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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 June 30, 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 August 2, 1997
----- -----------------------------
Common Stock, $1.00 par value per share 168,735,000 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, 1997 and 1996 2
Consolidated Condensed Statements of Financial Position
- June 30, 1997 and September 30, 1996 3
Consolidated Condensed Statements of Cash Flows - Nine Months
Ended June 30, 1997 and 1996 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 19
-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,
1997 1996 1997 1996
REVENUES: -------------------- --------------------
Sales $ 596,462 $ 522,025 $1,694,979 $1,487,256
Services and rentals 300,809 243,827 844,102 718,115
--------- --------- --------- ---------
Total revenues 897,271 765,852 2,539,081 2,205,371
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 346,775 298,352 990,371 858,616
Cost of services and rentals 139,180 120,304 395,948 364,914
Research and engineering 29,148 21,858 78,829 64,472
Marketing and field service 209,153 178,922 596,704 504,299
General and administrative 51,653 48,472 142,472 145,415
Amortization of goodwill
and other intangibles 6,767 7,371 21,520 22,218
Unusual charge 39,611 39,611
--------- --------- --------- ---------
Total costs and expenses 782,676 714,890 2,225,844 1,999,545
--------- --------- --------- ---------
Operating income 114,595 50,962 313,237 205,826
Gain on sale of Varco stock 44,295 44,295
Interest expense (11,650) (13,077) (34,991) (43,305)
Interest income 532 880 1,405 2,665
--------- --------- --------- ---------
Income before income taxes 103,477 83,060 279,651 209,481
Income taxes (21,454) (36,187) (89,287) (88,651)
--------- --------- --------- ---------
Income before cumulative
effect of accounting change 82,023 46,873 190,364 120,830
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 $ 82,023 $ 46,873 $ 178,285 $ 120,830
========= ========= ========= =========
Per share of common stock:
Income before cumulative
effect of accounting
change $ .56 $ .33 $ 1.31 $ .85
Cumulative effect of
accounting change (.08)
--------- --------- --------- ---------
Net income $ .56 $ .33 $ 1.23 $ .85
========= ========= ========= =========
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,
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 12,520 $ 7,714
---------- ----------
Receivables - net 864,065 793,801
---------- ----------
Inventories:
Finished goods 738,211 665,715
Work in process 94,080 70,609
Raw materials 72,698 65,870
---------- ----------
Total inventories 904,989 802,194
---------- ----------
Deferred income taxes 82,403 78,680
---------- ----------
Other current assets 48,368 34,004
---------- ----------
Total current assets 1,912,345 1,716,393
---------- ----------
PROPERTY - NET 687,015 598,950
---------- ----------
OTHER ASSETS:
Investments 81,768 68,992
Property held for disposal 43,084 57,666
Other assets 75,223 98,104
Excess costs arising from acquisitions - net 740,744 757,285
---------- ----------
Total other assets 940,819 982,047
---------- ----------
Total $ 3,540,179 $ 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
June 30, September 30,
1997 1996
---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 360,473 $ 330,138
Short-term borrowings and current portion
of long-term debt 62 1,859
Accrued employee compensation and benefits 163,477 155,310
Income taxes 62,052 32,925
Taxes other than income 23,415 26,600
Accrued insurance 26,599 28,052
Accrued interest 24,307 10,324
Other accrued liabilities 44,545 50,112
---------- ----------
Total current liabilities 704,930 635,320
---------- ----------
LONG-TERM DEBT 687,832 673,588
---------- ----------
DEFERRED INCOME TAXES 173,911 150,460
---------- ----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 96,292 97,635
---------- ----------
OTHER LONG-TERM LIABILITIES 47,055 51,178
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 145,807 144,553
Capital in excess of par value 1,420,598 1,393,580
Retained earnings 378,711 250,567
Cumulative foreign currency translation
adjustment (143,845) (118,766)
Unrealized gain on securities available
for sale 28,888 19,275
---------- ----------
Total stockholders' equity 1,830,159 1,689,209
---------- ----------
Total $ 3,540,179 $ 3,297,390
========== ==========
