Annual Report Project: Baker Hughes

Baker HughesBaker HughesJeff Burkhardt

Syarifah FakhryJulio IdrovoSri Krishna

Dionne MoonahBernd Ruehlicke

University of HoustonUniversity of Houston--VictoriaVictoriaACC6351Fall 2005

December 5, 2005

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I. IntroductionII. Industry Economic CharacteristicsIII. Business Strategies and PerformanceIV. Financial Reporting and AnalysisV. Forecasting Profitability and RiskVI. Conclusion and Recommendations

ReferencesAppendix

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• History• Products and Services• Core Values and Keys to Success• Management Team and Leadership• Business Performance

– Sales Growth and Profit– Market Shares– Stock Market Performance

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• In 1907, Reuben C. Baker developed a casing shoe that revolutionized cable tool drilling. In 1909, Howard R. Hughes, Sr. introduced the first roller cutter bit, which dramatically improved the rotary drilling process

• Over the next eight decades, Baker International and Hughes Tool Company became worldwide leaders in well completion, drilling tools, and related services. The two companies merged in 1987 to form Baker Hughes, Incorporated

• During its history, Baker Hughes has acquired and assimilated numerous oilfield pioneers

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• Drilling– Directional Drilling – Drill Bits– Drilling Fluids Systems – Drilling Optimization

(OASIS)• Formation Evaluation

– Coring Services– Integrated Formation

Evaluation

– Logging-While-Drilling – Measurement-While-

Drilling– Reservoir and Petrophysical

Analysis – Surface Logging Systems– Waste Management

Services – Wireline Logging

Baker Hughes delivers a broad range of products and services that help the petroleum industry improve efficiency and increase ultimate productivity for the life of the reservoir.

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• Completion Services– APEX Big Bore Solutions– Completion Systems– Deepwater Upper

Completions– Fishing Services– Flow Control– High Pressure/High

Temperature – Inflatable Systems– Liner Hangers– Packers – Perforating Systems– Safety Systems – Sand Control – Service Tools

• Production Management – Coiled Tubing– Electric Submersible Pumps

(ESP)– Oil/Water Separation and

Treatment Systems – Pipeline Management– Production Services– Reentry– Reservoir Management– Specialty Chemical

Programs– Wellbore Instrumentation– Workover Services

• Seismic Acquisition & Processing

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`lob=sîrbp=^kahbvp=ql=pr``bpp• Core Values

– Integrity– Teamwork– Performance– Learning

• Keys to Success– People contributing at their full potential. Everyone

can make a difference.– Delivering unmatched value to our customers.– Being cost efficient in everything we do.– Employing our resources effectively.

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j^k^dbjbkq=qb^j^ka=ibâbopefm• Comprised of eight operating

divisions focused on technology development, customer service, field operations, and financial performance

• Baker Hughes Business Shared Services provides administrative services supporting Baker Hughes divisions including information technology, finance and accounting, and human resources and benefits

• Corporate offices provide legal, tax, finance and investorrelations support, and executive management

Management Organization Chart

Baker Hughes executive management team.(bakerhughes.com)

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Baker Hughes sales and profitability figures for2002 through 2004. (bakerhughes.com)

Baker Hughes financial highlights as of June 30, 2005. (finance.yahoo.com)

Revenues*2004 $6.1 billion2003 5.3 billion2002 4.9 billion

Operating Income*2004 $821.0 million2003 560.3 million2002 562.4 million

Net Income*2004 $528.6 million2003 128.9 million2002 168.9 million

* Excludes the results of EIMCO Process Equipment, BirdMachine, and oil producing operations in West Africa,which are discontinued business.

Sales Growth and ProfitSales Growth and Profit

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Market SharesMarket Shares

Oil services industry market share by market position rank for Baker Hughes,Schlumberger, and Haliburton. (One-on-One, 2005)(RBC Capital, 2005)

3Baker Hughes Drilling Fluids 1 2

1Hughes

Christensen - 42 INTEQ 1 32 Baker Atlas 1 3

1Baker Oil

Tools 2 31 Centrilift 2 -

1Baker

Petrolite - - 1* Western Geco 1* -

Electronic Submersible PumpsCompletions

Oilfield Chemicals

Completion and Production

Market Postion

* Joint venture between Baker Hughes and Schlumberger

Seismic

Drilling and EvaluationDrilling Fluids

Dill BitsDrilling and EvaluationWireline

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The dramatic difference between the S&P 500 and Baker Hughes shows its strong correlationto the price of oil. In June 2005, crude oil was $45 per Barrel, and peaked in Septemberat $70 per Barrel

BHI: Baker Hughes Inc., GSPC: S&P 500, DJI: Dow Jones Index

Stock Market PerformanceStock Market Performance

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• Critical Success Factors• Business Environment Analysis

(SWOT)• Industry Competition Analysis

(Porter’s Five Forces)• Customer Analysis• Government and Regulatory Analysis

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• High Performance Culture• Best-in-Class Opportunities• Financial Flexibility• Master the Market

The Strategic FrameworkThe Strategic Framework

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• Core Values• Keys to Success• Leadership team

development– Succession planning

• Recruit, train, and retain a high performance nationalized workforce

High Performance CultureHigh Performance Culture

Illustrates the relationships within Baker Hughes’ high performance culture. (One-on-One, 2005)

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• Geographic opportunities– Russia and Caspian

Sea– Middle East– Mature markets

• Customer opportunities– National oil companies

• Market opportunites– Critical wells: risk

reduction– Standard wells: cost

reduction

BestBest--inin--Class OpportunitiesClass Opportunities

(One-on-One, 2005)

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• Cost discipline– Efficient cost base

• Financial discipline– Quarterly performance

reviews– Incentive

compensation plan– Individual performance

contracts• Financial Flexibility

– Retire debt– Repurchase stock– Grow the business

Financial FlexibilityFinancial Flexibility

Effective debt-load of Baker Hughes from 1999 to 2005. (One-on-One, 2005)

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• Cultivate superior process and capabilitesin:– Product development

and commercialization– Manufacturing and

product quality– Service quality

• Strengthen support services

Master the MarketMaster the Market

Illustrates Baker Hughes’ overlapping focus on product development, manufacturing and product quality, and service quality. (One-on-One, 2005)

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SWOTSWOT• Strengths• Weaknesses• Opportunities• Threats• SWOT Summary• SWOT Matrix

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StrengthsStrengths• Strong product line divisions that give a competitive

advantage.

• Develop technology innovations that cut cost, reduce risk, and increase productivity.

• Focus on best-in-class products and services.

• Maintain capital discipline by reducing debt and carefully evaluating investments.

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WeaknessesWeaknesses• Compete with the oil and natural gas industry’s largest

diversified oilfield service providers

• Not to carry inventory of materials and component parts used in manufacturing products that could be subject to shortages and rising costs

• Limited number of buyers

• Cyclical demand, dependent upon customer’s forecasts of future oil and natural gas prices and production, future economic growth.

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OpportunitiesOpportunities• Worldwide oil demand estimated to increase 2-3% in 2005

which will affect the clients to increase their upstream spending program by 9-12%

• Expand business in the areas that are growing rapidly, such as Russia and Caspian regions

• Expecting higher levels of activity in the Gulf of Mexico as deepwater development proceeds and in the North Sea where independents are ramping up operations.

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ThreatsThreats• Operations are subject to the risk of war, boycott, and

change in foreign currency exchange rate

• Risk of disruption in oil supply due to terrorist attacks targeting oil production from key producers, labor strikes, and military activity

• Adverse weather conditions, such as hurricanes

• Risk of doing business in multiple countries with various laws and differing political structures

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SWOT SummarySWOT Summary• Strengths:• Weaknesses:• Opportunities:• Threats:

HighLow

HighModerate

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Low

Strengths Weaknesses S-O Strategies W-O Strategies Growing demand for natural gas will support strong drilling activities.

Expand business in the areas where are few competitors exist.

S-T Strategies W-T Strategies Develop technology innovation that reduce risk of weather conditions.

Not to carry inventory of materials and component and component parts to avoid risk of political and weather condition.

Opportunities

Threats

SWOT MatrixSWOT Matrix

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PorterPorter’’s Five Forcess Five Forces• Buyer Power• Supplier Power• Rivalry Among Existing Firms• Threat of New Entrants• Threat of Substitutes• Porter’s Five Forces Summary• Porter’s Generic Strategies

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Buyer PowerBuyer Power• Direct sales account for most of the revenues, not

retailers or distributors

• Products and services offered are quite unique in a small industry of specialists

• Products provided are extremely essential for the industry, but the number of buyers is quite limited

• Cost of production and services offered is a small portion of the total capital investment of buyers

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Supplier PowerSupplier Power• Very specialized and high-tech suppliers for

components built and services offered

• Small number of suppliers, more bargaining power

• The size of companies they are selling to however, gives them some leverage when exercising control over suppliers

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Rivalry Among Existing FirmsRivalry Among Existing Firms• Halliburton Co., Schlumberger Ltd., Smith

International, Inc. are 3 main competitors

• The relative size and broad range of products and services offered makes the rivalry quite severe

• Number of buyers is quite limited

• Some competitor products are reasonably similar but each is best suited for certain applications only

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Threat of New EntrantsThreat of New Entrants• High capital investments, technology and

expertise and patents available with existing firms are high barriers for new entrants


• Very cyclical industry. During bad times, business is very bad

• Brand recognition for existing firms is quite high

• Reasonable good profitability

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Threat of SubstitutesThreat of Substitutes• Number of competitors is very limited


• Buyers like to standardize products and services for entire fleets

• After making a decision on one firm, it is very expensive to make a switch to another firm’s products

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PorterPorter’’s Five Forces Summarys Five Forces Summary• Buyer Power:• Supplier Power:• Rivalry Among Existing

Firms:• Threat of New Entrants:• Threat of Substitutes:

HighLowLow

LowModerate

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PorterPorter’’s Generic Strategiess Generic StrategiesBaker Hughes’ broad range of services and operational units

requires a varied strategic approach to each unit--not just a common strategy for the entire firm.

