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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
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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 May 3, 1997
----- --------------------------
Common Stock, $1.00 par value per share 145,667,000 shares
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BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three Months and
Six Months Ended March 31, 1997 and 1996 2
Consolidated Condensed Statements of Financial Position
- March 31, 1997 and September 30, 1996 3
Consolidated Condensed Statements of Cash Flows - Six Months
Ended March 31, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II - Other Information 16
-1-
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
REVENUES: -------------------- --------------------
Sales $ 549,569 $ 500,276 $1,098,517 $ 965,231
Services and rentals 283,621 244,546 543,293 474,288
--------- --------- --------- ---------
Total revenues 833,190 744,822 1,641,810 1,439,519
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 321,453 292,928 643,596 560,264
Cost of services and rentals 133,505 126,311 256,768 244,610
Research and engineering 26,186 21,206 49,681 42,614
Marketing and field service 197,387 164,138 387,551 325,377
General and administrative 42,862 48,725 90,819 96,943
Amortization of goodwill
and other intangibles 7,426 7,454 14,753 14,847
--------- --------- --------- ---------
Total costs and expenses 728,819 660,762 1,443,168 1,284,655
--------- --------- --------- ---------
Operating income 104,371 84,060 198,642 154,864
Interest expense (11,788) (14,801) (23,341) (30,228)
Interest income 342 1,303 873 1,785
--------- --------- --------- ---------
Income before income taxes 92,925 70,562 176,174 126,421
Income taxes (34,950) (29,003) (67,833) (52,464)
--------- --------- --------- ---------
Income before cumulative
effect of accounting change 57,975 41,559 108,341 73,957
Cumulative effect of accounting
change - Impairment of long-
lived assets to be disposed of
(net of $5,965 income tax
benefit) (12,079)
--------- --------- --------- ---------
Net income $ 57,975 $ 41,559 $ 96,262 $ 73,957
========= ========= ========= =========
Per share of common stock:
Income before cumulative
effect of accounting
change $ .40 $ .29 $ .75 $ .52
Cumulative effect of
accounting change (.08)
--------- --------- --------- ---------
Net income $ .40 $ .29 $ .67 $ .52
========= ========= ========= =========
Cash dividends per share of
common stock $ .115 $ .115 $ .23 $ .23
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
-2-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
ASSETS
March 31, September 30,
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 7,234 $ 7,714
---------- ----------
Receivables - net 826,066 793,801
---------- ----------
Inventories:
Finished goods 701,770 665,715
Work in process 93,210 70,609
Raw materials 84,128 65,870
---------- ----------
Total inventories 879,108 802,194
---------- ----------
Deferred income taxes 84,047 78,680
---------- ----------
Other current assets 40,095 34,004
---------- ----------
Total current assets 1,836,550 1,716,393
---------- ----------
PROPERTY - NET 639,810 598,950
---------- ----------
OTHER ASSETS:
Investments 60,163 68,992
Property held for disposal 44,969 57,666
Other assets 84,607 98,104
Excess costs arising from acquisitions - net 745,602 757,285
---------- ----------
Total other assets 935,341 982,047
---------- ----------
Total $ 3,411,701 $ 3,297,390
========== ==========
See accompanying notes to consolidated condensed financial statements.
-3-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
1997 1996
---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 342,961 $ 330,138
Short-term borrowings and current portion
of long-term debt 1,136 1,859
Accrued employee compensation and benefits 143,680 155,310
Income taxes 43,178 32,925
Taxes other than income 27,107 26,600
Accrued insurance 25,415 28,052
Accrued interest 17,107 10,324
Other accrued liabilities 42,701 50,112
---------- ----------
Total current liabilities 643,285 635,320
---------- ----------
LONG-TERM DEBT 695,233 673,588
---------- ----------
DEFERRED INCOME TAXES 172,125 150,460
---------- ----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 97,670 97,635
---------- ----------
OTHER LONG-TERM LIABILITIES 45,479 51,178
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 145,641 144,553
Capital in excess of par value 1,417,280 1,393,580
Retained earnings 313,440 250,567
Cumulative foreign currency translation
adjustment (133,330) (118,766)
Unrealized gain on securities available for
sale 14,878 19,275
---------- ----------
Total stockholders' equity 1,757,909 1,689,209
---------- ----------
Total $ 3,411,701 $ 3,297,390
========== ==========
See accompanying notes to consolidated condensed financial statements.
