares       Income     Shares
UNAUDITED                (numerator)(denominator)(numerator)(denominator)
                          ---------  -----------  ---------  -----------
Basic EPS
Income (loss) from continuing
 operations                   $   52.3     328.2    $ (280.9)    321.7
Effect of dilutive securities:
 Stock plans                                 1.7
                              --------  --------    --------  --------
Diluted EPS                   $   52.3     329.9    $ (280.9)    321.7
                              ========  ========    ========  ========

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     Conference Call

     The company has scheduled a conference call to discuss the

results of today's earnings announcement. The call will begin at 10:00 a.m. eastern standard time, 9:00 a.m. central standard time. To access the call please call the conference call operator at 312/470-0009 or 712/257-3667, 10 to 15 minutes prior to the scheduled start time, and ask for the "Baker Hughes Conference Call." A replay will be available through February 23, 2000. The number for the replay is 402/220-0240. The call and replay will also be webcast on www.streetevents.com.

Forward Looking Statements

This press release and its attachments contain 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 "future", "focus", and "will" and similar expressions are intended to identify forward-looking statements. Baker Hughes expectations about the probability of having accounting issues surface again are only its strong expectations about this matter. Although Baker Hughes believes that it has adequate systems and controls in place to reduce the risk of accounting misstatements and Baker Hughes is in the process of further strengthening these controls, there can be no absolute degree of certainty that an accounting misstatement will not occur in the future even with adequate systems and controls. Baker Hughes' expectations about the items of focus of its management are only its expectations about these matters. Management focus may change, depending on a changing industry, its effects on the company and a changing business strategy to address the company's markets and the needs of its shareholders. Baker Hughes' expectations regarding its outlook for its business, improved profitability and growth in the business and the oil and gas industry 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; world economic conditions, including (without limitation) the ability of Asian countries to grow their respective economies; 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 and the condition of the capital and equity markets and the timing of any of the foregoing.

Baker Hughes is a leading supplier of reservoir-centered products, services and systems to the worldwide oil and gas industry.

NOT INTENDED FOR BENEFICIAL HOLDERS

Attachment 1 - Additional Information on the INTEQ Accounting Issues

Baker Hughes announced on February 17, 2000 that it has completed its review of the accounting issues previously identified at its INTEQ division and will restate prior period results by $31.0 million on a cumulative after-tax basis ($33.1 million pre-tax) to address these issues. Completion of the review revealed that these misstatements occurred over a number of years, with approximately $24.0 million (after-tax) of the adjustments relating to periods prior to 1995. The company has restated its prior periods to adjust the unaudited financial information presented in this news release. The company is finalizing its audit of the timing of certain of the adjustments to be included in its audited financial statements to be filed in its Annual Report on Form 10-K. All adjustments have been made to income from continuing operations. Although the amounts were attributable to several of INTEQ's locations, $24.2 million of the after-tax amount was related to INTEQ's Venezuelan operations.

The adjustments to correct the misstatements include the write-off of uncollectable accounts receivable and inventory shortages, the recognition of inventory pricing adjustments, adjustments to write off various other current and long-lived assets that no longer exist and the recognition of certain previously unrecorded liabilities, including trade accounts payable and employee compensation and benefits.

The company believes that the misstatements were primarily the result of noncompliance with the company's accounting and operating procedures and that such noncompliance was isolated to INTEQ and primarily its operations in Venezuela.

The cumulative effect of the adjustments will be reflected in the consolidated statement of operations in the following categories: revenues, cost of revenues, selling, general and administrative and income taxes. The cumulative impact on revenues was $1.7 million.

Attachment 2 - Additional Information on Baker Process

Baker Process is an influential participant in key applications within the market for mechanical equipment utilized in liquid/solid and liquid/liquid separation and filtration. The company's global reputation as a leader in process equipment application design and engineering is reinforced by its direct operating presence in 19 countries. With fiscal 1999 revenue of $389.8 million, Baker Process designs, manufactures, markets and services a broad range of separation equipment and systems. The company's leading market positions and business lines include the widely recognized Bird Machine and EIMCO names, representing one of the largest installed equipment bases and active customer lists in the world.