Cost Leadership Strategy

• Acquisitions and mergers

• Outsourcing• Efficiencies in design

and production• Vertical integration• Examples : Reservoir

and PetrophysicalAnalysis tools, WellboreInstrumentation, OASIS business unit, VSFusion tools

Focus Strategy • Concentration within a

narrow segment• Risk of less bargaining

power with suppliers, so less of focus strategy is applied

• Since the market segment is narrow, a broad range of products and services is offered

• In a cyclical industry adoption of a firm-wide focus strategy is very risky

Differentiation Strategy

• Unique products • Strong R&D group• Strong sales group• Example : AutoTrack

rotarty Closed Loop Drilling System, Low Dosage Hydrate Inhibitors, Specialty Chemicals

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• Business based customers only

• Three major customers– Super major and major integrated oil and

natural gas companies– Independent oil and natural gas companies– State-owned national oil companies (NCO’s)

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• Compliance with all U.S. federal, state and local laws.– Comprehensive Environmental Response, Compensation and

Liability Act (Superfund or CERCLA)– The United States Protection Agency (EPA)– The Texas Commission on Environmental Quality (TECQ)– Identify as Potential Responsible Parties (PRP)

• Occupational Safety and Health Administration (OSHA)

• International Regulations – with regards to air and water quality

• Securities and Exchange Commission

• Financial Accounting and Standards Board

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• Product Life Cycle• Business Segments• BCG Matrix• Integration with Value Chain• Geographical Diversification

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• Negative Financing activity

• Large positive Operating activity

• Along with Investing activity patterns, we clearly identify a company in its Maturity phase

Consolidated Cash Flow

-600

-400

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600

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1000

2000 2001 2002 2003 2004

Operating activities

Investing activities

Financing activities

Cash

Break-down of cash flow by activity for BakerHughes for 2000 through 2004. (Baker Hughes,

2005)

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_rpfkbpp=pbdjbkqp• Baker Hughes is focused on providing drilling, formation evaluation

and production technology used within oil and gas wells. Six divisions provide best-in-class products and services to the worldwide petroleum industry.

– Baker Hughes Drilling Fluids: The market leader in providing advanced reservoir drill-in fluids that help maximize production.

– Hughes Christensen: The most innovative and technically advanced drill bit manufacturer in the world.

– INTEQ: Delivers advanced drilling technologies and services that deliver efficiency and precise well placement.

– Baker Atlas: Advanced well logging and completion systems. Industry leader in wireline and tubing-conveyed perforating services.

– Baker Oil Tools: Leads the world in completion, workover and fishing solutions.

– Centrilift: Provides a broad variety of pumping systems and related components. The leader in proprietary technology for electrical submersible pumps (ESPs), variable frequency drives, and cabling for ESP systems.

– Baker Petrolite: World leader in providing chemical technology solutions to the global hydrocarbon recovery and processing industries.

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_`d=j^qofu• Baker Hughes’ core businesses have moved to

“Cash Cow” status, while others enjoy “Star”status; some remain as “Question Marks”

• Baker Atlas introduced new technologies and expanded into new markets; along with a solid 2nd

place market share, it has star status• Hughes Christensen delivered record revenues

and profits; as the industry leader, has star value• Centrilift delivered record revenues and profits; as

a narrow industry leader, has cash cow status with star potential

• Baker Oil Tools revenues increased 16.4% in 2004; as industry leader, has cash cow status with star potential

• Baker Petrolite was able to offset rising material costs through improved efficiency and price increases; along with industry lead, gives it cash cow status

• INTEQ posted improvement in profitability, but with 2nd and sometimes 3rd place market share, a question mark with star potential

• Drilling Fluids disaggregated from INTEQ to renew focus; does not share top market position

• Baker Hughes will need to gain adoption of new technologies to move “Question Marks” to “Stars” and increase market share to return to and maintain “Star” status in others

Boston Consulting Group growth-share matrixfor each of Baker Hughes’ business segmentsbased on relative market share, revenue, andprofitability. (quickmba.com) (One-on-One,

2005)(Baker Hughes, 2004)

• Drilling Fluids (DF), Hughes Christensen (HC), INTEQ (I), Baker Atlas (BA), Baker Oil Tools (BOT), Centrilift (C), Baker Petrolite (BP)

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Each step in the oilfield services covered by one or more divisions has theirindividual value chain. We will focus on overall value chain. Looking at thechain of oilfield services Baker Hughes is covering

Drilling Formation Evaluation Completion Production

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• Inbound Logistics: Transportation to onside production sites worldwide

• Operations: Tool and material production or custom adjusting of equipment

• Outbound Logistics: Applying/using equipment• Marketing and Sales: SPE, Internet, tradeshows• Service: Fishing, workover, chemical provider• Support Activities: Increased research and development

It is clear that the firm is pursuing a vertical integration strategy.

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dbldo^mef`îafsbopfcf`^qflk• Reason

– Having construction and production sites at oilfield location

– Being close to the customer

• Risk– Security– Terrorism

Baker Hughes operates in 100 countries, withmanufacturing facilities in 60. They employ more

than 27,000 people around the world.(One-onOne, 2005)

Global Operations

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dbldo^mef`îafsbopfcf`^qflk• Strategy Forward

– Switching from mature areas like North Sea/North America to Eastern Hemisphere (Middle East, Caspian, Russia)

– Russia and China will roll in competitors

– Follow the super majors– National oil companies

attain momentum (Middle East, China, Russia) holding large reserves

Geographic Shift

Illustrates Baker Hughes’ shift from mature areas to emerging areas. (Ward, 2005)

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• Accounting practices– Accounting methods used– Recent accounting changes and effects on financial

statements– Audit opinion

• Financial reporting with SEC– Compliance with SEC– Recent changes in accounting and financial reporting

• Long-term trend analysis– Financial position and health– Operating performance– Cash flow

• Financial ratio analysis– Profitability Measures– Activity Measures– Liquidity Measures– Solvency Measures

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Accounting Methods UsedAccounting Methods Used• Financial statements are in conformity with U.S. GAAP

• Product Revenue Recognition– Upon delivery, when title passes and when collectibility is

reasonably assured during ordinary operations.– Products produce to customer specifications are produced using

standard manufacturing operations and sold using regular marketing channel

• Service Revenue Recognition– When rendered and collectability is reasonably assured during

ordinary business operations– Usually priced on a per day, per meter or per man hour

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Accounting Methods UsedAccounting Methods Used• Impairment of Long-Lived Assets

– Long lived assets includes property, goodwill and intangible assets which carrying values are periodically reviewed for impairment Losses.

– Base on the business climate in which BHI operates no significant impairment losses are anticipated for the foreseeable future

• Inventories– Stated at the lower of cost or market value.– Cost is determined by using the First-in, First-out ( FIFO) or the

Average Cost method• Cash equivalents

– Highly liquid investments with an original maturity date of 3 months or less

• Allowance for doubtful debts (Bad Debts)– Recorded when it is evident that customers will not meet present or

future payments as required by contractual due dates.– BAD Debts at December 2004 was $50.5 million or 3.6% of A/R.


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Accounting Methods UsedAccounting Methods Used• Interest Expense

– Decreased by $16.0 million in 2004 due to repayment of $350 million long term debt.

– Decreased by $8.0 Million in 2004 due to lower weighted averageinterest rates on commercial papers and market borrowings.

– Decreased by $4.1 million in 2004 as a result of new interest rate swap agreements entered into the second quarter of 2004

• Product Warranties– Estimated warranty claims are based upon current and historical

product sales data

• Remediation Cost– Accrue base on estimates of a probably environmental exposure, using

current data and recorded when likely obligated to pay.


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Accounting Methods UsedAccounting Methods Used• Foreign Currency

– Gains/losses due to foreign currency translation are recorded as a component of accumulated other comprehensive income

• Stock-Based Compensation– Stocks issued to employee as part of their compensation are valued

using the intrinsic value method

• Income Taxes– Liability method is used for determining income taxes.– Current deferred tax liabilities and assets are recorded in accordance

with enacted domestic and foreign tax laws and rates.– Earnings from foreign subsidiaries will be indefinitely reinvested

subsequently, no U.S. income taxes on these amounts will be paid.– BHI effective tax rate differ from the U.S. statutory rate of 35%.– BHI is confident that estimates and assumptions when providing for tax

valuation will be accurate


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Asset Class Depreciation Method

Estimated Useful Life

Estimated Residual

ValuePlant,

Property, and Machinery

Straight-line for financial statements 20 - 25 years 3% - 12%

Capital Lease Straight-line 5-15 years 1% - 3%Intangible

Assets Amortize 40 YEARSReview for impairment

*For Income tax purposes Baker Hughes uses the accelerated method of depreciation.

Accounting Methods UsedAccounting Methods Used

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Recent Accounting ChangesRecent Accounting Changes• SFAS No. 142: Goodwill and Other Intangible

Assets– Adopted January 1, 2002– Cease amortizing goodwill and perform a transitional

impairment test from– Valuations of the reporting units were performed by a

third party– Goodwill in EIMCO and BIRD operation divisions

determined to be impaired– Recognized transitional impairment losses of $42.5

million, net of tax of $20.4 million


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Recent Accounting ChangesRecent Accounting Changes• SFAS No. 143: Asset Retirement Obligations

– Adopted January 1, 2003– Fair value of a liability associated with an asset

retirement obligation be recognized in the period in which it is incurred if a reasonable estimation can be made

– Resulted in a change of $5.6 million, net of tax of $2.8 million

– Recorded ARO liabilities of $11.4 million


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Audit OpinionAudit OpinionIn our opinion, such consolidated financial statements present fairly, in all material respects, the

financial position of Baker Hughes Incorporated and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, 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 Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Deloitte & Touche, LLPHouston, TexasFebruary 24, 2005


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Compliance with SECCompliance with SEC• Section 16(a) of the Securities Exchange Act of 1934, as amended

(“Exchange Act”), requires executive officers and directors, and persons who beneficially own more than 10% of the Common Stock, to file initial reports of ownership and reports of changes in ownership with the SEC and the NYSE.

• SEC regulations require executive officers, directors and greater than 10% beneficial owners to furnish the Company with copies of all Section 16(a) forms they file.

• Based solely on a review of the copies of those forms furnished to the Company and written representations from the executive officers and directors, the Company believes, that during its fiscal year ended December 31, 2003, the Company’s executive officers and directors complied with all applicable Section 16(a) filing requirements.

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Recent Changes in Accounting and Financial ReportingRecent Changes in Accounting and Financial Reporting

• Effective as of January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, which established new accounting and reporting standards for asset retirement obligations

• Effective as of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, which established new accounting and reporting standards for the recording, amortization and impairment of goodwill and other intangibles

• Effective as of January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, as amended, which established new accounting and reporting standards for derivative instruments and hedging activities.


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Date Rule Number Description Consequence

November 2002

FASB issued Interpretation No. 45

(“FIN 45”)

Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others

Did not have an impact on the consolidated financial statements of the Company

June 2005 FASB issued 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 of fair value can be made

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

January & December

2003

FASB issued Interpretation No. 46

(“FIN 46”)

Consolidation of Variable Interest Entities

Does not expect the adoption to have a material impact, if any, on the consolidated financial statements

April 2003 FASB issued SFAS No. 149

Amendment of Statement 133 on Derivative Instruments and Hedging Activities

No impact on the consolidated financial statements

May 2003 FASB issued SFAS No. 150

Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

No impact on the consolidated financial statements

December 2003

FASB revised SFAS No. 132

Employers’ Disclosures about Pensions and Other Post retirement Benefits

Adopted the disclosure requirements that were effective for 2003

January 2004FASB issued FASB

Staff Position No. FAS 106-1 (“FSP 106-1”)

Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003

Elected to defer accounting for the effects of the Act until 2004

Recent Changes in Accounting and Financial ReportingRecent Changes in Accounting and Financial Reporting

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• Financial Position and Health– Balance Sheets

• Operating Performance– Income Statements

• Cash Flow– Statements of Cash Flow

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Selected company information for 2004. (bakerhughes.com)

Financial Health and PositionFinancial Health and Position

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Financial Health and PositionFinancial Health and Position• Cash and cash equivalents increased in 2004• Accounts receivable have increased somewhat in

2004, probably due in part to increased revenue• Inventories, property, plant, and equipment, and

other assets have remained stable during the last 5 years.

