UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission
file number 19397
Baker Hughes Incorporated
(Exact name of registrant as specified in its charter)
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Delaware
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760207995
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(State or other jurisdiction
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(I.R.S. Employer Identification No.)
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of incorporation or organization)
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3900 Essex Lane, Suite 1200, Houston, Texas
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770275177
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(713) 4398600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $1 Par Value per Share
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New York Stock Exchange
SWX Swiss Exchange
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Indicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule
405 of the Securities Act. YES
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NO
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. YES
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NO
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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
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NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
SK is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10K
or any amendment to this Form 10K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a nonaccelerated filer.
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Large accelerated filer
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Accelerated filer
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Nonaccelerated filer
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of
the Exchange Act). YES
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NO
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The aggregate market value of the voting and nonvoting common stock held by nonaffiliates as
of the last business day of the registrants most recently completed second fiscal quarter (based
on the closing price on July 1, 2005 reported by the New York Stock Exchange) was approximately
$17,495,000,000.
As
of February 24, 2006, the registrant has outstanding 342,267,907 shares of common stock, $1 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrants 2005 Proxy Statement for the Annual Meeting of Stockholders to be
held April 27, 2006 are incorporated by reference into Part III of this Form 10K.
Baker Hughes Incorporated
INDEX
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PART I
ITEM 1. BUSINESS
Baker Hughes Incorporated (Baker Hughes, Company, we, our or us) is a Delaware
corporation engaged in the oilfield services industry. Baker Hughes is a major supplier of
wellbore-related products and technology services and systems to the worldwide oil and natural gas
industry, including products and services for drilling, formation evaluation, completion and
production of oil and natural gas wells. We conduct our operations through subsidiaries,
affiliates, ventures and alliances.
Baker Hughes was formed in April 1987 in connection with the combination of Baker
International Corporation and Hughes Tool Company. We acquired Western Atlas Inc. in a merger
completed on August 10, 1998.
As used herein, Baker Hughes, Company, we, our and us may refer to Baker Hughes
Incorporated or its subsidiaries. The use of these terms is not intended to connote any particular
corporate status or relationships.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), are made available free of charge
on our Internet website at www.bakerhughes.com as soon as reasonably practicable after these
reports have been electronically filed with, or furnished to, the Securities and Exchange
Commission (the SEC).
We have adopted a Business Code of Conduct to provide guidance to our directors, officers and
employees on matters of business conduct and ethics, including compliance standards and procedures.
We have also required our principal executive officer, principal financial officer and principal
accounting officer to sign a Code of Ethical Conduct Certification. Our Business Code of Conduct
and Code of Ethical Conduct Certifications are available on the Investor Relations section of our
website at www.bakerhughes.com. We intend to promptly disclose on our website information about
any waiver of these codes for our executive officers and directors. Our Corporate Governance
Guidelines and the charters of our Audit/Ethics Committee, Compensation Committee, Executive
Committee, Finance Committee and Governance Committee are also available on the Investor Relations
section of our website at www.bakerhughes.com. In addition, a copy of our Business Code of
Conduct, Code of Ethical Conduct Certification, Corporate Governance Guidelines and the charters of
the Committees referenced above are available in print at no cost to any stockholder who requests
them by writing or telephoning us at the following address or telephone number:
Baker Hughes Incorporated
3900 Essex Lane, Suite 1200
Houston, TX 77027
Attention: Investor Relations
Telephone: (713) 439-8039
Information contained on or connected to our website is not incorporated by reference into
this annual report on Form 10-K and should not be considered part of this report or any other
filing we make with the SEC.
We have organized our seven product-line focused divisions into two separate segments:
Drilling and Evaluation and Completion and Production. The segments align product lines based on
the types of products and services provided to our customers. We also own a 30% equity interest in
WesternGeco, a seismic venture with Schlumberger Limited (Schlumberger). Accordingly, we report
our results under three segments Drilling and Evaluation, Completion and Production and
WesternGeco:
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The Drilling and Evaluation segment consists of Baker Hughes Drilling Fluids (drilling
fluids), Hughes Christensen (oilfield drill bits), INTEQ
(conventional and rotary directional drilling,
measurement-while-drilling and logging-while-drilling) and Baker Atlas (wireline formation
evaluation and wireline completion services). The Drilling and Evaluation segment provides
products and services used to drill oil and natural gas wells.
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The Completion and Production segment consists of Baker Oil Tools (completion, workover
and fishing equipment), Baker Petrolite (oilfield specialty chemicals) and Centrilift
(electric submersible pumps and progressing cavity pumps). The Completion and Production
segment also includes our Production Optimization business unit (permanent downhole
monitoring). The Completion and Production segment provides equipment and services used
from the completion phase through the productive life of oil and natural gas wells.
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The WesternGeco segment consists of our equity interest in WesternGeco that provides
reservoir imaging, monitoring and development services.
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We have aggregated our divisions into these segments because they have similar economic
characteristics and because their long-term financial performance is affected by similar economic
conditions. They also operate in the same markets, which include all of the major oil and natural
gas producing regions of the world. The results of each segment are evaluated regularly by our
chief operating decision maker in deciding how to allocate resources and in assessing performance.
For additional industry segment information for the three years ended December 31, 2005, see
Note 13 of the Notes to Consolidated Financial Statements in Item 8 herein.
DRILLING AND EVALUATION SEGMENT
Baker Hughes Drilling Fluids
Baker Hughes Drilling Fluids is a major provider of drilling fluids (also called mud),
completion fluids (also called brines) and fluids environmental services. Drilling fluids are an
important component of the drilling process and are pumped from the surface through the drill
string, exiting nozzles in the drill bit and traveling back up the wellbore where the fluids are
recycled. This process cleans the bottom of the well by transporting the cuttings to the surface
while also cooling and lubricating the bit and drill string. Drilling fluids typically contain
barite or bentonite to give them weight, which enables the fluids to hold the wellbore open and
stabilize it. Additionally, the fluids control downhole pressures and seal porous sections of the
wellbore. To ensure maximum efficiency and wellbore stability, drilling fluids are often
customized by the wellsite engineer. For drilling through the reservoir itself, Baker Hughes
Drilling Fluids drill-in or completion fluids possess properties that minimize formation damage.
The fluids environmental services of Baker Hughes Drilling Fluids also provide equipment and
services to separate the drill cuttings from the drilling fluids and re-inject the processed
cuttings into a specially prepared well, or to transport and dispose of the cuttings by other
means.
Although technology is very important in the selection of drilling fluids for many drilling
programs, cost efficiency tends to drive customer purchasing decisions. Specific opportunities for
competitive differentiation include:
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improving drilling efficiency,
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minimizing formation damage, and
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handling and disposing of drilling fluids and cuttings in an environmentally safe manner.
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Baker Hughes Drilling Fluids primary competitors include M-I SWACO, Halliburton Company
(Halliburton), Newpark Resources, Inc. and various other competitors.
Key business drivers for Baker Hughes Drilling Fluids include the number of drilling rigs
operating (especially the number of drilling programs targeting deep formations), total footage
drilled, environmental regulations, as well as the current and expected future price of both oil
and natural gas.
Hughes Christensen
Hughes Christensen is a leading manufacturer and supplier of drill bits, primarily Tricone
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roller cone bits and fixed-cutter polycrystalline diamond compact (PDC) bits, to the worldwide
oil and natural gas industry. The primary objective of a drill bit is to drill a high quality
wellbore as efficiently as possible.
Tricone
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Bits.
Tricone
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drill bits employ either hardened steel teeth or tungsten carbide
insert cutting structures mounted on three rotating cones. These bits work by crushing and
shearing the formation rock as they are turned. Tricone
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drill bits have a wide application range.
PDC Bits.
PDC (also known as Diamond) bits use fixed position cutters that shear the
formation rock with a milling action as they are turned. In many softer and less variable
applications, PDC bits offer higher penetration rates and a longer life than Tricone
®
bits.
Advances in PDC technology have expanded the application of PDC bits into harder, more abrasive
formations. A rental market has developed for PDC bits in the Western Hemisphere as improvements
in bit life and bit repairs allow a bit to be used to drill multiple wells.
The main driver of customer purchasing decisions in drill bits is the value added, usually
measured in terms of savings in total operating costs per distance drilled. Specific opportunities
for competitive differentiation include:
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improving the rate of penetration,
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extending bit life, and
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selecting the optimal bit for each section to be drilled.
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Hughes Christensens primary competitors in the oil and natural gas drill bit market are Smith
International, Inc. (Smith), Grant Prideco, Inc., Halliburton and various other competitors.
Key business drivers for Hughes Christensen include the number of drilling rigs operating,
total footage drilled, drilling rig rental costs, as well as the current and expected future price
of both oil and natural gas.
INTEQ
INTEQ is a leading supplier of drilling and evaluation services, which include directional
drilling, measurement-while-drilling (MWD) and loggingwhiledrilling (LWD) services.
Directional Drilling
. Directional drilling services are used to guide a drill string along a
predetermined path to drill a wellbore to optimally recover hydrocarbons from the reservoir. These
services are used to accurately drill vertical wells, deviated or directional wells (which deviate
from vertical by a planned angle and direction), horizontal wells (which are sections of wells
drilled perpendicular or nearly perpendicular to vertical) and extended reach wells.
INTEQ is a leading supplier of both conventional and rotary based directional drilling
systems. Conventional directional drilling systems employ a downhole motor that turns the drill
bit independently of drill string rotation from the surface. Placed just above the bit, a
steerable motor assembly has a bend in its housing that is oriented to steer the wells course.
During the rotary mode, the entire drill string is rotated from the surface, negating the effect
of this bend and causing the bit to drill on a straight course. During the sliding mode, drill
string rotation is stopped and a mud motor (which converts hydraulic energy from the drilling
fluids being pumped through the drill string into rotational energy at the bit) allows the bit to
drill in the planned direction by orienting its angled housing, gradually guiding the wellbore
through an arc.
INTEQ was a pioneer and is a leader in the development and use of automated rotary steerable
technology. In rotary steerable environments, the entire drill string is turned from the surface
to supply energy to the bit. Unlike conventional systems, INTEQs AutoTrak
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rotary steerable
system changes the trajectory of the well using three pads that push against the wellbore from a
non-rotating sleeve and is controlled by a downhole guidance system.
INTEQs AutoTrak
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Xtreme
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system combines conventional mud motor technology with rotary
steerable technology to provide directional control and improved rate of penetration.
Measurement-While-Drilling.
Directional drilling systems need real-time measurements of the
location and orientation of the bottom hole assembly to operate effectively. INTEQs MWD systems
are downhole tools that provide this directional information, which is necessary to adjust the
drilling process and guide the wellbore to a specific target. The AutoTrak
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rotary steerable
system has these MWD systems built in, allowing the tool to automatically alter its course based on
a planned trajectory.
Logging-While-Drilling.
LWD is a variation of MWD in which the LWD tool gathers information
on the petrophysical properties of the formation through which the wellbore is being drilled. Many
LWD measurements are the same as those taken via wireline; however, taking them in real-time often
allows for greater accuracy, as measurements occur before any damage has been sustained by the
reservoir as a result of the drilling process. Real-time measurements also enable geo-steering
where geological markers identified by LWD tools are used to guide the bit and assure placement of
the wellbore in the optimal location.
In both MWD and LWD systems, surface communication with the tool is achieved through mud-pulse
telemetry, which uses pulse signals (pressure changes in the drilling fluid traveling through the
drill string) to communicate the operating conditions and location of the bottom hole assembly to
the surface. The information transmitted is used to maximize the efficiency of the drilling
process, update and refine the reservoir model and steer the well into the optimal location in the
reservoir.
As part of INTEQs mud logging services, engineers monitor the interaction between the
drilling fluid and the formation and perform laboratory analysis of drilling fluids and
examinations of the drill cuttings to detect the presence of hydrocarbons and identify the
different geological layers penetrated by the drill bit.
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The main drivers of customer purchasing decisions in these areas are the value added by
technology and the reliability and durability of the tools used in these operations. Specific
opportunities for competitive differentiation include:
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the sophistication and accuracy of measurements,
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the efficiency of the drilling process (measured in cost per foot drilled),
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the reliability of equipment,
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the optimal placement of the wellbore in the reservoir, and
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the quality of the wellbore.
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INTEQs primary competitors in drilling and evaluation services are Halliburton, Schlumberger,
Weatherford International Ltd. (Weatherford) and various other competitors.
Key business drivers for INTEQ include the number of drilling rigs operating, the total
footage drilled, the mix of conventional and rotary steerable systems used, as well as the current
and expected future price of both oil and natural gas.
Baker Atlas
Baker Atlas is a leading provider of formation evaluation and wireline completion and
production services for oil and natural gas wells.
Formation Evaluation.
Formation evaluation involves measuring and analyzing specific physical
properties of the rock (petrophysical properties) in the immediate vicinity of a wellbore to
determine an oil or natural gas reservoirs boundaries, volume of hydrocarbons and ability to
produce fluids to the surface. Electronic sensor instrumentation is run through the wellbore to
measure porosity and density (how much open space there is in the rock), permeability (how well
connected the spaces in the rock are) and resistivity (whether there is oil, natural gas or water
in the spaces). Imaging tools are run through the wellbore to record a picture of the formation
along the wells length similar to a core sample. Acoustic logs measure rock properties and help
correlate wireline data with previous seismic surveys. Magnetic resonance measurements
characterize the volume and type of fluids in the formation as well as providing a direct measure
of permeability. At the surface, measurements are recorded digitally and can be displayed on a
continuous graph, or well log, which shows how each parameter varies along the length of the
wellbore. Formation evaluation tools can also be used to record formation pressures and take
samples of formation fluids to be further evaluated on the surface.
Formation evaluation instrumentation can be run in the well in several ways and at different
times over the life of the well. The two most common methods of data collection are wireline
logging (performed by Baker Atlas) and LWD (performed by INTEQ). Wireline logging is conducted by
pulling or pushing instruments through the wellbore after it is drilled, while LWD instruments are
attached to the drill string and take measurements while the well is being drilled. Wireline
logging measurements can be made before the wells protective steel casing is set (open hole
logging) or after casing has been set (cased hole logging). Baker Atlas also offers geophysical
data interpretation services which help the operator interpret the petrophysical properties
measured by the logging instruments and make inferences about the formation, presence and quantity
of hydrocarbons present. This information is used to determine the next steps in drilling and
completing the well.
Wireline Completion and Production Services.
Wireline completion and production services
include using wireline instruments to evaluate well integrity, perform mechanical intervention and
perform cement evaluations. Wireline instruments can also be run in producing wells to perform
production logging. Baker Atlas (and Baker Oil Tools) also provide perforating services, which
involve puncturing a wells steel casing and cement sheath with explosive charges. This creates a
fracture in the formation and provides a path for hydrocarbons in the formation to enter the
wellbore and be produced.
Baker Atlas services allow oil and natural gas companies to define, manage and reduce their
exploration and production risk. As such, the main driver of customer purchasing decisions is the
value added by formation evaluation and wireline completion and production services. Specific
opportunities for competitive differentiation include:
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the efficiency of data acquisition,
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the sophistication and accuracy of measurements,
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the ability to interpret the information gathered to quantify the hydrocarbons producible from the formation, and
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the ability to differentiate services that can run exclusively or more efficiently on
wireline from services that can run on either wireline or drill pipe.
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Baker Atlas primary formation evaluation and wireline completion and perforating competitors
are Schlumberger, Weatherford, Halliburton and various other competitors.
Key business drivers for Baker Atlas include the number of drilling and workover rigs
operating, as well as the current and expected future price of both oil and natural gas.
COMPLETION AND PRODUCTION SEGMENT
Baker Oil Tools
Baker Oil Tools is a world leader in well completion and wellbore intervention solutions.
Well Completion.
The economic success of a well largely depends on how the well is completed.
A successful completion ensures and optimizes the efficient and safe production of oil and natural
gas to the surface. Baker Oil Tools completion systems are matched to the formation and reservoir
for optimum production and can employ a variety of products and services including liner hangers,
packers, flow control equipment, subsurface safety valves, sand control equipment and other
advanced completion technologies.
Liner hangers suspend a section of steel casing (also called a liner) inside the bottom of the
previous section of casing. The liner hangers expandable slips grip the inside of the casing and
support the weight of the liner below.
Packers seal the annular space between the steel production tubing and the casing. These
tools control the flow of fluids in the well and protect the casing above and below from reservoir
pressures and corrosive formation fluids.
Flow control equipment controls and adjusts the flow of downhole fluids. A common flow
control device is a sliding sleeve, which can be opened or closed to allow or limit production from
a particular portion of a reservoir. Flow control can be accomplished from the surface via
wireline or downhole via hydraulic or electric motor-based automated systems.
Subsurface safety valves shut off all flow of fluids to the surface in the event of an
emergency, thus saving the well and preventing pollution of the environment. These valves are
required in substantially all offshore wells.
Sand control equipment includes gravel pack tools, sand screens and fracturing fluids. Sand
control systems and pumping services are used in loosely consolidated formations to prevent the
production of formation sand with the hydrocarbons.
Advanced completion technologies include multilateral systems, intelligent well systems and
expandable metal technologies. Multilateral completion systems enable two or more zones to be
produced from a single well, using multiple horizontal branches. Intelligent Completions
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use
real-time, remotely operated downhole systems to control the flow of hydrocarbons from one or more
zones. Expandable metal technology involves the permanent downhole expansion of a variety of
tubular products used in drilling, completion and well remediation applications.
Wellbore Intervention.
Wellbore intervention products and services are designed to protect
producing assets. Intervention operations troubleshoot drilling problems and improve, maintain or
restore economical production from already-producing wells. In this area, Baker Oil Tools
offerings range from service tools and inflatable products to conventional and through-tubing
fishing systems, casing exits, wellbore cleaning and temporary abandonment.
Service tools function as surface-activated, downhole sealing and anchoring devices to isolate
a portion of the wellbore during repair or stimulation operations. Service tool applications range
from treating and cleaning to testing components from the wellhead to the perforations. Service
tools also refer to tools and systems that are used for temporary or permanent well abandonment.
Inflatable packers expand to set in pipe that is much larger than the outside diameter of the
packer itself, so it can run through a restriction in the well and then set in the larger diameter
below. Inflatable packers also can be set in open hole whereas conventional tools only can be
set inside casing. Through-tubing inflatables enable remedial operations in producing wells.
Significant cost savings result from lower rig requirements and the ability to intervene in the
well without having to remove the completion.
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Fishing tools and services are used to locate, dislodge and retrieve damaged or stuck pipe,
tools or other objects from inside the wellbore, often thousands of feet below the surface.
Wellbore cleaning systems remove post-drilling debris to help ensure trouble-free well testing
and completion and optimum production for the life of the well.
Casing exit systems are used to sidetrack new wells from existing ones, to provide a
cost-effective method of tapping previously unreachable reserves.
The main drivers of customer purchasing decisions in well completion and wellbore intervention
are superior wellsite service execution and value-adding technologies that improve production
rates, protect the reservoir from damage and reduce cost. Specific opportunities for competitive
differentiation include:
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engineering and manufacturing superior-quality products and providing solutions with a
proven ability to reduce well construction costs,
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enhancing production and ultimate recovery,
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minimizing risks, and
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providing reliable performance over the life of the well, particularly in harsh environments and for critical wells.
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Baker Oil Tools primary competitors in well completion are Halliburton, Schlumberger,
Weatherford and various other competitors. Its primary competitors in wellbore intervention are
Halliburton, Schlumberger, Weatherford, Smith and various other competitors.
Key business drivers for Baker Oil Tools include the number of drilling and workover rigs
operating, the relative complexity of the wells drilled and completed, as well as the current and
expected future price of both oil and natural gas.
Baker Petrolite
Baker Petrolite is a leading provider of specialty chemicals to the oil and gas industry. The
division also supplies specialty chemicals to a number of industries including refining, pipeline
transportation, petrochemical, agricultural and iron and steel manufacturing and provides
polymer-based products to a broad range of industrial and consumer markets. Through its Pipeline
Management Group (PMG), Baker Petrolite also offers a variety of products and services for the
pipeline transportation industry.
Oilfield Chemicals.
Baker Petrolite provides oilfield chemical programs for drilling, well
stimulation, production, pipeline transportation and maintenance programs. Its products provide
measurable increases in productivity, decreases in operating and maintenance cost and solutions to
environmental problems. Examples of specialty oilfield chemical programs include chemicals which
inhibit hydrate-, paraffin-, scale- and corrosion-formation and emulsion breakers.
Hydrate
inhibitors Natural gas hydrates are solid ice-like crystals that form in production
flowlines and tubing and cause shutdowns and the need for system maintenance. Subsea wells and
flowlines, particularly in deepwater environments, are especially susceptible to hydrates.
Paraffin inhibitors The liquid hydrocarbons produced from many oil and natural gas
reservoirs become unstable soon after leaving the formation. Changing conditions, including
decreases in temperature and pressure, can cause certain hydrocarbons in the produced fluids to
crystallize and deposit on the walls of the wells tubing, flow lines and surface equipment. These
deposits are commonly referred to as paraffin. Baker Petrolite offers solvents that remove the
deposits, as well as inhibitors that prevent new deposits from forming.
Scale inhibitors Unlike paraffin deposits that originate from organic material in the
produced hydrocarbons, scale deposits come from mineral-based contaminants in water that are
produced from the formation as the water undergoes changes in temperature or pressure. Similar to
paraffin, scale deposits can clog the production system. Treatments prevent and remove deposits in
production systems.
Corrosion inhibitors Another problem caused by water mixed with downhole hydrocarbons is
corrosion of the wells tubulars and other production equipment. Corrosion can also be caused by
dissolved hydrogen sulfide (H
2
S) gas, which reacts with the iron
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in tubulars, valves and other equipment, potentially causing failures and leaks.
Additionally, the reaction creates iron sulfide, which can impair treating systems and cause
blockages. Baker Petrolite offers a variety of corrosion inhibitors and H
2
S scavengers.
Emulsion breakers Water and oil typically do not mix, but water present in the reservoir and
co-produced with oil can often become emulsified, or mixed, causing problems for oil and natural
gas producers. Baker Petrolite offers emulsion breakers that allow the water component of the
emulsion to be separated from the oil.
Refining, Industrial and Other Specialty Chemicals.
For the refining industry, Baker
Petrolite offers various process and water treatment programs, as well as finished fuel additives.
Examples include programs to remove salt from crude oil and to control corrosion in processing
equipment and environmentally friendly cleaners that decontaminate refinery equipment and
petrochemical vessels at a lower cost than other methods. Baker Petrolite also provides chemical
technology solutions to other industrial markets throughout the world, including petrochemicals,
fuel additives, plastics, imaging, adhesives, steel and crop protection.
Pipeline Management.
Baker Petrolites Pipeline Management Group (PMG) offers a variety of
products and services for the pipeline transportation industry. To improve efficiency, Baker
Petrolite offers custom turnkey cleaning programs that combine chemical treatments with brush and
scraper tools that are pumped through the pipeline. Efficiency can also be improved by adding
polymer-based drag reduction agents to reduce the slowing effects of friction between the pipeline
walls and the fluids within, thus increasing throughput and pipeline capacity. Additional services
allow pipelines to operate more safely. These include inspection and internal corrosion assessment
technologies, which physically confirm the structural integrity of the pipeline. In addition,
PMGs flow-modeling capabilities can identify high-risk segments of a pipeline to ensure proper
mitigation programs are in place.
The main driver of customer purchasing decisions in specialty chemicals is superior
application of technology and service delivery. Specific opportunities for competitive
differentiation include:
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higher levels of production or throughput,
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lower maintenance costs and frequency,
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lower treatment costs and treatment intervals, and
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successful resolution of environmental issues.
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Baker Petrolites primary competitors are GE Water Technologies, Nalco Company, Champion
Technologies, Smith and various other competitors.
Key business drivers for Baker Petrolite include oil and natural gas production levels, the
number of producing wells, total liquids production, and the current and expected future price of
both oil and natural gas.
Centrilift
Centrilift is a leading manufacturer and supplier of electrical submersible pump systems
(ESPs) and progressing cavity pump systems (PCPs).
Electrical Submersible Pump Systems.
ESPs lift high quantities of oil or oil and water from
wells that do not flow under their own pressure. These artificial lift systems consist of a
centrifugal pump and electric motor installed in the wellbore, armored electric cabling to provide
power to the downhole motor and a variable speed controller at the surface. Centrilift designs,
manufactures, markets and installs all the components of ESP systems and also offers modeling
software to size ESPs and simulate operating performance. ESPs may be used in both onshore or
offshore wells. The range of appropriate application of ESP systems is expanding as technology and
reliability enhancements have improved ESP system performance in harsher environments and marginal
reservoirs.
Progressing Cavity Pump Systems.
PCPs are a form of artificial lift comprised of a downhole
progressing cavity pump powered by either a downhole electric motor or a rod turned by a motor on
the surface. PCP systems are preferred when the fluid to be lifted is viscous or when the volume
is significantly less than could be economically lifted with an ESP system.
The main drivers of a customer purchasing decision in artificial lift include the depth of the
well, the volume of the fluid, the physical and chemical properties of the fluid as well as the
capital and operating cost of the system. Specific opportunities for competitive differentiation
include:
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the ability to lift fluids of differing physical properties and chemical compositions,
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system reliability and run life,
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the ability of the system to optimize production,
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operating efficiency, and
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service delivery.
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Centrilifts primary competitors in the ESP market are Schlumberger, John Wood Group PLC (ESP
Inc.) and various other competitors. In the PCP market the primary competitors are Weatherford,
Robbins & Myers, Inc., Kudu Industries, Inc. and various other competitors.
Key business drivers for Centrilift include oil production levels, as well as the current and
expected future price of oil, the volume of water produced in mature basins and gas dewatering in
coal bed methane and other gas wells.
Production Optimization
The Production Optimization business unit is a leading provider of permanent monitoring
systems and chemical automation systems.
Permanent Monitoring Systems.
Permanent downhole gauges are used in oil and gas wells to
measure temperature, pressure, flow and other parameters in order to monitor well production as
well as to confirm the integrity of the completion and production equipment in the well.
Production Optimization is a leading provider of electronic gauges including the engineering,
application and field services necessary to complete an installation of a permanent monitoring
system. In addition, they provide chemical injection line installation and services for treating
wells for corrosion, paraffin, scale and other well performance problems. They also provide fiber
optic based permanent downhole gauge technology for measuring pressure, temperature and distributed
temperature. The benefits of fiber optic sensing include reliability, high temperature properties
and the ability for distributed readings.
Chemical Automation Systems.
Chemical automation systems remotely monitor chemical tank
levels that are resident in producing field locations for well treatment or production stimulation
as well as continuously monitor and control chemicals being injected in individual wells. By using
these systems, a producer can insure proper chemical injection through real time monitoring and can
also remotely modify the injection parameters to insure optimized production.
The main drivers of customer purchasing decisions for both permanent monitoring and chemical
automation include application engineering expertise, ability to integrate a complete system,
product reliability, functionality and local field support. Specific opportunities for competitive
differentiation include:
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the ability to provide application engineering and economic return analysis,
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innovative products,
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gauge measurement accuracy,
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product life and performance, and
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installation and service capabilities.
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Production Optimizations primary competitors are Schlumberger, Halliburton and Weatherford.
Key business drivers for Production Optimization include the level of oil and gas prices,
total daily oil and gas production and capital spending for critical wells (offshore, sub-sea, high
production on-shore and remotely located on-shore).
WesternGeco
WesternGeco is a seismic venture in which we own 30% and Schlumberger owns 70%. WesternGeco
provides comprehensive worldwide reservoir imaging, monitoring and development services. The
venture provides these services through its extensive
9
number of
seismic crews and data processing centers, as well as through its
ownership of one of
the worlds largest multiclient seismic libraries. Services range from 3D and time-lapse (4D)
seismic surveys to multicomponent surveys for delineating prospects and reservoir management.
WesternGeco is positioned to meet the full range of customer needs in land, marine and
shallow-water transition-zone areas.
Seismic solutions include proprietary Q-Technology* for enhanced reservoir description,
characterization and monitoring throughout the life of the field from exploration through
enhanced recovery.
WesternGecos Omega* Seismic Processing System encompasses one of the industrys most advanced
and comprehensive suites of algorithms and runs on multiplatform technology, ensuring timely
turnaround for even the most complex processing projects.
WesternGecos major competitors are Compagnie Generale de Geophysique, Veritas DGC, Inc. and
Petroleum Geo-Services ASA.
For additional information related to WesternGeco, see the Related Party Transactions
section in Item 7 and Note 8 of the Notes to Consolidated Financial Statements in Item 8, both
contained herein.
* Mark of WesternGeco
MARKETING, COMPETITION AND ECONOMIC CONDITIONS
We market our products and services on a product line basis primarily through our own sales
organizations, although certain of our products and services are marketed through supply stores,
independent distributors, agents, licensees or sales representatives. We ordinarily provide
technical and advisory services to assist in our customers use of our products and services.
Stock points and service centers for our products and services are located in areas of drilling and
production activity throughout the world.
Our products and services are sold in highly competitive markets, and revenues and earnings
can be affected by changes in competitive prices, fluctuations in the level of drilling, workover
and completion activity in major markets, general economic conditions, foreign currency exchange
fluctuations and governmental regulations. We compete with the oil and natural gas industrys
largest diversified oilfield services providers, as well as many small companies. We believe that
the principal competitive factors in our industries are product and service quality, availability
and reliability, health, safety and environmental standards, technical proficiency and price.
Further information is contained in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
INTERNATIONAL OPERATIONS
We operate in over 90 countries worldwide, and our operations are subject to the risks
inherent in doing business in multiple countries with various laws and differing political
environments. These risks include the risks identified in Item 1A. Risk Factors. Although it is
impossible to predict the likelihood of such occurrences or their effect on us, division and
corporate management routinely evaluate these risks and take appropriate actions to mitigate the
risks where possible. However, there can be no assurance that an occurrence of any one or more of
these events would not have a material adverse effect on our operations.
Further information is contained in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
RESEARCH AND DEVELOPMENT; PATENTS
We are engaged in research and development activities directed primarily toward the
improvement of existing products and services, the design of specialized products to meet specific
customer needs and the development of new products, processes and services. For information
regarding the amounts of research and development expense in each of the three years in the period
ended December 31, 2005, see Note 17 of the Notes to Consolidated Financial Statements in Item 8
herein.
We have followed a policy of seeking patent and trademark protection both inside and outside
the United States for products and methods that appear to have commercial significance. We believe
our patents and trademarks to be adequate for the conduct of our business, and aggressively pursue
protection of our patents against patent infringement worldwide. Although, patent and trademark
10
protection is important to our business and future prospects, we consider the reliability and
quality of our products and the technical skills of our personnel to be more important. No single
patent or trademark is considered to be critical to our business.
RAW MATERIALS
We purchase various raw materials and component parts for use in manufacturing our products.
The principal materials we purchase are steel alloys (including chromium and nickel), titanium,
beryllium, copper, tungsten carbide, synthetic and natural diamonds, printed circuit boards and
other electronic components and hydrocarbon-based chemical feed stocks. These materials are
generally available from multiple sources and could be subject to rising costs. We have not
experienced significant shortages of these materials and normally do not carry inventories of such
materials in excess of those reasonably required to meet our production schedules. We do not
expect significant interruptions in supply, but there can be no assurance that there will be no
price or supply issues over the long term.
OTHER DEVELOPMENTS
In the fourth quarter of 2005, our management initiated and our Board of Directors approved a
plan to sell the Baker Supply Products Division (SPD), a product line group within the Baker Oil
Tools division of the Completion and Production segment. SPD distributes basic supplies, products
and small tools to the drilling industry. In January 2006, we signed a nonbinding letter of
intent for the sale of SPD. The sale is expected to close in the first quarter of 2006. We have
reflected SPD as a discontinued operation in the consolidated financial statements. SPD had
revenues of $32.5 million for the year ended December 31, 2005. This transaction is subject to the
negotiation and execution of a definitive sale agreement, as well as, various conditions, including
satisfactory due diligence review of SPDs business. There can be no assurance that the
transaction will be consummated.
In December 2005, we purchased Zeroth Technology Limited (Zertech), a developer of an
expandable metal sealing element, for $20.3 million in cash, which is included in the Baker Oil
Tools division of the Completion and Production segment. As a result of the acquisition and based
on preliminary estimates of fair values, we recorded approximately $19.5 million of goodwill and
intangible assets, which may be revised based on the final purchase price allocations. The
purchase price was preliminarily allocated based on the fair values of the assets acquired and
liabilities assumed in the acquisition. Under the terms of the Purchase Agreement, the former
owners of Zertech are entitled to additional purchase price consideration of up to approximately
$14.0 million based on the performance of the business during 2006, 2007 and 2008.
In October 2005, we finalized the purchase of the remaining 50% interest in QuantX Wellbore
Instrumentation venture (QuantX), a venture engaged in permanent inwell monitoring, for $27.2
million, subject to final purchase price adjustments. QuantX is included in the Production
Optimization business unit of the Completion and Production segment. Based on our carrying value
of our existing investment in QuantX of $35.5 million and the additional consideration of $27.2
million, we recorded approximately $28.4 million of goodwill and $19.6 million of intangibles. We
also assigned $5.1 million to inprocess research and development that was written off at the date
of acquisition. The purchase price was allocated based on the fair value of the assets acquired
and liabilities assumed of QuantX. The fair values were determined using a discounted cash flow
approach.
In January 2006, we acquired Nova Technology Corporation (Nova) for approximately $67.0
million in cash and assumed debt. Nova is a leading supplier of permanent monitoring, chemical
injection systems, and multiline services for deepwater and subsea oil and gas well applications
and will be included in the Production Optimization business unit of the Completion and Production
segment.
EMPLOYEES
On December 31, 2005, we had approximately 29,100 employees, as compared with approximately
26,900 employees on December 31, 2004. Approximately 2,590 of these employees are represented
under collective bargaining agreements or similartype labor arrangements, of which the majority
are outside the U.S. Based upon the geographic diversification of these employees, we believe any
risk of loss from employee strikes or other collective actions would not be material to the conduct
of our operations taken as a whole. We believe that our relations with our employees are good.
11
EXECUTIVE OFFICERS
The following table shows, as of February 28, 2006, the name of each of our executive
officers, together with his age and all offices presently held.
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Name
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Age
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Chad C. Deaton
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53
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Chairman of the Board and Chief Executive
Officer of the Company since 2004.
President and Chief Executive Officer of
Hanover Compressor Company from 2002 to
2004. Senior Advisor to Schlumberger
Oilfield Services from 1999 to 2001.
Executive Vice President of Schlumberger
from 1998 to 1999. Employed by the Company
in 2004.
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James R. Clark
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55
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President and Chief Operating Officer of
the Company since February 2004. Vice
President, Marketing and Technology of the
Company from 2003 to 2004. Vice President
of the Company and President of Baker
Petrolite Corporation from 2001 to 2003.
President and Chief Executive Officer of
Consolidated Equipment Companies, Inc. from
2000 to 2001 and President of SperrySun
from 1996 to 1999. Employed by the Company
in 2001.
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G. Stephen Finley
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55
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Senior Vice President Finance and
Administration and Chief Financial Officer
of the Company since 1999. Senior Vice
President and Chief Administrative Officer
of the Company from 1995 to 1999,
Controller from 1987 to 1993 and Vice
President from 1990 to 1995. Chief
Financial Officer of Baker Hughes Oilfield
Operations from 1993 to 1995. Employed by
the Company in 1982. Mr. Finley has
announced he will retire on March 31, 2006.
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Alan R. Crain, Jr.
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54
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Vice President and General Counsel of the
Company since October 2000. Executive Vice
President, General Counsel and Secretary of
Crown, Cork & Seal Company, Inc. from 1999
to 2000. Vice President and General
Counsel from 1996 to 1999, and Assistant
General Counsel from 1988 to 1996, of Union
Texas Petroleum Holdings, Inc. Employed by
the Company in 2000.
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Greg Nakanishi
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54
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Vice President, Human Resources of the
Company since November 2000. President of
GN Resources from 1989 to 2000. Employed
by the Company in 2000.
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David H. Barr
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56
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Group President of Drilling and Evaluation
since February 2005 and Vice President of
the Company since 2000. President of Baker
Atlas from 2000 to 2005. Vice President,
Supply Chain Management, of Cooper Cameron
from 1999 to 2000. Mr. Barr also held the
following positions with the Company: Vice
President, Business Process Development,
from 1997 to 1998 and the following
positions with Hughes Tool Company/Hughes
Christensen: Vice President, Production
and Technology, from 1994 to 1997; Vice
President, Diamond Products, from 1993 to
1994; Vice President, Eastern Hemisphere
Operations, from 1990 to 1993 and Vice
President, North American Operations, from
1988 to 1990. Employed by the Company in
1972.
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Douglas J. Wall
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53
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Group President of Completion and
Production since February 2005 and Vice
President of the Company since 1997.
President of Baker Oil Tools from 2003 to
2005 and President of Hughes Christensen
from 1997 to 2003. President and Chief
Executive Officer of Western Rock Bit
Company Limited, Hughes Christensens
former distributor in Canada, from 1991 to
1997. General Manager of Century Valve
Company from 1989 to 1991 and Vice
President, Contracts and Marketing, of
Adeco Drilling & Engineering from 1980 to
1989. Employed by the Company in 1997.
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Christopher P. Beaver
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48
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Vice President of the Company and President
of Baker Oil Tools since February 2005.
Vice President of Finance for Baker
Petrolite from 2002 to 2005; Director of
Finance and Controller at INTEQ from 1999
to 2002; Controller at Hughes Christensen
from 1994 to 1999. Various accounting and
finance positions at Hughes Christensen in
the Eastern Hemisphere from 1985 to 1994.
Employed by the Company in 1985.
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Paul S. Butero
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49
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Vice President of the Company and President
of Hughes Christensen since 2005. Vice
President, Marketing, of Hughes Christensen
from 2001 to 2005 and as Region Manager for
various Hughes
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Name
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Age
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Christensen areas (both in the United States and the Eastern Hemisphere)
from 1989 to 2001. Employed by the Company in 1981.
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Martin S. Craighead
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46
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Vice President of the Company since 2005 and
President of INTEQ since August 2005. Served
as President of Baker Atlas from February
2005 to August 2005. Vice President of
Worldwide Operations for Baker Atlas from
2003 to 2005 and Vice President, Marketing
and Business Development for Baker Atlas from
2001 to 2003; Region Manager for Baker Atlas
in Latin America and Asia and Region Manager
for E&P Solutions from 1995 to 2001.
Research Engineer for BJ Services Company
from 1982 to 1986. Employed by the Company
in 1986.
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William P. Faubel
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50
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Vice President of the Company since 2001 and
President of Baker Atlas since 2006. Served
as President of Centrilift from 2001 to 2006.
Vice President, Marketing, of Hughes
Christensen from 1994 to 2001 and as Region
Manager for various Hughes Christensen areas
(both domestic and international) from 1986
to 1994. Employed by the Company in 1977.
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Alan J. Keifer
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51
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Vice President and Controller of the Company
since July 1999. Western Hemisphere
Controller of Baker Oil Tools from 1997 to
1999 and Director of Corporate Audit for the
Company from 1990 to 1996. Employed by the
Company in 1990.
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Jay G. Martin
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54
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Vice President, Chief Compliance Officer and
Senior Deputy General Counsel since July
2004. Shareholder at Winstead Sechrest &
Minick P.C. from 2001 to July 2004. Partner,
Phelps Dunbar from 2000 to 2001 and Partner,
Andrews & Kurth from 1996 to 2000. Employed
by the Company in 2004.
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John A. ODonnell
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58
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Vice President of the Company since 1998 and
President of Baker Petrolite Corporation
since May 2005. President of Baker Hughes
Drilling Fluids from 2004 to 2005. Vice
President, Business Process Development of
the Company from 1998 to 2002; Vice
President, Manufacturing, of Baker Oil Tools
from 1990 to 1998 and Plant Manager of Hughes
Tool Company from 1988 to 1990. Employed by
the Company in 1975.