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,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: -------- --------
Net income $ 178,285 $ 120,830
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization of:
Property 98,775 87,436
Other assets and debt discount 28,873 30,184
Deferred tax provision 20,514 22,441
Noncash portion of unusual charge 25,269
Gain on sale of Varco stock (44,295)
Gain on disposal of assets (18,544) (856)
Foreign currency translation (gain)/loss - net (4,589) 7,801
Cumulative effect of accounting change 12,079
Change in receivables (68,453) (85,242)
Change in inventories (100,017) (75,743)
Change in accounts payable 26,037 (20,354)
Changes in other assets and liabilities 476 47,679
-------- --------
Net cash flows from operating activities 173,436 115,150
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (191,630) (131,596)
Proceeds from sale of Varco stock 95,476
Proceeds from disposal of assets 39,906 33,634
Acquisition of businesses, net of cash acquired (32,681)
-------- --------
Net cash flows from investing activities (151,724) (35,167)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from commercial paper and
revolving credit facilities 5,545 43,394
Repayment of indebtedness (108,401)
Proceeds from exercise of stock options
and stock purchase grants 28,272 33,239
Dividends (50,141) (49,265)
-------- --------
Net cash flows from financing activities (16,324) (81,033)
-------- --------
Effect of exchange rate changes on cash (582) 895
-------- --------
Increase (decrease) in cash and cash equivalents 4,806 (155)
Cash and cash equivalents, beginning of period 7,714 6,817
-------- --------
Cash and cash equivalents, end of period $ 12,520 $ 6,662
======== ========
Income taxes paid $ 40,396 $ 29,859
Interest paid $ 15,305 $ 36,255
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" or "BHI"), 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, 1997 and its consolidated results of operations and
cash flows for each of the three and nine month periods ended June 30, 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 nine months ended June 30, 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
June 30, 1997 and 1996, 145,707,000 and 143,704,000, respectively; nine
months ended June 30, 1997 and 1996, 145,348,000 and 142,880,000,
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. Acquisitions
- ----------------------------
Petrolite
- ---------
On July 2, 1997, the Company completed the acquisition of Petrolite
Corporation ("Petrolite") and Wm. S. Barnickel & Company ("Barnickel"), the
holder of 47.1% of Petrolite's common stock, pursuant to the Agreement and
Plan of Merger (the "Merger Agreement") dated as of February 25, 1997.
Pursuant to the Merger Agreement, the three-way business combination was
completed as follows:
1) The 8,800 shares of Barnickel common stock were converted at an
exchange rate of 1,075.5367 shares of BHI common stock for each
share of Barnickel common stock. This exchange rate was
determined by dividing (i) the Barnickel share value (determined
as described below) by (ii) $37.80625, which is the average
closing price of BHI common stock as reported on the New York
Stock Exchange for the ten trading days ended June 27, 1997.
The Barnickel share value was determined by multiplying $61.00,
the value per share of Petrolite common stock as set forth in
the Merger Agreement, and the number of shares of Petrolite
common stock owned by Barnickel (5,337,360 shares) and then
adding the net after tax value of Barnickel's assets, other than
Petrolite common stock.
2) The 6.1 million shares of Petrolite common stock, not held by
Barnickel, were converted at an exchange rate of 1.6135
shares of BHI common stock for each share of Petrolite common
stock. This exchange rate was determined by dividing (i) $61.00
by (ii) $37.80625 (determined as described above).
In the aggregate, BHI will issue 19.277 million shares of its common
stock to Petrolite and Barnickel shareholders having an aggregate value of
approximately $729 million. Additionally, BHI assumed Petrolite's
outstanding vested and unvested employee stock options to purchase an
aggregate of 591,000 shares of Petrolite common stock, which have been
converted into the right to acquire approximately 954,000 shares of BHI
common stock. Such assumption of Petrolite options by BHI has a fair
market value of approximately $21 million resulting in total consideration
in the acquisition of approximately $750 million.