Balance Sheet2004 2003 2002 2001 2000

AssetsCurrent assets:

Cash and cash equivalents 319 98.4 143.9 38.7 34.6Accounts receivable 1356.1 1141.8 1110.6 1268.8 1310.4Inventories 1035.2 1013.4 1032 1031.9 898.5

Total current assets 2966.6 2533 2555.5 2806.7 2486.6Total Assets 6821.3 6416.5 6400.8 6676.2 6452.7

Baker Hughes

* Full financial statements are included in the Appendix

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Financial Health and PositionFinancial Health and Position• Long-term debt shows a decreasing trend for the

past 5 years• Retained earnings have increased heavily in 2004,

maybe due to the increase in cash mentioned above


Balance Sheet2004 2003 2002 2001 2000

Liabilities and Stockholders' EquityTotal current liabilities 1235.5 1324.4 1080.1 1218.6 987.8Long-term debt 1086.3 1133 1424.3 1682.4 2049.6Retained earnings 545.9 170.9 196.3 182.3 -101.3Total stockholders' equity 3895.4 3350.4 3397.2 3327.8 3046.7

Total Liabilities and Stockholders' Equity 6821.3 6416.5 6400.8 6676.2 6452.7

Baker Hughes

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Financial Health and PositionFinancial Health and Position• Firm is financially healthy (cash showing a

positive trend, long term debt decreasing).• Baker Hughes has enough cash to cover short

term debt and current portion of long term debt commitments.

Note:• Halliburton's consolidated balance sheet

numbers include both ESG (direct competitor of Baker Hughes) and KBR (engineering & construction) business units.


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Operating PerformanceOperating Performance• Baker Hughes shows lower COGS compared to its

main competitors• Selling, general & administrative costs are stable, but

much higher than Halliburton and Schlumberger• Baker Hughes’ net income in 2004 increased

considerably compared to previous years, and it is at the top of its competitors


Income Statement2004 2003 2002 2001 2000

Revenues 6103.8 5252.4 5020.4 5139.6 5233.8Operating expenses:

Cost of goods sold 4367.4 3820.9 3625.7 3655.9 4009.6Selling, general, and administrative 915.4 827.0 840.6 781.7 759.6

Net Income 528.6 128.9 168.9 438.0 102.3

Baker Hughes

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Operating PerformanceOperating Performance• Baker Hughes’ overall operating performance is

improving as shown by the stable COGS (may indicate good cost control) and the increase in net income.

Note:• Halliburton's consolidated income statement

numbers include both ESG (direct competitor of Baker Hughes) and KBR (engineering & construction) business units.


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2004 2003 2002 2001 2000

Net cash flows from operating activities 783.7 656.1 706.4 720.8 563.5 Net cash flows from investing activities (196.8) (362.2) (283.1) (241.3) (313.5) Net cash flows from financing activities (352.2) (335.8) (312.3) (465.0) (223.2) Cash and cash equivalents, end of year 319.0 98.4 143.9 45.4 34.6

2004 2003 2002 2001 2000

Net cash flows from operating activities 19.45% -7.12% -2.00% 27.91% 3.74%Net cash flows from investing activities -45.67% 27.94% 17.32% -23.03% -35.52%Net cash flows from financing activities 4.88% 7.52% -32.84% 108.33% 280.89%Cash and cash equivalents, end of year 224.19% -31.62% 216.96% 31.21% 121.79%


Percent Change Cash FlowBaker Hughes

Baker Hughes


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Cash

Percent Change Cash Flow

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2000 2001 2002 2003 2004




Cash

Cash FlowCash Flow


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Cash FlowCash Flow• Operating cash flow show a steady increase in

excess of finance and investing activities• No stock was repurchased in 2004 and close to

twice as much as in 2003 were issued in 2004• This free cash gives Baker Hughes the

opportunity to repay borrowing• Baker Hughes may consider increasing dividends

payments


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• Profitability Measures– Return on Assets (ROA)– Gross Profit Margin– Asset Turnover– Return on Common Shareholder’s Equity (ROCE)– Earnings per Share (EPS)

• Activity Measures– Inventory Turnover– Accounts Receivable Turnover– Accounts Payable Turnover

• Liquidity Measures– Current Ratio– Working Capital

• Solvency Measures– Debt to Assets– Debt to Equity– Long-term Debt to Equity

• Summary

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• ROA based on income from continuing operations

• Average ROA of 5.4% • Baker Hughes above

industry average• Last four year greater or

equal to Schlumberger• Increasing ROA

indicates a better operating performance

Comparison of return on assets ratios for BakerHughes and Schlumberger between 2000 and 2004.(Baker Hughes, 2004)(Schlumberger, 2004)(D&B

Key Business Ratios)

Return on Assets (ROA)Return on Assets (ROA)Return on Assets

0 . 0 %

1. 0 %

2 . 0 %

3 . 0 %

4 . 0 %

5 . 0 %

6 . 0 %

7 . 0 %

8 . 0 %

9 . 0 %

10 . 0 %

Baker Hughes 3.2% 7.6% 4.5% 3.1% 8.8%

Schlumberger 5.4% 3.8% 3.5% 3.1% 6.6%

Industry 6.6% 3.7% 3.2%

2000 2001 2002 2003 2004

66


• Above industry average

• Increasing margins will improve Return on Sales

• Similar trend to Schlumberger, but more stable

Gross Profit Margin

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

29.0%

Baker Hughes 23.4% 28.9% 27.8% 27.3% 28.4%

Schlumberger 21.6% 21.6% 17.8% 15.9% 21.2%

Industry (5-Yr. Avg.) 26.2%

2000 2001 2002 2003 2004

Gross Profit MarginGross Profit Margin

Comparison of gross profit margin for Baker Hughesand Schlumberger between 2000 and 2004. (Baker

Hughes, 2004)(Schlumberger, 2004)(investor.reuters.com)

67


• Steadily increasing asset turnover

• Indicates resources are well managed

• Average consistently above Schlumberger’s

• Between two different acquired industry averages

• Adds to the increase of ROA

Total Asset TurnoverTotal Asset Turnover

Comparison of total asset turnover for Baker Hughesand Schlumberger between 2000 and 2004. (Baker

Hughes, 2004)(Schlumberger, 2004) (D&B KeyBusiness Ratios)(investor.reuters.com)

Total Asset Turnover

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Baker Hughes 0.77 0.78 0.77 0.82 0.92

Schlumberger 0.59 0.71 0.46 0.91 0.64

Industry (Med. Val.) 1.76 1.83 1.37

Industry (5-Yr. Avg.) 0.88

2000 2001 2002 2003 2004

68


Return on Common ShareholderReturn on Common Shareholder’’s Equity (ROCE)s Equity (ROCE)• ROCE significantly higher

since 2002, but still lower than Schlumberger

• Higher ROCE can be attributed to a combination of:- Higher profit margins- Greater asset utilization- Change in leverage- Emerging economies

Return on Common Shareholder's Equity

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

Baker Hughes 6.6% 8.5% 8.6% 11.2% 13.6%

Schlumberger 8.9% 9.7% 12.4% 15.5% 20.2%

Industry (Comp. Val.) 9.8% 5.6% 6.5% 6.9%

2000 2001 2002 2003 2004

Comparison of return on common shareholder’sequity for Baker Hughes and Schlumberger between

2000 and 2004. (Baker Hughes, 2004)(Schlumberger,2004) (D&B Key Business Ratios)

69


• Uses income from continuing operations before taxes due to extraordinary losses from discontinued operations sustained by Schlumberger in 2002

• Earnings comparable to Schlumberger’s

• After a two-year retreat, earnings improving again

• Little or no dilution potential

Earnings Per ShareEarnings Per Share

Comparison of earnings per share for Baker Hughesand Schlumberger between 2000 and 2004. (Baker

Hughes, 2004)(Schlumberger, 2004)

Earnings per Share (Basic)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

Baker Hughes $0.71 $1.98 $1.13 $0.98 $2.33

Schlumberger $1.69 $1.96 $1.13 $0.78 $2.25

2000 2001 2002 2003 2004

70


• Baker Hughes’ COGS is much lesser than Schulmberger’s, hence the smaller ratio

• Baker Hughes’s ratio over the past 3 years has been steady

• Schlumberger’s ratio has however been changing

• The increasing ratio indicates a tendency for Schlumberger to decrease investment in inventory

Inventory TurnoverInventory TurnoverInventory Turnover

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Baker Hughes 4.56 3.79 3.51 3.74 4.23

Schlumberger 6.54 9.51 7.06 8.43 9.71

2000 2001 2002 2003 2004

Comparison of inventory turnover for Baker Hughesand Schlumberger between 2000 and 2004. (Baker


71


• Baker Hughes’s ratio is consistently higher than Schlumberger’s

• For Baker Hughes, the ratio has been reasonably steady over the past 5 years

• Much lower value for Schlumberger could signal difficulty in collecting accounts receivable, especially in 2002

Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

Baker Hughes 4.20 3.99 4.22 4.36 4.95

Schlumberger 3.78 4.14 2.57 3.04 3.73

2000 2001 2002 2003 2004

Comparison of accounts receivable turnover forBaker Hughes and Schlumberger between 2000 and2004. (Baker Hughes, 2004)(Schlumberger, 2004)

72


• Baker Hughes’s ratio is consistently higher than Schlumberger’s

• Schlumberger has shown a constant ratio over the past 5 years whereas that of Baker Hughes has been rising for the past 3 years.

• Increasing ratio indicates better ability to make payments by reducing the accounts payable days.

Accounts Payable TurnoverAccounts Payable TurnoverAccounts Payable Turnover

1.00

3.00

5.00

7.00

9.00

11.00

Baker Hughes 8.34 7.33 7.83 8.23 10.41

Schlumberger 2.94 3.00 1.71 2.11 2.40

2000 2001 2002 2003 2004

Comparison of accounts payable turnover for BakerHughes and Schlumberger between 2000 and 2004.

