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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-9397
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BAKER HUGHES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 76-0207995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3900 Essex Lane, Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 29, 1994
----- -------------------------------
Common Stock, $1.00 par value per share 140,442,700 shares
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BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three
Months ended December 31, 1993 and 1992........................ 2
Consolidated Condensed Statements of Financial
Position - December 31, 1993 and September 30, 1993............ 3
Consolidated Condensed Statements of Cash Flows -
Three months ended December 31, 1993 and 1992.................. 5
Notes to Consolidated Condensed Financial Statements................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 13
Part II - Other Information............................................. 19
-1-
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
December 31,
1993 1992
REVENUES: --------------------
Sales............................................... $ 433,482 $ 493,592
Services and rentals................................ 191,080 190,481
--------- ---------
Total revenues.................................. 624,562 684,073
COSTS AND EXPENSES: --------- ---------
Cost of sales....................................... 251,931 296,629
Cost of services and rentals........................ 96,880 98,729
Research and engineering............................ 23,425 26,407
Marketing and field service......................... 147,444 154,366
General and administrative.......................... 53,315 51,181
Amortization of goodwill and other intangibles...... 7,961 9,346
Unusual charge...................................... 17,500
--------- ---------
Total costs and expenses........................ 580,956 654,158
--------- ---------
Operating income....................................... 43,606 29,915
Interest expense....................................... 15,191 17,662
Interest income........................................ (686) (1,711)
--------- ---------
Income before income taxes............................. 29,101 13,964
Income taxes........................................... 12,222 9,754
--------- ---------
Income before cumulative effect of accounting changes.. 16,879 4,210
Cumulative effect of accounting changes: ---------
Income taxes........................................ 25,455
Postretirement benefits other than pensions
(net of $37.5 million income tax benefit)....... (69,620)
---------
Accounting changes - net.................... (44,165)
--------- ---------
Net income (loss)...................................... $ (27,286)$ 4,210
========= =========
Per share of Common Stock: *
Income before cumulative effect of accounting changes $ .10 $ .01
Cumulative effect of accounting changes............. $ (.32)$
--------- ---------
Net income (loss)................................... $ (.22)$ .01
========= =========
Cash dividends per share of common stock............... $ .115 $ .115
========= =========
* Net income (loss) per common share is based on the weighted average number
of shares outstanding during the respective periods (three months ended
December 31, 1993 and 1992, 140,442,000 and 138,655,000, respectively) and
excludes the negligible dilutive effect of shares issuable in connection
with employee stock option and stock purchase plans and convertible
debentures. Net income (loss) per common share has been adjusted for
dividends on preferred stock of $3,000,000 for the three months ended
December 31, 1993 and 1992.
See accompanying notes to consolidated condensed financial statements.
-2-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
ASSETS
December 31, September 30,
1993 1993
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 15,281 $ 6,992
---------- ----------
Receivables - net............................... 654,082 619,953
---------- ----------
Inventories:
Finished goods.............................. 504,638 467,806
Work in process............................. 64,677 68,408
Raw materials............................... 101,622 102,926
---------- ----------
Total inventories....................... 670,937 639,140
---------- ----------
Net assets of business held for sale............ 130,213 126,430
---------- ----------
Deferred income taxes........................... 63,450 2,990
---------- ----------
Other current assets............................ 26,783 21,301
---------- ----------
Total current assets.................... 1,560,746 1,416,806
---------- ----------
PROPERTY - NET..................................... 643,664 661,463
---------- ----------
OTHER ASSETS:
Property held for disposal...................... 77,394 72,717
Investments..................................... 100,566 98,864
Notes receivable................................ 25,447 25,486
Other assets.................................... 53,569 53,934
Excess costs arising from acquisitions - net.... 811,200 814,070
---------- ----------
Total other assets...................... 1,068,176 1,065,071
---------- ----------
Total............................... $ 3,272,586 $ 3,143,340
========== ==========
See accompanying notes to consolidated condensed financial statements.
