- - -------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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
of incorporation or organization) Identification No.)
3900 Essex Lane, Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1994
----- -------------------------------
Common Stock, $1.00 par value per share 140,475,000 shares
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<PAGE>
BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three Months
and Six Months ended March 31, 1994 and 1993................... 2
Consolidated Condensed Statements of Financial
Position - March 31, 1994 and September 30, 1993............... 3
Consolidated Condensed Statements of Cash Flows -
Six months ended March 31, 1994 and 1993....................... 5
Notes to Consolidated Condensed Financial Statements................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 13
Part II - Other Information............................................. 20
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PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 1994 1993
REVENUES: -------------------- --------------------
Sales.......................... $ 453,305 $ 505,428 $ 886,787 $ 999,020
Services and rentals........... 196,711 187,021 387,791 377,502
--------- --------- --------- ---------
Total revenues............. 650,016 692,449 1,274,578 1,376,522
COSTS AND EXPENSES: --------- --------- --------- ---------
Cost of sales.................. 269,896 300,254 521,827 596,883
Cost of services and rentals... 93,765 96,083 190,645 194,812
Research and engineering....... 23,995 25,794 47,420 52,201
Marketing and field service.... 147,613 154,211 295,057 308,577
General and administrative..... 51,605 50,448 104,920 101,629
Amortization of goodwill and
other intangibles............ 7,504 9,159 15,465 18,505
Unusual charges................ 24,500 42,000
--------- --------- --------- ---------
Total costs and expenses... 594,378 660,449 1,175,334 1,314,607
--------- --------- --------- ---------
Operating income.................. 55,638 32,000 99,244 61,915
Interest expense.................. 16,588 18,798 31,779 36,460
Interest income................... (1,102) (1,862) (1,788) (3,573)
--------- --------- --------- ---------
Income before income taxes........ 40,152 15,064 69,253 29,028
Income taxes...................... 16,864 12,265 29,086 22,019
--------- --------- --------- ---------
Income before cumulative effect
of accounting changes........... 23,288 2,799 40,167 7,009
---------
Cumulative effect of accounting
changes:
Income taxes................... 25,455
Postretirement benefits other
than pensions (net of $37.5
million income tax benefit).. (69,620)
---------
Accounting changes - net... (44,165)
--------- --------- --------- ---------
Net income (loss)................. $ 23,288 $ 2,799 $ (3,998)$ 7,009
Per share of Common Stock: ========= ========= ========= =========
Income before cumulative effect
of accounting changes........ $ .14 $ .00 $ .24 $ .01
Cumulative effect of accounting
changes...................... (.32)
--------- --------- --------- ---------
Net income (loss).............. $ .14 $ .00 $ (.08)$ .01
========= ========= ========= =========
Cash dividends per share of common
stock........................... $ .115 $ .115 $ .23 $ .23
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
ASSETS
March 31, September 30,
1994 1993
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 13,515 $ 6,992
---------- ----------
Receivables - net............................... 564,329 619,953
---------- ----------
Inventories:
Finished goods.............................. 505,217 467,806
Work in process............................. 55,694 68,408
Raw materials............................... 89,116 102,926
---------- ----------
Total inventories....................... 650,027 639,140
---------- ----------
Net assets of business held for sale............ 111,070 126,430
---------- ----------
Deferred income taxes........................... 55,500 2,990
---------- ----------
Other current assets............................ 31,028 21,301
---------- ----------
Total current assets.................... 1,425,469 1,416,806
---------- ----------
PROPERTY - NET..................................... 590,395 661,463
---------- ----------
OTHER ASSETS:
Property held for disposal...................... 79,841 72,717
Investments..................................... 100,285 98,864
Notes receivable................................ 21,528 25,486
Other assets.................................... 59,225 53,934
Excess costs arising from acquisitions - net.... 808,324 814,070
---------- ----------
Total other assets...................... 1,069,203 1,065,071
---------- ----------
Total............................... $ 3,085,067 $ 3,143,340
========== ==========
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
1994 1993
---------- ----------
CURRENT LIABILITIES:
Accounts payable................................ $ 200,791 $ 249,781
Short-term borrowings and current
portion of long-term debt..................... 6,699 8,448
Accrued employee compensation and benefits...... 110,011 95,303
Taxes other than income......................... 18,938 22,552
Accrued insurance............................... 22,449 20,554
Accrued interest................................ 16,320 11,529
Income taxes.................................... 16,757 15,322
Other accrued liabilities....................... 68,659 72,348
---------- ----------
Total current liabilities............... 460,624 495,837
---------- ----------
LONG-TERM DEBT..................................... 855,951 935,846
---------- ----------
DEFERRED INCOME TAXES.............................. 51,446 78,306
---------- ----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS........ 99,832
----------
OTHER LONG-TERM LIABILITIES........................ 22,295 22,703
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock................................. 4,000 4,000
