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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
Commission file number 1-9397
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BAKER HUGHES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 76-0207995
(State or other jurisdiction (IRS 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 August 2, 1996
----- -----------------------------
Common Stock, $1.00 par value per share 144,545,600 shares
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BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three Months
and Nine Months Ended June 30, 1996 and 1995 2
Consolidated Condensed Statements of Financial Position
- June 30, 1996 and September 30, 1995 3
Consolidated Condensed Statements of Cash Flows - Nine Months
Ended June 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II - Other Information 18
-1-
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
REVENUES: -------------------- --------------------
Sales $ 522,025 $ 459,216 $1,487,256 $1,318,425
Services and rentals 243,827 209,188 718,115 609,505
--------- --------- --------- ---------
Total revenues 765,852 668,404 2,205,371 1,927,930
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 298,352 271,958 858,616 772,307
Cost of services and rentals 120,304 100,425 364,914 295,364
Research and engineering 21,858 20,855 64,472 61,702
Marketing and field service 178,922 150,671 504,299 444,752
General and administrative 48,472 49,934 145,415 151,538
Amortization of goodwill
and other intangibles 7,371 7,149 22,218 22,489
Unusual charge 39,611 39,611
--------- --------- --------- ---------
Total costs and expenses 714,890 600,992 1,999,545 1,748,152
--------- --------- --------- ---------
Operating income 50,962 67,412 205,826 179,778
Gain on sale of Varco stock 44,295 44,295
Interest expense (13,077) (13,791) (43,305) (38,971)
Interest income 880 1,546 2,665 3,621
--------- --------- --------- ---------
Income before income taxes 83,060 55,167 209,481 144,428
Income taxes (36,187) (22,925) (88,651) (59,955)
--------- --------- --------- ---------
Income before cumulative
effect of accounting change 46,873 32,242 120,830 84,473
Cumulative effect of accounting
change - Postemployment
benefits (net of $7,861
income tax benefit) (14,598)
--------- --------- --------- ---------
Net income $ 46,873 $ 32,242 $ 120,830 $ 69,875
========= ========= ========= =========
Per share of Common Stock:
Income before cumulative
effect of accounting
change $ .33 $ .09 $ .85 $ .42
Cumulative effect of
accounting change (.10)
--------- --------- --------- ---------
Net income $ .33 $ .09 $ .85 $ .32
========= ========= ========= =========
Cash dividends per share of
common stock $ .115 $ .115 $ .345 $ .345
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
-2-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
ASSETS
June 30, September 30,
1996 1995
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 6,662 $ 6,817
---------- ----------
Receivables - net 795,911 709,588
---------- ----------
Inventories:
Finished goods 665,627 595,417
Work in process 77,795 61,622
Raw materials 63,032 70,743
---------- ----------
Total inventories 806,454 727,782
---------- ----------
Deferred income taxes 89,008 92,550
---------- ----------
Other current assets 37,274 28,078
---------- ----------
Total current assets 1,735,309 1,564,815
---------- ----------
PROPERTY - NET 586,821 575,059
---------- ----------
OTHER ASSETS:
Investments 52,829 92,474
Property held for disposal 49,924 58,544
Other assets 98,799 103,321
Excess costs arising from acquisitions - net 758,026 772,378
---------- ----------
Total other assets 959,578 1,026,717
---------- ----------
Total $ 3,281,708 $ 3,166,591
========== ==========
See accompanying notes to consolidated condensed financial statements.
-3-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
1996 1995
---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 289,199 $ 304,689
Short-term borrowings and current portion
of long-term debt 1,289 2,898
Accrued employee compensation and benefits 154,496 133,135
Income taxes 64,254 28,445
Taxes other than income 24,649 25,176
Accrued insurance 27,835 27,475
Accrued interest 13,405 11,978
Other accrued liabilities 50,961 46,335
---------- ----------
Total current liabilities 626,088 580,131
---------- ----------
LONG-TERM DEBT 738,135 798,352
---------- ----------
DEFERRED INCOME TAXES 144,700 118,350
---------- ----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 98,188 97,187
---------- ----------
OTHER LONG-TERM LIABILITIES 50,555 58,965
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 144,018 142,237
Capital in excess of par value 1,378,297 1,342,317
Retained earnings 211,671 140,106
Cumulative foreign currency translation
adjustment (118,869) (107,689)
Unrealized gain(loss) on securities
available for sale 8,925 (3,365)
---------- ----------
Total stockholders' equity 1,624,042 1,513,606
---------- ----------
Total $ 3,281,708 $ 3,166,591
========== ==========
See accompanying notes to consolidated condensed financial statements.