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Richard L. Williams
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50
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Vice President of the Company and President
of Baker Hughes Drilling Fluids since May
2005. Vice President, Eastern Hemisphere
Operations, Baker Oil Tools from March 2005
to May 2005. Worldwide Operations Vice
President, INTEQ from 2004 to 2005. Vice
President Eastern Hemisphere, INTEQ from 2003
to 2004. Vice President Western Hemisphere,
INTEQ from 2001 to 2003. Employed by the
Company since 1975.
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Charles S. Wolley
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51
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Vice President of the Company and President
of Centrilift since January 2006. Vice
President of Manufacturing and Technology,
Hughes Christensen from 2004 to 2006. Senior
Vice President of Supply Chain Operations,
Dresser Flow Solutions 2003. President,
Dresser Measurement and Control from 2002 to
2003 and Senior Vice President from 2001 to
2002. Chief Executive Officer Van Leeuwen
Pipe and Tube Corp. from 1999 to 2001.
Employed by the Company since 2004.
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There are no family relationships among our executive officers.
ENVIRONMENTAL MATTERS
We are committed to the health and safety of people, protection of the environment and
compliance with laws, regulations and our policies. Our past and present operations include
activities that are subject to domestic (including U.S. federal, state and local) and international
regulations with regard to air and water quality and other environmental matters. We believe we
are in substantial compliance with these regulations. Regulation in this area continues to evolve,
and changes in standards of enforcement of existing regulations, as well as the enactment and
enforcement of new legislation, may require us and our customers to modify, supplement or replace
equipment or facilities or to change or discontinue present methods of operation.
We are involved in voluntary remediation projects at some of our present and former
manufacturing facilities, the majority of which relate to properties obtained in acquisitions or to
sites no longer actively used in operations. On rare occasions, remediation activities are
conducted as specified by a government agencyissued consent decree or agreed order. Remediation
costs are accrued based on estimates of probable exposure using currently available facts, existing
environmental permits, technology and presently enacted laws and regulations. For sites where we
are primarily responsible for the remediation, our cost estimates are developed based
13
on internal evaluations and are not discounted. Such accruals are recorded when it is
probable that we will be obligated to pay amounts for environmental site evaluation, remediation or
related activities, and such amounts can be reasonably estimated. If the obligation can only be
estimated within a range, we accrue the minimum amount in the range. Such accruals are recorded
even if significant uncertainties exist over the ultimate cost of the remediation. Ongoing
environmental compliance costs, such as obtaining environmental permits, installation of pollution
control equipment and waste disposal, are expensed as incurred.
During the year ended December 31, 2005, we spent approximately $32.1 million to comply with
domestic and international standards regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment (collectively, Environmental
Regulations). This cost includes the total spent on remediation projects at current or former
sites, Superfund projects and environmental compliance activities, exclusive of capital. In 2006,
we expect to spend approximately $34.2 million to comply with Environmental Regulations. Based
upon current information, we believe that our compliance with Environmental Regulations will not
have a material adverse effect upon our capital expenditures, earnings or competitive position
because we have either established adequate reserves or our cost for that compliance is not
expected to be material to our consolidated financial statements.
During the year ended December 31, 2005, we incurred approximately $3.8 million in capital
expenditures for environmental control equipment, and we estimate we will incur approximately $6.3
million during 2006. We believe these capital expenditures for environmental control equipment
will not have a material adverse effect upon our consolidated financial statements.
The Comprehensive Environmental Response, Compensation and Liability Act (known as Superfund
or CERCLA) imposes liability for the release of a hazardous substance into the environment.
Superfund liability is imposed without regard to fault and even if the waste disposal was in
compliance with laws and regulations. We have been identified as a potentially responsible party
(PRP) in remedial activities related to various Superfund sites, and we accrue our share of the
estimated remediation costs of the site based on the ratio of the estimated volume of waste we
contributed to the site to the total volume of waste disposed at the site. With the joint and
several liability imposed under Superfund, a PRP may be required to pay more than its proportional
share of such costs.
We have been identified as a PRP at various Superfund sites discussed below. The United
States Environmental Protection Agency (the EPA) and appropriate state agencies supervise
investigative and cleanup activities at these sites. For the year ended December 31, 2005, we paid
$0.5 million in superfund costs and have accrued an additional $4.9 million related to these sites.
Payments made in 2005 are in addition to amounts previously paid in settlements, cash calls or
other superfund costs, and these ongoing contributions reduce our financial liability for the total
site cleanup costs shown below. When used in the descriptions of the sites that follow, the word
de minimis
refers to the smallest PRPs, whose contribution rate is usually less than 1%.
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(a)
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Baker Petrolite, Hughes Christensen, an INTEQ predecessor entity, Baker Oil Tools and a
former subsidiary were named in April 1984 as PRPs at the Sheridan Superfund Site located in
Hempstead, Texas. The Texas Commission on Environmental Quality (TCEQ) is overseeing the
remedial work at this site. The Sheridan Site Trust was formed to manage the site
remediation and we participate as a member. Based on the use of new remedial technologies,
the cost projections remain at $6.0 million for full remediation, of which $5.5 million has
been collected. Our additional contribution is approximately 1.8% of the remaining costs.
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(b)
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In 1997, we entered into a settlement agreement with Prudential Insurance Company
(Prudential) regarding cost recovery for the San Fernando Valley Glendale Superfund.
One of our predecessors operated on the Prudential property in Glendale. After Prudential
was identified as a PRP for the Glendale Superfund, they instituted legal proceedings
against us for cost recovery under CERCLA. Without any admission of liability, we agreed to
pay 40% of Prudentials costs attributed to cleanup at the site, limited to a cap of $0.3
million. A pump and treat system was selected as the cleanup remedy at Glendale, and it is
expected to operate until 2012. We continue to contribute our portion of ongoing
assessments to fund this remediation strategy.
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(c)
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In 1999, the EPA named a Hughes Christensen predecessor as a PRP at the Li Tungsten Site
in Glen Cove, New York. We contributed a
de minimis
amount of hazardous substances to the
site. In December 2004, the EPA issued us a special
de minimis
settlement offer based on
the fact that our contribution was limited to metals contamination, not radiological
contamination, at the site. We expect to settle this matter with the EPA for less than $0.1
million.
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(d)
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In 1999, Baker Oil Tools, Baker Petrolite and predecessor entities of Baker Petrolite
were named as PRPs by the State of Californias Department of Toxic Substances Control for
the Gibson site in Bakersfield, California. The most recent cost estimate for remediation
of the site is $17.9 million. The combined volume that we contributed to the site is
estimated to be less than 0.5% for liquids and 0.25% for solids.
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(e)
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In 2001, a Hughes Christensen predecessor, Baker Oil Tools, INTEQ and one of our former
subsidiaries were named as PRPs in the Force Road State Superfund Site located in Brazoria
County, Texas. The TCEQ is overseeing the investigation and remediation at the Force Road
State Site. We participate as a member of the steering and technical committees to
effectively manage the project because our volumetric contribution is currently estimated at
approximately 76%. The onsite investigation was completed in late 2005, while the offsite
investigation is pending access to the adjacent property. The estimate of site remediation
costs used for initial settlement purposes was $17.7 million; however, we anticipate that a
more accurate calculation of site remediation costs will be possible once the offsite
investigation is complete. We believe that after further investigation at the site,
negotiation of additional early settlements with other PRPs, future cost recovery actions
against recalcitrant parties and other factors, our ultimate share of responsibility for
cleanup costs at the site will be less than initial estimates.
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(f)
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In 2002, Baker Petrolite predecessors, Hughes Christensen predecessors and two of our
former subsidiaries were identified as PRPs for the Malone site located on Campbell Bayou
Road in Texas City, Texas. The EPA oversees the investigation and remediation of the Malone
site and has engaged in emergency removal actions. The investigation is nearly complete and
in 2006, remedial options are expected to be developed and submitted to the EPA for
evaluation. The estimate for cleanup at the Malone site is $82 million with our
contribution estimated at approximately 1.7%. The current owners of the site have filed a
lawsuit against the PRPs seeking recovery of certain alleged damages, which may affect the
ultimate resolution of this superfund.
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(g)
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In 2003, Western Atlas International, Inc., its predecessor companies and Baker Hughes
Oilfield Operations, Inc. were identified as
de minimis
PRPs in the Gulf Nuclear Superfund
site in Odessa, Texas. The EPA conducted an emergency removal at the site in 2000. Total
investigation and cleanup costs were estimated by the EPA to be approximately $24 million.
The
de minimis
settlement proposal has been negotiated and should be finalized in 2006. Our
settlement cost is expected to be less than $0.1 million.
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(h)
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In 2003, we were identified as a
de minimis
PRP by the EPA for the Operating Industries,
Inc. Superfund site in Monterrey Park, California. A settlement offer to all remaining
de
minimis
parties has been repeatedly delayed, but is expected in mid 2006. The EPA and
Steering Committee estimate cleanup costs in excess of $650 million. As of January 2006,
there was insufficient information to estimate our allocation or potential contribution to
these cleanup costs.
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(i)
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In 2003, Baker Petrolite was notified by the EPA of their potential involvement at the
Cooper Drum Superfund site located in South Gate, California. The company responded to an
additional inquiry from the EPA in 2005. At this time there is no estimate available for
comprehensive cleanup costs or our allocation and, accordingly, the extent of our financial
liability at the site is unknown.
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(j)
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In 2004, we were notified that Baker Petrolite was included in the Container Recycling
Superfund site in Kansas City, Kansas. We are a PRP at the site, which was a former drum
recycler used by a predecessor company to Baker Petrolite. Site remediation has been
completed and the EPA has extended a settlement offer of $1.3 million to the PRP group with
our allocation calculated at 4% of these costs. Baker Petrolite has signed the settlement
offer.
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(k)
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In 2005, Centrilift was notified by the TCEQ of their potential involvement in the San Angelo
Superfund site in Tom Green County, Texas. Polychlorinated biphenyls (PCBs) are present at
the site as a result of the operations of the former San Angelo Electric Services Company
(SESCO), which manufactured, repaired and serviced transformers. SESCO declared bankruptcy
in mid 2003, after which the TCEQ conducted emergency removal actions in response to reports
of contamination onsite and in the adjacent residential area. A
de minimis
settlement offer
has been received, and our cost contribution for the remediation of soil and groundwater is
less than $0.1 million.
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In addition to the sites mentioned above, there are four Superfund sites where we have ongoing
obligations. The remedial work at most of these sites has been completed and remaining operations
are limited to groundwater recovery and/or monitoring. The monitoring phase can continue for up to
30 years. Our aggregate cost for these sites is estimated to be approximately $0.1 million over
this period of time.
While PRPs in Superfund actions have joint and several liability for all costs of remediation,
it is not possible at this time to quantify our ultimate exposure because some of the projects are
either in the investigative or early remediation stage. Based upon current information, we do not
believe that probable or reasonably possible expenditures in connection with the sites described
above are likely to have a material adverse effect on our consolidated financial statements because
we have established adequate reserves to cover the estimate we presently believe will be our
ultimate liability in the matter. Further, other PRPs involved in the sites have
15
substantial assets and may reasonably be expected to pay their share of the cost of
remediation, and, in some circumstances, we have insurance coverage or contractual indemnities from
third parties to cover a portion of or the ultimate liability.
We are subject to various other governmental proceedings and regulations, including foreign
regulations, relating to environmental matters, but we do not believe that any of these matters is
likely to have a material adverse effect on our consolidated financial statements. We continue to
focus on reducing future environmental liabilities by maintaining appropriate company standards and
improving our assurance programs. See Note 16 of the Notes to Consolidated Financial Statements in
Item 8 herein for further discussion of environmental matters.
Environmental Matters contains forwardlooking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act (each a
ForwardLooking Statement). The words will, believe, to be, expect, estimate and
similar expressions are intended to identify forwardlooking statements. Our expectations
regarding our compliance with Environmental Regulations and our expenditures to comply with
Environmental Regulations, including (without limitation) our capital expenditures for
environmental control equipment, are only our forecasts regarding these matters. These forecasts
may be substantially different from actual results, which may be affected by the following factors:
changes in Environmental Regulations; a material change in our allocation or other unexpected,
adverse outcomes with respect to sites where we have been named as a PRP, including (without
limitation) the Superfund sites described above; the discovery of new sites of which we are not
aware and where additional expenditures may be required to comply with Environmental Regulations;
an unexpected discharge of hazardous materials in the course of our business or operations; a
catastrophic event causing discharges into the environment; or an acquisition of one or more new
businesses.
ITEM 1A. RISK FACTORS
An investment in our common stock involves various risks. When considering an investment in
our company, you should consider carefully all of the risk factors described below, as well as
other information included and incorporated by reference in this report. These risks and
uncertainties are not the only ones facing us and there may be additional matters that we are
unaware of or that we currently consider immaterial. All of these could adversely affect our
business, financial condition, results of operations and cash flows and, thus, the value of an
investment in our company.
Risk Factors Related to the Worldwide Oil and Natural Gas Industry
Our business is focused on providing products and services to the worldwide oil and natural
gas industry; therefore, our risk factors include those factors that impact, either positively or
negatively, the markets for oil and natural gas. Expenditures by our customers for exploration,
development and production of oil and natural gas are based on their expectations of future
hydrocarbon demand, the risks associated with developing the reserves and the future value of the
hydrocarbon reserves. Their evaluation of the future value is based, in part, on their
expectations for global demand, global supply and other factors that influence oil and natural gas
prices. The key risk factors currently influencing the worldwide oil and natural gas markets are
discussed below.
Demand for oil and natural gas is subject to factors beyond our control, which may adversely affect
our operating results.
Growth in worldwide demand for oil and natural gas, as well as the demand for our services, is
highly correlated with global economic growth and in particular by the economic growth of
countries such as the U.S. and China, who are significant users of oil and natural gas. Increases
in global economic activity, particularly in China and developing Asia, create more demand for oil
and natural gas and higher oil and natural gas prices. A slowing of global economic growth, and in
particular in the U.S. or China, will likely reduce demand for oil and natural gas, increase excess
productive capacity and result in lower prices and adversely impact the demand for our services.
Volatility of oil and natural gas prices can adversely affect demand for our products and services.
Volatility in oil and natural gas prices can also impact our customers activity levels and
spending for our products and services. While current energy prices are important contributors to
positive cash flow for our customers, expectations about future prices and price volatility are
generally more important for determining future spending levels. While higher oil and natural gas
prices generally lead to increased spending by our customers, sustained high energy prices can be
an impediment to economic growth, and can therefore negatively impact spending by our customers.
Our customers also take into account the volatility of energy prices and other risk factors by
requiring higher returns for individual projects if there is higher perceived risk. Any of these
factors could affect the demand for oil and natural gas and could have a material adverse effect on
our results of operations.
16
Supply of oil and natural gas is subject to factors beyond our control, which may adversely affect
our operating results.
Productive capacity for oil and natural gas is dependent on our customers decisions to
develop and produce oil and natural gas reserves. The ability to produce oil and natural gas can
be affected by the number and productivity of new wells drilled and completed, as well as the rate
of production and resulting depletion of existing wells. Advanced technologies, such as horizontal
drilling, improve total recovery but also result in a more rapid production decline.
Access to prospects and capital are also important to our customers. Access to prospects may
be limited because host governments do not allow access to the reserves or because another oil and
natural gas exploration company owns the rights to develop the prospect. Access to capital is
dependent on our customers ability to access the funds necessary to develop economically
attractive projects based on their expectations of future energy prices, required investments and
resulting returns. Government regulations and the costs incurred by oil and natural gas
exploration companies to conform to and comply with government regulations, may also limit the
quantity of oil and natural gas that may be economically produced.
Supply can be interrupted by a number of factors including political instability, civil
unrest, labor issues, terrorist attacks, war or military activity. Key oil producing countries
which could be subject to supply interruptions include, but are not limited to, Saudi Arabia, Iran,
Iraq and other Middle Eastern countries, Nigeria, Norway, Russia and Venezuela. The impact of
supply and demand disruptions on oil and natural gas prices and oil and natural gas price
volatility is tempered by the size and expected duration of the disruption relative to the excess
productive capacity at the time of the disruption.
Supply can also be impacted by the degree to which individual Organization of Petroleum
Exporting Countries (OPEC) nations and other large oil and natural gas producing countries,
including, but not limited to, Mexico, Norway and Russia, are willing and able to control
production and exports of oil, to decrease or increase supply and to support their targeted oil
price while meeting their market share objectives. Any of these factors could affect the supply of
oil and natural gas and could have a material adverse effect on our results of operations.
Excess productive capacity and future demand impact our operations.
Oil and natural gas storage inventory levels are an indicator of the relative balance between
supply and demand. High or increasing storage or inventories generally indicate that supply is
exceeding demand and that energy prices are likely to soften. Low or decreasing storage or
inventories are an indicator that demand is growing faster than supply and that energy prices are
likely to rise. Measures of maximum productive capacity compared to demand (excess productive
capacity) are also an important factor influencing energy prices and spending by oil and natural
gas exploration companies. When excess productive capacity is low compared to demand, energy
prices tend to be higher and more volatile reflecting the increased vulnerability of the entire
system to disruption.
Seasonal and adverse weather conditions adversely affect demand for our services and operations.
Weather can also have a significant impact on demand as consumption of energy is seasonal and
any variation from normal weather patterns, cooler or warmer summers and winters, can have a
significant impact on demand. Adverse weather conditions, such as hurricanes in the Gulf of
Mexico, may interrupt or curtail our operations, or our customers operations, cause supply
disruptions and result in a loss of revenue and damage to our equipment and facilities, which may
or may not be insured.
Risk Factors Related to Our Business
Our expectations regarding our business are affected by the following risk factors and the
timing of any of these risk factors:
We operate in a highly competitive environment, which may adversely affect our ability to succeed.
We operate in a highly competitive environment for marketing oil and natural gas and securing
equipment and trained personnel. Our ability to continually provide competitive products and
services can impact our ability to maintain or increase prices for our products and services,
maintain market share and negotiate acceptable contract terms with our customers. In order to be
competitive, we must provide new technologies, and reliable products and services that perform as
expected and that create value for our customers. Our ability to maintain or increase prices for
our products and services is in part dependent on the industrys capacity relative to customer
demand, and on our ability to differentiate the value delivered by our products and services from
our competitors products and services. In addition, our ability to negotiate acceptable contract
terms and conditions with our customers, especially stateowned national oil companies, our ability
to manage warranty claims and our ability to effectively manage our commercial agents can also
impact our results of operations.
17
Managing development of competitive technology and new product introductions on a forecasted
schedule and at forecasted costs can impact our financial results. Development of competing
technology that accelerates the obsolescence of any of our products or services can have a
detrimental impact on our financial results and can result in the potential impairment of
long-lived assets.
We may be disadvantaged competitively and financially by a significant movement of exploration
and production operations to areas of the world in which we are not currently active.
The high cost or unavailability of materials, equipment, supplies and personnel could adversely
affect our ability to execute our operations on a timely basis.
Our manufacturing operations are dependent on having sufficient raw materials, component parts
and manufacturing capacity available to meet our manufacturing plans at a reasonable cost while
minimizing inventories. Our ability to effectively manage our manufacturing operations and meet
these goals can have an impact on our business, including our ability to meet our manufacturing
plans and revenue goals, control costs and avoid shortages of raw materials and component parts.
Raw materials and components of particular concern include steel alloys, copper, carbide, chemicals
and electronic components. Our ability to repair or replace equipment damaged or lost in the well
can also impact our ability to service our customers.
People are a key resource to developing, manufacturing and delivering our products and
services to our customers around the world. Our ability to recruit, train and retain the highly
skilled workforce required by our plans will impact our business. A well-trained, motivated work
force has a positive impact on our ability to attract and retain business. Rapid growth presents a
challenge to us and our industry to recruit, train and retain our employees while managing the
impact of wage inflation and potential lack of available qualified labor in the markets where we
operate. Labor-related actions, including strikes, slowdowns and facility occupations can also
have a negative impact on our business.
Compliance with and changes in laws and regulations and risks from investigations and legal
proceedings could be costly and could adversely affect operating results.
Our operations in the U.S. and over 90 countries can be impacted by expected and unexpected
changes in the legal and business environments in which we operate, as well as the outcome of
ongoing government and internal investigations and legal proceedings.
Changes that could impact the legal environment include new legislation, new regulation, new
policies, investigations and legal proceedings and new interpretations of the existing legal rules
and regulations. In particular, changes in export control laws or exchange control laws,
additional restrictions on doing business in countries subject to sanctions, and changes in laws in
Russia or other countries identified by management for immediate focus. Changes that impact the
business environment include changes in accounting standards, changes in environmental laws,
changes in tax laws or tax rates, the resolution of audits by various tax authorities, and the
ability to fully utilize our tax loss carryforwards and tax credits. Compliance related issues
could limit our ability to do business in certain countries.
These changes could have a significant financial impact on our future operations and the way
we conduct, or if we conduct, business in the affected countries.
Uninsured claims and litigation could adversely impact our operating results.
We have insurance coverage against operating hazards, including product liability claims and
personal injury claims related to our products, to the extent deemed prudent by our management and
to the extent insurance is available, but no assurance can be given that the nature and amount of
that insurance will be sufficient to fully indemnify us against liabilities arising out of pending
and future claims and litigation. This insurance has deductibles or self-insured retentions and
contains certain coverage exclusions. The insurance does not cover damages from breach of contract
by us or based on alleged fraud or deceptive trade practices. Whenever possible, we obtain
agreements from customers that limit our liability. Insurance and customer agreements do not
provide complete protection against losses and risks, and our results of operations could be
adversely affected by unexpected claims not covered by insurance.
Compliance with and rulings and litigation in connection with environmental regulations may
adversely affect our business and operating results.
Our business is impacted by unexpected outcomes or material changes in environmental
liability. Changes in our environmental liability could originate with the discovery of new
environmental remediation sites, changes in environmental regulations, or the discharge of
hazardous materials or oil and natural gas into the environment.
18
Changes in economic conditions and currency fluctuations may adversely affect our operating
results.
Fluctuation in foreign currencies relative to the U.S. Dollar can impact our costs of doing
business. Most of our products and services are sold through contracts denominated in U.S. Dollars
or local currency indexed to U.S. Dollars. Local expenses and some of our manufacturing costs are
incurred in local currencies and therefore changes in the exchange rates between the U.S. Dollar
and foreign currencies, particularly the British Pound Sterling, Euro, Canadian Dollar, Norwegian
Krone, Venezuelan Bolivar, Australian Dollar and Brazilian Real, can increase or decrease our U.S.
Dollar expenses and impact our operating margins. The majority of our significant foreign
subsidiaries have designated the local currency as their functional currency and, as such, gains
and losses resulting from balance sheet translation of foreign operations are included as a
separate component of accumulated other comprehensive loss within stockholders equity. Gains and
losses from foreign currency transactions, such as those resulting from the settlement of
receivables or payables in the nonfunctional currency, are included in the consolidated statements
of operations as incurred. For those foreign subsidiaries that have designated the U.S. Dollar as
the functional currency, gains and losses resulting from balance sheet translation of foreign
operations are also included in the consolidated statements of operations as incurred. Such
transaction and translation losses may adversely impact our results of operations.
The condition of the capital markets and equity markets in general can affect the price of our
common stock and our ability to obtain financing, if necessary. If the Companys credit rating is
downgraded, this would increase our costs under our credit agreement, as well as the cost of
obtaining, or make it more difficult to obtain or issue, new debt financing.
Our ability to forecast the size of and changes in the worldwide oil and natural gas industry
and our ability to forecast our customers activity levels and demand for our products and services
impacts our management of our manufacturing and distribution activities, our staffing levels and
our cash and financing requirements. Unanticipated changes in our customers requirements can
impact our costs, creating temporary shortages or surpluses of equipment and people and demands for
cash or financing.
The market price of our common stock may fluctuate.
Historically, the market price of common stock of companies engaged in the oil and natural gas
industry has been highly volatile. Likewise, the market price of our common stock has varied
significantly in the past. News announcements and changes in oil and natural gas prices, changes
in the demand for oil and natural gas exploration and changes in the supply and demand for oil and
natural gas have all been factors that have affected the price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We are headquartered in Houston, Texas and operate 42 principal manufacturing plants, ranging
in size from approximately 5,000 to 333,000 square feet of manufacturing space. The total area of
the plants is approximately 3.2 million square feet, of which approximately 2.1 million square feet
(65%) are located in the United States, 0.3 million square feet (11%) are located in Canada and
South America, 0.7 million square feet (22%) are located in Europe, and a minimal amount of space
is located in the Far East. Our principal manufacturing plants are located as follows: United
States Houston, Texas; Broken Arrow and Claremore, Oklahoma; Lafayette, Louisiana; South America
various cities in Venezuela; and Europe Aberdeen and East Kilbride, Scotland; Liverpool,
England; Celle, Germany; Belfast, Northern Ireland.
We own or lease numerous service centers, shops and sales and administrative offices
throughout the geographic areas in which we operate. We also have a significant investment in
service vehicles, rental tools and manufacturing and other equipment. We believe that our
manufacturing facilities are well maintained and suitable for their intended purposes. The table
below shows our principal manufacturing plants by segment and geographic area:
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Canada
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and
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Segment
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United States
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South America
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Europe
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Far East
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Total
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Completion and Production
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16
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4
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5
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1
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26
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Drilling and Evaluation
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12
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1
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3
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16
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19
ITEM 3. LEGAL PROCEEDINGS
We are involved in litigation or proceedings that have arisen in our ordinary business
activities. We insure against these risks to the extent deemed prudent by our management and to
the extent insurance is available, but no assurance can be given that the nature and amount of that
insurance will be sufficient to fully indemnify us against liabilities arising out of pending and
future legal proceedings. Many of these insurance policies contain deductibles or selfinsured
retentions in amounts we deem prudent and for which we are responsible for payment. In determining
the amount of selfinsurance, it is our policy to selfinsure those losses that are predictable,
measurable and recurring in nature, such as claims for automobile liability, general liability and
workers compensation. We record accruals for the uninsured portion of losses related to these
types of claims. The accruals for losses are calculated by estimating losses for claims using
historical claim data, specific loss development factors and other information as necessary.
On September 12, 2001, we, without admitting or denying the factual allegations contained in
the Order, consented with the Securities and Exchange Commission (SEC) to the entry of an Order
making Findings and Imposing a CeaseandDesist Order (the Order) for violations of Section
13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange Act. Among the findings included in the Order
were the following: In 1999, we discovered that certain of our officers had authorized an improper
$75,000 payment to an Indonesian tax official, after which we embarked on a corrective course of
conduct, including voluntarily and promptly disclosing the misconduct to the SEC and the Department
of Justice (the DOJ). In the course of our investigation of the Indonesia matter, we learned
that we had made payments in the amount of $15,000 and $10,000 in India and Brazil, respectively,
to our agents, without taking adequate steps to ensure that none of the payments would be passed on
to foreign government officials. The Order found that the foregoing payments violated Section
13(b)(2)(A). The Order also found us in violation of Section 13(b)(2)(B) because we did not have a
system of internal controls to determine if payments violated the Foreign Corrupt Practices Act
(FCPA). The FCPA makes it unlawful for U.S. issuers, including us, or anyone acting on their
behalf, to make improper payments to any foreign official in order to obtain or retain business.
In addition, as discussed below, the FCPA establishes accounting and internal control requirements
for U.S. issuers. We cooperated with the SECs investigation.
By the Order, dated September 12, 2001 (previously disclosed by us and incorporated by
reference in this annual report as Exhibit 99.1), we agreed to cease and desist from committing or
causing any violation and any future violation of Section 13(b)(2)(A) and Section 13(b)(2)(B) of
the Exchange Act. Such Sections of the Exchange Act require issuers to: (x) make and keep books,
records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the issuer and (y) devise and maintain a system of internal
accounting controls sufficient to provide reasonable assurances that: (i) transactions are
executed in accordance with managements general or specific authorization; and (ii) transactions
are recorded as necessary: (I) to permit preparation of financial statements in conformity with
generally accepted accounting principles or any other criteria applicable to such statements, and
(II) to maintain accountability for assets.
On March 29, 2002, we announced that we had been advised that the SEC and the DOJ are
conducting investigations into allegations of violations of law relating to Nigeria and other
related matters. The SEC has issued a formal order of investigation into possible violations of
provisions under the Foreign Corrupt Practices Act (FCPA) regarding antibribery, books and
records and internal controls. The SEC has issued subpoenas seeking information about our
operations in Angola (subpoena dated August 6, 2003) and Kazakhstan (subpoenas dated August 6, 2003
and April 22, 2005) as part of its ongoing investigation. We are providing documents to and
cooperating fully with the SEC and DOJ. The DOJ and the SEC have issued subpoenas to, or otherwise
asked for interviews with, current and former employees in connection with the investigations
regarding Nigeria, Angola and Kazakhstan. In addition, we have conducted internal investigations
into these matters.
Our internal investigations have identified issues regarding the propriety of certain payments
and apparent deficiencies in our books and records and internal controls with respect to certain
operations in Nigeria, Angola and Kazakhstan, as well as potential liabilities to governmental
authorities in Nigeria. The internal investigation in Nigeria was substantially completed during
the first quarter of 2003, and, based upon current information, we do not expect that any such
potential liabilities will have a material adverse effect on our consolidated financial statements.
The internal investigations in Angola and Kazakhstan were substantially completed in the third
quarter of 2004. Evidence obtained during the course of the internal investigations has been
provided to the SEC and DOJ.
The Department of Commerce, Department of the Navy and DOJ (the U.S. agencies) have
investigated compliance with certain export licenses issued to Western Geophysical from 1994
through 2000 for export of seismic equipment leased by the Peoples Republic of China. We acquired
Western Geophysical in August 1998 and subsequently transferred related assets to WesternGeco in
December 2000. WesternGeco continued to use the licenses until 2001. Under the WesternGeco
Formation Agreement, we owe indemnity to WesternGeco for certain matters and, accordingly, we have
agreed to indemnify WesternGeco with certain limitations in connection with this matter. We are
cooperating fully with the U.S. agencies.
20
We have received a subpoena from a grand jury in the Southern District of New York regarding
goods and services we delivered to Iraq from 1995 through 2003 during the United Nations
OilforFood Program. We have also received a request from the SEC to provide a written statement
and certain information regarding our participation in that program. We have responded to both the
subpoena and the request and may provide additional information and documents in the future. Other
companies in the energy industry are believed to have received similar subpoenas and requests.
The U.S. agencies, the SEC and other authorities have a broad range of civil and criminal
sanctions they may seek to impose against corporations and individuals in appropriate circumstances
including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications
to business practices and compliance programs. Such agencies and authorities have entered into
agreements with, and obtained a range of sanctions against, several public corporations and
individuals arising from allegations of improper payments and deficiencies in books and records and
internal controls, whereby civil and criminal penalties were imposed, including in some cases
multimillion dollar fines and other sanctions. We are in discussions with the U.S. agencies and
the SEC regarding the resolution, including sanctions, associated with certain of the matters
described above. It is not possible to accurately predict at this time when any of these matters
will be resolved. Based on current information, we cannot predict the outcome of such
investigations, whether we will reach resolution through such discussions or what, if any, actions
may be taken by the U.S. agencies, the SEC or other authorities or the effect the actions may have
on our consolidated financial statements.
On May 10, 2004, the District Court of Andrews County, Texas entered a judgment in favor of
LOTUS, LLC and against INTEQ in the amount of $14.8 million for lost profits resulting from a
breach of contract in drilling a well to create a salt cavern for disposing of naturally occurring
radioactive waste. We have filed an appeal and taken other actions. We believe that any liability
that we may incur as a result of this litigation would not have a material adverse financial effect
on our consolidated financial statements.
Further information is contained in the Environmental Matters section of Item 1 herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock, $1.00 par value per share, is principally traded on the New York Stock
Exchange. Our common stock is also traded on the SWX Swiss Exchange. As of February 24, 2006,
there were approximately 88,700 stockholders and
approximately 16,200 stockholders of record.
For information regarding quarterly high and low sales prices on the New York Stock Exchange
for our common stock during the two years ended December 31, 2005, and information regarding
dividends declared on our common stock during the two years ended December 31, 2005, see Note 18 of
the Notes to Consolidated Financial Statements in Item 8 herein.
The following table contains information about our purchases of equity securities during the
fourth quarter of 2005.
Issuer Purchases of Equity Securities
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Total Number
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Maximum Number (or
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of Shares
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Approximate Dollar
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Total Number
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Purchased as
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Average
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Value) of Shares that
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of Shares
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Part of a Publicly
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Price Paid
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May Yet Be Purchased
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Period
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Purchased
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Announced Program
(1)
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per Share
(2)
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Under the Program
(1)
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October 131, 2005
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$
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November 130, 2005
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888,200
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55.66
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December 131, 2005
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805,900
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60.93
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Total
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1,694,100
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$
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58.17
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(1)
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On September 10, 2002, we announced a program to repurchase from time to time up to
$275.0 million of our outstanding common stock. On October 27, 2005, we had authorization
remaining to repurchase up to $44.5 million in common stock and we announced that the Board of
Directors authorized us to repurchase up to an additional $455.5 million of our common stock
from
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time to time. As of December 31, 2005, we now have authorization remaining to repurchase up to a
total of $401.5 million of our common stock. The program has no expiration date, but may be
terminated by the Board of Directors at any time.
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On November 3, 2005, we entered into a Stock Purchase Plan with an agent for the purchase of
shares of our common stock that complies with the requirements of Rule 10b51 promulgated by the
Securities Exchange Act of 1934. The term of the November Plan will run from November 7, 2005
until April 30, 2006, unless earlier terminated. On February 22, 2006, we entered into another
Plan for a term that will run from February 23, 2006 until April 30, 2006, unless earlier
terminated. During that term, the agent will use its best efforts to repurchase a fixed dollar
value of our common stock each trading day, subject to applicable trading rules, until the
cumulative amount purchased under the November Plan equals $250.0 million and under the February
Plan equals $150.0 million, inclusive of all commissions and fees paid by us to the agent
related to such repurchases. Shares will be repurchased by the agent at the prevailing market
prices, subject to limitations provided by us, in open market transactions intended to comply
with Rule 10b18 of the Exchange Act. We or the agent may terminate the Plans. However, no
shares will be repurchased at any time that the cost of the shares exceeds an amount that has
been specified by us to the agent.
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(2)
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Average price paid includes commissions.
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22
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial
Statements and Supplementary Data, both contained herein.
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Year Ended December 31,
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(In millions, except per share amounts)
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2005
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2004
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2003
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2002
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2001
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Revenues
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$
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7,185.5
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$
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6,079.6
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$
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5,233.3
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$
|
4,843.5
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$
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4,980.5
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Costs and expenses:
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|
|
Cost of revenues
|
|
|
4,942.5
|
|
|
|
4,351.0
|
|
|
|
3,807.5
|
|
|
|
3,478.5
|
|
|
|
3,519.1
|
|
Selling, general and administrative
|
|
|
1,009.6
|
|
|
|
912.2
|
|
|
|
824.6
|
|
|
|
805.5
|
|
|
|
748.3
|
|
Impairment of investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
45.3
|
|
|
|
|
|
|
|
|
|
Restructuring charge reversals
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(4.2
|
)
|
Gain on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.4
|
)
|
|
Total costs and expenses
|
|
|
5,952.1
|
|
|
|
5,263.2
|
|
|
|
4,676.3
|
|
|
|
4,284.0
|
|
|
|
4,260.8
|
|
|
Operating income
|
|
|
1,233.4
|
|
|
|
816.4
|
|
|
|
557.0
|
|
|
|
559.5
|
|
|
|
719.7
|
|
Equity in income (loss) of affiliates
|
|
|
100.1
|
|
|
|
36.3
|
|
|
|
(137.8
|
)
|
|
|
(69.7
|
)
|
|
|
45.8
|
|
Interest expense
|
|
|
(72.3
|
)
|
|
|
(83.6
|
)
|
|
|
(103.1
|
)
|
|
|
(111.1
|
)
|
|
|
(126.3
|
)
|
Interest income
|
|
|
18.0
|
|
|
|
6.8
|
|
|
|
5.3
|
|
|
|
5.2
|
|
|
|
11.7
|
|
|
Income from continuing operations before
income taxes
|
|
|
1,279.2
|
|
|
|
775.9
|
|
|
|
321.4
|
|
|
|
383.9
|
|
|
|
650.9
|
|
Income taxes
|
|
|
(404.8
|
)
|
|
|
(250.6
|
)
|
|
|
(145.6
|
)
|
|
|
(157.9
|
)
|
|
|
(221.7
|
)
|
|
Income from continuing operations
|
|
|
874.4
|
|
|
|
525.3
|
|
|
|
175.8
|
|
|
|
226.0
|
|
|
|
429.2
|
|
Income (loss) from discontinued
operations, net of tax
|
|
|
4.9
|
|
|
|
3.3
|
|
|
|
(41.3
|
)
|
|
|
(14.6
|
)
|
|
|
9.5
|
|
|
Income before extraordinary loss and
cumulative effect of accounting change
|
|
|
879.3
|
|
|
|
528.6
|
|
|
|
134.5
|
|
|
|
211.4
|
|
|
|
438.7
|
|
Extraordinary loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
Cumulative effect of accounting change,
net of tax
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(5.6
|
)
|
|
|
(42.5
|
)
|
|
|
0.8
|
|
|
Net income
|
|
$
|
878.4
|
|
|
$
|
528.6
|
|
|
$
|
128.9
|
|
|
$
|
168.9
|
|
|
$
|
438.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.58
|
|
|
$
|
1.57
|
|
|
$
|
0.52
|
|
|
$
|
0.67
|
|
|
$
|
1.28
|
|
Diluted
|
|
|
2.56
|
|
|
|
1.57
|
|
|
|
0.52
|
|
|
|
0.67
|
|
|
|
1.27
|
|
Dividends
|
|
|
0.475
|
|
|
|
0.46
|
|
|
|
0.46
|
|
|
|
0.46
|
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
2,479.4
|
|
|
$
|
1,738.3
|
|
|
$
|
1,210.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,661.6
|
|
Total assets
|
|
|
7,807.4
|
|
|
|
6,821.3
|
|
|
|
6,416.5
|
|
|
|
6,499.7
|
|
|
|
6,676.2
|
|
Longterm debt
|
|
|
1,078.0
|
|
|
|
1,086.3
|
|
|
|
1,133.0
|
|
|
|
1,424.3
|
|
|
|
1,682.4
|
|
Stockholders equity
|
|
|
4,697.8
|
|
|
|
3,895.4
|
|
|
|
3,350.4
|
|
|
|
3,397.2
|
|
|
|
3,327.8
|
|
NOTES TO SELECTED FINANCIAL DATA
|
|
|
(1)
|
|
Discontinued operations.
The selected financial data includes reclassifications to reflect
Baker Supply Products Division, Baker Hughes Mining Tools, BIRD Machine, EIMCO Process
Equipment and our oil producing operations in West Africa as discontinued operations. See
Note 2 of the Notes to Consolidated Financial Statements in Item 8 herein for additional
information regarding discontinued operations.
|
|
(2)
|
|
Impairment of investment in affiliate.
See Note 8 of the Notes to Consolidated Financial
Statements in Item 8 herein for a description of the $45.3 million impairment of our
investment in WesternGeco in 2003 and for a description of the impairment and restructuring
charges of $135.7 million recorded in equity in income (loss) of affiliates in 2003, also
related to WesternGeco. Included in equity in income (loss) of affiliates for 2002 is $90.2
million for our share of a $300.7 million restructuring charge related to WesternGecos
impairment of assets, reductions in workforce, closing certain operations and reducing its
marine seismic fleet.
|
|
(3)
|
|
Restructuring charge reversals.
