<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): December 18, 1998
BAKER HUGHES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-9397 76-0207995
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
3900 Essex Lane, Suite 1200
Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
<PAGE> 2
Item 5. Other Events
The Company files herewith restated financial statements accounted for using the
pooling of interests method of business combinations and reflecting the audited
transition period related to the Company's change in fiscal year.
Item 7. Financial Statements and Exhibits
The following consolidated financial statements and other financial information
of Baker Hughes Incorporated ("Baker Hughes") and independent auditors'
report are filed herewith:
Independent Auditors' Report
Consolidated Statements of Operations for the three months ended December
31, 1997 and for each of the three years in the period ended September 30,
1997
Consolidated Statements of Financial Position as of December 31, 1997 and
September 30, 1997
Consolidated Statements of Stockholders' Equity for the three months ended
December 31, 1997 and for each of the three years in the period ended
September 30, 1997
Consolidated Statements of Cash Flows for the three months ended December
31, 1997 and for each of the three years in the period ended September 30,
1997
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Selected Financial Data
The following exhibits are filed herewith:
23.1 Consent of Deloitte & Touche LLP
27.1 Restated Financial Data Schedules
27.2 Restated Financial Data Schedules
27.3 Restated Financial Data Schedules
27.4 Restated Financial Data Schedules
27.5 Restated Financial Data Schedules
<PAGE> 3
Baker Hughes Incorporated
INDEPENDENT AUDITORS' REPORT
Stockholders of Baker Hughes Incorporated:
We have audited the accompanying consolidated statements of financial position
of Baker Hughes Incorporated and its subsidiaries as of December 31, 1997 and
September 30, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the three month period ended December
31, 1997 and for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Baker Hughes Incorporated and its
subsidiaries at December 31, 1997 and September 30, 1997, and the results of
their operations and their cash flows for the three month period ended December
31, 1997 and for each of the three years in the period ended September 30, 1997
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for postemployment benefits effective October
1, 1994 to conform with Statement of Financial Accounting Standards No. 112.
Also discussed in Note 2, the Company changed its method of accounting for
impairment of long-lived assets to be disposed of effective October 1, 1996 to
conform with Statement of Financial Accounting Standards No. 121. As discussed
in Note 19 to the consolidated financial statements, the Company provided for
various reserves and recorded write-downs during the three month period ended
September 30, 1998 as a result of a significant change in market conditions
for the Company's products and services. Also, as discussed in Note 19 the
Company recorded a significant charge for merger costs during the three month
period ended September 30, 1998.
December 18, 1998
Houston, Texas
<PAGE> 4
Baker Hughes Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ---------------------------------------
(In millions, except per share amounts) December 31, 1997 1997 1996 1995
------------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 773.4 $ 2,466.7 $ 2,046.8 $ 1,805.1
Services and rentals 799.5 2,876.9 2,399.0 2,115.3
--------- --------- --------- ---------
Total 1,572.9 5,343.6 4,445.8 3,920.4
--------- --------- --------- ---------
Costs and expenses:
Costs of sales 483.6 1,587.2 1,288.2 1,143.5
Costs of services and rentals 562.1 2,089.7 1,774.6 1,567.9
Selling, general and administrative 324.6 1,036.1 889.2 818.2
Unusual charge 52.1 39.6
Acquired in-process research and development 118.0
--------- --------- --------- ---------
Total 1,370.3 4,883.1 3,991.6 3,529.6
--------- --------- --------- ---------
Operating income 202.6 460.5 454.2 390.8
Interest expense (24.5) (91.4) (87.9) (89.1)
Interest income 1.1 3.6 4.9 6.6
Spin-off related costs (8.4)
Gain on sale of Varco stock 44.3
--------- --------- --------- ---------
Income from continuing operations before income
taxes and cumulative effect of accounting changes 179.2 364.3 415.5 308.3
Income taxes (68.0) (163.4) (169.1) (126.9)
--------- --------- --------- ---------
Income from continuing operations before cumulative
effect of accounting changes 111.2 200.9 246.4 181.4
Cumulative effect of accounting changes:
Impairment of long-lived assets to be disposed of
(net of $6.0 income tax benefit) (12.1)
Postemployment benefits (net of $7.9 income tax benefit) (14.6)
--------- --------- --------- ---------
Income from continuing operations 111.2 188.8 246.4 166.8
Discontinued operations 2.8 (154.9) 55.7 38.4
--------- --------- --------- ---------
Net income $ 114.0 $ 33.9 $ 302.1 $ 205.2
========= ========= ========= =========
Basic earnings per share:
Income from continuing operations before cumulative
effect of accounting changes $ 0.35 $ 0.67 $ 0.86 $ 0.55
Cumulative effect of accounting changes (0.04) (0.05)
Discontinued operations 0.01 (0.52) 0.19 0.13
--------- --------- --------- ---------
Net income $ 0.36 $ 0.11 $ 1.05 $ 0.63
========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations before cumulative
effect of accounting changes $ 0.34 $ 0.66 $ 0.85 $ 0.54
Cumulative effect of accounting changes (0.04) (0.05)
Discontinued operations 0.01 (0.51) 0.19 0.14
--------- --------- --------- ---------
Net income $ 0.35 $ 0.11 $ 1.04 $ 0.63
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
Baker Hughes Incorporated
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In millions) December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 41.9 $ 42.1
Receivables-less allowance for doubtful accounts:
December 31, 1997, $54.4; September 30, 1997, $51.8 1,519.4 1,492.5
Inventories 1,145.0 1,069.9
Other current assets 213.5 208.5
-------- --------
Total current assets 2,919.8 2,813.0
Property-net 1,979.0 1,909.3
Goodwill and other intangibles - less accumulated amortization:
December 31, 1997, $238.4; September 30, 1997, $230.1 1,537.2 1,541.3
Multiclient seismic data and other assets 800.1 823.4
-------- --------
Total assets $7,236.1 $7,087.0
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 601.5 $ 643.2
Short-term borrowings and current portion of long-term debt 177.4 116.2
Payroll and related expenses 287.0 334.3
Other accrued liabilities 351.3 320.9
-------- --------
Total current liabilities 1,417.2 1,414.6
-------- --------
Long-term debt 1,610.7 1,473.3
-------- --------
Deferred income taxes 283.8 297.9
-------- --------
Deferred revenue and other long-term liabilities 405.4 409.7
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value (authorized 400.0 shares; outstanding
316.8 shares at December 31, 1997 and 316.5 shares at
September 30, 1997) 316.8 316.5
Capital in excess of par value 2,834.0 2,828.5
Retained earnings 494.1 434.2
Cumulative foreign currency translation adjustment (160.5) (144.9)
Unrealized gain on securities available for sale 38.1 60.7
Pension liability adjustment (3.5) (3.5)
-------- --------
Total stockholders' equity 3,519.0 3,491.5
-------- --------
Total liabilities and stockholders' equity $7,236.1 $7,087.0
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
Baker Hughes Incorporated
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Capital Foreign
In Excess Currency
Preferred Common of Retained Translation
(In millions, except per share amounts) Stock Stock Par Value Earnings Adjustment
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994, $ 4.0 $ 140.9 $ 1,474.0 $ 125.3 $ (102.9)
as previously reported
Western Atlas pooling of interests 142.9 1,029.8 66.0 9.6
---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1994, restated 4.0 283.8 2,503.8 191.3 (93.3)
Net income 205.2
Cash and accrued dividends on
convertible preferred stock (8.0)
Cash dividends on common
stock ($.46 per share) (65.0)
Foreign currency translation adjustment (6.0)
Repurchase of convertible preferred
stock (4.0) (145.4) (17.6)
Unrealized loss adjustment
Stock issued pursuant to
employee stock plans 2.0 22.9
---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1995 285.8 2,381.3 305.9 (99.3)
Net income 302.1
Cash dividends on common
stock ($.46 per share) (65.9)
Foreign currency translation adjustment (7.0)
Unrealized gain adjustment,
net of $12.2 tax charge
Stock issued pursuant to
employee stock plans 3.7 67.1
Treasury stock purchase
---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1996 289.5 2,448.4 542.1 (106.3)
Drilex pooling of interests 2.7 46.9 5.7
Net income 33.9
Spin-off of UNOVA (See Note 3) (513.1) (77.9) (8.8)
Cash dividends on common
stock ($.46 per share) (69.6)
Foreign currency translation adjustment (29.8)
Unrealized gain adjustment,
net of $22.3 tax charge
Petrolite and other acquisitions 20.2 758.4
Stock issued pursuant to
employee stock plans 4.1 87.9
Pension adjustment
Treasury stock purchase
---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997 316.5 2,828.5 434.2 (144.9)
Net income 114.0
Cash dividends on common
stock ($.115 per share) (19.5)
Foreign currency translation adjustment (15.6)
Unrealized loss adjustment,
net of $10.3 tax benefit
Stock issued pursuant to
employee stock plans 0.3 5.5
Adjustment for change in year end (34.6)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 $ -- $ 316.8 $ 2,834.0 $ 494.1 $ (160.5)
========== ========== ========== ========== ==========
<CAPTION>
Unrealized
Gain (Loss) Pension
on Liability
Securities Adjustment
Available and
(In millions, except per share amounts) for Sale Other Total
---------- ---------- ----------
<S> <C> <S> <C>
BALANCE, SEPTEMBER 30, 1994, $ (2.8) $ 1,638.5
as previously reported
Western Atlas pooling of interests 1,248.3
---------- ----------
BALANCE, SEPTEMBER 30, 1994, restated (2.8) 2,886.8
Net income 205.2
Cash and accrued dividends on
convertible preferred stock (8.0)
Cash dividends on common
stock ($.46 per share) (65.0)
Foreign currency translation adjustment (6.0)
Repurchase of convertible preferred
stock (167.0)
Unrealized loss adjustment (0.6) (0.6)
Stock issued pursuant to
employee stock plans 24.9
---------- ----------
BALANCE, SEPTEMBER 30, 1995 (3.4) 2,870.3
Net income 302.1
Cash dividends on common
stock ($.46 per share) (65.9)
Foreign currency translation adjustment (7.0)
Unrealized gain adjustment,
net of $12.2 tax charge 22.7 22.7
Stock issued pursuant to
employee stock plans 70.8
Treasury stock purchase $ (2.1) (2.1)
---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1996 19.3 (2.1) 3,190.9
Drilex pooling of interests 55.3
Net income 33.9
Spin-off of UNOVA (See Note 3) (599.8)
Cash dividends on common
stock ($.46 per share) (69.6)
Foreign currency translation adjustment (29.8)
Unrealized gain adjustment,
net of $22.3 tax charge 41.4 41.4
Petrolite and other acquisitions 778.6
Stock issued pursuant to
employee stock plans 13.5 105.5
Pension adjustment (3.5) (3.5)
Treasury stock purchase (11.4) (11.4)
---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997 60.7 (3.5) 3,491.5
Net income 114.0
Cash dividends on common
stock ($.115 per share) (19.5)
Foreign currency translation adjustment (15.6)
Unrealized loss adjustment,
net of $10.3 tax benefit (22.6) (22.6)
Stock issued pursuant to
employee stock plans 5.8
Adjustment for change in year end (34.6)
---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 $ 38.1 $ (3.5) $ 3,519.0
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
Baker Hughes Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ------------------------------------------
(In millions) December 31, 1997 1997 1996 1995
------------------ -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Income from continuing operations $ 111.2 $ 188.8 $ 246.4 $ 166.8
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation, depletion and amortization 141.7 554.9 465.0 428.2
Provision (benefit) for deferred income taxes (4.2) (3.9) 28.6 36.0
Noncash portion of unusual charge 32.7 25.3
Acquired in-process research and development 118.0
Gain on sale of Varco stock (44.3)
Gain on disposal of assets (12.0) (20.7) (38.0) (31.7)
Cumulative effect of accounting changes 12.1 14.6
Change in receivables (84.4) (209.2) (132.1) (137.4)
Change in inventories (58.2) (110.1) (79.4) (91.5)
Change in accounts payable 8.5 82.9 43.6 32.2
Change in other assets and liabilities 38.5 68.0 121.5 (20.2)
-------- -------- -------- --------
Net cash flows from continuing operations 141.1 713.5 636.6 397.0
Net cash flows from discontinued operations 10.5 12.1 22.3 86.8
-------- -------- -------- --------
Net cash flows from operating activities 151.6 725.6 658.9 483.8
-------- -------- -------- --------
Cash flows from investing activities:
Expenditures for capital assets and multiclient
seismic data (296.6) (1,047.7) (657.7) (462.4)
Proceeds from disposal of assets 20.5 66.3 98.3 46.1
Cash obtained in stock acquisitions 68.7
Proceeds from sale of businesses 12.1 122.0
Acquisition of businesses, net of cash acquired (43.1) (107.6) (33.6) (20.1)
Proceeds from sale of investments 48.5 95.5
-------- -------- -------- --------
Net cash flows from continuing operations (319.2) (971.8) (485.4) (314.4)
Net cash flows from discontinued operations (0.6) (406.3) 9.6 (25.2)
-------- -------- -------- --------
Net cash flows from investing activities (319.8) (1,378.1) (475.8) (339.6)
-------- -------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) from commercial
paper and revolving credit facilities (29.0) 471.0 (19.4) 41.7
Repayment of indebtedness (21.4) (128.7) (111.6) (38.8)
Proceeds from issuance of long-term debt 99.9
Proceeds from issuance of common stock 13.6 80.0 60.1 19.6
Dividends (19.5) (69.6) (65.9) (74.0)
Payment from UNOVA, Inc. 230.0 109.6 2.9 0.4
Repurchase of preferred stock (167.0)
-------- -------- -------- --------
Net cash flows from continuing operations 173.7 462.3 (133.9) (118.2)
Net cash flows from discontinued operations 13.1 210.4 (44.5) (88.1)
-------- -------- -------- --------
Net cash flows from financing activities 186.8 672.7 (178.4) (206.3)
Adjustment for change in year end (17.3)
Effect of foreign exchange rate changes on cash (1.5) (2.1) (0.7)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents (0.2) 18.1 4.0 (62.1)
Cash and cash equivalents, beginning of year 42.1 24.0 20.0 82.1
-------- -------- -------- --------
Cash and cash equivalents, end of year $ 41.9 $ 42.1 $ 24.0 $ 20.0
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 8
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
CHANGE IN YEAR END
On August 27, 1998, the Board of Directors of Baker Hughes Incorporated ("Baker
Hughes") approved a change in the Company's fiscal year end from September 30
to December 31, effective with the calendar year beginning January 1, 1998. A
three month transition period from October 1, 1997 through December 31, 1997
(the "Transition Period") precedes the start of the 1998 fiscal year.