(Baker Hughes, 2004)(Schlumberger, 2004)

73


• 2003 number corrected for the sale of SEMA

• Stable, between 2.0 & 2.5 during last 5 years

• Current ratio values indicate good ability to pay short-term debt

• Larger that main competitor Schlumberger

Current RatioCurrent Ratio

Comparison of current ratio for Baker Hughes andSchlumberger between 2000 and 2004. (Baker

Hughes, 2004)(Schlumberger, 2004) (D&B KeyBusiness Ratios)

Current Ratio

1. 0 0

1. 2 0

1. 4 0

1. 6 0

1. 8 0

2 . 0 0

2 . 2 0

2 . 4 0

2 . 6 0

Baker Hughes 2.52 2.30 2.37 1.91 2.40

Schlumberger 1.88 1.24 1.11 1.28 1.50

Industry (Med. Val.) 2.20 2.20 2.00

2000 2001 2002 2003 2004

74


• 2003 number corrected for the sale of SEMA

• Stable during the last 5 years

• Indicates stable amount of net current resources dedicated to run the business

• Main competitor Schlumberger showing a steep decrease in 2002 due to charges for discontinued operations

Working CapitalWorking Capital

Comparison of working capital for Baker Hughesand Schlumberger between 2000 and 2004. (Baker


Working Capital

0

1, 000

2, 000

3, 000

4, 000

Baker Hughes 1,498.8 1,588.1 1,475.4 1,208.6 1,731.1

Schlumberger 3,502.3 1,487.1 734.4 1,554.2 2,327.9

2000 2001 2002 2003 2004

75


• Baker Hughes’ ratio is lower than Schlumberger’s

• Schlumberger’s higher ratio indicates it’s operations are more dependent on debt source than Baker Hughes

• More stable than Schlumberger

Debt to AssetsDebt to AssetsDebt to Assets

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

Baker Hughes 52.78 50.15 46.93 47.78 42.89

Schlumberger 51.69 62.47 71.15 70.65 61.77

2000 2001 2002 2003 2004

Comparison of debt to assets for Baker Hughes andSchlumberger between 2000 and 2004. (Baker


76


• Baker Hughes’ ratio has steadily declined compared to Schlumberger’s

• Baker Hughes’decreasing ratio indicates a better operating performance


Debt to EquityDebt to EquityDebt to Equity

25.00

35.00

45.00

55.00

65.00

75.00

85.00

95.00

105.00

115.00

Baker Hughes 67.27 50.55 41.93 33.81 27.89

Schlumberger 43.07 74.18 107.53 103.67 64.48

2000 2001 2002 2003 2004

Comparison of debt to equity for Baker Hughes andSchlumberger between 2000 and 2004. (Baker


77


• Baker Hughes’ ratio has steadily declined compared to Schlumberger’s

• Baker Hughes’ lower ratio indicates lower risk of bankruptcy compared to Schlumberger’s


LongLong--Term Debt to EquityTerm Debt to EquityLong-Term Debt to Equity

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

Baker Hughes 40.22 33.58 29.54 25.27 21.81

Schlumberger 30.11 42.59 51.82 50.90 39.20

2000 2001 2002 2003 2004

Comparison of long-term debt to equity for BakerHughes and Schlumberger between 2000 and 2004.

(Baker Hughes, 2004)(Schlumberger, 2004)

78


SummarySummary• Robust gross profit margins due to favorable

economic conditions and the ability to control costs has led to a surplus of cash

• Improving activity ratios, with a steady supply of inventory, better conversion of accounts receivable to cash, and, despite faster payment of accounts payable, fewer overall days of financing required

• Retirement of debt has led to much improved liquidity and solvency, and thus, a surplus of cash

79

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• Assumptions used in Forecasting– Pro-Forma Income Statements– Pro-Forma Balance Sheets

• Pro-Forma Financial Ratios Analysis– Pro-Forma Profitability Measures– Pro-Forma Risk Measures

• Pro-Forma Analysis

80

89

93

80

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ProPro--Forma Income StatementsForma Income Statements• Revenue Assumption (Assumption 1)

– Revenue growth rate in 2005 will remain strong due to price and demand increases carrying over from 2004

– However, revenue growth for 2006 to 2009 can not be maintained at the same growth rate as 2005, due to the cyclicality of the demand in the oil & gas industry

Increase in demand => High oil prices => More expenditure in exploration & production

=> Oil rigs count increases => More revenue + Oil service companies (BHI) increase prices


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Revenues 8476.5 7996.7 7544.1 7117.0 6714.2 6103.8 5252.4 5020.4 5139.6 5233.8

Assumption 1: Revenue Growth Rate 6.0% 6.0% 6.0% 6.0% 10.0% 16.2% 4.6% -2.3% -1.8% 6.0%

BAKER HUGHES

PRO-FORMA INCOME STATEMENTS HISTORICAL INCOME STATEMENTS

81


ProPro--Forma Income StatementsForma Income Statements• COGS Assumption (Assumption 2)

– One of Baker Hughes’ strategic goals is cost containment, hence the assumption is that COGS will decrease a bit or remain constant in the next few years (average COGS as % of Revenue was 72% during last 4 years)

– A value of 71% was found to be a good assumption for forecasting


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Cost of goods sold 6018.3 5677.7 5356.3 5053.1 4767.1 4367.4 3820.9 3625.7 3655.9 4009.6

Assumption 2: COGS as % of Revenue 71.0% 71.0% 71.0% 71.0% 71.0% 71.6% 72.7% 72.2% 71.1% 76.6%

BAKER HUGHES

PRO-FORMA INCOME STATEMENTS HISTORICAL INCOME STATEMENTS

82


ProPro--Forma Balance SheetsForma Balance Sheets• Cash Assumption (Assumption 1)

– Cash was calculated as:

Cash Balance = (Avg Sales per Day) x (Days Sales in Cash)

where: Avg. Sales per Day(t+1) = Revenue(t+1) / 365and: Days Sales in Cash = 365 / [Sales(t) / Cash(t)]

– By forecasting Cash as shown above (same method used in textbook) more realistic values are obtained, than if using Cash as the account to balance the Balance Sheet


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Cash and cash equivalents 443.0 417.9 394.3 372.0 350.9 319 98.4 143.9 38.7 34.6

Assumption 1: a) Avg Sales per Day 23 22 21 19 18 b) Days Sales in Cash 19

BAKER HUGHES

PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS

83


ProPro--Forma Balance SheetsForma Balance Sheets• Accounts Receivable Assumption (Assumption 2)

– A/R Turnover ratio has been constant (around 5.0) during the last 2 years. This same value will be used when forecasting Accounts Receivable


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Accounts receivable 1734.4 1636.3 1543.7 1456.3 1373.8 1356.1 1141.8 1110.6 1268.8 1310.4

Assumption 2: A/R Turnover Ratio 5 5 5 5 5 5 5 4 4 4

BAKER HUGHES


84


ProPro--Forma Balance SheetsForma Balance Sheets• Inventories Assumption (Assumption 3)

– Inventory Turnover ratio has been constant (around 4.0) during the last 4 years. The value 4.3 from year 2004 will be used when forecasting Inventories


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Inventories 1411.5 1331.6 1256.2 1185.1 1118.0 1035.2 1013.4 1032 1031.9 898.5

Assumption 3: Inventory Turnover Ratio 4.3 4.3 4.3 4.3 4.3 4.3 3.7 3.5 3.8 4.6

BAKER HUGHES


85


ProPro--Forma Balance SheetsForma Balance Sheets• Property, Plant, and Equipment Assumption

(Assumption 6)

– Fixed Assets will continue growing (as does Revenue), but a constant rate. The average F/A growth ratio of the last 4 years (which was 3.8) was used here


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Property, plant, and equipment 2230.7 2104.4 1985.3 1872.9 1766.9 1334.1 1395.1 1354.7 1297 1378.7

Assumption 6: Avg F/A Turnover Ratio 3.8 3.8 3.8 3.8 3.8 4.5 3.8 3.8 3.8 3.0

BAKER HUGHES


86


ProPro--Forma Balance SheetsForma Balance Sheets• Assumption 11

– Accounts Payable will continue to grow at a constant rate

– An Accounts Payable Turnover Ratio of 8.8 will be used, as this was the average value from the last 5 years


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Accounts payable 690.2 651.1 614.3 579.5 548.9 454.3 386.4 389.2 537.2 469.3

Assumption 11: A/P Turnover Ratio 8.8 8.8 8.8 8.8 8.8 10.4 9.8 7.8 7.5 8.6

BAKER HUGHES


87



– Short-Term Borrowing and Current Portion of Long-Term Debt is a small percentage of Total Assets

– The last 5 years average value of 1.8% will be used for projecting values for this account


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Short-term borrowings and current portion of

long-term debt 83.0 81.6 80.1 78.7 77.4 76 351.4 123.5 12.2 13.3Assumption 12: As % of Total Assets 1.8% 1.8% 1.8% 1.8% 1.8% 1.1% 5.5% 1.9% 0.2% 0.2%

BAKER HUGHES


88


ProPro--Forma Balance SheetsForma Balance Sheets• Retained Earnings Assumption (Assumption 21)

– Retained Earnings was used as the item to balance the Balance Sheet

– It worked out better than using the Cash account for balancing the Balance Sheet. Forecasted values for Retained Earnings are higher than Net Income (which is correct since Net Income is one of its components)


2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Retained earnings 1891.4 1594.8 1315.7 1052.9 803.5 545.9 170.9 196.3 182.3 -101.3

Assumption 21: Plug in value 1891.4 1594.8 1315.7 1052.9 803.5

BAKER HUGHES


89

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ROCE

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Earnings per Share

0

0.5

1

1.5

2

2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

ProPro--Forma Profitability MeasuresForma Profitability MeasuresROA

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

90


Accounts Receivable Turnover

3.7

3.9

4.1

4.3

4.5

4.7

4.9

5.1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Inventory Turnover

2

2.5

3

3.5

4

4.5

5

5.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

ProPro--Forma Profitability MeasuresForma Profitability Measures

91


Dept-Equity Ratio

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Long-Term Dept Ratio

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Current Ratio

1.8

1.9

2

2.1

2.2

2.3

2.4

2.5

2.6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

ProPro--Forma Risk MeasuresForma Risk Measures

92


ProPro--Forma Risk MeasuresForma Risk MeasuresDays Accounts Receivable

50

55

60

65

70

75

80

85

90

95

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Days Accounts Payable

30

32

34

36

38

40

42

44

46

48

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Days Inventory

70

75

80

85

90

95

100

105

110

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

93

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• Most of the Profitability and Risk Ratios show good trending. There are no major outliers that merit special explanation or investigation. This means our assumptions were reasonable

• The calculated plug in values for Retained Earnings follow a good trending, are higher than Net Income (one of its components), and are already deducted by the Dividends value (which are not reported separately by Baker Hughes)

• Long-term debt will increase at a moderate rate, in order to cover expansion of operations into emerging markets (consistent with increase in PP&E)

• Projected steady increase in revenues will increase cash and retained earnings. Company must have a strategic plan to use that excess cash efficiently

94

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• Business Strategy and Performance– Evaluation: Past and Present– Projection

• Strategic Recommendations for Future– Recommended Strategies– Cost/Benefit Analysis

• Investment Recommendation

95

97

99

95

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Evaluation: Past and PresentEvaluation: Past and Present• Consolidation of business units• Increasing global presence• Reducing long-term debt• Increasing prices to take advantage of up

market

96

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ProjectionProjection• Invest in emerging markets such as Russia• Continue reducing long-term debt• Invest in differentiating technologies

