- - -------------------------------------------------------------------------------
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 June 30, 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 July 31, 1994
----- -------------------------------
Common Stock, $1.00 par value per share 140,879,800 shares
- - -------------------------------------------------------------------------------
<PAGE>
BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three Months
and Nine Months ended June 30, 1994 and 1993................... 2
Consolidated Condensed Statements of Financial
Position - June 30, 1994 and September 30, 1993................ 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended June 30, 1994 and 1993....................... 6
Notes to Consolidated Condensed Financial Statements................ 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 15
Part II - Other Information............................................. 23
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------------------- --------------------
REVENUES:
Sales.......................... $ 400,324 $ 475,322 $1,287,111 $1,474,342
Services and rentals........... 190,208 195,094 577,999 572,596
--------- --------- --------- ---------
Total revenues............. 590,532 670,416 1,865,110 2,046,938
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales.................. 231,771 281,727 753,598 878,610
Cost of services and rentals... 96,961 102,223 287,606 297,035
Research and engineering....... 22,641 26,067 70,061 78,268
Marketing and field service.... 138,866 156,269 433,923 464,846
General and administrative..... 45,140 48,991 150,060 150,620
Amortization of goodwill and
other intangibles............ 7,572 9,345 23,037 27,850
Unusual charges (credit)....... (19,281) (19,281) 42,000
Operating income of business
held for sale................ (6,005) (6,005)
--------- --------- --------- ---------
Total costs and expenses... 517,665 624,622 1,692,999 1,939,229
--------- --------- --------- ---------
Operating income.................. 72,867 45,794 172,111 107,709
Interest expense.................. 16,170 15,639 47,949 52,099
Interest income................... (501) (1,408) (2,289) (4,981)
--------- --------- --------- ---------
Income before income taxes........ 57,198 31,563 126,451 60,591
Income taxes...................... 22,759 7,732 51,845 29,751
--------- --------- --------- ---------
Income before extraordinary loss
and cumulative effect of
accounting changes.............. 34,439 23,831 74,606 30,840
---------
Extraordinary loss (net of $6.3
million income tax benefit)..... (11,788) (11,788)
---------
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........................ $ 22,651 $ 23,831 $ 18,653 $ 30,840
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (CONTINUED)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------------------- --------------------
Per share of Common Stock:
Income before extraordinary loss
and cumulative effect of
accounting changes........... $ .22 $ .15 $ .46 $ .16
Extraordinary loss............. (.08) (.08)
Cumulative effect of accounting
changes...................... (.32)
--------- --------- --------- ---------
Net income..................... $ .14 $ .15 $ .06 $ .16
========= ========= ========= =========
Cash dividends per share of common
stock........................... $ .115 $ .115 $ .345 $ .345
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
-3-
<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
ASSETS
June 30, September 30,
1994 1993
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 40,131 $ 6,992
---------- ----------
Receivables - net............................... 600,492 619,953
---------- ----------
Inventories:
Finished goods.............................. 534,146 467,806
Work in process............................. 52,688 68,408
Raw materials............................... 79,425 102,926
---------- ----------
Total inventories....................... 666,259 639,140
---------- ----------
Net assets of business held for sale............ 104,137 126,430
---------- ----------
Deferred income taxes........................... 50,382 2,990
---------- ----------
Other current assets............................ 34,723 21,301
---------- ----------
Total current assets.................... 1,496,124 1,416,806
---------- ----------
PROPERTY - NET..................................... 573,327 661,463
---------- ----------
OTHER ASSETS:
Property held for disposal...................... 76,079 72,717
Investments..................................... 93,272 98,864
Notes receivable................................ 20,831 25,486
Other assets.................................... 59,396 53,934
Excess costs arising from acquisitions - net.... 801,084 814,070
---------- ----------
Total other assets...................... 1,050,662 1,065,071
---------- ----------
Total............................... $ 3,120,113 $ 3,143,340
========== ==========
See accompanying notes to consolidated condensed financial statements.