MERGER
On August 10, 1998, Baker Hughes completed a merger with Western Atlas Inc.
("Western Atlas") by issuing 148.6 million shares of Baker Hughes common stock
for all of the outstanding common stock of Western Atlas (the "Merger"). Each
share of Western Atlas common stock was exchanged for 2.7 shares of Baker Hughes
common stock. 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.
The Merger was accounted for as a pooling of interests and, accordingly, all
prior period consolidated financial statements of Baker Hughes have been
restated to include the results of operations, financial position and cash flows
of Western Atlas. Information concerning common stock, employee stock plans and
per share data has been restated on an equivalent share basis. The consolidated
financial statements as of September 30, 1997 and for each of the three years in
the period ended September 30, 1997 include Baker Hughes' previous September 30
fiscal year amounts and Western Atlas' December 31 calendar year amounts for
the respective fiscal years of Baker Hughes. Consolidated financial statements
for the three months ended December 31, 1997 include amounts for Baker Hughes
and Western Atlas for the three months ended December 31, 1997. As a result,
Western Atlas' results of operations for the three months ended December 31,
1997 are included in both the consolidated financial statements for the year
ended September 30, 1997 and for the three months ended December 31, 1997.
The reconciliations of revenue, income from continuing operations and net
income(loss) of Baker Hughes and Western Atlas for the periods prior to the
combination are as follows (in the Notes to Consolidated Financial Statements,
all dollar amounts in tabulations are in millions of dollars unless otherwise
indicated, and 1997, 1996 and 1995 refer to the respective years ended September
30. The Transition Period refers to the three months ended December 31, 1997):
<PAGE> 9
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended -----------------------------------------
December 31, 1997 1997 1996 1995
------------------ -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Baker Hughes $1,133.4 $3,685.4 $3,027.7 $2,637.5
Western Atlas 439.5 1,658.2 1,418.1 1,282.9
-------- -------- -------- --------
Combined $1,572.9 $5,343.6 $4,445.8 $3,920.4
======== ======== ======== ========
Income from continuing operations:
Baker Hughes $ 79.4 $ 97.0 $ 176.4 $ 105.4
Western Atlas 31.8 91.8 70.0 61.4
-------- -------- -------- --------
Combined $ 111.2 $ 188.8 $ 246.4 $ 166.8
======== ======== ======== ========
Net income (loss):
Baker Hughes $ 79.4 $ 97.0 $ 176.4 $ 105.4
Western Atlas 34.6 (63.1) 125.7 99.8
-------- -------- -------- --------
Combined $ 114.0 $ 33.9 $ 302.1 $ 205.2
======== ======== ======== ========
</TABLE>
There were no material adjustments required to conform the accounting policies
of the two companies. Certain amounts of Western Atlas have been reclassified to
conform to the reporting practices of Baker Hughes.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Baker Hughes Incorporated and all majority owned subsidiaries (the
"Company"). Investments in which the Company owns 20% to 50% and exercises
significant influence over operating and financial policies are accounted for on
the equity method. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: Revenue from product sales are recognized upon delivery of
products to the customer. Revenue from services and rentals are recorded when
such services are rendered.
INVENTORIES: Inventories are stated primarily at the lower of average cost or
market.
PROPERTY: Property is stated principally at cost less accumulated depreciation,
which is generally provided by using the straight-line method over the estimated
useful lives of individual items. The Company manufactures a substantial portion
of its rental tools and equipment, and the cost of these items includes direct
and indirect manufacturing costs. The Company is developing and implementing an
enterprise-wide software system. External direct costs of consulting services
and payroll related cost of employees who work full time on implementation of
the enterprise-wide
<PAGE> 10
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
software system are capitalized. Costs associated with business process
reengineering are expensed as incurred.
The Company uses the full-cost method of accounting for its investment in oil
and gas properties. Under this method, the Company capitalizes all acquisition,
exploration and development costs incurred for the purpose of finding oil and
gas reserves. Depreciation, depletion and amortization of oil and gas properties
is computed using the unit-of-production method based upon production and
estimates of proved reserves. The full-cost accounting rules of the Securities
and Exchange Commission include a reserve value ceiling test that requires a
write-down if the ceiling is exceeded. The Company had write-downs of $12.5
million and $7.0 million during 1997 and 1996, respectively, due to ceiling test
limitations.
MULTICLIENT SEISMIC DATA: Costs incurred in the creation of Company owned
multiclient seismic data are capitalized and amortized over the estimated
revenue that the Company expects to receive from the licensing of such data.
Cash prepayments received from customers for specific contracts
are included in deferred revenue until earned.
IMPAIRMENT OF 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 did 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 as
determined by a discounted cash flow analysis, 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 $12.1 million ($.04 per share), net of
a tax benefit of $6.0 million, in 1997 as the cumulative effect of a change in
accounting.
INVESTMENTS: Investments in debt and equity securities, other than those
accounted for by the equity method, are classified as available for sale and
reported at fair value with unrealized gains or losses, net of tax, recorded as
a separate component of stockholders' equity.
GOODWILL: Goodwill arising from acquisitions is amortized on the straight-line
method over the lesser of its expected useful life or forty years.
INCOME TAXES: Deferred income taxes are determined utilizing an asset and
liability approach. This method gives consideration to the future tax
consequences associated with differences between the financial accounting and
tax bases of assets and liabilities.
ENVIRONMENTAL MATTERS: Remediation costs are accrued based on estimates of known
environmental remediation exposure. Such accruals are recorded even if
significant uncertainties exist over the ultimate cost of the remediation.
Ongoing environmental compliance costs, including
maintenance and monitoring costs, are expensed as incurred.
<PAGE> 11
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCK BASED COMPENSATION: The intrinsic value method of accounting is used for
stock based employee compensation whereby no compensation expense is recognized
when the exercise price of an employee stock option is equal to the market price
of the Company's common stock on the grant date.
POSTEMPLOYMENT BENEFITS: The Company adopted SFAS No. 112, Employers'
Accounting for Postemployment Benefits, effective October 1, 1994. The standard
requires that the cost of benefits provided to former or inactive employees
after employment, but before retirement, be accrued when it is probable that a
benefit will be provided, or in the case of service related benefits, over the
period earned. The cost of providing these benefits was previously recognized as
a charge to income in the period the benefits were paid. The cumulative effect
of adopting SFAS No. 112 was a charge to income of $14.6 million ($.05 per
share), net of a tax benefit of $7.9 million in 1995.
FOREIGN CURRENCY TRANSLATION: Gains and losses resulting from balance sheet
translation of foreign operations where a foreign currency is the functional
currency are included as a separate component of stockholders' equity. Gains and
losses resulting from balance sheet translation of foreign operations where the
U.S. Dollar is the functional currency are included in the consolidated
statements of operations.
FINANCIAL INSTRUMENTS: The Company uses forward exchange contracts and currency
swaps to hedge certain firm commitments and transactions denominated in foreign
currencies. Gains and losses on forward contracts are deferred and offset
against foreign exchange gains or losses on the underlying hedged item. The
Company uses interest rate swaps to manage interest rate risk. The interest
differentials from interest rate swaps are recognized as an adjustment to
interest expense. The Company's policies do not permit financial instrument
transactions for speculative purposes.
STATEMENTS OF CASH FLOWS: The Company considers all highly liquid investments
with an original maturity of three months or less at the time of purchase to be
cash equivalents.
NOTE 3. DISCONTINUED OPERATIONS
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, organized to conduct Western Atlas' industrial automation
systems business. Pursuant to the Spin-off, on October 31, 1997 each Western
Atlas shareholder received an equivalent number of shares of UNOVA common stock
in a tax-free transaction. As explained in Note 1, the fiscal year financial
information for Baker Hughes includes Western Atlas' results on a calendar year
basis. Hence, on the statements of consolidated stockholders' equity, the
spin-off of UNOVA is included in the year ended September 30, 1997.
<PAGE> 12
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income (loss) from discontinued operations included interest expense allocated
on the basis of debt levels assumed in the Spin-off. Corporate, general and
administrative costs of Western Atlas were not allocated to UNOVA for any of the
periods presented. Concurrent with the Spin-off, UNOVA repaid Western Atlas for
intercompany indebtedness totaling $230.0 million.