-3-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1993 1993
---------- ----------
CURRENT LIABILITIES:
Accounts payable................................ $ 243,114 $ 249,781
Short-term borrowings and current
portion of long-term debt..................... 8,400 8,448
Accrued employee compensation and benefits...... 100,942 95,303
Taxes other than income......................... 23,047 22,552
Accrued insurance............................... 21,443 20,554
Accrued interest................................ 18,190 11,529
Income taxes.................................... 22,409 15,322
Other accrued liabilities....................... 95,378 72,348
---------- ----------
Total current liabilities............... 532,923 495,837
---------- ----------
LONG-TERM DEBT..................................... 994,622 935,846
---------- ----------
DEFERRED INCOME TAXES.............................. 46,292 78,306
---------- ----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS........ 98,610
----------
OTHER LONG-TERM LIABILITIES........................ 22,233 22,703
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock................................. 4,000 4,000
Common stock.................................... 140,443 140,437
Capital in excess of par value.................. 1,466,495 1,444,549
Retained earnings............................... 112,840 159,277
Cumulative foreign currency translation
adjustment.................................... (145,872) (137,615)
---------- ----------
Total stockholders' equity.............. 1,577,906 1,610,648
---------- ----------
Total............................... $ 3,272,586 $ 3,143,340
========== ==========
See accompanying notes to consolidated condensed financial statements.
-4-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
December 31,
1993 1992
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (27,286) $ 4,210
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization of:
Property....................................... 32,265 34,060
Other assets and debt discount................. 11,663 11,039
Gain on disposal of assets....................... (4,664) (2,909)
Foreign currency translation loss - net.......... 14 460
Cumulative effect of accounting changes.......... 44,165
Changes in assets and liabilities:
Change in receivables.......................... (36,705) (17,530)
Change in inventories.......................... (34,022) 10,665
Change in accounts payable..................... (4,989) (22,030)
Changes in other assets and liabilities........ 12,378 6,426
-------- --------
Net cash flows from operating activities........... (7,181) 24,391
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions............................... (26,466) (28,136)
Proceeds from disposal of assets................. 9,591 12,066
-------- --------
Net cash flows from investing activities........... (16,875) (16,070)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings......................... 73,958 74,525
Redemption of debentures......................... (18,197)
Reduction of borrowings.......................... (16,901) (47,344)
Proceeds from exercise of stock options
and stock purchase grants...................... 56 1,074
Dividends........................................ (19,151) (18,944)
-------- --------
Net cash flows from financing activities........... 37,962 (8,886)
-------- --------
Effect of exchange rate changes on cash............ (5,617) (3,145)
-------- --------
Increase (decrease) in cash and cash equivalents... 8,289 (3,710)
Cash and cash equivalents, beginning of period..... 6,992 6,692
-------- --------
Cash and cash equivalents, end of period........... $ 15,281 $ 2,982
======== ========
Income taxes paid.................................. $ 13,886 $ 10,200
Interest paid...................................... $ 7,347 $ 11,484
See accompanying notes to consolidated condensed financial statements.
-5-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. General
In the opinion of the Company, the unaudited consolidated condensed
financial statements include all adjustments consisting of normal recurring
accruals necessary for a fair presentation of the Company's consolidated
financial position as of December 31, 1993 and 1992 and its consolidated
results of operations and cash flows for each of the three month periods ended
December 31, 1993 and 1992. Although the Company believes that the disclosures
in these financial statements are adequate to make the information presented
not misleading, certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (See the Company's Annual
Report on Form 10-K for the year ended September 30, 1993 for the most recent
annual financial statements prepared in accordance with generally accepted
accounting principles). Certain balances on the Consolidated Statement of
Financial Position at September 30, 1993 have been reclassified to conform to
the December 31, 1993 presentation. The results of operations for the three
months ended December 31, 1993 are not necessarily indicative of the results to
be expected for the full year.
Note 2. Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," effective October 1, 1993. Previously, the
Company used SFAS No. 96, "Accounting for Income Taxes". The cumulative effect
of adopting SFAS No. 109 on the Company's consolidated financial statements was
a credit to income of $25.5 million ($.18 per share).
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credit carryforwards. The tax effects of the
Company's temporary differences and carryforwards at October 1, 1993 are as
follows (in thousands):
Deferred tax liabilities:
Property $ 65,750
Investments 35,600
Excess costs arising from acquisitions 43,800
Undistributed earnings of foreign subsidiaries 23,000
Other 16,600
--------
Total $ 184,750
========
-6-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Deferred tax assets:
Receivables $ 5,700
Inventory 48,900
Postretirement benefits other than pensions 37,500
Other liabilities 25,600
Operating loss carryforwards 51,350
Tax credit carryforwards 59,600
Other 12,150
--------
240,800
Valuation allowance (33,966)
--------
Total $ 206,834
========
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
valuation allowance relates to the realization of operating loss carryforwards
in certain non-U.S. jurisdictions and foreign tax credit carryforwards in the
U.S.