-4-
<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
1994 1993
---------- ----------
CURRENT LIABILITIES:
Accounts payable................................ $ 207,799 $ 249,781
Short-term borrowings and current
portion of long-term debt..................... 5,388 8,448
Accrued employee compensation and benefits...... 119,303 95,303
Taxes other than income......................... 20,685 22,552
Accrued insurance............................... 25,869 20,554
Accrued interest................................ 13,970 11,529
Income taxes.................................... 19,493 15,322
Other accrued liabilities....................... 60,140 72,348
---------- ----------
Total current liabilities............... 472,647 495,837
---------- ----------
LONG-TERM DEBT..................................... 854,579 935,846
---------- ----------
DEFERRED INCOME TAXES.............................. 48,654 78,306
---------- ----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS........ 95,253
----------
OTHER LONG-TERM LIABILITIES........................ 29,381 22,703
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock................................. 4,000 4,000
Common stock.................................... 140,486 140,437
Capital in excess of par value.................. 1,467,113 1,444,549
Retained earnings............................... 120,473 159,277
Cumulative foreign currency translation
adjustment.................................... (112,473) (137,615)
---------- ----------
Total stockholders' equity.............. 1,619,599 1,610,648
---------- ----------
Total............................... $ 3,120,113 $ 3,143,340
========== ==========
See accompanying notes to consolidated condensed financial statements.
-5-
<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
June 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES: -------- --------
Net income......................................... $ 18,653 $ 30,840
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization of:
Property....................................... 93,984 103,249
Other assets and debt discount................. 35,052 34,357
Gain on disposal of assets....................... (11,661) (11,198)
Gain on disposition of EM&C...................... (8,550)
Foreign currency translation (gain)loss - net.... 80 (67)
Cumulative effect of accounting changes.......... 44,165
Extraordinary loss............................... 11,788
Changes in assets and liabilities:
Change in receivables.......................... (23,157) (68,017)
Change in inventories.......................... (75,307) (31,267)
Change in accounts payable..................... (23,334) 892
Changes in other assets and liabilities........ 53,248 (72,980)
-------- --------
Net cash flows from operating activities........... 114,961 (14,191)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions............................... (77,249) (87,898)
Proceeds from disposal of assets................. 28,240 29,408
Proceeds from disposition of EM&C................ 128,389
-------- --------
Net cash flows from investing activities........... 79,380 (58,490)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) from commercial paper
and revolving credit facilities................ (55,972) (62,984)
Net proceeds from issuance of notes.............. 224,064
Net proceeds from issuance of debenture purchase
warrants....................................... 7,026
Redemption of debentures......................... (53,431) (18,197)
Proceeds from exercise of stock options
and stock purchase grants...................... 717 10,659
Dividends........................................ (57,457) (56,951)
-------- --------
Net cash flows from financing activities........... (159,117) 96,591
-------- --------
Effect of exchange rate changes on cash............ (2,085) (2,451)
-------- --------
Increase in cash and cash equivalents.............. 33,139 21,459
Cash and cash equivalents, beginning of
period........................................... 6,992 6,692
-------- --------
Cash and cash equivalents, end of period........... $ 40,131 $ 28,151
======== ========
Income taxes paid.................................. $ 35,340 $ 30,630
Interest paid...................................... $ 40,163 $ 48,011
See accompanying notes to consolidated condensed financial statements.
-6-
<PAGE>
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 June 30, 1994 and 1993 and its consolidated results of
operations and cash flows for each of the three and nine month periods ended
June 30, 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 June 30, 1994 presentation. The results of operations for the three and
nine months ended June 30, 1994 are not necessarily indicative of the results
to be expected for the full year.
Note 2. Income Per Common Share
Net income per common share is based on the weighted average number of
shares outstanding during the respective periods (three months ended
June 30, 1994 and 1993, 140,476,000 and 139,626,000, respectively; nine months
ended June 30, 1994 and 1993, 140,454,000, and 139,016,000, respectively) and
excludes the negligible dilutive effect of shares issuable in connection with
employee stock plans. Net income per common share has been adjusted for
dividends on preferred stock of $3.0 million and $9.0 million for the three
months and nine months ended June 30, 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):
-7-
<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 nine months ended June 30, 1993 of 24.5% and 29.0%, respectively.
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 nine
months ended June 30, 1994 to 39.8% and 41.0%, respectively.
The provision for income tax expense for the three months ended
June 30, 1994 was $22.8 million, of which $18.3 million and $4.5 million is
current and deferred expense, respectively. The provision for income tax
expense for the nine months ended June 30, 1994 was $51.8 million, of which
$28.4 million and $23.4 million is current and deferred expense, respectively.