97

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Recommended StrategiesRecommended Strategies• Increase capital spending budget to support the

increase market activity in Russia and Caspian Region

• Continue to invest in human resources and new technology that deliver measurable economic benefit to the customers

• Continue to strive for fair pricing for the value provided

• Consider increasing rental tool capital spending modestly to support the anticipated growth in revenues while maintaining financial discipline

• Liquidate underperforming divisions

98

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Cost/Benefit AnalysisCost/Benefit Analysis• Has demonstrated the ability to deliver a healthy

return on assets and total assets turnover in recent years

• Abundance of cash on hand makes new and expanded capital projects less expensive relative to financing

• Weak U.S. dollar makes foreign investing less risky

99

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“Buy”• The company has a strong cash situation• Debt will be reduced drastically with the cash on

hand• Pro-forma Revenue estimates are good• Pro-forma Earnings per share (EPS) estimates are

also good• Small risk is involved with the introduction of

“Windfall Profit Tax” by the federal government; this is being discussed for oil companies only, not for service providers

• Demand for energy and price of crude oil are not expected to go down anytime soon

100

obcbobk`bp• Baker Hughes. (2004). 2004 annual report and proxy statement. Houston, TX: Author.• Bank of America Presentation. (2005, November). Retrieved November 21, 2005, from

http://www.bakerhughes.com/investor/resources/Presentations/bank_of_america_nov05.pdf• Group A. (2005). Southwest Airlines: Financial Reporting and Analysis. Unpublished

presentation. University of Houston-Victoria.• Group B. (2004). The Home Depot, Inc: Annual Report Project. Unpublished presentation.

University of Houston-Victoria.• finance.yahoo.com• One-on-One Presentation Book, (2005, June). Retrieved September 15, 2005, from

http://www.bakerhughes.com/investor/resources/Presentations/June2005/1on1.pdf• Schlumberger. (2004). 2004 annual report. New York, NY: Author.• Stanko, B. B., & Zeller, T. L. (2003). Understanding the Corporate Annual Report: A User’s

Guide. Hoboken, NJ: John Wiley & Sons.• Stickney, C. P., Brown, P. R., & Wahlen, J. M. (2004). Financial Reporting and Statement

Analysis: A Strategic Perspective. Mason, OH: South-Western.• Ward, R.D. (2005, May). MENA…Opportunity and Challenge. JP Morgan Middle East/North

Africa Upstream Development Symposium. Retrieved September 15, 2005, from http://www.bakerhughes.com/investor/resources/Presentations/JP_MORGAN_PRESENTATION.pdf

• www.bakerhughes.com• www.investor.reuters.com• www.quickmba.com

101

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• Consolidated Balance Sheets• Common-Sized Balance Sheets• Percentage Change Balance Sheets• Consolidated Income Statements• Common-Sized Income Statements• Percentage Change Income Statements• Consolidated Statements of Cash Flow• Percentage Change Statements of Cash Flow• Pro-Forma Assumptions for Income Statements• Pro-Forma Assumptions for Balances Sheets• Pro-Forma Balance Sheets• Pro-Forma Income Statements• Pro-Forma Profitability Ratios• Pro-Forma Risk Ratios• 2004 Annual Report Baker Hughes

102

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2004 2003 2002 2001 2000 2004 2004 2004


Cash and cash equivalents 319 98.4 143.9 38.7 34.6 2808 223.5 53.6Short-term investments 2773.9Accounts receivable 1356.1 1141.8 1110.6 1268.8 1310.4 5751 2663.6 963.6Inventories 1035.2 1013.4 1032 1031.9 898.5 723 819.7 890.5Deferred income taxes 199.7 172.6 239.1 47Other current assets 56.6 58.1 204.7 235.4 243.1 680 274.6 64.8Assets of discontinued operations 0 48.7 64.3 231.9 65.2

Total current assets 2966.6 2533 2555.5 2806.7 2486.6 9962 7059.7 2019.6Property, plant, and equipment 1334.1 1395.1 1354.7 1297 1378.7 2553 3761.7 576.9Investments in affiliates 678.1 691.3 872 929 896.3 541 883.6Fixed income investments 203.7Multiclient seismic data 346.5Insurance 350Goodwill 1267 1239.4 1226.6 1248.3 1498.1 795 2789 713.3Deferred income taxes 780 343.6Intangible assets 155.1 163.4 136.8 136.5 346.8 68.6Other assets 420.4 394.3 255.2 258.7 220 815 266 128.2

Total Assets 6821.3 6416.5 6400.8 6676.2 6452.7 15796 16000.8 3506.8Liabilities and Stockholders' Equity

Current liabilities:Accounts payable 454.3 386.4 389.2 537.2 496.3 2271 2980.8 376.8Advance billings on uncompleted contracts 553Short-term borrowings and current portion of

long-term debt 76 351.4 123.5 12.2 13.3 347 715.9 211.4Accrued employee compensation 368.8 277.8 254 311.4 250.6 473 89.2Income taxes 104.8 41.6 858.8 91.6Dividend payable 111.1Asbestos- and silica-related liabilities 2408Other current liabilities 231.6 237.7 267.4 272.2 254.6 1012 118.4Liabilities of discontinued operations 0 29.5 46 85.6 34.6

Total current liabilities 1235.5 1324.4 1080.1 1218.6 987.8 7064 4701.2 887.4Long-term debt 1086.3 1133 1424.3 1682.4 2049.6 3593 3944.2 387.8Deferred income taxes 231.9 218.9 166.7 204.4 158.6 93.8Postretirement benefit obligations 308.3 311.1 635 670.8Asbestos- and silica-related liabilities 37Other liabilities 63.9 78.7 332.5 243 210 427 115.5 82.3Minority interest 108 416.4 654.7Commitments and contingenciesStockholders' equity:

Common stock 336.6 332 335.8 336 333.7 1146 2454.2 105.3Paid-in capital 3127.8 2998.6 3111.6 3119.3 3065.7 277 432.4Retained earnings 545.9 170.9 196.3 182.3 -101.3 871 6287.9 961.6Accumulated other comprehensive income -109.8 -151.1 -246.5 -309.8 -251.4 -146 -941 24.4Treasury stock -477 -1684.4 -122.9Deferred compensation -5.1 0 -74Trust fund 2335

Total stockholders' equity 3895.4 3350.4 3397.2 3327.8 3046.7 3932 6116.7 1400.8Total Liabilities and Stockholders' Equity 6821.3 6416.5 6400.8 6676.2 6452.7 15796 16000.8 3506.8

Baker Hughes Halliburton Schlumberger Smith

103

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Halliburton Schlumberger Smith2004 2003 2002 2001 2000 2004 2004 2004


Cash and cash equivalents 4.7% 1.5% 2.2% 0.6% 0.5% 17.8% 1.4% 1.5% Short-term investments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 17.3% 0.0% Accounts receivable 19.9% 17.8% 17.4% 19.0% 20.3% 36.4% 16.6% 27.5% Inventories 15.2% 15.8% 16.1% 15.5% 13.9% 4.6% 5.1% 25.4% Deferred income taxes 2.9% 2.7% 0.0% 0.0% 0.0% 0.0% 1.5% 1.3% Other current assets 0.8% 0.9% 3.2% 3.5% 3.8% 4.3% 1.7% 1.8% Assets of discontinued operations 0.0% 0.8% 1.0% 3.5% 0.0% 0.0% 0.4% 0.0%

Total current assets 43.5% 39.5% 39.9% 42.0% 38.5% 63.1% 44.1% 57.6% Property, plant, and equipment 19.6% 21.7% 21.2% 19.4% 21.4% 16.2% 23.5% 16.5% Investments in affiliates 9.9% 10.8% 13.6% 13.9% 13.9% 3.4% 5.5% 0.0% Fixed income investments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3% 0.0% Multiclient seismic data 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.2% 0.0% Insurance 0.0% 0.0% 0.0% 0.0% 0.0% 2.2% 0.0% 0.0% Goodwill 18.6% 19.3% 19.2% 18.7% 23.2% 5.0% 17.4% 20.3% Defferred income taxes 0.0% 0.0% 0.0% 0.0% 0.0% 4.9% 2.1% 0.0% Intangible assets 2.3% 2.5% 2.1% 2.0% 0.0% 0.0% 2.2% 2.0% Other assets 6.2% 6.1% 4.0% 3.9% 3.4% 5.2% 1.7% 3.7%

Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Liabilities and Stockholders' Equity

Current liabilities:Accounts payable 6.7% 6.0% 6.1% 8.0% 7.7% 14.4% 18.6% 10.7% Advance billings on uncompleted contracts 0.0% 0.0% 0.0% 0.0% 0.0% 3.5% 0.0% 0.0% Short-term borrowings and current portion of

long-term debt 1.1% 5.5% 1.9% 0.2% 0.2% 1.6% 2.2% 0.1% Accrued employee compensation 5.4% 4.3% 4.0% 4.7% 3.9% 3.0% 0.0% 2.5% Income taxes 1.5% 0.6% 0.0% 0.0% 0.0% 0.0% 5.4% 2.6% Dividend payable 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% 0.0% Asbestos- and silica-related liabilities 0.0% 0.0% 0.0% 0.0% 0.0% 15.2% 0.0% 0.0% Other current liabilities 3.4% 3.7% 4.2% 4.1% 3.9% 6.4% 0.0% 3.4% Liabilities of discontinued operations 0.0% 0.5% 0.7% 1.3% 0.0% 0.0% 0.2% 0.0%

Total current liabilities 18.1% 20.6% 16.9% 18.3% 15.3% 44.7% 29.4% 25.3% Long-term debt 15.9% 17.7% 22.3% 25.2% 31.8% 22.7% 24.7% 11.1% Deferred income taxes 3.4% 3.4% 2.6% 3.1% 2.5% 0.0% 0.0% 2.7% Postretirement benefit obligations 4.5% 4.8% 0.0% 0.0% 0.0% 4.0% 4.2% 0.0% Asbestos- and silica-related liabilities 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% Other liabilities 0.9% 1.2% 5.2% 3.6% 3.3% 2.7% 0.7% 2.3% Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% 2.6% 18.7% Commitments and contingencies 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Stockholders' equity:

Common stock 4.9% 5.2% 5.2% 5.0% 5.2% 7.3% 15.3% 3.0% Paid-in capital 45.9% 46.7% 48.6% 46.7% 47.5% 1.8% 0.0% 12.3% Retained earnings 8.0% 2.7% 3.1% 2.7% (1.6%) 5.5% 39.3% 27.4% Accumulated other comprehensive income (1.6%) (2.4%) (3.9%) (4.6%) (3.9%) (0.9%) (5.9%) 0.7% Treasury stock 0.0% 0.0% 0.0% 0.0% 0.0% (3.0%) (10.5%) (3.5%)Deferred compensation (0.1%) 0.0% 0.0% 0.0% 0.0% (0.5%) 0.0% 0.0% Trust fund 0.0% 0.0% 0.0% 0.0% 0.0% 14.8% 0.0% 0.0%

