Baker Hughes 2004 Annual Report Download - page 76

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฀eval-
uate฀these฀critical฀assumptions฀at฀least฀annually.฀Other฀less฀crit-
ical฀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฀accordingly฀to฀reflect฀our฀actual฀experience.
The฀discount฀rate฀enables฀us฀to฀state฀expected฀future฀cash฀
flows฀at฀a฀present฀value฀on฀the฀measurement฀date.฀A฀lower฀dis-
count฀rate฀increases฀the฀present฀value฀of฀benefit฀obligations฀and฀
increases฀plan฀expenses.฀We฀used฀a฀discount฀rate฀of฀6.25%฀in฀
2004,฀6.75%฀in฀2003฀and฀7.00%฀in฀2002฀to฀determine฀plan฀
expenses.฀A฀75฀basis฀point฀reduction฀in฀the฀discount฀rate฀would฀
have฀increased฀plan฀expenses฀in฀2004฀by฀$6.2฀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฀that฀rates฀of฀return฀on฀our฀plan฀investments฀
were฀8.50%฀in฀2004฀and฀2003฀and฀9.00%฀in฀2002.฀A฀50฀basis฀
point฀decrease฀in฀the฀expected฀rate฀of฀return฀on฀assets฀of฀our฀
principal฀plans฀would฀have฀increased฀plan฀expenses฀in฀2004฀
by฀$1.8฀million.
Discontinued฀Operations
In฀September฀2004,฀we฀completed฀the฀sale฀of฀Baker฀
Hughes฀Mining฀Tools฀(“BHMT”),฀a฀product฀line฀group฀within฀
the฀Oilfield฀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฀cumula-
tive฀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฀write-down฀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฀post-closing฀
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฀mil-
lion฀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฀for฀$32.0฀million฀in฀proceeds.฀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฀$10.0฀million฀as฀a฀deposit฀in฀2002฀and฀the฀remaining฀
$22.0฀million฀in฀April฀2003.
In฀November฀2002,฀we฀sold฀EIMCO฀Process฀Equipment฀
(“EIMCO”),฀a฀division฀of฀the฀former฀Process฀segment,฀and฀
recorded฀a฀loss฀on฀the฀disposal฀of฀$22.3฀million,฀net฀of฀tax฀of฀
$1.2฀million,฀which฀consisted฀of฀a฀loss฀of฀$2.3฀million฀on฀the฀
write-down฀to฀fair฀value฀and฀a฀loss฀of฀$20.0฀million฀related฀
to฀the฀recognition฀of฀cumulative฀foreign฀currency฀translation฀
adjustments฀into฀earnings.฀We฀received฀total฀proceeds฀of฀
$48.9฀million,฀of฀which฀$4.9฀million฀was฀held฀in฀escrow฀pend-
ing฀completion฀of฀final฀adjustments฀to฀the฀purchase฀price.฀In฀
2003,฀all฀purchase฀price฀adjustments฀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.฀In฀2003,฀
we฀also฀recorded฀an฀additional฀loss฀on฀the฀sale฀due฀to฀purchase฀
price฀adjustments฀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฀Finan-
cial฀Statements฀in฀Item฀8฀herein฀for฀additional฀information฀
regarding฀discontinued฀operations.
Results฀of฀Operations
The฀discussions฀below฀relating฀to฀significant฀line฀items฀rep-
resent฀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฀compa-
rability฀or฀trends฀and,฀where฀possible฀and฀practical,฀have฀quan-
tified฀the฀impact฀of฀such฀items.
The฀table฀below฀details฀certain฀consolidated฀statement฀of฀
operations฀data฀and฀their฀percentage฀of฀revenues฀for฀2004,฀
2003฀and฀2002,฀respectively.
฀2004฀ 2003฀ 2002
฀ $฀ %฀ $฀ %฀ $฀ %
Revenues฀ $฀ 6,103.8฀ 100.0%฀ $฀ 5,252.4฀ 100.0%฀ $฀ 4,860.2฀ 100.0%฀
Cost฀of฀revenues฀ ฀ 4,367.4฀ 71.6฀ ฀ 3,820.9฀ 72.7฀ ฀ 3,490.1฀ 71.8฀
Selling,฀general฀and฀administrative฀ ฀ 915.4฀ 15.0฀ ฀ 827.0฀ 15.7฀ ฀ 807.7฀ 16.6
26฀฀฀฀฀Baker฀Hughes฀Incorporated