See Note 4 of the Notes to Consolidated Financial Statements
in Item 8 herein for a description of the restructuring charge reversal in 2003. During 2000,
we recorded a restructuring charge of $29.5 million related to our plan
|
23
|
|
|
|
|
to substantially exit the oil and natural gas exploration business. Included in the
restructuring charge were costs to settle contractual obligations of $4.5 million for the
minimum amount of our share of project costs relating to our interest in an oil and natural gas
property in Colombia. After unsuccessful attempts to negotiate a settlement with our joint
venture partner, we decided to abandon further involvement in the project. Subsequently, in
2001, a third party agreed to assume the remaining obligation in exchange for our interest in
the project. Accordingly, we reversed $4.2 million related to this obligation.
|
|
(4)
|
|
Cumulative effect of accounting change.
In 2005, we adopted Financial Accounting Standards
Board (FASB) Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement
Obligations
. In 2003, we adopted Statement of Financial Accounting Standards (SFAS) No.
143,
Accounting for Asset Retirement Obligations
. In 2002, we adopted SFAS No. 142,
Goodwill
and Other Intangible Assets
. In 2001, we adopted SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, as amended by SFAS No. 137 and 138.
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
should be read in conjunction with the consolidated financial statements of Item 8. Financial
Statements and Supplementary Data contained herein.
EXECUTIVE SUMMARY
We are a leading provider of drilling, formation evaluation, completion and production
products and services to the worldwide oil and natural gas industry. We compete as one of the
three largest diversified oilfield services companies. In early 2005, we organized our
product-line focused divisions into two separate segments: the Drilling and Evaluation segment and
the Completion and Production segment. The segments are aligned by product line based on the types
of products and services provided to our customers and on the business characteristics of the
divisions during business cycles. Activity of the businesses under the Drilling and Evaluation
segment is closely correlated to rig counts and, therefore, is prone to cyclicality as drilling
activity increases or decreases. Activity of businesses in the Completion and Production segment
is more dependent on production volumes and, therefore, is less cyclical than the Drilling and
Evaluation segment. We also own a 30% equity interest in WesternGeco, a seismic venture with
Schlumberger Limited (Schlumberger). Accordingly, we report our results under three segments -
Drilling and Evaluation, Completion and Production and WesternGeco:
|
|
|
The Drilling and Evaluation segment consists of Baker Hughes Drilling Fluids (drilling
fluids), Hughes Christensen (oilfield drill bits), INTEQ (conventional and rotary
directional drilling, measurement-while-drilling and logging-while-drilling) and Baker
Atlas (wireline formation evaluation and wireline completion services). The Drilling and
Evaluation segment provides products and services used to drill oil and natural gas wells.
|
|
|
|
|
The Completion and Production segment consists of Baker Oil Tools (workover, fishing and
completion equipment), Baker Petrolite (oilfield specialty chemicals) and Centrilift
(electric submersible pumps and progressing cavity pumps). The Completion and Production
segment also includes our Production Optimization business unit (permanent downhole
monitoring). The Completion and Production segment provides equipment and services used
from the completion phase through the productive life of oil and natural gas wells.
|
|
|
|
|
The WesternGeco segment consists of our equity interest in WesternGeco.
|
Also in 2005, we organized the business operations of our divisions around four primary
geographic regions: North America, Latin America, Middle East/Asia Pacific, and Europe, Africa,
Russia and the Caspian. Each region has a council comprised of regional vice presidents from each
division as well as representatives from various functions such as human resources, legal,
marketing and health, safety and environmental. The regional vice presidents report directly to
each division president. Through this structure, we have placed our management closer to the
customer, improving our customer relationships and allowing us to react more quickly to local
market conditions and needs.
Our headquarters are in Houston, Texas, and we have significant manufacturing operations in
various countries, including, but not limited to, the United States (Texas, Oklahoma and
Louisiana), Scotland (Aberdeen and East Kilbride), Germany (Celle), Northern Ireland (Belfast) and
Venezuela (Maracaibo). We operate in over 90 countries around the world and employ approximately
29,100 employees about one-half of which work outside the U.S. Our revenue in 2005 was $7.2
billion approximately 36% of which came from providing products and services to oil and natural
gas companies operating in the U.S.
24
During 2005, the Baker Hughes worldwide rig count continued to increase, as oil and natural
gas companies around the world recognized the need to build productive capacity to meet the growing
demand for hydrocarbons and to offset depletion of existing developed reserves. Oil and natural
gas prices were at historic highs in 2005, reflecting continued strong demand, relatively low
excess productive capacity, and disruptions in supply due to hurricanes in the Gulf of Mexico. We
reported revenues of $7,185.5 million for 2005, an 18.2% increase compared with 2004, approximating
the 14.8% increase in the worldwide average rig count for 2005 compared with 2004. In addition to
the growth in our revenues from increased activity, our revenues were impacted by pricing
improvements and changes in market share in certain product lines. Net income for 2005 was $878.4
million, a 66.2% increase compared with $528.6 million in 2004.
|
|
|
North American revenues increased 20.9% in 2005 compared with 2004, while the rig count
increased 18.0% for 2005 compared with 2004, driven primarily by land-based drilling for
natural gas. In 2005, hurricane-related disruptions negatively impacted our revenues from
the U.S. offshore market by approximately $68.0 million.
|
|
|
|
|
Latin American revenues increased 15.3% and the Latin American rig count increased 9.0%
in 2005 compared with 2004.
|
|
|
|
|
Europe, Africa, Russia and the Caspian revenues increased 14.0% in 2005 compared with
2004. Growth in revenues from Europe and Africa exceeded the increase in the rig counts
for both regions for the comparable periods.
|
|
|
|
|
Middle East and Asia Pacific revenues were up 20.2% in 2005 compared with 2004. Revenue
from the Middle East was up 20.5% compared to a rig count which increased 7.4% and Asia
Pacific revenue was up 20.0% compared to a rig count which increased 14.2%.
|
The customers for our products and services include the super-major and major integrated oil
and natural gas companies, independent oil and natural gas companies and state-owned national oil
companies (NOCs). Our ability to compete in the oilfield services market is dependent on our
ability to differentiate our product and service offerings by technology, service and the price
paid for the value we deliver.
The primary driver of our business is our customers capital and operating expenditures
dedicated to exploring and drilling for and developing and producing oil and natural gas. Our
business is cyclical and is dependent upon our customers forecasts of future oil and natural gas
prices, future economic growth and hydrocarbon demand and estimates of future oil and natural gas
production. During 2005, our customers spending directed to both worldwide oil and North American
oil and natural gas projects increased compared with 2004. The increase in spending was driven by
the multi-year requirement to find, develop and produce more hydrocarbons to meet the growth in
demand, offset production declines, increase inventory levels and rebuild productive capacity.
Additionally, the increase was supported by historically high oil and natural gas prices. Our
customers spending on oil and gas projects is expected to continue to grow through 2006.
The critical success factors for our business are embodied in our long-term strategy, which we
call our Strategic Framework. This strategy includes the development and maintenance of a high
performance culture founded on our Core Values; our product line focused organization and our focus
on Best-in-Class opportunities; maintaining our financial flexibility and financial discipline; and
execution of our strategies for product development and commercialization, manufacturing quality
and service quality.
Our ongoing effort to develop and maintain a high performance culture starts with our Core
Values of integrity, teamwork, performance and learning. We employ succession planning efforts to
develop leaders across all our businesses that embody these Core Values and represent the diversity
of our customer base. We hire and train employees from around the world to ensure that we have a
well-trained workforce in place to support our business plans.
Our focus on Best-in-Class opportunities starts with our product line focused organization
structure. We believe that through our product line focused divisions, we develop the technologies
that deliver Best-in-Class value to our customers. As an enterprise, we are also focused on those
markets that we believe provide Best-in-Class opportunities for growth. Our management team has
identified markets for immediate focus including the Middle East, Russia and the Caspian region and
NOCs.
Our focus on financial flexibility and financial discipline is the backbone of our effort to
deliver differential growth at superior margins while earning an acceptable return on our
investments throughout the business cycle. Investments are given priority and funded depending on
their ability to provide risk-adjusted returns in excess of our cost of capital. Our effort to
obtain the best price for our products and services begins with our approach to capital discipline.
Over the past few years, we have invested for growth in our business, repaid debt, paid dividends
and repurchased stock, and we expect to maintain the flexibility to undertake such activities in
the future.
25
The last element of our Strategic Framework focuses on our ability to identify, develop and
commercialize new products and services that will lead to differential growth at superior margins
in our business. The effort extends to every phase of our operations, including continuous
improvement programs in our manufacturing facilities and field operations that support our goal of
flawless execution at the well site.
The execution of our 2006 business plan and the ability to meet our 2006 financial objectives
are dependent on a number of factors. These factors include, but are not limited to, our ability
to: recruit, train and retain the skilled and diverse workforce necessary to meet our business
needs; realize price increases commensurate with the value we provide to our customers and in
excess of the increase in raw material and labor costs; expand our business in areas that are
growing rapidly with customers whose spending is expected to increase substantially (such as NOCs),
and in areas where we have market share opportunities (such as the Middle East, Russia and the
Caspian region); manage increasing raw material and component costs (especially steel alloys,
copper, carbide, chemicals and electronic components); continue to make ongoing improvements in the
productivity of our manufacturing organization.
For a full discussion of risk factors and forward-looking statements, please see the Risk
Factors Related to the Worldwide Oil and Natural Gas Industry and the Risk Factors Related to Our
Business in Item 1A. Risk Factors and in the Forward-Looking Statements section in Item 6, both
contained herein.
BUSINESS ENVIRONMENT
Our business environment and its corresponding operating results are significantly affected by
the level of energy industry spending for the exploration and production (E&P) of oil and natural
gas reserves. An indicator for this spending is the rig count, because when drilling and workover
rigs are active, many of the products and services provided by the oilfield services industry are
required. Our products and services are used during the drilling and workover phases, during the
completion of oil and natural gas wells and during actual production of the hydrocarbons. This E&P
spending by oil and natural gas companies is, in turn, influenced strongly by expectations about
the supply and demand for oil and natural gas products and by current and expected prices for both
oil and natural gas. Rig counts, therefore, generally reflect the relative strength and stability
of energy prices.
Rig Counts
We have been providing rig counts to the public since 1944. We gather all relevant data
through our field service personnel, who obtain the necessary data from routine visits to the
various rigs, customers, contractors or other outside sources. This data is then compiled and
distributed to various wire services and trade associations and is published on our website. Rig
counts are compiled weekly for the U.S. and Canada and monthly for all international and U.S.
workover rigs. Published international rig counts do not include rigs drilling in certain
locations, such as Russia, onshore China and other countries, because this information is extremely
difficult to obtain or we do not have local resources to make an accurate count.
Rigs in the U.S. are counted as active if, on the day the count is taken, the well being
drilled has been started, drilling has not been completed and the well is anticipated to be of
sufficient depth, which may change from time to time and may vary
from region to region, and is expected to be a
potential consumer of our drill bits. In general, rigs are counted as active if the well has been
started but has not reached its target depth, even if there are extensive delays due to weather or
other reasons. If the well has been started but not completed and the rig is expected to resume
work in two weeks or less, the rig is counted as active during a weather delay. Rigs are not
typically counted as active if the rig is lost or damaged or if drilling operations are expected to
be suspended for more than two weeks.
Rigs in Canada are counted as active if data obtained by the Canadian Association of Oilwell
Drillers and Contractors indicates that drilling operations have occurred during the week and we
are able to verify this information. In most other international areas, rigs are counted as active
if drilling operations have taken place for at least 15 days during the month. In some active
international areas where better data is available, a weekly or daily average of active rigs is
taken. In those international areas where there is poor availability of data, the rig counts are
estimated or quoted from third party data.
The rig count does not include rigs that are in transit from one location to another, are
rigging up, are being used in non-drilling activities, including production testing, completion and
workover, or are not, in our opinion, deemed to be a potential user of our drill bits.
26
Our rig counts are summarized in the table below as averages for each of the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
U.S. land and inland waters
|
|
|
1,290
|
|
|
|
1,095
|
|
|
|
924
|
|
U.S. offshore
|
|
|
93
|
|
|
|
97
|
|
|
|
108
|
|
Canada
|
|
|
455
|
|
|
|
365
|
|
|
|
372
|
|
|
North America
|
|
|
1,838
|
|
|
|
1,557
|
|
|
|
1,404
|
|
|
Latin America
|
|
|
316
|
|
|
|
290
|
|
|
|
244
|
|
North Sea
|
|
|
43
|
|
|
|
39
|
|
|
|
46
|
|
Other Europe
|
|
|
27
|
|
|
|
31
|
|
|
|
38
|
|
Africa
|
|
|
50
|
|
|
|
49
|
|
|
|
54
|
|
Middle East
|
|
|
247
|
|
|
|
230
|
|
|
|
211
|
|
Asia Pacific
|
|
|
225
|
|
|
|
197
|
|
|
|
177
|
|
|
Outside North America
|
|
|
908
|
|
|
|
836
|
|
|
|
770
|
|
|
Worldwide
|
|
|
2,746
|
|
|
|
2,393
|
|
|
|
2,174
|
|
|
U.S. Workover Rigs
|
|
|
1,356
|
|
|
|
1,235
|
|
|
|
1,129
|
|
|
The U.S. land and inland waters rig count increased 17.8% in 2005 compared with 2004, due to
the increase in drilling for natural gas. The U.S. offshore rig count decreased 4.1% in 2005
compared with 2004, reflecting the activity disruptions caused by hurricanes in the Gulf of Mexico
in the third quarter of 2005. The Canadian rig count increased 24.7% due to the increase in
drilling for natural gas.
Outside North America, the rig count increased 8.6% in 2005 compared with 2004. The rig count
in Latin America increased 9.0% in 2005 compared with 2004, driven primarily by activity increases
in Venezuela, Colombia and Argentina. The North Sea rig count increased 10.3% in 2005 compared
with 2004. The rig count in Africa increased by 2.0% in 2005 compared with 2004. Activity in the
Middle East continued to rise steadily, with a 7.4% increase in the rig count in 2005 compared with
2004, driven primarily by activity increases in Saudi Arabia, Qatar, Sudan and Yemen. The rig
count in the Asia Pacific region was up 14.2% in 2005 compared with 2004, primarily due to activity
increases in India, Indonesia, offshore China and Thailand.
Oil and Natural Gas Prices
Generally, changes in the current price and expected future prices of oil or natural gas drive
both customers expectations about their prospects from oil and natural gas sales and their
expenditures to explore for or produce oil and natural gas. Accordingly, changes in these
expenditures will normally result in increased or decreased demand for our products and services.
Oil (Bloomberg West Texas Intermediate (WTI) Cushing Crude Oil Spot Price) and natural gas
(Bloomberg Henry Hub Natural Gas Spot Price) prices are summarized in the table below as averages
of the daily closing prices during each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Oil prices ($/Bbl)
|
|
$
|
56.59
|
|
|
$
|
41.51
|
|
|
$
|
31.06
|
|
Natural gas prices ($/mmBtu) *
|
|
|
8.66
|
|
|
|
5.90
|
|
|
|
5.49
|
|
|
|
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*
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In late September 2005, Hurricane Rita damaged natural gas processing facilities in Henry,
Louisiana (Henry Hub) and the New York Mercantile Exchange declared
force majeure
on its
Henry Hub natural gas contracts. As a result, the average natural gas prices for 2005 exclude
price data for September 22, 2005 through October 6, 2005 when there was insufficient activity
to determine a spot price.
|
Oil prices averaged a historic high of $56.59/Bbl in 2005. Prices increased from the low
$40s/Bbl in January 2005 to a high of almost $70/Bbl in late September 2005, before moderating and
ending the year in the low $60s/Bbl. Between mid-August and the end of September oil prices traded
between $60/Bbl and $70/Bbl primarily due to the disruptive impact of hurricanes in the Gulf of
Mexico. Worldwide demand for hydrocarbons was driven by strong worldwide economic growth, which
was particularly strong in China and developing Asia. Worldwide excess productive capacity was at
the lowest level in 30 years, and disruptions, or the potential for disruptions, in oil supply
resulted in volatile oil prices throughout the year.
During 2005, natural gas prices averaged a historic high of $8.66/mmBtu. Throughout the first
seven months of 2005, a tight balance between supply and demand supported prices between
$5.50/mmBtu and $8/mmBtu. In the last five months of 2005, natural gas was extremely volatile
trading between $9/mmBtu and $15/mmBtu due to supply disruptions caused by Gulf of Mexico
hurricanes and supported by high oil prices.
27
Worldwide Oil and Natural Gas Industry Outlook
This section should be read in conjunction with the factors described in the Risk Factors
Related to the Worldwide Oil and Natural Gas Industry and the Risk Factors Related to Our
Business in Item 1A. Risk Factors and in the Forward-Looking Statements section in Item 6, both
contained herein. These factors could impact, either positively or negatively, our expectation for
oil and natural gas demand, oil and natural gas prices and drilling activity.
Oil
Average oil prices in 2006 are expected to be between $55/Bbl and $75/Bbl. Strong
worldwide economic growth and the lack of excess productive capacity are expected to support prices
within this range. Growth in oil demand is expected to increase in 2006 compared with 2005, as
worldwide economic growth and, in particular, economic growth in China is expected to continue to
grow in 2006. At the beginning of December 2005, the International Energy Agency estimated that
excess productive capacity was less than 3% of demand and that more than three-quarters of the
excess capacity was in Saudi Arabia and Iraq. The ongoing lack of excess productive capacity will
leave the energy markets susceptible to price volatility and the Organization of Petroleum
Exporting Countries (OPEC) is unlikely to be able to rapidly increase production should there be
any significant disruptions or threat of disruptions in oil supplies.
Factors that could lead to prices at the lower end of this range include, but are not limited
to: (1) a significant slowing of worldwide economic growth, particularly economic growth in China;
(2) increases in Russian oil exports; (3) any significant disruption to demand; or (4) other
factors that result in excess productive capacity and higher oil
inventory levels or decreased
demand. Factors that could lead to prices at the higher end of this range include, but are not
limited to: (1) more rapid than planned expansion of the worldwide economy, particularly the
economy in China; (2) a significant slowing of exports from Russia and the inability of key
exporting countries to produce additional crude; or (3) other factors that result in excess
productive capacity remaining at low levels.
Factors that could lead to disruptions or the threat of disruptions in oil supply and
volatility in oil prices include, but are not limited to: (1) terrorist attacks targeting oil
production from Saudi Arabia or other key producers; (2) labor strikes in key oil producing areas
such as Nigeria; (3) the potential for other military actions in the Middle East; or (4) adverse
weather conditions, especially in the Gulf of Mexico. The potential for these and other events to
cause volatility will be mitigated by the degree to which OPEC and, in particular, Saudi Arabia are
able to increase excess productive capacity as well as the capability of the markets to refine and
market products refined from crude oil.
Natural Gas
Natural gas prices in 2006 are expected to remain volatile, averaging between
$6/mmBtu and $15/mmBtu. A significant factor for the markets will be the pace of recovery of
production of natural gas in the Gulf of Mexico following the disruptions from hurricanes in the
Gulf of Mexico in 2005.
Natural gas prices could trade at the top, or beyond the top, of this range if: (1) storage
levels are relatively low at the beginning of the withdrawal season; (2) winter weather is colder
than normal or summer weather is warmer than normal; (3) we experience slower than expected
restoration of hurricane damaged production facilities; or (4) the U.S. economy, particularly the
industrial sector, exhibits greater than expected growth and continued levels of oilfield customer
spending are not sufficient to support the production growth required to meet the growth of natural
gas demand. Natural gas prices could move to the bottom, or below the bottom, of this range if:
(1) storage levels are relatively high at the beginning of the injection season; (2) U.S. economic
growth is weaker than expected; or (3) weather is milder than expected.
Customer Spending
Based upon our discussions with major customers, review of published
industry reports and our outlook for oil and natural gas prices described above, anticipated
customer spending trends are as follows:
|
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North America Customer spending in North America, primarily towards developing natural
gas supplies, is expected to increase approximately 18% to 22% in 2006 compared with 2005.
|
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Outside North America Customer spending, primarily directed at developing oil supplies,
is expected to increase approximately 16% to 20% in 2006 compared with 2005.
|
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Total spending is expected to increase approximately 17% to 21% in 2006 compared with
2005.
|
Drilling Activity
Based upon our outlook for oil and natural gas prices and customer
spending described above, our outlook for drilling activity, as measured by the Baker Hughes rig
count, is as follows:
|
|
|
Drilling activity in North America is expected to increase approximately 12% to 14% in
2006 compared with 2005.
|
28
|
|
|
Drilling activity outside of North America is expected to increase approximately 8% to
10% in 2006 compared with 2005, excluding Iran and Sudan.
|
Risk Factors Related to the Worldwide Oil and Natural Gas Industry
For discussion of our risk factors and cautions regarding forward-looking statements, see the
Risk Factors Related to the Worldwide Oil and Natural Gas Industry in Item 1A. Risk Factors and
in the Forward-Looking Statements section in Item 6, both contained herein. The risk factors
discussed there are not intended to be all inclusive.
BUSINESS OUTLOOK
This section should be read in conjunction with the factors described in the Risk Factors
Related to Our Business, Risk Factors Related to the Worldwide Oil and Natural Gas Industry and
Forward-Looking Statements sections contained herein. These factors could impact, either
positively or negatively, our expectation for oil and natural gas demand, oil and natural gas
prices and drilling activity.
In our outlook for 2006, we took into account the factors described herein. Revenues in 2006
are expected to increase by approximately 19% to 21%, in line with the expected increase in
customer spending. We expect the growth in our revenues will primarily be due to increased
activity and pricing improvement. Our assumptions regarding overall growth in customer spending
assume strong economic growth in the U.S. and China, resulting in an average oil price exceeding
$50/Bbl. Our assumptions regarding customer spending in North America assume strong economic
growth in the U.S. and natural gas prices exceeding an average of $8/mmBtu.
In North America, we expect revenues to increase approximately 21% to 23% in 2006 compared
with 2005. We expect spending on land-based projects to continue to increase in 2006 driven by
demand for natural gas, following the trend evident in 2005. We also expect offshore spending in
the Gulf of Mexico to increase modestly in 2006 compared with 2005. The normal weather-driven
seasonal decline in U.S. and Canadian spending in the first half of the year should result in
sequentially softer revenues in the first and second quarters of 2006.
In 2005, 2004 and 2003, revenues outside North America were 57.6%, 58.5% and 57.9% of total
revenues, respectively. In 2006, we expect revenues outside North America to continue to be
between 55% and 60% of total revenues, and we expect these revenues to increase approximately 18%
to 21% in 2006 compared with 2005, continuing the multi-year trend of growth in customer spending.
Spending on large projects by NOCs is expected to reflect established seasonality trends, resulting
in softer revenues in the first half of the year and stronger revenues in the second half. In
addition, customer spending should be affected by weather-related reductions in the North Sea in
the first and second quarters of 2006. The Middle East, Africa and Latin America regions are
expected to grow modestly in 2006 compared with 2005. Our expectations for spending and revenue
growth could decrease if there are disruptions in key oil and natural gas production markets, such
as Venezuela or Nigeria.
In 2005, WesternGeco contributed $96.7 million of equity in income of affiliates compared with
$34.5 million of equity in income of affiliates in 2004. We expect the trend of improving
operating results for WesternGeco to continue throughout 2006. Information regarding WesternGecos
profitability in 2006 is based on information that WesternGeco has provided to us. Should this
information not be accurate, our forecasts for profitability could be impacted, either positively
or negatively.
Based on the above forecasts, we believe net income per diluted share in 2006 will be in the
range of $3.40 to $3.60, which includes the impact of expensing stock option awards and stock
issued under the employee stock purchase plan of between $18.0 million and $20.0 million, net of
tax. Significant price increases, lower than expected raw material and labor costs, higher than
planned activity or significantly better than expected results from WesternGeco could cause
earnings per share to reach the upper end of this range. Conversely, less than expected price
increases, higher than expected raw material and labor costs, lower than expected productivity or
significantly worse than expected results at WesternGeco could result in earnings per share being
at or below the bottom of this range. Our ability to improve pricing is dependent on demand for
our products and services and our competitors strategies of managing capacity. While the
commercial introduction of new technology is an important factor in realizing pricing improvement,
without pricing discipline throughout the industry as a whole, meaningful improvements in our
prices are not likely to be realized. Additionally, significant changes in drilling activity
outside our expectations could impact operating results positively or negatively.
We do business in approximately 90 countries including over one-half of the 35 countries
having the lowest scores, which indicates high levels of corruption, in Transparency
Internationals Corruption Perception Index (CPI) survey for 2005. We devote significant
resources to the development, maintenance and enforcement of our Business Code of Conduct policy,
our Foreign Corrupt
29
Practices Act (the FCPA) policy, our internal control processes and procedures and other
compliance related policies. Notwithstanding the devotion of such resources, and in part as a
consequence thereof, from time to time we discover or receive information alleging potential
violations of laws and regulations, including the FCPA and our policies, processes and procedures.
We conduct internal investigations of these potential violations and take appropriate action
depending upon the outcome of the investigation. In addition, U.S. government agencies and
authorities are conducting investigations into allegations of potential violations of laws.
We anticipate that the devotion of significant resources to compliance related issues,
including the necessity for investigations, will continue to be an aspect of doing business in a
number of the countries in which oil and natural gas exploration, development and production take
place and in which we are requested to conduct operations. Compliance related issues could limit
our ability to do business in these countries. In order to provide products and services in some
of these countries, we may in the future utilize ventures with third parties, sell products to
distributors or otherwise modify our business approach in order to improve our ability to conduct
our business in accordance with laws and regulations and our Business Code of Conduct. In the
third quarter of 2005, our independent foreign subsidiaries initiated a process to prohibit any
business activity that directly or indirectly involves or facilitates transactions in Iran, Sudan
or with their governments, including government-controlled companies operating outside of these
countries. Implementation of this process should be substantially complete by the end of 2006 and
is not expected to have a material impact on our consolidated financial statements.
Risk Factors Related to Our Business
For discussion of our risk factors and cautions regarding forward-looking statements, see the
Risk Factors Related to Our Business in Item 1A. Risk Factors and in the Forward-Looking
Statements section, both contained herein. This list of risk factors is not intended to be all
inclusive.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures and about contingent assets and liabilities. We base these estimates and
judgments on historical experience and other assumptions and information that are believed to be
reasonable under the circumstances. Estimates and assumptions about future events and their
effects cannot be perceived with certainty, and accordingly, these estimates may change as new
events occur, as more experience is acquired, as additional information is obtained and as the
business environment in which we operate changes.
We have defined a critical accounting estimate as one that is both important to the portrayal
of either our financial condition or results of operations and requires us to make difficult,
subjective or complex judgments or estimates about matters that are uncertain. We have discussed
the development and selection of our critical accounting estimates with the Audit/Ethics Committee
of our Board of Directors and the Audit/Ethics Committee has reviewed the disclosure presented
below. During the past three fiscal years, we have not made any material changes in the
methodology used to establish the critical accounting estimates discussed below. We believe that
the following are the critical accounting estimates used in the preparation of our consolidated
financial statements. In addition, there are other items within our consolidated financial
statements that require estimation but are not deemed critical as defined above.
Allowance for Doubtful Accounts
The determination of the collectibility of amounts due from our customers requires us to use
estimates and make judgments regarding future events and trends, including monitoring our
customers payment history and current credit worthiness to determine that collectibility is
reasonably assured, as well as consideration of the overall business climate in which our customers
operate. Inherently, these uncertainties require us to make frequent judgments and estimates
regarding our customers ability to pay amounts due us in order to determine the appropriate amount
of valuation allowances required for doubtful accounts. Provisions for doubtful accounts are
recorded when it becomes evident that the customer will not make the required payments at either
contractual due dates or in the future. At December 31, 2005 and 2004, allowance for doubtful
accounts totaled $51.4 million, or 3.0%, and $50.2 million, or 3.6%, of total gross accounts
receivable, respectively. We believe that our allowance for doubtful accounts is adequate to cover
potential bad debt losses under current conditions; however, uncertainties regarding changes in the
financial condition of our customers, either adverse or positive, could impact the amount and
timing of any additional provisions for doubtful accounts that may be required. A five percent
change in the allowance for doubtful accounts would have had a pretax impact of approximately $2.6
million in 2005.
30
Inventory Reserves
Inventory is a significant component of current assets and is stated at the lower of cost or
market. This requires us to record provisions and maintain reserves for excess, slow moving and
obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities
on hand and compare them to estimates of future product demand, market conditions, production
requirements and technological developments. These estimates and forecasts inherently include
uncertainties and require us to make judgments regarding potential outcomes. At December 31, 2005
and 2004, inventory reserves totaled $201.3 million, or 15.2%, and $220.0 million, or 17.7%, of
gross inventory, respectively. We believe that our reserves are adequate to properly value
potential excess, slow moving and obsolete inventory under current conditions. Significant or
unanticipated changes to our estimates and forecasts, either adverse or positive, could impact the
amount and timing of any additional provisions for excess or obsolete inventory that may be
required. A five percent change in this inventory reserve balance would have had a pretax impact
of approximately $10.1 million in 2005.
Impairment of LongLived Assets
Longlived assets, which include property, goodwill, intangible assets, investments in
affiliates and certain other assets, comprise a significant amount of our total assets. We review
the carrying values of these assets for impairment periodically, and at least annually for
goodwill, or whenever events or changes in circumstances indicate that the carrying amounts may not
be recoverable. An impairment loss is recorded in the period in which it is determined that the
carrying amount is not recoverable. This requires us to make judgments regarding longterm
forecasts of future revenues and costs related to the assets subject to review. In turn, these
forecasts are uncertain in that they require assumptions about demand for our products and
services, future market conditions and technological developments. Significant and unanticipated
changes to these assumptions could require a provision for impairment in a future period. Given
the nature of these evaluations and their application to specific assets and specific times, it is
not possible to reasonably quantify the impact of changes in these assumptions; however, based upon
our evaluation of the current business climate in which we operate, we do not currently anticipate
that any significant asset impairment losses will be necessary in the foreseeable future.
Income Taxes
The liability method is used for determining our income taxes, under which current and
deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates.
Under this method, the amounts of deferred tax liabilities and assets at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Valuation allowances are established to reduce deferred tax assets when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. In determining the need
for valuation allowances, we have considered and made judgments and estimates regarding estimated
future taxable income and ongoing prudent and feasible tax planning strategies. These estimates
and judgments include some degree of uncertainty and changes in these estimates and assumptions
could require us to adjust the valuation allowances for our deferred tax assets. Historically,
changes to valuation allowances have been caused by major changes in the business cycle in certain
countries and changes in local country law. The ultimate realization of the deferred tax assets
depends on the generation of sufficient taxable income in the applicable taxing jurisdictions.
We operate in more than 90 countries under many legal forms. As a result, we are subject to
the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and
treaties among these governments. Our operations in these different jurisdictions are taxed on
various bases: actual income before taxes, deemed profits (which are generally determined using a
percentage of revenues rather than profits) and withholding taxes based on revenue. Determination
of taxable income in any jurisdiction requires the interpretation of the related tax laws and
regulations and the use of estimates and assumptions regarding significant future events such as
the amount, timing and character of deductions, permissible revenue recognition methods under the
tax law and the sources and character of income and tax credits. Changes in tax laws, regulations,
agreements and treaties, foreign currency exchange restrictions or our level of operations or
profitability in each taxing jurisdiction could have an impact on the amount of income taxes that
we provide during any given year.
Our tax filings for various periods are subjected to audit by the tax authorities in most
jurisdictions where we conduct business. These audits may result in assessments of additional
taxes that are resolved with the authorities or potentially through the courts. We believe these
assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax
law. Resolution of these situations inevitably includes some degree of uncertainty; accordingly,
we provide taxes only for the amounts we believe will ultimately result from these proceedings.
The resulting change to our tax liability, if any, is dependent on numerous factors that are
difficult to estimate. These include, among others, the amount and nature of additional taxes
potentially asserted by local tax authorities; the willingness of local tax authorities to
negotiate a fair settlement through an administrative process; the impartiality of the local
courts; the sheer number of countries in which we do business; and the potential for changes in the
tax paid to one country to
31
either produce, or fail to produce, an offsetting tax change in other countries. Our
experience has been that the estimates and assumptions we have used to provide for future tax
assessments have proven to be appropriate. However, past experience is only a guide, and the
potential exists, however limited, that the tax resulting from the resolution of current and
potential future tax controversies may differ materially from the amount accrued. Although we have
provided for the taxes that we believe will ultimately be payable as a result of these assessments,
the aggregate assessments are approximately $34.1 million in excess of the taxes provided for in
our consolidated financial statements.
In addition to the aforementioned assessments that have been received from various taxing
authorities, we provide for taxes in certain situations where assessments have not been received.
In those situations, we consider it probable that the taxes ultimately payable will exceed those
amounts reflected in filed tax returns; accordingly, taxes are provided in those situations under
the guidance in Statement of Financial Accounting Standards (SFAS) No. 5,
Accounting for
Contingencies
. Future events such as changes in the facts or tax law, judicial decisions regarding
existing law or a favorable audit outcome may later indicate the assertion of additional taxes is
no longer probable. In that circumstance, it is possible that taxes previously provided would be
released.
Pensions and Postretirement Benefit Obligations
Pensions and postretirement benefit obligations and the related plan expenses are calculated
using actuarial models and methods. This involves the use of two critical assumptions, the
discount rate and the expected rate of return on assets, both of which are important elements in
determining plan expenses and in measuring plan assets and liabilities. We evaluate these critical
assumptions at least annually. Although considered less critical, other assumptions used in
determining benefit obligations and plan expenses, such as demographic factors like retirement age,
mortality and turnover, are also evaluated periodically and are updated to reflect our actual and
expected experience.
The discount rate enables us to state expected future cash flows at a present value on the
measurement date. A lower discount rate increases the present value of benefit obligations and
increases plan expenses. We used a discount rate of 6.00% in 2005, 6.25% in 2004 and 6.75% in 2003
to determine plan expenses. A 50 basis point reduction in the discount rate would have increased
plan expenses in 2005 by $3.4 million.
To determine the expected rate of return on plan assets, we consider the current and expected
asset allocations, as well as historical and expected returns on various categories of plan assets.
A lower rate of return increases plan expenses. We assumed rates of return on our plan
investments were 8.50% in 2005, 2004 and 2003. A 50 basis point reduction in the expected rate of
return on assets of our principal plans would have increased plan expenses in 2005 by $2.9 million.
DISCONTINUED OPERATIONS
In the fourth quarter of 2005, our management initiated and our Board of Directors approved a
plan to sell the Baker Supply Products Division (SPD), a product line group within the Completion
and Production segment. SPD distributes basic supplies, products and small tools to the drilling
industry. In January 2006, we signed a nonbinding letter of intent for the sale of SPD. The sale
is expected to close in the first quarter of 2006. SPD had revenues of $32.5 million for the year
ended December 31, 2005. This transaction is subject to the negotiation and execution of a
definitive sale agreement, as well as, various conditions, including satisfactory due diligence
review of SPDs business. There can be no assurance that the transaction will be consummated.
In September 2004, we completed the sale of Baker Hughes Mining Tools (BHMT), a product line
group within the Drilling and Evaluation segment that manufactured rotary drill bits used in the
mining industry, for $31.5 million. We recorded a gain on the sale of $0.2 million, net of tax of
$3.6 million, which consisted of a gain on the disposal of $6.8 million offset by a loss of $6.6
million related to the recognition of the cumulative foreign currency translation adjustments into
earnings.
In October 2003, we signed a definitive agreement for the sale of BIRD Machine (BIRD), the
remaining division of the former Process segment, and recorded charges totaling $37.4 million, net
of tax of $10.9 million, which consisted of a loss of $13.5 million on the writedown of BIRD to
fair value, $6.2 million of severance and warranty accruals and a loss of $17.7 million related to
the recognition of cumulative foreign currency translation adjustments into earnings. In January
2004, we completed the sale of BIRD and recorded an additional loss on the sale of $0.5 million
with no tax benefit. We received $5.6 million in proceeds, which were subject to postclosing
adjustments to the purchase price, and retained certain accounts receivable, inventories and other
assets. During the second quarter of 2004, we made a net payment of $6.8 million to the buyer in
settlement of the final purchase price adjustments. The adjustments were the result of changes in
the value of assets sold to and liabilities assumed by the buyer between the date the initial sales
price was negotiated and the closing of the sale.
32
In December 2002, we entered into exclusive negotiations for the sale of our interest in our
oil producing operations in West Africa and received $10.0 million as a deposit. The transaction
was effective as of January 1, 2003, and resulted in a gain on the sale of $4.1 million, net of a
tax benefit of $0.2 million. We received the remaining $22.0 million in proceeds in April 2003.
In 2003, all purchase price adjustments related to the sale of EIMCO Process Equipment
(EIMCO) were completed, resulting in the release of the escrow balance, of which we received $2.0
million and $2.9 million was returned to the buyer. We recorded an additional loss on the sale of
EIMCO of $2.5 million, net of tax of $1.3 million.
We have reclassified the consolidated financial statements for all prior periods presented to
reflect these operations as discontinued. See Note 2 of the Notes to Consolidated Financial
Statements in Item 8 herein for additional information regarding discontinued operations.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated statements of
operations are based on available information and represent our analysis of significant changes or
events that impact the comparability of reported amounts. Where appropriate, we have identified
specific events and changes that affect comparability or trends and, where possible and practical,
have quantified the impact of such items. The discussions are based on our consolidated financial
results, as individual segments do not contribute disproportionately to our revenues, profitability
or cash requirements.
The table below details certain consolidated statement of operations data and their percentage
of revenues for 2005, 2004 and 2003, respectively (dollar amounts in millions).
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2005
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2004
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2003
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$
|
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%
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$
|
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%
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|
$
|
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%
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Revenues
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$
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7,185.5
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|
|
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100.0
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%
|
|
$
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6,079.6
|
|
|
|
100.0
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%
|
|
$
|
5,233.3
|
|
|
|
100.0
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%
|
Cost of revenues
|
|
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4,942.5
|
|
|
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68.8
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%
|
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4,351.0
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|
|
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71.6
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%
|
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3,807.5
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|
|
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72.8
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%
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Selling, general and administrative
|
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1,009.6
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14.1
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%
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912.2
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15.0
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%
|
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824.6
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15.8
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%
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Revenues
Revenues for 2005 increased 18.2% compared with 2004, primarily due to increases in activity,
as evidenced by a 14.8% increase in the worldwide rig count, pricing improvements of between four
and six percent and increases in market share in selected product lines and geographic areas.
These increases were partially offset by the impact of hurricanes in the Gulf of Mexico. Revenues
in North America, which accounted for 42.4% of total revenues, increased 20.9% for 2005 compared
with 2004, despite the unfavorable impact on our U.S. offshore revenues of approximately $68.0
million from hurricanerelated disruptions. This increase reflects increased activity in the U.S.,
as evidenced by the 18.0% increase in the North American rig count, with activity dominated by
landbased gasdirected drilling. Revenues outside North America, which accounted for 57.6% of
total revenues, increased 16.3% for 2005 compared with 2004. This increase reflects the
improvement in international drilling activity, as evidenced by the 8.6% increase in the rig count
outside North America, particularly in Latin America, the Middle East and Asia Pacific, coupled
with price increases in certain markets and product lines.
Revenues for 2004 increased 16.2% compared with 2003, reflecting a 10.1% increase in the
worldwide rig count. Revenues in North America, which accounted for 41.5% of total revenues,
increased 14.4% compared with 2003. This increase reflects increased drilling activity in the U.S.
and Canada, as evidenced by a 10.9% increase in the North American rig count, and $24.8 million
related to intellectual property license fees, which is not expected to recur in the same magnitude
in the future. Revenues outside North America, which accounted for 58.5% of total revenues,
increased 17.5% compared with 2003. This increase reflects the improvement in international
drilling activity, as evidenced by an 8.6% increase in the rig count outside North America,
primarily in Latin America and Asia Pacific, partially offset by decreased drilling activity in the
North Sea and Africa. During 2004, our revenue growth was primarily due to increases in activity
and, to a lesser extent, pricing improvements.