Discontinued operations of UNOVA are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ------------------------------------------
December 31, 1997 1997 1996 1995
------------------ -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 107.0 $1,201.1 $1,164.7 $ 942.9
Allocated interest expense 1.7 17.2 11.5 12.2
Allocated interest income 2.7 4.4 2.8
Income (loss) before income taxes $ 4.7 $ (122.7) $ 92.9 $ 64.6
Provision for income taxes (1.9) (32.2) (37.2) (26.2)
-------- -------- -------- --------
Discontinued operations $ 2.8 $ (154.9) $ 55.7 $ 38.4
======== ======== ======== ========
</TABLE>
The UNOVA results of operations in 1997 include a $203.0 million charge for
acquired in-process research and development activities related to UNOVA's
acquisition of Norand Corporation and United Barcode Industries in 1997.
The net assets of UNOVA as of the distribution date were as follows:
<TABLE>
<S> <C>
Current assets $ 752.7
Noncurrent assets 586.9
--------
Total assets 1,339.6
--------
Current liabilities (652.2)
Noncurrent liabilities (87.6)
--------
Total liabilities (739.8)
--------
Net assets of UNOVA $ 599.8
========
</TABLE>
<PAGE> 13
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share," in the Transition
Period. SFAS No. 128 establishes new standards for computing and presenting
earnings per share ("EPS"), and requires all prior periods to be restated.
Reconciliation of the numerators and denominators of the basic and diluted EPS
computations for income from continuing operations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, 1997 September 30, 1997
-------------------- --------------------
Income Shares Income Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS $111.2 316.2 $200.9 299.5
Effect of dilutive securities:
Stock plans 6.2 5.2
Liquid Yield Option Notes 1.7 7.2
------ ------ ------ ------
Diluted EPS $112.9 329.6 $200.9 304.7
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1996 September 30, 1995
-------------------- ----------------------
Income Shares Income Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS $246.4 $181.4
Less:
Preferred stock dividends (8.0)
Effect of preferred stock repurchase (17.6)
------ ------
Income available to common stockholders 246.4 287.7 155.8 284.5
Effect of dilutive securities:
Stock plans 2.9 2.0
Liquid Yield Option Notes 6.0 7.2
------ ------ ------ ------
Diluted EPS $252.4 297.8 $155.8 286.5
====== ====== ====== ======
</TABLE>
Options to purchase 3.2 million shares of common stock were not included in the
computation of diluted EPS for the three months ended December 31, 1997 because
the options' exercise price of $47.81 was greater than the average market price
of the Company's common stock during the period.
In June 1995, the Company repurchased all outstanding shares of its convertible
preferred stock for $167.0 million. The fair market value of the preferred stock
was $149.4 million on its original date of issuance. The repurchase price in
excess of this amount, $17.6 million, and the related preferred stock dividends
of $8.0 million are deducted from net income in arriving at net income per share
of common stock.
<PAGE> 14
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Finished goods $ 911.5 $ 836.6
Work in process 138.2 114.3
Raw materials 95.3 119.0
-------- --------
Total $1,145.0 $1,069.9
======== ========
</TABLE>
NOTE 6. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Land $ 73.0 $ 75.5
Buildings 534.3 515.7
Machinery and equipment 1,983.6 1,944.6
Rental tools and equipment 820.0 782.7
Oil and gas properties, full cost method 114.8 111.7
-------- --------
Total property 3,525.7 3,430.2
Accumulated depreciation and depletion 1,546.7 1,520.9
-------- --------
Property - net $1,979.0 $1,909.3
======== ========
</TABLE>
NOTE 7. ACQUISITIONS AND DISPOSITIONS
In addition to the acquisitions discussed below, the Company made five
significant acquisitions with an aggregate purchase price of $74.3 million
during the Transition Period and two significant acquisitions with an aggregate
purchase price of $98.4 million in 1997. 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
statements of operation 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.
<PAGE> 15
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1997
Petrolite
In July 1997, the Company acquired Petrolite Corporation ("Petrolite") and Wm.
S. Barnickel & Company ("Barnickel"), the holder of 47.1% of Petrolite's common
stock, for 19.3 million shares of the Company's common stock having a value of
$730.2 million in a three-way business combination. The transaction was
accounted for using the purchase method of accounting. Additionally, the Company
assumed Petrolite's outstanding vested and unvested employee stock options which
were converted into the right to acquire 1.0 million shares of the Company's
common stock. Such assumption of Petrolite options by the Company had a fair
market value of $21.0 million resulting in total consideration in the
acquisitions of $751.2 million. Petrolite, previously a publicly held company,
is a manufacturer and marketer of specialty chemicals used in the petroleum and
process industries. Barnickel was a privately held company that owned marketable
securities, which were sold after the acquisition, in addition to its investment
in Petrolite.
The purchase price has been allocated to the assets purchased and the
liabilities assumed based on their estimated fair market values at the date of
acquisition. In accordance with generally accepted accounting principles, the
amount allocated to in-process research and development, which was determined by
an independent valuation, has been recorded as a charge in the consolidated
statement of operations as of the acquisition date because its technological
feasibility had not been established and it had no alternative future use at the
date of acquisition.
The Company incurred certain liabilities as part of the plan to combine the
operations of Petrolite with those of the Company. These liabilities relate to
the Petrolite operations and include severance of $13.8 million for redundant
marketing, manufacturing and administrative personnel, relocation of $5.8
million for moving equipment and transferring marketing and technology
personnel, primarily from St. Louis to Houston, and environmental remediation of
$16.5 million for redundant properties and facilities that will be sold. Cash
spent during 1997 totaled $7.7 million. Cash spent during the Transition Period
totaled $2.1 million. The Company anticipates completing these activities in
1998, except for some environmental remediation which will occur in 1999.
The operating results of Petrolite and Barnickel are included in the 1997
consolidated statement of operations from the acquisition date, July 2, 1997.
The following unaudited pro forma information combines the results of operations
of the Company, Petrolite and Barnickel assuming the acquisitions had occurred
at the beginning of the periods presented. The pro forma summary does not
necessarily reflect the results that would have occurred had the acquisitions
been completed for the periods presented, nor do they purport to be indicative
of the results that will be obtained in the future, and excludes certain
nonrecurring charges related to the acquisition which have an after tax impact
of $155.2 million.
<PAGE> 16
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended September 30,
(Per share amounts in dollars) 1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 5,602.2 $ 4,806.5
Income from continuing operations 363.6 259.2
Income from continuing operations per share of common stock - diluted 1.19 0.89
</TABLE>
In connection with the acquisition of Petrolite, the Company recorded an unusual
charge of $35.5 million. See Note 8 of Notes to Consolidated Financial
Statements.
Drilex
In July 1997, the Company acquired Drilex International Inc. ("Drilex"), a
provider of products and services used in the directional and horizontal
drilling and workover of oil and gas wells, for 2.7 million shares of the
Company's common stock. The acquisition was accounted for using the pooling of
interests method of accounting. Under this method of accounting, the historical
cost bases of the assets and liabilities of the Company and Drilex are combined
at recorded amounts and the results of operations of the combined companies for
1997 are included in the 1997 consolidated statement of operations. The
historical results of the separate companies for years prior to 1997 are not
combined because the retained earnings and results of operations of Drilex are
not material to the consolidated financial statements of the Company. In
connection with the acquisition of Drilex, the Company recorded an unusual
charge of $7.1 million for transaction and other one time costs associated with
the acquisition. See Note 8 of Notes to Consolidated Financial Statements.
Norand and United Barcode Industries
The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United
Barcode Industries ("UBI") on April 4, 1997. These companies were integrated
into the Company's industrial automation systems operations and included in the
Spin-off. The purchase method of accounting was used to record these
acquisitions and, accordingly, the acquisition costs ($280.0 million and $107.0
million for Norand and UBI, respectively) were allocated to the net assets
acquired based upon their relative fair values. In accordance with generally
accepted accounting principles, such allocation assigned $203.0 million to
in-process research and development activities, which was expensed in 1997
because its technological feasibility had not been established and it had no
alternative future use at the date of acquisition.
<PAGE> 17
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1996
In May 1996, the Company sold 6.3 million shares of Varco International, Inc.
("Varco") common stock, representing its entire investment in Varco. The Company
received net proceeds of $95.5 million and recognized a pretax gain of $44.3
million. The Company's investment in Varco was accounted for using the equity
method. Equity income included in the consolidated statements of operations for
1996 and 1995 was $1.8 million and $3.2 million, respectively.
1995
The assets of the Company's seismic equipment manufacturing operations were sold
in 1995 for $122.0 million in cash. As part of the sales agreement, the Company
entered into a commitment to purchase from the buyer $350.0 million of seismic
and related equipment. The remaining equipment purchase commitment is $67.0
million as of December 31, 1997. The excess of the sales price over the net book
value of the assets sold was deferred and is amortized as the Company purchases
equipment from the buyer.
SUBSEQUENT ACQUISITIONS
In April 1998, the Company acquired all the outstanding stock of WEDGE DIA-LOG,
Inc. ("WEDGE") for $218.5 million in cash. WEDGE specializes in cased-hole
logging and pipe recovery services. Also in April 1998, the Company acquired 3-D
Geophysical, Inc. ("3-D") for $117.5 million in cash. 3-D is a supplier of
primarily land-based seismic data acquisition services. The purchase method of
accounting was used to record both of these acquisitions. Pro forma results of
these two acquisitions have not been presented as the pro forma revenue, net
income and earnings per share would not be materially different from the
Company's actual results.
<PAGE> 18
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. UNUSUAL CHARGE
1997
During the year ended September 30, 1997, the Company recognized a $52.1 million
unusual charge consisting of the following:
<TABLE>
<S> <C>
Baker Petrolite:
Severance for 140 employees $ 2.2
Relocation of people and equipment 3.4
Environmental 5.0
Abandoned leases 1.5
Integration costs 2.8
Inventory write-down 11.3
Write-down of other assets 9.3
Drilex:
Write-down of property and other assets 4.1
Banking and legal fees 3.0
Discontinued product lines:
Severance for 50 employees 1.5
Write-down of inventory, property and other assets 8.0
-----
Total $52.1
=====
</TABLE>
In connection with the acquisitions of Petrolite and Drilex, the Company
recorded unusual charges of $35.5 million and $7.1 million, respectively, to
combine the acquired operations with those of the Company. The charges include
the cost of closing redundant facilities, eliminating or relocating personnel
and equipment and rationalizing inventories that require disposal at amounts
less than their cost. A $9.5 million charge was recorded as a result of the
decision to discontinue a low margin, oilfield product line in Latin America and
to sell the Tracor Europa subsidiary, a computer peripherals operation, which
resulted in a write-down of the investment to net realizable value. Cash
provisions of the unusual charge totaled $19.4 million. The Company spent $5.5
million during 1997 and $1.6 million during the Transition Period. The Company
has spent substantially all of the remaining $12.3 million in 1998.
<PAGE> 19
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1996
During the year ended September 30, 1996, the Company recognized a $39.6 million
unusual charge consisting of the following:
<TABLE>
<S> <C>
Patent write-off $ 8.5
Impairment of joint venture 5.0
Restructurings:
Severance for 360 employees 7.1
Relocation of people and equipment 2.3
Abandoned leases 2.8
Inventory write-down 1.5
Write-down of assets 10.4
Other 2.0
-----
Total $39.6
=====
</TABLE>
The Company had certain oilfield operations patents which no longer protected
commercially significant technology resulting in the write-off of $8.5 million.
