- ---------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
Commission file number 1-9397
-----------------------------
BAKER HUGHES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 76-0207995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3900 Essex Lane, Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 1, 1998
----- -------------------------------
Common Stock, $1.00 par value per share 169,709,279 shares
- ---------------------------------------------------------------------------
BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three months and
six months ended March 31, 1998 and 1997 2
Consolidated Condensed Statements of Financial Position
- March 31, 1998 and September 30, 1997 4
Consolidated Condensed Statements of Cash Flows - Six months
ended March 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II - Other Information 19
-1-
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
-------------------- --------------------
REVENUES:
Sales $ 792.0 $ 553.4 $ 1,565.4 $ 1,105.2
Services and rentals 365.4 296.8 725.4 571.7
--------- --------- --------- ---------
Total revenues 1,157.4 850.2 2,290.8 1,676.9
--------- --------- --------- ---------
COSTS AND EXPENSES:
Costs of sales 492.0 348.4 969.5 696.5
Costs of services and rentals 209.1 172.7 406.5 330.3
Selling, general and
administrative 309.6 216.7 616.0 433.8
Amortization of goodwill
and other intangibles 10.3 7.7 20.6 15.3
--------- --------- --------- ---------
Total costs and expenses 1,021.0 745.5 2,012.6 1,475.9
--------- --------- --------- ---------
Operating income 136.4 104.7 278.2 201.0
Interest expense (17.6) (12.1) (32.1) (23.9)
Interest income 1.1 .3 1.8 .9
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of
accounting change 119.9 92.9 247.9 178.0
Income taxes (40.6) (34.9) (89.2) (68.5)
--------- --------- --------- ---------
Income before cumulative effect
of accounting change 79.3 58.0 158.7 109.5
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 $ 79.3 $ 58.0 $ 158.7 $ 97.4
========= ========= ========= =========
-2-
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS CONTINUED
(In millions, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
-------------------- --------------------
Earnings Per Share of Common Stock - Basic:
Income before cumulative
effect of accounting
change $ .47 $ .39 $ .94 $ .74
Cumulative effect of
accounting change (.08)
--------- --------- --------- ---------
Net income $ .47 $ .39 $ .94 $ .66
========= ========= ========= =========
Earnings Per Share of Common Stock - Diluted:
Income before cumulative
effect of accounting
change $ .46 $ .38 $ .91 $ .72
Cumulative effect of
accounting change (.08)
--------- --------- --------- ---------
Net income $ .46 $ .38 $ .91 $ .64
========= ========= ========= =========
Cash dividends per share of
common stock $ .115 $ .115 $ .23 $ .23
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
-3-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
ASSETS
March 31, September 30,
1998 1997
Current Assets: ---------- ----------
Cash and cash equivalents $ 9.3 $ 8.6
Receivables - net 1,105.7 1,047.1
Inventories 1,197.2 1,030.5
Deferred income taxes 75.8 83.8
Other current assets 65.8 50.5
---------- ----------
Total current assets 2,453.8 2,220.5
Property - net 1,129.6 982.9
Other assets 480.4 497.5
Excess costs arising from acquisitions - net 1,069.8 1,055.4
---------- ----------
Total assets $ 5,133.6 $ 4,756.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 443.4 $ 499.7
Short-term borrowings and current portion
of long-term debt 152.0 9.6
Accrued employee compensation and benefits 183.3 223.2
Income taxes payable 41.3 48.6
Other accrued liabilities 179.7 155.2
---------- ----------
Total current liabilities 999.7 936.3
---------- ----------
Long-term debt 1,029.7 771.8
---------- ----------
Deferred income taxes 249.0 275.9
---------- ----------
Other long-term liabilities 163.5 167.7
---------- ----------
Stockholders' Equity:
Common stock 169.7 169.1
Capital in excess of par value 2,246.3 2,236.0
Retained earnings 403.4 283.7
Cumulative foreign currency translation
adjustment (159.7) (144.9)
Unrealized gain on securities available for sale 32.0 60.7
---------- ----------
Total stockholders' equity 2,691.7 2,604.6
---------- ----------
Total liabilities and stockholders' $ 5,133.6 $ 4,756.3
========== ==========
See accompanying notes to consolidated condensed financial statements.