-4-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: -------- --------
Net income $ 120,830 $ 69,875
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization of:
Property 87,436 86,796
Other assets and debt discount 30,184 30,323
Deferred tax provision 22,441 28,406
Noncash portion of unusual charge 25,269
Gain on sale of Varco stock (44,295)
Gain on disposal of assets (856) (2,233)
Foreign currency translation loss - net 7,801 2,346
Cumulative effect of accounting change 14,598
Change in receivables (85,242) (53,955)
Change in inventories (75,743) (53,917)
Change in accounts payable (20,354) (3,994)
Changes in other assets and liabilities 47,679 (44,808)
-------- --------
Net cash flows from operating activities 115,150 73,437
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (131,596) (96,629)
Proceeds from sale of Varco stock 95,476
Proceeds from disposal of assets 33,634 22,206
Acquisition of businesses, net of cash acquired (32,681)
-------- --------
Net cash flows from investing activities (35,167) (74,423)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from commercial paper and
revolving credit facilities 43,394 74,827
Repayment of indebtedness (108,401)
Proceeds from exercised debenture purchase
warrants 93,000
Repurchase of preferred stock (167,000)
Proceeds from exercise of stock options
and stock purchase grants 33,239 3,580
Dividends (49,265) (57,669)
-------- --------
Net cash flows from financing activities (81,033) (53,262)
-------- --------
Effect of exchange rate changes on cash 895 (982)
-------- --------
Decrease in cash and cash equivalents (155) (55,230)
Cash and cash equivalents, beginning of period 6,817 69,179
-------- --------
Cash and cash equivalents, end of period $ 6,662 $ 13,949
======== ========
Income taxes paid $ 29,859 $ 44,535
Interest paid $ 36,255 $ 26,110
See accompanying notes to consolidated condensed financial statements.
-5-
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, 1996, and its consolidated results of
operations and cash flows for each of the three and nine month periods
ended June 30, 1996 and 1995. 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, 1995 for the most recent annual
financial statements prepared in accordance with generally accepted
accounting principles). The results of operations for the three and nine
months ended June 30, 1996 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 and excludes the
negligible dilutive effect of shares issuable in connection with employee
stock, stock option and similar plans. During the quarter ended June 30,
1995, the Company repurchased four million shares of its convertible
preferred stock for $167.0 million. The estimated fair market value of the
shares of convertible preferred stock was $149.4 million at the date of
issuance. The repurchase price in excess of this amount, $17.6 million,
has been deducted from net income in arriving at net income per share of
common stock.
The following table presents information necessary to calculate income
per common share for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
(In thousands) 1996 1995 1996 1995
----------------------------------------------------------------------
Net Income $ 46,873 $ 32,242 $120,830 $ 69,875
Less: Preferred stock
dividends (2,000) (8,000)
Effect of preferred
stock repurchase (17,600) (17,600)
------- ------- ------- -------
Net Income Applicable to
Common Stock $ 46,873 $ 12,642 $120,830 $ 44,275
======= ======= ======= =======
Weighted Average Shares
Outstanding 143,704 141,163 142,880 141,057
======= ======= ======= =======
-6-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Note 3. Acquisitions
- --------------------
The acquisitions discussed below have been accounted for using the
purchase method of accounting and accordingly, the costs of the
acquisitions have been allocated to assets acquired and liabilities assumed
based on their estimated fair market values at the dates of acquisition.
The operating results are included in the consolidated statements of
operations from the respective acquisition dates.
In April 1996, the Company purchased the assets and stock of a business
operating as Vortoil Separation Systems, and certain related oil/water
separation technology, for $18.8 million. In June 1996, the Company
purchased the stock of KTM Process Equipment, Inc., a centrifuge company,
for $14.1 million.