As a result of applying SFAS No. 109, previously unrecorded deferred tax
assets related to net deductible temporary differences, tax credit
carryforwards and operating loss carryforwards were recognized at
October 1, 1993 as part of the cumulative effect of adopting the statement.
Under prior accounting, a part of these benefits would have been recognized as
a reduction of income tax expense in the period utilized. This is evident in
the effective tax rate, adjusted for the unusual charge, for the three months
ended December 31, 1992 of 31.0%. Accordingly, the adoption of SFAS No. 109 at
the beginning of 1994 had the effect of increasing the effective tax rate for
the three months ended December 31, 1993 to 42.0%.
The provision for income tax expense for the three months ended
December 31, 1993 was $12.2 million, of which $7.3 million and $4.9 million is
current and deferred expense, respectively.
In conjunction with the adoption of SFAS No. 109, a benefit of $21.9
million was allocated to capital in excess of par value, which reflects the
cumulative tax effect of stock options exercised by employees of the Company
for which the Company has taken tax deductions in its federal tax return.
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 as a dividend, lent by the foreign subsidiary to the Company or if the
Company should sell its stock in the subsidiary. The additional amount of
taxes payable are not practicable to estimate but the Company believes they
would not be material due to offsetting foreign tax credits generated by the
repatriation of such earnings.
-7-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Note 3. Postretirement Benefits Other than Pensions
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" effective October 1, 1993. The statement
requires that the estimated cost of postretirement benefits other than pensions
be accrued over the period earned rather than expensed as incurred.
The cumulative effect of adopting SFAS No. 106 on the immediate recognition
basis, as of October 1, 1993, was a charge to income of $69.6 million ($.50 per
share), net of an income tax benefit of $37.5 million.
The Company provides postretirement health care and life insurance benefits
for substantially all U.S. employees. In fiscal 1993 and 1992, the Company
recognized $9.5 million and $8.4 million, respectively, as expense for
postretirement health care and life insurance benefits. Expense to be
recognized in fiscal 1994 under SFAS No. 106 is expected to be approximately
$8.8 million. The Company's postretirement plans are not funded. The status
of the plan is as follows:
Accumulated postretirement benefit obligation ("APBO") at October 1, 1993
(in thousands):
Retirees $ 73,300
Fully eligible active plan participants 10,300
Other active plan participants 23,500
--------
APBO $ 107,100
========
Net periodic postretirement benefit cost for the three months ended
December 31, 1993 (in thousands):
Service cost of benefits earned during
the quarter $ 325
Interest cost on APBO 1,875
--------
Net postretirement benefit cost $ 2,200
========
The assumed health care cost trend rate used in measuring the APBO as of
October 1, 1993 was 12.2% for 1994 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 APBO by
approximately 8% and the aggregate of the service and interest cost components
of the net periodic postretirement benefit cost by approximately 9%. The
assumed discount rate used in determining the APBO was 7%.
Note 4. Acquisitions and Dispositions
In July 1993, the Company announced that the EnviroTech Measurements &
Controls ("EM&C") group of companies would no longer be considered part of its
core business. In January 1994, the Company signed a definitive agreement with
-8-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Thermo Electron Corporation to sell EM&C for approximately $134.0 million. The
net proceeds from the disposition are expected to exceed the carrying value by
a modest amount. The sale would exclude the computer peripherals business in
Europe operated under the name of Tracor Europa and is expected to close by
March 31, 1994.
Note 5. Unusual Charge
During the first quarter of 1993, the Company recognized an unusual charge
of $17.5 million in connection with reaching an agreement with representatives
of the class plaintiffs for the settlement of a class action civil antitrust
lawsuit concerning the marketing of tricone rock bits. See Note 6.