-4-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended
March 31,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 158.7 $ 97.4
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization of:
Property 91.4 66.6
Other assets and debt discount 25.8 20.2
Deferred income taxes (4.5) 24.6
Gain on disposal of assets (18.0) (16.2)
Foreign currency translation (gain)loss - net 1.7 (2.6)
Cumulative effect of accounting change 12.1
Change in receivables (47.2) (34.3)
Change in inventories (145.1) (76.3)
Change in accounts payable (57.8) 3.7
Changes in other assets and liabilities (76.6) (19.8)
-------- --------
Net cash flows from operating activities (71.6) 75.4
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (243.5) (122.2)
Proceeds from disposal of assets 35.7 26.9
Cash obtained in stock acquisition 3.3
Acquisition of businesses, net of cash acquired (80.6)
-------- --------
Net cash flows from investing activities (288.4) (92.0)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from commercial paper and
revolving credit facilities 389.2 25.8
Proceeds from exercise of stock options 10.7 23.4
Dividends (38.9) (33.4)
-------- --------
Net cash flows from financing activities 361.0 15.8
-------- --------
Effect of exchange rate changes on cash (.3) .2
-------- --------
Increase(decrease) in cash and cash equivalents .7 (.6)
Cash and cash equivalents, beginning of period 8.6 7.7
-------- --------
Cash and cash equivalents, end of period $ 9.3 $ 7.1
======== ========
Income taxes paid $ 98.1 $ 32.0
Interest paid $ 26.3 $ 17.7
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, 1998 and its consolidated results of operations and cash flows
for each of the three and six month periods ended March 31, 1998 and 1997.
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 and six months ended March 31, 1998 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. Inventories
Inventories are comprised of the following:
March 31, September 30,
1998 1997
----------- ------------
Finished goods $ 910.3 $ 832.3
Work in process 129.0 98.3
Raw materials 157.9 99.9
---------- ----------
Total $ 1,197.2 $ 1,030.5
========== ==========
Note 3. Acquisitions
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.
On March 3, 1998, the Company acquired the assets of Western Rock Bit
Company Limited ("WRB"). WRB had been the Company's exclusive licensee and
distributor of bits in Canada and will be operated as a separate division
of Hughes Christensen. The purchase price was $31.4 million.
Other acquisitions were made by the Company during the six months ended
March 31, 1998, that were not individually nor in the aggregate material to
the consolidated financial statements of the Company.
-6-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
These acquisitions were accounted for using the purchase method of
accounting. Accordingly, the cost of each acquisition has been allocated
to assets acquired and liabilities assumed based on their estimated fair
market values at the date of the acquisition. The operating results of
these acquisitions are included in the consolidated condensed statement of
operations from their respective acquisition date.
Pro forma results of these acquisitions 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 4. 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
March 31, 1998 March 31, 1997
Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
--------- ----------- --------- -----------
Basic EPS $ 79.3 169.5 $ 58.0 148.1
Effect of dilutive
securities:
Stock plans 1.2 1.4
Liquid Yield
Option Notes 1.7 7.2 1.5 7.2
----- ----- ----- -----
Diluted EPS $ 81.0 177.9 $ 59.5 156.7
===== ===== ===== =====
For the Six Months Ended For the Six Months Ended
March 31, 1998 March 31, 1997
Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
--------- ----------- --------- -----------
Basic EPS $158.7 169.4 $ 97.4 147.8
Effect of dilutive
securities:
Stock plans 1.4 1.5
Liquid Yield
Option Notes 3.4 7.2 3.1 7.2
----- ----- ----- -----
Diluted EPS $162.1 178.0 $100.5 156.5
===== ===== ===== =====
Options to purchase 3.2 million shares of common stock were not
included in the computation of diluted EPS for the three months and the six
-7-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
months ended March 31, 1998 because the options' exercise price of $47.81
was greater than the average market price of the Company's common stock
during the respective periods.