-8-
<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
========
-9-
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Net periodic postretirement benefit cost for 1994 (in thousands):
Three Months Ended Nine Months Ended
June 30, 1994 June 30, 1994
------------------ -----------------
Service cost of benefits earned
during the quarter $ 325 $ 975
Interest cost on APBO 1,875 5,625
------ ------
Net postretirement benefit cost $ 2,200 $ 6,600
====== ======
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, petrochemical 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 June 30, 1994,
anticipating that the disposition will occur within twelve months. EPS
operating revenues have been reported in a manner similar to discontinued
operations since March 1994. As such, six months of EPS's revenues are
included in 1994 and third quarter net operating results are reflected as a
separate component in the Company's Consolidated Statement of Operations. EPS
provided revenues and profits of $213.0 million and $15.0 million,
respectively, in 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 Charges (Credit)
During the quarter ended June 30, 1994, the Company realized a gain of
$19.3 million from the settlement of a suit against certain insurance carriers
in the Parker & Parsley litigation. See Note 7.
-10-
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
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.
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
$19.3 million, net of expenses, was received in May 1994 and recognized as an
unusual credit in the third quarter.
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.
-11-
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
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
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. The Company made a payment of $7.5
million on August 5, 1994. Such amount was accrued at September 30, 1993 and
June 30, 1994.
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 the early stages of
discovery.
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
-12-
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
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
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 whose claim represented four
percent of the original class, but who had previously opted out of the class,
was settled for $1.0 million. The payment was made by the Company on
July 27, 1994. Such amount was accrued at June 30, 1994.
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 (8.59%) and pay a floating
rate ("LIBOR + 2.01%") of interest on a notional amount of $93.0 million.
In April 1994, the Company issued 930 debenture purchase warrants for $7.0
million which entitle the holders to purchase $93.0 million of the Company's
debentures. The warrants may be exercised from October 27, 1994 to
January 27, 1995. The Company believes that the holders of the warrants will
exchange those warrants for $93.0 million of debentures prior to
-13-
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
January 27, 1995. The debentures will mature on January 27, 2000, and have a
fixed interest rate of 8.59%.
During the third quarter of 1994, the Company recorded an extraordinary
loss of $18.1 million ($11.8 million after tax) in connection with the
repurchase of $58.6 million face amount of its outstanding 6% debentures due
March 2002 for a net repurchase price of $53.4 million. Subsequent to the
third quarter of 1994, the Company repurchased another $9.0 million face amount
of the same debentures, for a net repurchase price of $8.1 million resulting in
a loss of $2.7 million which will be recorded in the fourth quarter of 1994.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
Oilfield Operations companies manufacture, sell and provide services used
in the drilling, completion and maintenance of oil and gas wells. The business
environment of the Company is significantly affected by worldwide expenditures
of the petroleum industry. Important factors establishing the levels of these
expenditures include world economic conditions, crude oil and natural gas
supply and demand balances, the legislative environment in the United States
and other major countries, and developments in the Middle East and other major
petroleum producing regions.
ACTIVITY INDICATORS
Crude oil and natural gas prices are a major determinant of exploration and
development expenditures. (The amounts in the table below are quarter averages
for the period.)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
---------------------------------------------------------------------------
WTI ($/Bbl) 17.86 19.69 16.32 20.00
U.S. Spot Natural Gas ($/mcf) 1.78 2.05 2.00 2.02
Oil prices weakened in the third quarter and first nine months of 1994
falling $1.83/Bbl or 9.3% and $3.68/Bbl or 18.4%, respectively, compared to the
same periods a year ago. The Company expects prices to be between $16 and
$21/Bbl for the next several years. U.S. natural gas prices began to weaken in
the third quarter of 1994, decreasing 13.2% for the quarter and virtually flat
for the nine months. Prices are expected to increase modestly over the next 12
months. 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 Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
---------------------------------------------------------------------------
North American 912 776 1,018 902
Non-North American 739 776 756 787
----- ----- ----- -----
Total Rig Count 1,651 1,552 1,774 1,689
===== ===== ===== =====
U.S. Workover Rig Count 1,203 1,311 1,347 1,374
===== ===== ===== =====
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Total drilling activity was 6.4% higher in the third quarter of 1994 and
5.0% higher in the first nine 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.