A $5.0 million impairment of a Latin America joint venture was recorded due to
changing market conditions in the region in which it operates. The Company
recorded a $24.1 million restructuring charge including the downsizing of Baker
Hughes INTEQ's Singapore and Paris operations, a reorganization of EIMCO Process
Equipment's Italian operations and the consolidation of certain Baker Oil Tools
manufacturing operations. Cash provisions of the charge totaled $14.3 million.
The Company spent $4.2 million during 1996, $6.3 million during 1997 and the
remaining $3.8 million during the Transition Period.
<PAGE> 20
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. INDEBTEDNESS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Commercial Paper with an average interest rate of 5.99% at
December 31, 1997 $ 370.3 $ 209.3
Revolving Credit Facilities due through 1999 and 2002 with an average
interest rate of 6.35% at December 31, 1997 285.6 311.4
Liquid Yield Option Notes ("LYONS") due May 2008 with a yield to
maturity of 3.5% per annum, net of unamortized discount of
$119.5 at December 31, 1997 ($121.9 at September 30, 1997) 265.7 263.3
7.625% Notes due February 1999 with an effective interest rate
of 7.73%, net of unamortized discount of $.3 at December 31, 1997
($.4 at September 30, 1997) 149.7 149.6
8% Notes due May 2004 with an effective interest rate of 8.08%,
net of unamortized discount of $.9 at December 31, 1997
($.9 at September 30, 1997) 99.1 99.1
7.875% Notes due June 2004 250.0 250.0
8.55% Debentures due June 2004 150.0 150.0
Debentures with an effective interest rate of 8.59%, due
January 2000 93.0 93.0
5.65% Notes due 1998 48.5 48.5
Other debt with an effective interest rate of 7.57% 6.0 5.8
-------- --------
Total debt 1,717.9 1,580.0
Less current maturities 107.2 106.7
-------- --------
Long-term debt $1,610.7 $1,473.3
======== ========
</TABLE>
At December 31, 1997, the Company had $1,044.9 million of credit facilities with
commercial banks, of which $700.0 million was committed. The committed
facilities were to expire as follows: $300.0 million in 1999 and $400.0 million
in 2002. The Company's policy is to classify commercial paper and short-term
borrowings under revolving credit facilities as long-term debt since the Company
has the ability under certain credit agreements, and the intent, to maintain
these obligations for longer than one year.
<PAGE> 21
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The $300.0 million committed facilities were subject to normal banking terms and
conditions and did not materially restrict the Company's activities. With regard
to the Company's $400.0 million committed facilities at December 31, 1997, the
Company was in compliance with its various debt covenants related to incurrence
of debt, mergers, consolidations and the sale of assets and the maintenance of
certain financial ratios. At September 30, 1998, the Company had $2,063.4
million of credit facilities with commercial banks, of which $1,000.0 million
was committed.
The Liquid Yield Option Notes ("LYONS") are convertible into the Company's
common stock at a conversion price of $37.35 per share, calculated as of
November 5, 1997, which increases at an annual rate of 3.5%. At the option of
the Company, the LYONS may be redeemed for cash at any time on or after May 5,
1998, at a redemption price equal to the issue price plus accrued original issue
discount through the date of redemption. At the option of the holder, the LYONS
may be redeemed for cash on May 5, 1998, or on May 5, 2003, for a redemption
price equal to the issue price plus accrued original issue discount through the
date of redemption. Except for an insignificant amount, holders of the LYONS did
not redeem the LYONS for cash on May 5, 1998.
Maturities of long-term debt for the next five years are as follows: 1998-$107.2
million; 1999-$451.1 million; 2000-$94.3 million; 2001-$.3 million and
2002-$300.1 million.
NOTE 10. FINANCIAL INSTRUMENTS
INTEREST RATE SWAPS
At December 31, 1997, the Company had two interest rate swap agreements for a
notional amount of $93.0 million and $230.5 million maturing January 27, 2000,
and May 5, 1998, respectively. These swaps effectively exchange a weighted
average fixed interest rate of 5.0% for variable interest rates on the notional
amount. The variable interest rate is six-month LIBOR plus 2% on the $93.0
million notional amount and 30-day commercial paper rates minus 1.96% on the
$230.5 million notional amount. The interest rate swaps settle semi-annually
with respect to the $93.0 million notional amount and upon maturity with respect
to the $230.5 million notional amount. At December 31, 1997 and September 30,
1997, the Company had recorded an asset of $2.6 million and $2.7 million,
respectively, related to the interest rate swap agreements. In the unlikely
event that the counterparties fail to meet the terms of an interest rate swap
agreement, the Company's exposure is limited to the interest rate differential.
FOREIGN CURRENCY CONTRACTS
At December 31, 1997, the Company had Norwegian Krone denominated commitments of
$84.0 million to purchase two seismic vessels in 1999. The Company entered into
forward exchange contracts with notional amounts of $88.9 million at December
31, 1997 to hedge these commitments. The notional amounts are used to express
the volume of these transactions and do not represent exposure to loss. The
carrying value of the contracts was not significant. The fair value of the
contracts, were based on year-end quoted rates for purchasing contracts with
similar terms and maturity dates. Foreign currency gains and losses for such
purchases are deferred and
<PAGE> 22
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
will become part of the bases of the assets. The counterparties to the Company's
forward contracts are major financial institutions. The credit ratings and
concentration of risk of these financial institutions are monitored on a
continuing basis and, in management's opinion, present no significant credit
risk to the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Except as described below, the estimated fair values of the Company's financial
instruments at December 31, 1997 and September 30, 1997 approximate their
carrying value as reflected in the consolidated statement of financial position.
The Company's financial instruments include cash and short-term investments,
receivables, investments, payables, debt and interest rate and foreign currency
contracts. The fair value of such financial instruments has been estimated based
on quoted market prices and the Black-Scholes option-pricing model.
The estimated fair value of the Company's debt, at December 31, 1997 and
September 30, 1997 was $1,913.8 million and $1,724.0 million, respectively,
which differs from the carrying amounts of $1,788.1 million and $1,589.5
million, respectively, included in the consolidated statements of financial
position. The fair value of the Company's interest rate swap contracts at
December 31, 1997 and September 30, 1997 was $2.8 million and $2.7 million,
respectively.
CONCENTRATION OF CREDIT RISK
The Company manufactures, provides services and sells its products to various
companies in the oil and gas industry. Although this concentration could affect
the Company's overall exposure to credit risk, management believes that the
Company is exposed to minimal risk since the majority of its business is
conducted with major companies within the industry. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral for its accounts receivables.
The Company maintains cash deposits with major banks which from time to time may
exceed federally insured limits. The Company periodically assesses the financial
condition of the institutions and believes that any possible loss is minimal.
NOTE 11. EMPLOYEE STOCK PLANS
The Company has stock option plans that provide for granting of options for the
purchase of common stock to officers and other key employees. These stock
options may be granted subject to terms ranging from one to ten years at a price
equal to or greater than the fair market value of the stock at the date of
grant.
<PAGE> 23
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock option activity for the Company was as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price
(Shares in thousands) of Shares Per Share
--------- ----------------
<S> <C> <C>
Outstanding at September 30, 1994 12,309 $ 14.86
Granted 2,918 17.39
Exercised (993) 8.17
Forfeited (1,476) 20.70
------- -------
Outstanding at September 30, 1995 12,758 15.30
------- -------
Granted 2,803 20.75
Exercised (2,965) 15.89
Forfeited (403) 18.45
------- -------
Outstanding at September 30, 1996 12,193 16.30
------- -------
Granted 3,237 30.15
Options assumed in acquisitions 2,324 16.04
Spin-off adjustment 2,387
Exercised (3,590) 16.04
Forfeited (204) 21.32
------- -------
Outstanding at September 30, 1997 16,347 16.54
------- -------
Granted 3,173 47.81
Exercised (818) 12.26
Forfeited (4) 30.83
Adjustment for change in year end 528
------- -------
Outstanding at December 31, 1997 19,226 $ 21.66
------- -------
</TABLE>
In connection with the Spin-off, all employee and director options of Western
Atlas outstanding immediately prior to the Spin-off were adjusted by increasing
the number of shares subject to the option and decreasing the exercise price per
share so as to preserve the difference between the aggregate exercise price of
the option and the aggregate market value of the shares subject to the option.
<PAGE> 24
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information for stock options outstanding at
December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------------------------------- --------------------------------
Weighted Weighted Weighted
Range of Average Remaining Average Average
Exercise Prices Shares Contractual Life (Years) Exercise Price Shares Exercise Price
--------------- --------- -------------------------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$0.61 - 7.49 1,723 3.50 $ 5.16 1,720 $ 5.16
7.79 - 11 10 1,919 5.69 8.80 1,387 8.60
11.13 - 12 94 3,428 7.13 12.71 1,187 12.63
13.08 - 17 98 2,689 7.45 16.75 865 16.46
18.15 - 19 71 1,520 7.46 19.35 853 19.38
20.13 - 27 54 3,758 8.48 22.60 882 22.44
28.50 - 36 00 934 8.02 35.07 469 34.16
36.29 - 47 81 3,255 9.63 47.59 441 47.13
------ --------- --------- --------- ---------
Total 19,226 7.46 $ 21.66 7,804 $ 15.79
====== ========= ========= ========= =========
</TABLE>
Under the terms of the Baker Hughes and Western Atlas stock option plans, all
outstanding options vested as a result of the Merger. At December 31, 1997, 4.0
million shares were available for future option grants.
The fair market value of the options granted in the Transition Period, 1997 and
1996 was $14.47, $11.18 and $6.49, respectively, using the following assumptions
for those respective years in the Black-Scholes option-pricing model: dividend
yield of .96%, 1.5% and 2.2%; expected volatility of 36.4%, 33.5% and 26.7%;
risk-free interest rate of 5.6%, 6.2% and 6.2%; and expected life of each option
of 3.2 years, 4.6 years and 4.6 years.
Assuming the Company had used the fair market value method of accounting for its
stock based compensation plans, pro forma net income and net income per share
would have been $99.2 million and $.31 per share in the Transition Period, $16.2
million and $.05 per share in 1997 and $294.0 million and $1.01 per share in
1996. The effects of applying the fair market value method of accounting in the
above pro forma disclosure may not be indicative of future amounts since the pro
forma disclosure does not apply to options granted prior to 1996 and additional
awards in future years are anticipated.