Note 5. Segment Information
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
Three Months Ended Process
March 31, 1998 Oilfield Chemicals Equipment Other Total
- ------------------ -------- --------- --------- -------- --------
Revenues $ 842.4 $ 185.4 $ 123.3 $ 6.3 $1,157.4
Segment profit(loss) 119.5 24.9 10.0 (34.5) 119.9
Total assets 3,338.4 1,010.9 418.4 365.9 5,133.6
Three Months Ended
March 31, 1997
- ------------------
Revenues $ 677.9 $ 82.9 $ 82.9 $ 6.5 $ 850.2
Segment profit(loss) 95.4 9.0 8.4 (19.9) 92.9
Total assets 2,667.9 298.0 235.8 298.7 3,500.4
Six Months Ended
March 31, 1998
- ------------------
Revenues $1,670.2 $ 361.9 $ 247.4 $ 11.3 $2,290.8
Segment profit(loss) 247.5 45.4 19.0 (64.0) 247.9
Six Months Ended
March 31, 1997
- ------------------
Revenues $1,330.8 $ 159.6 $ 173.1 $ 13.4 $1,676.9
Segment profit(loss) 187.7 15.0 15.3 (40.0) 178.0
The following table presents the details of "Other" segment profit
(loss):
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
------ ------ ------ ------
Corporate expenses $(17.7) $ (8.7) $(33.5) $(18.4)
Interest expense - net (16.5) (11.8) (30.3) (23.0)
Other (.3) .6 (.2) 1.4
------ ------ ------ ------
Total $(34.5) $(19.9) $(64.0) $(40.0)
====== ====== ====== ======
Note 6. Subsequent Event
On May 10, 1998, Baker Hughes signed a merger agreement (the
"Agreement") with Western Atlas Inc. ("Western Atlas"), which was
-8-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
unanimously approved by each company's board of directors. Western Atlas
is a leading provider of seismic, wireline logging and reservoir
information services worldwide. Upon completion of the transaction,
Western Atlas stockholders will receive 2.4 shares of newly issued Baker
Hughes common stock for each share of Western Atlas common stock provided
that the average Baker Hughes stock price for the 20 trading days ending
five trading days prior to the closing is greater than or equal to $38.25
and less than or equal to $42.75. If the Baker Hughes stock price average
is greater than or equal to $35.00 and less than $38.25, the exchange ratio
adjusts up to keep the value constant at $91.80 per Western Atlas share.
Similarly, if the Baker Hughes stock price average is greater than $42.75
and less than or equal to $44.75, the exchange ratio adjusts down to 2.293.
If the Baker Hughes stock price average is above $44.75, the exchange ratio
remains fixed at 2.293. If the Baker Hughes stock price average is below
$35.00, Baker Hughes has the option to issue additional shares to keep the
value at $91.80. If Baker Hughes does not issue additional shares, Western
Atlas can terminate the Agreement.
Based on Baker Hughes' closing stock price on Friday, May 8, 1998,
($41.125), the Company would issue an additional 131 million shares to
Western Atlas' stockholders. As a result, Baker Hughes would have
approximately 301 million shares outstanding after the merger, with
approximately 56% owned by Baker Hughes' stockholders and 44% owned by
Western Atlas' stockholders.
The transaction is expected to be accounted for as a pooling of
interests and is expected to be tax-free to Western Atlas stockholders.
The transaction is subject to the approval of the stockholders of both
companies and regulatory approvals, including the expiration of the
applicable waiting period under the Hart-Scott-Rodino Act, and other
customary closing conditions. The transaction is expected to be completed
by September 30, 1998. For its most recent fiscal year ended December 31,
1997, Western Atlas had revenues of $1.658 billion.
-9-
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 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 in the quarter ended March 31, 1998. Oilfield Operations consists
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".
Three key factors involved in shaping oilfield service markets are:
1) Technology: 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.
2) Outsourcing and Partnering: 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. The Company continues to expand and develop its
involvement in project management by working closely with customers in
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
project planning and in the engineering and integration of several products
and services into solutions that meet client objectives.
3) Growth: Expenditures by the Company's customers for exploration and
production programs are increasing but at a slower rate than previously
anticipated. In turn, the markets for the Company's products and services
are expected to grow as the demand for developing new supplies of
hydrocarbons paces the increasing worldwide demand for energy. Such growth
requires additions to the Company's manufacturing capacity, rental tool
fleet and work force.
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 Six Months Ended
March 31, March 31,
1998 1997 1998 1997
- --------------------------------------------------------------------------
WTI ($/bbl) 15.90 23.18 17.89 23.93
U.S. Spot Natural Gas ($/mcf) 2.06 2.49 2.35 2.73
Crude oil prices have experienced downward pressure in the quarter due
to increased supply from renewed Iraqi exports, increased OPEC production,
and a simultaneous slowing of demand growth due to the Asian economic
downturn. The Company expects that crude oil prices will trade between
$14.50 and $17.50 per barrel for the remainder of 1998 and will experience
volatility within this range. The Company anticipates 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.