Common stock.................................... 140,443 140,437
Capital in excess of par value.................. 1,466,501 1,444,549
Retained earnings............................... 116,977 159,277
Cumulative foreign currency translation
adjustment.................................... (133,002) (137,615)
---------- ----------
Total stockholders' equity.............. 1,594,919 1,610,648
---------- ----------
Total............................... $ 3,085,067 $ 3,143,340
========== ==========
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
March 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES: -------- --------
Net income (loss).................................. $ (3,998) $ 7,009
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization of:
Property....................................... 65,387 68,754
Other assets and debt discount................. 23,513 21,909
Gain on disposal of assets....................... (5,014) (6,443)
Gain on disposition of EM&C...................... (8,550)
Foreign currency translation loss - net.......... 9 11
Cumulative effect of accounting changes.......... 44,165
Changes in assets and liabilities:
Change in receivables.......................... 17,712 (46,140)
Change in inventories.......................... (58,736) (16,685)
Change in accounts payable..................... (23,310) (5,918)
Changes in other assets and liabilities........ (13,367) 3,167
-------- --------
Net cash flows from operating activities........... 37,811 25,664
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions............................... (56,613) (58,929)
Proceeds from disposal of assets................. 16,132 19,916
Proceeds from disposition of EM&C................ 128,389
-------- --------
Net cash flows from investing activities........... 87,908 (39,013)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) from commercial paper
and revolving credit facilities................ (81,540) 79,019
Redemption of debentures......................... (21,361)
Proceeds from exercise of stock options
and stock purchase grants...................... 62 1,904
Dividends........................................ (38,302) (37,900)
-------- --------
Net cash flows from financing activities........... (119,780) 21,662
-------- --------
Effect of exchange rate changes on cash............ 584 (3,698)
-------- --------
Increase in cash and cash equivalents.............. 6,523 4,615
Cash and cash equivalents, beginning of
period........................................... 6,992 6,692
-------- --------
Cash and cash equivalents, end of period........... $ 13,515 $ 11,307
======== ========
Income taxes paid.................................. $ 23,020 $ 19,188
Interest paid...................................... $ 24,402 $ 30,317
See accompanying notes to consolidated condensed financial statements.
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. General
In the opinion of the Company, the unaudited consolidated condensed
financial statements include all adjustments consisting of normal recurring
accruals necessary for a fair presentation of the Company's consolidated
financial position as of March 31, 1994 and 1993 and its consolidated results
of operations and cash flows for each of the three and six month periods ended
March 31, 1994 and 1993. Although the Company believes that the disclosures in
these financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (See the Company's Annual
Report on Form 10-K for the year ended September 30, 1993 for the most recent
annual financial statements prepared in accordance with generally accepted
accounting principles). Certain balances on the Consolidated Statement of
Financial Position at September 30, 1993 have been reclassified to conform to
the March 31, 1994 presentation. The results of operations for the three and
six months ended March 31, 1994 are not necessarily indicative of the results
to be expected for the full year.
Note 2. Income(Loss) Per Common Share
Net income (loss) per common share is based on the weighted average number
of shares outstanding during the respective periods (three months ended
March 31, 1994 and 1993, 140,443,000 and 138,794,000, respectively; six months
ended March 31, 1994 and 1993, 140,442,000, and 138,722,000, respectively) and
excludes the negligible dilutive effect of shares issuable in connection with
employee stock plans. Net income (loss) per common share has been adjusted for
dividends on preferred stock of $3.0 million and $6.0 million for the three
months and six months ended March 31, 1994 and 1993, respectively.
Note 3. Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," effective October 1, 1993. Previously, the
Company used SFAS No. 96, "Accounting for Income Taxes". The cumulative effect
of adopting SFAS No. 109 on the Company's consolidated financial statements was
a credit to income of $25.5 million ($.18 per share).
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credit carryforwards. The tax effects of the
Company's temporary differences and carryforwards at October 1, 1993 are as
follows (in thousands):
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<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Deferred tax liabilities:
Property $ 65,750
Investments 35,600
Excess costs arising from acquisitions 43,800
Undistributed earnings of foreign subsidiaries 23,000
Other 16,600
--------
Total $ 184,750
========
Deferred tax assets:
Receivables $ 5,700
Inventory 48,900
Postretirement benefits other than pensions 37,500
Other liabilities 25,600
Operating loss carryforwards 51,350
Tax credit carryforwards 59,600
Other 12,150
--------
240,800
Valuation allowance (33,966)
--------
Total $ 206,834
========
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
valuation allowance relates to the realization of operating loss carryforwards
in certain non-U.S. jurisdictions and foreign tax credit carryforwards in the
U.S.