<PAGE> 25
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. INCOME TAXES
The geographic sources of income before income taxes and cumulative effect of
accounting changes are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ----------------------------------
December 31, 1997 1997 1996 1995
------------------ ------ ------ ------
<S> <C> <C> <C> <C>
United States $ 40.9 $ 52.9 $149.6 $145.6
Foreign 138.3 311.4 265.9 162.7
------ ------ ------ ------
Total $179.2 $364.3 $415.5 $308.3
====== ====== ====== ======
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended -----------------------------------
December 31, 1997 1997 1996 1995
------------------ ------ ------ ------
<S> <C> <C> <C> <C>
Current:
United States $ 32.2 $ 54.6 $ 42.7 $ 10.7
Foreign 40.0 112.7 97.8 80.2
------ ------ ------ ------
Total current 72.2 167.3 140.5 90.9
------ ------ ------ ------
Deferred:
United States (14.1) 2.7 19.1 33.3
Foreign 9.9 (6.6) 9.5 2.7
------ ------ ------ ------
Total deferred (4.2) (3.9) 28.6 36.0
------ ------ ------ ------
Provision for income taxes $ 68.0 $163.4 $169.1 $126.9
====== ====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying the
U.S. statutory income tax rate to income before income taxes and cumulative
effect of accounting changes for the reasons set forth below:
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ------------------------------------
December 31, 1997 1997 1996 1995
------------------ ------ ------ ------
<S> <C> <C> <C> <C>
Statutory income tax $ 62.7 $127.5 $145.4 $107.9
Nondeductible acquired in-process
research and development charge 41.3
Incremental effect of foreign operations 6.5 (5.0) 13.8 23.7
1992 and 1993 IRS audit agreement (11.4)
Nondeductible goodwill amortization 2.0 6.1 7.0 5.6
State income taxes - net of U.S. tax benefit 2.1 4.6 1.6 (0.6)
Operating loss and credit carryforwards (0.6) (4.2) (3.3) (13.1)
Other-net (4.7) 4.5 4.6 3.4
------ ------ ------ ------
Provision for income taxes $ 68.0 $163.4 $169.1 $126.9
====== ====== ====== ======
</TABLE>
<PAGE> 26
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
for income tax purposes, and of operating loss and tax credit carryforwards. The
tax effects of the Company's temporary differences and carryforwards are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Deferred tax liabilities:
Property $ 95.6 $ 89.1
Other assets 153.8 163.9
Excess costs arising from acquisitions 68.1 67.6
Undistributed earnings of foreign subsidiaries 41.3 41.3
Other 43.4 42.0
------ ------
Total 402.2 403.9
Deferred tax assets:
Receivables 3.0 2.8
Inventory 99.1 80.8
Employee benefits 24.2 25.8
Other accrued expenses 52.6 54.6
Operating loss carryforwards 10.8 9.0
Tax credit carryforwards 15.5 19.5
Other 40.5 37.9
------ ------
Subtotal 245.7 230.4
Valuation allowance (12.6) (5.7)
------ ------
Total 233.1 224.7
------ ------
Net deferred tax liability $169.1 $179.2
====== ======
</TABLE>
A valuation allowance is recorded when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets depends on the ability to generate
sufficient taxable income of the appropriate character in the future. The
Company has reserved the operating loss carryforwards in certain non-U.S.
jurisdictions where its operations have decreased, currently ceased or the
Company has withdrawn entirely.
Provision has been made for U.S. and additional foreign taxes for the
anticipated repatriation of certain earnings of foreign subsidiaries of the
Company. The Company considers the undistributed earnings of its foreign
subsidiaries above the amount already provided to be permanently reinvested.
These additional foreign earnings could become subject to additional tax if
remitted, or deemed remitted, as a dividend; however, the additional amount of
taxes payable is not practicable to estimate.
At December 31, 1997, the Company had approximately $11.9 million of foreign tax
credits available to offset future payments of federal income taxes expiring in
varying amounts between 1998 and 2001.
<PAGE> 27
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in 1997 which changes the way the Company reports
information about its operating segments.
The Company is primarily engaged in the oilfield service industry. Its oilfield
operations generated more than 90% of the Company's consolidated revenues in all
periods presented.
OILFIELD OPERATIONS consists of eight business units - Baker Atlas, Baker Hughes
INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions, Hughes
Christensen and Western Geophysical that manufacture and sell equipment and
provide services used in the drilling, completion, production and maintenance of
oil and gas wells and in reservoir measurement and evaluation. The principal
markets for this segment include all major oil and gas producing regions of the
world including North America, Latin America, Europe, Africa, the Middle East
and the Far East. Customers include major multi-national, independent and
national or state-owned oil companies.
The following table presents consolidated revenues by country based on the
location of the use of the product or service.
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ----------------------------------------
December 31, 1997 1997 1996 1995
------------------ -------- -------- --------
<S> <C> <C> <C> <C>
United States $ 545.6 $1,849.0 $1,479.3 $1,386.3
United Kingdom 117.8 426.6 383.1 317.3
Venezuela 107.5 383.0 246.8 182.2
Canada 87.6 266.3 203.9 173.9
Norway 64.2 222.8 185.4 136.9
Other countries (approximately 65 countries) 650.2 2,195.9 1,947.3 1,723.8
-------- -------- -------- --------
Total $1,572.9 $5,343.6 $4,445.8 $3,920.4
======== ======== ======== ========
</TABLE>
<PAGE> 28
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents long-lived assets by country based on the location
of the asset.
<TABLE>
<CAPTION>
September 30,
----------------------------------------
December 31, 1997 1997 1996 1995
----------------- -------- -------- --------
<S> <C> <C> <C> <C>
United States $ 879.2 $ 823.7 $ 547.4 $ 551.9
United Kingdom 204.2 192.7 118.9 119.5
Venezuela 70.8 54.8 45.6 31.5
Nigeria 41.4 38.9 30.4 6.8
Norway 37.2 32.0 45.5 23.8
Canada 36.7 39.7 17.2 13.9
Other countries 282.9 300.9 161.6 136.9
Western Geophysical mobile assets * 426.6 426.6 324.6 277.1
-------- -------- -------- --------
Total $1,979.0 $1,909.3 $1,291.2 $1,161.4
======== ======== ======== ========
</TABLE>
* These assets represent marine seismic vessels, land crews and related
equipment that are mobile and move frequently between countries. Data
processing centers, land and buildings have been included in the countries
where these assets are located.
NOTE 14. EMPLOYEE BENEFIT PLANS
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care benefits for substantially all
U.S. employees.
The following table sets forth the funded status and amounts recognized in the
Company's consolidated statements of financial position:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retirees $ (82.0) $ (83.0)
Fully eligible active plan participants (12.1) (11.9)
Other active plan participants (21.7) (21.1)
------- -------
Total (115.8) (116.0)
Unrecognized net gain (7.8) (8.6)
------- -------
Accrued postretirement benefit cost $(123.6) $(124.6)
======= =======
</TABLE>
Postretirement benefit expense, which is primarily interest cost on the APBO,
was $2.4 million, $9.0 million, $8.7 million, and $10.0 million for the
Transition Period, 1997, 1996 and 1995, respectively.
The assumed health care cost trend rate used in measuring the APBO as of
December 31, 1997 was 7.2% for 1998 declining gradually each successive year
until it reaches 5% in 2002, after which it remains constant. A 1% increase in
the trend rate for health care costs would have increased the
<PAGE> 29
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
APBO as of December 31, 1997 by 5% and the aggregate of the service and interest
cost components of the 1997 net periodic postretirement benefit cost by 5%. The
assumed discount rate used in determining the APBO as of December 31, 1997 was
7.5%.
DEFINED BENEFIT PENSION PLANS
The Company has several noncontributory defined benefit pension plans covering
various domestic and foreign employees, including an overfunded plan obtained as
part of the acquisition of Petrolite. Generally, the Company makes annual
contributions to the plans in amounts necessary to meet minimum governmental
funding requirements.
The net periodic pension cost (benefit) includes the following components:
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ---------------------------------
December 31, 1997 1997 1996 1995
------------------ ----- ----- -----
<S> <C> <C> <C> <C>
Cost of benefits earned $ 1.2 $ 3.9 $ 3.0 $ 3.0
Interest cost on projected benefit obligation 3.3 7.7 5.2 5.1
Actual return on assets (3.9) (15.2) (10.0) (8.2)
Net amortization and deferral (1.7) 5.5 3.6 2.0
----- ----- ----- -----
Net periodic pension cost (benefit) $(1.1) $ 1.9 $ 1.8 $ 1.9
===== ===== ===== =====
</TABLE>
The weighted average assumptions used in the accounting for the defined benefit
plans were:
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ------------------------------
December 31, 1997 1997 1996 1995
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 7.51% 7.56% 7.90% 7.98%
Rates of increase in compensation levels 3.89% 3.73% 4.37% 4.37%
Expected long-term rate of return on assets 8.92% 8.92% 8.81% 8.89%
</TABLE>
<PAGE> 30
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the funded status and amounts recognized in the
Company's consolidated statements of financial position.
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
------------------------- --------------------------
Overfunded Underfunded Overfunded Underfunded
Plans Plans Plans Plans
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(150.2) $(28.1) $(143.4) $(26.9)
====== ====== ======= ======
Accumulated benefit obligation (151.1) (29.2) (144.2) (28.2)
====== ====== ======= ======
Projected benefit obligation (153.9) (33.6) (147.8) (31.7)
Plan assets at fair value 264.7 4.5 258.3 4.7
------ ------ ------- ------
Projected benefit obligation (in excess of) less than
plan assets 110.8 (29.1) 110.5 (27.0)
Unrecognized net (gain) loss (8.5) 9.3 (11.0) 8.5
Minimum liability adjustment (6.0) (5.4)
------ ------ ------- ------
Prepaid pension cost (pension liability) $102.3 $(25.8) $ 99.5 $(23.9)
====== ====== ======= ======
</TABLE>
Pension plan assets are primarily mortgages, private placements, bonds and
common stocks.
DEFINED CONTRIBUTION PLANS
During the periods reported, virtually all Baker Hughes U.S. employees (other
than those employed at the time by Western Atlas) not covered under one of the
Baker Hughes pension plans were eligible to participate in the Baker Hughes
sponsored Thrift Plan. The Thrift Plan allows eligible employees to elect to
contribute from 2% to 15% of their salaries to an investment trust. Employee
contributions are matched by the Company at the rate of $1.00 per $1.00 employee
contribution for the first 2% and $.50 per $1.00 employee contribution for the
next 4% of the employee's salary. In addition, the Company contributes for all
eligible employees between 2% and 5% of their salary depending on the employee's
age as of January 1 each year. Such contributions become fully vested to the
employee after five years of employment. Baker Hughes' contribution to the
Thrift Plan and other defined contribution plans amounted to $10.6 million,
$35.9 million, $30.0 million and $27.5 million in the Transition Period, 1997,
1996 and 1995, respectively.
During the periods reported, most of Western Atlas' U.S. employees were covered
by a defined contribution plan. Western Atlas contributed an amount based on its
consolidated pretax earnings in accordance with the provisions of such plan.
This plan includes a voluntary savings feature that is intended to qualify under
Section 401(k) of the Internal Revenue Code and is designed to enhance the
retirement programs of participating employees. Under this feature, Western
Atlas matches up to 67% of a certain portion of participants' contributions.
Western Atlas contributions to this plan were $10.5 million, $39.0 million,
$32.8 million and $30.4 million in the Transition Period, 1997, 1996 and 1995,
respectively.
<PAGE> 31
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
POSTEMPLOYMENT BENEFITS
During the periods reported, the Company provided certain postemployment
benefits to substantially all former or inactive Baker Hughes U.S. employees
(other than those employed at the time by Western Atlas) following employment
but before retirement. Disability income benefits ("Disability Benefits"),
available at the date of hire, are provided through a qualified plan which has
been funded by contributions from the Company and employees. The primary asset
of the plan is a guaranteed insurance contract with an insurance company which
currently earns interest at 6%. The actuarially determined obligation is
calculated at a discount rate of 7%. Disability Benefits expense was $.5 million
in the Transition Period and $1.1 million in 1997. Disability Benefits income
was $.1 million and $1.5 million in 1996 and 1995, respectively. The
continuation of medical, life insurance and Thrift Plan benefits while on
disability and the service related salary continuance benefits ("Continuation
Benefits") were provided through a nonqualified, unfunded plan until April 1997.
The continuation of the medical benefit portion of the plan was merged into the
disability income benefits plan beginning in April 1997. Expense for
Continuation Benefits, which is primarily interest cost on the projected benefit
obligation, was $.7 million, $3.3 million, $2.9 million and $2.8 million for the
Transition Period, 1997, 1996 and 1995, respectively.