The company's principal product lines include a broad range of continuous and batch centrifuges, pressure filters (filter presses and belt presses), granular media filters, sedimentation equipment (thickeners and clarifiers), flotation cells and aeration equipment used in a variety of applications and industries including the treatment of municipal water and wastewater. In addition, the company manufactures vacuum filters, such as drum, disc and horizontal belt, and specialty filters that are widely used in the environmental, chemical, minerals and pharmaceutical markets to dewater or clarify process and waste streams. The company also designs and manufactures process solutions for the oilfield and refinery markets, including 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, floating units, hydrocyclones, coalescers, deaeration towers, electrochlorinators and electrostatic desalters.

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 and also offers facilities operation services for processes that utilize many of the company's process equipment product and service lines. The company also provides a variety of services including Design, Build, Own and Operate, contract operations and equipment leases. -0-

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Attachment 3 - Operational Highlights

Operational Highlights for the three and twelve month periods ended December 31, 1999.

                            Year over Year
         (for the 12 months ended December 31, 1999 and 1998)
                               UNAUDITED

                                                     Operating Profit
                                   Revenues            Before Tax
             Segment              ($ millions)         ($ millions)
                              --------------------- ------------------
                                 1999      1998(1)    1999     1998(1)
                              ---------- ---------- --------- --------
Oilfield Operations           $  4,546.7 $  5,820.6 $  360.8  $  741.0
Corporate, interest and other        0.0        0.0   (249.0)   (227.8)
                              ---------- ---------- --------- --------
Total                         $  4,546.7 $  5,820.6 $  111.8  $  513.2
                              ---------- ---------- --------- --------

(1)  Restated for the effect of resolution of the INTEQ accounting
     issues and to treat Baker Process as a discontinued operation.
Results for the year ended December 31, 1999 were impacted by lower worldwide exploration and production spending, resulting in lower revenues, lower prices and decreased utilization of fixed overhead offset partially by cost reductions.

                            Year over Year
          (for the 3 months ended December 31, 1999 and 1998)
                               UNAUDITED

                                                     Operating Profit
                                    Revenues            Before Tax
             Segment              ($ millions)         ($ millions)
                              --------------------- -----------------
                                Dec 99    Dec 98(1)  Dec 99  Dec 98(1)
                              ---------- ---------- -------- --------
Oilfield Operations           $  1,103.9 $  1,307.3 $  51.0  $  137.5
Corporate, interest and other        0.0        0.0   (63.3)    (62.7)
                              ---------- ---------- -------- --------
Total                         $  1,103.9 $  1,307.3 $ (12.3) $   74.8
                              ---------- ---------- -------- --------

                          Sequential Quarters
   (for the 3 months ended December 31, 1999 and September 30, 1999)
                               UNAUDITED
                                                     Operating Profit
                                    Revenues            Before Tax
             Segment              ($ millions)         ($ millions)
                             ---------------------- -----------------
                                Dec 99   Sep 99(1)   Dec 99  Sep 991
                              ---------- ---------- -------- --------
Oilfield Operations           $  1,103.9 $  1,117.6 $  51.0  $  81.6
Corporate, interest and other        0.0        0.0   (63.3)   (61.9)
                              ---------- ---------- -------- --------
 Total                         $  1,103.9 $  1,117.6 $ (12.3) $  19.7
                              ---------- ---------- -------- --------

(1)  Restated for the effect of resolution of the INTEQ accounting
     issues and to treat Baker Process as a discontinued operation.

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     Fourth quarter 1999 results reflect increased exploration and

production spending in the United States and Canada, primarily directed at natural gas, offset by decreased customer spending internationally and weaker results from Western Geophysical. Lower pricing, particularly in international and offshore markets, and manufacturing under-absorption also impacted fourth quarter 1999 results.