-4-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
March 31,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 96,262 $ 73,957
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization of:
Property 63,490 58,777
Other assets and debt discount 19,636 20,204
Gain on disposal of assets (16,589) (13,557)
Foreign currency translation (gain)/loss-net (2,589) 3,595
Deferred tax provision 24,647 11,497
Cumulative effect of accounting change 12,079
Change in receivables (32,930) (45,003)
Change in inventories (71,894) (69,942)
Change in accounts payable 8,693 (20,014)
Changes in other assets and liabilities (23,040) 1,986
-------- --------
Net cash flows from operating activities 77,765 21,500
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (112,244) (86,312)
Proceeds from disposal of assets 26,183 46,085
-------- --------
Net cash flows from investing activities (86,061) (40,227)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from commercial paper and
revolving credit facilities 16,171 44,640
Proceeds from exercise of stock options
and stock purchase grants 24,788 16,621
Dividends (33,389) (32,753)
-------- --------
Net cash flows from financing activities 7,570 28,508
-------- --------
Effect of exchange rate changes on cash 246 (724)
-------- --------
(Decrease)/increase in cash and cash equivalents (480) 9,057
Cash and cash equivalents, beginning of period 7,714 6,817
-------- --------
Cash and cash equivalents, end of period $ 7,234 $ 15,874
======== ========
Income taxes paid $ 31,363 $ 20,565
Interest paid $ 11,442 $ 21,250
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 Baker Hughes Incorporated (the "Company" or "Baker
Hughes"), the unaudited consolidated condensed financial statements include
all adjustments consisting of normal recurring accruals necessary for a
fair presentation of the Company's consolidated financial position as of
March 31, 1997 and its consolidated results of operations and cash flows
for each of the three and six month periods ended March 31, 1997 and 1996.
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, 1996
for the most recent annual financial statements prepared in accordance with
generally accepted accounting principles). The results of operations for
the three and six months ended March 31, 1997 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 March
31, 1997 and 1996, 145,416,000 and 142,654,000, respectively; six months
ended March 31, 1997 and 1996, 145,168,000 and 142,467,000, respectively)
and excludes the negligible dilutive effect of shares issuable in
connection with employee stock, stock option and similar plans.
Note 3. Impairment of Long-Lived Assets To Be Disposed Of
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", effective 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 prior policy and, therefore, the adoption of
SFAS No. 121 does not have a significant impact on the consolidated
financial statements as it relates to impairment of long-lived assets used
in operations. However, 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 method that was previously used by the Company.
The Company recognized a charge to income of $12.1 million ($.08 per
share), net of a tax benefit of $6.0 million, as the cumulative effect of a
change in accounting in the first quarter of 1997.
-6-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Note 4. Pending Acquisitions
In February 1997, the Company entered into a definitive agreement with
Petrolite Corporation ("Petrolite") and Wm. S. Barnickel & Company
("Barnickel"), Petrolite's major shareholder, pursuant to which the Company
will acquire Petrolite, a manufacturer and marketer of specialty chemicals
used in the petroleum and process industries, and Barnickel, which owns
certain marketable securities in addition to its investment in Petrolite.
Terms of the agreement call for a tax-free exchange of common stock in
which each of the 11.4 million Petrolite shares will be converted into the
Company's common stock having a value of $61 per share based upon the
average market price of the Company's common stock during a 10-day period
shortly before the closing. The agreement is subject to approval by a vote
of the shareholders of Petrolite and Barnickel. The Company expects the
acquisition, if approved, would result in the issuance of between 18 and 22
million shares of the Company's common stock (assuming such 10-day average
market price of the Company's common stock is between $33 and $40 per
share) and would be consummated by September 30, 1997. For its most recent
fiscal year ended October 31, 1996, Petrolite had revenues of $360.7
million.