U.S. natural gas prices have remained strong, above $2.00 per mcf,
indicating tight supply and demand conditions in North America. The
Company believes that natural gas prices at or above $2.00 per mcf will
support continued growth in natural gas exploration and development
drilling activity.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Rotary Rig Count Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
- --------------------------------------------------------------------------
U.S. - Land 830 739 853 738
U.S. - Offshore 136 114 130 111
Canada 459 396 454 357
- --------------------------------------------------------------------------
North America 1,425 1,249 1,437 1,206
- --------------------------------------------------------------------------
Latin America 272 284 276 283
North Sea 60 63 59 59
Other Europe 49 60 50 60
Africa 82 83 81 82
Middle East 165 142 165 140
Asia Pacific 184 177 179 179
- --------------------------------------------------------------------------
International 812 809 810 803
- --------------------------------------------------------------------------
Worldwide 2,237 2,058 2,247 2,009
- --------------------------------------------------------------------------
U.S. Workover 1,298 1,352 1,363 1,352
Outlook
Longer term, the Company anticipates that continued growth in worldwide
demand for hydrocarbons will result in increased spending by oil and gas
companies for the development of the hydrocarbon supply. This increase
remains dependent on continued worldwide economic growth and, in
particular, on economic growth in developing countries which may continue
to be adversely impacted by the recent banking crisis in Asia. The
increased spending is expected to result in increased drilling activity in
most of the major producing regions.
North America: The Company anticipates that the rate of growth in
North American drilling activity will slow in 1998, with offshore activity
expected to remain strong.
International: The Company anticipates that international activity
will remain relatively flat in 1998 with an increase expected in the Middle
East offsetting flat to slightly down activity in Latin America, the North
Sea and Asia Pacific.
Chemicals
Baker Petrolite generated 16% of the Company's consolidated revenues in
the quarter ended March 31, 1998. Baker Petrolite is the sole business
unit reported in this segment and is the result of combining Baker
Performance Chemicals Incorporated and Petrolite Corporation ("Petrolite"),
acquired in July 1997.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
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
in the quarter ended March 31, 1998. Process Equipment consists 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, 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, the supply and demand for refined
products and chemicals, the expanding Asian populations and economies, as
well as environmental pressures and legislation. Except for the Asian,
pulp and paper, and copper markets, the Company anticipates increased
capital project activity in the refining, chemical, pulp and industrial
markets. In addition, the Company anticipates growth from acquisitions and
new technology.
ACQUISITIONS
Oil Dynamics, Inc.
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 will be added to the operations of Centrilift.
On March 3, 1998, the Company acquired the assets of Western Rock Bit
Company Limited ("WRB"). WRB had been the Company's exclusive licensee and
distributor of bits in Canada and will be operated as a separate division
of Hughes Christensen. The purchase price was $31.4 million.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Other acquisitions were made by the Company during the six months ended
March 31, 1998, that were not individually nor in the aggregate material to
the consolidated financial statements of the Company.
PENDING MERGER
On May 10, 1998, Baker Hughes signed a merger agreement (the
"Agreement") with Western Atlas Inc. ("Western Atlas"), which was
unanimously approved by each company's board of directors. Western Atlas
is a leading provider of seismic, wireline logging and reservoir
information services worldwide. Upon completion of the transaction,
Western Atlas stockholders will receive 2.4 shares of newly issued Baker
Hughes common stock for each share of Western Atlas common stock provided
that the average Baker Hughes stock price for the 20 trading days ending
five trading days prior to the closing is greater than or equal to $38.25
and less than or equal to $42.75. If the Baker Hughes stock price average
is greater than or equal to $35.00 and less than $38.25, the exchange ratio
adjusts up to keep the value constant at $91.80 per Western Atlas share.
Similarly, if the Baker Hughes stock price average is greater than $42.75
and less than or equal to $44.75, the exchange ratio adjusts down to 2.293.
If the Baker Hughes stock price average is above $44.75, the exchange ratio
remains fixed at 2.293. If the Baker Hughes stock price average is below
$35.00, Baker Hughes has the option to issue additional shares to keep the
value at $91.80. If Baker Hughes does not issue additional shares, Western
Atlas can terminate the Agreement.