The following table sets forth the funded status and amounts recognized in the
Company's consolidated statements of financial position for Disability Benefits
and Continuation Benefits:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation $(40.2) $(39.9)
Plan assets at fair value 15.0 15.8
------ ------
Accumulated benefit obligation in excess of plan assets (25.2) (24.1)
Unrecognized net loss 5.7 5.6
------ ------
Postemployment liability $(19.5) $(18.5)
====== ======
</TABLE>
Health care cost assumptions used to measure the Continuation Benefits
obligation are similar to the assumptions used in determining the obligation for
postretirement health care benefits. Additional assumptions used in the
accounting for Continuation Benefits in the Transition Period, 1997 and 1996
were a discount rate of 7% and increases in compensation of 5%.
NOTE 15. LITIGATION
The Company is sometimes named as a defendant in litigation relating to the
products and services it provides. The Company insures against these risks to
the extent deemed prudent by its management, but no assurance can be given that
the nature and amount of such insurance will in every case fully indemnify the
Company against liabilities arising out of pending and future legal
proceedings relating to its ordinary business activities.
<PAGE> 32
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. ENVIRONMENTAL MATTERS
The Company's past and present operations include activities which are subject
to extensive federal and state environmental regulations.
The Company has been identified as a potentially responsible party ("PRP") in
remedial activities related to various "Superfund" sites. Applicable federal law
imposes joint and several liability on each PRP for the cleanup of these sites
leaving the Company with the uncertainty that it may be responsible for the
remediation cost attributable to other PRPs who are unable to pay their share of
the remediation costs. Generally, the Company has estimated its share of such
total cost based on the ratio that the number of gallons of waste estimated to
be contributed to the site by the Company bears to the total number of gallons
of waste estimated to have been disposed at the site. The Company has accrued
what it believes to be its share of the total cost of remediation of these
Superfund sites. No accrual has been made under the joint and several liability
concept since the Company believes that the probability that it will have to pay
material costs above its share is remote. The Company believes the other PRPs
have substantial assets available to satisfy their obligation.
At December 31, 1997 and September 30, 1997, the Company had accrued $23.7
million, and $25.1 million, respectively, for remediation costs, including the
Superfund sites referred to above. The measurement of the accruals for
remediation costs is subject to uncertainties, including the evolving nature of
environmental regulations and the difficulty in estimating the extent and remedy
of agreements that may be available to the Company to mitigate the remediation
costs. Such amounts have not been considered in measuring the remediation
accrual. The Company believes that the likelihood of material losses in excess
of those amounts recorded is remote.
NOTE 17. OTHER MATTERS
Supplemental consolidated statement of operations information is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended ----------------------------------
December 31, 1997 1997 1996 1995
------------------ ------ ------ ------
<S> <C> <C> <C> <C>
Rental expense (generally transportation
equipment and warehouse facilities) $ 40.5 $154.2 $114.6 $112.4
Research and development 31.8 118.7 98.8 97.2
Income taxes paid 64.7 148.7 84.2 116.4
Interest paid 33.1 92.4 90.0 85.8
</TABLE>
At December 31, 1997, the Company had long-term operating leases covering
certain facilities and equipment on which minimum annual rental commitments for
each of the five years in the period ending December 31, 2002 are $44.5 million,
$33.1 million, $21.5 million, $11.4 million and $8.2 million, respectively, and
$47.8 million in the aggregate thereafter. The Company has not entered
into any significant capital leases.
<PAGE> 33
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18. RELATED PARTY TRANSACTIONS
For the purpose of governing certain relationships between UNOVA and the Company
after the Spin-off, UNOVA and the Company entered into various agreements
including a Distribution and Indemnity Agreement, a Tax-Sharing Agreement, a
Benefits Agreement and an Intellectual Property Agreement.
NOTE 19. SUBSEQUENT EVENT
During the three month period ended September 30, 1998, the demand for the
Company's products and services declined sharply as the price of oil and natural
gas fell. This sharp decline in customer demand materialized quickly after a
period in which the Company experienced high growth levels over the last several
years, including high growth levels during the early part of 1998. As a result
of this significant change in market conditions, the Company provided for
various reserves and recorded write-downs during the third quarter of 1998 for
the impairment of inventory, property and goodwill, severance for 3,400
employees under existing benefit plans and settlement of abandoned leases and
other contractual obligations. Such reserves and write-downs aggregated $549.0
million.
Additionally, in connection with the acquisition of Western Atlas, the
Company recorded a charge of $201.9 million for merger related expenses
during the three month period ended September 30, 1998. Merger expenses
included: transaction costs, including banking and legal fees, printing
and other costs directly related to the merger and employee costs,
including payments made under various change in control provisions of
employment contracts of certain officers of Western Atlas and Baker
Hughes, service benefits paid to terminated employees whose responsibilities
were redundant as a result of the merger and a noncash charge related to the
triggering of change in control rights contained in certain Western Atlas
employee stock option plans which occurred as a result of the merger.
NOTE 20. QUARTERLY DATA (UNAUDITED):
<TABLE>
<CAPTION>
Three Months Ended
(Per share amounts in dollars) December 31, 1997
-----------------
<S> <C>
Transition Period *
Revenues $ 1,572.9
Gross profit ** 527.2
Income before cumulative effect of accounting change 111.2
Net income 114.0
Per share of common stock:
Income before cumulative effect of accounting change
Basic 0.35
Diluted 0.34
Net income
Basic 0.36
Diluted 0.35
Common stock market prices:
High $ 49.63
Low $ 39.00
</TABLE>
<PAGE> 34
Baker Hughes Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
First Second Third Fourth Total
(Per share amounts in dollars) Quarter Quarter Quarter Quarter Fiscal Year
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Fiscal Year 1997 *
Revenues $ 1,206.7 $ 1,268.7 $ 1,337.5 $ 1,530.7 $ 5,343.6
Gross profit ** 365.9 386.2 428.4 486.2 1,666.7
Income (loss) before cumulative
effect of accounting change 67.6 74.6 109.8 (51.1) 200.9
Net income (loss) 70.2 (111.9) 123.9 (48.3) 33.9
Per share of common stock:
Income (loss) before cumulative
effect of accounting change
Basic 0.23 0.25 0.37 (0.16) 0.67
Diluted 0.23 0.25 0.36 (0.16) 0.66
Net income (loss)
Basic 0.24 (0.38) 0.42 (0.15) 0.11
Diluted 0.24 (0.36) 0.41 (0.15) 0.11
Common stock market prices:
High $ 38.88 $ 41.25 $ 40.13 $ 47.25
Low $ 29.50 $ 34.13 $ 32.63 $ 38.38
Fiscal Year 1996: *
Revenues $ 1,003.7 $ 1,107.2 $ 1,128.5 $ 1,206.4 $ 4,445.8
Gross profit ** 320.0 349.5 378.3 336.0 1,375.7
Income before cumulative
effect of accounting change 43.8 59.2 69.0 74.4 246.4
Net income 55.1 71.5 83.4 92.1 302.1
Per share of common stock:
Income before cumulative
effect of accounting change
Basic 0.15 0.21 0.24 0.26 0.86
Diluted 0.15 0.20 0.24 0.25 0.85
Net income
Basic 0.19 0.25 0.29 0.32 1.05
Diluted 0.19 0.25 0.28 0.31 1.04
Common stock market prices:
High $ 24.88 $ 29.75 $ 34.25 $ 35.63
Low $ 18.38 $ 22.75 $ 28.00 $ 28.88
</TABLE>
* See Note 2 for accounting changes; see Note 3 for discontinued operations;
see Note 7 for acquisitions and dispositions; see Note 8 for unusual charges.
** Represents revenues less costs of sales and costs of services and rentals.
<PAGE> 35
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 financial statements for the three months ended December 31, 1997
and for the years ended September 30, 1997, 1996 and 1995 and the related notes
to consolidated financial statements.
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 effects 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.
CHANGE IN YEAR END
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 with
the calendar year beginning January 1, 1998. A three-month transition period
from October 1, 1997 through December 31, 1997 (the "Transition Period")
precedes the start of the 1998 fiscal year.
MERGER
On August 10, 1998, Baker Hughes Incorporated ("Baker Hughes" or the "Company")
completed a merger with Western Atlas Inc. ("Western Atlas") by issuing 148.6
million shares of its common stock for all of the outstanding common stock of
Western Atlas (the "Merger"). Each share of Western Atlas common stock was
exchanged for 2.7 shares of Baker Hughes common stock. Western Atlas 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.
In connection with the acquisition of Western Atlas, the Company recorded a
charge of $201.9 million for merger related expenses during the three month
period ended September 30, 1998. Merger expenses included: transaction costs,
including banking and legal fees, printing and other costs directly related to
the merger; and employee costs, including payments made under various change in
control provisions of employment contracts of certain officers of Western Atlas
and Baker Hughes, service benefits paid to terminated employees whose
responsibilities were redundant as a result of the merger and a noncash charge
related to the triggering of change in control rights contained in certain
Western Atlas employee stock option plans which occurred as a result of the
merger.
The Merger was accounted for as a pooling of interests and, accordingly, all
prior period consolidated financial statements of Baker Hughes have been
restated to include the results of operations, financial position and cash flows
of Western Atlas. Information concerning common stock, employee stock plans and
per share data has been restated on an equivalent share basis. The consolidated
financial statements as of September 30, 1997 and for each of the three years in
the period ended September 30, 1997 include Baker Hughes' previous September 30
fiscal year amounts and Western Atlas' December 31 calendar year amounts for the
respective fiscal years of Baker Hughes. Consolidated financial statements for
the three months ended December 31, 1997
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
include amounts for Baker Hughes and Western Atlas for the three months ended
December 31, 1997. As a result, Western Atlas' results of operations for the
three months ended December 31, 1997 are included in both the consolidated
financial statements for the year ended September 30, 1997 and for the three
months ended December 31, 1997. Unless the context expressly requires a
different reading, references to specific year periods in MD&A refer to the
Company's fiscal year then ended September 30.
BUSINESS ENVIRONMENT
The Company is primarily engaged in the oilfield service industry. Oilfield
operations generated more than 90% of the Company's consolidated revenues in the
Transition Period, 1997, 1996 and 1995 and currently consists of eight business
units - Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite,
Centrilift, E&P Solutions, Hughes Christensen and Western Geophysical - that
manufacture and sell equipment and provide services used in the drilling,
completion, production and maintenance of oil and gas wells and in reservoir
measurement and evaluation. The business environment for the Company and its
corresponding operating results are affected significantly by the 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 levels.
3) The level of economic growth in certain key areas of the world,
particularly developing Asia, where the correlation 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
commodity price movement, influence overall levels of expenditures for
exploration and development by the Company's customers.
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
More specifically, two key factors influence the level of exploration and
development spending:
1) Technology: Advances in the design and application of more technologically
advanced 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 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
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended -----------------------------
December 31, 1997 1997 1996 1995
------------------ ----- ----- -----
<S> <C> <C> <C> <C>
WTI ($/bbl) 20.02 21.83 20.51 18.29
U. S. Spot Natural Gas ($/mcf) 2.72 2.47 2.21 1.42
</TABLE>
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.