North American Activity
The North American rig count was up 17.5% for the quarter and 12.9% for the
nine months. Activity increases in the Gulf of Mexico drove an increase in the
average offshore rig count from 75 to 108 rigs -- up 44.0% from the third
quarter of 1993 and from 67 to 101 rigs -- up 50.7% from the first nine 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 44.7% and 48.1%
for the quarter and nine months year over year, respectively. U.S. workover
activity was down 8.2% for the quarter and 2.0% for the nine months from 1993
levels.
The outlook for North American activity continues to be positive as the
Company expects gas-directed drilling to remain strong over the next year. The
average U.S. workover rig count is expected to remain flat over the next year.
Non-North American Activity
Outside North America, activity continued to fall. The average rig count
was down 4.8% for the quarter and 3.9% for the nine 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 volatility 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
June 30, 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
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
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.
RESULTS OF OPERATIONS
Revenue
The following table summarizes the effect of the dispositions mentioned
above on consolidated revenues.
Three Months Ending Nine Months Ending
Revenue Analysis June 30, June 30,
(In millions) 1994 1993 1994 1993
---------------------------------------------------------------------------
Consolidated Revenues
Sales $ 400.3 $ 475.3 $1,287.1 $1,474.3
Services and rentals 190.2 195.1 578.0 572.6
------- ------- ------- -------
Total 590.5 670.4 1,865.1 2,046.9
------- ------- ------- -------
Less Disposed Operations:
EM&C and EPS:
Sales 96.2 101.1 301.0
Services and rentals 5.8 20.5
------- ------- -------
Total 102.0 101.1 321.5
------- ------- -------
Revenue from Ongoing Operations:
Sales 400.3 379.1 1,186.0 1,173.3
Services and rentals 190.2 189.3 578.0 552.1
------- ------- ------- -------
Total $ 590.5 $ 568.4 $1,764.0 $1,725.4
======= ======= ======= =======
Consolidated revenues for the three months and nine months ended
June 30, 1994 decreased 11.9% and 8.9%, respectively, compared to the same
periods last year. Consolidated revenues in 1994 were impacted by the revenues
of disposed businesses. EM&C was sold in March 1994 and EPS is in the process
of being sold. Due to the pending sale of EPS, its results have been reported
in a manner similar to discontinued operations since March 1994. As such, six
months of EPS's revenues are included in the nine months ended June 30, 1994.
EPS's third quarter net operating results are reflected as a separate component
in the Company's Consolidated Statement of Operations. EPS's third quarter
revenues were $56.6 million.
Revenue from ongoing businesses were up 3.9% for the quarter and 2.2% for
the nine months. Oilfield Operations represents approximately 88% of this
total with the remaining 12% represented by the Process Equipment Operations
(formerly EnviroTech Process Equipment). Much of the improvement in Oilfield
Operations sales, services and rentals revenue is attributable to increased
-17-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
drilling activity in the Western Hemisphere, fueled in large part by natural
gas drilling. Offsetting this trend was a decline in the average number of
workover rigs running in the U.S.. 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. Process Equipment Operations
sales, service and rental revenues reported a slight decline year over year.
Continued general weakness in the worldwide economy and project deferrals due
to financing delays resulted in the revenue decline.
Operating Income
The following table summarizes the effect of the dispositions and unusual
charges (credit) on consolidated operating income.
Three Months Ending Nine Months Ending
Operating Income Analysis June 30, June 30,
(In millions) 1994 1993 1994 1993
---------------------------------------------------------------------------
Consolidated Operating Income $ 72.9 $ 45.8 $ 172.1 $ 107.7
Unusual Charges (Credit) (19.3) (19.3) 42.0
------- ------- ------- -------
Consolidated Operating Income
Without Unusual Charges
(Credit) 53.6 45.8 152.8 149.7
Operating Income of Disposed
Businesses 6.0 5.4 13.4 18.8
------- ------- ------- -------
Operating Income from Ongoing
Operations $ 47.6 $ 40.4 $ 139.4 $ 130.9
======= ======= ======= =======
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, decreased for the quarter and
remained virtually unchanged for the nine months compared to the prior year.
The decrease for the quarter is reflective of the impact of disposed businesses
offset by foreign exchange losses of $2.3 million from the devaluation of the
Venezuelan Bolivar incurred in the third quarter of 1994. Additionally a net
gain of $2.0 million was 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.
Offsetting the $8.6 million gain recorded on the sale of EM&C in the nine
months ended June 30, 1994, 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.