Corporate expenses, including interest expense, were $63.3 million for the three months ended December 31, 1999, compared to $62.7 million for the three months ended December 31, 1998. Increased expenses from Project Renaissance and higher net interest expense were the primary reasons for this increase.

Attachment 4 - Division Highlights

Division highlights for the three and twelve month periods ended December 31, 1999:

  • Western Geophysical posted an operating loss in the quarter ended December 31, 1999, as lower pricing and low utilization of seismic assets impacted results. Revenues at Western Geophysical were down 42% in the quarter ended December 31, 1999, as compared to the same period a year ago. International proprietary acquisition continues at depressed levels and multi-client sales weakened during the fourth quarter 1999.

  • Baker Hughes INTEQ also posted a slight operating loss in the quarter ended December 31, 1999 as US revenues were up 15% sequentially from the third quarter but were more than offset by weaker non-US revenues. AutoTrak(TM), its rotary closed looped drilling system, reached a milestone in the fourth quarter of 1999 of one million feet drilled since introduction.

  • Baker Atlas improved its sequential revenues and operating margins in the three months ended December 31, 1999, as compared to the three months ended September 30, 1999, as price erosion in the Eastern Hemisphere was more than offset by stronger cased hole activity and stabilizing prices in North America.

  • Baker Oil Tools expanded its sand control and fracturing services in the quarter ended December 31, 1999 by bringing the vessel R.C. Baker into service in the Gulf of Mexico joining the Republic Tide, which entered service a year earlier. These state of the art vessels have augmented Baker Hughes leadership in the deepwater completions market and have been key to the strong year on year growth in the sand control product line from 1998 to 1999. Increased US revenue in the quarter ended December 31, 1999 was offset by declining international revenues, particularly in the North Sea, which has showed little sign of recovery into early 2000. Baker Oil Tools operating margins declined modestly in the three months ended December 31, 1999, as compared to the three months ended September 30, 1999.

  • Hughes Christensen had a strong quarter ended December 31, 1999, improving both revenue and operating margin sequentially, as compared to the quarter ended September 30, 1999. Customer demand for the Spectrum product line was important to results as fourth quarter drill bit sales in North American approached 1998 levels. Hughes Christensen was Baker Value Added (BVA) positive, that is it returned its cost of capital for both the quarter and the year ended December 31 1999.

  • Centrilift also recorded positive BVA in the quarter ended December 31, 1999.

  • Baker Petrolite posted strong revenue gains in the three months ended December 31, 1999, as compared to the three months ended December 31, 1998. Operating margins improved in the quarter ended December 31, 1999, as compared to both the quarter ended September 31, 1999 and the quarter ended December 31, 1998.

  • Project Renaissance continues on schedule and on budget. At the end of 1999 the company had converted much of Baker Oil Tools and INTEQ's US manufacturing and field operations to SAP and established shared services for information technology, human resources and selected financial functions. The majority of Baker Hughes' US payroll and disbursement transactions are now processed on SAP.

Attachment 5 - Geographic Highlights

     The table sets forth the geographic distribution of oilfield
revenue changes and the BHI rig count changes by geographic region.

     UNAUDITED         12 months ended     3 months ended
                      Dec 99 vs. Dec 98   Dec 99 vs. Dec 98
                      -----------------   -----------------
 Geographic Region     Revenue  Rigs        Revenue Rigs
-----------------------------------------------------------
North America            -15%   -20%           -6%   +24%
   Latin America         -33%   -23%          -14%    -7%
   Europe                -20%   -17%          -29%   -17%
   Middle East           -25%   -16%          -18%   -15%
   Asia Pacific          -30%   -20%          -13%   -18%
   Africa                -18%   -43%          -24%   -43%
Outside North America    -26%   -22%          -22%   -16%
-----------------------------------------------------------
TOTAL                   -22%   -21%          -15%    +7%

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     Weaker seismic revenues impacted regional results in the quarter

ended December 31, 1999. Excluding Western Geophysical, North American revenue was up 3% and revenue outside of North America was down 11% in the quarter ended December 31, 1999, compared to the quarter ended December 31, 1998.