Petrolite, previously a publicly held company, is a manufacturer and
marketer of specialty chemicals used in the petroleum and process
industries. For its most recent fiscal year ended October 31, 1996,
Petrolite had revenues of $360.7 million. Barnickel was a privately held
company which owned certain marketable securities in addition to its
investment in Petrolite.
The mergers will be accounted for using the purchase method of
accounting with BHI acquiring Petrolite and Barnickel.
-7-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Environmental Technology Division of Deutz AG
- ---------------------------------------------
On July 7, 1997, the Company completed its cash acquisition of the
Environmental Technology Division, a decanter centrifuge and dryer
business, of Deutz AG ("ETD") for approximately DM 92 million (subject to
adjustment), equivalent to approximately $53 million. BHI will add ETD to
its Baker Hughes Process Equipment Company operations as part of its Bird
Machine Company division, headquartered in South Walpole, Massachusetts.
The acquisition will be accounted for using the purchase method of
accounting. For its most recent fiscal year ended December 31, 1996, ETD
had revenues of approximately $103.0 million.
Drilex
- ------
On July 14, 1997, the Company completed the acquisition of Drilex
International Inc. ("Drilex") a provider of products and services used in
the directional and horizontal drilling and workover of oil and gas wells.
The exchange ratio for the acquisition was .4013 shares of BHI common stock
for each share of Drilex common stock. As a result, the 6.8 million shares
of Drilex common stock were exchanged for 2.7 million shares of BHI common
stock, for a total consideration of approximately $108 million. The
acquisition will be accounted for using the pooling of interests method of
accounting. For its most recent fiscal year ended December 31, 1996,
Drilex had revenues of $76.1 million.
Oil Dynamics, Inc.
- ------------------
On June 24, 1997, the Company entered into a definitive agreement to
acquire Oil Dynamics, Inc. ("ODI") from Franklin Electric Co. Inc. ODI is
a manufacturer of electric submersible pumps used to lift crude oil in
producing wells. The purchase price is $31.5 million in cash subject to
certain post-closing adjustments. The agreement is subject to the
satisfaction of customary conditions, including the expiration or
termination of the waiting period prescribed by the Hart-Scott-Rodino Act
of 1976, as amended. Assuming that all conditions to closing are satisfied
or waived, the acquisition is expected to close by September 30, 1997.
-8-
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 90% 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.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
ACQUISITIONS
- ------------
Petrolite
- ---------
On July 2, 1997, the Company completed the acquisition of Petrolite
Corporation ("Petrolite") and Wm. S. Barnickel & Company ("Barnickel"), the
holder of 47.1% of Petrolite's common stock.
In the aggregate, BHI will issue 19.277 million shares of its common
stock to Petrolite and Barnickel shareholders having an aggregate value of
approximately $729 million. Additionally, BHI assumed Petrolite's
outstanding vested and unvested employee stock options. Such assumption of
Petrolite options by BHI has a fair market value of approximately $21
million resulting in total consideration of approximately $750 million.
Petrolite is a manufacturer and marketer of specialty chemicals used in
the petroleum and process industries. For its most recent fiscal year
ended October 31, 1996, Petrolite had revenues of $360.7 million.
Barnickel was a privately held company which owned certain marketable
securities in addition to its investment in Petrolite. The mergers will be
accounted for using the purchase method of accounting with BHI acquiring
Petrolite and Barnickel.
Environmental Technology Division of Deutz AG
- ---------------------------------------------
On July 7, 1997, the Company completed its cash acquisition of the
Environmental Technology Division, a decanter centrifuge and dryer
business, of Deutz AG ("ETD") for approximately DM 92 million (subject to
adjustment), equivalent to approximately $53 million. BHI will add ETD to
its BHPEC operations. The acquisition will be accounted for using the
purchase method of accounting. For its most recent fiscal year ended
December 31, 1996, ETD had revenues of approximately $103.0 million.