In April 1997, the Company entered into a definitive agreement to
acquire Drilex International Inc. ("Drilex") a provider of products and
services used in directional and horizontal drilling and workover of oil
and gas wells. Terms of the agreement call for a tax-free exchange of
stock. The agreement is subject to approval by a vote of the shareholders
of Drilex as well as satisfaction of other customary conditions including
clearance by appropriate government agencies. The Company expects the
acquisition, if approved, would result in the issuance of between 2.6 and
3.2 million shares of the Company's common stock (assuming the average
market price of the Company's common stock during a 10-day period shortly
before the closing is between $33 and $40 per share) and would be
consummated by September 30, 1997. For its most recent fiscal year ended
December 31, 1996, Drilex had revenues of $76.1 million.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with the Company's
Consolidated Condensed Financial Statements and the related notes thereto.
Forward-Looking Statements
- --------------------------
MD&A includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "forecasts,"
"will," "could," "may" and similar expressions are intended to identify
forward-looking statements. No assurance can be given that actual results
may not differ materially from those in the forward-looking statements
herein for reasons including the effect of competition, the level of
petroleum industry exploration and production expenditures, world economic
conditions, prices of and the demand for crude oil and natural gas,
drilling activity, weather, the legislative environment in the United
States and other countries, OPEC policy, conflict in the Middle East and
other major petroleum producing regions and the condition of the capital
and equity markets.
BUSINESS ENVIRONMENT
- --------------------
Baker Hughes provides products and services to the worldwide oilfield
services and continuous process industries. Oilfield services generate
approximately 88% of the Company's consolidated revenues.
Baker Hughes Oilfield Operations consist of six 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
affected significantly by petroleum industry exploration and production
expenditures. These expenditures are influenced strongly by oil company
expectations about energy prices and the supply and demand for crude oil
and natural gas. Petroleum supply and pricing, in turn, are influenced by
numerous factors including, but not limited to, those described above in
"Forward-Looking Statements".
Baker Hughes Process Equipment Company ("BHPEC") has three divisions
that serve a broad range of process industries around the world. BHPEC's
technologies separate solids from liquids and liquids from liquids through
filtration, sedimentation, centrifugation and flotation processes. The
business environment for BHPEC is affected significantly by worldwide
economic conditions and the economic health of the specific business
sectors where it participates. The results for BHPEC also includes the
results of Tracor Europa, a computer peripherals operation.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
PENDING ACQUISITIONS
- --------------------
In February 1997, the Company entered into a definitive agreement with
Petrolite Corporation ("Petrolite") and Wm. S. Barnickel & Company
("Barnickel"), Petrolite's major shareholder, pursuant to which the Company
will acquire Petrolite, a manufacturer and marketer of specialty chemicals
used in the petroleum and process industries, and Barnickel, which owns
certain marketable securities in addition to its investment in Petrolite.
Terms of the agreement call for a tax-free exchange of common stock in
which each of the 11.4 million Petrolite shares will be converted into the
Company's common stock having a value of $61 per share based upon the
average market price of the Company's common stock during a 10-day period
shortly before the closing. The agreement is subject to approval by a vote
of the shareholders of Petrolite and Barnickel. The Company expects the
acquisition, if approved, would result in the issuance of between 18 and 22
million shares of the Company's common stock (assuming such 10-day average
market price of the Company's common stock is between $33 and $40 per
share) and would be consummated by September 30, 1997. For its most recent
fiscal year ended October 31, 1996, Petrolite had revenues of $360.7
million.
