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FORM 10-QT
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from October 1, 1997 to December 31, 1997
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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 (I.R.S. Employer
of incorporation or organization) Identification No.)
3900 Essex Lane, Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 29, 1998
----- ------------------------------
Common Stock, $1.00 par value per share 325,791,000 shares
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BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three Months
ended December 31, 1997 and 1996 2
Consolidated Condensed Statements of Financial Position
- December 31, 1997 and September 30, 1997 3
Consolidated Condensed Statements of Cash Flows - Three months
ended December 31, 1997 and 1996 4
Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II - Other Information 17
-1-
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Three Months Ended
December 31,
1997 1996
REVENUES: --------- ---------
Sales $ 773.4 $ 551.7
Services and rentals 360.0 275.0
--------- ---------
Total revenues 1,133.4 826.7
--------- ---------
COSTS AND EXPENSES:
Cost of sales 477.5 348.1
Cost of services and rentals 197.4 157.6
Selling, general and administrative 306.4 217.1
Amortization of goodwill and other intangibles 10.3 7.6
--------- ---------
Total costs and expenses 991.6 730.4
--------- ---------
Operating income 141.8 96.3
Interest expense (14.5) (11.8)
Interest income .7 .5
--------- ---------
Income before income taxes and cumulative effect of
accounting change 128.0 85.0
Income taxes (48.6) (33.5)
--------- ---------
Income before cumulative effect of accounting change 79.4 51.5
Cumulative effect of accounting change -
Impairment of long-lived assets to be disposed of
(net of $6.0 income tax benefit) (12.1)
--------- ---------
Net income $ 79.4 $ 39.4
========= =========
Earnings Per share of Common Stock - Basic:
Income before cumulative effect of accounting
change $ .47 $ .35
Cumulative effect of accounting change (.08)
--------- ---------
Net income $ .47 $ .27
========= =========
Earnings Per Share of Common Stock - Diluted:
Income before cumulative effect of accounting
change $ .46 $ .34
Cumulative effect of accounting change (.08)
--------- ---------
Net income $ .46 $ .26
========= =========
Cash dividends per share of common stock $ .115 $ .115
========= =========
See accompanying notes to consolidated condensed financial statements.
-2-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
ASSETS
December 31, September 30,
1997 1997
Current Assets: ---------- ----------
Cash and cash equivalents $ 8.4 $ 8.6
Receivables - net 1,074.0 1,047.1
Inventories 1,105.6 1,030.5
Deferred income taxes 79.8 83.8
Other current assets 59.5 50.5
---------- ----------
Total current assets 2,327.3 2,220.5
Property - net 1,049.5 982.9
Other assets 476.3 497.5
Excess costs arising from acquisitions - net 1,052.3 1,055.4
---------- ----------
Total assets $ 4,905.4 $ 4,756.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 458.0 $ 499.7
Short-term borrowings and current portion
of long-term debt 70.8 9.6
Accrued employee compensation and benefits 175.9 223.2
Income taxes payable 45.7 48.6
Other accrued liabilities 188.5 155.2
---------- ----------
Total current liabilities 938.9 936.3
---------- ----------
Long-term debt 909.2 771.8
---------- ----------
Deferred income taxes 261.8 275.9
---------- ----------
Other long-term liabilities 163.4 167.7
---------- ----------
Stockholders' Equity:
Common stock 169.4 169.1
Capital in excess of par value 2,241.5 2,236.0
Retained earnings 343.6 283.7
Cumulative foreign currency translation
adjustment (160.5) (144.9)
Unrealized gain on securities available for sale 38.1 60.7
---------- ----------
Total stockholders' equity 2,632.1 2,604.6
---------- ----------
Total liabilities and stockholders' equity $ 4,905.4 $ 4,756.3
========== ==========
See accompanying notes to consolidated condensed financial statements.