Cost of Revenues
Cost of revenues for 2005 increased 13.6% compared with 2004. Cost of revenues as a
percentage of revenues was 68.8% and 71.6% for 2005 and 2004, respectively. The decrease in cost
of revenues as a percentage of revenue is primarily the result of overall price increases of
between four and six percent and very high utilization of our rental tool fleet and personnel.
These increases were partially offset by higher raw material costs and employee compensation
expenses.
33
Cost of revenues for 2004 increased 14.3% compared with 2003. Cost of revenues as a
percentage of revenues was 71.6% and 72.8% for 2004 and 2003, respectively. The decrease in cost
of revenues as a percentage of revenues is primarily related to limited pricing improvement in
certain markets and product lines and improved cost control measures, including lower repair and
maintenance costs at our INTEQ division, partially offset by increased material costs and higher
employee compensation expense. A change in the geographic and product mix from the sale of our
products and services also contributed to the decrease in the cost of revenues as a percentage of
revenues. During 2004, our revenue increases came predominantly from outside North America and our
margins on revenues generated outside North America are typically higher than margins generated in
North America.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses increased 10.7% in 2005 compared with
2004. The increase corresponds with increased activity and resulted primarily from higher
marketing and employee compensation expenses.
SG&A expenses for 2004 increased 10.6% compared with 2003. This increase was primarily due to
higher marketing and administrative expenses as a result of increased activity, including higher
employee compensation expense, and increased costs related to our continued focus on compliance,
including legal investigations and increased staffing in our legal, compliance and audit groups.
The increase was also due to the implementation of programs and procedures as a result of the
requirements of the SarbanesOxley Act of 2002.
Reversal of Restructuring Charge
In 2000, our Board of Directors approved a plan to substantially exit the oil and natural gas
exploration business and we recorded a restructuring charge of $29.5 million. Included in the
restructuring charge was $1.1 million for a contractual obligation related to an oil and natural
gas property in Angola. The property was subsequently sold in 2003, and we reversed the liability
related to this contractual obligation, accordingly.
Impairment of Investment in Affiliate
In 2003, as a result of the continued weakness in the seismic industry, we evaluated the
carrying value of our investment in WesternGeco and recorded an impairment loss of $45.3 million to
writedown the investment to its fair value. The fair value was determined using a combination of
a market capitalization and discounted cash flow approach. We were assisted in the determination
of the fair value by a third party. Although not anticipated, further declines in the fair value
of the investment in WesternGeco would result in additional impairments.
Equity in Income (Loss) of Affiliates
Equity in income of affiliates increased $63.8 million in 2005 compared with 2004. The
increase is almost entirely due to the increase in equity in income of WesternGeco, our most
significant equity method investment. WesternGecos revenue and profitability has continued to
improve as a result of ongoing favorable market conditions in the seismic industry.
Equity in income of affiliates was $36.3 million in 2004 compared with equity in loss of
affiliates of $2.1 million in 2003, which excludes the $135.7 million related to our portion of the
restructuring and impairment charge taken by WesternGeco in the third quarter of 2003. During
2003, the operating results of WesternGeco continued to be adversely affected by the weakness in
the seismic industry and, as a result of this weakness, WesternGeco recorded certain impairment and
restructuring charges of $452.0 million for impairment of its multiclient seismic library and
rationalization of its marine seismic fleet.
Interest Expense and Interest Income
Interest expense decreased $11.3 million in 2005 compared with 2004. The decrease was
primarily due to lower total debt levels partially offset by the impact of the interest rate swap
agreement that was in place from April 2004 through June 2005. The lower total debt levels were a
result of the repayment of $350.0 million of longterm debt in the second quarter of 2004.
Interest income in 2005 increased $11.2 million over 2004, due to significantly higher cash
balances and shortterm investments during the year resulting primarily from higher cash flows from
operations.
Interest expense for 2004 decreased $19.5 million compared with 2003, primarily due to lower
total debt levels and the effect of the interest rate swap agreement entered into in April 2004.
The lower total debt levels are the result of the repayment of $350.0 million of longterm debt in
the second quarter of 2004, which decreased interest expense by $16.0 million in 2004 compared with
2003. Additionally, the favorable impact of the interest rate swap agreement decreased interest
expense by $4.1 million in 2004 compared with 2003.
34
Income Taxes
Our effective tax rates differ from the U.S. statutory income tax rate of 35% due to state
income taxes, differing rates of tax on international operations and higher taxes within the
WesternGeco venture. Additionally, in 2005 we have reflected a $10.6 million reduction to tax
expense attributable to the recognition of a deferred tax asset associated with our supplemental
retirement plan (SRP).
During 2003, we recognized an incremental effect of $36.3 million of additional taxes
attributable to our portion of the operations of WesternGeco. Of this amount, $15.9 million
related to the reduction in the carrying value of our equity investment in WesternGeco for which
there was no tax benefit. The remaining $20.4 million arose from operations of the venture due to:
(i) the venture being taxed in certain foreign jurisdictions based on a deemed profit basis, which
is a percentage of revenues rather than profits and (ii) unbenefitted foreign losses of the
venture, which are operating losses and impairment and restructuring charges in certain foreign
jurisdictions where there was no current tax benefit and where a deferred tax asset was not
recorded due to the uncertainty of realization.
During 2005 and 2003, benefits of $4.3 million and $3.3 million, respectively, were recognized
as the result of various refund claims filed in the U.S.
Our tax filings for various periods are subjected to audit by tax authorities in most
jurisdictions where we conduct business. These audits may result in assessments of additional
taxes that are resolved with the authorities or potentially through the courts. We believe that
these assessments may occasionally be based on erroneous and even arbitrary interpretations of
local tax law. We have received tax assessments from various taxing authorities and are currently
at varying stages of appeals and/or litigation regarding these matters. We have provided for the
amounts we believe will ultimately result from these proceedings. We believe we have substantial
defenses to the questions being raised and will pursue all legal remedies should an unfavorable
outcome result. However, resolution of these matters involves uncertainties and there are no
assurances that the outcomes will be favorable.
Cumulative Effect of Accounting Change
On December 31, 2005, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 47 (FIN 47),
Conditional Asset Retirement Obligations
. FIN 47 clarifies that the term
conditional asset retirement obligation as used in SFAS No. 143,
Accounting for Asset Retirement
Obligations,
refers to a legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future event that may or may not be within
the control of the entity. The adoption of FIN 47 resulted in a charge of $0.9 million, net of tax
of $0.5 million, recorded as the cumulative effect of accounting change in the consolidated
statement of operations. In conjunction with the adoption, we recorded conditional asset
retirement obligations of $1.6 million as the fair value of the costs associated with the special
handling of asbestos related materials in certain facilities. We also have certain facilities that
contain asbestos related materials for which a liability has not been recognized because the fair value
cannot be reasonably estimated. We believe that there are indeterminate settlement dates for these
obligations because the range of time over which we would settle these obligations is unknown or
cannot be estimated; therefore, sufficient information does not exist to apply an expected present
value technique.
On January 1, 2003, we adopted SFAS No. 143,
Accounting for Asset Retirement Obligations
.
SFAS No. 143 requires that the fair value of a liability associated with an asset retirement
obligation (ARO) be recognized in the period in which it is incurred if a reasonable estimate can
be made. The liability for the ARO is revised each subsequent period due to the passage of time
and changes in estimates. The associated retirement costs are capitalized as part of the carrying
amount of the longlived asset and subsequently depreciated over the estimated useful life of the
asset. The adoption of SFAS No. 143 in 2003 resulted in a charge of $5.6 million, net of tax of
$2.8 million, recorded as the cumulative effect of accounting change in the consolidated statement
of operations. In conjunction with the adoption, we recorded ARO liabilities of $11.4 million
primarily for anticipated costs of obligations associated with the future disposal of power source
units at certain of our divisions and refurbishment costs associated with certain leased facilities
in Europe and with a fleet of leased railcars and tanks.
LIQUIDITY AND CAPITAL RESOURCES
Our objective in financing our business is to maintain adequate financial resources and access
to additional liquidity. During 2005, cash flows from operations and proceeds from the issuance of
common stock resulting from the exercise of stock options were the principal sources of funding.
We anticipate that cash flows from operations will be sufficient to fund our liquidity needs in
2006. We also have a $500.0 million committed revolving credit facility that provides backup
liquidity in the event an unanticipated and significant demand on cash flows could not be funded by
operations.
35
Our capital planning process is focused on utilizing cash flows generated from operations in
ways that enhance the value of our company. In 2005, we used cash for a variety of activities
including working capital needs, payment of dividends, repurchase of common stock, repayments of
borrowings and capital expenditures.
Cash Flows
Cash flows provided (used) by continuing operations by type of activity were as follows for
the years ended December 31 (in millions):
|
|
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|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Operating activities
|
|
$
|
949.6
|
|
|
$
|
781.8
|
|
|
$
|
649.0
|
|
Investing activities
|
|
|
(465.3
|
)
|
|
|
(196.3
|
)
|
|
|
(360.7
|
)
|
Financing activities
|
|
|
(108.1
|
)
|
|
|
(352.2
|
)
|
|
|
(335.8
|
)
|
Statements of cash flows for entities with international operations that are local currency
functional exclude the effects of the changes in foreign currency exchange rates that occur during
any given year, as these are noncash changes. As a result, changes reflected in certain accounts
on the consolidated statements of cash flows may not reflect the changes in corresponding accounts
on the consolidated balance sheets.
Operating Activities
Cash flows from operating activities have been steadily increasing over the last three years
and we expect this trend to continue in 2006. We attribute the increases in our cash flow to the
increasing levels of income from continuing operations adjusted for noncash items.
Cash flows from operating activities of continuing operations increased $167.8 million in 2005
compared with 2004. This increase was primarily due to an increase in income from continuing
operations of $349.1 million partially offset by a change in net operating assets and liabilities that used
$180.6 million more in cash flows during 2005 compared with 2004.
The underlying drivers of the changes in operating assets and liabilities are as follows:
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|
|
An increase in accounts receivable used $329.4 million in cash in 2005 compared with
using $173.7 million in cash in 2004. This was due to the increase in revenues and an
increase in days sales outstanding (defined as the average number of days our accounts
receivable are outstanding) of approximately three days.
|
|
|
|
|
A build up in inventory in anticipation of and related to increased activity used $108.7
million in cash in 2005 compared with using $3.2 million in cash in 2004.
|
|
|
|
|
An increase in accounts payable, accrued employee compensation and other accrued
liabilities provided $269.6 million in cash in 2005 compared with providing $189.0 million
in cash in 2004. This was due primarily to increased activity and increased employee
compensation accruals.
|
Our contributions to our defined benefit pension plans in 2005 were approximately $48.0
million, a decrease of approximately $62.0 million compared to 2004, due to higher funding in
excess of the minimum requirements in 2004.
Cash flows from operating activities of continuing operations increased $132.8 million in 2004
compared with 2003. The increase was primarily due to increased operating performance attributable
to our increased revenues. In addition, changes in net operating assets and liabilities provided
$11.1 million less in cash flows during 2004 compared with 2003.
The underlying drivers of the changes in operating assets and liabilities are as follows:
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|
|
An increase in accounts receivable used $173.7 million in cash in 2004 compared with
using $13.8 million in cash in 2003. This was due to the
increase in revenues and an
increase in days sales outstanding of approximately two days.
|
|
|
|
|
A build up in inventory in anticipation of increased activity used $3.2 million in cash
in 2004 compared with providing $20.7 million in cash in 2003. The build up in inventory
was partially offset by our continued focus on improving the utilization of inventory on
hand.
|
36
|
|
|
An increase in accounts payable, accrued employee compensation and other accrued
liabilities provided $189.0 million in cash in 2004 compared with providing $16.3 million in
cash in 2003. This was due primarily to increased activity and increased employee
compensation accruals.
|
Our contributions to our defined benefit pension plans in 2004 were approximately $110.0
million, an increase of approximately $82.0 million compared with 2003, due to our decision to
improve the funded status of certain pension plans and to provide us with increased flexibility on
the future funding of these pension plans.
Investing Activities
Our principal recurring investing activity is the funding of capital expenditures to ensure
that we have the appropriate levels and types of rental tools in place to generate revenues from
operations. Expenditures for capital assets totaled $478.3 million, $348.2 million and $403.9
million for 2005, 2004 and 2003, respectively. The majority of these expenditures were for rental
tools and machinery and equipment, including wireline tools and equipment.
During 2005, we paid $46.8 million for acquisitions of businesses, net of cash acquired. In
December, we purchased Zeroth Technology Limited (Zertech), a developer of an expandable metal
sealing element, for $20.3 million. In November, we paid $25.5 million, net of cash acquired of
$1.7 million, for the remaining 50% interest in QuantX Wellbore
Instrumentation (QuantX), a venture we
entered into in 2003 which is engaged in the permanent inwell monitoring market. During 2005, we also made smaller acquisitions having an aggregate purchase
price of $1.0 million.
During 2005, we purchased $77.0 million of auction rate securities, which are highly liquid,
variablerate debt securities. While the underlying security has a longterm maturity, the
interest rate is reset through Dutch auctions that are typically held every 7, 28 or 35 days,
creating shortterm liquidity. These shortterm investments are classified as availableforsale
and are recorded at cost, which approximates market value.
Proceeds from disposal of assets were $90.1 million, $106.9 million and $66.8 million for
2005, 2004 and 2003, respectively. These disposals relate to rental tools that were lostinhole,
as well as machinery, rental tools and equipment no longer used in operations that were sold
throughout the year. Included in the proceeds for 2004 was $12.2 million related to the sale of
certain real estate properties held for sale.
In 2005, we received distributions of $30.0 million from WesternGeco, which were recorded as a
reduction in the carrying value of our investment. We also received $13.3 million from
Schlumberger related to the WesternGeco trueup payment, of which $13.0 million was recorded as a
reduction in the carrying value of our investment and $0.3 million as interest income.
In May 2005, we received $3.7 million from the release of a portion of the amount held in
escrow related to our sale of Petreco International. The remainder is expected to be released to
us in the first quarter of 2006, subject to the indemnity obligations under the sales agreement.
In 2004, we paid $6.6 million for acquisition of businesses, net of cash acquired. We
purchased the remaining 60% interest in Luna Energy L.L.C. (Luna), a venture we entered into in
2002, for $1.0 million. We also paid $5.6 million in settlement of the final purchase price
related to an acquisition completed in a prior year and invested an additional $7.1 million in
certain of our investments in affiliates.
In 2003, we made two acquisitions having an aggregate purchase price of $16.9 million, of
which $9.5 million was paid in cash. In addition, during 2003, we invested $38.1 million in
affiliates, of which $30.1 million related to our 50% interest in QuantX.
In 2004, we received $58.7 million in net proceeds from the sale of businesses and our
interest in an affiliate. In January, we completed the sale of BIRD and received $5.6 million in
proceeds, which were subject to postclosing adjustments to the purchase price. In June 2004, we
made a net payment of $6.8 million to the buyer of BIRD in settlement of the final purchase price
adjustments. In February 2004, we completed the sale of our minority interest in Petreco
International, a venture we entered into in 2001, and received proceeds of $35.8 million, of which
$7.4 million was placed in escrow pending the outcome of potential indemnification obligations
pursuant to the sales agreement. In September, we also completed the sale of BHMT and received
proceeds of $31.5 million.
In 2003, we received $24.0 million in net proceeds from the sale of businesses. In April, we
completed the sale of our interest in an oil producing property in West Africa and received the
remaining $22.0 million in proceeds. We also completed all purchase price adjustments related to
the sale of our EIMCO division and received $2.0 million from the release of the escrow balance.
37
We routinely evaluate potential acquisitions of businesses of third parties that may enhance
our current operations or expand our operations into new markets or product lines. We may also
from time to time sell business operations that are not considered part of our core business.
Financing Activities
We had net (repayments) borrowings of commercial paper and other shortterm debt of $(71.1)
million, $35.5 million and $11.2 million in 2005, 2004 and 2003, respectively. In 2004, we repaid
the $100.0 million 8.0% Notes due May 2004 and the $250.0 million 7.875% Notes due June 2004. In
2003, we repaid the $100.0 million 5.8% Notes due February 2003. These repayments were funded with
cash on hand, cash flows from operations and the issuance of commercial paper.
Total debt outstanding at December 31, 2005 was $1,087.9 million, a decrease of $74.4 million
compared with December 31, 2004. The total debt to total capitalization (defined as total debt
plus stockholders equity) ratio was 0.19 at December 31, 2005 and 0.23 at December 31, 2004.
In April 2004, we entered into an interest rate swap agreement for a notional amount of $325.0
million associated with our 6.25% Notes due January 2009. The interest rate swap agreement was
designated and qualified as a fair value hedging instrument. Due to our outlook for interest
rates, we terminated the interest rate swap agreement in June 2005, which required us to make a
payment of $5.5 million. This amount was deferred and is being amortized as an increase to
interest expense over the remaining life of the underlying debt security.
At different times during 2003, we entered into three separate interest rate swap agreements,
each for a notional amount of $325.0 million, associated with our 6.25% Notes due January 2009.
These agreements had been designated and had qualified as fair value hedging instruments. Due to
our outlook for interest rates, we terminated the three agreements and received payments totaling
$26.9 million. Each of the three agreements was terminated prior to entering into a new agreement.
The deferred gains are being amortized as a reduction of interest expense over the remaining life
of the underlying debt security.
We received proceeds of $228.1 million, $115.9 million and $61.8 million in 2005, 2004 and
2003, respectively, from the issuance of common stock through the exercise of stock options and the
employee stock purchase plan.
On October 27, 2005, the Board of Directors authorized us to repurchase up to $455.5 million
of common stock, which was in addition to the balance of $44.5 million remaining from the Board of
Directors September 2002 authorization, resulting in the authorization to repurchase up to a total
of $500.0 million of common stock. On November 3, 2005, we entered into a Stock Purchase Plan with
an agent for the purchase of shares of our common stock that complies with the requirements of Rule
10b51 promulgated by the Securities Exchange Act of 1934. The term of the November Plan will run
from November 7, 2005 until April 30, 2006, unless earlier terminated. On February 22, 2006, we
entered into another Plan for a term that will run from February 23, 2006 until April 30, 2006,
unless earlier terminated. During that term, the agent will use its best efforts to repurchase a
fixed dollar value of our common stock each trading day, subject to applicable trading rules, until
the cumulative amount purchased under the November Plan equals $250.0 million and under the
February Plan equals $150.0 million, inclusive of all commissions and fees paid by us to the agent
related to such repurchases. Shares will be repurchased by the agent at the prevailing market
prices, subject to limitations provided by us, in open market transactions intended to comply with
Rule 10b18 of the Exchange Act. We or the agent may terminate the Plans. However, no shares will
be repurchased at any time that the cost of the shares exceeds an amount that has been specified by
us to the agent. During the fourth quarter of 2005, we repurchased 1.7 million shares of our
common stock at an average price of $58.17 per share, for a total of $98.5 million. During 2003,
we repurchased 6.3 million shares at an average price of $28.78 per share, for a total of $181.4
million. Upon repurchase, the shares were retired.
We paid dividends of $161.1 million, $153.6 million and $154.3 million in 2005, 2004 and 2003,
respectively. Beginning in the fourth quarter of 2005 as authorized by our Board of Directors, we
increased our quarterly dividend to $0.13 per share, compared to $0.115 per share that was paid in
prior quarters.
Available Credit Facilities
At December 31, 2005, we had $955.6 million of credit facilities with commercial banks, of
which $500.0 million is a committed revolving credit facility (the facility) that expires in July
2010. The facility provides for up to three oneyear extensions, subject to the approval and
acceptance by the lenders, among other conditions. In addition, the facility contains a provision
to allow for an increase in the facility amount of an additional $500.0 million, subject to the
approval and acceptance by the lenders, among other conditions. The facility contains certain
covenants which, among other things, require the maintenance of a funded indebtedness to total
capitalization ratio (a defined formula per the facility) of less than or equal to 0.60, restrict
certain merger transactions or the sale
38
of all or substantially all of the assets of the company or a significant subsidiary and limit
the amount of subsidiary indebtedness. Upon the occurrence of certain events of default, our
obligations under the facility may be accelerated. Such events of default include payment defaults
to lenders under the facility, covenant defaults and other customary defaults. At December 31,
2005, we were in compliance with all of the facility covenants. There were no direct borrowings
under the facility during the year ended December 31, 2005; however, to the extent we have
outstanding commercial paper, our ability to borrow under the facility is reduced. At December 31,
2005, we had no outstanding commercial paper.
If market conditions were to change and revenues were to be significantly reduced or operating
costs were to increase, our cash flows and liquidity could be reduced. Additionally, it could
cause the rating agencies to lower our credit rating. We do not have any ratings triggers in the
facility that would accelerate the maturity of any borrowings under the facility. However, a
downgrade in our credit ratings could increase the cost of borrowings under the facility and could
also limit or preclude our ability to issue commercial paper. Should this occur, we would seek
alternative sources of funding, including borrowing under the facility.
We believe our credit ratings and relationships with major commercial and investment banks
would allow us to obtain interim financing over and above our existing credit facilities for any
currently unforeseen significant needs or growth opportunities. We also believe that such interim
financings could be funded with subsequent issuances of longterm debt or equity, if necessary.
Cash Requirements
In 2006, we believe operating cash flows will provide us with sufficient capital resources and
liquidity to manage our working capital needs, meet contractual obligations, fund capital
expenditures, pay dividends, repurchase common stock and support the development of our shortterm
and longterm operating strategies.
We currently expect 2006 capital expenditures will be between $750.0 million and $780.0
million, excluding acquisitions. The expenditures are expected to be used primarily for normal,
recurring items necessary to support the growth of our business and operations.
In 2006, we expect to make interest payments of between $72.0 million and $77.0 million. This
is based on our current expectations of debt levels during 2006. We also expect to make income tax
payments of between $490.0 million and $530.0 million in 2006.
As of December 31, 2005, we have authorization remaining to repurchase up to $401.5 million in
common stock. We may repurchase our common stock depending on market conditions, applicable legal
requirements, our liquidity and other considerations. We anticipate paying dividends of between
$170.0 million and $180.0 million in 2006; however, the Board of Directors can change the dividend
policy at anytime.
During 2006, we estimate we will contribute between $18.0 million and $23.0 million to our
defined benefit pension plans and make benefit payments related to postretirement welfare plans of
between $15.0 million and $17.0 million. We also estimate we will contribute between $85.0 million
and $95.0 million to our defined contribution plans.
We do not believe there are any other material trends, demands, commitments, events or
uncertainties that would have, or are reasonably likely to have, a material impact on our financial
condition and liquidity. Other than previously discussed, we currently have no information that
would create a reasonable likelihood that the reported levels of revenues and cash flows from
operations in 2005 are not indicative of what we can expect in the future.
39
Contractual Obligations
In the table below, we set forth our contractual cash obligations as of December 31, 2005.
Some of the figures we include in this table are based on our estimates and assumptions about these
obligations, including their duration, anticipated actions by third parties and other factors. The
contractual cash obligations we will actually pay in future periods may vary from those reflected
in the table because the estimates and assumptions are subjective.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Period (In millions)
|
|
|
|
|
|
|
Less Than
|
|
1 3
|
|
4 5
|
|
More than
|
|
|
Total
|
|
1 year
|
|
Years
|
|
Years
|
|
5 Years
|
|
Total debt
(1)
|
|
$
|
1,084.9
|
|
|
$
|
9.9
|
|
|
$
|
|
|
|
$
|
525.0
|
|
|
$
|
550.0
|
|
Estimated interest payments
(2)
|
|
|
996.5
|
|
|
|
72.6
|
|
|
|
145.2
|
|
|
|
96.8
|
|
|
|
681.9
|
|
Operating leases
(3)
|
|
|
314.0
|
|
|
|
74.7
|
|
|
|
93.8
|
|
|
|
41.8
|
|
|
|
103.7
|
|
Purchase obligations
(4)
|
|
|
173.0
|
|
|
|
163.2
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
Other longterm liabilities
(5)
|
|
|
52.4
|
|
|
|
12.8
|
|
|
|
20.7
|
|
|
|
6.0
|
|
|
|
12.9
|
|
|
Total
|
|
$
|
2,620.8
|
|
|
$
|
333.2
|
|
|
$
|
269.5
|
|
|
$
|
669.6
|
|
|
$
|
1,348.5
|
|
|
|
|
|
(1)
|
|
Amounts represent the expected cash payments for our total debt and do not include
any unamortized discounts, deferred issuance costs or net deferred gains on terminated
interest rate swap agreements.
|
|
(2)
|
|
Amounts represent the expected cash payments for interest on our fixed rate
longterm debt.
|
|
(3)
|
|
We enter into operating leases in the normal course of business. Some lease
agreements provide us with the option to renew the lease. Our future operating lease payments
would change if we exercised these renewal options and if we entered into additional operating
lease agreements.
|
|
(4)
|
|
Purchase obligations include agreements to purchase goods or services that are
enforceable and legally binding and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Purchase obligations exclude agreements that are
cancelable at anytime without penalty.
|
|
(5)
|
|
Amounts represent other longterm liabilities, including the current portion,
reflected in the consolidated balance sheet where both the timing and amount of payment
streams are known. Amounts include: payments for certain environmental remediation
liabilities, payments for deferred compensation, payouts under acquisition agreements and
payments for certain asset retirement obligations. Amounts do not include: payments for
pension contributions, payments for various postretirement welfare benefit plans and
postemployment benefit plans and payments for deferred taxes and other tax liabilities.
|
OffBalance Sheet Arrangements
In the normal course of business with customers, vendors and others, we have entered into
offbalance sheet arrangements, such as letters of credit and other bank issued guarantees, which
totaled approximately $319.8 million at December 31, 2005. In addition, at December 31, 2005, we
have guaranteed debt and other obligations of third parties with a maximum potential exposure of
$1.4 million. None of these offbalance sheet arrangements either has, or is likely to have, a
material effect on our current or future financial condition, results of operations, liquidity or
capital resources.
Other than normal operating leases, we do not have any offbalance sheet financing
arrangements such as securitization agreements, liquidity trust vehicles, synthetic leases or
special purpose entities. As such, we are not materially exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such financing arrangements.
NEW ACCOUNTING STANDARDS
In
November 2004, the FASB issued SFAS No. 151,
Inventory Costs an Amendment of ARB No. 43,
Chapter 4
, which amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that
these items be recognized as current period charges. In addition, SFAS No. 151 requires the
allocation of fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We adopted SFAS No. 151 on January 1, 2006, with no material effect
on our consolidated financial statements.
40
In December 2004, the FASB issued the revised SFAS No. 123,
ShareBased Payment
(SFAS No.
123(R)). SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No.
123(R) requires an entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grantdate fair value of the award. That cost will be
recognized over the period in which an employee is required to provide service in exchange for the
award. SFAS No. 123(R) also requires an entity to initially measure the cost of employee services
rendered in exchange for an award of liability instruments at its current fair value. The fair
value of that award is to be remeasured subsequently at each reporting date through the settlement
date. Changes in the fair value during the required service period are to be recognized as
compensation cost over that period. In accordance with guidance issued by the SEC that delayed the
effective date of SFAS No. 123(R), we adopted SFAS No. 123(R) on January 1, 2006 using the modified
prospective method, whereby we will recognize expense on any previously granted unvested awards
over the remaining service period of the award. New awards granted after the adoption date will be
expensed over the estimated service period. Based on our current estimates, we expect the impact
in 2006 of the adoption of SFAS No. 123(R) to be additional expense of between $18.0 million and
$20.0 million, net of tax. We are continuing to evaluate the various option pricing models and the
required assumptions and estimates that will be used in determining the fair value of awards made
in 2006. In addition, we have estimated the number of awards to be granted in 2006 because the
final amount has not been determined. As a result, the actual amount recorded as expense in 2006
may be different from this estimated amount and this estimated amount may not be indicative of the
expense we may incur in future years.
In December 2004, the FASB issued FASB Staff Position No. 1091 (FSP 1091),
Application of
FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109) to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004
, which provides
guidance on the American Jobs Creation Act of 2004 (the Act). The Act provides a tax deduction
for income from qualified domestic production activities. FSP 1091 provides for the treatment of
the deduction as a special deduction as described in SFAS No. 109. As such, the deduction will
have no effect on existing deferred tax assets and liabilities. The impact of the deduction is to
be reported in the period in which the deduction is claimed on our U.S. tax return. We adopted FSP
1091 on January 1, 2005, with no material impact on our 2005 effective tax rate, and we do not
expect that this deduction will have a material impact on our effective tax rate in future years.
In December 2004, the FASB issued FASB Staff Position No. 1092 (FSP 1092),
Accounting and
Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of
2004,
which provides guidance under SFAS No. 109 with respect to recording the potential impact of
the repatriation provisions of the Act on a companys income tax expense and deferred tax
liability. FSP 1092 states that a company is allowed time beyond the financial reporting period
of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying SFAS No. 109. We have decided not to elect to repatriate
foreign earnings under the provisions in the Act. Accordingly, our consolidated financial
statements do not reflect a provision for taxes related to this election.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47),
Accounting for
Conditional Asset Retirement Obligations
. FIN 47 clarifies that the term conditional asset
retirement obligation as used in SFAS No. 143,
Accounting for Asset Retirement Obligations
, refers
to a legal obligation to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the control of the
entity. We adopted FIN 47 on December 31, 2005, which resulted in a charge of $0.9 million, net of
tax of $0.5 million, recorded as the cumulative effect of accounting change in the consolidated
statement of operations. In conjunction with the adoption, we recorded conditional asset
retirement obligations of $1.6 million as the fair value of the costs associated with certain
conditional asset retirement obligations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
. SFAS No.
154 replaces Accounting Principles Board Opinion No. 20 (APB No. 20),
Accounting Changes
, and
SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements
, and changes the
requirements for the accounting for and reporting of a change in accounting principle. SFAS No.
154 requires retrospective application of changes in accounting principle to prior periods
financial statements, unless it is impracticable to determine either the periodspecific effects or
the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No.
154 on January 1, 2006.
RELATED PARTY TRANSACTIONS
In conjunction with the formation of WesternGeco in November 2000, we entered into an
agreement with Schlumberger whereby a cash trueup payment was to be made by either of the parties
based on a formula comparing the ratio of the net present value of sales revenue from each partys
contributed multiclient seismic data libraries during the fouryear period ending November 30, 2004
and the ratio of the net book value of those libraries as of November 30, 2000. The maximum
payment that either party would be required to make as a result of this adjustment was $100.0
million. In August 2005, we received $13.3 million from Schlumberger related to
41
the trueup payment. We recorded $13.0 million as a reduction in the carrying value of our investment in
WesternGeco and $0.3 million as interest income. The income tax effect of $3.3 million related to this payment is
included in our provision for income taxes for the year ended December 31, 2005.
In November 2000, we also entered into an agreement with WesternGeco whereby WesternGeco
subleased a facility from us for a period of ten years at then current market rates. During 2005,
2004 and 2003, we received payments of $6.5 million, $5.5 million and $5.0 million, respectively,
from WesternGeco related to this lease.
During 2005, we received distributions of $30.0 million from WesternGeco, which were recorded
as reductions in the carrying value of our investment.
Effective December 1, 2005, either party to the WesternGeco Master Formation Agreement may
offer to sell its entire interest in the venture to the other party at a cash purchase price per
percentage interest specified in an offer notice. If the offer to sell is not accepted, the
offering party will be obligated to purchase and the other party will be obligated to sell its
entire interest at the same price per percentage interest as the price specified in the offer
notice.
At December 31, 2005 and 2004, net accounts receivable (payable) from unconsolidated
affiliates totaled $0.4 million and $(1.1) million, respectively. There were no other significant
related party transactions.
FORWARDLOOKING STATEMENTS
MD&A and certain statements in the Notes to Consolidated Financial Statements include
forwardlooking 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, (each a
forwardlooking statement). The words anticipate, believe, ensure, expect, if,
intend, estimate, project, forecasts, predict, outlook, aim, will, could,
should, would, may, likely and similar expressions, and the negative thereof, are intended
to identify forwardlooking statements. Our forwardlooking statements are based on assumptions
that we believe to be reasonable but that may not prove to be accurate. The statements do not
include the potential impact of future transactions, such as an acquisition, disposition, merger,
joint venture or other transaction that could occur. We undertake no obligation to publicly update
or revise any forwardlooking statement. Our expectations regarding our business outlook,
including changes in revenue, pricing, capital spending, profitability, strategies for our
operations, impact of our common stock repurchases, oil and natural gas market conditions, market
share and contract terms, costs and availability of resources, economic and regulatory conditions,
and environmental matters are only our forecasts regarding these matters.
All of our forwardlooking information is subject to risks and uncertainties that could cause
actual results to differ materially from the results expected. Although it is not possible to
identify all factors, these risks and uncertainties include the risk factors and the timing of any
of those risk factors identified in the Risk Factors Related to the Worldwide Oil and Natural Gas
Industry and Risk Factors Related to Our Business sections contained in Item 1A. Risk Factors
and those set forth from time to time in our filings with the Securities and Exchange Commission
(SEC). These documents are available through our web site or through the SECs Electronic
Data Gathering and Analysis Retrieval System (EDGAR) at
http://www.sec.gov.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial instruments and
arise in the normal course of business. We may enter into derivative financial instrument
transactions to manage or reduce market risk but do not enter into derivative financial instrument
transactions for speculative purposes. A discussion of our primary market risk exposure in
financial instruments is presented below.
INDEBTEDNESS
We are subject to interest rate risk on our longterm fixed interest rate debt. Commercial
paper borrowings, other shortterm borrowings and variable rate longterm debt do not give rise to
significant interest rate risk because these borrowings either have maturities of less than three
months or have variable interest rates. All other things being equal, the fair market value of
debt with a fixed interest rate will increase as interest rates fall and 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.
42
At December 31, 2005 and 2004, we had fixed rate debt aggregating $1,075.0 million and
$1,075.2 million, respectively. The following table sets forth the required cash payments for our
indebtedness, which bear a fixed rate of interest and are denominated in U.S. Dollars, and the
related weighted average effective interest rates by expected maturity dates as of December 31,
2005 and 2004 (dollar amounts in millions).
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2005
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2006
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2007
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2008
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2009
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2010
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|
Thereafter
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|
Total
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As of December 31, 2005:
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Longterm debt
(1) (2)
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$
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|
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$
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$
|
|
|
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$
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|
|
|
$
|
525.0
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|
|
$
|
|
|
|
$
|
550.0
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|
|
$
|
1,075.0
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Weighted average
effective interest rates
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|
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5.19
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%
(3)
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7.55
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%
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6.37
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%
(3)
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As of December 31, 2004:
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Longterm debt
(1) (2)
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$
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0.1
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$
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0.1
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$
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$
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|
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$
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525.0
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|
|
$
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|
|
|
$
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550.0
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|
|
$
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1,075.2
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Weighted average
effective interest rates
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12.30
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%
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6.50
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%
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4.96
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%
(3)(4)
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7.55
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%
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|
6.24
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%
(3)(4)
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Fixed to variable swaps
(4)
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Notional amount
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|
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$
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325.0
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|
|
|
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|
|
|
|
|
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$
|
325.0
|
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Pay rate
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
4.60
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%
(5)
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|
|
|
|
|
|
|
|
|
|
4.60
|
%
(5)
|
Receive rate
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|
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|
|
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|
|
|
|
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|
|
|
|
|
|
6.25
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%
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|
|
|
|
|
|
|
|
|
|
6.25
|
%
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|
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(1)
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Amounts do not include any unamortized discounts, deferred issuance costs or net
deferred gains on terminated interest rate swap agreements.
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(2)
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Fair market value of fixed rate longterm debt was $1,223.7 million at
December 31, 2005 and $1,239.0 million at December 31, 2004.
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(3)
|
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Includes the effect of the amortization of net deferred gains on terminated
interest rate swap agreements.
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(4)
|
|
Includes the fair market value of the interest rate swap agreement entered
into in April 2004. The fair market value of the interest rate swap agreement was a $2.3
million liability at December 31, 2004.
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(5)
|
|
Sixmonth LIBOR for the U.S. Dollar, reset semiannually in January and
July, plus 2.741%.
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INTEREST RATE SWAP AGREEMENTS
At December 31, 2005, there were no interest rate swap agreements in effect. Due to our
outlook for interest rates, on June 2, 2005, we terminated the interest rate swap agreement we had
entered into in April 2004. This agreement had been designated and had qualified as a fair value
hedging instrument. Upon termination we were required to pay $5.5 million. This amount is being
amortized as an increase to interest expense over the remaining life of the underlying debt
security, which matures in January 2009.
In April 2004, we entered into an interest rate swap agreement for a notional amount of $325.0
million associated with our 6.25% Notes due January 2009. Under the agreement we received interest
at a fixed rate of 6.25% and paid interest at a floating rate of sixmonth LIBOR plus a spread of
2.741%. The interest rate swap agreement was designated and qualified as a fair value hedging
instrument. The interest rate swap agreement was fully effective, resulting in no gain or loss
recorded in the consolidated statement of operations. We recorded the fair value of the interest
rate swap agreement, which was a $2.3 million liability at December 31, 2004, based on quoted
market prices for contracts with similar terms and maturity dates.
FOREIGN CURRENCY AND FOREIGN CURRENCY FORWARD CONTRACTS
We conduct operations around the world in a number of different currencies. Many of our
significant foreign subsidiaries have designated the local currency as their functional currency.
As such, future earnings are subject to change due to fluctuations in foreign currency exchange
rates when transactions are denominated in currencies other than our functional currencies. To
minimize the need for foreign currency forward contracts to hedge this exposure, our objective is
to manage foreign currency exposure by maintaining a minimal consolidated net asset or net
liability position in a currency other than the functional currency.
At December 31, 2005, we had entered into several foreign currency forward contracts with
notional amounts aggregating $65.0 million to hedge exposure to currency fluctuations in various
foreign currency payables and receivables, including the British Pound Sterling, the Norwegian
Krone, the Euro and the Brazilian Real. These contracts are designated and qualify as fair value
hedging
43
instruments. Based on quoted market prices as of December 31, 2005 for contracts with similar
terms and maturity dates, we recorded a gain of $0.1 million to adjust these foreign currency
forward contracts to their fair market value. This gain offsets designated foreign exchange losses
resulting from the underlying exposures and is included in selling, general and administrative
expense in the consolidated statement of operations.
At December 31, 2004, we had entered into several foreign currency forward contracts with
notional amounts aggregating $78.0 million to hedge exposure to currency fluctuations in various
foreign currency payables and receivables, including the British Pound Sterling, the Norwegian
Krone, the Euro and the Brazilian Real. These contracts were designated and qualified as fair
value hedging instruments. Based on quoted market prices as of December 31, 2004 for contracts
with similar terms and maturity dates, we recorded a loss of $0.4 million to adjust these foreign
currency forward contracts to their fair market value. This loss offsets designated foreign
exchange gains resulting from the underlying exposures and is included in selling, general and
administrative expense in the consolidated statement of operations.
At December 31, 2004, we had also entered into several foreign currency forward contracts with
notional amounts aggregating $122.4 million to hedge exposure to currency fluctuations in various
foreign currencies, including the British Pound Sterling and the Canadian Dollar. These exposures
arise when local currency operating expenses are not in balance with local currency revenue
collections. The funding of such imbalances was supported by shortterm intercompany borrowing
commitments that had definitive amounts and funding dates. All funding took place before December
31, 2005. These foreign currency forward contracts were designated as cash flow hedging
instruments and were fully effective. Based on quoted market prices as of December 31, 2004 for
contracts with similar terms and maturity dates, we recorded a loss of $0.1 million to adjust these
foreign currency forward contracts to their fair market value. The loss was recorded in other
comprehensive income in the consolidated balance sheet.