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
ROTARY RIG COUNT
<TABLE>
<CAPTION>
Year Ended September 30,
Three Months Ended -------------------------------
December 31, 1997 1997 1996 1995
------------------ ----- ----- -----
<S> <C> <C> <C> <C>
U.S. - Land 873 788 652 638
U.S. - Offshore 125 118 107 100
Canada 448 340 247 247
----- ----- ----- -----
North America 1,446 1,246 1,006 985
----- ----- ----- -----
Latin America 280 277 279 266
North Sea 55 58 53 42
Other Europe 56 57 69 66
Africa 75 80 76 65
Middle East 165 150 138 123
Asia pacific 173 181 173 186
----- ----- ----- -----
International 804 803 788 748
----- ----- ----- -----
Worldwide 2,250 2,049 1,794 1,733
----- ----- ----- -----
U.S. Workover 1,427 1,412 1,306 1,298
</TABLE>
OUTLOOK
In 1998 declining demand from developing Asia and a warmer than normal winter
coupled with increases in Iraqi exports and increases in nonOPEC and OPEC
supply resulted in historically high inventory levels and lower oil prices. Oil
prices that had ranged from $18-$26/barrel in 1997 fell to $15-$18/barrel in the
first part of 1998. At the end of 1998 oil prices were trading between
$10-$14/barrel. In response to lower oil prices and expectations for continued
low oil prices in 1999, oil companies cut upstream capital spending particularly
in the second half of 1998.
Oil prices are expected to remain at relatively low levels throughout 1999. As a
result, 1999 oil company upstream capital spending is expected to be
significantly lower when compared to 1998. Cuts in upstream capital spending
were more significant in North America and South America than in the rest of the
world in 1998. The Company expects customer spending in the first 2 quarters of
1999 to decline sequentially from the prior quarters.
As a result of the significant change in market conditions described above, the
Company provided for various reserves and recorded write-downs during the third
quarter of 1998 for the impairment of inventory, property and goodwill,
severance for 3,400 employees under existing benefit plans and settlement of
abandoned leases and other contractual obligations. Such reserves and
write-downs aggregated $549.0 million.
DISCONTINUED OPERATIONS
On October 31, 1997, Western Atlas distributed all the shares of UNOVA, Inc.
("UNOVA"), its then wholly owned industrial automation systems subsidiary, as a
stock dividend to its shareholders (the "Spin-off"). The operations of UNOVA for
the Transition Period, 1997, 1996 and 1995 are classified as discontinued
operations in the Company's consolidated condensed financial statements. For
periods prior to the Spin-off, cash, debt, and the related net interest expense
were allocated based on the capital needs of UNOVA's operations. All corporate
general and administrative costs of the Company are included in continuing
operations and no allocation was made to UNOVA for any of the periods presented.
The UNOVA results of operations for 1997 include a $203.0 million charge for
acquired in-process research and development activities related to UNOVA's
acquisition of Norand Corporation and United Barcode Industries in April 1997.
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
ACQUISITIONS
In addition to the acquisitions discussed below the Company made several
strategic acquisitions to expand its technology base and to increase its
presence in key geographic areas. None of the acquisitions individually or in
the aggregate are material to the Company's consolidated financial
statements.
PETROLITE
On July 2, 1997, the Company completed the acquisition of Petrolite Corporation
("Petrolite"). Baker Hughes issued 19.3 million shares of its common stock
having an aggregate value of $730.2 million. Additionally, the Company assumed
Petrolite's outstanding vested and unvested employee stock options which had a
fair market value of $21.0 million resulting in total consideration of $751.2
million. The Company recorded an unusual charge of $35.5 million related to the
combination of Petrolite with Baker Performance Chemicals, the Company's
existing oilfield and industrial chemicals operations, forming Baker Petrolite,
a leading provider of oilfield chemicals in the major oilfield markets.
DRILEX
On July 14, 1997, the Company acquired Drilex International Inc. ("Drilex"), a
provider of products and services used in the directional and horizontal
drilling and workover of oil and gas wells, for 2.7 million shares of the
Company's common stock. The acquisition of Drilex which has been combined with
the operations of Baker Hughes INTEQ in Oilfield Operations provides the Company
with an increased presence in the growing U.S. land directional and horizontal
drilling market. In connection with the acquisition of Drilex, the Company
recorded an unusual charge of $7.1 million related to transaction and other
one-time costs.
RESULTS OF OPERATIONS
REVENUES
TRANSITION PERIOD
Consolidated revenues for the three months ended December 31, 1997 were $1,572.9
million, an increase of 30.4% over revenues in the same period in 1996 of
$1,206.7 million.
1997 vs. 1996
Consolidated revenues for 1997 were $5,343.6 million, an increase of 20% over
1996 revenues of $4,445.8 million. Sales revenues was up $419.9 million, an
increase of 21%, and services and rentals revenues was up $477.9 million, an
increase of 20%, in each case, when compared to 1996. Approximately 65% of the
Company's 1997 consolidated revenues were derived from international activities.
Revenue from 1997 acquisitions contributed $218.7 million of the revenue
improvement.
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Revenue growth outpaced rig count increases in most areas of the world. In
particular, revenues in Venezuela increased $136.2 million, or 55.2%, as that
country continued to work towards its then stated goal of significantly
increasing production.
1996 vs. 1995
Consolidated revenues for 1996 increased $525.4 million, or 13%, over 1995.
Sales revenues and services and rentals revenues were both up 13% from 1995.
International activities accounted for approximately 67% of consolidated 1996
revenues. Activity was particularly strong in several key oilfield regions of
the world including Nigeria where revenues increased 30.7% and the North Sea
where revenues grew 21.8%, in each case when compared to 1995. Strong drilling
activity drove a 35.5% increase in Venezuela revenues.
GROSS MARGIN
Gross margins for the Transition Period, 1997, 1996 and 1995, were 33.5%, 31.2%,
31.1% and 30.8%, respectively. The increases result primarily from increased
revenues, changes in the revenue mix and continued emphasis on productivity and
cost improvements.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense as a percent of
consolidated revenues for the Transition Period, 1997, 1996 and 1995 were 20.6%,
19.4%, 19.8% and 20.9%, respectively. The increase in SG&A resulted from
increased marketing, field operations, manufacturing and business support to
keep pace with the increased activity levels. Employee training and development
efforts were also increased.
UNUSUAL CHARGE
1997: During 1997, the Company recorded unusual charges of $52.1 million. In
connection with the acquisitions of Petrolite and Drilex, the Company recorded
unusual charges of $35.5 million and $7.1 million, respectively, to combine the
acquired operations with those of the Company. An additional $9.5 million charge
was recorded as a result of the decision to discontinue a low margin, oilfield
product line in Latin America and to sell the Tracor Europa subsidiary, a
computer peripherals operation. This resulted in a write-down of the investment
in Tracor Europa to net realizable value. Cash provisions of the unusual charge
totaled $19.4 million. The Company spent $5.5 million during 1997 and $1.6
million during the Transition Period. The Company has spent substantially all of
the remaining $12.3 million in 1998. Such expenditures relate to specific plans
and clearly defined actions and were funded from operations and available credit
facilities.
1996: During 1996, the Company recorded an unusual charge of $39.6 million. The
charge consisted 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, restructuring charges totaling $24.1 million,
and $2.0 million of other charges. The restructuring charges included the
downsizing of
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Baker Hughes INTEQ's Singapore and Paris operations, a reorganization of EIMCO
Process Equipment's Italian operations and the consolidation of certain Baker
Oil Tools manufacturing operations. Noncash provisions of the charge totaled
$25.3 million and consisted primarily of the write-down of assets to net
realizable value. The remaining $14.3 million of the charge represents expected
cash expenditures related to severance under existing benefit arrangements,
abandoned leases and the relocation of people and equipment. The Company spent
$4.2 million of the cash during 1996, $6.3 million during 1997 and the remaining
$3.8 million during the Transition Period.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In the Petrolite acquisition, the Company allocated $118.0 million of the
purchase price to in- process research and development. In accordance with
generally accepted accounting principles, the Company recorded the acquired
in-process research and development as a charge to expense because its
technological feasibility had not been established and it had no alternative
future use at the date of acquisition.
INTEREST EXPENSE
Interest expense in the Transition Period increased $4.0 million and in 1997
increased $3.5 million from the respective periods in 1996 due to higher debt
levels that funded acquisitions, capital expenditures and working capital.
Interest expense in 1996 decreased $1.2 million from 1995 as a result of lower
debt levels.
SPIN-OFF RELATED COSTS
Costs related to the spin-off of UNOVA of $8.4 million were charged to
continuing operations during 1997.
GAIN ON SALE OF VARCO STOCK
In May 1996, the Company sold 6.3 million shares of Varco International, Inc.
("Varco") common stock, representing its entire investment in Varco. The Company
received net proceeds of $95.5 million and recognized a pretax gain of $44.3
million. The Company's investment in Varco was accounted for using the equity
method. Equity income included in the Consolidated Statements of Operations for
1996 and 1995 was $1.8 million and $3.2 million, respectively.
INCOME TAXES
The Company reached an agreement with the Internal Revenue Service ("IRS") to
close the audit of its 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 $0.04 per share) in the quarter ended June 30, 1997.
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
The effective income tax rate for the Transition Period was 37.9% as compared to
44.9% in 1997, 40.7% in 1996 and 41.2% in 1995. The effective rates differ from
the federal statutory rate in all years due primarily to taxes on foreign
operations and nondeductible goodwill amortization. The increase in the rate for
1997 is due in large part to the nondeductible charge for the acquired in-
process research and development related to the Petrolite acquisition offset by
the IRS settlement as explained above.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Net cash inflows from operating activities of continuing operations were $141.1
million, $713.5 million, $636.6 million and $397.0 million in the Transition
Period, 1997, 1996 and 1995, respectively, and continue to provide the principal
source of the Company's liquidity. The primary use of cash by operating
activities was to fund increased working capital due to increased levels of
activity.
INVESTING ACTIVITIES
Net cash outflows from investing activities of continuing operations were $319.2
million in the Transition Period, $971.8 million in 1997, $485.4 million in 1996
and $314.4 million in 1995.
Property additions increased as the Company added capacity to meet increased
market demand and due to an increase in the acquisition of multiclient seismic
data. The Company expects 1998 capital expenditures to be in excess of $1.2
billion. Funds provided from operations and outstanding lines of credit are
expected to be adequate to meet future capital expenditure requirements.
The Company obtained $68.7 million of cash from the two stock acquisitions of
Petrolite Corporation and Drilex that occurred in 1997. In July 1997, the
Company sold all of the marketable securities it obtained from Wm. S. Barnickel
& Company in association with the Petrolite acquisition for $48.5 million. In
May 1996, the Company sold its entire investment in Varco receiving net proceeds
of $95.5 million.
The assets of the Company's seismic equipment manufacturing operations were sold
in 1995 for $122.0 million in cash.
During the June 1997 quarter, the Company began a multi-year initiative designed
to develop and implement an enterprise wide software system. The initiative,
named "Project Renaissance," will utilize SAP's R/3 as its software platform
across the whole of the Company and is expected to cost in excess of $300
million over a four year period.
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
FINANCING ACTIVITIES
Net cash inflows (outflows) from financing activities of continuing operations
were $173.7 million in the Transition Period and $462.3 million, ($133.9)
million and ($118.2) million in 1997, 1996 and 1995, respectively.
Total debt outstanding at December 31, 1997 was $1,788.1 million, compared to
$1,589.5 million at September 30, 1997. The debt to equity ratio was 0.51 at
December 31, 1997 compared to 0.46 at September 30, 1997. The increase from the
prior year is primarily due to increased borrowings to fund capital expenditures
and increases in working capital. Debt increased in 1997 due primarily to the
acquisitions of Norand Corporation for $280.0 million and United Barcode
Industries for $107.0 million. These companies were integrated into the
Company's industrial automation systems operations and included in the Spin-off.