These acquisitions are now a part of Baker Hughes Process Equipment
Company. Pro forma results reflecting these two acquisitions have not been
presented as the pro forma revenue, net income and earnings per share would
not be materially different from the Company's actual results.
Note 4. Investments
- -------------------
In April 1996, the Company exchanged the 100,000 shares of Tuboscope
Vetco International Corporation ("Tuboscope") Series A convertible
preferred stock held by the Company since October 1991, for 1.5 million
shares of Tuboscope common stock and a warrant to purchase 1.25 million
shares of Tuboscope common stock. The warrants are exercisable at $10.00
per share and expire on December 31, 2000.
In May 1996, the Company sold 6.3 million shares of Varco
International, Inc. ("Varco") common stock at a price of $15.875 per share.
The Company received net proceeds of $95.5 million and recognized a pretax
gain of $44.3 million. The Company's investment in Varco was accounted for
using the equity method. Equity income included in the Consolidated
Condensed Statements of Operations for the nine months ended June 30, 1996
and 1995 was $1.8 million and $2.4 million, respectively.
-7-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Note 5. Unusual Charge
- ----------------------
During the quarter ended June 30, 1996, the Company recognized a
$39.6 million unusual charge consisting of the following:
(In thousands)
-------------------------------------------------------------------
Patent write-off $ 8,481
Impairment of joint venture 5,000
Restructurings:
Severance under existing benefit arrangements 7,145
Relocation of people and equipment 2,332
Abandoned leases 2,765
Inventory write-down 1,500
Write-down of assets to net realizable value 10,388
Other 2,000
------
Unusual charge $ 39,611
======
The Company has certain oilfield operations patents which no longer
protect commercially significant technology resulting in the write-off of
$8.5 million. A $5.0 million impairment of a Latin America joint venture
was recorded due to changing market conditions in the region in which it
operates. The Company recorded a $24.1 million restructuring charge
including the downsizing of Baker Hughes INTEQ's Singapore and Paris
operations, a reorganization of Baker Hughes Process Equipment Company's
Italian operations and the consolidation of certain Baker Oil Tools
manufacturing operations.
Note 6. Indebtedness/Financial Instruments
- ------------------------------------------
The Company used $108.4 million of cash to repay the 4.125% Swiss Franc
Bonds ("SFr Bonds") which matured in June 1996. The SFr Bonds were hedged
through a foreign currency swap agreement and a foreign currency option,
both of which expired in June 1996.
Note 7. Stockholder Rights Agreement
- ------------------------------------
In April 1996, the Company exercised its option to redeem all of the
rights to purchase one one-hundredth of a share of the Company's Series One
Junior Participating Preferred Stock for the redemption price of $0.03 per
right, in accordance with the Company's Stockholder Rights Agreement. The
third quarter cash distribution of $.115 per share of common stock includes
the redemption price.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
- --------------------
Baker Hughes has eight divisions that provide products and services to
two industry segments worldwide: Oilfield and Process Equipment. Oilfield
Operations generate approximately 87% of the Company's consolidated
revenues; 83% of sales revenue and 97% of services and rentals revenue.
Oilfield Operations consist of five divisions that provide products,
services and solutions used in the drilling, completion, production and
maintenance of oil and gas wells. The business environment for Oilfield
Operations and its corresponding operating results are significantly
affected by worldwide expenditures of the petroleum industry. Important
factors establishing the levels of these expenditures include, but are not
limited to, world economic conditions, crude oil and natural gas supply and
demand balances, the legislative environment in the United States and other
major countries, war, insurrection, weather, OPEC policy and other
developments in the Middle East and other major petroleum producing
regions.
Process Equipment Operations consist of three divisions that serve a
broad range of process industries. These divisions provide filtration,
sedimentation, centrifugation and flotation process equipment and systems
for the separation of solids from liquids, and liquids from liquids. The
business environment for Process Equipment Operations, which also includes
Tracor Europa, a computer peripherals division, is significantly affected
by worldwide economic conditions in the specific markets that they serve,
which include, among others, waste water, minerals processing, oil and gas,
and pulp and paper.