As a result of applying SFAS No. 109, previously unrecorded deferred tax
assets related to net deductible temporary differences, tax credit
carryforwards and operating loss carryforwards were recognized at
October 1, 1993 as part of the cumulative effect of adopting the statement.
Under prior accounting, a part of these benefits would have been recognized as
a reduction of income tax expense in the period utilized. This is evident in
the effective tax rate, adjusted for the unusual charges, for the three months
and six months ended March 31, 1993 of 31.0%. Accordingly, the adoption of
SFAS No. 109 at the beginning of 1994 had the effect of increasing the
effective tax rate for the three months and six months ended March 31, 1994 to
42.0%.
The provision for income tax expense for the three months ended
March 31, 1994 was $16.9 million, of which $2.8 million and $14.1 million is
current and deferred expense, respectively. The provision for income tax
expense for the six months ended March 31, 1994 was $29.1 million, of which
$10.1 million and $19.0 million is current and deferred expense, respectively.
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<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
In conjunction with the adoption of SFAS No. 109, a benefit of $21.9
million was allocated to capital in excess of par value in the first quarter of
1994, which reflects the cumulative tax effect of stock options exercised by
employees of the Company for which the Company has taken tax deductions in its
federal tax return.
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 as a dividend, lent by the foreign subsidiary to the Company or if the
Company should sell its stock in the subsidiary. The additional amount of
taxes payable are not practicable to estimate but the Company believes they
would not be material due to offsetting foreign tax credits generated by the
repatriation of such earnings.
Note 4. Postretirement Benefits Other than Pensions
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" effective October 1, 1993. The statement
requires that the estimated cost of postretirement benefits other than pensions
be accrued over the period earned rather than expensed as incurred.
The cumulative effect of adopting SFAS No. 106 on the immediate recognition
basis, as of October 1, 1993, was a charge to income of $69.6 million ($.50 per
share), net of an income tax benefit of $37.5 million.
The Company provides postretirement health care and life insurance benefits
for substantially all U.S. employees. In fiscal 1993 and 1992, the Company
recognized $9.5 million and $8.4 million, respectively, as expense for
postretirement health care and life insurance benefits. Expense to be
recognized in fiscal 1994 under SFAS No. 106 is expected to be approximately
$8.8 million. The Company's postretirement plans are not funded. The status
of the plan is as follows:
Accumulated postretirement benefit obligation ("APBO") at October 1, 1993
(in thousands):
Retirees $ 73,300
Fully eligible active plan participants 10,300
Other active plan participants 23,500
--------
APBO $ 107,100
========
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<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Net periodic postretirement benefit cost for 1994 (in thousands):
Three Months Ended Six Months Ended
March 31, 1994 March 31, 1994
------------------ ----------------
Service cost of benefits earned
during the quarter $ 325 $ 650
Interest cost on APBO 1,875 3,750
------ ------
Net postretirement benefit cost $ 2,200 $ 4,400
====== ======
The assumed health care cost trend rate used in measuring the APBO as of
October 1, 1993 was 12.2% for 1994 declining gradually each successive year
until it reaches 5% in 2002, after which it remains constant. A 1% increase in
the trend rate for health care costs would have increased the APBO by
approximately 8% and the aggregate of the service and interest cost components
of the net periodic postretirement benefit cost by approximately 9%. The
assumed discount rate used in determining the APBO was 7%.
Note 5. Dispositions
In March 1994, the Company announced its intent to dispose of the
EnviroTech Pumpsystems ("EPS") group of companies. EPS provides a variety of
specialized pumps to the mineral, mining, chemical, petro-chemical and
municipal markets. The decision to divest EPS is part of a continuing review
of the Company's core product and service competencies. Accordingly, the net
assets of the EPS operations have been classified as a current asset at March
31, 1994, anticipating that the disposition will occur within twelve months.
EPS provided revenues and profits of $213.0 million and $15.0 million,
respectively, in the fiscal year 1993. The proceeds from any disposition would
be redeployed in a manner that will prevent dilution to future earnings. Such
action could include reduction of debt by repurchase or repayment.
In July 1993, the Company announced that the EnviroTech Measurements &
Controls ("EM&C") group of companies would no longer be considered part of its
core business. In March 1994, the Company completed the sale of EM&C. The
sale provided $128.4 million in cash and resulted in a pre-tax gain of $8.6
million. The sale excluded the computer peripherals business in Europe
operated under the name of Tracor Europa.