The counterparties to the forward contracts are major financial institutions. The credit
ratings and concentration of risk of these financial institutions are monitored on a continuing
basis. In the unlikely event that the counterparties fail to meet the terms of a foreign currency
contract, our exposure is limited to the foreign currency rate differential.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
our financial reporting, as such term is defined in Exchange Act Rules 13a15(f). Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our control environment is
the foundation for our system of internal control and is embodied in our Business Code of Conduct,
which sets the tone of our company and includes our Core Values of Integrity, Teamwork, Performance
and Learning. Included in our system of internal control are written policies, an organizational
structure providing division of responsibilities, the selection and training of qualified personnel
and a program of financial and operations reviews by a professional staff of internal auditors.
Our internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a material effect on
the financial statements.
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting. Our evaluation was based on the framework in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on our evaluation under the framework in
Internal Control Integrated Framework
, our
principal executive officer and principal financial officer concluded that our internal control
over financial reporting was effective as of December 31, 2005. The conclusion of our principal
executive officer and principal financial officer is based on the recognition that there are
inherent limitations in all systems of internal control. Because of the inherent limitations of
internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented
or detected on a timely basis. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our managements assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which is included herein.
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/s/ CHAD C. DEATON
|
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/s/ G. STEPHEN FINLEY
|
|
/s/ ALAN J. KEIFER
|
Chad C. Deaton
|
|
G. Stephen Finley
|
|
Alan J. Keifer
|
Chairman and
|
|
Senior Vice President
|
|
Vice President and
|
Chief Executive Officer
|
|
Finance and Administration
|
|
Controller
|
|
|
and Chief Financial Officer
|
|
|
Houston, Texas
February 23, 2006
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Baker Hughes Incorporated
Houston, Texas
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Baker Hughes Incorporated and subsidiaries (the
Company) maintained effective internal control over financial reporting as of December 31, 2005,
based on criteria established in
Internal Control Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based
on the criteria established in
Internal Control Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2005, based on the criteria established in
Internal Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule II as of and for the year ended December 31, 2005 of the Company; and our report dated
February 23, 2006, expressed an unqualified opinion on those consolidated financial statements and
financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 23, 2006
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Baker Hughes Incorporated
Houston, Texas
We have audited the accompanying consolidated balance sheets of Baker Hughes Incorporated and
subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the three years in the
period ended December 31, 2005. Our audits also included the financial statement schedule II,
valuation and qualifying accounts listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 subsidiaries at December 31, 2005
and 2004, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of December 31, 2005, based on the criteria established in
Internal ControlIntegrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 23, 2006, expressed an unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over financial reporting and an unqualified opinion
on the effectiveness of the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 23, 2006
47
Baker Hughes Incorporated
Consolidated Statements of Operations
(In millions, except per share amounts)
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|
|
|
|
Year Ended December 31,
|
|
|
2005
|
|
2004
|
|
2003
|
|
Revenues
|
|
$
|
7,185.5
|
|
|
$
|
6,079.6
|
|
|
$
|
5,233.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
4,942.5
|
|
|
|
4,351.0
|
|
|
|
3,807.5
|
|
Selling, general and administrative
|
|
|
1,009.6
|
|
|
|
912.2
|
|
|
|
824.6
|
|
Impairment of investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
45.3
|
|
Reversal of restructuring charge
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
Total costs and expenses
|
|
|
5,952.1
|
|
|
|
5,263.2
|
|
|
|
4,676.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,233.4
|
|
|
|
816.4
|
|
|
|
557.0
|
|
Equity in income (loss) of affiliates
|
|
|
100.1
|
|
|
|
36.3
|
|
|
|
(137.8
|
)
|
Interest expense
|
|
|
(72.3
|
)
|
|
|
(83.6
|
)
|
|
|
(103.1
|
)
|
Interest income
|
|
|
18.0
|
|
|
|
6.8
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,279.2
|
|
|
|
775.9
|
|
|
|
321.4
|
|
Income taxes
|
|
|
(404.8
|
)
|
|
|
(250.6
|
)
|
|
|
(145.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
874.4
|
|
|
|
525.3
|
|
|
|
175.8
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
4.9
|
|
|
|
3.3
|
|
|
|
(41.3
|
)
|
|
Income before cumulative effect of accounting change
|
|
|
879.3
|
|
|
|
528.6
|
|
|
|
134.5
|
|
Cumulative effect of accounting change, net of tax
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(5.6
|
)
|
|
Net income
|
|
$
|
878.4
|
|
|
$
|
528.6
|
|
|
$
|
128.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.58
|
|
|
$
|
1.57
|
|
|
$
|
0.52
|
|
Income (loss) from discontinued operations
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.12
|
)
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
Net income
|
|
$
|
2.59
|
|
|
$
|
1.58
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.56
|
|
|
$
|
1.57
|
|
|
$
|
0.52
|
|
Income (loss) from discontinued operations
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.12
|
)
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
Net income
|
|
$
|
2.57
|
|
|
$
|
1.58
|
|
|
$
|
0.38
|
|
|
See Notes to Consolidated Financial Statements
48
Baker Hughes Incorporated
Consolidated Balance Sheets
(In millions, except par value)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2005
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
697.0
|
|
|
$
|
319.0
|
|
Shortterm investments
|
|
|
77.0
|
|
|
|
|
|
Accounts receivable less allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
December 31, 2005, $51.4; December 31, 2004, $50.2
|
|
|
1,673.4
|
|
|
|
1,351.2
|
|
Inventories
|
|
|
1,126.3
|
|
|
|
1,025.3
|
|
Deferred income taxes
|
|
|
181.2
|
|
|
|
199.7
|
|
Other current assets
|
|
|
68.6
|
|
|
|
56.6
|
|
Assets of discontinued operations
|
|
|
16.6
|
|
|
|
16.7
|
|
|
Total current assets
|
|
|
3,840.1
|
|
|
|
2,968.5
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliates
|
|
|
678.9
|
|
|
|
678.1
|
|
Property less accumulated depreciation:
|
|
|
|
|
|
|
|
|
December 31, 2005, $2,475.7; December 31, 2004, $2,380.5
|
|
|
1,355.5
|
|
|
|
1,332.2
|
|
Goodwill
|
|
|
1,315.8
|
|
|
|
1,267.0
|
|
Intangible assets less accumulated amortization:
|
|
|
|
|
|
|
|
|
December 31, 2005, $84.5; December 31, 2004, $70.2
|
|
|
163.4
|
|
|
|
155.1
|
|
Other assets
|
|
|
453.7
|
|
|
|
420.4
|
|
|
Total assets
|
|
$
|
7,807.4
|
|
|
$
|
6,821.3
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
558.1
|
|
|
$
|
452.1
|
|
Shortterm borrowings and current portion of longterm debt
|
|
|
9.9
|
|
|
|
76.0
|
|
Accrued employee compensation
|
|
|
424.5
|
|
|
|
368.4
|
|
Income taxes
|
|
|
141.5
|
|
|
|
104.8
|
|
Other accrued liabilities
|
|
|
222.9
|
|
|
|
226.0
|
|
Liabilities of discontinued operations
|
|
|
3.8
|
|
|
|
2.9
|
|
|
Total current liabilities
|
|
|
1,360.7
|
|
|
|
1,230.2
|
|
|
|
|
|
|
|
|
|
|
Longterm debt
|
|
|
1,078.0
|
|
|
|
1,086.3
|
|
Deferred income taxes and other tax liabilities
|
|
|
228.1
|
|
|
|
231.9
|
|
Pensions and postretirement benefit obligations
|
|
|
336.1
|
|
|
|
308.3
|
|
Other liabilities
|
|
|
106.7
|
|
|
|
69.2
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, one dollar par value (shares authorized 750.0;
outstanding 341.5 at December 31, 2005 and 336.6 at
December 31, 2004)
|
|
|
341.5
|
|
|
|
336.6
|
|
Capital in excess of par value
|
|
|
3,293.5
|
|
|
|
3,127.8
|
|
Retained earnings
|
|
|
1,263.2
|
|
|
|
545.9
|
|
Accumulated other comprehensive loss
|
|
|
(188.0
|
)
|
|
|
(109.8
|
)
|
Unearned compensation
|
|
|
(12.4
|
)
|
|
|
(5.1
|
)
|
|
Total stockholders equity
|
|
|
4,697.8
|
|
|
|
3,895.4
|
|
|
Total liabilities and stockholders equity
|
|
$
|
7,807.4
|
|
|
$
|
6,821.3
|
|
|
See Notes to Consolidated Financial Statements
49
Baker Hughes Incorporated
Consolidated Statements of Stockholders Equity
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
in Excess
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
of
|
|
Retained
|
|
Comprehensive
|
|
Unearned
|
|
|
|
|
Stock
|
|
Par Value
|
|
Earnings
|
|
Loss
|
|
Compensation
|
|
Total
|
|
Balance, December 31, 2002
|
|
$
|
335.8
|
|
|
$
|
3,111.6
|
|
|
$
|
196.3
|
|
|
$
|
(246.5
|
)
|
|
$
|
|
|
|
$
|
3,397.2
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
128.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications included in
net income due to sale of
business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
Translation adjustments, net
of tax of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.6
|
|
|
|
|
|
|
|
|
|
Change in minimum pension
liability, net of tax of $5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.9
|
)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224.3
|
|
Cash dividends ($0.46 per share)
|
|
|
|
|
|
|
|
|
|
|
(154.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(154.3
|
)
|
Stock issued pursuant to employee
stock plans, net of tax of $1.5
|
|
|
2.5
|
|
|
|
62.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.6
|
|
Repurchase and retirement of common
stock
|
|
|
(6.3
|
)
|
|
|
(175.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181.4
|
)
|
|
Balance, December 31, 2003
|
|
|
332.0
|
|
|
|
2,998.6
|
|
|
|
170.9
|
|
|
|
(151.1
|
)
|
|
|
|
|
|
|
3,350.4
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
528.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications included in
net income due to sale of
business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
Translation adjustments, net
of tax of $2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.8
|
|
|
|
|
|
|
|
|
|
Change in minimum pension
liability, net of tax of $(1.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
Loss on derivative instruments,
net of tax of $0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569.9
|
|
Cash dividends ($0.46 per share)
|
|
|
|
|
|
|
|
|
|
|
(153.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(153.6
|
)
|
Issuance of restricted stock, net
of tax of $1.1
|
|
|
0.2
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
(5.6
|
)
|
|
|
1.3
|
|
Amortization of unearned
compensation, net of tax of $(0.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock issued pursuant to employee
stock plans, net of tax of $12.5
|
|
|
4.4
|
|
|
|
122.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126.9
|
|
|
Balance, December 31, 2004
|
|
|
336.6
|
|
|
|
3,127.8
|
|
|
|
545.9
|
|
|
|
(109.8
|
)
|
|
|
(5.1
|
)
|
|
|
3,895.4
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
878.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments, net of tax of $0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65.0
|
)
|
|
|
|
|
|
|
|
|
Change in minimum pension
liability, net of tax of $5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800.2
|
|
Cash dividends ($0.475 per share)
|
|
|
|
|
|
|
|
|
|
|
(161.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(161.1
|
)
|
Issuance of restricted stock net of
cancellations, net of tax of $6.6
|
|
|
0.4
|
|
|
|
19.2
|
|
|
|
|
|
|
|
|
|
|
|
(12.3
|
)
|
|
|
7.3
|
|
Amortization of unearned
compensation, net of tax of $(2.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Stock issued pursuant to employee
stock plans, net of tax of $19.8
|
|
|
6.2
|
|
|
|
243.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249.5
|
|
Repurchase and retirement of common
stock
|
|
|
(1.7
|
)
|
|
|
(96.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98.5
|
)
|
|
Balance, December 31, 2005
|
|
$
|
341.5
|
|
|
$
|
3,293.5
|
|
|
$
|
1,263.2
|
|
|
$
|
(188.0
|
)
|
|
$
|
(12.4
|
)
|
|
$
|
4,697.8
|
|
|
See Notes to Consolidated Financial Statements
50
Baker Hughes Incorporated
Consolidated Statements of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2005
|
|
2004
|
|
2003
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
874.4
|
|
|
$
|
525.3
|
|
|
$
|
175.8
|
|
Adjustments to reconcile income from continuing operations to net cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
382.4
|
|
|
|
371.6
|
|
|
|
347.3
|
|
Amortization of net deferred gains on derivatives
|
|
|
(5.7
|
)
|
|
|
(7.9
|
)
|
|
|
(6.7
|
)
|
Amortization of unearned compensation
|
|
|
7.1
|
|
|
|
0.7
|
|
|
|
|
|
Acquired inprocess research and development
|
|
|
5.1
|
|
|
|
1.8
|
|
|
|
|
|
Provision (benefit) for deferred income taxes
|
|
|
7.4
|
|
|
|
48.4
|
|
|
|
(20.1
|
)
|
Gain on disposal of assets
|
|
|
(34.8
|
)
|
|
|
(37.8
|
)
|
|
|
(30.2
|
)
|
Impairment of investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
45.3
|
|
Equity in (income) loss of affiliates
|
|
|
(100.1
|
)
|
|
|
(36.3
|
)
|
|
|
137.8
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(329.4
|
)
|
|
|
(173.7
|
)
|
|
|
(13.8
|
)
|
Inventories
|
|
|
(108.7
|
)
|
|
|
(3.2
|
)
|
|
|
20.7
|
|
Accounts payable
|
|
|
122.3
|
|
|
|
48.3
|
|
|
|
15.6
|
|
Accrued employee compensation and other accrued liabilities
|
|
|
147.3
|
|
|
|
140.7
|
|
|
|
0.7
|
|
Pensions and postretirement benefit obligations and other liabilities
|
|
|
41.7
|
|
|
|
(30.4
|
)
|
|
|
(23.0
|
)
|
Other
|
|
|
(59.4
|
)
|
|
|
(65.7
|
)
|
|
|
(0.4
|
)
|
|
Net cash flows from continuing operations
|
|
|
949.6
|
|
|
|
781.8
|
|
|
|
649.0
|
|
Net cash flows from discontinued operations
|
|
|
5.8
|
|
|
|
1.9
|
|
|
|
7.1
|
|
|
Net cash flows from operating activities
|
|
|
955.4
|
|
|
|
783.7
|
|
|
|
656.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for capital assets
|
|
|
(478.3
|
)
|
|
|
(348.2
|
)
|
|
|
(403.9
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(46.8
|
)
|
|
|
(6.6
|
)
|
|
|
(9.5
|
)
|
Purchase of shortterm investments
|
|
|
(77.0
|
)
|
|
|
|
|
|
|
|
|
Proceeds from disposal of assets
|
|
|
90.1
|
|
|
|
106.9
|
|
|
|
66.8
|
|
Distributions from WesternGeco
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
Receipt of trueup payment related to WesternGeco
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of business and interest in affiliate
|
|
|
3.7
|
|
|
|
58.7
|
|
|
|
24.0
|
|
Investments in affiliates
|
|
|
|
|
|
|
(7.1
|
)
|
|
|
(38.1
|
)
|
|
Net cash flows from continuing operations
|
|
|
(465.3
|
)
|
|
|
(196.3
|
)
|
|
|
(360.7
|
)
|
Net cash flows from discontinued operations
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
(1.5
|
)
|
|
Net cash flows from investing activities
|
|
|
(465.4
|
)
|
|
|
(196.8
|
)
|
|
|
(362.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings of commercial paper and other
shortterm debt
|
|
|
(71.1
|
)
|
|
|
35.5
|
|
|
|
11.2
|
|
Repayment of indebtedness
|
|
|
|
|
|
|
(350.0
|
)
|
|
|
(100.0
|
)
|
Payment to terminate interest rate swap agreement
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
Proceeds from termination of interest rate swap agreements
|
|
|
|
|
|
|
|
|
|
|
26.9
|
|
Proceeds from issuance of common stock
|
|
|
228.1
|
|
|
|
115.9
|
|
|
|
61.8
|
|
Repurchase of common stock
|
|
|
(98.5
|
)
|
|
|
|
|
|
|
(181.4
|
)
|
Dividends
|
|
|
(161.1
|
)
|
|
|
(153.6
|
)
|
|
|
(154.3
|
)
|
|
Net cash flows from financing activities
|
|
|
(108.1
|
)
|
|
|
(352.2
|
)
|
|
|
(335.8
|
)
|
|
Effect of foreign exchange rate changes on cash
|
|
|
(3.9
|
)
|
|
|
(14.1
|
)
|
|
|
(3.6
|
)
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
378.0
|
|
|
|
220.6
|
|
|
|
(45.5
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
319.0
|
|
|
|
98.4
|
|
|
|
143.9
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
697.0
|
|
|
$
|
319.0
|
|
|
$
|
98.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
299.7
|
|
|
$
|
143.2
|
|
|
$
|
188.5
|
|
Interest paid
|
|
$
|
80.8
|
|
|
$
|
97.5
|
|
|
$
|
116.2
|
|
See Notes to Consolidated Financial Statements
51
Baker Hughes Incorporated
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry.
Baker Hughes is a major supplier of wellborerelated products and technology services and systems
to the worldwide oil and natural gas industry and provides products and services for drilling,
formation evaluation, completion and production of oil and natural gas wells.
Basis of Presentation
The consolidated financial statements include the accounts of Baker Hughes and all majority
owned subsidiaries (we, our or us). Investments over which we have the ability to exercise
significant influence over operating and financial policies, but do not hold a controlling
interest, are accounted for using the equity method of accounting. All significant intercompany
accounts and transactions have been eliminated in consolidation. In the Notes to Consolidated
Financial Statements, all dollar and share amounts in tabulations are in millions of dollars and
shares, respectively, unless otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities, 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. We base our estimates and judgments on historical experience
and on various other assumptions and information that are believed to be reasonable under the
circumstances. Estimates and assumptions about future events and their effects cannot be perceived
with certainty and, accordingly, these estimates may change as new events occur, as more experience
is acquired, as additional information is obtained and as our operating environment changes. While
we believe that the estimates and assumptions used in the preparation of the consolidated financial
statements are appropriate, actual results could differ from those estimates. Estimates are used
for, but are not limited to, determining the following: allowance for doubtful accounts and
inventory valuation reserves, recoverability of longlived assets, useful lives used in
depreciation and amortization, income taxes and related valuation allowances and insurance,
environmental, legal and pensions and postretirement benefit obligations.
Revenue Recognition
Our products and services are generally sold based upon purchase orders or contracts with the
customer that include fixed or determinable prices and that do not include right of return or other
similar provisions or other significant postdelivery obligations. Our products are produced in a
standard manufacturing operation, even if produced to our customers specifications, and are sold
in the ordinary course of business through our regular marketing channels. We recognize revenue
for these products upon delivery, when title passes and when collectibility is reasonably assured.
Provisions for estimated warranty returns or similar types of items are made at the time the
related revenue is recognized. Revenue for services is recognized as the services are rendered and
when collectibility is reasonably assured. Rates for services are typically priced on a per day,
per meter, per man hour or similar basis.
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less at
the time of purchase to be cash equivalents.
Shortterm Investments
During 2005, we began investing in auction rate securities, which are highly liquid,
variablerate debt securities. While the underlying security has a longterm maturity, the
interest rate is reset through Dutch auctions that are typically held every 7, 28 or 35 days,
creating shortterm liquidity. The securities trade at par and are callable at par on any interest
payment date at the option of the issuer. Interest is paid at the end of each auction period. We
limit our investments in auction rate securities to securities that carry a AAA (or equivalent)
rating from a recognized rating agency. The investments are classified as availableforsale and
are recorded at cost, which approximates market value.
52
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the firstin,
firstout (FIFO) method or the average cost method, which approximates FIFO, and includes the
cost of materials, labor and manufacturing overhead.
Property and Depreciation
Property is stated at cost less accumulated depreciation, which is generally provided by using
the straightline method over the estimated useful lives of the individual assets. We manufacture
a substantial portion of our rental tools and equipment and the cost of these items, which includes
direct and indirect manufacturing costs, are capitalized and carried in inventory until the tool is
completed. Once the tool has been completed, the cost of the tool is reflected in capital
expenditures and the tool is classified as rental tools and equipment in property. Significant
improvements and betterments are capitalized if they extend the useful life of the asset.
Goodwill, Intangible Assets and Amortization
Goodwill, including goodwill associated with equity method investments, and intangible assets
with indefinite lives are not amortized. Intangible assets with finite useful lives are amortized
either on a straightline basis over the assets estimated useful life or on a basis that reflects
the pattern in which the economic benefits of the intangible assets are realized.
Impairment of LongLived Assets
We review property, intangible assets and certain other assets for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable. The
determination of recoverability is made based upon the estimated undiscounted future net cash
flows, excluding interest expense. The amount of impairment loss, if any, is determined by
comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value
of the related assets.
We perform an annual impairment test of goodwill for each of our reporting units as of October
1, or more frequently if circumstances indicate an impairment may exist. Our reporting units are
based on our organizational and reporting structure. Corporate and other assets and liabilities
are allocated to the reporting units to the extent that they relate to the operations of those
reporting units in determining their carrying amount. Investments in affiliates are also reviewed
for impairment whenever events or changes in circumstances indicate that impairment may exist. The
determination of impairment is made by comparing the carrying amount with its fair value, which is
calculated using a combination of a market capitalization and discounted cash flow approach.
Income Taxes
We use the liability method for determining our income taxes, under which current and deferred
tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this
method, the amounts of deferred tax liabilities and assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or recovered. Future tax
benefits are recognized to the extent that realization of such benefits is more likely than not.
Deferred income taxes are provided for the estimated income tax effect of temporary
differences between financial and tax bases in assets and liabilities. Deferred tax assets are
also provided for certain tax credit carryforwards. A valuation allowance to reduce deferred tax
assets is established when it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
We intend to indefinitely reinvest certain earnings of our foreign subsidiaries in operations
outside the U.S., and accordingly, we have not provided for U.S. income taxes on such earnings. We
do provide for the U.S. and additional nonU.S. taxes on earnings anticipated to be repatriated
from our nonU.S. subsidiaries.
We operate in more than 90 countries under many legal forms. As a result, we are subject to
the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and
treaties among these governments. Our operations in these different jurisdictions are taxed on
various bases: actual income before taxes, deemed profits (which are generally determined using a
percentage of revenues rather than profits) and withholding taxes based on revenue. Determination
of taxable income in any jurisdiction requires the interpretation of the related tax laws and
regulations and the use of estimates and assumptions regarding significant future events, such as
the amount, timing and character of deductions, permissible revenue recognition methods under the
tax law and the sources and character of income and tax credits. Changes in tax laws, regulations,
agreements and treaties, foreign currency exchange restrictions or our level of operations or
profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that
we provide during any given year.
53
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Our tax filings for various periods are subjected to audit by tax authorities in most
jurisdictions where we conduct business. These audits may result in assessments of additional
taxes that are resolved with the authorities or potentially through the courts. We believe that
these assessments may occasionally be based on erroneous and even arbitrary interpretations of
local tax law. We have received tax assessments from various taxing authorities and are currently
at varying stages of appeals and/or litigation regarding these matters. We have provided for the
amounts we believe will ultimately result from these proceedings. We believe we have substantial
defenses to the questions being raised and will pursue all legal remedies should an unfavorable
outcome result. However, resolution of these matters involves uncertainties and there are no
assurances that the outcomes will be favorable.
Product Warranties
We sell certain products with a product warranty that provides that customers can return a
defective product during a specified warranty period following the purchase in exchange for a
replacement product, repair at no cost to the customer or the issuance of a credit to the customer.
We accrue amounts for estimated warranty claims based upon current and historical product sales
data, warranty costs incurred and any other related information known to us.
Environmental Matters
Remediation costs are accrued based on estimates of known environmental remediation exposure
using currently available facts, existing environmental permits, technology and presently enacted
laws and regulations. For sites where we are primarily responsible for the remediation, our cost
estimates are developed based on internal evaluations and are not discounted. Such accruals are
recorded when it is probable that we will be obligated to pay for environmental site evaluation,
remediation or related activities, and such costs can be reasonably estimated. If the obligation
can only be estimated within a range, we accrue the minimum amount in the range. Such accruals are
recorded even if significant uncertainties exist over the ultimate cost of the remediation. As
additional or more accurate information becomes available, accruals are adjusted to reflect current
cost estimates. Ongoing environmental compliance costs, such as obtaining environmental permits,
installation of pollution control equipment and waste disposal, are expensed as incurred. Where we
have been identified as a potentially responsible party in a United States federal or state
Superfund site, we accrue our share of the estimated remediation costs of the site. This share
is based on the ratio of the estimated volume of waste we contributed to the site to the total
volume of waste disposed at the site.
Foreign Currency
The majority of our significant foreign subsidiaries have designated the local currency as
their functional currency and, as such, gains and losses resulting from balance sheet translation
of foreign operations are included as a separate component of accumulated other comprehensive loss
within stockholders equity. Gains and losses from foreign currency transactions, such as those
resulting from the settlement of receivables or payables in the nonfunctional currency, are
included in selling, general and administrative (SG&A) expense in the consolidated statements of
operations as incurred. For those foreign subsidiaries that have designated the U.S. Dollar as the
functional currency, gains and losses resulting from balance sheet translation of foreign
operations are also included in SG&A expense in the consolidated statements of operations as
incurred. We recorded net foreign currency transaction and translation gains in SG&A in the
consolidated statement of operations of $6.8 million, $4.0 million and $1.5 million in 2005, 2004
and 2003, respectively.
Derivative Financial Instruments
We monitor our exposure to various business risks including commodity price, foreign currency
exchange rate and interest rate risks and occasionally use derivative financial instruments to
manage the impact of certain of these risks. Our policies do not permit the use of derivative
financial instruments for speculative purposes. We use foreign currency forward contracts to hedge
certain firm commitments and transactions denominated in foreign currencies. We use interest rate
swaps to manage interest rate risk.
At the inception of any new derivative, we designate the derivative as a cash flow or fair
value hedge or we determine the derivative to be undesignated as a hedging instrument as the facts
dictate. We document all relationships between the hedging instruments and the hedged items, as
well as our risk management objectives and strategy for undertaking various hedge transactions. We
assess whether the derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of the hedged item at both the inception of the hedge and on an
ongoing basis.
54
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
StockBased Compensation
As allowed under Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for
StockBased Compensation
, we account for compensation related to stock options and our employee
stock purchase plan using the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees
. Under
this method, compensation expense is recognized only for the difference between the quoted market
price of the stock at the measurement date less the amount, if any, the employee is required to pay
for the stock. Our reported net income does not include any compensation expense associated with
our employee stock purchase plan or with stock option awards because the exercise prices of our
stock option awards equal the market prices of the underlying stock when granted and because our
employee stock purchase plan is non compensatory. Our reported net income does include
compensation expense associated with restricted stock awards.
In December 2004, the Financial Accounting Standards Board (FASB) issued the revised SFAS
No. 123,
ShareBased Payment
(SFAS No. 123(R)). SFAS No. 123(R) is a revision of SFAS No. 123
and supersedes APB No. 25. SFAS No. 123(R) requires an entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the grantdate fair value
of the award. That cost will be recognized over the period in which an employee is required to
provide service in exchange for the award. SFAS No. 123(R) also requires an entity to initially
measure the cost of employee services rendered in exchange for an award of liability instruments at
its current fair value with the fair value remeasured at each subsequent reporting date through the
settlement date. Changes in the fair value during the required service period are to be recognized
as compensation cost over that period.
SFAS No. 123(R) clarified the accounting in SFAS No. 123 related to estimating the service
period for employees that are or become retirement eligible during the vesting period, requiring
that the recognition of compensation expense for these employees be accelerated. This impacts the
timing of expense recognition, but not the total expense to be recognized over the vesting period.
In the first quarter of 2005, we adopted this new methodology on a prospective basis. The
cumulative effect of this clarification is $11.8 million, net of tax, which, for purposes of
calculating the pro forma disclosure, is included in our pro forma disclosure for stockbased
compensation below for the year ended December 31, 2005.
If we had recognized compensation expense by applying the fair value based method to all
awards as provided for under SFAS No. 123, our pro forma net income, earnings per share (EPS) and
stockbased compensation cost would have been as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net income, as reported
|
|
$
|
878.4
|
|
|
$
|
528.6
|
|
|
$
|
128.9
|
|
Add:
Stockbased
compensation for
restricted stock
awards included in
reported net income,
net of tax
|
|
|
6.1
|
|
|
|
1.6
|
|
|
|
1.9
|
|
Deduct:
Stockbased
compensation
determined under the
fair value method, net
of tax
|
|
|
(35.0
|
)
|
|
|
(23.1
|
)
|
|
|
(23.1
|
)
|
|
Pro forma net income
|
|
$
|
849.5
|
|
|
$
|
507.1
|
|
|
$
|
107.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.59
|
|
|
$
|
1.58
|
|
|
$
|
0.38
|
|
Pro forma
|
|
|
2.50
|
|
|
|
1.52
|
|
|
|
0.32
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.57
|
|
|
$
|
1.58
|
|
|
$
|
0.38
|
|
Pro forma
|
|
|
2.49
|
|
|
|
1.51
|
|
|
|
0.32
|
|
55
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Under SFAS No. 123, the fair value of stockbased awards is calculated through the use of
option pricing models. These models require a number of subjective assumptions and estimates which
can significantly affect the calculated values. These include future stock price volatility,
expected time to exercise, discount rates, forfeiture rates and employee turnover rates. In
addition, the number of awards granted impacts the amount of expense. As a result, the above pro
forma amounts may not be indicative of future amounts. The above proforma calculations were made
using the BlackScholes option pricing model with the following weighted average assumptions for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
RiskFree
|
|
Expected
|
|
|
Dividend
|
|
Expected
|
|
Interest
|
|
Life
|
|
|
Yield
|
|
Volatility
|
|
Rate
|
|
(In years)
|
|
2005
|
|
|
1.0
|
%
|
|
|
35.0
|
%
|
|
|
3.7
|
%
|
|
|
3.7
|
|
2004
|
|
|
1.3
|
%
|
|
|
39.9
|
%
|
|
|
2.8
|
%
|
|
|
3.5
|
|
2003
|
|
|
1.6
|
%
|
|
|
45.0
|
%
|
|
|
2.5
|
%
|
|
|
3.8
|
|
The weighted average fair values of options granted in 2005, 2004 and 2003 were $14.62, $11.16
and $10.25 per share, respectively.
In accordance with guidance issued by the SEC that delayed the effective date, we adopted SFAS
No. 123(R) on January 1, 2006 using the modified prospective method whereby we will recognize
expense on any previously granted unvested awards over the remaining service period of the award.
New awards granted after the adoption date will be expensed over the estimated service period.
Based on our current estimates, we expect the impact in 2006 of the adoption of SFAS No. 123(R) to
be additional expense of between $18.0 million and $20.0 million, net of tax. We are continuing to
evaluate the various option pricing models and the required assumptions and estimates that will be
used in determining the fair value of awards made in 2006. In addition, we have estimated the
number of awards to be granted in 2006 because the final amount has not been determined. As a
result, the actual amount recorded as expense in 2006 may be different from this estimated amount
and this estimated amount may not be indicative of the expense we may incur in future years.
New Accounting Standards
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an Amendment of ARB No. 43,
Chapter 4
, which amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that
these items be recognized as current period charges. In addition, SFAS No. 151 requires the
allocation of fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 was effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We adopted SFAS No. 151 on January 1, 2006 with no material impact
on our consolidated financial statements.
In December 2004, the FASB issued FASB Staff Position No. 1091 (FSP 1091),
Application of
FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109) to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004
, which provides
guidance on the American Jobs Creation Act of 2004 (the Act). The Act provides a tax deduction
for income from qualified domestic production activities. FSP 1091 provides for the treatment of
the deduction as a special deduction as described in SFAS No. 109. As such, the deduction will
have no effect on existing deferred tax assets and liabilities. The impact of the deduction is to
be reported in the period in which the deduction is claimed on our U.S. tax return. We adopted FSP
1091 on January 1, 2005, with no material impact on our 2005 effective tax rate, and we do not
expect that this deduction will have a material impact on our effective tax rate in future years.
In December 2004, the FASB issued FASB Staff Position No. 1092 (FSP 1092),
Accounting and
Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of
2004,
which provides guidance under SFAS No. 109 with respect to recording the potential impact of
the repatriation provisions of the Act on a companys income tax expense and deferred tax
liability. FSP 1092 states that a company is allowed time beyond the financial reporting period
of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying SFAS No. 109. We have decided not to elect to repatriate
foreign earnings under the provisions in the Act. Accordingly, our consolidated financial
statements do not reflect a provision for taxes related to this election.
56
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47),
Accounting for
Conditional Asset Retirement Obligations
. FIN 47 clarifies that the term conditional asset
retirement obligation as used in SFAS No. 143,
Accounting for Asset Retirement Obligations
, refers
to a legal obligation to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. We adopted FIN 47 on December 31, 2005, which resulted in a charge of $0.9
million, net of tax of $0.5 million, recorded as the cumulative effect of accounting change in the
consolidated statement of operations. In conjunction with the adoption, we recorded conditional
asset retirement obligations of $1.6 million as the fair value of the costs associated with certain
conditional asset retirement obligations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
. SFAS No.
154 replaces Accounting Principles Board Opinion No. 20 (APB No. 20),
Accounting Changes
, and
SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements
, and changes the
requirements for the accounting for and reporting of a change in accounting principle. SFAS No.
154 requires retrospective application of changes in accounting principle to prior periods
financial statements, unless it is impracticable to determine either
the periodspecific effects or
the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No.
154 on January 1, 2006.
NOTE 2. DISCONTINUED OPERATIONS
In the fourth quarter of 2005, our management initiated and our Board of Directors approved a
plan to sell the Baker Supply Products Division (SPD), a product line group within the Completion
and Production segment. SPD distributes basic supplies, products and small tools to the drilling
industry. In January 2006, we signed a nonbinding letter of intent for the sale of SPD. The sale
is expected to close in the first quarter of 2006. This transaction is subject to the negotiation
and execution of a definitive sale agreement, as well as, various conditions, including
satisfactory due diligence review of SPDs business. There can be no assurance that the
transaction will be consummated.
In September 2004, we completed the sale of Baker Hughes Mining Tools (BHMT), a product line
group within the Drilling and Evaluation segment that manufactured rotary drill bits used in the
mining industry, for $31.5 million. We recorded a gain on the sale of $0.2 million, net of tax of
$3.6 million, which consisted of a gain on the disposal of $6.8 million offset by a loss of $6.6
million related to the recognition of the cumulative foreign currency translation adjustments into
earnings.
In October 2003, we signed a definitive agreement for the sale of BIRD Machine (BIRD), the
remaining division of the former Process segment, and recorded charges totaling $37.4 million, net
of tax of $10.9 million, which consisted of a loss of $13.5 million on the writedown of BIRD to
fair value, $6.2 million of severance and warranty accruals and a loss of $17.7 million related to
the recognition of cumulative foreign currency translation adjustments into earnings. In January
2004, we completed the sale of BIRD and recorded an additional loss on the sale of $0.5 million
with no tax benefit. We received $5.6 million in proceeds, which were subject to postclosing
adjustments to the purchase price, and retained certain accounts receivable, inventories and other
assets. During the second quarter of 2004, we made a net payment of $6.8 million to the buyer in
settlement of the final purchase price adjustments. The adjustments were the result of changes in
the value of assets sold to and liabilities assumed by the buyer between the date the initial sales
price was negotiated and the closing of the sale.
In December 2002, we entered into exclusive negotiations for the sale of our interest in our
oil producing operations in West Africa and received $10.0 million as a deposit. The transaction
was effective as of January 1, 2003, and resulted in a gain on the sale of $4.1 million, net of a
tax benefit of $0.2 million. We received the remaining $22.0 million in proceeds in April 2003.
In 2003, all purchase price adjustments related to the sale of EIMCO Process Equipment
(EIMCO) were completed, resulting in the release of the escrow balance, of which we received $2.0
million and $2.9 million was returned to the buyer. We recorded an additional loss on the sale of
EIMCO of $2.5 million, net of tax of $1.3 million.
57
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
We have reclassified the consolidated financial statements for all prior periods
presented to reflect these operations as discontinued. Summarized financial information from
discontinued operations is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
SPD
|
|
$
|
32.5
|
|
|
$
|
24.2
|
|
|
$
|
19.1
|
|
BHMT
|
|
|
|
|
|
|
29.4
|
|
|
|
40.4
|
|
BIRD
|
|
|
|
|
|
|
1.6
|
|
|
|
94.2
|
|
Oil producing operations
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
|
Total
|
|
$
|
32.5
|
|
|
$
|
55.2
|
|
|
$
|
157.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
SPD
|
|
$
|
7.7
|
|
|
$
|
4.7
|
|
|
$
|
3.3
|
|
BHMT
|
|
|
|
|
|
|
1.1
|
|
|
|
3.5
|
|
BIRD
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(16.9
|
)
|
Oil producing operations
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
Total
|
|
|
7.7
|
|
|
|
5.6
|
|
|
|
(8.3
|
)
|
|
Income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
SPD
|
|
|
(2.8
|
)
|
|
|
(1.8
|
)
|
|
|
(1.2
|
)
|
BHMT
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(1.3
|
)
|
BIRD
|
|
|
|
|
|
|
0.1
|
|
|
|
6.0
|
|
Oil producing operations
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
Total
|
|
|
(2.8
|
)
|
|
|
(2.0
|
)
|
|
|
2.8
|
|
|
Income (loss) before gain (loss) on disposal:
|
|
|
|
|
|
|
|
|
|
|
|
|
SPD
|
|
|
4.9
|
|
|
|
2.9
|
|
|
|
2.1
|
|
BHMT
|
|
|
|
|
|
|
0.8
|
|
|
|
2.2
|
|
BIRD
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(10.9
|
)
|
Oil producing operations
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
|
Total
|
|
|
4.9
|
|
|
|
3.6
|
|
|
|
(5.5
|
)
|
|
Gain (loss) on disposal, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
BHMT
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
BIRD
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(37.4
|
)
|
Oil producing operations
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
EIMCO
|
|
|
|
|
|
|
|
|
|
|
(2.5
|
)
|
|
Total
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(35.8
|
)
|
|
Income (loss) from discontinued operations
|
|
$
|
4.9
|
|
|
$
|
3.3
|
|
|
$
|
(41.3
|
)
|
|
Assets and liabilities of discontinued operations are as follows for the years ended December
31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Accounts receivable, net
|
|
$
|
6.0
|
|
|
$
|
4.9
|
|
Inventories
|
|
|
8.8
|
|
|
|
9.9
|
|
Property, net
|
|
|
1.8
|
|
|
|
1.9
|
|
|
Assets of discontinued operations
|
|
$
|
16.6
|
|
|
$
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2.7
|
|
|
$
|
2.2
|
|
Accrued employee compensation
|
|
|
0.7
|
|
|
|
0.4
|
|
Other accrued liabilities
|
|
|
0.4
|
|
|
|
0.3
|
|
|
Liabilities of discontinued operations
|
|
$
|
3.8
|
|
|
$
|
2.9
|
|
|
NOTE 3. ACQUISITIONS
In December 2005, we purchased Zeroth Technology Limited (Zertech), a developer of an expandable
metal sealing element, for $20.3 million in cash, which is included in the Completion and
Production segment. As a result of the acquisition and based on preliminary estimates of fair
values, we recorded approximately $19.5 million of goodwill and intangible assets, which may be
revised based on the final purchase price allocations. The purchase price was preliminarily
allocated based on the fair values of the assets acquired and liabilities assumed in the
acquisition. Pro forma results of the operations have not been presented because the effects of
the acquisition were not material to our consolidated financial statements. Under the terms of the
Purchase Agreement, the former
58
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
owners of Zertech are entitled to additional purchase price consideration of up to
approximately $14.0 million based on the performance of the business during 2006, 2007 and 2008.