ACQUISITIONS
- ------------
In April 1996, the Company purchased the assets and stock of a business
operating as Vortoil Separation Systems, and certain related oil/water
separation technology (collectively, "Vortoil"), for $18.8 million. In
June 1996, the Company purchased the stock of KTM Process Equipment,
Inc.("Ketema"), a centrifuge company, for $14.1 million. These
acquisitions are now a part of Baker Hughes Process Equipment Company, and
were funded with borrowings from the Company's credit facilities. Combined
annual revenues, based on their most recent fiscal year, for Vortoil and
Ketema were $35.6 million.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
OPERATING ENVIRONMENT FOR OILFIELD OPERATIONS
- ---------------------------------------------
Historically, crude oil and natural gas prices and the number of rotary
rigs operating have been prevalent factors in determining the level of
worldwide exploration and production expenditures. However, the operating
environment for the oilfield service industry has been changing over the
past several years. While prices and rig count are still relevant as an
indicator of expenditure activity, a number of new trends are emerging that
are altering the oilfield service market place. One key trend is the
concept of integrated solutions, which is to involve the oilfield service
company in the planning, engineering and integrating of several products
and services. Another trend is the application of new technologies aimed
at reducing the finding costs for oil and gas.
Crude oil and natural gas prices and the Baker Hughes rotary rig count
are summarized in the tables below as quarterly averages followed by the
Company's outlook.
While reading the Company's outlook set forth below, caution is advised
that the factors described above in "Business Environment" could negatively
impact the Company's expectations for oil and gas prices, drilling
activity, future operating results and capital expenditures.
Oil and Gas Prices Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
----------------------------------------------------------------------
WTI ($/Bbl) 21.76 19.31 19.90 18.43
U.S. Spot Natural Gas ($/mcf) 2.17 1.44 2.28 1.42
Barring any significant change in OPEC policy, the Company expects
crude oil to trade between $17 and $21/Bbl over the next twelve months
while remaining susceptible to short-term price fluctuations as the growth
in worldwide demand is met by increased production by non-OPEC producing
countries. Uncertainty as to the impact of Iraqi oil exports contributes
to the potential for volatility in crude oil prices. U.S. natural gas
prices are expected to remain above $2.00/mcf in 1996 with demand for
natural gas expected to grow 2% to 3% per year. The Company believes that
higher natural gas prices and a tightening market would stimulate
exploration and development drilling of natural gas.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Rotary Rig Count Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
----------------------------------------------------------------------
U.S. - Land 646 581 637 636
U.S. - Offshore 113 96 107 99
Canada 157 152 241 255
----- ----- ----- -----
North American 916 829 985 990
----- ----- ----- -----
Latin America 286 269 280 263
North Sea 56 43 53 40
Other Europe 68 66 69 65
Africa 76 63 74 64
Middle East 138 131 136 126
Asia Pacific 172 188 171 188
----- ----- ----- -----
International 796 760 783 746
----- ----- ----- -----
Worldwide 1,712 1,589 1,768 1,736
----- ----- ----- -----
U.S. Workover 1,332 1,310 1,290 1,308
----------------------------------------------------------------------
North America
In the U.S., the Company anticipates drilling activity to continue to
strengthen and to be above prior year levels. This increase in drilling
activity is expected to be led by offshore and gas-directed drilling being
partially offset by a modest decline in oil-directed drilling. Canadian
activity is expected to lag from 1995 levels for the remainder of 1996 as
natural gas exports are bottlenecked.