Based on Baker Hughes' closing stock price on Friday, May 8, 1998,
($41.125), the Company would issue an additional 131 million shares to
Western Atlas' stockholders. As a result, Baker Hughes would have
approximately 301 million shares outstanding after the merger, with
approximately 56% owned by Baker Hughes' stockholders and 44% owned by
Western Atlas' stockholders.
The transaction is expected to be accounted for as a pooling of
interests and is expected to be tax-free to Western Atlas stockholders.
The transaction is subject to the approval of the stockholders of both
companies and regulatory approvals, including the expiration of the
applicable waiting period under the Hart-Scott-Rodino Act, and other
customary closing conditions. The transaction is expected to be completed
by September 30, 1998. For its most recent fiscal year ended December 31,
1997, Western Atlas had revenues of $1.658 billion.
RESULTS OF OPERATIONS
Revenues
Consolidated revenues were up 36% and 37% for the three and six months
ended March 31, 1998, respectively, as compared to the same periods in
1997. Sales revenue was up 43% for the quarter and 42% for the six months
compared to the corresponding prior periods. Service and rentals revenue
was up 23% for the quarter and 27% for the six months compared to the
corresponding prior periods.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Oilfield Operations lead the revenue improvement with an increase of
24% for the current quarter and 26% for the current six months compared to
the prior year periods. Revenue increases outpaced rig count increases in
most areas of the world as the Company continues to benefit from the
increased use of its technologies in key geographic regions. In North
America, revenues increased 24% for the current quarter, on rig count
increases of only 14%, and 28% for the six months, on rig count increases
of 19%, in each case, as compared to the prior year periods. Outside of
North America, revenues increased 24% for the current quarter and for the
six months on a less than 1% increase in rig activity for the same periods.
More specifically, European revenues were up 15% and 16% for the current
quarter and six months, respectively, compared to the prior year periods.
Latin American revenues also increased 29% and 32% for the current quarter
and six months, respectively, compared to the same periods a year ago.
Chemical revenues increased $102.5 million to $185.4 million for the
quarter and $202.3 million to $361.9 million for the six months compared to
the prior year periods due to the Petrolite acquisition in July 1997.
Process Equipment revenues increased 49% and 43% for the current
quarter and six months, respectively, compared to the corresponding prior
year periods. The increases are due to acquisitions offset by activity
declines due to the drop in copper prices and the economic problems in Asia
resulting in delays in customers' capital spending.
Costs and Expenses Applicable to Revenues
Costs of sales and costs of services and rentals have increased from
the prior year periods consistent with the related revenue increases.
Gross margin percentages have increased to 39.4% and 39.9% for the three
and six months ended March 31, 1998, respectively, from 38.7% and 38.8% for
the three and six months ended March 31, 1997, respectively.
Selling, General and Administrative19
Selling, general and administrative ("SG&A") expense increased $92.9
million in the second quarter of 1998 from the second quarter of 1997. As
a percent of consolidated revenues, SG&A expense was 26.7% and 25.5% in the
second quarter of 1998 and 1997, respectively. SG&A expense increased
$182.2 million for the six months ended March 31, 1998 compared to the same
period in 1997. As a percent of consolidated revenues, SG&A expense was
26.9% and 25.9% in the first six months of 1998 and 1997, respectively.
SG&A increased due to the Petrolite acquisition, increases in marketing and
sales support costs, higher foreign exchange losses and costs incurred by
the Company's reengineering project.
Amortization Expense
Amortization expense increased $2.6 million and $5.3 million in the
three and six months ended March 31, 1998, respectively, compared to the
same prior year periods due primarily to the Petrolite acquisition in July
1997.
-15-
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, 1998
increased compared to the corresponding periods in 1997 due to higher debt
levels that funded acquisitions and increases in working capital and
capital expenditures.
Income Taxes
The effective income tax rate for the six months ended March 31, 1998
was 36.0%, down from 38.5% in the prior year periods. This was 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 $361.0 million in the
first six months of 1998 compared to $15.8 million for the same period in
1997. The change from the prior year is due to increased borrowings that
funded acquisitions and increases in working capital and capital
expenditures.