-3-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
December 31,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 79.4 $ 39.4
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization of:
Property 45.1 32.4
Other assets and debt discount 12.8 10.0
Deferred income taxes 3.5 7.2
Gain on disposal of assets (9.7) (7.0)
Foreign currency translation gain - net (2.0)
Cumulative effect of accounting change 12.1
Change in receivables (21.0) (11.2)
Change in inventories (59.3) (40.8)
Change in accounts payable (47.6) (35.2)
Changes in other assets and liabilities (61.1) (10.0)
-------- --------
Net cash flows from operating activities (59.9) (3.1)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (105.2) (54.7)
Proceeds from disposal of assets 17.5 13.3
Cash obtained in stock acquisition 3.3
Acquisition of business, net of cash acquired (33.1)
-------- --------
Net cash flows from investing activities (120.8) (38.1)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from commercial paper and
revolving credit facilities 195.9 56.3
Proceeds from exercise of stock options 5.6 12.6
Dividends (19.5) (16.7)
-------- --------
Net cash flows from financing activities 182.0 52.2
-------- --------
Effect of exchange rate changes on cash (1.5) .2
-------- --------
(Decrease)increase in cash and cash equivalents (.2) 11.2
Cash and cash equivalents, beginning of period 8.6 7.7
-------- --------
Cash and cash equivalents, end of period $ 8.4 $ 18.9
======== ========
Income taxes paid $ 48.0 $ 12.9
Interest paid $ 8.8 $ 6.6
See accompanying notes to consolidated condensed financial statements.
-4-
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
December 31, 1997 and its consolidated results of operations and cash flows
for each of the three month periods ended December 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, 1997
for the most recent annual financial statements prepared in accordance with
generally accepted accounting principles). The results of operations for
the three months ended December 31, 1997 are not necessarily indicative of
the results to be expected for the full year. In the Notes to Consolidated
Condensed Financial Statements, all dollar and share amounts in tabulations
are in millions of dollars and shares, respectively, unless otherwise
indicated.
Note 2. Change in Fiscal Year
On August 27, 1998, the Board of Directors of the Company approved a
change in the Company's fiscal year end from September 30 to December 31,
effective the calendar year beginning January 1, 1998. A three-month
transition period from October 1, 1997 through December 31, 1997 will
precede the start of the new fiscal year.
Note 3. Inventories
Inventories are comprised of the following:
December 31, September 30,
1997 1997
----------- ------------
Finished goods $ 907.2 $ 832.3
Work in process 122.2 98.3
Raw materials 76.2 99.9
---------- ----------
Total $ 1,105.6 $ 1,030.5
========== ==========
Note 4. Acquisition
On October 24, 1997, the Company acquired Oil Dynamics, Inc. ("ODI")
from Franklin Electric Co. Inc. for $34.4 million. ODI is a manufacturer
of electric submersible pumps used to lift crude oil in producing regions
worldwide and has been added to the operations of Centrilift.
-5-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
The acquisition was accounted for using the purchase method of
accounting. Accordingly, the cost of the acquisition has been allocated to
assets acquired and liabilities assumed based on their estimated fair
market values at the date of acquisition, October 24, 1997. The operating
results of ODI are included in the consolidated condensed statement of
operations from the acquisition date. Pro forma results of the acquisition
have not been presented as the pro forma revenue, income before accounting
change and earnings per share would not be materially different from the
Company's actual results.
Note 5. Income Per Common Share
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," which establishes new standards for
computing and presenting earnings per share ("EPS"), in the quarter ended
December 31, 1997.
Reconciliation of the numerators and denominators of the basic and
diluted EPS computations is as follows:
For the Three Months Ended For the Three Months Ended
December 31, 1997 December 31, 1996
Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
--------- ----------- --------- -----------
Basic EPS $79.4 169.3 $39.4 147.6
Effect of dilutive
securities:
Stock plans 1.5 1.4
Liquid Yield
Option Notes 1.7 7.2 1.6 7.2
---- ----- ---- -----
Diluted EPS $81.1 178.0 $41.0 156.2
==== ===== ==== =====
Options to purchase 3.2 million shares of common stock were not
included in the computation of diluted EPS because the options' exercise
price of $47.81 was greater than the average market price of the Company's
common stock during the quarter.