International
The Company is optimistic that most areas internationally will continue
to post an increasing rig count for the remainder of 1996. The Company is
forecasting increases in Latin America, the North Sea and West Africa.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
RESULTS OF OPERATIONS
- ---------------------
Revenues Three Months Ended
June 30, $ %
(In millions) 1996 1995 Change Change
-----------------------------------------------------------------------
Oilfield Operations $ 665.2 $ 574.5 $ 90.7 15.8%
Process Equipment Operations 100.7 93.9 6.8 7.2%
------- ------- -------
Total Consolidated Revenues $ 765.9 $ 668.4 $ 97.5 14.6%
======= ======= =======
Nine Months Ended
June 30, $ %
(In millions) 1996 1995 Change Change
-----------------------------------------------------------------------
Oilfield Operations $ 1,933.0 $ 1,682.5 $ 250.5 14.9%
Process Equipment Operations 272.4 245.4 27.0 11.0%
------- ------- -------
Total Consolidated Revenues $ 2,205.4 $ 1,927.9 $ 277.5 14.4%
======= ======= =======
Sales revenue was up 13.7% and 12.8% for the three months and nine
months ended June 30, 1996, respectively. Service and rentals revenue was
up 16.6% and 17.8% for the three months and nine months ended June 30,
1996, respectively. Changes in the mix of the worldwide rig count had a
significant impact on the revenue of the Company. Certain areas of the
world, including offshore U.S., North Sea and West Africa, historically
provide more revenue per rig because of the more difficult and complex
drilling conditions. Conditions such as deep water, high pressure, high
temperature and sensitive environment require the premium products and
services offered by the Company. Additionally, technological advances in
the design and application of the Company's products and services allow oil
and gas operators to reach and extract greater quantities of hydrocarbons
from a single drilling rig or wellbore. For example, from a single
offshore drilling rig, multiple wells can be drilled, completed and
produced and, as such, the revenue generating capability of a single
drilling rig increases. The Company enjoys ancillary benefits in
situations like these because of the wide breadth of products and services
offered by the Company. The Oilfield Operations' results for the three and
nine months ended June 30, 1996 were favorably impacted by these two
important trends.
Oilfield Operations was well positioned to take advantage of growth
opportunities in a number of key geographic markets. In Africa, revenue
increased 30.3% for the quarter and 27.9% for the nine months. The revenue
improvement was driven by an increase in drilling activity in Nigeria.
Oilfield Operations saw revenue increases in the Gulf of Mexico as
horizontal drilling remained strong. Revenue in Europe was up 28.8% for
the quarter and the nine months due in large part to growing integrated
solutions business in the North Sea resulting in the larger percentage
increase in service and rentals revenue. The successful introduction of
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
new technology also made a significant contribution to the current quarter
and year-to-date results. During the quarter, Hughes Christensen
introduced the new STARTM line of drill bits for slimhole and re-entry
drilling. The new GT roller cone and Gold Series drill bits also
manufactured by Hughes Christensen drove strong bit sales. Baker Hughes
INTEQ continues to grow revenues with the new Navi Drill Ultra Series
downhole motors, which is exceeding expectations in performance and market
acceptance.
Process Equipment Operations' revenue increase for the quarter is
attributable to the additional revenue of $8.4 million from the Vortoil and
Ketema acquisitions.
Operating Income
During the June 1996 quarter, the Company recorded an unusual charge of
$39.6 million (see discussion below); $30.9 million was recorded by
Oilfield Operations, $3.7 million was recorded by Process Equipment
Operations and $5.0 million was recorded at the Corporate level. The
operating income information presented below includes these unusual
charges.
Three Months Ended
June 30, $
(In millions) 1996 1995 Change
----------------------------------------------------------------------
Oilfield Operations $ 59.9 $ 69.4 $ (9.5)
Process Equipment Operations 4.7 9.1 (4.4)
Corporate and Other (13.6) (11.1) (2.5)
------- ------- -------
Total Operating Income $ 51.0 $ 67.4 $ (16.4)
======= ======= =======
Nine Months Ended
June 30, $
(In millions) 1996 1995 Change
----------------------------------------------------------------------
Oilfield Operations $ 220.2 $ 191.9 $ 28.3
Process Equipment Operations 17.9 19.6 (1.7)
Corporate and Other (32.3) (31.7) (.6)
------- ------- -------
Total Operating Income $ 205.8 $ 179.8 $ 26.0
======= ======= =======
Consolidated operating income, excluding the unusual charge, increased
34.4% and 36.5% for the three and nine months ended June 30, 1996,
respectively. Consolidated operating margin, excluding the unusual charge,
for the quarter ended June 30, 1996 was 11.8% compared to 10.1% in the same
quarter a year ago; and for the nine months ended June 30, 1996 was 11.1%
compared to 9.3% in the prior year The increases result primarily from
improved revenues, particularly the increases in U.S. offshore, North Sea
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
and African markets, and the impact of the Company's ongoing quality
programs where, through various actions, increases in efficiency and
productivity produce cost savings.
Cost and Expenses
Operating expenses typically fluctuate within a narrow band as a
percentage of consolidated revenues as the Company manages expenses both in
absolute terms and as a function of revenues.