Note 6. Litigation
PARKER & PARSLEY
On September 8, 1992, Parker & Parsley Petroleum Development Incorporated
("PDP") filed a lawsuit alleging intentional product delivery or service
variances on a number of well stimulation projects in West Texas for PDP and
certain related parties in the 238th Judicial District Court in Midland, Texas
seeking in excess of $120.0 million in actual and punitive damages. This case
was similar to a case in federal court which had previously been vacated by the
U.S. Fifth Circuit Court of Appeals. In connection with the initial public
offering by BJ Services Company ("BJ"), the Company agreed to indemnify BJ for
damages and costs of litigation arising out of said allegations or similar
claims from any other customers prior to the date of the initial public
offering.
On May 26, 1993, the Company and Dresser Industries ("DI") made a cash
payment, shared equally, of $115.0 million to PDP to settle all outstanding
claims among the parties in this litigation. Of the $57.5 million portion of
the settlement paid by the Company, the Company believes it has liability
insurance coverage available to recover a significant portion of the settlement
amount.
The Company previously established a reserve for this litigation and also
had access to additional third party funds from contractual arrangements.
Since the Company was unable to reach timely agreement with its insurance
carriers, the Company recorded a charge to earnings of $24.5 million in the
quarter ended March 31, 1993, and is vigorously pursuing its legal claims
against its insurance carriers.
In this regard, Ms. E. M. Filter, a director of the Company and an
executive officer of Xerox Corporation, has disclosed that two subsidiaries of
Talegen Holdings, Inc., a wholly owned subsidiary of Xerox Financial Services,
Inc., have been sued by the Company in connection with the litigation. On
June 17, 1991, the Company filed a Complaint against its insurers, including
the two subsidiaries of Talegen Holdings, Inc., styled Baker Hughes
Incorporated, et. al. v. Underwriters of Lloyds et. al. in the 333rd Judicial
District Court in Harris County, Texas. At the time of the settlement with
PDP, Ms. Filter advised the Company that a conflict of interest existed in this
-9-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
matter and requested exclusion from any further discussions regarding insurance
coverage in connection with the PDP litigation.
GLYN SNELL
On February 15, 1991, Glyn Snell, et. al. filed a class action suit on
behalf of royalty interest owners in 238th Judicial District Court in Midland
County, Texas, implicating DI, BJ, the Company and affiliates in damages to the
same wells included in the PDP litigation. On September 30, 1993, the Company
and DI agreed to make a cash payment, shared equally, of $15.0 million to the
class pursuant to a Settlement Agreement. An Order Preliminarily Approving The
Settlement, Directing Notice To The Class and Setting a Hearing on Proposed
Settlement on April 18, 1994 (now postponed to June 30, 1994) was entered by
the Court on October 1, 1993. The Company has adequate reserves recorded at
December 31, 1993 with respect to this matter.
MISSION RESOURCES
On June 30, 1992, the Company was notified of a suit against BJ and certain
individual defendants filed by Mission Resources, Inc. - II ("Mission") in the
Superior Court for the State of California for the County of Kern, alleging
fraudulent misrepresentation, negligent misrepresentation, fraud, breach of
contract and violations of RICO in connection with product delivery or service
variances on approximately 53 well stimulation projects performed by BJ-Hughes,
in Kern County in late 1983 and early 1984. Although the suit does not name
the Company as a defendant, the allegations may fall within the Company's
agreement, in connection with the initial public offering by BJ, to indemnify
it for damages, if any, and costs of litigation arising out of any such
claims. BJ has removed the case to the United States District Court for the
Eastern District of California, Fresno Division. On January 27, 1994, Mission
amended its complaint to include an allegation of negligence. The suit seeks
general damages in the amount of at least $15.0 million and treble damages in
the amount of at least $45.0 million. This case is in its early stages with no
discovery on the merits having occurred. Quantification of the magnitude of
damages, if any, is premature. The Company believes that this claim will not
result in any material adverse effect on the Company's consolidated financial
position.
DEPARTMENT OF JUSTICE INVESTIGATION
On January 2, 1991, the Company and Hughes Christensen Company received a
United States federal grand jury subpoena requesting documents relating to the
marketing of tricone rock bits. Six other tricone rock bit manufacturers
received similar subpoenas with respect to the same investigation being
conducted by the Department of Justice.
On July 13, 1992, pursuant to an agreement with the Justice Department, HCC
pleaded guilty to a one count criminal information alleging that it had
conspired to fix the price of tricone rock bits for a period of nine weeks in
1989 in violation of Section 1 of the Sherman Act. A fine of $1.0 million was
imposed by the Court upon acceptance of the plea.