Sequentially, oilfield revenue was down 1% in the three months ended December 31, 1999 from the three months ended September 30, 1999. Weaker seismic revenues impacted all regions in the fourth quarter of 1999. North American revenue for the quarter ended December 31, 1999 fell 4%, but increased 7% excluding Western Geophysical, compared to the quarter ended September 30, 1999. Outside of North America fourth quarter 1999 revenue increased 1% reflecting little change in activity from the quarter ended September 30, 1999. -0-

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Attachment 6 - Impact of Non-Recurring Items

The following schedules detail the non-recurring items the company recognized in the twelve month and three month periods ended December 31, 1999.

          Impact of Nonrecurring Items for the Twelve Months
                       Ended December 31, 1999
                               UNAUDITED

                            Profit                  Profit     earnings
                          before tax     Tax       after tax  per share
                          (millions)  (millions)  (millions)  ($/share)
-----------------------------------------------------------------------
As reported income (loss)
 from continuing
 operations (including
 impact of nonrecurring
 items)                   $   84.3    $  (32.0)   $   52.3    $   0.16
Adjust for the following
 nonrecurring items:
   Net gain on sale of
    properties resulting
    in unusual credits       (39.6)       14.6       (25.0)      (0.08)
   IRS settlement of 1994
    and 1995 audit
    reflected in income
    taxes                                (18.1)      (18.1)      (0.05)
   Net gain on the sale
    of certain assets
    related to a joint
    venture reflected
    in SG&A                  (15.2)        5.8        (9.4)      (0.03)
   Western Geophysical -
    disposition or idling
    of certain marine,
    ocean bottom cable
    and land acquisition
    assets reflected in
    unusual charges
    ($35.2) and cost
    of revenue ($72.1)       107.3       (18.9)       88.4        0.27
   Contract termination
    on a wellbore
    construction unit
    resulting in an
    unusual charge             3.9          --         3.9        0.01
    Severance                 11.6        (3.7)        7.9        0.02
   Net adjustments to the
    1998 nonrecurring
    charge accruals           (9.0)        2.4        (6.6)      (0.02)
   Realized gain on
    trading securities       (31.5)       11.1       (20.4)      (0.06)
-----------------------------------------------------------------------
Operating results,
 excluding impact of
 nonrecurring items       $  111.8    $  (38.8)   $   73.0    $   0.22


           Impact of Nonrecurring Items for the Three Months
                       Ended December 31, 1999
                               UNAUDITED


                            Profit                  Profit    earnings
                          before tax     Tax       after tax  per share
                          (millions)  (millions)  (millions)  ($/share)
-----------------------------------------------------------------------
As reported income (loss)
 from continuing
 operations (including
 impact of nonrecurring
 items)                    $ (94.6)   $   13.1    $  (81.5)   $  (0.25)
Adjust for the following
 nonrecurring items:
    Western Geophysical -
     disposition or idling
     of certain marine,
     ocean bottom cable
     and land acquisition
     assets reflected in
     unusual charges
     ($35.2) and cost of
     revenue ($72.1)          107.3      (18.9)       88.4        0.27
    Contract termination
     on a wellbore
     construction unit
     resulting in an
     unusual charge             3.9         --         3.9        0.01
    Severance                  11.6       (3.7)        7.9        0.02
    Net adjustments to the
     1998 nonrecurring
     charge accruals           (9.0)       2.4        (6.6)      (0.02)
    Realized gain on
     trading securities       (31.5)      11.1       (20.4)      (0.06)
-----------------------------------------------------------------------
Operating results,
 excluding impact
 of nonrecurring items     $  (12.3)  $    4.0    $   (8.3)   $  (0.03)

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     CONTACT: Baker Hughes Incorporated, Houston
              Gary R. Flaharty, 713/439-8039
              gary.flaharty@bakerhughes.com