Total debt outstanding at March 31, 1998 was $1,181.7 million, compared
to $781.4 million at September 30, 1997. The debt to equity ratio was .44
at March 31, 1998, compared to .30 at September 30, 1997.
Cash dividends increased in the first six months of 1998 compared to
the first six months of 1997 due to an increase in the number of shares of
common stock outstanding resulting primarily from shares issued in
connection with the Petrolite and Drilex International Inc. acquisitions in
1997.
At March 31, 1998, the Company had $702.1 million of credit facilities
with commercial banks, of which $300.0 million was committed. In April
1998, the Company increased the committed credit facilities to $500.0
million. These facilities are subject to normal banking terms and
conditions and do not materially restrict the Company's activities.
At March 31, 1998, the Company classified the outstanding balance on
the 7.625% Notes ($149.8 million) that are due in February 1999 as current
portion of long-term debt.
Investing Activities
Net cash outflows from investing activities were $288.4 million in the
first six months of 1998 compared to $92.0 million in the first six months
of 1997.
Property additions increased significantly in 1998 to $243.5 million
from $122.2 million in the first six months of 1997 as the Company added
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
capacity to meet the increased market demand. The majority of the capital
expenditures have been in Oilfield Operations where expenditures for rental
tools and machinery and equipment accounted for 40% and 44%, respectively,
of total capital expenditures for the first six months of 1998. Funds
provided from operations and outstanding lines of credit are expected to be
adequate to meet future capital expenditure requirements. The Company
expects 1998 capital expenditures to be in excess of $450 million.
The Company used short term borrowings to purchase ODI in October 1997
for a purchase price, net of cash acquired, of $34.2 million and Western
Rock Bit in March 1998 for $31.4 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 $71.6 million in the
first six months of 1998 compared to cash inflows of $75.4 million in the
first six months of 1997. The primary use of cash by operating activities
was to fund increases in working capital, primarily inventory, due to
increased levels of 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 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 in the first quarter of 1997.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, which for the Company is effective in
the year ending September 30, 1999. 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.
-17-
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 by or at the Year 2000.
The Company is currently assessing the cost and uncertainties related
to the Year 2000 issue using internal resources. Based on preliminary
information, the Company currently believes that with certain
modifications, upgrades and, in some instances, converting to new software,
compliance with Year 2000 will be achieved with no significant impact on
the Company's operating systems. The estimated costs to assure Year 2000
compliance 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 which would be
material to the Company's financial position, results of operations or
liquidity.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE UPDATE
On May 5, 1998, the interest rate swap agreement for notional amount of
$230.5 million matured. This swap effectively exchanged a fixed interest
rate of 3.5% for a variable interest rate equal to 30-day commercial paper
rates minus 1.96% on the notional amount.
Except for an insignificant amount, holders of the Company's Liquid
Yield Option Notes ("LYONS") did not redeem the LYONS for cash on May 5,
1998.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6.
(a) Exhibits:
(27.1) Financial Data Schedule
(27.2) Restated Financial Data Schedule
(27.3) Restated Financial Data Schedule
(b) Reports on Form 8-K:
None.