-10-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
As a consequence of the Justice Department investigation, the Company and
three other major producers of tricone rock bits were sued civilly by several
litigants, including Red Eagle Resources Corporation Inc., alleging unspecified
damages and claiming to represent a class of purchasers of such rock bits who
had been damaged as a consequence of a conspiracy in violation of Section 1 of
the Sherman Act. The civil suits have been consolidated in a single action in
the Southern District of Texas, Houston Division. On September 8, 1992, the
trial court entered an order provisionally certifying the case as a class
action on behalf of all purchasers of insert and milled tooth tricone rock bits
for domestic use from September 1986 to January 1992. On January 27, 1993, the
Company reached an agreement with the representatives of the class plaintiffs
to settle this suit for $17.5 million. On April 26, 1993, the settlement was
approved by the Court and a judgement dismissing claims against the Company on
behalf of the class was entered. A charge to earnings of $17.5 million was
recorded in the first quarter of 1993. On September 17, 1993, the Court
notified the class that an Additional Settlement Agreement had been entered
into on behalf of the class with two other defendants. Because the prior
settlement with the Company contained a most favored nations clause requiring a
refund to the Company if a later settlement with any other defendants is more
favorable, the Company received a refund of $2.1 million in the first quarter
of 1994. One antitrust action by a customer who opted out of the class
settlement remains pending; however, the Company believes that this claim will
not result in any material adverse effect on the Company's consolidated
financial position.
TRW INC.
On May 30, 1989, TRW Inc. ("TRW") filed suit against the Company, Bird
Machine Company, Inc. (a wholly owned subsidiary of the Company) ("BMC"), and
Bird Incorporated (the previous parent of BMC), in the U.S. District Court for
the Southern District of Texas, Houston Division, alleging breach of express
warranty, fraud, and breach of a duty of good faith and fair dealing, in
connection with the sale of certain disc and decanter machines sold to TRW by
BMC prior to the acquisition of BMC by the Company in 1989. On April 29, 1992,
the jury found that TRW had suffered damages. The District Court, on
July 30, 1992, entered a final judgment in the amount of $7.7 million together
with prejudgment and post-judgment interest. The United States Court of
Appeals for the Fifth Circuit affirmed the District Court's decision, and
denied the Company's appeal to rehear portions of the case in December 1993.
In January 1994, the Company paid $10.4 million to TRW in satisfaction of the
judgment. Such amount was accrued at December 31, 1993.
OTHER
The Company is sometimes named as a defendant in litigation relating to the
products and services it provides. The Company insures against these risks to
the extent deemed prudent by its management, but no assurance can be given that
the nature and amount of such insurance will in every case fully indemnify the
-11-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Company against liabilities arising out of pending and future legal proceedings
relating to its ordinary business activities. However, the Company is not a
party to any litigation the probable outcome of which, in the opinion of the
Company's management, would have a material adverse effect on the consolidated
financial position of the Company.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
Oilfield Operations companies manufacture, sell and provide services used
in the drilling, completion and maintenance of oil and gas wells. The business
environment of the Company is significantly affected by worldwide expenditures
of the petroleum industry. Important factors establishing the levels of these
expenditures include world economic conditions, crude oil and natural gas
supply and demand balances, the legislative environment in the United States
and other major countries, and developments in the Middle East and other major
petroleum producing regions.
ACTIVITY INDICATORS
Crude oil and natural gas prices are a major determinant of exploration and
development expenditures. (The amounts in the table below are quarter
averages.)
Quarter Ending December 31, 1993 1992
--------------------------------------------------------------------
WTI ($/Bbl) 16.46 20.50
U.S. Spot Natural Gas ($/mcf) 2.03 2.15
Oil prices weakened in the first quarter of 1994 falling $4.04/Bbl or 19.7%
compared to the same period a year ago. The Company expects prices to be flat,
ranging between $15 and $20/Bbl for the next several years. U.S. natural gas
prices also fell, decreasing 5.6% from the prior year, but remain strong.
Prices are expected to increase modestly over the next year. The Company
believes that higher natural gas prices and a tightening market should
stimulate exploration and development drilling directed towards natural gas.