Drilex
- ------
On July 14, 1997, the Company completed the acquisition of Drilex
International Inc. ("Drilex") a provider of products and services used in
the directional and horizontal drilling and workover of oil and gas wells.
The 6.8 million shares of Drilex common stock were exchanged for 2.7
million shares of BHI common stock, for a total consideratin of $108
million. The acquisition will be accounted for using the pooling of
interests method of accounting. For its most recent fiscal year ended
December 31, 1996, Drilex had revenues of $76.1 million.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
The table below presents certain proforma information as of June 30,
1997 taking into account the acquisitions completed in July.
Reported Proforma
(In millions) Balance Balance
-------- --------
Stockholders' equity $1,830.2 $2,636.4
Shares of common stock outstanding 145.8 167.8
In connection with these three acquisitions, the Company expects to
record an unusual charge in its fourth quarter of 1997 of between $12.0
million and $19.0 million related to the integration of the acquired
businesses into the respective divisions of the Company. Additionally, BHI
expects to record a non-recurring charge to cost of sales of between $19.0
million and $23.0 million in the fourth quarter of 1997 related to the fair
market value adjustment of Petrolite's inventories as of the acquisition
date, July 2, 1997.
Oil Dynamics, Inc.
- ------------------
On June 24, 1997, the Company entered into a definitive agreement to
acquire Oil Dynamics, Inc. ("ODI") from Franklin Electric Co. Inc.. ODI is
a manufacturer of electric submersible pumps used to lift crude oil in
producing regions worldwide. The purchase price is $31.5 million in cash
subject to certain post-closing adjustments. The agreement is subject to
the satisfaction of customary conditions, including the expiration or
termination of the waiting period prescribed by the Hart-Scott-Rodino Act
of 1976, as amended. Assuming that all conditions to closing are satisfied
or waived, the acquisition is expected to close by September 30, 1997.
OPERATING ENVIRONMENT FOR OILFIELD OPERATIONS
- ---------------------------------------------
Two key trends are continuing to alter the oilfield service market
place: the impact of technology and the growth in outsourcing and
partnering. Advances in the design and application of the Company's
products and services allow oil and gas operators to drill and complete
wells at a lower overall cost. At the same time, this technology helps
accelerate hydrocarbon production and enhance reserve recovery.
Similarly, oil companies have increased their levels of outsourcing to,
and partnering with, service companies because this approach has proven to
be effective in lowering finding and development costs. Baker Hughes works
closely with client companies in project planning and management, and in
the engineering and integration of several products and services into
solutions that meet client objectives.
Crude oil and natural gas prices and the Baker Hughes rotary rig count
are summarized in the tables below as quarterly averages followed by the
Company's outlook. While reading the Company's outlook set forth below,
caution is advised that the factors described above in "Forward-Looking
Statements" could negatively impact the Company's expectations for oil
demand, oil and gas prices and drilling activity.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Oil and Gas Prices Three Months Ended Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
----------------------------------------------------------------------
WTI ($/Bbl) 19.93 21.76 22.53 19.90
U.S. Spot Natural Gas ($/mcf) 2.04 2.17 2.50 2.28
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 $2.50/mcf through late 1997 and
early 1998.
Rotary Rig Count Three Months Ended Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
----------------------------------------------------------------------
U.S. - Land 811 646 762 637
U.S. - Offshore 122 113 115 107
Canada 253 157 322 241
----- ----- ----- -----
North American 1,186 916 1,199 985
----- ----- ----- -----
Latin America 277 286 279 280
North Sea 60 56 59 53
Other Europe 52 68 57 69
Africa 82 76 82 74
Middle East 158 138 146 136
Asia Pacific 183 172 181 171
----- ----- ----- -----
International 812 796 804 783
----- ----- ----- -----
Worldwide 1,998 1,712 2,003 1,768
----- ----- ----- -----
U.S. Workover 1,422 1,332 1,416 1,290
----------------------------------------------------------------------
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.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
North America
The Company anticipates strong growth in both the U.S. and Canadian
markets. Growth in the rig count will be 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 for the remainder of 1997 and into 1998.