Total stockholders' equity 57.1% 52.2% 53.1% 49.8% 47.2% 24.9% 38.2% 39.9% Total Liabilities and Stockholders' Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Baker Hughes

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Cash and cash equivalents 224.2% (31.6%) 271.8% 11.8% 121.8% 54.7% (4.6%) 4.5% Short-term investments (3.5%) Accounts receivable 18.8% 2.8% (12.5%) (3.2%) 10.6% 20.7% 3.7% 20.2% Inventories 2.2% (1.8%) 0.0% 14.8% 4.3% 4.0% 2.9% 20.4% Deferred income taxes 15.7% (24.2%) 50.6% Other current assets (2.6%) (71.6%) (13.0%) (3.2%) 8.0% 5.6% (19.7%) 16.1% Assets of discontinued operations (100.0%) (24.3%) (72.3%) (98.0%)

Total current assets 17.1% (0.9%) (9.0%) 12.9% 8.8% 25.8% (31.9%) 20.2% Property, plant, and equipment (4.4%) 3.0% 4.4% (5.9%) (32.9%) 1.1% (1.0%) 7.9% Investments in affiliates (1.9%) (20.7%) (6.1%) 3.6% 2129.6% (6.6%) 13.7% Fixed income investments (8.8%) Multiclient seismic data (31.5%) Insurance (82.8%) Goodwill 2.2% 1.0% (1.7%) (16.7%) (18.4%) 18.7% (17.4%) 3.3% Deferred income taxes 0.8% 8.6% Intangible assets (5.1%) 19.4% 0.2% (14.0%) 5.2% Other assets 6.6% 54.5% (1.4%) 17.6% (77.2%) (17.9%) (1.2%) 1.3%

Total Assets 6.3% 0.2% (4.1%) 3.5% (10.2%) 1.9% (20.2%) 13.2% Liabilities and Stockholders' Equity

Current liabilities:Accounts payable 17.6% (0.7%) (27.6%) 8.2% 4.6% 27.9% (8.2%) 21.3% Advance billings on uncompleted contracts (25.4%) Short-term borrowings and current portion of

long-term debt (78.4%) 184.5% 912.3% (8.3%) (88.2%) (67.6%) 1477.3% (96.9%)Accrued employee compensation 32.8% 9.4% (18.4%) 24.3% 42.1% 18.3% 21.0% Income taxes 151.9% 6.3% 32.2% Dividend payable 0.5% Asbestos- and silica-related liabilities (3.9%) Other current liabilities (2.6%) (11.1%) (1.8%) 6.9% (30.2%) (9.5%) 35.5% Liabilities of discontinued operations (100.0%) (35.9%) (46.3%) (97.2%)

Total current liabilities (6.7%) 22.6% (11.4%) 23.4% (12.4%) 7.6% (30.8%) 40.7% Long-term debt (4.1%) (20.5%) (15.3%) (17.9%) (24.3%) 5.2% (35.3%) (20.6%)Deferred income taxes 5.9% 31.3% (18.4%) 28.9% 351.9% 17.3% Postretirement benefit obligations (0.9%) (20.7%) 9.1% Asbestos- and silica-related liabilities (97.7%) Other liabilities (18.8%) (76.3%) 36.8% 15.7% (13.1%) (13.4%) (54.7%) 11.2% Minority interest (100.0%) 8.0% (76.0%)Commitments and contingencies Stockholders' equity:

Common stock 1.4% (1.1%) (0.1%) 0.7% 1.2% 0.4% 8.7% 2.5% Paid-in capital 4.3% (3.6%) (0.2%) 1.7% 2.8% 1.5% 16.4% Retained earnings 219.4% (12.9%) 7.7% (280.0%) 96.7% (57.9%) 14.2% 23.4% Accumulated other comprehensive income (27.3%) (38.7%) (20.4%) 23.2% 33.5% (51.0%) 151.1% 110.3% Treasury stock (17.3%) 11.7% 322.3% Deferred compensation 15.6% Trust fund

Total stockholders' equity 16.3% (1.4%) 2.1% 9.2% (0.8%) 54.4% 4.0% 13.4% Total Liabilities and Stockholders' Equity 6.3% 0.2% (4.1%) 3.5% (10.2%) 1.9% (20.2%) 13.2%

Baker Hughes

105

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2004 2003 2002 2001 2000 2004 2004 2004Revenues 6103.8 5252.4 5020.4 5139.6 5233.8 20466 11480.2 4419Operating expenses:

Cost of goods sold 4367.4 3820.9 3625.7 3655.9 4009.6 19323 9042 3067Selling, general, and administrative (R&D, Mktg, D 915.4 827 840.6 781.7 759.6 361 967 913.1Sale of business assets (merger costs) 0 0 0 -2.4 0 -55Impairment of investment in affiliate 0 45.3Restructuring charge (Unusual charge, net) 0 -1.1 -1.9 1.8 69.6 0

Total operating expenses 5282.8 4692.1 4464.4 4437 4838.8 19629 10009 3980.2Operating income 821 560.3 556 702.6 395 837 1471.2 438.7Interest income (expense):

Interest expense -83.6 -103.1 -111.2 -126.4 -173.3 -229 -272.4 -38.7Interest income 6.8 5.3 5.3 11.9 4.8 44 128.7 1.3

Net interest income (expense) -76.8 -97.8 -105.9 -114.5 -168.5 -185 -143.7 -37.4Foreign currency gains (losses) -3Other 36.3 -137.8 -69.7 45.8 9.5 2Income from continuing operations before

income taxes, minority interest, andcumulative effect of change in accountingprinciple 780.5 324.7 380.4 633.9 236 651 1327.4 401.3

Income taxes -252.3 -146.8 -156.7 -215.8 -133.7 -241 -276.9 -129.7Income from continuing operations before

minority interest and cumulative effectof change in accounting principle 410 1050.4 271.6

Minority interest -25 -36.4 -89.1Income from continuing operations before

cumulative effect of change in accountingprinciple 528.6 134.5 211.4 438.7 0 385 1014 182.5

Cumulative effect of change in accounting principle 0 -5.6 -42.5 0.8 0 0 0 0Income from continuing operations 528.2 177.9 223.7 418.1 0 385 1014 182.5Income from discontinued operations 0.4 -43.4 -12.3 20.6 0 -1364 209.8 0Net income 528.6 128.9 168.9 438 102.3 -979 1223.8 182.5

Baker Hughes Halliburton Schlumberger Smith

106

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Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses:

Cost of goods sold 71.6% 72.7% 72.2% 71.1% 76.6% 94.4% 78.8% 69.4% Selling, general, and administrative 15.0% 15.7% 16.7% 15.2% 14.5% 1.8% 8.4% 20.7% Sale of business assets 0.0% 0.0% 0.0% (0.0%) 0.0% (0.3%) 0.0% 0.0% Impairment of investment in affiliate 0.0% 0.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Restructuring charge 0.0% (0.0%) (0.0%) 0.0% 1.3% 0.0% 0.0% 0.0%

Total operating expenses 86.5% 89.3% 88.9% 86.3% 92.5% 95.9% 87.2% 90.1% Operating income 13.5% 10.7% 11.1% 13.7% 7.5% 4.1% 12.8% 9.9% Interest income (expense):

Interest expense (1.4%) (2.0%) (2.2%) (2.5%) (3.3%) (1.1%) (2.4%) (0.9%)Interest income 0.1% 0.1% 0.1% 0.2% 0.1% 0.2% 1.1% 0.0%

Net interest income (expense) (1.3%) (1.9%) (2.1%) (2.2%) (3.2%) (0.9%) (1.3%) (0.8%)Foreign currency gains (losses) 0.0% 0.0% 0.0% 0.0% 0.0% (0.0%) 0.0% 0.0% Other 0.6% (2.6%) (1.4%) 0.9% 0.2% 0.0% 0.0% 0.0% Income from continuing operations before 0.0% 0.0% 0.0%

income taxes, minority interest, and 0.0% 0.0% 0.0% cumulative effect of change in accounting 0.0% 0.0% 0.0% principle 12.8% 6.2% 7.6% 12.3% 4.5% 3.2% 11.6% 9.1%

Income taxes (4.1%) (2.8%) (3.1%) (4.2%) (2.6%) (1.2%) (2.4%) (2.9%)Income from continuing operations before 0.0% 0.0% 0.0%

minority interest and cumulative effect 0.0% 0.0% 0.0% of change in accounting principle 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 9.1% 6.1%

Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% (0.1%) (0.3%) (2.0%)Income from continuing operations before 0.0% 0.0% 0.0%

cumulative effect of change in accounting 0.0% 0.0% 0.0% principle 8.7% 2.6% 4.2% 8.5% 0.0% 1.9% 8.8% 4.1%

Cumulative effect of change in accounting principle 0.0% (0.1%) (0.8%) 0.0% 0.0% 0.0% 0.0% 0.0% Income from continuing operations 8.7% 3.4% 4.5% 8.1% 0.0% 1.9% 8.8% 4.1% Income from discontinued operations 0.0% (0.8%) (0.2%) 0.4% 0.0% (6.7%) 1.8% 0.0% Net income 8.7% 2.5% 3.4% 8.5% 2.0% (4.8%) 10.7% 4.1%

Baker Hughes

107

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Revenues 16.2% 4.6% (2.3%) (1.8%) 6.0% 25.8% 14.6% 22.9% Operating expenses:

Cost of goods sold 14.3% 5.4% (0.8%) (8.8%) (0.0%) 26.6% 7.3% 21.8% Selling, general, and administrative 10.7% (1.6%) 7.5% 2.9% 2.4% 9.4% 0.4% 22.2% Sale of business assets (100.0%) (100.0%) 17.0% Impairment of investment in affiliate (100.0%) Restructuring charge (100.0%) (42.1%) (205.6%) (97.4%) 1350.0%

Total operating expenses 12.6% 5.1% 0.6% (8.3%) 1.8% 26.2% 6.6% 21.9% Operating income 46.5% 0.8% (20.9%) 77.9% 117.5% 16.3% 135.4% 33.5% Interest income (expense):

Interest expense (18.9%) (7.3%) (12.0%) (27.1%) 3.8% 64.7% (5.4%)Interest income 28.3% 0.0% (55.5%) 147.9% (5.9%) 46.7% (31.6%)

Net interest income (expense) (21.5%) (7.6%) (7.5%) (32.0%) 4.1% 69.7% (14.4%) (4.1%)Foreign currency gains (losses) Other (126.3%) 97.7% (252.2%) 382.1% (75.3%) 100.0% Income from continuing operations before

income taxes, minority interest, andcumulative effect of change in accountingprinciple 140.4% (14.6%) (40.0%) 168.6% 305.5% 6.4% 190.3% 38.5%