Cash dividends in 1997 increased due to the increase in the number of shares of
common stock outstanding. On an annualized basis the cash dividend of $0.46 per
share of common stock will require approximately $150.0 million of cash which
compares to an annual requirement of approximately $80.0 million before the
merger with Western Atlas.
In June 1995, the Company repurchased all outstanding shares of its convertible
preferred stock for $167.0 million. Existing cash on hand and borrowings from
commercial paper and revolving credit facilities funded the repurchase. Cash
dividends decreased in 1996 due to the repurchase.
At December 31, 1997, the Company had $1,044.9 million of credit facilities with
commercial banks, of which $700.0 million is committed. These facilities are
subject to normal banking terms and conditions that do not materially restrict
the Company's activities.
ACCOUNTING STANDARDS
POSTEMPLOYMENT BENEFITS
The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 112,
Employers' Accounting for Postemployment Benefits, effective October 1, 1994.
The Company recognized a charge to income of $14.6 million ($.05 per share), net
of a $7.9 million tax benefit, in the first quarter of 1995. Expense under SFAS
No. 112 for 1995 was not significantly different from the prior method of cash
basis accounting.
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 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
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
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 $12.1 million ($.04 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 Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, Accounting for Stock-Based Compensation, effective October 1, 1996.
SFAS No. 123 permits, but does not require, a fair value based method of
accounting for employee stock option plans which results in compensation expense
being recognized in the results of operations when stock options are granted.
The Company continues to use the intrinsic value method of accounting for such
plans where no compensation expense is recognized when the exercise price of an
employee stock option is equal to the market price of the Company's common stock
on the grant date.
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 has determined that additional
disclosures will be required for future periods.
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, was issued that revises required disclosures about
pensions and postretirement benefit plans. SFAS No. 132 is effective for the
Company starting in 1998. The Company has determined that additional disclosures
will be required for the 1998 fiscal year end reporting.
DERIVATIVE AND HEDGE ACCOUNTING
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at its fair value. Depending on the intended use of the derivative, changes in
its fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income.
SFAS No. 133 is effective for all quarters of fiscal years beginning after June
15, 1999. Retroactive application to periods prior to adoption is not allowed.
The Company has not quantified the impact of the adoption of SFAS No. 133 on its
consolidated financial statements.
<PAGE> 45
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.
QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company is exposed to certain market risks which are inherent in the
Company's financial instruments arising from transactions which are entered
into in the normal course of business. The Company may enter into derivative
financial instrument transactions in order to manage or reduce market risk; that
is, the Company does not enter into derivative financial instrument transactions
for speculative purposes. A discussion of the Company's primary market risk
exposure in financial instruments is presented below.
LONG-TERM DEBT
The Company is subject to interest rate risk on its long term fixed interest
rate debt. Commercial paper borrowings and borrowings under revolving credit
facilities do not give rise to significant interest rate risk because these
borrowings have maturities of less than three months. All other things being
equal, the fair market value of debt with a fixed interest rate will increase as
interest rates fall and the fair market value will decrease as interest rates
rise. This exposure to interest rate risk is managed by borrowing money that has
a variable interest rate or using interest rate swaps to change fixed interest
rate borrowings to variable interest rate borrowings. Generally, the Company
maintains a variable interest rate mix of between 50% and 60% of total
borrowings.
The following table sets forth, as of December 31, 1997, the Company's principal
cash flows for its long-term debt obligations, which bear a fixed rate of
interest and are denominated in U.S. dollars, and the related weighted average
interest rates by expected maturity dates. Additionally, the table
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
sets forth the notional amounts and weighted average interest rates of the
Company's interest rate swaps by expected maturity.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt $ 49.1 $ 150.0 $ 93.0 $ 890.6(1) $ 1,182.7 $ 1,257.9
Weighted average 5.65% 7.73% 8.59% 6.11% 6.48%
interest rates
Fixed to variable swaps $ 230.5 $ 93.0
Pay rate 3.55%(2) 7.82(3)
Receive rate 3.50% 8.59%
</TABLE>
(1) Includes a zero-coupon instrument with an accreted value of $265.7 million
at December 31, 1997.
(2) 30-day commercial paper minus 1.96% settled at maturity in May 1998.
(3) Six-month LIBOR plus 2% settled semi-annually, maturing in January 2000.
Included in the table above in the "Thereafter" column is the Company's Liquid
Yield Option Notes ("LYONS") which are convertible into Company common stock at
the option of the holder. As such, the fair value of the LYONS is determined, in
addition to changes in interest rates, by changes in the market price of the
Company's common stock. Holding interest rates constant, a 20% decline in the
market price of the Company's common stock would cause the fair value of the
LYONS at December 31, 1997 to decrease by a comparable percent amount during the
period as the LYONS traded more like an equity instrument than a debt instrument
because the market price of the Company's common stock at December 31, 1997 of
$43.63 was significantly above the LYONS conversion price of $37.35.
INVESTMENTS
The Company's investment in common stock and common stock warrants of
Tuboscope, Inc. ("Tuboscope") is subject to equity price risk as the common
stock of Tuboscope is traded on the New York Stock Exchange. Warrants to buy
shares of Tuboscope common stock derive their value, in part, from the market
value of Tuboscope common stock. This investment is classified as available for
sale and, consequently, is reflected in the consolidated statement of financial
position at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity. The Company has no current intention of
acquiring or disposing of its interest in Tuboscope; however, the Company's
intentions may change in light of facts and circumstances that may arise in
future dealings in the marketplace or other events affecting Tuboscope or the
Company and the operation of the terms of their agreements.
At December 31, 1997, the fair value of the Company's investment in common
stock and common stock warrants of Tuboscope was $91.4 million. The Tuboscope
common stock was valued at the closing price reported on the New York Stock
Exchange, and the warrants were valued using the Black-Scholes option-pricing
model. No actions have been taken by the Company to hedge this market risk
exposure. A 20% decline in the market price of the Tuboscope common stock would
cause the fair value of the investment in common stock and common stock warrants
of Tuboscope to decrease $20.3 million.
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
FOREIGN CURRENCY
The Company's operations are conducted around the world in a number of
different currencies. As such, there is exposure to future earnings due to
changes in foreign currency exchange rates when transactions are denominated in
currencies other than the Company's functional currency, which is the primary
currency in which the Company conducts business.
As a general rule, the Company hedges all or part of the future earnings
exposure when it believes the risk of loss is greater than the cost of the
associated hedge. At December 31, 1997, the Company had entered into Norwegian
Krone denominated commitments of $84.0 million to purchase two seismic vessels
in 1999. The Company entered into forward exchange contracts with notional
amounts of $88.9 million at December 31, 1997 to hedge these commitments. The
notional amounts are used to express the volume of these transactions and do not
represent exposure to loss. The carrying value of the contracts was not
significant. The fair value of the contracts were based on year-end quoted rates
for purchasing contracts with similar terms and maturity dates. Foreign currency
gains and losses for such purchases are deferred and will become part of the
bases of the assets. The counterparties to the Company's forward contracts are
major financial institutions. The credit ratings and concentration of risk of
these financial institutions are monitored on a continuing basis and, in
management's opinion, present no significant credit risk to the Company.
Certain short-term borrowings of the Company are denominated in a currency other
than its functional currency. At December 31, 1997, the Company's nonfunctional
currency short-term borrowings totaled $8.7 million where the primary exposure
was to the French Franc. A 10% appreciation of the U.S. Dollar against this
currency would not have a significant effect on the future earnings of the
Company.
<PAGE> 48
Baker Hughes Incorporated
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three
Months Ended Year Ended September 30,
(In millions, except per share amounts) December 31, -----------------------------------------------------------------
1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 1,572.9 $ 5,343.6 $ 4,445.8 $ 3,920.4 $ 3,699.3 $ 3,863.4
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before cumulative effect of accounting
changes $ 111.2 $ 200.9 $ 246.4 $ 181.4 $ 170.9 $ 99.7
Per share of common stock:
Income from continuing operations
before cumulative effect of
accounting changes -
Basic 0.35 0.67 0.86 0.55 0.59 0.32
Diluted 0.34 0.66 0.85 0.54 0.58 0.32
Dividends 0.115 0.46 0.46 0.46 0.46 0.46
Financial Position:
Total assets $ 7,236.1 $ 7,087.0 $ 5,796.6 $ 5,435.2 $ 5,141.3 $ 4,900.0
Long-term debt 1,610.7 1,473.3 1,124.2 1,295.3 1,128.0 1,108.2
</TABLE>
See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion
of the merger with Western Atlas Inc. and the adoption of new accounting
standards in 1997 and 1995. In 1994, the Company adopted new accounting
standards related to accounting for income taxes and employers accounting for
post retirement benefits other than pensions. See Note 7 of Notes to
Consolidated Financial Statements for a discussion of acquisitions made in the
Transition Period, 1997, 1996 and 1995. The Company sold EnviroTech Pumpsystems
and EnviroTech Measurements and Controls in 1994. See Note 8 of Notes to
Consolidated Financial Statements for a description of the unusual charge-net in
1997 and 1996. The usual charge-net in 1994 consisted of the restructuring and
reorganization of certain Oilfield divisions and the discontinuance of an MWD
product line, offset by an insurance recovery. The unusual charge-net in 1993
consisted primarily of litigation settlements. The Company repurchased or
defeased debt in 1994 resulting in an extraordinary loss.
<PAGE> 49
SIGNATURE
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
Date: December 18, 1998 By: /s/ Lawrence O'Donnell, III
-----------------------------
Lawrence O'Donnell, III
Vice President and
General Counsel
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23.1 CONSENT OF DELOITTE & TOUCHE LLP
27.1 RESTATED FINANCIAL DATA SCHEDULES
27.2 RESTATED FINANCIAL DATA SCHEDULES
27.3 RESTATED FINANCIAL DATA SCHEDULES
27.4 RESTATED FINANCIAL DATA SCHEDULES
27.5 RESTATED FINANCIAL DATA SCHEDULES
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Baker Hughes Incorporated:
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 33-16094 on Form S-4, in Post-Effective Amendment
Nos. 1 and 2 to Registration Statement No. 33-14803 on Form S-8, in Registration
Statement No. 33-39445 on Form S-8, in Registration Statement No. 33-61304 on
Form S-3, in Amendment No. 1 to Registration Statement No. 33-61304 on Form S-3,
in Registration Statement No. 33-52195 on Form S-8, in Registration Statement
No. 33-57759 on Form S-8, in Registration Statement No. 33-63375 on Form S-3, in
Registration Statement No. 333-19771 on Form S-8, in Post-Effective Amendment
No. 1 on Form S-8 to Registration Statement No. 333-28123 on Form S-4, in
Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No.
333-29027 on Form S-4, in Registration Statement No. 333-49327 on Form S-8, in
Registration Statement No. 333-61065 on Form S-8 and in Registration Statement
No. 333-66205 on Form S-8 of our report dated December 18, 1998 (which expresses
an unqualified opinion and includes an explanatory paragraph relating to the
change in the method of accounting for postemployment benefits and for
impairment of long-lived assets to be disposed of to conform with Statement of
Financial Accounting Standards Nos. 112 and 121, respectively, and relating to
the Company's provision for various reserves and write-downs recorded during the
three month period ended September 30, 1998 and the recorded charge for merger
costs during the three month period ended September 30, 1998), appearing in this
Current Report on Form 8-K of Baker Hughes Incorporated.
DELOITTE & TOUCHE LLP
Houston, Texas
December 21, 1998
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