In 2003, we obtained a 50% interest in the QuantX Wellbore Instrumentation venture (QuantX),
which is engaged in permanent inwell monitoring. Through August 2005, we accounted for our
ownership in QuantX using the equity method of accounting. In August 2005, we exercised our right
to acquire the remaining 50% interest in QuantX and began to consolidate QuantXs accounts and
discontinued using the equity method of accounting. In October 2005, we finalized the purchase of
the remaining 50% interest in QuantX for $27.2 million, subject to final purchase price
adjustments. Based on our carrying value of our existing investment in QuantX of $35.5 million and
the additional consideration of $27.2 million, we recorded approximately $28.4 million of goodwill
and $19.6 million of intangibles. We also assigned $5.1 million to inprocess research and
development that was written off in October 2005 at the date of acquisition. This writeoff is
included in research and development expenses, which are included in cost of revenues in the
consolidated statement of operations. The purchase price was allocated based on the fair value of
the assets acquired and liabilities assumed of QuantX. The fair values were determined using a
discounted cash flow approach. Pro forma results of operations have not been presented because the
effect of this acquisition was not material to our consolidated financial statements. QuantX is
included in the Completion and Production segment.
In 2002, we entered into a venture, Luna Energy, L.L.C. (Luna), in which we had a 40%
interest and that we accounted for using the equity method of accounting. In December 2004, we
acquired the remaining 60% interest in Luna for $1.0 million in cash. As a result of the
acquisition, we have recorded approximately $19.0 million of goodwill and $5.5 million of
intangible assets. We also assigned $1.8 million to inprocess research and development that was
written off at the date of acquisition. This writeoff is included in research and development
expenses, which are included in cost of revenues in the consolidated statement of operations. The
purchase price was allocated based on the fair value of the assets acquired and liabilities assumed
of Luna. The fair values were determined using a discounted cash flow approach. Pro forma results
of operations have not been presented because the effect of this acquisition was not material to
our consolidated financial statements. Luna is included in the Completion and Production segment.
In 2003, we made two acquisitions having an aggregate purchase price of $16.9 million, of
which $9.5 million was paid in cash. As a result of these acquisitions, we recorded approximately
$3.9 million of goodwill and $9.6 million of intangible assets. The purchase price was allocated
based on the fair value of the assets acquired and liabilities assumed in each of these
acquisitions. Pro forma results of operations have not been presented because the effects of these
acquisitions were not material to our consolidated financial statements on either an individual or
aggregate basis.
NOTE 4. REVERSAL OF RESTRUCTURING CHARGE
In 2000, our Board of Directors approved a plan to substantially exit the oil and natural gas
exploration business and recorded a restructuring charge of $29.5 million. Included in the
restructuring charge was $1.1 million for a contractual obligation related to an oil and natural
gas property in Angola. The property was sold in 2003, and we reversed the liability related to
this contractual obligation.
NOTE 5. INCOME TAXES
The provision for income taxes on income from continuing operations is comprised of the
following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
146.3
|
|
|
$
|
51.7
|
|
|
$
|
1.6
|
|
Foreign
|
|
|
251.1
|
|
|
|
150.5
|
|
|
|
164.1
|
|
|
Total current
|
|
|
397.4
|
|
|
|
202.2
|
|
|
|
165.7
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
7.0
|
|
|
|
45.4
|
|
|
|
(38.1
|
)
|
Foreign
|
|
|
0.4
|
|
|
|
3.0
|
|
|
|
18.0
|
|
|
Total deferred
|
|
|
7.4
|
|
|
|
48.4
|
|
|
|
(20.1
|
)
|
|
Provision for income taxes
|
|
$
|
404.8
|
|
|
$
|
250.6
|
|
|
$
|
145.6
|
|
|
59
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
The geographic sources of income from continuing operations before income taxes are as
follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
United States
|
|
$
|
409.6
|
|
|
$
|
213.9
|
|
|
$
|
(137.4
|
)
|
Foreign
|
|
|
869.6
|
|
|
|
562.0
|
|
|
|
458.8
|
|
|
Income from continuing
operations before income taxes
|
|
$
|
1,279.2
|
|
|
$
|
775.9
|
|
|
$
|
321.4
|
|
|
Tax benefits of $19.8 million, $12.5 million and $1.5 million associated with the exercise of
employee stock options were allocated to equity and recorded in capital in excess of par value in
the years ended December 31, 2005, 2004 and 2003, respectively.
The provision for income taxes differs from the amount computed by applying the U.S. statutory
income tax rate to income from continuing operations before income taxes for the reasons set forth
below for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Statutory income tax at 35%
|
|
$
|
447.7
|
|
|
$
|
271.6
|
|
|
$
|
112.5
|
|
Effect of WesternGeco operations
|
|
|
4.1
|
|
|
|
1.8
|
|
|
|
36.3
|
|
Effect of foreign operations
|
|
|
(46.0
|
)
|
|
|
(28.3
|
)
|
|
|
(5.8
|
)
|
Net tax charge related to foreign losses
|
|
|
5.5
|
|
|
|
4.0
|
|
|
|
4.9
|
|
State income taxes net of U.S. tax benefit
|
|
|
8.8
|
|
|
|
3.4
|
|
|
|
4.0
|
|
IRS audit agreement and refund claims
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
Cumulative tax effect of SRP
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
Other net
|
|
|
(0.4
|
)
|
|
|
(1.9
|
)
|
|
|
(3.0
|
)
|
|
Provision for income taxes
|
|
$
|
404.8
|
|
|
$
|
250.6
|
|
|
$
|
145.6
|
|
|
During 2005 and 2004, we recognized an incremental effect of $4.1 million and $1.8 million,
respectively, of additional taxes attributable to our portion of the operations of WesternGeco.
This consists of $3.3 million of tax expense associated with the $13.3 million WesternGeco trueup
payment received from Schlumberger in 2005 and the state tax effect related to increased income in
the U.S. in 2005 and 2004.
During 2003, we recognized an incremental effect of $36.3 million of additional taxes related
to our investment in WesternGeco. Of this amount, $15.9 million related to the reduction in the
carrying value of our equity investment in WesternGeco, for which there was no tax benefit. The
remaining $20.4 million arose from operations of the venture due to: (i) the venture being taxed
in certain foreign jurisdictions based on a deemed profit basis, which is a percentage of revenues
rather than profits, and (ii) unbenefitted foreign losses of the venture, which are operating
losses and impairment and restructuring charges in certain foreign jurisdictions where there was no
current tax benefit and where a deferred tax asset was not recorded due to the uncertainty of
realization.
In 2005 and 2003, we recognized a benefit of $4.3 million and $3.3 million, respectively, as
the result of refund claims filed in the U.S.
In 2005, we recognized a $10.6 million deferred tax asset attributable to the cumulative
temporary difference between the carrying values of our Supplemental Retirement Plan (SRP) for
financial reporting and income tax purposes, which had the effect of reducing current year tax
expense.
We have received tax assessments from various taxing authorities and are currently at varying
stages of appeals and /or litigation regarding these matters. We have provided for the amounts we
believe will ultimately result from these proceedings. We believe we have substantial defenses to
the questions being raised and will pursue all legal remedies should an unfavorable outcome result.
While we have provided for the taxes that we believe will ultimately be payable as a result of
these assessments, the aggregate assessments are approximately $34.1 million in excess of the taxes
provided for in our consolidated financial statements.
In addition to the aforementioned assessments that have been received from various taxing
authorities, we provide for taxes in certain situations where assessments have not been received.
In those situations, we consider it probable that the taxes ultimately payable will exceed the
amounts reflected in filed tax returns; accordingly, taxes are provided in those situations under
the guidance in
SFAS No. 5,
Accounting for Contingencies
, and are included in both income taxes in current
liabilities and in deferred income taxes and other tax liabilities in the consolidated balance
sheets.
60
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 purposes and the amounts used
for income tax purposes, as well as operating loss and tax credit carryforwards. The tax effects
of our temporary differences and carryforwards are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
9.9
|
|
|
$
|
9.7
|
|
Inventory
|
|
|
125.9
|
|
|
|
110.6
|
|
Property
|
|
|
40.8
|
|
|
|
5.8
|
|
Employee benefits
|
|
|
28.7
|
|
|
|
25.0
|
|
Other accrued expenses
|
|
|
31.5
|
|
|
|
26.5
|
|
Operating loss carryforwards
|
|
|
44.1
|
|
|
|
49.1
|
|
Tax credit carryforwards
|
|
|
46.7
|
|
|
|
76.9
|
|
Capitalized research and development costs
|
|
|
63.5
|
|
|
|
74.1
|
|
Other
|
|
|
46.0
|
|
|
|
41.3
|
|
|
Subtotal
|
|
|
437.1
|
|
|
|
419.0
|
|
Valuation allowances
|
|
|
(42.4
|
)
|
|
|
(36.7
|
)
|
|
Total
|
|
|
394.7
|
|
|
|
382.3
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
113.4
|
|
|
|
105.4
|
|
Undistributed earnings of foreign subsidiaries
|
|
|
61.7
|
|
|
|
34.7
|
|
Other
|
|
|
20.7
|
|
|
|
9.1
|
|
|
Total
|
|
|
195.8
|
|
|
|
149.2
|
|
|
Net deferred tax asset
|
|
$
|
198.9
|
|
|
$
|
233.1
|
|
|
We record a valuation allowance 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 and in the appropriate taxing jurisdictions. We have provided a valuation allowance for
operating loss carryforwards in certain nonU.S. jurisdictions where our operations have decreased,
currently ceased or we have withdrawn entirely.
We have provided for U.S. and additional foreign taxes for the anticipated repatriation of
certain earnings of our foreign subsidiaries. We consider the undistributed earnings of our
foreign subsidiaries above the amount already provided to be indefinitely reinvested, as we have no
intention to repatriate these earnings. These additional foreign earnings could become subject to
additional tax if remitted, or deemed remitted, as a dividend; however, it is not practicable to
estimate the additional amount of taxes payable.
At December 31, 2005, we had approximately $41.0 million of foreign tax credits expiring in
varying amounts between 2014 and 2016 and $5.7 million of state tax credits which may be carried
forward indefinitely under current state law. The operating loss carryforwards without a valuation
allowance will expire in varying amounts over the next twenty years.
NOTE 6. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted EPS computations is as
follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Weighted average common shares outstanding for basic EPS
|
|
|
339.4
|
|
|
|
333.8
|
|
|
|
334.9
|
|
Effect of dilutive securities stock plans
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
1.0
|
|
|
Adjusted weighted average common shares outstanding for diluted EPS
|
|
|
341.5
|
|
|
|
335.6
|
|
|
|
335.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future potentially dilutive shares excluded from diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options with an exercise price greater than average market price
for the period
|
|
|
0.7
|
|
|
|
4.6
|
|
|
|
6.8
|
|
61
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
NOTE 7. INVENTORIES
Inventories are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Finished goods
|
|
$
|
914.5
|
|
|
$
|
860.3
|
|
Work in process
|
|
|
134.2
|
|
|
|
107.3
|
|
Raw materials
|
|
|
77.6
|
|
|
|
57.7
|
|
|
Total
|
|
$
|
1,126.3
|
|
|
$
|
1,025.3
|
|
|
NOTE 8. INVESTMENTS IN AFFILIATES
We have investments in affiliates that are accounted for using the equity method of
accounting. The most significant of these affiliates is WesternGeco, a seismic venture in which we
own 30% and Schlumberger Limited (Schlumberger) owns 70%.
In conjunction with the formation of WesternGeco in November 2000, we entered into an
agreement with Schlumberger whereby a cash trueup payment was to be made by either of the parties
based on a formula comparing the ratio of the net present value of sales revenue from each partys
contributed multiclient seismic data libraries during the fouryear period ending November 30, 2004
and the ratio of the net book value of those libraries as of November 30, 2000. In August 2005, we
received $13.3 million from Schlumberger related to the trueup payment. We recorded $13.0 million
as a reduction in the carrying value of our investment in WesternGeco and $0.3 million as interest
income. The income tax effect of $3.3 million related to this payment is included in our provision
for income taxes for the year ended December 31, 2005.
In November 2000, we also entered into an agreement with WesternGeco whereby WesternGeco
subleased a facility from us for a period of ten years at then current market rates. During 2005,
2004 and 2003, we received payments of $6.5 million, $5.5 million and $5.0 million, respectively,
from WesternGeco related to this lease.
During 2005, we received distributions of $30.0 million from WesternGeco, which were recorded
as reductions in the carrying value of our investment.
Effective December 1, 2005, either party to the WesternGeco Master Formation Agreement may
offer to sell its entire interest in the venture to the other party at a cash purchase price per
percentage interest specified in an offer notice. If the offer to sell is not accepted, the
offering party will be obligated to purchase and the other party will be obligated to sell its
entire interest at the same price per percentage interest as the price specified in the offer
notice.
Included in the caption Equity in income (loss) of affiliates in our consolidated statement
of operations for 2003 is $135.7 million for our share of $452.0 million of certain impairment and
restructuring charges taken by WesternGeco in 2003. The charges related to the impairment of
WesternGecos multiclient seismic library and rationalization of WesternGecos marine seismic
fleet. In addition, as a result of the continued weakness in the seismic industry, we evaluated
the value of our investment in WesternGeco and recorded an impairment loss of $45.3 million in 2003
to writedown the investment to its fair value. The fair value was determined using a combination
of a market capitalization and discounted cash flow approach.
In February 2004, we completed the sale of our minority interest in Petreco International, a
venture we entered into in 2001, for $35.8 million, of which $7.4 million was placed in escrow
pending the outcome of potential indemnification obligations pursuant to the sales agreement. In
May 2005, we received $3.7 million from the release of a portion of the amount held in escrow. The
remainder is expected to be released in the first quarter of 2006, subject to the indemnity
obligations under the sales agreement. In 2004, we recognized a gain on the sale of $1.3 million,
net of tax of $1.5 million.
62
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Summarized unaudited combined financial information for the affiliates, in which we
account for our interests using the equity method of accounting, is as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Combined operating results:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,700.7
|
|
|
$
|
1,313.8
|
|
Operating income
|
|
|
327.3
|
|
|
|
131.9
|
|
Net income
|
|
|
279.7
|
|
|
|
124.9
|
|
|
|
|
|
|
|
|
|
|
Combined financial position:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,110.8
|
|
|
$
|
755.2
|
|
Noncurrent assets
|
|
|
1,056.6
|
|
|
|
1,162.8
|
|
|
Total assets
|
|
$
|
2,167.4
|
|
|
$
|
1,918.0
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
522.7
|
|
|
$
|
423.6
|
|
Noncurrent liabilities
|
|
|
85.2
|
|
|
|
101.2
|
|
Stockholders equity
|
|
|
1,559.5
|
|
|
|
1,393.2
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,167.4
|
|
|
$
|
1,918.0
|
|
|
At December 31, 2005 and 2004, net accounts receivable (payable) from unconsolidated
affiliates totaled $0.4 million and $(1.1) million, respectively. As of December 31, 2005 and
2004, the excess of our investment over our equity in affiliates was $239.4 million and $268.9
million, respectively.
NOTE 9. PROPERTY
Property is comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Period
|
|
2005
|
|
2004
|
|
Land
|
|
|
|
|
|
$
|
39.7
|
|
|
$
|
40.5
|
|
Buildings and improvements
|
|
5 40 years
|
|
|
611.7
|
|
|
|
616.3
|
|
Machinery and equipment
|
|
2 20 years
|
|
|
2,022.3
|
|
|
|
1,958.4
|
|
Rental tools and equipment
|
|
1 8 years
|
|
|
1,157.5
|
|
|
|
1,097.5
|
|
|
Total property
|
|
|
|
|
|
|
3,831.2
|
|
|
|
3,712.7
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(2,475.7
|
)
|
|
|
(2,380.5
|
)
|
|
Property net
|
|
|
|
|
|
$
|
1,355.5
|
|
|
$
|
1,332.2
|
|
|
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill are detailed below by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
|
|
Completion
|
|
|
|
|
and
|
|
and
|
|
|
|
|
Evaluation
|
|
Production
|
|
Total
|
|
Balance as of December 31, 2003
|
|
$
|
895.0
|
|
|
$
|
344.4
|
|
|
$
|
1,239.4
|
|
Goodwill from acquisitions during the period
|
|
|
5.6
|
|
|
|
19.0
|
|
|
|
24.6
|
|
Translation adjustments and other
|
|
|
2.3
|
|
|
|
0.7
|
|
|
|
3.0
|
|
|
Balance as of December 31, 2004
|
|
|
902.9
|
|
|
|
364.1
|
|
|
|
1,267.0
|
|
Goodwill from acquisitions during the period
|
|
|
|
|
|
|
48.1
|
|
|
|
48.1
|
|
Translation adjustments and other
|
|
|
1.2
|
|
|
|
(0.5
|
)
|
|
|
0.7
|
|
|
Balance as of December 31, 2005
|
|
$
|
904.1
|
|
|
$
|
411.7
|
|
|
$
|
1,315.8
|
|
|
We perform an annual impairment test of goodwill as of October 1 of every year. There were no
impairments of goodwill in 2005, 2004 or 2003 related to the annual impairment test.
63
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Intangible assets are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
|
|
|
Amount
|
|
Amortization
|
|
Net
|
|
Amount
|
|
Amortization
|
|
Net
|
|
Technology based
|
|
$
|
204.8
|
|
|
$
|
(71.3
|
)
|
|
$
|
133.5
|
|
|
$
|
190.2
|
|
|
$
|
(58.8
|
)
|
|
$
|
131.4
|
|
Contract based
|
|
|
11.1
|
|
|
|
(6.5
|
)
|
|
|
4.6
|
|
|
|
11.0
|
|
|
|
(4.8
|
)
|
|
|
6.2
|
|
Marketing related
|
|
|
6.1
|
|
|
|
(5.6
|
)
|
|
|
0.5
|
|
|
|
6.1
|
|
|
|
(5.6
|
)
|
|
|
0.5
|
|
Customer based
|
|
|
6.4
|
|
|
|
(0.4
|
)
|
|
|
6.0
|
|
|
|
0.6
|
|
|
|
(0.2
|
)
|
|
|
0.4
|
|
Other
|
|
|
1.2
|
|
|
|
(0.7
|
)
|
|
|
0.5
|
|
|
|
1.2
|
|
|
|
(0.8
|
)
|
|
|
0.4
|
|
|
Total amortizable intangible assets
|
|
|
229.6
|
|
|
|
(84.5
|
)
|
|
|
145.1
|
|
|
|
209.1
|
|
|
|
(70.2
|
)
|
|
|
138.9
|
|
Marketing related intangible asset
with an indefinite useful life
|
|
|
18.3
|
|
|
|
|
|
|
|
18.3
|
|
|
|
16.2
|
|
|
|
|
|
|
|
16.2
|
|
|
Total
|
|
$
|
247.9
|
|
|
$
|
(84.5
|
)
|
|
$
|
163.4
|
|
|
$
|
225.3
|
|
|
$
|
(70.2
|
)
|
|
$
|
155.1
|
|
|
Intangible assets are amortized either on a straightline basis with estimated useful lives
ranging from 1 to 20 years, or on a basis that reflects the pattern in which the economic benefits
of the intangible assets are consumed, which range from 15 to 30 years.
Amortization expense included in net income for the years ended December 31, 2005, 2004 and
2003 was $15.2 million, $14.9 million and $13.5 million, respectively. Estimated amortization
expense for each of the subsequent five fiscal years is expected to be within the range of $11.6
million to $18.2 million.
NOTE 11. INDEBTEDNESS
Total debt consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
6.25% Notes due January 2009 with an effective
interest rate of 4.65%, net of unamortized
discount of $1.0 at December 31, 2005 ($1.3 at
December 31, 2004)
|
|
$
|
339.5
|
|
|
$
|
348.2
|
|
|
|
|
|
|
|
|
|
|
6.00% Notes due February 2009 with an effective
interest rate of 6.11%, net of unamortized
discount of $0.5 at December 31, 2005 ($0.7 at
December 31, 2004)
|
|
|
199.5
|
|
|
|
199.3
|
|
|
|
|
|
|
|
|
|
|
8.55% Debentures due June 2024 with an
effective interest rate of 8.80%, net of
unamortized discount of $2.5 at December 31,
2005 ($2.6 at December 31, 2004)
|
|
|
147.5
|
|
|
|
147.4
|
|
|
|
|
|
|
|
|
|
|
6.875% Notes due January 2029 with an effective
interest rate of 7.08%, net of unamortized
discount of $8.5 at December 31, 2005 ($8.7 at
December 31, 2004)
|
|
|
391.5
|
|
|
|
391.3
|
|
|
|
|
|
|
|
|
|
|
Other debt
|
|
|
9.9
|
|
|
|
76.1
|
|
|
Total debt
|
|
|
1,087.9
|
|
|
|
1,162.3
|
|
Less shortterm debt and current maturities
|
|
|
9.9
|
|
|
|
76.0
|
|
|
Longterm debt
|
|
$
|
1,078.0
|
|
|
$
|
1,086.3
|
|
|
At December 31, 2005, we had $955.6 million of credit facilities with commercial banks, of
which $500.0 million is a committed revolving credit facility (the facility) that expires in July
2010. The facility provides for up to three oneyear extensions, subject to the approval and
acceptance by the lenders, among other conditions. In addition, the facility contains a provision
to allow for an increase in the facility amount of an additional $500.0 million, subject to the
approval and acceptance by the lenders, among other conditions. The facility contains certain
covenants which, among other things, require the maintenance of a funded indebtedness to
total capitalization ratio (a defined formula per the facility) of less than or equal to 0.60,
restrict certain merger transactions or the sale of all or substantially all of the assets of the
company or a significant subsidiary and limit the amount of subsidiary indebtedness. Upon the
occurrence of certain events of default, our obligations under the facility may be accelerated.
Such events of default include
64
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
payment defaults to lenders under the facility, covenant defaults and other customary
defaults. At December 31, 2005, we were in compliance with all of the facility covenants. There
were no direct borrowings under the facility during the year ended December 31, 2005; however, to
the extent we have outstanding commercial paper, our ability to borrow under the facility is
reduced. At December 31, 2005, we had no outstanding commercial paper.
We realized net gains as a result of terminating various interest rate swap agreements prior
to their scheduled maturities. The net gains were deferred and are being amortized as a net
reduction of interest expense over the remaining life of the underlying debt securities. The
unamortized deferred gains of $15.5 million and $26.8 million are included in the 6.25% Notes due
January 2009 and reported in longterm debt in the consolidated balance sheets at December 31, 2005
and 2004, respectively.
Maturities of debt at December 31, 2005 are as follows: 2006 $9.9 million; 2007 $0.0
million; 2008 $0.0 million; 2009 $539.0 million; 2010 $0.0 million and $539.0 million
thereafter.
NOTE 12. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
Our financial instruments include cash and shortterm investments, receivables, payables, debt
and foreign currency forward contracts. Except as described below, the estimated fair value of
such financial instruments at December 31, 2005 and 2004 approximates their carrying value as
reflected in our consolidated balance sheets. The fair value of our debt and foreign currency
forward contracts has been estimated based on yearend quoted market prices.
The estimated fair value of total debt at December 31, 2005 and 2004 was $1,233.6 million and
$1,315.0 million, respectively, which differs from the carrying amounts of $1,087.9 million and
$1,162.3 million, respectively, included in our consolidated balance sheet.
Interest Rate Swap Agreements
At December 31, 2005, there were no interest rate swap agreements in effect. Due to our
outlook for interest rates, on June 2, 2005, we terminated the interest rate swap agreement we had
entered into in April 2004. This agreement had been designated and had qualified as a fair value
hedging instrument. Upon termination we were required to pay $5.5 million. This amount is being
amortized as an increase to interest expense over the remaining life of the underlying debt
security, which matures in January 2009.
In April 2004, we entered into an interest rate swap agreement for a notional amount of $325.0
million associated with our 6.25% Notes due January 2009. The interest rate swap agreement was
designated and qualified as a fair value hedging instrument. The interest rate swap agreement was
fully effective, resulting in no gain or loss recorded in the consolidated statement of operations.
We recorded the fair value of the interest rate swap agreement, which was a $2.3 million liability
at December 31, 2004, based on quoted market prices for contracts with similar terms and maturity
dates.
Foreign Currency Forward Contracts
At December 31, 2005, we had entered into several foreign currency forward contracts with
notional amounts aggregating $65.0 million to hedge exposure to currency fluctuations in various
foreign currency payables and receivables, including the British Pound Sterling, the Norwegian
Krone, the Euro and the Brazilian Real. These contracts are designated and qualify as fair value
hedging instruments. Based on quoted market prices as of December 31, 2005 for contracts with
similar terms and maturity dates, we recorded a gain of $0.1 million to adjust these foreign
currency forward contracts to their fair market value. This gain offsets designated foreign
exchange losses resulting from the underlying exposures and is included in selling, general and
administrative expense in the consolidated statement of operations.
At December 31, 2004, we had entered into several foreign currency forward contracts with
notional amounts aggregating $78.0 million to hedge exposure to currency fluctuations in various
foreign currency payables and receivables, including the British Pound Sterling, the Norwegian
Krone, the Euro and the Brazilian Real. These contracts were designated and qualified as fair
value hedging instruments. Based on quoted market prices as of December 31, 2004, for contracts
with similar terms and maturity dates, we recorded a loss of $0.4 million to adjust these foreign
currency forward contracts to their fair market value. This loss offsets
designated foreign exchange gains resulting from the underlying exposures and is included in
selling, general and administrative expense in the consolidated statement of operations.
65
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
At December 31, 2004, we had also entered into several foreign currency forward contracts
with notional amounts aggregating $122.4 million to hedge exposure to currency fluctuations in
various foreign currencies, including the British Pound Sterling and the Canadian Dollar. These
exposures arise when local currency operating expenses are not in balance with local currency
revenue collections. The funding of such imbalances was supported by shortterm intercompany
borrowing commitments that had definitive amounts and funding dates. All funding took place before
December 31, 2005. These foreign currency forward contracts were designated as cash flow hedging
instruments and were fully effective. Based on quoted market prices as of December 31, 2004, for
contracts with similar terms and maturity dates, we recorded a loss of $0.1 million to adjust these
foreign currency forward contracts to their fair market value. The loss was recorded in other
comprehensive income in the consolidated balance sheet.
Additionally, during 2005 and 2004, we entered into and settled foreign currency forward
contracts to hedge exposure to currency fluctuations for specific transactions or balances. The
impact on our consolidated statements of operations was not significant for these contracts either
individually or in the aggregate.
The counterparties to our foreign currency forward contracts are major financial institutions.
The credit ratings and concentration of risk of these financial institutions are monitored on a
continuing basis. In the unlikely event that the counterparties fail to meet the terms of a
foreign currency contract, our exposure is limited to the foreign currency exchange rate
differential.
Concentration of Credit Risk
We sell our products and services to numerous companies in the oil and natural gas industry.
Although this concentration could affect our overall exposure to credit risk, we believe that we
are exposed to minimal risk since the majority of our business is conducted with major companies
within the industry. We perform periodic credit evaluations of our customers financial condition
and generally do not require collateral for our accounts receivable. In some cases, we will
require payment in advance or security in the form of a letter of credit or bank guarantee.
We maintain cash deposits with major banks that may exceed federally insured limits. We
periodically assess the financial condition of the institutions and believe that the risk of any
loss is minimal.
NOTE 13. SEGMENT AND RELATED INFORMATION
In 2005, we reorganized our operating divisions into two separate segments: the Drilling and
Evaluation segment, which consists of the Baker Atlas, Baker Hughes Drilling Fluids, Hughes
Christensen and INTEQ divisions, and the Completion and Production segment, which consists of the
Baker Oil Tools, Baker Petrolite and Centrilift divisions. The Completion and Production segment
also includes our Production Optimization business unit. The reorganization was done to align
product lines based on the types of products and services provided to our customers, to provide
additional focus on our product lines and technology and to be able to more effectively serve our
customers.
Accordingly, we are reporting our results under three segments: Drilling and Evaluation,
Completion and Production and WesternGeco. Divisions in the Drilling and Evaluation segment
generally provide services and products used directly in the drilling and formation evaluation of
oil and natural gas wells. Divisions in the Completion and Production segment generally provide
services and products used to complete wells, rework existing wells and enhance or initiate
production from new wells.
We have aggregated the divisions within each segment because they have similar economic
characteristics and because the long-term financial performance of these divisions is affected by
similar economic conditions. They also operate in the same markets, which include all of the major
oil and natural gas producing regions of the world. The results of each segment are evaluated
regularly by our chief operating decision maker in deciding how to allocate resources and in
assessing performance. All prior period segment information has been restated to reflect these
changes.
The accounting policies of our segments are the same as those described in Note 1 of Notes to
Consolidated Financial Statements. We evaluate the performance of our segments based on segment
profit (loss), which is defined as income from continuing operations before income taxes,
accounting changes, restructuring charge reversals, impairment of assets and interest income and
expense.
66
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Summarized financial information is shown in the following table. The Corporate and
Other column includes corporaterelated items, results of insignificant operations and, as it
relates to segment profit (loss), income and expense not allocated to the segments, including
restructuring charge reversals and impairment of assets. The Corporate and Other column, for all
periods presented, also includes assets of discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
|
|
|
|
Total
|
|
Corporate
|
|
|
|
|
Evaluation
|
|
Production
|
|
WesternGeco
|
|
Oilfield
|
|
and Other
|
|
Total
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,694.2
|
|
|
$
|
3,490.0
|
|
|
$
|
|
|
|
$
|
7,184.2
|
|
|
$
|
1.3
|
|
|
$
|
7,185.5
|
|
Equity in income of affiliates
|
|
|
1.1
|
|
|
|
2.2
|
|
|
|
96.7
|
|
|
|
100.0
|
|
|
|
0.1
|
|
|
|
100.1
|
|
Segment profit (loss)
|
|
|
766.3
|
|
|
|
682.4
|
|
|
|
96.7
|
|
|
|
1,545.4
|
|
|
|
(266.2
|
)
|
|
|
1,279.2
|
|
Total assets
|
|
|
3,221.9
|
|
|
|
2,882.6
|
|
|
|
688.0
|
|
|
|
6,792.5
|
|
|
|
1,014.9
|
|
|
|
7,807.4
|
|
Investment in affiliates
|
|
|
6.1
|
|
|
|
12.2
|
|
|
|
660.6
|
|
|
|
678.9
|
|
|
|
|
|
|
|
678.9
|
|
Capital expenditures
|
|
|
347.8
|
|
|
|
129.6
|
|
|
|
|
|
|
|
477.4
|
|
|
|
0.9
|
|
|
|
478.3
|
|
Depreciation and amortization
|
|
|
232.7
|
|
|
|
121.1
|
|
|
|
|
|
|
|
353.8
|
|
|
|
28.6
|
|
|
|
382.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,033.3
|
|
|
$
|
3,042.9
|
|
|
$
|
|
|
|
$
|
6,076.2
|
|
|
$
|
3.4
|
|
|
$
|
6,079.6
|
|
Equity in income (loss) of
affiliates
|
|
|
0.4
|
|
|
|
1.9
|
|
|
|
34.5
|
|
|
|
36.8
|
|
|
|
(0.5
|
)
|
|
|
36.3
|
|
Segment profit (loss)
|
|
|
510.4
|
|
|
|
514.4
|
|
|
|
34.5
|
|
|
|
1,059.3
|
|
|
|
(283.4
|
)
|
|
|
775.9
|
|
Total assets
|
|
|
2,893.1
|
|
|
|
2,625.4
|
|
|
|
643.9
|
|
|
|
6,162.4
|
|
|
|
658.9
|
|
|
|
6,821.3
|
|
Investment in affiliates
|
|
|
5.2
|
|
|
|
48.3
|
|
|
|
624.6
|
|
|
|
678.1
|
|
|
|
|
|
|
|
678.1
|
|
Capital expenditures
|
|
|
236.4
|
|
|
|
110.4
|
|
|
|
|
|
|
|
346.8
|
|
|
|
1.4
|
|
|
|
348.2
|
|
Depreciation and amortization
|
|
|
226.7
|
|
|
|
116.7
|
|
|
|
|
|
|
|
343.4
|
|
|
|
28.2
|
|
|
|
371.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,653.8
|
|
|
$
|
2,579.5
|
|
|
$
|
|
|
|
$
|
5,233.3
|
|
|
$
|
|
|
|
$
|
5,233.3
|
|
Equity in income (loss) of
affiliates
|
|
|
(0.6
|
)
|
|
|
1.8
|
|
|
|
(9.8
|
)
|
|
|
(8.6
|
)
|
|
|
(129.2
|
)
|
|
|
(137.8
|
)
|
Segment profit (loss)
|
|
|
367.5
|
|
|
|
388.4
|
|
|
|
(10.1
|
)
|
|
|
745.8
|
|
|
|
(424.4
|
)
|
|
|
321.4
|
|
Total assets
|
|
|
2,820.2
|
|
|
|
2,451.6
|
|
|
|
606.0
|
|
|
|
5,877.8
|
|
|
|
538.7
|
|
|
|
6,416.5
|
|
Investment in affiliates
|
|
|
9.6
|
|
|
|
64.8
|
|
|
|
588.5
|
|
|
|
662.9
|
|
|
|
28.4
|
|
|
|
691.3
|
|
Capital expenditures
|
|
|
286.4
|
|
|
|
114.2
|
|
|
|
|
|
|
|
400.6
|
|
|
|
3.3
|
|
|
|
403.9
|
|
Depreciation and amortization
|
|
|
210.1
|
|
|
|
109.9
|
|
|
|
|
|
|
|
320.0
|
|
|
|
27.3
|
|
|
|
347.3
|
|
For the years ended December 31, 2005, 2004 and 2003, there were no revenues attributable to
one customer that accounted for more than 10% of total revenues.
The following table presents the details of Corporate and Other segment loss for the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Corporate and other expenses
|
|
$
|
(211.9
|
)
|
|
$
|
(206.6
|
)
|
|
$
|
(146.7
|
)
|
Interestnet
|
|
|
(54.3
|
)
|
|
|
(76.8
|
)
|
|
|
(97.8
|
)
|
Impairment of investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
(45.3
|
)
|
Reversal of restructuring charge
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
Impairment and restructuring charges
related to investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
(135.7
|
)
|
|
Total
|
|
$
|
(266.2
|
)
|
|
$
|
(283.4
|
)
|
|
$
|
(424.4
|
)
|
|
67
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
The following table presents the details of Corporate and Other total assets at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Current deferred tax asset
|
|
$
|
29.4
|
|
|
$
|
61.7
|
|
|
$
|
35.7
|
|
Property
|
|
|
78.5
|
|
|
|
107.6
|
|
|
|
134.7
|
|
Accounts receivable
|
|
|
9.3
|
|
|
|
26.5
|
|
|
|
50.0
|
|
Other tangible assets
|
|
|
109.3
|
|
|
|
115.6
|
|
|
|
107.5
|
|
Investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
28.4
|
|
Assets of discontinued operations
|
|
|
16.6
|
|
|
|
16.7
|
|
|
|
62.4
|
|
Cash and other assets
|
|
|
771.8
|
|
|
|
330.8
|
|
|
|
120.0
|
|
|
Total
|
|
$
|
1,014.9
|
|
|
$
|
658.9
|
|
|
$
|
538.7
|
|
|
The following table presents consolidated revenues by country based on the location of the use
of the products or services for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
United States
|
|
$
|
2,576.1
|
|
|
$
|
2,132.9
|
|
|
$
|
1,873.0
|
|
Canada
|
|
|
472.8
|
|
|
|
389.1
|
|
|
|
332.3
|
|
United Kingdom
|
|
|
402.9
|
|
|
|
329.2
|
|
|
|
295.8
|
|
Norway
|
|
|
376.1
|
|
|
|
310.7
|
|
|
|
328.9
|
|
China
|
|
|
218.5
|
|
|
|
192.9
|
|
|
|
117.6
|
|
Venezuela
|
|
|
176.8
|
|
|
|
163.3
|
|
|
|
130.3
|
|
Saudi Arabia
|
|
|
170.6
|
|
|
|
89.3
|
|
|
|
74.4
|
|
Other countries
|
|
|
2,791.7
|
|
|
|
2,472.2
|
|
|
|
2,081.0
|
|
|
Total
|
|
$
|
7,185.5
|
|
|
$
|
6,079.6
|
|
|
$
|
5,233.3
|
|
|
The following table presents net property by country based on the location of the asset at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
United States
|
|
$
|
734.4
|
|
|
$
|
724.6
|
|
|
$
|
789.2
|
|
United Kingdom
|
|
|
133.2
|
|
|
|
146.0
|
|
|
|
143.4
|
|
Canada
|
|
|
67.9
|
|
|
|
56.4
|
|
|
|
54.4
|
|
Germany
|
|
|
49.4
|
|
|
|
44.4
|
|
|
|
43.3
|
|
Norway
|
|
|
43.8
|
|
|
|
46.8
|
|
|
|
47.5
|
|
United Arab Emirates
|
|
|
29.0
|
|
|
|
15.4
|
|
|
|
19.0
|
|
Angola
|
|
|
26.0
|
|
|
|
16.5
|
|
|
|
27.6
|
|
Other countries
|
|
|
271.8
|
|
|
|
282.1
|
|
|
|
268.8
|
|
|
Total
|
|
$
|
1,355.5
|
|
|
$
|
1,332.2
|
|
|
$
|
1,393.2
|
|
|
68
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
NOTE 14. EMPLOYEE STOCK PLANS
We have stock option plans that provide for the issuance of incentive and nonqualified stock
options to directors, officers and other key employees at an exercise price equal to the fair
market value of the stock at the date of grant. These stock options generally vest over three
years. Vested options are exercisable in part or in full at any time prior to the expiration date
of ten years from the date of grant. As of December 31, 2005, 11.3 million shares were available
for future option grants. The following table summarizes the activity for our stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number
|
|
Average
|
|
|
of Shares
|
|
Exercise Price
|
|
|
(In thousands)
|
|
Per Share
|
|
Outstanding at December 31, 2002
|
|
|
10,868
|
|
|
$
|
32.68
|
|
Granted
|
|
|
2,481
|
|
|
|
30.92
|
|
Exercised
|
|
|
(1,005
|
)
|
|
|
21.44
|
|
Forfeited
|
|
|
(515
|
)
|
|
|
38.97
|
|
|
Outstanding at December 31, 2003
|
|
|
11,829
|
|
|
|
32.99
|
|
Granted
|
|
|
2,495
|
|
|
|
37.68
|
|
Exercised
|
|
|
(3,764
|
)
|
|
|
25.62
|
|
Forfeited
|
|
|
(255
|
)
|
|
|
39.07
|
|
|
Outstanding at December 31, 2004
|
|
|
10,305
|
|
|
|
36.67
|
|
Granted
|
|
|
1,321
|
|
|
|
49.63
|
|
Exercised
|
|
|
(5,594
|
)
|
|
|
36.96
|
|
Forfeited
|
|
|
(457
|
)
|
|
|
44.01
|
|
|
Outstanding at December 31, 2005
|
|
|
5,575
|
|
|
$
|
38.84
|
|
|
|
Shares exercisable at December 31:
|
|
|
|
|
|
|
|
|
2005
|
|
|
2,420
|
|
|
$
|
35.38
|
|
2004
|
|
|
6,417
|
|
|
$
|
38.02
|
|
2003
|
|
|
7,611
|
|
|
$
|
33.80
|
|
The following table summarizes information for stock options outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Contractual
|
|
Average
|
|
|
|
|
|
Average
|
Range of Exercise
|
|
Shares
|
|
Life
|
|
Exercise
|
|
Shares
|
|
Exercise
|
Prices
|
|
(In thousands)
|
|
(In years)
|
|
Price
|
|
(In thousands)
|
|
Price
|
|
$ 8.80 $15.99
|
|
|
11
|
|
|
|
2.2
|
|
|
$
|
11.59
|
|
|
|
11
|
|
|
$
|
11.59
|
|
16.08
21.00
|
|
|
140
|
|
|
|
2.6
|
|
|
|
20.64
|
|
|
|
140
|
|
|
|
20.64
|
|
21.06
26.07
|
|
|
375
|
|
|
|
4.5
|
|
|
|
24.48
|
|
|
|
374
|
|
|
|
24.49
|
|
28.25
39.23
|
|
|
2,861
|
|
|
|
7.3
|
|
|
|
34.65
|
|
|
|
1,046
|
|
|
|
33.08
|
|
41.06
56.21
|
|
|
2,188
|
|
|
|
6.8
|
|
|
|
48.08
|
|
|
|
849
|
|
|
|
45.75
|
|
|
Total
|
|
|
5,575
|
|
|
|
6.8
|
|
|
$
|
38.84
|
|
|
|
2,420
|
|
|
$
|
35.38
|
|
|
We also have an employee stock purchase plan whereby eligible employees may purchase shares of
our common stock at a price equal to 85% of the lower of the closing price of our common stock on
the first or last trading day of the calendar year. A total of 3.4 million shares are remaining
for issuance under the plan. Employees purchased 0.6 million, 0.8 million and 0.8 million shares
in the three years ending December 31, 2005, 2004 and 2003, respectively.