Note 6. Unusual Charge
During the first quarter of 1993, the Company recognized an unusual charge
of $17.5 million in connection with reaching an agreement with representatives
of the class plaintiffs for the settlement of a class action civil antitrust
lawsuit concerning the marketing of tricone rock bits. A cash payment was made
in April 1993 of $17.5 million. See Note 7.
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<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
During the second quarter of fiscal 1993, the Company, along with Dresser
Industries and Parker & Parsley Petroleum Development Incorporated, entered
into a Memorandum of Understanding covering the settlement of all outstanding
litigation among the parties. In recognition of settlement, the Company
recorded an unusual charge of $24.5 million. A cash payment was made for the
Company's portion in May 1993 of $57.5 million. See Note 7.
Note 7. Litigation
PARKER & PARSLEY
On September 8, 1992, Parker & Parsley Petroleum Development Incorporated
("PDP") filed a lawsuit alleging intentional product delivery or service
variances on a number of well stimulation projects in West Texas for PDP and
certain related parties in the 238th Judicial District Court in Midland, Texas
seeking in excess of $120.0 million in actual and punitive damages. This case
was similar to a case in federal court which had previously been vacated by the
U.S. Fifth Circuit Court of Appeals. In connection with the initial public
offering by BJ Services Company ("BJ"), the Company agreed to indemnify BJ for
damages and costs of litigation arising out of said allegations or similar
claims from any other customers prior to the date of the initial public
offering.
On May 26, 1993, the Company and Dresser Industries ("DI") made a cash
payment, shared equally, of $115.0 million to PDP to settle all outstanding
claims among the parties in this litigation. The Company previously
established a reserve for this litigation and also had access to additional
third party funds from contractual arrangements. Since the Company was unable
to reach timely agreement with its insurance carriers, the Company recorded a
charge to earnings of $24.5 million in the quarter ended March 31, 1993. In
April 1994 a settlement was reached with the insurance carriers. A recovery of
approximately $20 million, net of expenses, is expected to be received in
May 1994. This gain will be recorded in the quarter ending June 30, 1994.
In this regard, Ms. E. M. Filter, a director of the Company and an
executive officer of Xerox Corporation, had disclosed that two subsidiaries of
Talegen Holdings, Inc., a wholly owned subsidiary of Xerox Financial Services,
Inc., had been sued by the Company in connection with the litigation. On
June 17, 1991, the Company filed a Complaint against its insurers, including
the two subsidiaries of Talegen Holdings, Inc., styled Baker Hughes
Incorporated, et. al. v. Underwriters of Lloyds et. al. in the 333rd Judicial
District Court in Harris County, Texas. At the time of the settlement with
PDP, Ms. Filter advised the Company that a conflict of interest existed in this
matter and requested exclusion from any further discussions regarding insurance
coverage in connection with the PDP litigation.
GLYN SNELL
On February 15, 1991, Glyn Snell, et. al. filed a class action suit on
behalf of royalty interest owners in 238th Judicial District Court in Midland
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BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
County, Texas, implicating DI, BJ, the Company and affiliates in damages to the
same wells included in the PDP litigation. On September 30, 1993, the Company
and DI agreed to make a cash payment, shared equally, of $15.0 million to the
class pursuant to a Settlement Agreement. An Order Preliminarily Approving The
Settlement, Directing Notice To The Class and Setting a Hearing on Proposed
Settlement on April 18, 1994 (now postponed to June 30, 1994) was entered by
the Court on October 1, 1993. The Company has adequate reserves recorded at
March 31, 1994 with respect to this matter.
MISSION RESOURCES
On June 30, 1992, the Company was notified of a suit against BJ and certain
individual defendants filed by Mission Resources, Inc. - II ("Mission") in the
Superior Court for the State of California for the County of Kern, alleging
fraudulent misrepresentation, negligent misrepresentation, fraud, breach of
contract and violations of RICO in connection with product delivery or service
variances on approximately 53 well stimulation projects performed by BJ-Hughes,
in Kern County in late 1983 and early 1984. Although the suit does not name
the Company as a defendant, the allegations may fall within the Company's
agreement, in connection with the initial public offering by BJ, to indemnify
it for damages, if any, and costs of litigation arising out of any such
claims. BJ has removed the case to the United States District Court for the
Eastern District of California, Fresno Division. On January 27, 1994, Mission
amended its complaint to include an allegation of negligence. The suit seeks
general damages in the amount of at least $15.0 million and treble damages in
the amount of at least $45.0 million. This case is in its early stages with no
discovery on the merits having occurred.
DEPARTMENT OF JUSTICE INVESTIGATION
On January 2, 1991, the Company and Hughes Christensen Company received a
United States federal grand jury subpoena requesting documents relating to the
marketing of tricone rock bits. Six other tricone rock bit manufacturers
received similar subpoenas with respect to the same investigation being
conducted by the Department of Justice.