-6-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Note 6. Segment Information
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
Three Months Ended Process
December 31, 1997 Oilfield Chemicals Equipment Other Total
- ------------------ -------- --------- --------- -------- --------
Revenues $ 827.8 $ 176.6 $ 124.1 $ 4.9 $1,133.4
Segment profit(loss) 128.0 20.5 9.0 (29.5) 128.0
Total assets 3,175.1 997.3 378.6 354.4 4,905.4
Three Months Ended
December 31, 1996
- ------------------
Revenues $ 652.9 $ 76.7 $ 90.2 $ 6.9 $ 826.7
Segment profit(loss) 92.3 6.0 6.9 (20.2) 85.0
Total assets 2,601.0 294.9 253.5 295.2 3,444.6
The following table presents the details of "Other" segment profit
(loss):
Three Months Ended
December 31,
1997 1996
------ ------
Corporate expenses $(15.8) $ (9.7)
Interest expense - net (13.8) (11.3)
Other .1 .8
------ ------
Total $(29.5) $(20.2)
====== ======
Note 7. Subsequent Event
On August 10, 1998, Baker Hughes completed the merger with Western
Atlas Inc. ("Western Atlas"). Under the terms of the merger agreement,
each outstanding share of Western Atlas common stock has been converted
into the right to receive 2.7 shares of Baker Hughes common stock. In the
aggregate, Baker Hughes issued approximately 148.6 million shares of Baker
Hughes common stock to Western Atlas shareholders. In addition, as part of
the merger, Baker Hughes issued 5.4 million shares of Baker Hughes common
stock in exchange for certain rights relating to Western Atlas employee
stock options.
Western Atlas, the common stock of which was previously publicly
traded, is a leading supplier of oilfield services and reservoir
information technologies for the worldwide oil and gas industry. It
specializes in land, marine and transition-zone seismic data acquisition
and processing services; well-logging and completion services; and
reservoir characterization and project management services.
-7-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
The following table sets forth certain unaudited pro forma condensed
combined financial information for Baker Hughes giving effect to the merger
with Western Atlas accounted for as a pooling of interests.
Three Months Ended
December 31,
1997 1996
-------- --------
Revenues $1,572.9 $1,210.7
Income from continuing
operations before accounting change 111.2 70.3
Net income 114.0 76.0
Income from continuing
operations before accounting change per share:
Basic .35 .24
Diluted .34 .24
Net income per share:
Basic .36 .26
Diluted .35 .26
December 31, 1997
-----------------
Current assets $2,919.8
Current liabilities 1,417.2
Total assets 7,236.1
Long-term debt 1,610.7
Stockholders' equity 3,519.0
In May 1997, the Western Atlas Board of Directors approved, in
principle, a plan to distribute (the "Spin-off") to Western Atlas
shareholders all of the outstanding common stock of UNOVA, Inc. ("UNOVA"),
a wholly owned subsidiary of Western Atlas. In connection with the Spin-
off, the consolidated financial statements of Western Atlas were restated
to present the operations of UNOVA as discontinued operations.
-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," "targeted," "quantified," "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 or consuming
regions, the development of technology that lowers overall finding and
development costs and the condition of the capital and equity markets.
BUSINESS ENVIRONMENT
Oilfield
Oilfield Operations generated 73% of the Company's consolidated
revenues for the three months ended December 31, 1997. Oilfield Operations
consisted of five business units - Baker Hughes INTEQ, Baker Hughes
Solutions, Baker Oil Tools, Centrilift and Hughes Christensen - 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 the supply and demand for crude oil and natural gas,
energy prices and finding and development costs. Petroleum supply and
demand, pricing and finding and development costs, in turn, are influenced
by numerous factors including, but not limited to, those described above in
"--Forward-Looking Statements".
Four key factors which currently influence the worldwide crude oil
market and therefore current and future expenditures for exploration and
development by our customers are:
1) The degree to which certain large producing countries, in particular
Saudi Arabia, Venezuela, and Mexico, are willing and able to restrict
production and exports of crude oil.
2) The increasing rate of depletion of known hydrocarbon reserves.
Technological advances are resulting in accelerated decline rates and
shorter well lives. In general, accelerated decline rates require
additional customer spending to hold production level.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
3) The economic growth in certain key areas of the world, particularly
developing Asia, where the linkage between energy demand and economic
growth is particularly strong.
4) The amount of crude oil in storage relative to historic levels.
These four factors, together with oil and gas company projections for
future energy price movement, influence overall levels of expenditures for
exploration and development by our customers.