69
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
We have a plan under which restricted stock is issued to directors and executive officers and
beginning in 2005 to other key employees. The fair value of the restricted stock on the date of
grant is amortized ratably over the vesting period. The following table summarizes the restricted
stock awarded during the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Number of shares of restricted stock awarded (in thousands)
|
|
|
460
|
|
|
|
163
|
|
|
|
10
|
|
Fair value of restricted stock at date of grant (in millions)
|
|
$
|
20.4
|
|
|
$
|
6.9
|
|
|
$
|
0.3
|
|
NOTE 15. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
We have noncontributory defined benefit pension plans (Pension Benefits) covering employees
primarily in the U.S., the U.K. and Germany. We make annual contributions to the plans in amounts
at least necessary to meet minimum governmental funding requirements. The measurements of plan
assets and obligations are as of October 1 of each year presented.
The reconciliation of the beginning and ending balances of the projected benefit obligations
(PBO) and fair value of plan assets and the funded status of the plans are as follows for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
NonU.S. Pension Benefits
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of
year
|
|
$
|
203.8
|
|
|
$
|
175.6
|
|
|
$
|
261.0
|
|
|
$
|
269.2
|
|
Service cost
|
|
|
22.8
|
|
|
|
20.6
|
|
|
|
2.2
|
|
|
|
2.1
|
|
Interest cost
|
|
|
11.9
|
|
|
|
10.6
|
|
|
|
13.8
|
|
|
|
12.7
|
|
Actuarial loss
|
|
|
10.9
|
|
|
|
6.7
|
|
|
|
47.8
|
|
|
|
7.9
|
|
Benefits paid from fund
|
|
|
(11.3
|
)
|
|
|
(9.7
|
)
|
|
|
(5.3
|
)
|
|
|
(5.8
|
)
|
Curtailments/settlements (gain) loss
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(42.2
|
)
|
Other
|
|
|
0.7
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
Exchange rate adjustments
|
|
|
|
|
|
|
|
|
|
|
(31.0
|
)
|
|
|
17.1
|
|
|
Projected benefit obligation at end of year
|
|
|
238.8
|
|
|
|
203.8
|
|
|
|
287.5
|
|
|
|
261.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
284.9
|
|
|
|
237.9
|
|
|
|
158.3
|
|
|
|
135.2
|
|
Actual gain on plan assets
|
|
|
45.9
|
|
|
|
33.4
|
|
|
|
30.7
|
|
|
|
18.3
|
|
Employer contributions
|
|
|
34.6
|
|
|
|
23.3
|
|
|
|
45.6
|
|
|
|
18.4
|
|
Benefits paid from fund
|
|
|
(11.3
|
)
|
|
|
(9.7
|
)
|
|
|
(5.3
|
)
|
|
|
(5.8
|
)
|
Settlements (gain) loss
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
(17.6
|
)
|
Exchange rate adjustments
|
|
|
|
|
|
|
|
|
|
|
(20.4
|
)
|
|
|
9.8
|
|
|
Fair value of plan assets at end of year
|
|
|
354.1
|
|
|
|
284.9
|
|
|
|
207.6
|
|
|
|
158.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status over (under)
|
|
|
115.3
|
|
|
|
81.1
|
|
|
|
(79.9
|
)
|
|
|
(102.7
|
)
|
Unrecognized actuarial loss
|
|
|
47.8
|
|
|
|
59.5
|
|
|
|
95.1
|
|
|
|
77.0
|
|
Unrecognized prior service cost
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
Net amount recognized
|
|
|
163.4
|
|
|
|
140.9
|
|
|
|
15.4
|
|
|
|
(25.5
|
)
|
Employer contributions/benefits paid
October to December
|
|
|
28.8
|
|
|
|
32.5
|
|
|
|
8.3
|
|
|
|
36.1
|
|
|
Net amount recognized in the balance sheet
|
|
$
|
192.2
|
|
|
$
|
173.4
|
|
|
$
|
23.7
|
|
|
$
|
10.6
|
|
|
70
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
We report prepaid benefit cost in other assets and accrued benefit and minimum liabilities in
pensions and postretirement benefit obligations in the consolidated balance sheet. The amounts
recognized in the consolidated balance sheet are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
NonU.S. Pension Benefits
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Prepaid benefit cost
|
|
$
|
203.6
|
|
|
$
|
185.0
|
|
|
$
|
46.2
|
|
|
$
|
33.8
|
|
Accrued benefit liability
|
|
|
(11.4
|
)
|
|
|
(11.6
|
)
|
|
|
(22.5
|
)
|
|
|
(23.2
|
)
|
Minimum liability
|
|
|
(14.2
|
)
|
|
|
(14.9
|
)
|
|
|
(86.6
|
)
|
|
|
(68.3
|
)
|
Intangible asset
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
14.1
|
|
|
|
14.8
|
|
|
|
86.6
|
|
|
|
68.3
|
|
|
Net amount recognized in the balance sheet
|
|
$
|
192.2
|
|
|
$
|
173.4
|
|
|
$
|
23.7
|
|
|
$
|
10.6
|
|
|
Weighted average assumptions used to determine benefit obligations for these plans are as
follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
|
NonU.S. Pension Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
Discount rate
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
4.90
|
%
|
|
|
5.67
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
3.50
|
%
|
|
|
3.38
|
%
|
|
|
3.53
|
%
|
The accumulated benefit obligation (ABO) is the actuarial present value of pension benefits
attributed to employee service to date and present compensation levels. The ABO differs from the
PBO in that the ABO does not include any assumptions about future compensation levels. The ABO for
all U.S. plans was $232.9 million and $201.8 million at December 31, 2005 and 2004, respectively.
The ABO for all nonU.S. plans was $279.2 million and $252.5 million at December 31, 2005 and 2004,
respectively.
Information for the plans with ABOs in excess of plan assets is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
NonU.S. Pension Benefits
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Projected benefit obligation
|
|
$
|
108.0
|
|
|
$
|
78.6
|
|
|
$
|
281.7
|
|
|
$
|
256.3
|
|
Accumulated benefit obligation
|
|
|
102.2
|
|
|
|
76.6
|
|
|
|
274.6
|
|
|
|
248.2
|
|
Fair value of plan assets
|
|
|
77.9
|
|
|
|
40.3
|
|
|
|
203.0
|
|
|
|
153.3
|
|
The components of net periodic benefit cost are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
NonU.S. Pension Benefits
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
Service cost
|
|
$
|
22.8
|
|
|
$
|
20.6
|
|
|
$
|
16.6
|
|
|
$
|
2.2
|
|
|
$
|
2.1
|
|
|
$
|
5.4
|
|
Interest cost
|
|
|
11.9
|
|
|
|
10.6
|
|
|
|
9.1
|
|
|
|
13.8
|
|
|
|
12.7
|
|
|
|
12.1
|
|
Expected return on plan assets
|
|
|
(25.9
|
)
|
|
|
(20.7
|
)
|
|
|
(15.0
|
)
|
|
|
(13.2
|
)
|
|
|
(9.2
|
)
|
|
|
(8.1
|
)
|
Amortization of prior service cost
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
Recognized actuarial loss
|
|
|
2.6
|
|
|
|
4.0
|
|
|
|
6.5
|
|
|
|
2.6
|
|
|
|
4.6
|
|
|
|
2.9
|
|
Special termination benefit cost
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized curtailment (gain) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
Recognized settlement (gain) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
12.1
|
|
|
$
|
14.6
|
|
|
$
|
17.2
|
|
|
$
|
5.6
|
|
|
$
|
7.0
|
|
|
$
|
12.2
|
|
|
Weighted average assumptions used to determine net costs for these plans are as follows for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
NonU.S Pension Benefits
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
|
|
5.67
|
%
|
|
|
5.37
|
%
|
|
|
5.82
|
%
|
Expected rate of return on
plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
7.38
|
%
|
|
|
7.28
|
%
|
|
|
7.41
|
%
|
Rate of compensation increase
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
|
|
4.00
|
%
|
|
|
3.53
|
%
|
|
|
2.50
|
%
|
|
|
3.40
|
%
|
71
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
In selecting the expected rate of return on plan assets, we consider the average rate of
earnings expected on the funds invested or to be invested to provide for the benefits of these
plans. This includes considering the trusts asset allocation and the expected returns likely to
be earned over the life of the plans.
The weightedaverage asset allocations by asset category for the plans are as follows at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Plan Assets
|
|
|
|
U.S. Pension Benefits
|
|
|
NonU.S Pension Benefits
|
|
Asset Category
|
|
Target
|
|
|
2005
|
|
|
2004
|
|
|
Target
|
|
|
2005
|
|
|
2004
|
|
|
Equity securities
|
|
|
68
|
%
|
|
|
69
|
%
|
|
|
68
|
%
|
|
|
55
|
%
|
|
|
58
|
%
|
|
|
65
|
%
|
Debt securities
|
|
|
25
|
%
|
|
|
21
|
%
|
|
|
23
|
%
|
|
|
21
|
%
|
|
|
20
|
%
|
|
|
21
|
%
|
Real estate
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
8
|
%
|
|
|
21
|
%
|
|
|
17
|
%
|
|
|
9
|
%
|
Other
|
|
|
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
We have an investment committee that meets quarterly to review the portfolio returns and to
determine assetmix targets based on asset/liability studies. A thirdparty investment consultant
assisted us in developing an asset allocation strategy to determine our expected rate of return and
expected risk for various investment portfolios. The investment committee considered these studies
in the formal establishment of the current assetmix targets based on the projected risk and return
levels for each asset class.
In 2006, we expect to contribute between $2.0 million and $3.0 million to the U.S. pension
plans and between $16.0 million and $20.0 million to the nonU.S. pension plans.
The expected benefit payments related to our U.S. pension plans for each of the five years in
the period ending December 31, 2010 are $12.7 million, $13.4 million, $14.6 million, $16.8 million
and $18.9 million, respectively, and $141.7 million in the aggregate for the five years thereafter.
The expected benefit payments related to our nonU.S. pension plans for each of the five years in
the period ending December 31, 2010 are $7.1 million, $9.6 million, $4.4 million, $3.6 million and
$4.4 million, respectively, and $27.0 million in the aggregate for the five years thereafter.
These payments reflect benefits attributable to estimated future employee service and are primarily
funded from plan assets.
Postretirement Welfare Benefits
We provide certain postretirement health care and life insurance benefits (postretirement
welfare benefits) to substantially all U.S. employees who retire and have met certain age and
service requirements. The plan is unfunded. The measurement of plan obligations is as of October
1 of each year presented. The reconciliation of the beginning and ending balances of benefit
obligations and the funded status of the plan is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at beginning of year
|
|
$
|
169.5
|
|
|
$
|
174.8
|
|
Service cost
|
|
|
6.1
|
|
|
|
5.5
|
|
Interest cost
|
|
|
9.7
|
|
|
|
9.6
|
|
Actuarial (gain) loss
|
|
|
12.5
|
|
|
|
(7.1
|
)
|
Benefits paid
|
|
|
(13.3
|
)
|
|
|
(13.3
|
)
|
|
Accumulated benefit obligation at end of year
|
|
|
184.5
|
|
|
|
169.5
|
|
|
|
|
|
|
|
|
|
|
|
Funded status over (under)
|
|
|
(184.5
|
)
|
|
|
(169.5
|
)
|
Unrecognized actuarial loss
|
|
|
45.4
|
|
|
|
34.9
|
|
Unrecognized prior service cost
|
|
|
7.2
|
|
|
|
7.8
|
|
|
Net amount recognized
|
|
|
(131.9
|
)
|
|
|
(126.8
|
)
|
Benefits paid October to December
|
|
|
3.3
|
|
|
|
3.6
|
|
|
Net amount recognized
|
|
|
(128.6
|
)
|
|
|
(123.2
|
)
|
Less current portion reported in accrued employee
compensation
|
|
|
(15.5
|
)
|
|
|
(16.3
|
)
|
|
Longterm portion reported in pensions and
postretirement benefit obligations
|
|
$
|
(113.1
|
)
|
|
$
|
(106.9
|
)
|
|
72
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Weighted average discount rates of 5.50% and 6.00% were used to determine postretirement
welfare benefit obligations for the plan for the years ended December 31, 2005 and 2004,
respectively.
The components of net periodic benefit cost are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Service cost
|
|
$
|
6.1
|
|
|
$
|
5.5
|
|
|
$
|
4.8
|
|
Interest cost
|
|
|
9.7
|
|
|
|
9.6
|
|
|
|
10.3
|
|
Amortization of prior service cost
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Recognized actuarial loss
|
|
|
2.0
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
Net periodic benefit cost
|
|
$
|
18.4
|
|
|
$
|
16.7
|
|
|
$
|
16.8
|
|
|
Weighted average discount rates of 6.00%, 6.25% and 6.75% were used to determine net
postretirement welfare benefit costs for the plan for the years ended December 31, 2005, 2004 and
2003, respectively.
Assumed health care cost trend rates have a significant effect on the amounts reported for the
postretirement welfare benefits plan. The assumed health care cost trend rate used in measuring
the accumulated benefit obligation for postretirement welfare benefits was increased in 2003. As
of December 31, 2005, the health care cost trend rate was 10.0% for employees under age 65 and 7.0%
for participants over age 65, with each declining gradually each successive year until it reaches
5.0% for both employees under age 65 and over age 65 in 2011. A one percentage point change in
assumed health care cost trend rates would have had the following effects on 2005:
|
|
|
|
|
|
|
|
|
|
|
One Percentage
|
|
One Percentage
|
|
|
Point Increase
|
|
Point Decrease
|
|
Effect on total of service and interest cost components
|
|
$
|
0.6
|
|
|
$
|
(0.5
|
)
|
Effect on postretirement welfare benefit obligation
|
|
|
9.4
|
|
|
|
(8.5
|
)
|
The expected benefit payments related to postretirement welfare benefits are as follows for
the years ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2015
|
|
Gross benefit payments
|
|
$
|
17.4
|
|
|
$
|
18.1
|
|
|
$
|
18.9
|
|
|
$
|
19.8
|
|
|
$
|
20.3
|
|
|
$
|
115.8
|
|
Expected Medicare subsidies
|
|
|
(1.9
|
)
|
|
|
(2.1
|
)
|
|
|
(2.2
|
)
|
|
|
(2.4
|
)
|
|
|
(2.5
|
)
|
|
|
(13.9
|
)
|
|
Net benefit payments
|
|
$
|
15.5
|
|
|
$
|
16.0
|
|
|
$
|
16.7
|
|
|
$
|
17.4
|
|
|
$
|
17.8
|
|
|
$
|
101.9
|
|
|
Defined Contribution Plans
During the periods reported, generally all of our U.S. employees were eligible to participate
in our sponsored Thrift Plan, which is a 401(k) plan under the Internal Revenue Code of 1986, as
amended. The Thrift Plan allows eligible employees to elect to contribute from 1% to 50% of their
salaries to an investment trust. Employee contributions are matched in cash by us at the rate of
$1.00 per $1.00 employee contribution for the first 3% and $0.50 per $1.00 employee contribution
for the next 2% of the employees salary. Such contributions vest immediately. In addition, we
make cash contributions for all eligible employees between 2% and 5% of their salary depending on
the employees age. Such contributions become fully vested to the employee after five years of
employment. The Thrift Plan provides for ten different investment options, for which the employee
has sole discretion in determining how both the employer and employee contributions are invested.
Our contributions to the Thrift Plan and several other nonU.S. defined contribution plans amounted
to $86.5 million, $75.5 million and $67.7 million in 2005, 2004 and 2003, respectively.
For certain nonU.S. employees who are not eligible to participate in the Thrift Plan, we
provide a nonqualified defined contribution plan that provides basically the same benefits as the
Thrift Plan. In addition, we provide a nonqualified supplemental retirement plan (SRP) for
certain officers and employees whose benefits under the Thrift Plan and/or the U.S. defined benefit
pension plan are limited by federal tax law. The SRP also allows the eligible employees to defer a
portion of their eligible compensation and provides for employer matching and base contributions
pursuant to limitations. Both nonqualified plans are fully funded and invested through trusts,
and the assets and corresponding liabilities are included in our consolidated balance sheet. Our
contributions to these nonqualified plans were $7.2 million, $6.1 million and $5.5 million for
2005, 2004 and 2003, respectively.
73
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Postemployment Benefits
We provide certain postemployment disability income, medical and other benefits to
substantially all qualifying former or inactive U.S. employees. Income benefits for longterm
disability are provided through a fullyinsured plan. The continuation of medical and other
benefits while on disability (Continuation Benefits) are provided through a qualified
selfinsured plan. The accrued postemployment liability for Continuation Benefits at December 31,
2005 and 2004 was $17.5 million and $20.2 million, respectively, and is included in other
liabilities in our consolidated balance sheet.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Leases
At December 31, 2005, we had longterm noncancelable operating leases covering certain
facilities and equipment. The minimum annual rental commitments, net of amounts due under
subleases, for each of the five years in the period ending December 31, 2010 are $74.7 million,
$54.6 million, $39.2 million, $25.0 million and $16.8 million, respectively, and $103.7 million in
the aggregate thereafter. We have not entered into any significant capital leases.
Litigation
We are involved in litigation or proceedings that have arisen in our ordinary business
activities. We insure against these risks to the extent deemed prudent by our management and to
the extent insurance is available, but no assurance can be given that the nature and amount of such
insurance will be sufficient to fully indemnify us against liabilities arising out of pending and
future legal proceedings. Many of these insurance policies contain deductibles or selfinsured
retentions in amounts we deem prudent, and for which we are responsible for payment. In
determining the amount of selfinsurance, it is our policy to selfinsure those losses that are
predictable, measurable and recurring in nature, such as claims for automobile liability, general
liability and workers compensation. We record accruals for the uninsured portion of losses related
to these types of claims. The accruals for losses are calculated by estimating losses for claims
using historical claim data, specific loss development factors and other information as necessary.
On March 29, 2002, we announced that we had been advised that the Securities and Exchange
Commission (SEC) and the Department of Justice (DOJ) are conducting investigations into
allegations of violations of law relating to Nigeria and other related matters. The SEC has issued
a formal order of investigation into possible violations of provisions under the Foreign Corrupt
Practices Act (FCPA) regarding antibribery, books and records and internal controls. The SEC
has issued subpoenas seeking information about our operations in Angola (subpoena dated August 6,
2003) and Kazakhstan (subpoenas dated August 6, 2003 and April 22, 2005) as part of its ongoing
investigation. We are providing documents to and cooperating fully with the SEC and DOJ. The DOJ
and the SEC have issued subpoenas to, or otherwise asked for interviews with, current and former
employees in connection with the investigations regarding Nigeria, Angola and Kazakhstan. In
addition, we have conducted internal investigations into these matters.
Our internal investigations have identified issues regarding the propriety of certain payments
and apparent deficiencies in our books and records and internal controls with respect to certain
operations in Nigeria, Angola and Kazakhstan, as well as potential liabilities to governmental
authorities in Nigeria. The internal investigation in Nigeria was substantially completed during
the first quarter of 2003 and, based upon current information, we do not expect that any such
potential liabilities will have a material adverse effect on our consolidated financial statements.
The internal investigations in Angola and Kazakhstan were substantially completed in the third
quarter of 2004. Evidence obtained during the course of the internal investigations has been
provided to the SEC and DOJ.
The Department of Commerce, Department of the Navy and DOJ (the U.S. agencies) have
investigated compliance with certain export licenses issued to Western Geophysical from 1994
through 2000 for export of seismic equipment leased by the Peoples Republic of China. We acquired
Western Geophysical in August 1998 and subsequently transferred related assets to WesternGeco in
December 2000. WesternGeco continued to use the licenses until 2001. Under the WesternGeco
Formation Agreement, we owe indemnity to WesternGeco for certain matters and, accordingly, we have
agreed to indemnify WesternGeco with certain limitations in connection with this matter. We are
cooperating fully with the U.S. agencies.
We have received a subpoena from a grand jury in the Southern District of New York regarding
goods and services we delivered to Iraq from 1995 through 2003 during the United Nations
OilforFood Program. We have also received a request from the SEC to provide a written statement
and certain information regarding our participation in that program. We have responded to both the
subpoena and the request and may provide additional information and documents in the future. Other
companies in the energy industry are believed to have received similar subpoenas and requests.
74
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
The U.S. agencies, the SEC and other authorities have a broad range of civil and criminal
sanctions they may seek to impose against corporations and individuals in appropriate circumstances
including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications
to business practices and compliance programs. Such agencies and authorities have entered into
agreements with, and obtained a range of sanctions against, several public corporations and
individuals arising from allegations of improper payments and deficiencies in books and records and
internal controls, whereby civil and criminal penalties were imposed, including in some cases
multimillion dollar fines and other sanctions. We are in discussions with the U.S. agencies and
the SEC regarding the resolution, including sanctions, associated with certain of the matters
described above. It is not possible to accurately predict at this time when any of these matters
will be resolved. Based on current information, we cannot predict the outcome of such
investigations, whether we will reach resolution through such discussions or what, if any, actions
may be taken by the U.S. agencies, the SEC or other authorities or the effect the actions may have
on our consolidated financial statements.
On May 10, 2004, the District Court of Andrews County, Texas entered a judgment in favor of
LOTUS, LLC and against INTEQ in the amount of $14.8 million for lost profits resulting from a
breach of contract in drilling a well to create a salt cavern for disposing of naturally occurring
radioactive waste. We have filed an appeal and taken other actions. We believe that any liability
that we may incur as a result of this litigation would not have a material adverse financial effect
on our consolidated financial statements.
Environmental Matters
Our past and present operations include activities which are subject to extensive domestic
(including U.S. federal, state and local) and international environmental regulations with regard
to air and water quality and other environmental matters. Our environmental procedures, policies
and practices are designed to ensure compliance with existing laws and regulations and to minimize
the possibility of significant environmental damage.
We are involved in voluntary remediation projects at some of our present and former
manufacturing facilities, the majority of which relate to properties obtained in acquisitions or to
sites no longer actively used in operations. On rare occasions, remediation activities are
conducted as specified by a government agencyissued consent decree or agreed order. Remediation
costs are accrued based on estimates of probable exposure using currently available facts, existing
environmental permits, technology and presently enacted laws and regulations. Remediation cost
estimates include direct costs related to the environmental investigation, external consulting
activities, governmental oversight fees, treatment equipment and costs associated with longterm
operation, maintenance and monitoring of a remediation project.
We have also been identified as a potentially responsible party (PRP) in remedial activities
related to various Superfund sites. We participate in the process set out in the Joint
Participation and Defense Agreement to negotiate with government agencies, identify other PRPs and
determine each PRPs allocation and estimate remediation costs. We have accrued what we believe to
be our prorata share of the total estimated cost of remediation and associated management of these
Superfund sites. This share is based upon the ratio that the estimated volume of waste we
contributed to the site bears to the total estimated volume of waste disposed at the site.
Applicable United States federal law imposes joint and several liability on each PRP for the
cleanup of these sites leaving us with the uncertainty that we may be responsible for the
remediation cost attributable to other PRPs who are unable to pay their share. No accrual has been
made under the joint and several liability concept for those Superfund sites where our
participation is
de minimis
since we believe that the probability that we will have to pay material
costs above our volumetric share is remote. We believe there are other PRPs who have greater
involvement on a volumetric calculation basis, who have substantial assets and who may be
reasonably expected to pay their share of the cost of remediation. For those Superfund sites where
we are a significant PRP, remediation costs are estimated to include recalcitrant parties. In some
cases, we have insurance coverage or contractual indemnities from third parties to cover a portion
of or the ultimate liability.
Our total accrual for environmental remediation is $17.4 million and $13.6 million, which
includes accruals of $4.9 million and $3.6 million for the various Superfund sites, at December 31,
2005 and 2004, respectively. The determination of the required accruals for remediation costs is
subject to uncertainty, including the evolving nature of environmental regulations and the
difficulty in estimating the extent and type of remediation activity that will be utilized. We
believe that the likelihood of material losses in excess of the recorded accruals is remote.
Other
In the normal course of business with customers, vendors and others, we have entered into
offbalance sheet arrangements, such as letters of credit and other bank issued guarantees, which
totaled approximately $319.8 million at December 31, 2005. We also had commitments outstanding for
purchase obligations related to capital expenditures and inventory under purchase orders and
contracts of approximately $173.0 million at December 31, 2005. In addition, at December 31, 2005,
we have guaranteed debt and other
75
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
obligations of third parties with a maximum exposure of $1.4 million. It is not practicable to
estimate the fair value of these financial instruments. None of the offbalance sheet arrangements
either has, or is likely to have, a material effect on our consolidated financial statements.
NOTE 17. OTHER SUPPLEMENTAL INFORMATION
Supplemental consolidated statement of operations information is as follows for the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Rental expense (generally
transportation equipment and
warehouse facilities)
|
|
$
|
138.7
|
|
|
$
|
123.5
|
|
|
$
|
111.5
|
|
Research and development
|
|
|
188.2
|
|
|
|
176.7
|
|
|
|
173.3
|
|
The changes in the aggregate product warranty liability are as follows:
|
|
|
|
|
Balance as of December 31, 2003
|
|
$
|
14.1
|
|
Claims paid
|
|
|
(4.9
|
)
|
Additional warranties
|
|
|
7.6
|
|
Other
|
|
|
(0.2
|
)
|
|
Balance as of December 31, 2004
|
|
|
16.6
|
|
Claims paid
|
|
|
(2.6
|
)
|
Additional warranties
|
|
|
2.1
|
|
Revisions in estimates for previously issued warranties
|
|
|
(2.5
|
)
|
Other
|
|
|
(0.2
|
)
|
|
Balance as of December 31, 2005
|
|
$
|
13.4
|
|
|
On January 1, 2003, we adopted SFAS No. 143,
Accounting for Asset Retirement Obligations
.
SFAS No. 143 requires that the fair value of a liability associated with an asset retirement
obligation (ARO) be recognized in the period in which it is incurred if a reasonable estimate can
be made. The liability for the ARO is revised each subsequent period due to the passage of time
and changes in estimates. The associated retirement costs are capitalized as part of the carrying
amount of the longlived asset and subsequently depreciated over the estimated useful life of the
asset. The adoption of SFAS No. 143 in 2003 resulted in a charge of $5.6 million, net of tax of
$2.8 million, recorded as the cumulative effect of accounting change in the consolidated statement
of operations. In conjunction with the adoption, we recorded ARO liabilities of $11.4 million
primarily for anticipated costs of obligations associated with the future disposal of power source
units at certain of our divisions and refurbishment costs associated with certain leased facilities
in Europe and with a fleet of leased railcars and tanks.
On December 31, 2005, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 47 (FIN 47),
Conditional Asset Retirement Obligations
.
FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143,
Accounting for Asset Retirement Obligations,
refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity.
The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. FIN 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN 47 resulted in a charge of $0.9 million, net of tax of $0.5 million,
recorded as the cumulative effect of accounting change in the consolidated statement of operations. In conjunction with the adoption, we recorded conditional asset retirement obligations
of $1.6 million as the fair value of the costs associated with the special handling of asbestos related materials in certain facilities. We also have certain facilities that contain asbestos related
materials for which a liability has not been recognized because the fair value cannot be reasonably estimated. We believe that there are indeterminate settlement dates for these obligations because
the range of time over which we would settle these obligations is unknown or cannot be estimated; therefore, sufficient information does not exist to apply an expected present value technique.
76
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
The changes in the asset retirement obligation liability are as follows:
|
|
|
|
|
Balance as of December 31, 2003
|
|
$
|
11.5
|
|
Liabilities incurred
|
|
|
1.5
|
|
Liabilities settled
|
|
|
(0.4
|
)
|
Accretion expense
|
|
|
0.2
|
|
Revisions to existing liabilities
|
|
|
(0.1
|
)
|
Translation adjustments
|
|
|
0.2
|
|
|
Balance as of December 31, 2004
|
|
|
12.9
|
|
Liabilities incurred
|
|
|
1.6
|
|
Liabilities settled
|
|
|
(0.2
|
)
|
Accretion expense
|
|
|
0.5
|
|
Revisions to existing liabilities
|
|
|
1.2
|
|
Adoption of FIN 47
|
|
|
1.6
|
|
Translation adjustments
|
|
|
(0.2
|
)
|
|
Balance as of December 31, 2005
|
|
$
|
17.4
|
|
|
Accumulated other comprehensive loss, net of tax, is comprised of the following at December
31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Foreign currency translation adjustments
|
|
$
|
(117.4
|
)
|
|
$
|
(52.4
|
)
|
Pension adjustment
|
|
|
(69.5
|
)
|
|
|
(57.3
|
)
|
Other
|
|
|
(1.1
|
)
|
|
|
(0.1
|
)
|
|
Total
|
|
$
|
(188.0
|
)
|
|
$
|
(109.8
|
)
|
|
77
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
NOTE 18. QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,642.9
|
|
|
$
|
1,768.4
|
|
|
$
|
1,784.8
|
|
|
$
|
1,989.4
|
|
|
$
|
7,185.5
|
|
Gross profit
(1)
|
|
|
487.3
|
|
|
|
552.6
|
|
|
|
564.8
|
|
|
|
638.3
|
|
|
|
2,243.0
|
|
Income from continuing operations
|
|
|
178.4
|
|
|
|
218.0
|
|
|
|
220.6
|
|
|
|
257.4
|
|
|
|
874.4
|
|
Net income
|
|
|
179.8
|
|
|
|
218.8
|
|
|
|
221.9
|
|
|
|
257.9
|
|
|
|
878.4
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
0.53
|
|
|
|
0.65
|
|
|
|
0.64
|
|
|
|
0.76
|
|
|
|
2.58
|
|
Net income
|
|
|
0.53
|
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
0.76
|
|
|
|
2.59
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
0.53
|
|
|
|
0.64
|
|
|
|
0.64
|
|
|
|
0.75
|
|
|
|
2.56
|
|
Net income
|
|
|
0.53
|
|
|
|
0.64
|
|
|
|
0.65
|
|
|
|
0.75
|
|
|
|
2.57
|
|
Dividends per share
|
|
|
0.115
|
|
|
|
0.115
|
|
|
|
0.115
|
|
|
|
0.130
|
|
|
|
0.475
|
|
Common stock market prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
47.70
|
|
|
|
51.95
|
|
|
|
60.79
|
|
|
|
62.76
|
|
|
|
|
|
Low
|
|
|
41.20
|
|
|
|
42.51
|
|
|
|
51.54
|
|
|
|
51.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,381.5
|
|
|
$
|
1,493.7
|
|
|
$
|
1,532.0
|
|
|
$
|
1,672.4
|
|
|
$
|
6,079.6
|
|
Gross profit
(1)
|
|
|
370.3
|
|
|
|
426.3
|
|
|
|
432.5
|
|
|
|
499.5
|
|
|
|
1,728.6
|
|
Income from continuing operations
|
|
|
93.6
|
|
|
|
116.2
|
|
|
|
136.7
|
|
|
|
178.8
|
|
|
|
525.3
|
|
Net income
|
|
|
94.6
|
|
|
|
116.9
|
|
|
|
137.5
|
|
|
|
179.6
|
|
|
|
528.6
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
0.28
|
|
|
|
0.35
|
|
|
|
0.40
|
|
|
|
0.54
|
|
|
|
1.57
|
|
Net income
|
|
|
0.28
|
|
|
|
0.35
|
|
|
|
0.41
|
|
|
|
0.54
|
|
|
|
1.58
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
0.28
|
|
|
|
0.35
|
|
|
|
0.40
|
|
|
|
0.53
|
|
|
|
1.57
|
|
Net income
|
|
|
0.28
|
|
|
|
0.35
|
|
|
|
0.41
|
|
|
|
0.53
|
|
|
|
1.58
|
|
Dividends per share
|
|
|
0.11
|
|
|
|
0.12
|
|
|
|
0.11
|
|
|
|
0.12
|
|
|
|
0.46
|
|
Common stock market prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
38.42
|
|
|
|
38.27
|
|
|
|
44.57
|
|
|
|
44.89
|
|
|
|
|
|
Low
|
|
|
32.00
|
|
|
|
33.71
|
|
|
|
37.80
|
|
|
|
40.28
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents revenues less cost of revenues.
|
NOTE 19. SUBSEQUENT EVENTS (UNAUDITED)
In January 2006, we acquired Nova Technology Corporation (Nova) for approximately $67.0
million in cash and assumed debt. Nova is a leading supplier of permanent monitoring, chemical
injection systems, and multiline services for deepwater and subsea oil and gas well applications
and will be included in the Production Optimization business unit within the Completion and
Production segment.
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has established and maintains a system of disclosure controls and procedures to
provide reasonable assurances that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. As of December 31, 2005, our management,
including our principal executive officer and principal financial officer, conducted an evaluation
of our disclosure controls and procedures. Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure controls and procedures
as of December 31, 2005 are effective in ensuring that the information required to be disclosed by
us in reports filed under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC.
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant to Section 404 of the SarbanesOxley Act of 2002, our management included a report of
their assessment of the design and effectiveness of our internal controls as part of this Annual
Report on Form 10K for the fiscal year ended December 31, 2005. Our managements assessment of the
effectiveness of our internal control over financial reporting as of December 31, 2005 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in
their report which is included herein. Managements report and the independent registered public
accounting firms attestation report are included in Item 8 under the captions entitled
Managements Report on Internal Control Over Financial Reporting and Report of Independent
Registered Public Accounting Firm and are incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter
ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors is set forth in the sections entitled Proposal No. 1,
Election of Directors, and Corporate Governance Committees of the Board Audit/Ethics
Committee in our Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 2006
(Proxy Statement), which sections are incorporated herein by reference. For information
regarding our executive officers, see Item 1. Business Executive Officers in this annual report
on Form 10K. Additional information regarding compliance by directors and executive officers with
Section 16(a) of the Exchange Act is set forth under the section entitled Compliance with Section
16(a) of the Securities Exchange Act of 1934 in our Proxy Statement, which section is incorporated
herein by reference. For information concerning our code of ethics, see Item 1. Business in this
annual report on Form 10K.
ITEM 11. EXECUTIVE COMPENSATION
Information for this item is set forth in the sections entitled Executive Compensation
Summary Compensation Table, Corporate Governance Board of Directors, Stock Options Granted
During 2005, Aggregated Option Exercises During 2005 and Option Values at December 31, 2005,
LongTerm Incentive Plan Awards During 2005, Pension Plan Table, Employment, Change in
Control, and Indemnification Agreements, Compensation Committee Report, Compensation Committee
Interlocks and Insider Participation, and Corporate Performance Graph in our Proxy Statement,
which sections are incorporated herein by reference.
79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information concerning security ownership of certain beneficial owners and our management is
set forth in the sections entitled Voting Securities and Security Ownership of Management in
our Proxy Statement, which sections are incorporated herein by reference.
Our Board of Directors has approved procedures for use under our Securities Trading and
Disclosure Policy to permit our employees, officers and directors to enter into written trading
plans complying with Rule 10b51 under the Exchange Act. Rule 10b51 provides criteria under which
such an individual may establish a prearranged plan to buy or sell a specified number of shares of
a companys stock over a set period of time. Any such plan must be entered into in good faith at a
time when the individual is not in possession of material, nonpublic information. If an individual
establishes a plan satisfying the requirements of Rule 10b51, such individuals subsequent receipt
of material, nonpublic information will not prevent transactions under the plan from being
executed. Certain of our officers have advised us that they have and may enter into a stock sales
plan for the sale of shares of our common stock which are intended to comply with the requirements
of Rule 10b51 promulgated by the Securities Exchange Act of 1934.
Equity Compensation Plan Information
The information in the following table is presented as of December 31, 2005 with respect to
shares of our common stock that may be issued under our existing equity compensation plans,
including the Baker Hughes Incorporated 1993 Stock Option Plan, the Baker Hughes Incorporated
LongTerm Incentive Plan and the Baker Hughes Incorporated 2002 Directors & Officers LongTerm
Incentive Plan, all of which have been approved by our stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
In millions of shares
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
Number of Securities
|
|
WeightedAverage
|
|
Future Issuance Under
|
|
|
to be Issued Upon
|
|
Exercise Price of
|
|
Equity Compensation
|
|
|
Exercise of
|
|
Outstanding
|
|
Plans (excluding
|
|
|
Outstanding Options,
|
|
Options, Warrants
|
|
securities reflected in the
|
Equity Compensation Plan Category
|
|
Warrants and Rights
|
|
and Rights
|
|
first column)
|
|
Stockholderapproved plans (excluding Employee Stock
Purchase Plan)
|
|
|
1.7
|
(2)
|
|
$
|
39.23
|
|
|
|
4.1
|
|
Nonstockholderapproved plans
(1)
|
|
|
3.8
|
|
|
|
38.79
|
|
|
|
7.2
|
|
|
Subtotal (except for weighted average exercise price)
|
|
|
5.5
|
|
|
|
38.92
|
|
|
|
11.3
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
(3)
|
|
|
|
3.4
|
|
|
Total
|
|
|
5.5
|
(4)
|
|
|
|
|
|
|
14.7
|
|
|
|
|
|
(1)
|
|
The table includes the nonstockholderapproved plans: the 1998 Employee Stock
Option Plan, the 1998 Special Employee Stock Option Plan, the 2002 Employee LongTerm
Incentive Plan and the Director Compensation Deferral Plan. A description of each of these
plans is set forth below.
|
|
(2)
|
|
The table includes approximately 0.9 million shares of our common stock
that would be issuable upon the exercise of the outstanding options under our 1993 Stock
Option Plan, which expired in 2003. No additional options may be granted under the 1993 Stock
Option Plan.
|
|
(3)
|
|
In the Baker Hughes Incorporated Employee Stock Purchase Plan, the purchase
price is determined in accordance with Section 423 of the Code, as amended, as 85% of the
lower of the fair market value on the date of grant or the date of purchase.
|
|
(4)
|
|
The table does not include shares subject to outstanding options we assumed
in connection with certain mergers and acquisitions of entities which originally granted those
options. When we acquired the stock of Western Atlas Inc. in a transaction completed in
August 1998, we assumed the options granted under the Western Atlas Director Stock Option Plan
and the Western Atlas 1993 Stock Incentive Plan. As of December 31, 2005, 36,159 shares and
3,836 shares of our common stock would be issuable upon the exercise of outstanding options
previously granted under the Western Atlas Director Stock Option Plan and the Western Atlas
1993 Stock Incentive Plan, with a weighted average exercise price per share of $25.56 and
$26.07, respectively.
|
80
Our nonstockholderapproved plans are described below:
1998 Employee Stock Option Plan
The Baker Hughes Incorporated 1998 Employee Stock Option Plan (the 1998 ESOP) was adopted
effective as of October 1, 1998. The number of shares authorized for issuance under the 1998 ESOP
is 3.5 million shares. Nonqualified stock options may be granted under the 1998 ESOP to our
employees. The exercise price of the options will be equal to the fair market value per share of
our common stock on the date of grant, and option terms may be up to ten years. Under the terms
and conditions of the option award agreements for options issued under the 1998 ESOP, options
generally vest and become exercisable in installments over the optionees period of service, and
the options vest on an accelerated basis in the event of a change in control. As of December 31,
2005, options covering approximately 0.5 million shares of our common stock were outstanding under
the 1998 ESOP, options covering approximately 0.9 million shares were exercised during fiscal year
2005 and approximately 0.3 million shares remained available for future options.