-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: May 14, 1998 By /s/LAWRENCE O'DONNELL, III
------------------------------------
Lawrence O'Donnell, III
Vice President and General Counsel
Date: May 14, 1998 By /s/JAMES E. BRAUN
------------------------------------
James E. Braun
Vice President and Controller
-20-
<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 reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,300
<SECURITIES> 0
<RECEIVABLES> 1,133,600
<ALLOWANCES> 27,900
<INVENTORY> 1,197,200
<CURRENT-ASSETS> 2,453,800
<PP&E> 2,208,600
<DEPRECIATION> 1,079,000
<TOTAL-ASSETS> 5,133,600
<CURRENT-LIABILITIES> 999,700
<BONDS> 1,029,700
0
0
<COMMON> 169,700
<OTHER-SE> 2,522,000
<TOTAL-LIABILITY-AND-EQUITY> 5,133,600
<SALES> 1,565,400
<TOTAL-REVENUES> 2,290,800
<CGS> 969,500
<TOTAL-COSTS> 1,376,000
<OTHER-EXPENSES> 636,600
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 32,100
<INCOME-PRETAX> 247,900
<INCOME-TAX> 89,200
<INCOME-CONTINUING> 158,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158,700
<EPS-PRIMARY> .94
<EPS-DILUTED> .91
</TABLE>
<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 reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997 SEP-30-1997 SEP-30-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 18,911 7,107 11,534 8,600
<SECURITIES> 0 0 0 0
<RECEIVABLES> 853,985 878,347 915,374 1,071,000
<ALLOWANCES> 21,681 29,538 27,697 23,900
<INVENTORY> 859,110 890,798 917,440 1,030,500
<CURRENT-ASSETS> 1,829,534 1,872,307 1,948,666 2,220,500
<PP&E> 1,611,759 1,645,794 1,703,904 2,012,000
<DEPRECIATION> 959,380 969,800 979,088 1,029,100
<TOTAL-ASSETS> 3,444,592 3,500,376 3,631,372 4,756,300
<CURRENT-LIABILITIES> 614,162 653,574 716,562 936,300
<BONDS> 740,944 714,544 708,705 771,800
0 0 0 0
0 0 0 0
<COMMON> 145,244 145,709 145,875 169,100
<OTHER-SE> 1,635,757 1,668,582 1,741,167 2,435,500
<TOTAL-LIABILITY-AND-EQUITY> 3,444,592 3,500,376 3,631,372 4,756,300
<SALES> 551,761 1,105,203 1,705,924 2,466,700
<TOTAL-REVENUES> 826,642 1,676,865 2,594,097 3,685,400
<CGS> 348,114 646,814 1,077,281 1,573,300
<TOTAL-COSTS> 505,766 1,026,809 1,582,258 2,256,200
<OTHER-EXPENSES> 224,572 449,059 695,087 1,169,300
<LOSS-PROVISION> 1,000 2,000 3,000 9,800
<INTEREST-EXPENSE> 11,805 23,910 35,957 48,600
<INCOME-PRETAX> 85,030 177,960 282,200 213,100
<INCOME-TAX> 33,519 68,471 90,192 104,000
<INCOME-CONTINUING> 51,511 109,489 192,008 109,100
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> (12,079) (12,079) (12,079) (12,100)
<NET-INCOME> 39,432 97,410 179,929 97,000
<EPS-PRIMARY> .27 .66 1.22 .63
<EPS-DILUTED> .26 .64 1.18 .63
</TABLE>
<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 reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996 SEP-30-1996 SEP-30-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 8,026 15,874 6,662 7,714
<SECURITIES> 0 0 0 0
<RECEIVABLES> 778,397 770,274 819,722 816,667
<ALLOWANCES> 23,112 21,963 23,811 22,866
<INVENTORY> 755,953 796,756 806,454 802,194
<CURRENT-ASSETS> 1,650,426 1,690,079 1,735,309 1,716,393
<PP&E> 1,523,025 1,516,394 1,534,274 1,516,329
<DEPRECIATION> 955,026 944,562 947,453 917,379
<TOTAL-ASSETS> 3,223,057 3,271,581 3,281,708 3,297,390
<CURRENT-LIABILITIES> 544,120 564,941 626,088 635,320
<BONDS> 879,802 847,608 739,424 673,588
0 0 0 0
0 0 0 0
<COMMON> 142,426 143,174 144,018 144,553
<OTHER-SE> 1,382,634 1,426,272 1,480,024 1,544,656
<TOTAL-LIABILITY-AND-EQUITY> 3,223,057 3,271,581 3,281,708 3,297,390
<SALES> 464,955 965,231 1,487,256 2,046,850
<TOTAL-REVENUES> 694,697 1,439,519 2,205,371 3,027,730
<CGS> 267,336 560,264 858,616 1,186,843
<TOTAL-COSTS> 568,282 1,172,865 1,792,301 2,451,994
<OTHER-EXPENSES> 55,611 111,790 207,244 269,057
<LOSS-PROVISION> 1,000 2,000 3,000 7,000
<INTEREST-EXPENSE> 15,427 30,228 43,305 55,528
<INCOME-PRETAX> 55,859 126,421 209,481 298,867
<INCOME-TAX> 23,461 52,464 88,651 122,517
<INCOME-CONTINUING> 32,398 73,957 120,830 176,350
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 32,398 73,957 120,830 176,350
<EPS-PRIMARY> .23 .52 .85 1.23
<EPS-DILUTED> .23 .51 .83 1.21
</TABLE>