A more direct indicator of expenditures and drilling activity is the Baker
Hughes rotary rig count. Workover activity, as measured by the U.S. workover
rig count, is also an indicator of expenditure activity. (The amounts in the
table below are quarter averages.)
Quarter Ending December 31, 1993 1992
--------------------------------------------------------------------
North American 1,089 1,005
Non-North American 781 819
----- -----
Total Rig Count 1,870 1,824
===== =====
U.S. Workover Rig Count 1,529 1,473
===== =====
Total drilling activity was 2.5% higher in the first quarter of 1994 over
1993. Activity increases in North America were offset by activity decreases in
the non-North American markets.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
North American Activity
The North American rig count was up 8.4% from 1993. Activity increases in
the Gulf of Mexico drove an increase in the average offshore rig count from 58
to 98 rigs -- up 69% from the first quarter of 1993. The Company benefits from
offshore drilling, more so than land drilling, as this type of activity
requires the premium products and services offered by the Company. An increase
in Canadian activity in 1994 also contributed to the North American
improvement. The primary driver in Canada was increased drilling for gas
fueled by higher natural gas prices. Workover activity was up 3.8% from 1993
levels.
The outlook for North American activity continues to be positive as the
Company expects gas-directed drilling to increase over the next year. In
Canada, the increase in gas-directed drilling should continue. The average
U.S. workover rig count is expected to increase slightly in 1994.
Non-North American Activity
Outside North America, activity continued to fall. The average rig count
was down 4.6% from the first quarter of 1993. The fall was widespread as most
regions showed a decrease in activity. Two areas of particular importance to
the Company that were down significantly were the North Sea and Nigeria. The
Company expects little change in international activity over the near term.
Political issues and softness in crude oil prices will continue to create
uncertainty in key international markets.
ACQUISITIONS AND DISPOSITIONS
1994: In July, 1993, the Company announced that the EnviroTech
Measurements & Controls ("EM&C") group of companies would no longer be
considered part of its core business. In January 1994, the Company signed a
definitive agreement with Thermo Electron Corporation to sell EM&C for
approximately $134.0 million. The net proceeds from the disposition are
expected to exceed the carrying value by a modest amount. The sale would
exclude the computer peripherals business in Europe and is expected to close by
March 31, 1994.
RESULTS OF OPERATIONS
Quarter Ending
Selected Consolidated Results December 31,
(In millions) 1993 1992
--------------------------------------------------------------------
Revenues $ 624.6 $ 684.1
======== ========
Operating Income Before Unusual Charges 43.6 47.4
Unusual Charge - 17.5
-------- --------
Operating Income $ 43.6 $ 29.9
======== ========
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Revenues
Consolidated revenues for the first quarter of 1994 decreased 8.7% compared
to the same quarter last year. The quarter ended December 31, 1992 includes
the results of EM&C, which had revenues of $50.0 million. Due to the pending
sale of EM&C, its results are not included in the quarter ended December 31,
1993. Excluding EM&C, revenues were down 1.5%
Oilfield Operations reported revenues of $517.9 million for the quarter,
virtually unchanged from the first quarter of 1993. U.S. revenues rose 12.9%
from 1993 driven by increases in U.S. offshore and Canadian drilling rig
activity. However, the improvement in the North American market was offset by
a decline in drilling rig activity outside of North America, most notably in
geographic areas that generate meaningful profit for Oilfield Operations,
specifically, the North Sea and West Africa regions.
EnviroTech achieved revenues of $109.2 million in the first quarter of 1994
down $9.6 million from the first quarter of 1993, excluding the first quarter
of 1993 results of EM&C. The decrease in worldwide activity levels in the pump
and process equipment operations was the major reason for the revenue decline.
Operating Income
Operating income increased 45.8% in the first quarter of 1994 compared to
the first quarter of 1993. Results for 1993 include the impact of an unusual
charge, discussed below, of $17.5 million. Excluding the unusual charge,
operating income decreased 8.0%.
Operating income for Oilfield Operations was $47.6 million, compared to
$33.2 million in 1993, a 43.6% increase. Results for 1993 include the impact
of a $17.5 million unusual charge. Excluding the impact of the unusual charge,
Oilfield Operations' operating income decreased 6.0%. The EnviroTech group
contributed operating income of $5.4 million in the first quarter of 1994,
compared to $6.8 million in the first quarter of 1993. The declines in both
groups were in line with the decreased revenues.