1998 Special Employee Stock Option Plan
The Baker Hughes Incorporated 1998 Special Employee Stock Option Plan (the 1998 SESOP) was
adopted effective as of October 22, 1997. The number of shares authorized for issuance upon the
exercise of options granted under the 1998 SESOP is 2.5 million shares. Under the 1998 SESOP, the
Compensation Committee of our Board of Directors has the authority to grant nonqualified stock
options to purchase shares of our common stock to a broadbased group of employees. The exercise
price of the options will be equal to the fair market value per share of our common stock at the
time of the grant, and option terms may be up to ten years. Stock option grants of 100 shares,
with an exercise price of $47.813 per share, were issued to all of our U.S. employees in October
1997 and to our international employees in May 1998. As of December 31, 2005, options covering
approximately 0.5 million shares of our common stock were outstanding under the 1998 SESOP, options
covering approximately 0.4 million shares were exercised during fiscal year 2005 and approximately
1.7 million shares remained available for future options.
2002 Employee LongTerm Incentive Plan
The Baker Hughes Incorporated 2002 Employee LongTerm Incentive Plan (the 2002 Employee
LTIP) was adopted effective as of March 6, 2002. The 2002 Employee LTIP permits the grant of
awards as nonqualified stock options, stock appreciation rights, restricted stock, restricted stock
units, performance shares, performance units, stock awards and cashbased awards to our corporate
officers and key employees. The number of shares authorized for issuance under the 2002 Employee
LTIP is 9.5 million, with no more than 3.0 million available for grant as awards other than options
(the number of shares is subject to adjustment for changes in our common stock).
The 2002 Employee LTIP is the companion plan to the Baker Hughes Incorporated 2002 Director &
Officer LongTerm Incentive Plan, which was approved by our stockholders in 2002. The rationale
for the two companion plans was to discontinue the use of the remaining older option plans and to
have only two plans from which we would issue compensation awards.
Options.
The exercise price of the options will not be less than the fair market value of the
shares of our common stock on the date of grant, and options terms may be up to ten years. The
maximum number of shares of our common stock that may be subject to options granted under the 2002
Employee LTIP to any one employee during any one fiscal year will not exceed 3.0 million, subject
to adjustment under the antidilution provisions of the 2002 Employee LTIP. Under the terms and
conditions of the stock option awards for options issued under the 2002 Employee LTIP, options
generally vest and become exercisable in installments over the optionees period of service, and
the options vest on an accelerated basis in the event of a change in control or certain
terminations of employment. As of December 31, 2005, options covering approximately 2.8 million
shares of our common stock were outstanding under the 2002 Employee LTIP, options covering
approximately 1.0 million shares were exercised during fiscal year 2005 and approximately 4.8
million shares remained available for future options.
Performance Shares and Units; CashBased Awards.
Performance shares may be granted to
employees in the amounts and upon the terms determined by the Compensation Committee of our Board
of Directors, but must be limited to no more than 1.0 million shares to any one employee in any one
fiscal year. Performance shares will have an initial value equal to the fair market value of our
common stock at the date of the award. Performance units and cashbased awards may be granted to
employees in amounts and upon the terms determined by the Compensation Committee, but must be
limited to no more than $10.0 million for any one employee in any one fiscal year. The performance
measures that may be used to determine the extent of the actual performance payout or vesting
include, but are not limited to, net earnings; earnings per share; return measures; cash flow
return on investments (net cash
81
flows divided by owners equity); earnings before or after taxes, interest, depreciation and/or
amortization; share price (including growth measures and total shareholder return) and Baker Value
Added (our metric that measures operating profit after tax less the cost of capital employed).
Restricted Stock and Restricted Stock Units.
With respect to awards of restricted stock and
restricted stock units, the Compensation Committee will determine the conditions or restrictions on
the awards, including whether the holders of the restricted stock or restricted stock units will
exercise full voting rights or receive dividends and other distributions during the restriction
period. At the time the award is made, the Compensation Committee will determine the right to
receive unvested restricted stock or restricted units after termination of service. Awards of
restricted stock are limited to 1.0 million shares in any one year to any one individual.
Stock Appreciation Rights.
Stock appreciation rights may be granted under the 2002 Employee
LTIP on the terms and conditions determined by the Compensation Committee. The grant price of a
freestanding stock appreciation right will not be less than the fair market value of our common
stock on the date of grant. The maximum number of shares of our common stock that may be utilized
for purposes of determining an employees compensation under stock appreciation rights granted
under the 2002 Employee LTIP during any one fiscal year will not exceed 3.0 million shares, subject
to adjustment under the antidilution provisions of the 2002 Employee LTIP.
Administration; Amendment and Termination
. The Compensation Committee shall administer the
2002 Employee LTIP, and in the absence of the Compensation Committee, the Board will administer the
Plan. The Compensation Committee will have full and exclusive power to interpret the provisions of
the 2002 Employee LTIP as the Committee may deem necessary or proper, with the powers exercised in
the best interests of the Company and in keeping with the objectives of the Plan. The Board may
alter, amend, modify, suspend or terminate the 2002 Employee LTIP, except that no amendment,
modification, suspension or termination that would adversely affect in any material way the rights
of a participant under any award previously granted under the Plan may be made without the written
consent of the participant or to the extent stockholder approval is otherwise required by
applicable legal requirements.
Director Compensation Deferral Plan
The Baker Hughes Incorporated Director Compensation Deferral Plan, as amended and restated
effective July 24, 2002 (the Deferral Plan), is intended to provide a means for members of our
Board of Directors to defer compensation otherwise payable and provide flexibility with respect to
our compensation policies. Under the provisions of the Deferral Plan, directors may elect to defer
income with respect to each calendar year. The compensation deferrals may be stock optionrelated
deferrals or cashbased deferrals. The stock optionrelated deferrals may be either marketpriced
stock options or discounted stock options. The number of shares to be issued for the marketpriced
stock option deferral is calculated on a quarterly basis by multiplying the deferred compensation
by 4.4 and then dividing by the fair market value of our common stock on the last day of the
quarter. The number of shares to be issued for the discounted stock option deferral is calculated
on a quarterly basis by dividing the deferred compensation by the discounted price of our common
stock on the last day of the quarter. The discounted price is 50% of the fair market value of our
common stock on the valuation date. Stock options granted under the Deferral Plan vest on the
first anniversary of the date of grant and must be exercised within 10 years of the date of grant.
If a directors directorship terminates for any reason, any options outstanding will expire 3 years
after the termination of the directorship. The maximum aggregate number of shares of our common
stock that may be issued under the Deferral Plan is 0.5 million. As of December 31, 2005, options
covering 4,191 shares of our common stock were outstanding under the Deferral Plan, options
covering 2,880 shares were exercised during fiscal 2005 and approximately 0.5 million shares
remained available for future options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding related party transactions is set forth in the sections entitled
Executive Compensation Employment, Change in Control, and Indemnification Agreements in our
Proxy Statement, which sections are incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services is set forth in the section
entitled Fees Paid to Deloitte & Touche LLP in our Proxy Statement, which section is incorporated
herein by reference.
82
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
|
|
List of Documents filed as part of this Report
|
|
(1)
|
|
Financial Statements
|
|
|
|
|
All financial statements of the Registrant as set forth under Item 8 of this Annual Report on
Form 10K.
|
|
|
(2)
|
|
Financial Statement Schedules
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
(3)
|
|
Exhibits
|
|
|
|
|
Each exhibit identified below is filed as a part of this report. Exhibits designated with an
* are filed as an exhibit to this Annual Report on Form 10K. Exhibits designated with a
+ are identified as management contracts or compensatory plans or arrangements. Exhibits
previously filed as indicated below are incorporated by reference.
|
|
3.1
|
|
Restated Certificate of Incorporation (filed as Exhibit 3.1 to Quarterly Report
of Baker Hughes Incorporated on Form 10Q for the quarter ended June 30, 2002).
|
|
|
3.2
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Current Report of Baker Hughes Incorporated on Form 8K filed May 4,
2005).
|
|
|
3.3
|
|
Bylaws of Baker Hughes Incorporated restated as of April 28, 2005 (filed as
Exhibit 3.2 to Current Report of Baker Hughes Incorporated on Form 8K filed May 4,
2005).
|
|
|
4.1
|
|
Rights of Holders of the Companys LongTerm Debt. The Company has no longterm
debt instrument with regard to which the securities authorized thereunder equal or
exceed 10% of the total assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of its longterm debt instruments to the
SEC upon request.
|
|
|
4.2
|
|
Restated Certificate of Incorporation (filed as Exhibit 3.1 to Quarterly Report
of Baker Hughes Incorporated on Form 10Q for the quarter ended June 30, 2002).
|
|
|
4.3
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Current Report of Baker Hughes Incorporated on Form 8K filed May 4,
2005).
|
|
|
4.4
|
|
Bylaws of Baker Hughes Incorporated restated as of April 28, 2005 (filed as
Exhibit 3.2 to Current Report of Baker Hughes Incorporated on Form 8K filed May 4,
2005).
|
|
|
4.5
|
|
Indenture dated as of May 15, 1994 between Western Atlas Inc. and The Bank of New
York, Trustee, providing for the issuance of securities in series (filed as Exhibit 4.4 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 2004).
|
|
|
10.1+
|
|
Employment Agreement by and between Baker Hughes Incorporated and Chad C. Deaton
dated as of October 25, 2004 (filed as Exhibit 10.3 to Current Report of Baker Hughes
Incorporated on Form 8K filed October 7, 2004).
|
|
|
10.2+
|
|
Change in Control Agreement between Baker Hughes Incorporated and Chad C. Deaton
dated as of October 25, 2004 (filed as Exhibit 10.2 to Current Report of Baker Hughes
Incorporated on Form 8K filed October 7, 2004).
|
|
|
10.3+
|
|
Indemnification Agreement dated as of October 25, 2004 between Baker Hughes
Incorporated and Chad C. Deaton (filed as Exhibit 10.1 to Current Report of Baker Hughes
Incorporated on Form 8K filed on October 7, 2004).
|
|
|
10.4+
|
|
Stock Option Agreement issued to Chad C. Deaton on October 25, 2004 in the
amount of 75,000 shares of Company Common Stock (filed as Exhibit 10.4 to Quarterly
Report of Baker Hughes Incorporated on Form 10Q for the quarter ended September 30,
2004).
|
83
|
10.5+
|
|
Agreement regarding restricted stock award issued to Chad C. Deaton on October
25, 2004 in the amount of 80,000 shares of Company Common Stock (filed as Exhibit 10.5
to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended
September 30, 2004).
|
|
|
10.6+
|
|
Agreement regarding restricted stock award issued to James R. Clark on October
27, 2004 in the amount of 40,000 shares of Baker Hughes Incorporated Common Stock (filed
as Exhibit 10.7 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the
quarter ended September 30, 2004).
|
|
|
10.7+
|
|
Second Amended and Restated Stock Matching Agreement by and between Baker Hughes
Incorporated and James R. Clark dated as of October 25, 2004 (filed as Exhibit 10.6 to
Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended
September 30, 2004).
|
|
|
10.8+
|
|
Letter dated October 26, 2005 to James R. Clark clarifying Mr. Clarks
employment terms (filed as Exhibit 10.2 to Quarterly Report of Baker Hughes Incorporated
on Form 10Q for the quarter ended September 30, 2005).
|
|
|
10.9+*
|
|
Retirement and Consulting Agreement dated November 1, 2005 and clarification letter
dated February 15, 2006 between Baker Hughes Incorporated and G. Stephen Finley
effective as of April 1, 2006.
|
|
|
10.10+
|
|
Form of Change in Control Severance Plan (filed as Exhibit 10.8 to Annual Report of
Baker Hughes Incorporated on Form 10K for the year ended December 31, 2003).
|
|
|
10.11+
|
|
Form of Change in Control Severance Agreement between Baker Hughes Incorporated and
David H. Barr and John A. ODonnell effective as of July 28, 2004, and with James R.
Clark, Alan R. Crain, Jr., William P. Faubel, G. Stephen Finley, Greg Nakanishi and
Douglas J. Wall to be effective as of January 1, 2006 and with Chris P. Beaver, Paul S.
Butero and Martin S. Craighead effective as of February 28, 2005 and with Richard L.
Williams effective as of May 2, 2005 and with Charles S. Wolley effective as of January
1, 2006 (filed as Exhibit 10.8 to Quarterly Report of Baker Hughes Incorporated on Form
10Q for the quarter ended September 30, 2004).
|
|
|
10.12+
|
|
Form of Indemnification Agreement between Baker Hughes Incorporated and each of the
directors and executive officers (filed as Exhibit 10.4 to Annual Report of Baker Hughes
Incorporated on Form 10K for the year ended December 31, 2003).
|
|
|
10.13+
|
|
Baker Hughes Incorporated Director Retirement Policy for Certain Members of the Board
of Directors (filed as Exhibit 10.10 to Annual Report of Baker Hughes Incorporated on
Form 10K for the year ended December 31, 2003).
|
|
|
10.14+
|
|
Baker Hughes Incorporated Director Compensation Deferral Plan, as amended and restated
effective as of July 24, 2002 (filed as Exhibit 10.16 to Annual Report of Baker Hughes
Incorporated on Form 10K for the year ended December 31, 2002).
|
|
|
10.15+
|
|
Baker Hughes Incorporated Executive Severance Plan (effective November 1, 2002) (filed
as Exhibit 10.13 to Annual Report of Baker Hughes Incorporated on Form 10K for the year
ended December 31, 2002).
|
|
|
10.16
|
|
1995 Employee Annual Incentive Compensation Plan, as amended by Amendment No.
19971 to the 1995 Employee Annual Incentive Compensation Plan and as amended by
Amendment No. 19991 to the 1995 Employee Annual Incentive Compensation Plan (filed as
Exhibit 10.17 to Annual Report of Baker Hughes Incorporated on Form 10K for the year
ended December 31, 2002).
|
|
|
10.17+
|
|
Baker Hughes Incorporated Supplemental Retirement Plan, as amended and restated
effective as of January 1, 2005 (filed as Exhibit 10.1 to Quarterly Report of Baker
Hughes Incorporated on Form 10Q for the quarter ended September 30, 2005).
|
|
|
10.18
|
|
LongTerm Incentive Plan, as amended by Amendment No. 19991 to LongTerm
Incentive Plan (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on
Form 10K for the year ended December 31, 2002).
|
|
|
10.19
|
|
Baker Hughes Incorporated 1998 Employee Stock Option Plan, as amended by
Amendment No. 19991 to 1998 Employee Stock Option Plan (filed as Exhibit 10.3 to
Quarterly Report of Baker Hughes Incorporated on
Form 10Q for the quarter ended June 30, 2003).
|
84
|
10.20
|
|
Baker Hughes Incorporated 2002 Employee LongTerm Incentive Plan (filed as
Exhibit 4.4 to Registration Statement No. 33387372 on Form S8 filed May 1, 2002).
|
|
|
10.21+
|
|
Baker Hughes Incorporated 2002 Director & Officer LongTerm Incentive Plan (filed as
Exhibit 10.2 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the
quarter ended September 30, 2003).
|
|
|
10.22+
|
|
Amendment to 2002 Director & Officer LongTerm Incentive Plan, effective as of October
27, 2005 (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005).
|
|
|
10.23
|
|
Baker Hughes Incorporated Employee Stock Purchase Plan, as amended and restated,
effective as of March 3, 2003 (filed as Exhibit 10.1 to Quarterly Report of Baker Hughes
Incorporated on Form 10Q for the quarter ended March 31, 2003).
|
|
|
10.24
|
|
Baker Hughes Incorporated Pension Plan effective as of January 1, 2002, as
amended by First Amendment, effective January 1, 2002 (filed as Exhibit 10.51 to Annual
Report of Baker Hughes Incorporated on Form 10K for the year ended December 31, 2002).
|
|
|
10.25
|
|
Form of Nonqualified Stock Option Agreement for employees effective October 25,
1995 (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10K
for the year ended December 31, 2001).
|
|
|
10.26
|
|
Form of Incentive Stock Option Agreement for employees effective October 25,
1995 (filed as Exhibit 10.28 to Annual Report of Baker Hughes Incorporated on Form 10K
for the year ended December 31, 2001).
|
|
|
10.27+
|
|
Form of Nonqualified Stock Option Agreement for directors effective October 25, 1995
(filed as Exhibit 10.26 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2001).
|
|
|
10.28+
|
|
Form of Stock Option Agreement for executive officers effective October 1, 1998 (filed
as Exhibit 10.37 to Annual Report of Baker Hughes Incorporated on Form 10K for the year
ended December 31, 2000).
|
|
|
10.29+
|
|
Form of Nonqualified Stock Option Agreement for directors effective October 25, 1998
(filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2000).
|
|
|
10.30+
|
|
Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for executive
officers, dated January 24, 2001 (filed as Exhibit 10.41 to Annual Report of Baker
Hughes Incorporated on Form 10K for the year ended December 31, 2001).
|
|
|
10.31
|
|
Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for
employees, dated January 30, 2002 (filed as Exhibit 10.43 to Annual Report of Baker
Hughes Incorporated on Form 10K for the year ended December 31, 2001).
|
|
|
10.32
|
|
Form of Baker Hughes Incorporated Incentive Stock Option Agreement for
employees, dated January 30, 2002 (filed as Exhibit 10.44 to Annual Report of Baker
Hughes Incorporated on Form 10K for the year ended December 31, 2001).
|
|
|
10.33+
|
|
Form of Baker Hughes Incorporated Stock Option Award Agreements, with Terms and
Conditions (filed as Exhibit 10.46 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2002).
|
|
|
10.34+
|
|
Form of Baker Hughes Incorporated Performance Award Agreement, including Terms and
Conditions for certain executive officers (filed as Exhibit 10.4 to Quarterly Report of
Baker Hughes Incorporated on Form 10Q for the quarter ended March 31, 2004).
|
|
|
10.35+
|
|
Form of Restricted Stock Award Resolution, including Terms and Conditions (filed as
Exhibit 10.3 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the
quarter ended March 31, 2004).
|
|
|
10.36+
|
|
Form of Baker Hughes Incorporated Restricted Stock Award Agreement (filed as Exhibit
10.54 to Annual Report on Form 10K for the year ended December 31, 2004).
|
85
|
10.37+
|
|
Form of Baker Hughes Incorporated Restricted Stock Award Terms and Conditions (filed
as Exhibit 10.54 to Annual Report on Form 10K for the year ended December 31, 2004).
|
|
|
10.38
|
|
Form of Baker Hughes Incorporated Restricted Stock Unit Agreement (filed as
Exhibit 10.54 to Annual Report on Form 10K for the year ended December 31, 2004).
|
|
|
10.39
|
|
Form of Baker Hughes Incorporated Restricted Stock Unit Terms and Conditions
(filed as Exhibit 10.54 to Annual Report on Form 10K for the year ended December 31,
2004).
|
|
|
10.40+*
|
|
Form of Baker Hughes Incorporated Restricted Stock Award, including Terms and
Conditions for directors.
|
|
|
10.41+*
|
|
Form of Baker Hughes Incorporated Stock Option Award Agreement, including Terms and
Conditions for directors.
|
|
|
10.42+*
|
|
Form of Baker Hughes Incorporated Performance Unit Award Agreement, including Terms
and Conditions.
|
|
|
10.43+*
|
|
Performance Goals for the Performance Unit Award granted in 2006.
|
|
|
10.44+*
|
|
Compensation Table for Named Executive Officers and Directors.
|
|
|
10.45
|
|
Form of Credit Agreement, dated as of July 7, 2005, among Baker Hughes
Incorporated, JP Morgan Chase Bank, N.A., as Administrative Agent and fourteen lenders
for $500 million, in the aggregate for all banks (filed as Exhibit 10.1 to Current
Report of Baker Hughes Incorporated on Form 8K filed July 11, 2005).
|
|
|
10.46
|
|
Agreement and Plan of Merger among Baker Hughes Incorporated, Baker Hughes
Delaware I, Inc. and Western Atlas Inc. dated as of May 10, 1998 (filed as Exhibit 10.30
to Annual Report of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2003).
|
|
|
10.47
|
|
Tax Sharing Agreement dated October 31, 1997, between Western Atlas Inc. and
UNOVA Inc. (filed as Exhibit 10.31 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2003).
|
|
|
10.48
|
|
Employee Benefits Agreement dated October 31, 1997, between Western Atlas Inc.
and UNOVA Inc. (filed as Exhibit 10.32 to Annual Report of Baker Hughes Incorporated on
Form 10K for the year ended December 31, 2003).
|
|
|
10.49
|
|
Master Formation Agreement by and among the Company, Schlumberger Limited and
certain wholly owned subsidiaries of Schlumberger Limited dated as of September 6, 2000
(filed as Exhibit 2.1 to Current Report of Baker Hughes Incorporated on Form 8K dated
September 7, 2000).
|
|
|
10.50
|
|
Shareholders Agreement by and among Schlumberger Limited, Baker Hughes
Incorporated and other parties listed on the signature pages thereto dated November 30,
2000 (filed as Exhibit 10.1 to Current Report of Baker Hughes Incorporated on Form 8K
dated November 30, 2000).
|
|
|
21.1*
|
|
Subsidiaries of Registrant.
|
|
|
23.1*
|
|
Consent of Deloitte & Touche LLP.
|
|
|
31.1*
|
|
Certification of Chad C. Deaton, Chief Executive Officer,
dated February 28,
2006, pursuant to Rule 13a14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
31.2*
|
|
Certification of G. Stephen Finley, Chief Financial Officer,
dated February 28,
2006, pursuant to Rule 13a14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
32*
|
|
Statement of Chad C. Deaton, Chief Executive Officer, and G. Stephen Finley,
Chief Financial Officer, dated February 28, 2006, furnished pursuant to Rule 13a14(b)
of the Securities Exchange Act of 1934, as amended.
|
|
|
99.1
|
|
Administrative Proceeding, File No. 310572, dated September 12, 2001, as issued
by the Securities and Exchange Commission (filed as Exhibit 99.1 to Current Report on
Form 8K filed on September 19, 2001).
|
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
BAKER HUGHES INCORPORATED
|
|
Date: February 28, 2006
|
/s/CHAD C. DEATON
|
|
|
Chad C. Deaton
|
|
|
Chairman of the Board and Chief Executive Officer
|
|
87
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Chad. C. Deaton and G. Stephen Finley, each of whom may act without
joinder of the other, as their true and lawful attorneysinfact and agents, each with full power
of substitution and resubstitution, for such person and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual Report on Form 10K, and to file
the same, with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneysinfact and agents full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneysinfact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/CHAD C. DEATON
|
|
Chairman of the Board and Chief Executive
|
|
February 28, 2006
|
|
|
Officer (principal executive officer)
|
|
|
|
|
|
|
|
/s/G. STEPHEN FINLEY
|
|
Senior Vice President Finance and
|
|
February 28, 2006
|
|
|
Administration and Chief Financial Officer (principal financial officer)
|
|
|
|
|
|
|
|
/s/ALAN J. KEIFER
|
|
Vice President and Controller
|
|
February 28, 2006
|
|
|
(principal accounting officer)
|
|
|
|
|
|
|
|
/s/LARRY D. BRADY
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
|
|
|
|
|
/s/CLARENCE P. CAZALOT, JR.
|
|
Director
|
|
February 28, 2006
|
(Clarence P. Cazalot, Jr.)
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ANTHONY G. FERNANDES
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
|
|
|
|
|
/s/CLAIRE W. GARGALLI
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
|
|
|
|
|
/s/JAMES A. LASH
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
|
|
|
|
|
/s/JAMES F. MCCALL
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
|
|
|
|
|
/s/J. LARRY NICHOLS
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
|
|
|
|
|
/s/H. JOHN RILEY, JR.
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
|
|
|
|
|
/s/CHARLES L. WATSON
|
|
Director
|
|
February 28, 2006
|
|
|
|
|
|
88
Baker Hughes Incorporated
Schedule II Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Reversal of
|
|
|
|
|
|
Charged to
|
|
Balance at
|
|
|
Beginning
|
|
Cost and
|
|
Prior
|
|
|
|
|
|
Other
|
|
End of
|
(In millions)
|
|
of Period
|
|
Expenses
|
|
Deductions
(1)
|
|
Writeoffs
(2)
|
|
Accounts
(3)
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for doubtful accounts receivable
|
|
$
|
50.2
|
|
|
$
|
28.3
|
|
|
$
|
(14.8
|
)
|
|
$
|
(8.0
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
51.4
|
|
Reserve for inventories
|
|
|
220.0
|
|
|
|
31.4
|
|
|
|
|
|
|
|
(42.1
|
)
|
|
|
(8.0
|
)
|
|
|
201.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for doubtful accounts receivable
|
|
|
61.6
|
|
|
|
21.1
|
|
|
|
(19.3
|
)
|
|
|
(14.4
|
)
|
|
|
1.2
|
|
|
|
50.2
|
|
Reserve for inventories
|
|
|
231.5
|
|
|
|
38.8
|
|
|
|
|
|
|
|
(59.3
|
)
|
|
|
9.0
|
|
|
|
220.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for doubtful accounts receivable
|
|
|
66.2
|
|
|
|
18.1
|
|
|
|
(9.7
|
)
|
|
|
(13.5
|
)
|
|
|
0.5
|
|
|
|
61.6
|
|
Reserve for inventories
|
|
|
233.6
|
|
|
|
23.0
|
|
|
|
|
|
|
|
(36.1
|
)
|
|
|
11.0
|
|
|
|
231.5
|
|
|
|
|
(1)
|
|
Represents the reversals of prior accruals as receivables are collected.
|
|
(2)
|
|
Represents the elimination of accounts receivable and inventory deemed
uncollectible or worthless.
|
|
(3)
|
|
Represents reclasses, currency translation adjustments and divestitures.
|
89
INDEX OF EXHIBITS
3.1
|
|
Restated Certificate of Incorporation (filed as Exhibit 3.1 to Quarterly Report
of Baker Hughes Incorporated on Form 10-Q for the quarter ended June 30, 2002).
|
|
3.2
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Current Report of Baker Hughes Incorporated on Form 8-K filed May 4,
2005).
|
|
3.3
|
|
Bylaws of Baker Hughes Incorporated restated as of April 28, 2005 (filed as
Exhibit 3.2 to Current Report of Baker Hughes Incorporated on Form 8-K filed May 4,
2005).
|
|
4.1
|
|
Rights of Holders of the Companys Long-Term Debt. The Company has no long-term
debt instrument with regard to which the securities authorized thereunder equal or
exceed 10% of the total assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of its long-term debt instruments to the
SEC upon request.
|
|
4.2
|
|
Restated Certificate of Incorporation (filed as Exhibit 3.1 to Quarterly Report
of Baker Hughes Incorporated on Form 10-Q for the quarter ended June 30, 2002).
|
|
4.3
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Current Report of Baker Hughes Incorporated on Form 8-K filed May 4,
2005).
|
|
4.4
|
|
Bylaws of Baker Hughes Incorporated restated as of April 28, 2005 (filed as
Exhibit 3.2 to Current Report of Baker Hughes Incorporated on Form 8-K filed May 4,
2005).
|
|
4.5
|
|
Indenture dated as of May 15, 1994 between Western Atlas Inc. and The Bank of New
York, Trustee, providing for the issuance of securities in series (filed as Exhibit 4.4 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended December 31, 2004).
|
|
10.1+
|
|
Employment Agreement by and between Baker Hughes Incorporated and Chad C. Deaton
dated as of October 25, 2004 (filed as Exhibit 10.3 to Current Report of Baker Hughes
Incorporated on Form 8-K filed October 7, 2004).
|
|
10.2+
|
|
Change in Control Agreement between Baker Hughes Incorporated and Chad C. Deaton
dated as of October 25, 2004 (filed as Exhibit 10.2 to Current Report of Baker Hughes
Incorporated on Form 8-K filed October 7, 2004).
|
|
10.3+
|
|
Indemnification Agreement dated as of October 25, 2004 between Baker Hughes
Incorporated and Chad C. Deaton (filed as Exhibit 10.1 to Current Report of Baker Hughes
Incorporated on Form 8-K filed on October 7, 2004).
|
|
10.4+
|
|
Stock Option Agreement issued to Chad C. Deaton on October 25, 2004 in the
amount of 75,000 shares of Company Common Stock (filed as Exhibit 10.4 to Quarterly
Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended September 30,
2004).
|
10.5+
|
|
Agreement regarding restricted stock award issued to Chad C. Deaton on October
25, 2004 in the amount of 80,000 shares of Company Common Stock (filed as Exhibit 10.5
to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended
September 30, 2004).
|
|
10.6+
|
|
Agreement regarding restricted stock award issued to James R. Clark on October
27, 2004 in the amount of 40,000 shares of Baker Hughes Incorporated Common Stock (filed
as Exhibit 10.7 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the
quarter ended September 30, 2004).
|
|
10.7+
|
|
Second Amended and Restated Stock Matching Agreement by and between Baker Hughes
Incorporated and James R. Clark dated as of October 25, 2004 (filed as Exhibit 10.6 to
Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended
September 30, 2004).
|
|
10.8+
|
|
Letter dated October 26, 2005 to James R. Clark clarifying Mr. Clarks
employment terms (filed as Exhibit 10.2 to Quarterly Report of Baker Hughes Incorporated
on Form 10-Q for the quarter ended September 30, 2005).
|
|
10.9+*
|
|
Retirement and Consulting Agreement dated November 1, 2005 and clarification letter
dated February 15, 2006 between Baker Hughes Incorporated and G. Stephen Finley
effective as of April 1, 2006.
|
|
10.10+
|
|
Form of Change in Control Severance Plan (filed as Exhibit 10.8 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2003).
|
|
10.11+
|
|
Form of Change in Control Severance Agreement between Baker Hughes Incorporated and
David H. Barr and John A. ODonnell effective as of July 28, 2004, and with James R.
Clark, Alan R. Crain, Jr., William P. Faubel, G. Stephen Finley, Greg Nakanishi and
Douglas J. Wall to be effective as of January 1, 2006 and with Chris P. Beaver, Paul S.
Butero and Martin S. Craighead effective as of February 28, 2005 and with Richard L.
Williams effective as of May 2, 2005 and with Charles S. Wolley effective as of January
1, 2006 (filed as Exhibit 10.8 to Quarterly Report of Baker Hughes Incorporated on Form
10-Q for the quarter ended September 30, 2004).
|
|
10.12+
|
|
Form of Indemnification Agreement between Baker Hughes Incorporated and each of the
directors and executive officers (filed as Exhibit 10.4 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 2003).
|
|
10.13+
|
|
Baker Hughes Incorporated Director Retirement Policy for Certain Members of the Board
of Directors (filed as Exhibit 10.10 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended December 31, 2003).
|
|
10.14+
|
|
Baker Hughes Incorporated Director Compensation Deferral Plan, as amended and restated
effective as of July 24, 2002 (filed as Exhibit 10.16 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31, 2002).
|
|
10.15+
|
|
Baker Hughes Incorporated Executive Severance Plan (effective November 1, 2002) (filed
as Exhibit 10.13 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2002).
|
|
10.16
|
|
1995 Employee Annual Incentive Compensation Plan, as amended by Amendment No.
1997-1 to the 1995 Employee Annual Incentive Compensation Plan and as amended by
Amendment No. 1999-1 to the 1995 Employee Annual Incentive Compensation Plan (filed as
Exhibit 10.17 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2002).
|
|
10.17+
|
|
Baker Hughes Incorporated Supplemental Retirement Plan, as amended and restated
effective as of January 1, 2005 (filed as Exhibit 10.1 to Quarterly Report of Baker
Hughes Incorporated on Form 10-Q for the quarter ended September 30, 2005).
|
|
10.18
|
|
Long-Term Incentive Plan, as amended by Amendment No. 1999-1 to Long-Term
Incentive Plan (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended December 31, 2002).
|
|
10.19
|
|
Baker Hughes Incorporated 1998 Employee Stock Option Plan, as amended by
Amendment No. 1999-1 to 1998 Employee Stock Option Plan (filed as Exhibit 10.3 to
Quarterly Report of Baker Hughes Incorporated on
Form 10-Q for the quarter ended June 30, 2003).
|
10.20
|
|
Baker Hughes Incorporated 2002 Employee Long-Term Incentive Plan (filed as
Exhibit 4.4 to Registration Statement No. 333-87372 on Form S-8 filed May 1, 2002).
|
|
10.21+
|
|
Baker Hughes Incorporated 2002 Director & Officer Long-Term Incentive Plan (filed as
Exhibit 10.2 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the
quarter ended September 30, 2003).
|
|
10.22+
|
|
Amendment to 2002 Director & Officer Long-Term Incentive Plan, effective as of October
27, 2005 (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005).
|
|
10.23
|
|
Baker Hughes Incorporated Employee Stock Purchase Plan, as amended and restated,
effective as of March 3, 2003 (filed as Exhibit 10.1 to Quarterly Report of Baker Hughes
Incorporated on Form 10-Q for the quarter ended March 31, 2003).
|
|
10.24
|
|
Baker Hughes Incorporated Pension Plan effective as of January 1, 2002, as
amended by First Amendment, effective January 1, 2002 (filed as Exhibit 10.51 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2002).
|
|
10.25
|
|
Form of Nonqualified Stock Option Agreement for employees effective October 25,
1995 (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10-K
for the year ended December 31, 2001).
|
|
10.26
|
|
Form of Incentive Stock Option Agreement for employees effective October 25,
1995 (filed as Exhibit 10.28 to Annual Report of Baker Hughes Incorporated on Form 10-K
for the year ended December 31, 2001).
|
|
10.27+
|
|
Form of Nonqualified Stock Option Agreement for directors effective October 25, 1995
(filed as Exhibit 10.26 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2001).
|
|
10.28+
|
|
Form of Stock Option Agreement for executive officers effective October 1, 1998 (filed
as Exhibit 10.37 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
|
|
10.29+
|
|
Form of Nonqualified Stock Option Agreement for directors effective October 25, 1998
(filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2000).
|
|
10.30+
|
|
Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for executive
officers, dated January 24, 2001 (filed as Exhibit 10.41 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended December 31, 2001).
|
|
10.31
|
|
Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for
employees, dated January 30, 2002 (filed as Exhibit 10.43 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended December 31, 2001).
|
|
10.32
|
|
Form of Baker Hughes Incorporated Incentive Stock Option Agreement for
employees, dated January 30, 2002 (filed as Exhibit 10.44 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended December 31, 2001).
|
|
10.33+
|
|
Form of Baker Hughes Incorporated Stock Option Award Agreements, with Terms and
Conditions (filed as Exhibit 10.46 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2002).
|
|
10.34+
|
|
Form of Baker Hughes Incorporated Performance Award Agreement, including Terms and
Conditions for certain executive officers (filed as Exhibit 10.4 to Quarterly Report of
Baker Hughes Incorporated on Form 10-Q for the quarter ended March 31, 2004).
|
|
10.35+
|
|
Form of Restricted Stock Award Resolution, including Terms and Conditions (filed as
Exhibit 10.3 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the
quarter ended March 31, 2004).
|
|
10.36+
|
|
Form of Baker Hughes Incorporated Restricted Stock Award Agreement (filed as Exhibit
10.54 to Annual Report on Form 10-K for the year ended December 31, 2004).
|
10.37+
|
|
Form of Baker Hughes Incorporated Restricted Stock Award Terms and Conditions (filed
as Exhibit 10.54 to Annual Report on Form 10-K for the year ended December 31, 2004).
|
|
10.38
|
|
Form of Baker Hughes Incorporated Restricted Stock Unit Agreement (filed as
Exhibit 10.54 to Annual Report on Form 10-K for the year ended December 31, 2004).
|
|
10.39
|
|
Form of Baker Hughes Incorporated Restricted Stock Unit Terms and Conditions
(filed as Exhibit 10.54 to Annual Report on Form 10-K for the year ended December 31,
2004).
|
|
10.40+*
|
|
Form of Baker Hughes Incorporated Restricted Stock Award, including Terms and
Conditions for directors.
|
|
10.41+*
|
|
Form of Baker Hughes Incorporated Stock Option Award Agreement, including Terms and
Conditions for directors.
|
|
10.42+*
|
|
Form of Baker Hughes Incorporated Performance Unit Award Agreement, including Terms
and Conditions.
|
|
10.43+*
|
|
Performance Goals for the Performance Unit Award granted in 2006.
|
|
10.44+*
|
|
Compensation Table for Named Executive Officers and Directors.
|
|
10.45
|
|
Form of Credit Agreement, dated as of July 7, 2005, among Baker Hughes
Incorporated, JP Morgan Chase Bank, N.A., as Administrative Agent and fourteen lenders
for $500 million, in the aggregate for all banks (filed as Exhibit 10.1 to Current
Report of Baker Hughes Incorporated on Form 8-K filed July 11, 2005).
|
|
10.46
|
|
Agreement and Plan of Merger among Baker Hughes Incorporated, Baker Hughes
Delaware I, Inc. and Western Atlas Inc. dated as of May 10, 1998 (filed as Exhibit 10.30
to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December
31, 2003).
|
|
10.47
|
|
Tax Sharing Agreement dated October 31, 1997, between Western Atlas Inc. and
UNOVA Inc. (filed as Exhibit 10.31 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2003).
|
|
10.48
|
|
Employee Benefits Agreement dated October 31, 1997, between Western Atlas Inc.
and UNOVA Inc. (filed as Exhibit 10.32 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended December 31, 2003).
|
|
10.49
|
|
Master Formation Agreement by and among the Company, Schlumberger Limited and
certain wholly owned subsidiaries of Schlumberger Limited dated as of September 6, 2000
(filed as Exhibit 2.1 to Current Report of Baker Hughes Incorporated on Form 8-K dated
September 7, 2000).
|
|
10.50
|
|
Shareholders Agreement by and among Schlumberger Limited, Baker Hughes
Incorporated and other parties listed on the signature pages thereto dated November 30,
2000 (filed as Exhibit 10.1 to Current Report of Baker Hughes Incorporated on Form 8-K
dated November 30, 2000).
|
|
21.1*
|
|
Subsidiaries of Registrant.
|
|
23.1*
|
|
Consent of Deloitte & Touche LLP.
|
|
31.1*
|
|
Certification of Chad C. Deaton, Chief Executive Officer, dated February 28,
2006, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
31.2*
|
|
Certification of G. Stephen Finley, Chief Financial Officer, dated February 28,
2006, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
32*
|
|
Statement of Chad C. Deaton, Chief Executive Officer, and G. Stephen Finley,
Chief Financial Officer, dated February 28, 2006, furnished pursuant to Rule 13a-14(b)
of the Securities Exchange Act of 1934, as amended.
|
|
99.1
|
|
Administrative Proceeding, File No. 3-10572, dated September 12, 2001, as issued
by the Securities and Exchange Commission (filed as Exhibit 99.1 to Current Report on
Form 8-K filed on September 19, 2001).
|