More specifically, two key factors influence the level of exploration
and development spending:
1) Technology: Advances in the design and application of the Company's
products and services allow oil and gas companies to drill fewer wells,
place the wells they drill more precisely in the higher yielding or more
easily produced hydrocarbon zones of the reservoir and allow operators to
drill, complete and operate wells at lower overall costs.
2) Price Volatility: Changes in hydrocarbon markets create uncertainty
in the future price of hydrocarbons and therefore create uncertainty about
the aggregate level of customer spending. Multi-year projects, such as
deep-water exploration and drilling, are the least likely to be impacted by
price volatility. Projects with relatively short payback periods or low
profit margins, such as workover activity or the extraction of heavy oil,
are more likely to be impacted.
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" and "--Business Environment" could negatively impact the
Company's expectations for oil demand, oil and gas prices and drilling
activity.
Oil and Gas Prices
Three Months Ended December 31, 1997 1996
- -------------------------------------------------------------------------
WTI ($/bbl) 20.02 24.67
U.S. Spot Natural Gas ($/mcf) 2.72 2.96
Crude oil prices experienced downward pressure due to increased supply
from renewed Iraqi exports, increased OPEC production, higher inventories
(particularly in North America) and a simultaneous slowing of demand growth
due to the Asian economic downturn.
U.S. natural gas prices remained strong during most of the quarter
ended December 31, 1997, averaging above $2.00 per mcf, reflecting
relatively tight supply and demand conditions in North America. Since June
30, 1998, gas prices have averaged below $2.00 per mcf which could impact
natural gas drilling.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Rotary Rig Count
Three Months Ended December 31, 1997 1996
- -------------------------------------------------------------------------
U.S. - Land 873 736
U.S. - Offshore 125 109
Canada 448 318
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North America 1,446 1,163
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Latin America 280 281
North Sea 55 54
Other Europe 56 62
Africa 75 82
Middle East 165 138
Asia Pacific 173 181
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International 804 798
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Worldwide 2,250 1,961
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U.S. Workover 1,427 1,352
Outlook
The Company expects oil prices to trade between $12.00 and $15.50 per
barrel for the remainder of 1998 as production cuts balance the impact of
weakened demand and inventories stabilize. The Company believes that a
sustained low price environment for crude oil may result in a period of
slower than expected customer spending through the end of 1998 and into
1999. In 1999, the willingness and ability by certain countries,
particularly Saudi Arabia, Venezuela and Mexico, to restrict production and
exports, as well as increasing depletion rates, could result in inventories
that approach normal levels and ultimately rising oil prices. In the long-
term, the economic rebound of developing Asia is expected to result in
demand growth approximating the long-term trend of 2 to 2-1/2% per year.
North America: The Company anticipates that North American activity
will continue to decline through the remainder of the year relative to the
prior year. Offshore activity is expected to weaken temporarily as high
day-rate rigs are recontracted at lower rates.
International: The Company expects that activity in Latin America will
decrease over the remainder of the year as budget cuts in Mexico and
Venezuela impact activity levels. Eastern Hemisphere activity is expected
to weaken if oil prices remain at current depressed levels.
Chemicals
Baker Petrolite generated 16% of the Company's consolidated revenues
for the three months ended December 31, 1997. Baker Petrolite is the sole
business unit reported in this segment and is the result of combining Baker
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Performance Chemicals Incorporated, previously reported in the oilfield
segment, and Petrolite Corporation ("Petrolite"), acquired in July, 1997.
Operating in all major oil and gas producing regions of the world,
Baker Petrolite manufactures specialty chemicals for inclusion in the sale
of integrated chemical technology solutions for petroleum production,
transportation and refining. In addition to those business environment
factors discussed above for the oilfield segment, the business environment
for the chemicals segment is significantly influenced by the trend of
continued reduction in the total operating cost of the customer base, which
includes major multi-national, independent and national or state-owned oil
companies. Improvements in chemical technology and its application, as
well as the expanded use of alliance relationships, enable Baker Petrolite
to reduce overall production, transportation and refining costs.
Baker Petrolite also provides chemical technology solutions to other
industrial markets throughout the world including petrochemicals, steel,
fuel additives, plastics, imaging and adhesives. The business environments
for these markets are individually unique but most are influenced by the
general level of gross domestic product.