On July 13, 1992, pursuant to an agreement with the Justice Department, HCC
pleaded guilty to a one count criminal information alleging that it had
conspired to fix the price of tricone rock bits for a period of nine weeks in
1989 in violation of Section 1 of the Sherman Act. A fine of $1.0 million was
imposed by the Court upon acceptance of the plea.
As a consequence of the Justice Department investigation, the Company and
three other major producers of tricone rock bits were sued civilly by several
litigants, including Red Eagle Resources Corporation Inc., alleging unspecified
damages and claiming to represent a class of purchasers of such rock bits who
had been damaged as a consequence of a conspiracy in violation of Section 1 of
the Sherman Act. The civil suits have been consolidated in a single action in
the Southern District of Texas, Houston Division. On September 8, 1992, the
trial court entered an order provisionally certifying the case as a class
action on behalf of all purchasers of insert and milled tooth tricone rock bits
-11-
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
for domestic use from September 1986 to January 1992. On January 27, 1993, the
Company reached an agreement with the representatives of the class plaintiffs
to settle this suit for $17.5 million. On April 26, 1993, the settlement was
approved by the Court and a judgement dismissing claims against the Company on
behalf of the class was entered. A charge to earnings of $17.5 million was
recorded in the first quarter of 1993. On September 17, 1993, the Court
notified the class that an Additional Settlement Agreement had been entered
into on behalf of the class with two other defendants. Because the prior
settlement with the Company contained a most favored nations clause requiring a
refund to the Company if a later settlement with any other defendants is more
favorable, the Company received a refund of $2.1 million in the first quarter
of 1994. One antitrust action by a customer who opted out of the class
settlement remains pending. This customer's claim represented four percent of
the original class.
TRW INC.
On May 30, 1989, TRW Inc. ("TRW") filed suit against the Company, Bird
Machine Company, Inc. (a wholly owned subsidiary of the Company) ("BMC"), and
Bird Incorporated (the previous parent of BMC), in the U.S. District Court for
the Southern District of Texas, Houston Division, alleging breach of express
warranty, fraud, and breach of a duty of good faith and fair dealing, in
connection with the sale of certain disc and decanter machines sold to TRW by
BMC prior to the acquisition of BMC by the Company in 1989. On April 29, 1992,
the jury found that TRW had suffered damages. The District Court, on
July 30, 1992, entered a final judgment in the amount of $7.7 million together
with prejudgment and post-judgment interest. The United States Court of
Appeals for the Fifth Circuit affirmed the District Court's decision, and
denied the Company's appeal to rehear portions of the case in December 1993.
In January 1994, the Company paid $10.4 million to TRW in satisfaction of the
judgment.
Note 8. Debt
In March 1994, the Company entered into an interest rate swap that will
begin in October 1994 and mature in January 2000. Under the terms of the swap,
the Company will receive a fixed rate of interest and pay a floating rate of
interest on a notional amount of $93.0 million.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
Oilfield Operations companies manufacture, sell and provide services used
in the drilling, completion and maintenance of oil and gas wells. The business
environment of the Company is significantly affected by worldwide expenditures
of the petroleum industry. Important factors establishing the levels of these
expenditures include world economic conditions, crude oil and natural gas
supply and demand balances, the legislative environment in the United States
and other major countries, and developments in the Middle East and other major
petroleum producing regions.
ACTIVITY INDICATORS
Crude oil and natural gas prices are a major determinant of exploration and
development expenditures. (The amounts in the table below are quarter averages
for the period.)
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 1994 1993
---------------------------------------------------------------------------
WTI ($/Bbl) 14.79 19.89 15.56 20.20
U.S. Spot Natural Gas ($/mcf) 2.19 1.89 2.11 2.02
Oil prices weakened in the second quarter and first six months of 1994
falling $5.10/Bbl or 25.6% and $4.64/Bbl or 23.0%, respectively, compared to
the same periods a year ago. The Company expects prices to be flat, ranging
between $15 and $20/Bbl for the next several years. U.S. natural gas prices
strengthened in 1994, increasing 15.9% for the quarter and 4.5% for the six
months. Prices are expected to increase modestly over the next year. The
Company believes that higher natural gas prices and a tightening market should
stimulate exploration and development drilling directed towards natural gas.
A more direct indicator of expenditures and drilling activity is the Baker
Hughes rotary rig count. Workover activity, as measured by the U.S. workover
rig count, is also an indicator of expenditure activity. (The amounts in the
table below are quarter averages for the period.)