In general, operating expenses have fluctuated within a narrow band as a
percent of consolidated revenues as the Company tries to manage expenses both
in absolute terms and as a function of revenues. Amortization of goodwill and
other intangibles has decreased for the quarter because of the exclusion of
amortization related to EM&C.
Unusual Charge
1993: During the first quarter of 1993, the Company recognized a charge of
$17.5 million relating to an agreement for the settlement of the civil
antitrust litigation involving the marketing of tricone rockbits.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Interest Expense
Interest expense in the first quarter of 1994 decreased $2.5 million from
the same quarter in 1993. The decrease was attributable to lower effective
interest rates offset by an increase in total debt outstanding.
Income Taxes
The effective income tax rate for the first quarter of 1994 was 42.0% as
compared to 69.9% in 1993. The effective rate in 1993 differs from the federal
statutory rate due primarily to nondeductible goodwill amortization, unusual
charges for which a benefit is not currently recognizable and foreign earnings
taxed at higher effective tax rates. The Company determined its tax provision
in 1993 under SFAS No. 96. The effective rate for 1994 differs from the
federal statutory rate due primarily to nondeductible goodwill amortization,
disallowance of certain expenses and foreign earnings taxed at higher effective
tax rates. The Company determined its tax provision for 1994 under
SFAS No. 109.
CAPITAL RESOURCES AND LIQUIDITY
Financing Activities
Total debt outstanding at December 31, 1993 was $1,003.0 million, compared
to $944.3 million at September 30, 1993. The debt to equity ratio was .636 at
December 31, 1993, compared to .586 at September 30, 1993.
The Company has increased total debt to fund operating needs while at the
same time taking advantage of lower interest rates to reduce the weighted
average effective interest rate on its debt portfolio. In December 1992, the
Company used cash to redeem in full its 9% debentures for $18.2 million. The
Company expects to use the net proceeds from the sale of EM&C to reduce debt.
At December 31, 1993, the Company had $589.2 million of credit facilities
with commercial banks, of which $414.0 million is committed. These facilities
are subject to normal banking terms and conditions and do not materially
restrict the Company's activities.
Investing Activities
Net cash outflows from investing activities were $16.9 million in the first
quarter of 1994 and $16.1 million in the first quarter of 1993. Property
additions have decreased from $28.1 million in 1993 to $26.5 million in 1994.
The ratio of capital expenditures to depreciation has decreased slightly over
the same period from 82.6% to 82.0%. The Company targets a capital expenditure
to depreciation ratio of approximately 80% which it believes is adequate to
support current levels of operations. The majority of the capital expenditures
have been in the Oilfield segment where the largest single item is the
expenditure for rental tools and equipment to supplement the rental fleet.
Funds provided from operations and outstanding lines of credit are expected to
be more than adequate to meet future capital expenditure requirements.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Operating Activities
Net cash outflows from operating activities were $7.2 million in the first
quarter of 1994 compared to net cash inflows of $24.4 million in the first
quarter of 1993. The decrease of $31.6 million in 1994 was due primarily to
the build up of receivables and inventories in Oilfield Operations due to
increased activity in the U.S. and Latin America compared to 1993. These uses
of cash were offset to some degree by an increase in income before cumulative
effect of accounting changes.
ACCOUNTING STANDARDS
Postretirement Benefits Other Than Pensions
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The statement
requires accrual basis accounting for future postretirement benefits rather
than cash basis accounting. The Company adopted this statement effective
October 1, 1993.
The Company elected to immediately recognize the cumulative effect of the
change in accounting and recorded a charge of $107.1 million ($69.6 million net
of income tax benefit) in the first quarter of 1994.
Accounting for Income Taxes
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes". The statement requires an asset and liability approach for financial
accounting and reporting of income taxes. The Company adopted SFAS No. 109
effective October 1, 1993, without restatement of prior years and recorded a
credit to income of $25.5 million in the first quarter of 1994.