In April 1997, the Company entered into a definitive agreement to
acquire Drilex International Inc. ("Drilex") a provider of products and
services used in directional and horizontal drilling and workover of oil
and gas wells. Terms of the agreement call for a tax-free exchange of
stock. The agreement is subject to approval by a vote of the shareholders
of Drilex as well as satisfaction of other customary conditions including
clearance by appropriate government agencies. The Company expects the
acquisition, if approved, would result in the issuance of between 2.6 and
3.2 million shares of the Company's common stock (assuming the average
market price of the Company's common stock during a 10-day period shortly
before the closing is between $33 and $40 per share) and would be
consummated by September 30, 1997. For its most recent fiscal year ended
December 31, 1996, Drilex had revenues of $76.1 million.
OPERATING ENVIRONMENT FOR OILFIELD OPERATIONS
- ---------------------------------------------
Two key trends are continuing to alter the oilfield service market
place: the impact of technology and the growth in outsourcing and
partnering. Advances in the design and application of the Company's
products and services allow oil and gas operators to drill and complete
wells at a lower overall cost. At the same time, this technology helps
accelerate hydrocarbon production and enhance reserve recovery.
Similarly, oil companies have increased their levels of outsourcing to
and partnering with service companies because this approach has proven to
be effective in lowering finding and development costs. Baker Hughes works
closely with client companies in project planning and management, and in
the engineering and integration of several products and services into
solutions that meet client objectives.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Crude oil and natural gas prices and the Baker Hughes rotary rig count
are summarized in the tables below as quarterly averages followed by the
Company's outlook. While reading the Company's outlook set forth below,
caution is advised that the factors described above in "Forward-Looking
Statements" could negatively impact the Company's expectations for oil
demand, oil and gas prices and drilling activity.
Oil and Gas Prices Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
----------------------------------------------------------------------
WTI ($/Bbl) 23.18 19.79 23.93 18.98
U.S. Spot Natural Gas ($/mcf) 2.49 2.75 2.73 2.33
The Company expects crude oil to trade between $18 and $22 per barrel
in 1997 and early 1998 while remaining susceptible to short-term price
fluctuations as the incremental worldwide demand is met by incremental
production from both non-OPEC and OPEC countries. According to the
International Energy Agency, the demand for crude oil is expected to grow
1.4 million to 2.0 million barrels per day per year through the end of the
century. Three-quarters of the incremental demand is expected to be driven
by relatively low energy prices, low but increasing energy consumption per
capita, population growth and economic growth in non-OECD countries,
particularly in Asia and Latin America.
U.S. natural gas prices are expected to trade between $1.80/mcf and
$2.25/mcf through late 1997 and early 1998. The Company believes that
natural gas prices at or above $1.80/mcf will sustain the current natural
gas exploration and development drilling activity.
Rotary Rig Count Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
----------------------------------------------------------------------
U.S. - Land 739 607 738 633
U.S. - Offshore 114 102 111 104
Canada 396 339 357 283
----- ----- ----- -----
North American 1,249 1,048 1,206 1,020
----- ----- ----- -----
Latin America 284 282 283 277
North Sea 63 50 59 51
Other Europe 60 70 60 70
Africa 83 77 82 73
Middle East 142 131 140 132
Asia Pacific 177 167 179 169
----- ----- ----- -----
International 809 777 803 772
----- ----- ----- -----
Worldwide 2,058 1,825 2,009 1,792
----- ----- ----- -----
U.S. Workover 1,352 1,253 1,352 1,270
----------------------------------------------------------------------
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
The Company anticipates continued growth in the worldwide demand for
hydrocarbons that will result in increased spending by oil and gas
companies for the development of the hydrocarbon supply. The increase is
dependent on continued worldwide economic growth and in particular economic
growth in the developing countries. The increased spending is expected to
result in increased drilling activity in most regions.
North America
The Company anticipates strong growth in both the U.S. and Canadian
markets. Growth in the rig count will be somewhat limited by the
availability of drilling rigs in certain sectors - in particular offshore
U.S. and in Canada.
International
The Company is optimistic that most international areas will continue
to post an increasing rig count in 1997. The Company is forecasting
increases in Latin America, the North Sea and the Middle East. Activity in
Africa is expected to remain at current levels while drilling in Asia is
expected to fall.