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 1994 1993
---------------------------------------------------------------------------
North American 1,052 914 1,072 959
Non-North American 749 764 764 789
----- ----- ----- -----
Total Rig Count 1,801 1,678 1,836 1,748
===== ===== ===== =====
U.S. Workover Rig Count 1,309 1,340 1,419 1,407
===== ===== ===== =====
Total drilling activity was 7.3% higher in the second quarter of 1994 and
5.0% higher in the first six months of 1994 when compared to the same periods
in 1993. Activity increases in North America were offset by activity decreases
in the non-North American markets.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
North American Activity
The North American rig count was up 15.1% for the quarter and 11.8% for the
six months. Activity increases in the Gulf of Mexico drove an increase in the
average offshore rig count from 68 to 97 rigs -- up 42.6% from the second
quarter of 1993 and from 63 to 98 rigs -- up 55.6% from the first six months of
1993. The Company benefits from offshore drilling, more so than land drilling,
as this type of activity requires the premium products and services offered by
the Company. The Canadian operations were also favorably impacted by the
increase in gas drilling as Canadian rig activity was up 37.8% and 51.1% for
the quarter and six months year over year. U.S. workover activity was down
2.3% for the quarter and up .9% for the six months from 1993 levels.
The outlook for North American activity continues to be positive as the
Company expects gas-directed drilling to increase over the next year. In
Canada, the increase in gas-directed drilling should continue. The average
U.S. workover rig count is expected to increase slightly in 1994.
Non-North American Activity
Outside North America, activity continued to fall. The average rig count
was down 2.0% for the quarter and 3.2% for the six months. The fall was
widespread as most regions showed a decrease in activity. Two areas of
particular importance to the Company that were down significantly were Italy
and Nigeria. The Company expects little change in international activity over
the near term. Political issues and softness in crude oil prices will continue
to create uncertainty in key international markets.
DISPOSITIONS
In March 1994, the Company announced its intent to dispose of the
EnviroTech Pumpsystems ("EPS") group of companies. EPS provides a variety of
specialized pumps to the mineral, mining, chemical, petro-chemical and
municipal markets. The decision to divest EPS is part of a continuing review
of the Company's core product and service competencies. Accordingly, the net
assets of the EPS operations have been classified as a current asset at
March 31, 1994, anticipating that the disposition will occur within twelve
months. EPS provided revenues and profits of $210.0 million and $15.0 million,
respectively, in the fiscal year 1993. The proceeds from any disposition would
be redeployed in a manner that will prevent dilution to future earnings. Such
action could include reduction of debt by repurchase or repayment.
In July, 1993, the Company announced that the EnviroTech Measurements &
Controls ("EM&C") group of companies would no longer be considered part of its
core business. In March 1994, the Company completed the sale of EM&C. The
sale provided $128.4 million in cash and resulted in a pre-tax gain of $8.6
million. The sale excluded the computer peripherals business in Europe
operated under the name of Tracor Europa.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
RESULTS OF OPERATIONS
Three Months Ending Six Months Ending
Selected Consolidated Results March 31, March 31,
(In millions) 1994 1993 1994 1993
---------------------------------------------------------------------------
Revenues $ 650.0 $ 692.4 $1,274.6 $1,376.5
======= ======= ======= =======
Operating Income Before Unusual
Charges 55.6 56.5 99.2 103.9
Unusual Charge 24.5 42.0
------- ------- ------- -------
Operating Income $ 55.6 $ 32.0 $ 99.2 $ 61.9
======= ======= ======= =======
Revenues
Consolidated revenues for the three months and six months ended March 31,
1994 decreased 6.1% and 7.4%, respectively, compared to the same periods last
year. The quarter and six months ended March 31, 1993 include the results of
EM&C revenues of $48.9 million and $92.1 million, respectively. Excluding
EM&C, revenues were up 1.0% for the quarter with virtually no change for the
six months. Sales revenues were down in the 1994 periods because of the sale
of EM&C and decreases in EnviroTech Process Equipment and EPS. Process
Equipment and EPS operations consist primarily of sales revenue. The services
and rentals revenue increases result from the Oilfield Operations.
Oilfield Operations reported revenues of $531.8 million for the quarter,
compared to $513.2 million for the 1993 quarter, an increase of $18.6 million.
Revenues for the six months increased $19.6 million to $1.05 billion compared
to 1993. Much of the improvement in both sales and service and rental revenues
is attributable to increased drilling activity in the Western Hemisphere fueled
by higher natural gas prices, specifically U.S. offshore and Canada. Latin
America's improved business and economic climate coupled with the development
of several large projects, has resulted in higher sales and service and rental
revenues in this region as well. However, much of the improvement in the
Western Hemisphere markets was offset by declines in the European and West
Africa Markets, most notably in geographic areas where Oilfield Operations
enjoys significant revenue on a per rig basis.