Income taxes 71.9% (6.3%) (27.4%) 61.4% 436.9% 3.0% 31.7% 39.0% Income from continuing operations before

minority interest and cumulative effectof change in accounting principle 8.5% 325.6% 38.3%

Minority interest (35.9%) (124.1%) 24.3% Income from continuing operations before

cumulative effect of change in accountingprinciple 293.0% (36.4%) (51.8%) 13.6% 154.7% 46.4%

Cumulative effect of change in accounting principle (100.0%) (86.8%) (5412.5%) (100.0%) (100.0%)Income from continuing operations 196.9% (20.5%) (46.5%) 16.3% 154.7% 47.7% Income from discontinued operations (100.9%) 252.8% (159.7%) 18.5% (1489.4%) Net income 310.1% (23.7%) (61.4%) 328.2% 207.2% 19.4% 219.5% 47.8%

Baker Hughes

108

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2004 2003 2002 2001 2000

Cash flows from operating activitiesIncome from continuing operations 528.2 177.9 227.8 438.0 102.3

Depreciation and amortization 365.7 340.8 318.3 344.7 611.5 Provision (benefit) for deferred income taxes 48.4 (20.1) (20.4) 74.0 49.0 Gain on disposal of assets (37.8) (30.2) (45.8) (35.7) 27.9 Impairment of investment in affiliate 0.0 45.3 0.0 0.0 0.0 Equity in (income) loss of affiliates (36.3) 137.8 69.7 (45.8) 4.6 Change in accounts receivable (175.3) (13.9) 86.4 0.0 0.0 Change in inventories (4.5) 20.9 15.4 0.0 0.0 Change in accounts payable 49.2 16.0 (56.8) 0.0 0.0

141.4 0.5 (49.4) 0.0 0.0

(30.4) (23.0) 18.0 0.0 0.0 Change in other assets and liabilities (65.0) (0.4) 56.9 (54.4) (231.8)

Net cash flows from continuing operations 783.6 651.6 620.1 0.0 0.0 Net cash flows from discontinued operations 0.1 4.5 86.3 0.0 0.0 Net cash flows from operating activities 783.7 656.1 706.4 720.8 563.5

Expenditures for capital assets (348.3) (404.3) (355.9) (319.0) (599.2) Acquisition of businesses, net of cash acquired (6.6) (9.5) (39.7) 0.0 0.0 Investments in affiliates (7.1) (38.1) (16.5) 0.0 0.0

58.7 24.0 54.0 0.0 72.7 Proceeds from disposal of assets 106.9 66.8 77.7 77.7 213.0

Net cash flows from continuing operations (196.4) (361.1) (280.4) 0.0 0.0 (0.4) (1.1) (2.7) 0.0 0.0

Net cash flows from investing activities (196.8) (362.2) (283.1) (241.3) (313.5)

Cash flows from financing activities

35.5 11.2 (162.4) (67.9) (753.1) Repayment of indebtedness (350.0) (100.0) 0.0 (301.8) 0.0 Borrowings of long-term dept 0.0 0.0 0.0 0.0 0.0

0.0 26.9 15.8 0.0 0.0 0.0 0.0 0.0 9.0 493.4 0.0 0.0 0.0 0.0 117.7

Proceeds from issuance of common stock 115.9 61.8 38.3 50.1 70.9 Repurchase of common stock 0.0 (181.4) (49.1) 0.0 0.0 Dividends (153.6) (154.3) (154.9) (154.4) (152.1)

Net cash flows from financing activities (352.2) (335.8) (312.3) (465.0) (223.2)

Effect of foreign exchange rate changes on cash (14.1) (3.6) (5.8) (3.7) (7.8) Increase (decrease) in cash and cash equivalents (220.6) (45.5) 105.2 10.8 19.0 Cash and cash equivalents, beginning of year 98.4 143.9 38.7 34.6 15.6 Cash and cash equivalents, end of year 319.0 98.4 143.9 45.4 34.6

Baker Hughes

Change in accrued employee compensation and other accrued liabilitiesChange in pensions and postretirement benefit obligations and other liabilities

Cash flows from investing activities

Net cash flows from discontinued operations

Proceeds from sale/leaseback

Net borrowings (repayments) of commercial paper and other short–term debt

Proceeds from termination of interest rate swap agreements

Proceeds from sale of business and interest in affiliate

Proceeds from sale of interest in affiliate

109

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2004 2003 2002 2001 2000

Cash flows from operating activitiesIncome from continuing operations 196.9% -21.9% -48.0% 328.2% 207.2%

Depreciation and amortization 7.3% 7.1% -7.7% -43.6% -22.7%Provision (benefit) for deferred income taxes -340.8% -1.5% -127.6% 51.0% -203.8%Gain on disposal of assets 25.2% -34.1% 28.3% -228.0% -158.4%Impairment of investment in affiliate -100.0% Equity in (income) loss of affiliates -126.3% 97.7% -252.2% -1095.7% -165.7%Change in accounts receivable 1161.2% -116.1% Change in inventories -121.5% 35.7% Change in accounts payable 207.5% -128.2%

28180.0% -101.0%

32.2% -227.8% Change in other assets and liabilities 16150.0% -100.7% -204.6% -76.5% 29.6%

Net cash flows from continuing operations 20.3% 5.1% Net cash flows from discontinued operations -97.8% -94.8% Net cash flows from operating activities 19.4% -7.1% -2.0% 27.9% 3.7%

Expenditures for capital assets -13.9% 13.6% 11.6% -46.8% -6.4%Acquisition of businesses, net of cash acquired -30.5% -76.1% Investments in affiliates -81.4% 130.9%

144.6% -55.6% -100.0% Proceeds from disposal of assets 60.0% -14.0% 0.0% -63.5% 46.7%

Net cash flows from continuing operations -45.6% 28.8% -63.6% -59.3%

Net cash flows from investing activities -45.7% 27.9% 17.3% -23.0% -35.5%

Cash flows from financing activities

217.0% -106.9% 139.2% -91.0% -7.7%Repayment of indebtedness 250.0% -100.0% -100.0%Borrowings of long-term dept -100.0%

-100.0% 70.3% -100.0% -98.2% -100.0%

Proceeds from issuance of common stock 87.5% 61.4% -23.6% -29.3% 48.9%Repurchase of common stock -100.0% 269.5% Dividends -0.5% -0.4% 0.3% 1.5% 0.8%

Net cash flows from financing activities 4.9% 7.5% -32.8% 108.3% 280.9%

Effect of foreign exchange rate changes on cash 291.7% -37.9% 56.8% -52.6% -880.0%Increase (decrease) in cash and cash equivalents 384.8% -143.3% 874.1% -43.2% -3266.7%Cash and cash equivalents, beginning of year -31.6% 271.8% 11.8% 121.8% -3.7%Cash and cash equivalents, end of year 224.2% -31.6% 217.0% 31.2% 121.8%

Proceeds from sale/leaseback

Net borrowings (repayments) of commercial paper and other short–term debt

Proceeds from termination of interest rate swap agreements

Proceeds from sale of business and interest in affiliate

Proceeds from sale of interest in affiliate

Change in accrued employee compensation and other accrued liabilitiesChange in pensions and postretirement benefit obligations and other liabilities

Cash flows from investing activities

Net cash flows from discontinued operations

Baker Hughes

110

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Assets Current assets:

Cash and cash equivalents 443.0 417.9 394.3 372.0 350.9 319 98.4 143.9 38.7 34.6 15.6Accounts receivable 1734.4 1636.3 1543.7 1456.3 1373.8 1356.1 1141.8 1110.6 1268.8 1310.4 1184.3Inventories 1411.5 1331.6 1256.2 1185.1 1118.0 1035.2 1013.4 1032 1031.9 898.5 861.5Other current assets (incl. Deferred Inc.Taxes) 355.9 335.8 316.8 298.8 281.9 256.3 230.7 204.7 235.4 243.1 225Assets of discontinued operations 0.0 0.0 0.0 0.0 0.0 0 48.7 64.3 231.9 0 0

Total current assets 3944.9 3721.6 3510.9 3312.2 3124.7 2966.6 2533 2555.5 2806.7 2486.6 2286.4Property, plant, and equipment 2230.7 2104.4 1985.3 1872.9 1766.9 1334.1 1395.1 1354.7 1297 1378.7 2053.7Investments in affiliates 941.7 888.4 838.1 790.7 745.9 678.1 691.3 872 929 869.3 40.2Goodwill 1759.5 1659.9 1566.0 1477.3 1393.7 1267 1239.4 1226.6 1248.3 1498.1 1836.8Intangible assets 215.4 203.2 191.7 180.8 170.6 155.1 163.4 136.8 136.5Other assets 583.8 550.8 519.6 490.2 462.4 420.4 394.3 255.2 258.7 220 965

Total Assets 9676.0 9128.3 8611.6 8124.1 7664.3 6821.3 6416.5 6400.8 6676.2 6452.7 7182.1Liabilities and Stockholders' Equity

Current liabilities:Accounts payable 690.2 651.1 614.3 579.5 548.9 454.3 386.4 389.2 537.2 469.3 474.6Short-term borrowings and current portion of

long-term debt 83.0 81.6 80.1 78.7 77.4 76 351.4 123.5 12.2 13.3 112.6Accrued employee compensation 512.2 483.2 455.8 430.0 405.7 368.8 277.8 254 311.4 250.6 176.3Other current liabilities (incl. Income Taxes) 467.2 440.7 415.8 392.2 370.0 336.4 279.3 267.4 272.2 254.6 364.7Liabilities of discontinued operations 0 0 0 0 0 0 29.5 46 85.6 0 0

Total current liabilities 1752.5 1656.6 1566.0 1480.5 1402.0 1235.5 1324.4 1080.1 1218.6 987.8 1128.2Long-term debt 1816.3 1713.5 1616.5 1525.0 1438.7 1086.3 1133 1424.3 1682.4 2049.6 2706Deferred income taxes 322.0 303.8 286.6 270.4 255.1 231.9 218.9 166.7 204.4 158.6 35.1Other liabilities (incl. Post Retirement Benefits Obligations 516.9 487.6 460.0 434.0 409.4 372.2 389.8 332.5 243 210 241.7

Total Liabilities 4407.8 4161.5 3929.2 3709.9 3505.2 2925.9 3066.1 3003.6 3348.4 3406 4111Stockholders' equity:

Common stock 336.6 336.6 336.6 336.6 336.6 336.6 332 335.8 336 333.7 329.8Paid-in capital 3127.8 3127.8 3127.8 3127.8 3127.8 3127.8 2998.6 3111.6 3119.3 3065.7 2981.1Retained earnings 1891.4 1594.8 1315.7 1052.9 803.5 545.9 170.9 196.3 182.3 -101.3 -51.5Accumulated other comprehensive income (loss) -87.6 -92.5 -97.7 -103.1 -108.8 -114.9 -151.1 -246.5 -309.8 -251.4 -188.3