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Unusual Charges (Credit)
1994: During the quarter ended June 30, 1994, the Company realized a gain
of $19.3 million, net of expenses from the settlement of a suit against certain
insurance carriers in the Parker & Parsley litigation. See Note 7.
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. Cash payments totaling $75 million were made during
the third quarter of 1993.
Interest Expense
Interest expense in the third quarter of 1994 increased $.5 million from
the same quarter a year ago. In the third quarter of 1993, a reversal of $1.3
million of accrued interest was recorded from settlements with the IRS. This
reversal coupled with the expiration of an interest rate swap agreement in
February of 1994 resulted in the increase for the quarter. Interest expense
for the first nine months of 1994 decreased $4.2 million compared to 1993. The
decrease for the nine months is attributable to lower effective interest rates
coupled with a decrease in total debt outstanding.
Interest Income
Interest income decreased $.9 million and $2.7 million for the quarter and
nine months, respectively, compared to 1993. The decreases were due to the
repayment of notes receivables in 1994 and a decrease in short-term
investments.
Income Taxes
The effective income tax rate for the third quarter and first nine months
of 1994 was 39.8% and 41.0%, respectively, as compared to 81.4% and 75.9%,
respectively, in 1993. The Company determined its tax provision in 1993 under
SFAS No. 96. 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 for 1994
under SFAS No. 109. 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.
Extraordinary Loss
During the third quarter of 1994, the Company recorded an extraordinary
loss of $18.1 million ($11.8 million after tax) in connection with the
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
repurchase of $58.6 million face amount of its outstanding 6% debentures due
March 2002 for a net repurchase price of $53.4 million. Subsequent to the
third quarter of 1994, the Company repurchased another $9.0 million face amount
of the same debentures, for a net repurchase price of $8.1 million resulting in
a loss of $2.7 million which will be recorded in the fourth quarter of 1994.
CAPITAL RESOURCES AND LIQUIDITY
Financing Activities
Net cash outflows from financing activities were $159.1 million in the
first nine months of 1994 compared to cash inflows of $96.6 million in the
first nine months of 1993. The Company used the proceeds from the sale of EM&C
to reduce debt levels. Borrowings were used in 1994 and 1993 to fund operating
needs. In December 1992, the Company used cash to redeem in full its 9%
debentures for $18.2 million. In May 1993, the Company sold $385.3 million
principal amount at maturity of Liquid Yield Option Notes ("LYONs"). The LYONs
provided approximately $224.1 million in net proceeds which were used to repay
commercial paper borrowings incurred to fund acquisitions and working capital
needs.
During the third quarter of 1994, the Company repurchased $58.6 million
face amount of its outstanding 6% debentures for $53.4 million.
Total debt outstanding at June 30, 1994 was $860.0 million, compared to
$944.3 million at September 30, 1993. The debt to equity ratio was .531 at
June 30, 1994, compared to .586 at September 30, 1993.
At June 30, 1994, the Company had $519.3 million of credit facilities with
commercial banks, of which $350.2 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 $79.4 million in the first
nine months of 1994 compared to cash outflows of $58.5 million in the first
nine months of 1993. The sale of EM&C in March 1994 provided $128.4 million in
cash. Property additions have decreased from $87.9 million in 1993 to $77.2
million in 1994. The ratio of capital expenditures to depreciation has
decreased slightly over the same period from 85.1% to 82.2%. The Company
targets a capital expenditure to depreciation ratio of approximately 80% which
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.
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Operating Activities
Net cash inflows from operating activities were $114.9 million in the first
nine months of 1994 compared to cash outflows of $14.2 million in the first
nine months of 1993. The increase of $129.1 million in 1994 was due primarily
to the collection of receivables and an increase in income before extraordinary
loss and cumulative effect of accounting changes. Also contributing to the
increase is the payment of legal settlements, unusual charges, and Teleco
acquisition costs accrued in prior years but paid during 1993. Cash was used
to build inventories in Oilfield Operations due to increased activity in the
U.S., Canada 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
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.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
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
June 30, 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 postemployment benefit obligation at October 1, 1994 of
approximately $23.0 million.
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.
-22-
<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.
-23-
<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: August 12, 1994 By /s/FRANKLIN MYERS
------------------------------------
Vice President and General Counsel
Date: August 12, 1994 By /s/JAMES E. BRAUN
------------------------------------
Controller
-24-
<PAGE>