The operations of the EnviroTech group which currently consist of the
EnviroTech Process Equipment group of companies had revenues of $59.5 million
for the second quarter of 1994, down $13.4 million from 1993, and $118.3
million for the first six months of 1994, down $18.6 million from 1993. These
results exclude EM&C, which was sold during the quarter, as well as EPS due to
the planned sale of this business. Political uncertainty in the countries of
the former Soviet Union and several large project deferrals due to financing
delays are the major factors in the sales and services and rentals decline.
Revenues from businesses held for sale, which consist primarily of the EPS
group of companies, were $61.3 million for the quarter, down 8.4%, and $111.6
million for the six months, down 8.8%. The decrease is due primarily to the
general weakness in the worldwide economy and several large orders in the prior
year.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Operating Income
Operating income increased 73.8% in the second quarter of 1994 compared to
1993. Results for 1993 include the impact of an unusual charge, discussed
below, of $24.5 million. Excluding the unusual charge, operating income
decreased 1.6%. Operating income increased 60.3% in the first six months of
1994 compared to 1993. Results for 1993 include the impact of unusual charges,
discussed below, of $42.0 million. Excluding the unusual charges, operating
income decreased 4.5%.
Cost of sales, cost of services and rentals, research and engineering
expenses and marketing and field service expenses decreased in the 1994 periods
in line with the revenue decreases. General and administrative expenses, which
are less sensitive to changes in revenue, increased in 1994. The increase is
due primarily to a net gain of $2.0 million recorded in the second quarter of
1993 in connection with the termination of a defined benefit pension plan.
Amortization of goodwill and other intangibles has decreased because of the
sale of EM&C.
Operating income for Oilfield Operations was $52.8 million for the quarter,
compared to $51.7 million in 1993, a 2.1% increase. Operating income for the
six months was $100.6 million, compared to $84.3 million in 1993, a 19.3%
increase. Results for the first six months of 1993 include the impact of a
$17.5 million unusual charge. Excluding the impact of the unusual charge,
Oilfield Operations' operating income for the six months decreased 1.2%. The
EnviroTech group contributed operating income of $3.1 million in the second
quarter of 1994, compared to $4.8 million in the second quarter of 1993.
Operating income for the six months was $5.1 million, compared to $7.3 million
in 1993.
Operating income for businesses held for sale was $4.9 million for the
quarter, down $1.8 million, and $8.4 million for the six months, down $3.6
million.
Offsetting the $8.6 million gain recorded on the sale of EM&C, the Company
provided a reserve of $4.4 million to discontinue certain Oilfield Operations
in Mexico, recorded a $2.1 million provision to writedown certain excess
facilities to their net realizable value and accrued $2.0 million for certain
litigation.
Unusual Charge
1993: During the first quarter of 1993, the Company recognized a charge of
$17.5 million relating to an agreement for the settlement of the civil
antitrust litigation involving the marketing of tricone rockbits. During the
second quarter of fiscal 1993, the Company, along with Dresser Industries and
Parker & Parsley Petroleum Development Incorporated, entered into a Memorandum
of Understanding covering the settlement of all outstanding litigation among
the parties. In recognition of settlement, the Company recorded an unusual
charge of $24.5 million.
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Interest Expense
Interest expense in the second quarter of 1994 decreased $2.2 million from
the same quarter a year ago. Interest expense for the first six months of 1994
decreased $4.7 million compared to 1993. The decreases are attributable to
lower effective interest rates coupled with a decrease in total debt
outstanding.
Income Taxes
The effective income tax rate for the second quarter and first six months
of 1994 was 42.0% as compared to 81.4% and 75.9%, respectively, in 1993. The
effective rate in 1993 differs from the federal statutory rate due primarily to
nondeductible goodwill amortization, unusual charges for which a benefit is not
currently recognizable and foreign earnings taxed at higher effective tax
rates. The Company determined its tax provision in 1993 under SFAS No. 96.
The effective rate for 1994 differs from the federal statutory rate due
primarily to nondeductible goodwill amortization, disallowance of certain
expenses and foreign earnings taxed at higher effective tax rates. The Company
determined its tax provision for 1994 under SFAS No. 109.
CAPITAL RESOURCES AND LIQUIDITY
Financing Activities
Net cash outflows from financing activities were $119.8 million in the
first six months of 1994 compared to cash inflows of $21.7 million in the first
six months of 1993. The Company used the proceeds from the sale of EM&C to
reduce debt levels. Borrowings were used in 1993 to fund operating needs. In
December 1992, the Company used cash to redeem in full its 9% debentures for
$18.2 million.
Total debt outstanding at March 31, 1994 was $862.7 million, compared to
$944.3 million at September 30, 1993. The debt to equity ratio was .541 at
March 31, 1994, compared to .586 at September 30, 1993.