RESULTS OF OPERATIONS
- ---------------------
Industry Segment Results (In millions)
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
Revenues ---- ---- ---- ----
- -------
Oilfield Operations $ 742.8 $ 655.6 $1,453.2 $1,267.8
BHPEC 90.4 89.2 188.6 171.7
------- ------- ------- -------
Consolidated Revenues $ 833.2 $ 744.8 $1,641.8 $1,439.5
======= ======= ======= =======
Operating Income
- ----------------
Oilfield Operations $ 104.4 $ 86.1 $ 200.9 $ 160.6
BHPEC 8.7 7.5 16.1 13.2
Corporate and Other (8.7) (9.5) (18.4) (18.9)
------- ------- ------- -------
Consolidated Operating Income $ 104.4 $ 84.1 $ 198.6 $ 154.9
======= ======= ======= =======
Revenues
Consolidated revenues were up 12% and 14% for the three months and six
months ended March 31, 1997, respectively, as compared to the same periods
in 1996. Sales revenue was up 10% for the quarter and 14% for the six
months as compared to the same periods in 1996. Service and
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
rentals revenue was up 16% for the quarter and 15% for the six months as
compared to the same periods in 1996. Approximately 66% of the Company's
1997 revenues were derived from international activities for the quarter
and six months. The revenue improvement was lead by Oilfield Operations
where revenue growth outpaced rig count increases in most areas of the
world. In the United States revenues increased 12% for the quarter and 13%
for the six months as compared to the same periods in 1996. Revenues in
Venezuela were up 35% for both the quarter and six months as compared to
the same periods in 1996 and, Nigerian revenues were up 27% for the quarter
and 60% for the six months as compared to the same periods in 1996. The
continued deployment of new technology aimed at reducing the cost to drill
and complete a well coupled with increased drilling activity around the
globe contributed to revenue gains.
BHPEC had a slight revenue increase in the second quarter of 1997 of
$1.2 million, or 1%, and $16.9 million, or 10% for the six months as
compared to the same periods in 1996. Excluding $4.7 million of revenue
due to 1996 acquisitions, BHPEC's revenue for the current quarter decreased
from the prior year quarter due primarily to reduced international
activity.
Operating Income
Oilfield Operations margins were 14% for both the three and six months
ended March 31, 1997 compared to 13% in the same prior year periods. BHPEC
margins were 10% in the second quarter of 1997 compared to 8% in the prior
year quarter and 9% for the first six months of 1997 compared to 8% in the
prior year.
Costs and Expenses
The increase in cost of sales, cost of services and rentals, research
and engineering and marketing and field service expenses is in line with
the increase in the related revenue. In total, as a percent of
consolidated revenues, costs and expenses applicable to revenues decreased
from 81.2% in the second quarter of 1996 to 80.7% in the second quarter of
1997.
General and administrative expense, which is less sensitive to changes
in revenue, declined for the three and six months ended March 31, 1997 as
compared to the same periods in 1996 due to foreign exchange gains in the
current quarter of $4.8 million.
The three year cumulative rate of inflation in Mexico exceeded 100% for
the year ended December 31, 1996, therefore Mexico is considered to be a
highly inflationary economy. Effective December 31, 1996, the functional
currency for the Company's investments in Mexico has changed from the
Mexican peso to the U.S. dollar.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Interest Expense
Interest expense for the three and six months ended March 31, 1997
decreased compared to the prior year periods due to the repayment of the
4.125% Swiss Franc Bonds which matured in June 1996.
Income Taxes
The effective income tax rates for the three and six months ended March
31, 1997, are down from the prior year periods due to a favorable change in
the mix of foreign earnings, the fixed nature of the nondeductible goodwill
amortization, an increase in export sales incentives utilized through the
Company's foreign sales corporation and additional tax credits for
increasing U.S. research activities.
CAPITAL RESOURCES AND LIQUIDITY
Financing Activities
Net cash inflows from financing activities during the first six months
of 1997 were $7.6 million compared to $28.5 million for the first six
months in 1996.