The Company is forecasting increases in Latin America, the North Sea and
the Middle East. Activity in Africa and Asia is expected to remain at
current levels.
RESULTS OF OPERATIONS
- ---------------------
Industry Segment Results Three Months Ended Nine Months Ended
June 30, June 30,
Revenues (In millions) 1997 1996 1997 1996
- ---------------------- ---- ---- ---- ----
Oilfield Operations $ 805.3 $ 665.2 $2,258.5 $1,933.0
BHPEC 92.0 100.7 280.6 272.4
------- ------- ------- -------
Consolidated Revenues $ 897.3 $ 765.9 $2,539.1 $2,205.4
======= ======= ======= =======
Revenues
Consolidated revenues were up 17.2% and 15.1% for the three months and
nine months ended June 30, 1997, respectively, as compared to the same
periods in 1996. Sales revenue was up 14.3% for the quarter and 14.0% for
the nine months as compared to the same periods in 1996. Service and
rentals revenue was up 23.4% for the quarter and 17.5% for the nine 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 nine months. The revenue improvement was lead by Oilfield
Operations where revenue growth outpaced rig count increases in most areas
of the world. In particular, revenues in the United States increased 24%
for the quarter and 17% for the nine months as compared to the same periods
in 1996. Revenues in Venezuela were up 62% for the quarter and 44% for the
nine months as compared to the same periods in 1996 and, Nigerian revenues
were up 38% for the quarter and 51% for the nine 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's revenue declined 8.6% in the third quarter of 1997 compared to
the prior year quarter due to weakness in the pulp and paper industry
combined with delays in customers' capital spending. Year to date revenues
were up 3% due to two acquisitions in the third quarter of 1996 offset by
the current quarter decline.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Operating Income
During the June 1996 quarter, the Company recorded an unusual charge of
$39.6 million; $30.9 million was recorded by Oilfield Operations, $3.7
million was recorded by BHPEC and $5.0 million was recorded at the
Corporate level. The operating income information presented below includes
these unusual charges.
Three Months Ended Nine Months Ended
June 30, June 30,
Operating Income (In millions) 1997 1996 1997 1996
- ------------------------------ ---- ---- ---- ----
Oilfield Operations $ 116.3 $ 59.9 $ 317.3 $ 220.2
BHPEC 7.4 4.7 23.5 17.9
Corporate and Other (9.1) (13.6) (27.6) (32.3)
------- ------- ------- -------
Consolidated Operating Income $ 114.6 $ 51.0 $ 313.2 $ 205.8
======= ======= ======= =======
Consolidated operating income, excluding the 1996 unusual charges,
increased 26.5% and 27.6% for the three and nine months ended June 30,
1997, respectively.
Oilfield Operations margins for the three months ended June 30, 1997
and 1996, excluding the 1996 unusual charge, were 14.4% and 13.7%,
respectively. Oilfield Operations margins for the nine months ended June
30, 1997 and 1996, excluding the 1996 unusual charge, were 14.0% and 13.0%,
respectively. The increases result primarily from increased revenues and
continued emphasis on productivity and cost improvements.
BHPEC margins, excluding the 1996 unusual charge, were 8.0% in the
third quarter of 1997 compared to 8.3% in the prior year quarter and 8.4%
for the first nine months of 1997 compared to 7.9% 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
slightly from 80.9% in the third quarter of 1996 to 80.7% in the third
quarter of 1997.
General and administrative expense ("G&A") was $51.7 million and $48.5
million for the quarter ended June 30, 1997 and 1996, respectively. The
increase is due, in part, to an increase in employment and employee
training. G&A was $142.5 million and $145.4 million for the nine months
ended June 30, 1997 and 1996, respectively. The dollar decline is due to
higher foreign exchange losses in 1996 due to the Venezuelan Bolivar
devaluation.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
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.