Process Equipment
Process Equipment generated 11% of the Company's consolidated revenues
for the three months ended December 31, 1997. Process Equipment consisted
of four business units - EIMCO Process Equipment, Bird Machine Company,
Baker Hughes Process Systems and Baker Hughes Industrial Services - that
provide technologies that separate solids from liquids and liquids from
liquids through filtration, sedimentation, centrifugation and flotation
processes. The business environment for Process Equipment and its
corresponding operating results are affected significantly by spending on
large capital projects in the pulp and paper, oil and gas, industrial,
refining, chemical and municipal wastewater treatment markets. Spending on
capital projects is influenced by numerous factors including, but not
limited to, commodity price cycles, especially copper and pulp, oil and
gas, the supply and demand for refined products and chemicals, the
expanding Asian populations and economies, as well as environmental
pressures and legislation. Process Equipment anticipates a decrease in
capital project activity for the remainder of 1998 due to delays in
customers' capital spending. These delays are a result of the unstable
economic conditions in Asia and a general weakness in most of the markets
Process Equipment serves.
ACQUISITIONS
Oil Dynamics, Inc.
On October 24, 1997, the Company acquired 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 and
will be added to the operations of Centrilift. The purchase price was
$34.4 million.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
RESULTS OF OPERATIONS
Revenues
Consolidated revenues for the three months ended December 31, 1997 were
$1,133.4 million, an increase of 37% over revenues of $826.7 million for
the three months ended December 31, 1996. Sales revenues were up $221.7
million, an increase of 40%, and service and rentals revenues were up $85.0
million, an increase of 31%, in each case, over the same three months in
1996. Approximately 64% of the Company's consolidated revenues in the
three months ended December 31, 1997 were derived from international
activities.
Oilfield Operations reported revenues for the three months ended
December 31, 1997 of $827.8 million, an increase of 27% over revenues of
$652.9 million for the three months ended December 31, 1996. Revenue
growth outpaced rig count increases in most areas of the world. In
particular, revenues in Venezuela increased 68% as that country continued
to work towards its then stated goal of significantly increasing
production.
Baker Petrolite revenues increased to $176.6 million for the three
months ended December 31, 1997 compared to $76.7 million for the three
months ended December 31, 1996 due to the Petrolite acquisition in July
1997.
Process Equipment revenues were $124.1 million for the three months
ended December 31, 1997, an increase of 38% over the three months ended
December 31, 1996. Excluding revenues from 1997 acquisitions of $42.5
million, revenues for the three months ended December 31, 1997 declined
9.5% due primarily to the decline in copper prices driven by the economic
problems in Asia resulting in delays in customers' capital spending.
Costs and Expenses Applicable to Revenues
Cost of sales and cost of services and rentals increased in the three
months ended December 31, 1997 from the same period in 1996 consistent with
the related revenue increases. Gross margin percentages increased from
38.8% for the three months ended December 31, 1996 to 40.5% for the three
months ended December 31, 1997.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense increased $89.3
million for the three months ended December 31, 1997 compared to the same
period in 1996. As a percent of consolidated revenues, SG&A expense was
27.0% and 26.3% for the three months ended December 31, 1997 and 1996,
respectively.
Excluding the impact of acquisitions, the Company added approximately
3,700 employees during the three months ended December 31, 1997, a 22%
increase in headcount over the same period in 1996, to keep pace with the
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
increased activity levels. As a result, employee training and development
efforts increased compared to the same period in 1996.
Amortization Expense
Amortization expense for the three months ended December 31, 1997
increased $2.7 million from the three months ended December 31, 1996 due to
the Petrolite acquisition.
Interest Expense
Interest expense for the three months ended December 31, 1997 increased
$2.7 million compared to the same period in 1996 due to higher debt levels
during the three months ended December 31, 1997 as compared to the same
period in 1996.
Income Taxes
The effective income tax rate for the three months ended December 31,
1997 was 38.0%, down from 39.5% for the three months ended December 31,
1996 due primarily to a change in the mix of foreign earnings and the fixed
nature of the nondeductible goodwill amortization.