Total debt outstanding at March 31, 1997 was $696.4 million, compared
to $675.4 million at September 30, 1996. The debt to equity ratio was .396
at March 31, 1997, compared to .400 at September 30, 1996.
The Company's stock price increased significantly during the first six
months of 1997 compared to the same period in 1996 resulting in $24.8
million of capital raised through employee stock plans.
At March 31, 1997 the Company had $626.8 million of credit facilities with
commercial banks, of which $300.0 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 $86.1 million in the
first six months of 1997 compared to cash outflows of $40.2 million in the
first six months of 1996.
Proceeds from the disposal of assets and noncore businesses generated
$26.2 million in the first six months of 1997 compared to $46.1 million in
the first six months of 1996. Property additions increased to $112.2
million from $86.3 million. The increase in additions is in line with the
Company's objective of replacing and adding capital to increase
productivity and ensure that the necessary capacity is available to meet
the increased market demand.
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
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
operations and outstanding lines of credit are expected to be more than
adequate to meet future capital expenditure requirements. The Company
expects 1997 capital expenditures to be in excess of $200 million.
Operating Activities
Net cash inflows from operating activities for the first six months of
1997 were $77.8 million compared to $21.5 million in the first six months
of 1996.
The increase of $56.3 million in 1997 was due to an increase in net
income adjusted for noncash items and a decrease in the growth of working
capital from the prior year due primarily to the decrease in days sales
outstanding from increased accounts receivable collections and an increase
in trade debt resulting from the increase in activity.
ACCOUNTING STANDARDS
Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," effective 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 prior policy and, therefore, the adoption of
SFAS No. 121 does not have a significant impact on the consolidated
financial statements as it relates to impairment of long-lived assets used
in operations. However, 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 method that was previously used by the Company.
The Company recognized a charge to income of $12.1 million ($.08 per
share), net of a tax benefit of $6.0 million, as the cumulative effect of a
change in accounting in the first quarter of 1997.
Stock Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation". 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 will 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 in the notes to the consolidated financial
statements for the year ending September 30, 1997, as if the fair value
based method of accounting had been applied.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which establishes new standards for computing and presenting earnings per
share ("EPS"). SFAS No. 128 will require the presentation of "basic" and
"diluted" EPS on the face of the income statement, including all prior
periods presented, and is effective for financial statements issued for
periods ending after December 15, 1997. The calculation of basic EPS will
result in a per share amount equal to that currently presented for income
per share of common stock. The calculation of diluted EPS is expected to
be lower than the basic EPS calculation by approximately 2-3%.
-15-
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 March 5,
1997, reporting that the Company had entered into an agreement providing
for the acquisition of Petrolite Corporation by the Company.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BAKER HUGHES INCORPORATED
(Registrant)
Date: May 13, 1997 By /s/LAWRENCE O'DONNELL, III
------------------------------------
Vice President & General Counsel
Date: May 13, 1997 By /s/JAMES E. BRAUN
------------------------------------
Controller
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Consolidated Statements of Operations and Consolidated Statements of Financial
Position and is qualified in its entirety by refrence to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,234
<SECURITIES> 0
<RECEIVABLES> 854,636
<ALLOWANCES> 28,570
<INVENTORY> 879,108
<CURRENT-ASSETS> 1,836,550
<PP&E> 1,599,324
<DEPRECIATION> 959,514
<TOTAL-ASSETS> 3,411,701
<CURRENT-LIABILITIES> 643,285
<BONDS> 695,233
0
0
<COMMON> 145,641
<OTHER-SE> 1,612,268
<TOTAL-LIABILITY-AND-EQUITY> 3,411,701
<SALES> 1,098,517
<TOTAL-REVENUES> 1,641,810
<CGS> 643,596
<TOTAL-COSTS> 1,337,596
<OTHER-EXPENSES> 105,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,341
<INCOME-PRETAX> 176,174
<INCOME-TAX> 67,833
<INCOME-CONTINUING> 108,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (12,079)
<NET-INCOME> 96,262
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