The Company established valuation reserves for certain of its deferred tax
assets which management deemed the realization was not likely to occur. In the
U.S. jurisdiction, the Company has fully reserved the credit portion of all its
foreign tax credit carryforwards based on a recent historical pattern of
expiring foreign tax credits and the lack of foreign sourced taxable income in
amounts sufficient to utilize the foreign tax credit carryforwards. The
Company has also reserved the operating loss carryforwards in certain non-U.S.
jurisdictions where its operations have decreased, currently ceased or the
Company has withdrawn entirely.
The Company has not established valuation reserves on its remaining
deferred tax assets. Management believes that sufficient sources of taxable
income will occur in the applicable future periods so that these tax assets
will be utilized. This judgement is based on recent profitable operations,
before unusual charges, in the appropriate jurisdictions.
The adoption of SFAS No. 109 has the practical effect of allowing the
Company to report its tax assets, net of valuation reserves, on the
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Consolidated Statement of Financial Position. Additionally, the statement
allows the netting of the noncurrent deferred tax assets and liabilities within
the same taxing jurisdiction. The Company has used this approach in reporting
its tax accounts in the Consolidated Statement of Financial Position at
December 31, 1993.
Postemployment Benefits
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits". The statement, like SFAS 106, requires accrual basis
accounting for such benefits as opposed to cash basis accounting. The Company
plans to adopt SFAS No. 112 in fiscal 1995 and immediately recognize the
cumulative effect of the change in accounting. The Company currently estimates
an accumulated postemployment benefit obligation at October 1, 1994 of
approximately $35.0 million.
Investments in Debt and Equity Securities
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", that will supersede SFAS No. 12
that required marketable equity securities be carried at lower of aggregate
cost or market. As it relates to the Company, SFAS No. 115 requires that
investments in debt and equity securities should be reported at fair value with
changes in the fair value recorded in a separate component of stockholders'
equity. The Company plans to adopt SFAS No. 115 in fiscal 1995 and currently
estimates it will not have a material impact on the consolidated financial
statements.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 of Notes to Consolidated Condensed Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on January 26, 1994,
to elect four Class III members of the Board of Directors, to approve the 1993
Stock Option Plan and the 1993 Employee Stock Bonus Plan, to consider a
proposal to endorse the Code of Conduct for Businesses Operating in South
Africa adopted by the South African Council of Churches, and to consider a
proposal to implement and/or increase activity on the MacBride Principles with
respect to the Company's operations in Northern Ireland.
The four Class III directors who were so elected are: Gordon M. Anderson,
Victor G. Beghini, Eunice M. Filter and James D. Woods. The directors whose
term of office continued after the Annual Meeting are: Lester M. Alberthal,
Jr., Jack S. Blanton, Harry M. Conger, Joe B. Foster, John F. Maher and Donald
C. Trauscht. Richard D. Kinder and Dana G. Mead were elected by the remaining
directors in their respective classes to fill the vacancies created by the
retirement of Richard M. Bressler and Kenneth L. Lay, due to the term
limitation contained in the Company's Bylaws. The number of affirmative votes
and the number of votes withheld for the four Class III directors so elected
were:
Number of Number of
Affirmative Votes
Votes Withheld
----------- ----------
Gordon M. Anderson 112,408,963 629,112
Victor G. Beghini 112,404,538 633,537
Eunice M. Filter 112,410,502 627,573
James D. Woods 112,383,318 654,757
The number of affirmative votes, the number of negative votes, the number
of abstentions and the number of broker non-votes with respect to the 1993
Stock Option Plan, the 1993 Employee Stock Bonus Plan and each of the
stockholder proposals were as follows:
Number of Number of
Affirmative Negative Broker
Votes Votes Abstentions Non-Votes
----------- ---------- ----------- ----------
Approval of 1993
Stock Option Plan 90,049,833 7,725,615 2,245,267 13,017,360
Approval of 1993 Employee
Stock Bonus Plan 87,634,286 10,196,420 2,190,009 13,017,360
Proposal regarding
South Africa 6,016,845 79,176,756 14,827,114 13,017,360
Proposal regarding
Northern Ireland 13,417,527 75,884,303 10,718,885 13,017,360
-19-
PART II. OTHER INFORMATION CONTINUED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAKER HUGHES INCORPORATED
(Registrant)
Date: February 14, 1994 By /s/FRANKLIN MYERS
------------------------------------
Vice President and General Counsel
Date: February 14, 1994 By /s/JAMES E. BRAUN
-------------------------------------
Controller
-21-