The total of cost of sales, cost of services and rentals, research and
engineering and marketing and field service expenses as a percentage of
total revenue was down slightly at 80.9% for the three months ended June
30, 1996 compared to 81.4% in the same period of the prior year.
Individually, cost of sales, cost of services and rentals, research and
engineering expense and marketing and field service expense increased for
the quarter and nine months in line with the revenue increase.
General and administrative expenses, which are less sensitive to
changes in revenue, decreased $1.5 million for the quarter and $6.1 million
for the nine months. The decrease for the quarter is due primarily to non-
recurring insurance and legal expenses incurred in the third quarter of
1995, partially offset by $2.7 million of foreign exchange losses incurred
in the third quarter of 1996 primarily due to the currency devaluation in
Venezuela. As it relates to the nine months, the decrease is due to a
litigation settlement made in the second quarter of 1995 in addition to the
third quarter decrease explained above. Amortization of goodwill and
intangibles has increased slightly for the quarter due to the recent
acquisitions of Vortoil and Ketema.
Unusual Charge
During the quarter ended June 30, 1996, the Company recorded an unusual
charge of $39.6 million. The charge consisted primarily of the write-off
of $8.5 million of Oilfield Operations patents that no longer protected
commercially significant technology, a $5.0 million impairment of a Latin
America joint venture due to changing market conditions in the region in
which it operates and restructuring charges totaling $24.1 million. The
restructuring charges include the downsizing of Baker Hughes INTEQ's
Singapore and Paris operations, a reorganization of Baker Hughes Process
Equipment Company's Italian operations and the consolidation of certain
Baker Oil Tools manufacturing operations. Noncash provisions of the charge
totaled $25.3 million and consist primarily of the write-down of assets to
net realizable value. The remaining $14.3 million of the charge represents
future cash expenditures related to severance under existing benefit
arrangements, the relocation of people and equipment and abandoned leases.
The Company spent $1.4 million of the cash during the third quarter and
expects to spend substantially all of the remaining $12.9 million by the
end of 1997. Such expenditures relate to specific plans and clearly
defined actions and will be funded from operations and available credit
facilities. The actions taken are expected to favorably impact future
operating results and liquidity as the reduction of headcount and the
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
downsizing of operations will reduce future operating costs without
significantly impacting the pricing of the products and services and market
share. Annual cost savings are expected to be between $7.0 million and
$9.0 million.
Sale of Varco Stock
In May 1996, the Company sold 6.3 million shares of Varco
International, Inc. ("Varco") common stock resulting in a pretax gain of
$44.3 million. The Company received net proceeds of $95.5 million.
Interest Expense
Interest expense decreased $.7 million for the three months ended June
30, 1996. Interest expense increased $4.3 million for the nine months
ended June 30, 1996. The decrease for the current quarter is due to the
repayment of the 4.125% Swiss Franc Bonds ("SFr Bonds") which matured in
June 1996. The year-to-date increase is attributable to higher debt levels
through June 1996 resulting from the repurchase of convertible preferred
stock in June 1995 and higher working capital levels.
Income Taxes
The effective income tax rate in the 1996 periods is up slightly due to
the impact of the unusual charge where certain components of the charge did
not produce a tax benefit.
Net Income Per Share of Common Stock
In June 1995, the Company repurchased all outstanding shares of its
convertible preferred stock for $167.0 million. The fair market value of
the preferred stock was $149.4 million on its date of issuance. The
repurchase price in excess of this amount, $17.6 million, is deducted from
net income in arriving at net income per share of common stock for the
three and nine months ended June 30, 1995. In addition, net income is
adjusted for dividends on preferred stock of $2.0 million and $8.0 million
for the three and nine months ended June 30, 1995, respectively.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Financing Activities
Net cash outflows from financing activities were $81.0 million in the
first nine months of 1996 compared to $53.3 million in the first nine
months of 1995.
Total debt outstanding at June 30, 1996 was $739.4 million, compared to
$801.3 million at September 30, 1995. The debt to equity ratio was .455 at
June 30, 1996, compared to .529 at September 30, 1995.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
The Company used $108.4 million of cash to repay the SFr Bonds which
matured in June 1996.