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 $4.2 million of the cash during 1996. For the nine
months ended June 30, 1997, the Company spent $4.0 million and expects to
spend substantially all of the remaining $6.1 million by the end of
calendar 1997. Such expenditures relate to specific plans and clearly
defined actions and will be funded from operations and available credit
facilities.
Interest Expense
Interest expense for the three and nine months ended June 30, 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 Company reached an agreement with the Internal Revenue Service
("IRS") to close the audit of its fiscal 1992 and 1993 U.S. consolidated
income tax returns. The principal issue in the examination related to
inter-company pricing on the transfer of goods and services between U.S.
and non-U.S. subsidiary companies. As a result of the agreement, the
Company recognized a tax benefit through the reversal of deferred income
taxes previously provided of $11.4 million (approximately $0.08 per share)
in the quarter ended June 30, 1997.
The effective income tax rates for the three and nine months ended
June 30, 1997, are down from the prior year periods due to the IRS
settlement as explained above, 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.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
The Company expects the effective tax rate to be 38% in 1998.
CAPITAL RESOURCES AND LIQUIDITY
Financing Activities
Net cash outflows from financing activities during the first nine
months of 1997 were $16.3 million compared to $81.0 million for the first
nine months in 1996.
Total debt outstanding at June 30, 1997 was $687.9 million, compared to
$675.4 million at September 30, 1996. The debt to equity ratio was .376 at
June 30, 1997, compared to .400 at September 30, 1996.
At June 30, 1997 the Company had $634.7 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 $151.7 million in the
first nine months of 1997 compared to cash outflows of $35.2 million in the
first nine months of 1996.
Proceeds from the disposal of assets and noncore businesses generated
$39.9 million in the first nine months of 1997 compared to $33.6 million in
the first nine months of 1996. Property additions increased to $191.6
million in 1997 from $131.6 million in 1996. 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
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 $250 million.
Operating Activities
Net cash inflows from operating activities for the first nine months of
1997 were $173.4 million compared to $115.2 million in the first nine
months of 1996.
The increase of $58.2 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 offset by growth in inventory levels resulting from the
increase in activity.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
During the June 1997 quarter, the Company began a multi-year initiative
designed to completely overhaul and reengineer the Company's business
processes. The initiative, named "Project Renaissance", will identify best
practices and standardize these processes across the whole of BHI. As a
technology enabler, the Company will move to an enterprise wide software
solution and has chosen SAP R/3 as its platform for the future. This
project is expected to cost in excess of $200 million over a four year
period.
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.
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
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
per share of common stock. The calculation of diluted EPS is expected to
be lower than the basic EPS calculation by approximately 2-3%.
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information", which establishes new standards
for reporting information about operating segments and for related
disclosures about products and services, geographic areas and major
customers. The statement is effective for financial statements for fiscal
years beginning after December 15, 1997. Restatement of prior years is
required. The Company is currently analyzing the impact of this statement
and has not made a decision as to when to adopt.
-18-
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 July 17,
1997, as amended on Form 8-K/A dated August 11, 1997, reporting that the
Company had consummated the transactions contemplated by the Agreement and
Plan of Merger dated February 25, 1997, providing for the acquisition of
Petrolite Corporation and Wm. S. Barnickel & Company by the Company.
-19-
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 14, 1997 By /s/LAWRENCE O'DONNELL, III
------------------------------------
Vice President & General Counsel
Date: August 14, 1996 By /s/JAMES E. BRAUN
------------------------------------
Controller
-20-
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<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 reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
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<TOTAL-ASSETS> 3,540,179
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0
0
<COMMON> 145,807
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<INTEREST-EXPENSE> 34,999
<INCOME-PRETAX> 279,651
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<INCOME-CONTINUING> 190,364
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<CHANGES> (12,079)
<NET-INCOME> 178,285
<EPS-PRIMARY> 1.23
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