At March 31, 1994, the Company had $514.2 million of credit facilities with
commercial banks, of which $346.9 million is committed. These facilities are
subject to normal banking terms and conditions and do not materially restrict
the Company's activities.
Investing Activities
Net cash inflows from investing activities were $87.9 million in the first
six months of 1994 compared to cash outflows of $39.0 million in the first six
months of 1993. The sale of EM&C in March 1994 provided $128.4 million in
cash. Property additions have decreased from $58.9 million in 1993 to $56.6
million in 1994. The ratio of capital expenditures to depreciation has
increased slightly over the same period from 85.7% to 86.6%. The Company
targets a capital expenditure to depreciation ratio of approximately 80% which
-17-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
it believes is adequate to support current levels of operations. The majority
of the capital expenditures have been in the Oilfield segment where the largest
single item is the expenditure for rental tools and equipment to supplement the
rental fleet. Funds provided from operations and outstanding lines of credit
are expected to be more than adequate to meet future capital expenditure
requirements.
Operating Activities
Net cash inflows from operating activities were $37.8 million in the first
six months of 1994 compared to $25.7 million in the first six months of 1993.
The increase of $12.1 million in 1994 was due primarily to the collection of
receivables and an increase in income before cumulative effect of accounting
changes. These sources of cash were offset to some degree by the build up of
inventories in Oilfield Operations due to increased activity in the U.S. and
Latin America compared to 1993.
ACCOUNTING STANDARDS
Postretirement Benefits Other Than Pensions
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The statement
requires accrual basis accounting for future postretirement benefits rather
than cash basis accounting. The Company adopted this statement effective
October 1, 1993.
The Company elected to immediately recognize the cumulative effect of the
change in accounting and recorded a charge of $107.1 million ($69.6 million net
of income tax benefit) in the first quarter of 1994.
Accounting for Income Taxes
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes". The statement requires an asset and liability approach for financial
accounting and reporting of income taxes. The Company adopted SFAS No. 109
effective October 1, 1993, without restatement of prior years and recorded a
credit to income of $25.5 million in the first quarter of 1994.
The Company established valuation reserves for certain of its deferred tax
assets which management deemed the realization was not likely to occur. In the
U.S. jurisdiction, the Company has fully reserved the credit portion of all its
foreign tax credit carryforwards based on a recent historical pattern of
expiring foreign tax credits and the lack of foreign sourced taxable income in
amounts sufficient to utilize the foreign tax credit carryforwards. The
Company has also reserved the operating loss carryforwards in certain non-U.S.
jurisdictions where its operations have decreased, currently ceased or the
Company has withdrawn entirely.
The Company has not established valuation reserves on its remaining
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
deferred tax assets. Management believes that sufficient sources of taxable
income will occur in the applicable future periods so that these tax assets
will be utilized. This judgement is based on recent profitable operations,
before unusual charges, in the appropriate jurisdictions.
The adoption of SFAS No. 109 has the practical effect of allowing the
Company to report its tax assets, net of valuation reserves, on the
Consolidated Statement of Financial Position. Additionally, the statement
allows the netting of the noncurrent deferred tax assets and liabilities within
the same taxing jurisdiction. The Company has used this approach in reporting
its tax accounts in the Consolidated Statement of Financial Position at
March 31, 1994.
Postemployment Benefits
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits". The statement, like SFAS 106, requires accrual basis
accounting for such benefits as opposed to cash basis accounting. The Company
plans to adopt SFAS No. 112 in fiscal 1995 and immediately recognize the
cumulative effect of the change in accounting. The Company currently estimates
an accumulated postponement benefit obligation at October 1, 1994 of
approximately $23.0 million. The reduction in the Company's estimate from the
first quarter of 1994 of $35.0 million is the result of recent legislation
stating that Medicare benefits would be the primary coverage for certain
disabled employees covered by the Company's long-term disability plan.
Investments in Debt and Equity Securities
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", that will supersede SFAS No. 12
that required marketable equity securities be carried at lower of aggregate
cost or market. As it relates to the Company, SFAS No. 115 requires that
investments in debt and equity securities should be reported at fair value with
changes in the fair value recorded in a separate component of stockholders'
equity. The Company plans to adopt SFAS No. 115 in fiscal 1995 and currently
estimates it will not have a material impact on the consolidated financial
statements.
-19-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 of Notes to Consolidated Condensed Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAKER HUGHES INCORPORATED
(Registrant)
Date: May 13, 1994 By /s/FRANKLIN MYERS
------------------------------------
Vice President and General Counsel
Date: May 13, 1994 By /s/JAMES E. BRAUN
------------------------------------
Controller
-21-
<PAGE>