In June 1995, the Company repurchased all outstanding shares of its
convertible preferred stock for $167.0 million. Existing cash on hand and
borrowings from commercial paper and revolving credit facilities funded the
repurchase. Total cash dividends decreased in 1996 due to the repurchase.
At June 30, 1996, the Company had $594.9 million of credit facilities
with commercial banks, of which $303.0 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 outflows from investing activities were $35.2 million in the
first nine months of 1996 compared to $74.4 million in the first nine
months of 1995.
Proceeds from the disposal of assets generated $33.6 million in the
first nine months of 1996 compared to $22.2 million in the first nine
months of 1995. Property additions increased to $131.6 million compared to
$96.6 million in 1995. The increase is in line with the Company's
objective of replacing capital to increase productivity and ensure that the
necessary capacity is available to meet increased market demand.
Likewise, the ratio of capital expenditures to depreciation has
increased from 111.3% to 150.5%. The majority of the capital expenditures
have been in Oilfield Operations 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.
The Company expects 1996 capital expenditures to be between $170.0 million
and $190.0 million.
In May 1996, the Company sold 6.3 million shares of Varco common stock
at a price of $15.875 per share. The Company received net proceeds of
$95.5 million and recognized a pretax gain of $44.3 million. The Company's
investment in Varco was accounted for using the equity method. Equity
income included in the Consolidated Condensed Statements of Operations for
the nine months ended June 30, 1996 and 1995 was $1.8 million and $2.4
million, respectively.
Baker Hughes Process Equipment Company completed two acquisitions in
the third quarter of 1996. Vortoil, which includes oil/water separation
technology, was acquired for $18.8 million. Ketema, a centrifuge company,
was purchased for $14.1 million.
Operating Activities
Net cash inflows from operating activities were $115.2 million and
$73.4 million in 1996 and 1995, respectively.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
The increase of $41.8 million in 1996 was due primarily to an increase
in net income adjusted for noncash items and increases in certain accrued
liabilities and income taxes offset by the build up of working capital in
Oilfield Operations to support increased activity, in particular the
increase in Latin America, Africa and Europe.
ACCOUNTING STANDARDS
- --------------------
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which is effective for the Company on
October 1, 1996. The statement sets forth guidance as to when to recognize
an impairment of long-lived assets, including goodwill, and how to measure
such an impairment. The methodology set forth in SFAS No. 121 is not
significantly different from the Company's current policy and, therefore,
the Company does not expect the adoption of SFAS No. 121, as it relates to
impairment, to have a significant impact on the consolidated financial
statements.
SFAS No. 121 also addresses the accounting for long-lived assets to be
disposed of and requires these assets to be carried at the lower of cost or
fair market value, rather than the lower of cost or net realizable value,
the Company's current accounting policy. The Company estimates the impact
of the adoption of this aspect of SFAS No. 121 as of October 1, 1996 will
be a charge to income between $10.0 million and $13.0 million, net of tax,
to be recorded in the first quarter of 1997 as the cumulative effect of the
change in accounting.
Stock Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-
Based Compensation, which is effective for the Company on October 1, 1996.
SFAS No. 123 permits, but does not require, a fair value based method of
accounting for employee stock option plans which results in compensation
expense being recognized in the results of operations when stock options
are granted. The Company plans to continue the use of its current
intrinsic value based method of accounting for such plans where no
compensation expense is recognized. However, as required by SFAS No. 123,
the Company will provide pro forma disclosure of net income and earnings
per share, if significantly different from amounts as reported, in the
notes to the consolidated financial statements as if the fair value based
method of accounting had been applied.
-17-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Commission on April 25,
1996, reporting that the Company exercised its option to redeem all of the
rights to purchase one one-hundredth of a share of Baker Hughes Series One
Junior Participating Preferred Stock for the redemption price of $0.03 per
Right, in accordance with the Company's Stockholder Rights Agreement.
-18-
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 13, 1996 By /s/LAWRENCE O'DONNELL, III
--------------------------------
Vice President, General Counsel
and Corporate Secretary
Date: August 13, 1996 By /s/JAMES E. BRAUN
--------------------------------
Controller
-19-
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This Schedule contains summary financial information extracted from the
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