CAPITAL RESOURCES AND LIQUIDITY
Financing Activities
Net cash inflows from financing activities were $182.0 million for the
three months ended December 31, 1997 compared to $52.2 million for the same
period in 1996. The change from the 1996 period was due to increased
borrowings to fund higher working capital levels, higher capital spending
and the ODI acquisition.
Total debt outstanding at December 31, 1997 was $980.0 million,
compared to $781.4 million at September 30, 1997. The debt to equity ratio
was .37 at December 31, 1997, compared to .30 at September 30, 1997.
Cash dividends increased for the three months ended December 31, 1997
compared to the three months ended December 31, 1996 due to an increase in
the number of shares of common stock outstanding primarily resulting from
shares issued in connection with the Petrolite and Drilex International
Inc. acquisitions in July 1997.
At December 31, 1997, the Company had $644.9 million of credit
facilities with commercial banks, of which $300.0 million was 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 $120.8 million for the
three months ended December 31, 1997 compared to cash outflows of $38.1
million for the three months ended December 31, 1996.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Property additions increased significantly during the three months
ended December 31, 1997 to $105.2 million compared to $54.7 million for the
three months ended December 31, 1996 as the Company added capacity to meet
the increased market demand. The majority of the capital expenditures were
in Oilfield Operations where expenditures for rental tools and machinery
and equipment accounted for 31% and 47% of total capital expenditures for
the three months ended December 31, 1997. In light of the recent activity
decline, the Company is reviewing significant capital projects and expects
the rate of capital spending to slow. Funds provided from operations and
outstanding lines of credit are expected to be more than adequate to meet
future capital expenditure requirements.
The Company used short term borrowings to purchase ODI in October 1997
for a purchase price, net of cash acquired, of $33.1 million. The Company
obtained $3.3 million of cash from the stock for stock acquisition of
Drilex in 1997.
Operating Activities
Net cash outflows from operating activities were $59.9 million and $3.1
million for the three months ended December 31, 1997 and 1996,
respectively. The primary use of cash by operating activities was to fund
increases in working capital due to increased levels of activity.
ACCOUNTING STANDARDS
Impairment of Long-Lived Assets
The Company adopted 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 current 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 during the three months ended
December 31, 1996.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which for the Company is effective in the year ending December 31,
1998. SFAS No. 130 establishes standards for the reporting and displaying
of comprehensive income and its components. The Company will be analyzing
SFAS No. 130 during 1998 to determine what, if any, additional disclosures
will be required.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs that use only
two digits to identify a year rather than four. If not corrected, computer
applications could fail or create erroneous results before, during and
after the Year 2000.
The Company is currently assessing the cost and uncertainties related
to the Year 2000 issue using internal and external resources. Based on
preliminary information, the Company currently believes that with certain
modifications, upgrades and, in some instances, converting to new software,
the Company will have substantially addressed the Year 2000 issues with
respect to its software, hardware and products without significant impact
on its operating systems. The estimated costs for the Company to
substantially address these Year 2000 issues are not expected to be
material to the Company's financial position, results of operations or
liquidity. Additionally, the Company is not aware of Year 2000 issues of
its customers or suppliers that would be material to the Company's
financial position, results of operations or liquidity.
MERGER WITH WESTERN ATLAS
On August 10, 1998, Baker Hughes completed the merger with Western
Atlas Inc. ("Western Atlas"). Under the terms of the merger agreement,
each outstanding share of Western Atlas common stock has been converted
into the right to receive 2.7 shares of Baker Hughes common stock. In the
aggregate, Baker Hughes issued approximately 148.6 million shares of Baker
Hughes common stock to Western Atlas shareholders. In addition, as part of
the merger, Baker Hughes issued 5.4 million shares of Baker Hughes common
stock in exchange for certain rights relating to Western Atlas employee
stock options.
Western Atlas, the common stock of which was previously publicly
traded, is a leading supplier of oilfield services and reservoir
information technologies for the worldwide oil and gas industry. It
specializes in land, marine and transition-zone seismic data acquisition
and processing services; well-logging and completion services; and
reservoir characterization and project management services.
-16-
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:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
-17-
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: October 5, 1998 By /s/LAWRENCE O'DONNELL, III
------------------------------------
Vice President and General Counsel
Date: October 5, 1998 By /s/JAMES E. BRAUN
------------------------------------
Vice President and Controller
-18-
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