Total stockholders' equity 5268.2 4966.7 4682.4 4414.2 4159.1 3895.4 3350.4 3397.2 3327.8 3046.7 3071.1Total Liabilities and Stockholders' Equity 9676.0 9128.3 8611.6 8124.1 7664.3 6821.3 6416.5 6400.8 6676.2 6452.7 7182.1

HistoricalBaker Hughes

Pro-Forma

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2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999Revenues 8476.5 7996.7 7544.1 7117.0 6714.2 6103.8 5252.4 5020.4 5139.6 5233.8 4936.5Operating expenses:

Cost of goods sold 6018.3 5677.7 5356.3 5053.1 4767.1 4367.4 3820.9 3625.7 3655.9 4009.6 4009.8Selling, general, and administrative (R&D, Mktg, Debt costs 1313.9 1239.5 1169.3 1103.1 1040.7 915.4 827 840.6 781.7 759.6 741.9Other Operating Expense 0 0 0 0 0 0 44.2 -1.9 -0.6 69.6 3.2

Total operating expenses 7332.2 6917.1 6525.6 6156.2 5807.8 5282.8 4692.1 4464.4 4437 4838.8 4754.9Operating income 1144.3 1079.6 1018.4 960.8 906.4 821 560.3 556 702.6 395 181.6Interest income (expense):

Interest expense -133.0 -125.7 -118.8 -112.3 -106.1 -83.6 -103.1 -111.2 -126.4 -173.3 -167Interest income 15.5 14.6 13.8 13.0 12.3 6.8 5.3 5.3 11.9 4.8 5.1

Net interest income (expense) -117.4 -111.0 -105.0 -99.2 -93.8 -76.8 -97.8 -105.9 -114.5 -168.5 -161.9Other (Equity in Income (loss) of affiliates) 36.3 36.3 36.3 36.3 36.3 36.3 -137.8 -69.7 45.8 9.5 38.5Income from continuing operations before

income taxes, minority interest, andcumulative effect of change in accountingprinciple 1063.2 1004.8 949.8 897.9 848.9 780.5 324.7 380.4 633.9 236 58.2

Income taxes -372.1 -351.7 -332.4 -314.2 -297.1 -252.3 -146.8 -156.7 -215.8 -133.7 -24.9Income from continuing operations before

minority interest and cumulative effectof change in accounting principle 691.1 653.1 617.4 583.6 551.8 528.2 177.9 223.7 418.1 102.3 33.3

Minority interest 0 0 0 0 0 0 0 0 0 0 0Income from continuing operations before

cumulative effect of change in accountingprinciple 691.1 653.1 617.4 583.6 551.8 528.2 177.9 223.7 418.1 102.3 33.3

Cumulative effect of change in accounting principle 0 0 0 0 0 0 -5.6 -42.5 -0.8 0 0Income from continuing operations 691.1 653.1 617.4 583.6 551.8 528.2 172.3 181.2 417.3 102.3 33.3Income from discontinued operations 0.0 0.0 0.0 0.0 0.0 0.4 -43.4 -12.3 20.6 0 0Net income 691.1 653.1 617.4 583.6 551.8 528.6 128.9 168.9 437.9 102.3 33.3

Baker Hughes

Pro-Forma Historical

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ProPro--Forma Income StatementsForma Income Statements• Assumption 3

– SG&A as % of Revenue has remained constant around 15.5% during last 5 years

– The assumption is that these costs will remain constant in the next few years

• Assumption 4– Other Operating Expenses in 2004 was zero (i.e. merger costs,

impairment of investment in affiliates, restructuring charges, etc.). The assumption is that it will remain unchanged in future years

• Assumption 5– Baker Hughes’ 10-K report for 2004 shows an average of 7%

interest on both short-term and long-term debt instruments – To forecast Interest Expense, that 7% average will be applied to

the sum of short-term and long-term debt

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– Interest Income was calculated using a value of 3.5% for interest, based on the average valued from the last 3 years

– This assumption is based in the fact that Cash is likely to be held in very low risk investments

• Assumption 7– There will be no change on Other Operating Income

(Equity in Income (Loss) of Affiliates), so the 2004 value will be used for future projections

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– Income Tax Rate of 35%, although there will be some effect from state income taxes and other tax jurisdictions

• Assumption 9, 10, and 11

– During 2004, Minority Interest, Cumulative Effect of Changing in Accounting Principle or Discontinued Operations were zero or almost zero

– The assumption is that these will remain at zero in the next few years

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– Other Current Assets will grow at the same growth rate as Revenue, since they usually vary in relation to the level of operating activity

– Hence, Revenue growth rates were used to forecast this account

• Assumption 5Assets for Discontinued Operations will not change, hence 2004’s value of zero was used

116


ProPro--Forma Balance SheetsForma Balance Sheets• Assumption 7, 8, 9, and 10

Investment in Affiliates, Goodwill, Intangible Assets and Other Assets will grow at the same rate as Revenue growth rates

• Assumption 13 and 14Accrued Employee Compensation and Other Current Liabilities will grow at the same rate as Revenue

• Assumption 15

Liabilities of operations will remain at zero (same as in 2004)

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– Long-term debt will grow at the same rate as Fixed Assets (they are directly related)

• Assumption 17 and 18– Deferred Income Taxes and Other Liabilities (including

Post Retirement Benefits) will grow at the same rate as Revenue

118


ProPro--Forma Balance SheetsForma Balance Sheets• Assumption 19 and 20

– Common Stock and Paid In Capital will remain stable over the next few years

– The same value that these accounts had in 2004 was used for forecasting

• Assumption 22– Accumulated Other Comprehensive Income (actually a

loss) will continue decreasing at a constant rate– For forecasting purposes, 2004 rate was used (-5.3%)

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2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Profit Margin for ROA 9.2% 9.2% 9.2% 9.2% 9.2% 9.6% 3.5% 4.7% 10.1% 3.4% 2.6%

Assets Turnover 0.9 0.9 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.8

ROA 8.3% 8.3% 8.3% 8.3% 8.6% 8.8% 2.9% 3.6% 7.9% 2.6%

Profit Margin for ROCE 8.2% 8.2% 8.2% 8.2% 8.2% 8.7% 2.5% 3.4% 8.5% 2.0% 0.7%

CSL 1.8 1.8 1.8 1.8 1.8 1.8 1.9 1.9 2.1 2.2

ROCE 13.5% 13.5% 13.6% 13.6% 13.7% 14.6% 3.8% 5.0% 13.7% 3.3%

COGS/Sales 71.0% 71.0% 71.0% 71.0% 71.0% 71.6% 72.7% 72.2% 71.1% 76.6% 81.2%

SG&A 15.5% 15.5% 15.5% 15.5% 15.5% 15.0% 15.7% 16.7% 15.2% 14.5% 15.0%

IncomeTax Expense / Sales 4.9% 4.9% 5.0% 5.0% 5.0% 4.6% 3.7% 4.0% 5.0% 4.4% 2.0%

A/R Turnover 5.0 5.0 5.0 5.0 4.9 4.9 4.7 4.2 4.0 4.2

Inventory Turnover 4.4 4.4 4.4 4.4 4.4 4.3 3.7 3.5 3.8 4.6

F/A Turnover 3.9 3.9 3.9 3.9 4.3 4.5 3.8 3.8 3.8 3.0

Earnings per Share 2.1 1.9 1.8 1.7 1.6 1.6 0.4 0.5 1.3 0.3 Earnings per Share = (Net Income - Preferred Stock Dividends) / (Weighted Average Number of Common Shares Ourstanding)

BAKER HUGHES - PROFITABILITY RATIOS

Income Tax Expense (excluding tax effects of interest expense) ÷ Sales =

Rate of Return on Common Shareholders Equity (ROCE) =

Inventory Turnover = Cost of Goods Sold / Average Inventories

Accounts Receivable Turnover = Sales / Average Accounts Receivable

= [Income Tax Expense + t.(Interest Expense)] / Sales

Profit Margin for ROCE = (Net Income - Preferred Dividends) / Sales

Rate of Return on Assets (ROA) = [Net Income + (1 - t).Interest Expense] / Average Total Assets

Assets Turnover = Sales / Average Total Assets

Fixed Assets Turnover = Sales / Average Fixed Assets

Profit Margin for ROA = [Net Income + (1 - t).Interest Expense] / Sales

Selling and Administrative Expense ÷ Sales = SG&A / Sales

Cost of Goods Sold ÷ Sales = COGS / Sales

= (Net Income - Preferred Dividends) / Average Common SHE

Capital Structure Leverage = Average Total Assets / Average Common Shareholders Equity

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molJcloj^=ofph=o^qflp2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Current Ratio 2.3 2.2 2.2 2.2 2.2 2.4 1.9 2.4 2.3 2.5 2.0

Quick Ratio 1.2 1.2 1.2 1.2 1.2 1.4 0.9 1.2 1.1 1.4 1.1

Days A/R 73 73 73 73 74 75 78 86 92 87

Days Inventory Held 83 83 83 83 82 86 98 104 96 80

where:and:

Days A/P 40 40 40 40 38 35 37 47 48 43 18A/P Turnover 9.1 9.1 9.1 9.1 9.7 10.4 9.8 7.8 7.5 8.6 20.5

Purchases 6098.2 5753.0 5427.4 5120.2 4849.9 4389.2 3802.3 3625.8 3789.3 4046.6 4871.3

Net Days Working Capital 116 116 116 116 119 125 139 144 139 125

Long-Term Debt Ratio 25.6% 25.7% 25.7% 25.7% 25.7% 21.8% 25.3% 29.5% 33.6% 40.2% 46.8%

Debt-Equity Ratio 34.5% 34.5% 34.5% 34.5% 34.6% 27.9% 33.8% 41.9% 50.6% 67.3% 88.1%

Liabilities to Assets Ratio 45.6% 45.6% 45.6% 45.7% 45.7% 42.9% 47.8% 46.9% 50.2% 52.8% 57.2%

Interest Coverage Ratio 9.0 9.0 9.0 9.0 9.0 10.3 3.7 3.9 6.2 2.4 1.3

Debt-Equity Ratio = Long-Term Debt / Shareholders' Equity

Long-Term Debt Ratio = Long-Term Debt / (Long-Term Debt + Shareholders' Equity)

Interest Coverage Ratio = (N.I. + Interest Exp. + Income Tax Expense + Minority Int.) / Interest Exp.

Days Accounts Receivable = 365 / Accounts Receivable Turnover

Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities

Current Ratio = Current Assets / Current Liabilities

Liabilities to Assets Ratio = Total Liabilities / Total Assets

Net Days Working Capital = Days Inventory Held + Days AR Outstanding - Days AP Outstanding

Account Payable Turnover = Purchases / Average Accounts Payable

BAKER HUGHES - RISK RATIOS

Purchases = COGS + Ending Inventory - Beginning Inventory

Days Inventory = 365 / Inventory Turnover

Days Accounts Payable = 365 / Accounts Payable Turnover

Documents

Annual Report Project: Baker Hughes