Baker Hughes 2004 Annual Report Download - page 77

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Revenues
Revenues฀for฀2004฀increased฀16.2%฀compared฀with฀2003,฀
reflecting฀a฀10.1%฀increase฀in฀the฀worldwide฀rig฀count.฀Reve-
nues฀in฀North฀America,฀which฀accounted฀for฀41.6%฀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฀58.4%฀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.
Revenues฀for฀2003฀increased฀8.1%฀compared฀with฀2002,฀
reflecting฀a฀19.1%฀increase฀in฀the฀worldwide฀rig฀count.฀Reve-
nues฀in฀North฀America,฀which฀accounted฀for฀42.3%฀of฀total฀
revenues,฀increased฀14.0%฀compared฀with฀2002.฀This฀increase฀
reflects฀increased฀drilling฀activity฀in฀the฀U.S.฀and฀Canada,฀as฀
evidenced฀by฀a฀28.4%฀increase฀in฀the฀North฀American฀rig฀
count.฀Revenues฀outside฀North฀America,฀which฀accounted฀
for฀57.7%฀of฀total฀revenues,฀increased฀4.1%฀compared฀with฀
2002.฀This฀increase฀reflects฀the฀improvement฀in฀international฀
drilling฀activity,฀as฀evidenced฀by฀the฀5.2%฀increase฀in฀the฀rig฀
count฀outside฀North฀America,฀primarily฀in฀Latin฀America฀and฀
the฀Middle฀East,฀partially฀offset฀by฀decreased฀drilling฀activity฀
in฀the฀North฀Sea฀and฀Africa.฀During฀2003,฀pricing฀was฀not฀a฀
significant฀contributor฀to฀our฀revenue฀growth,฀as฀deterioration฀
in฀prices฀for฀certain฀product฀lines฀at฀our฀INTEQ฀division฀were฀
partially฀offset฀by฀pricing฀improvement฀realized฀from฀our฀฀
other฀product฀lines.
Cost฀of฀Revenues
Cost฀of฀revenues฀for฀2004฀increased฀14.3%฀compared฀
with฀2003.฀Cost฀of฀revenues฀as฀a฀percentage฀of฀revenues฀
was฀71.6%฀and฀72.7%฀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฀mea-
sures,฀including฀lower฀repair฀and฀maintenance฀costs฀at฀our฀
INTEQ฀division,฀partially฀offset฀by฀increased฀material฀costs฀and฀
higher฀employee฀bonus฀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฀mar-
gins฀on฀revenues฀generated฀outside฀North฀America฀are฀typi-
cally฀higher฀than฀margins฀generated฀in฀North฀America.
Cost฀of฀revenues฀for฀2003฀increased฀9.5%฀compared฀
with฀2002.฀Cost฀of฀revenues฀as฀a฀percentage฀of฀revenues฀
was฀72.7%฀and฀71.8%฀for฀2003฀and฀2002,฀respectively.฀
The฀increase฀in฀cost฀of฀revenues฀as฀a฀percentage฀of฀revenues฀
is฀primarily฀related฀to฀our฀INTEQ฀division.฀In฀2003,฀INTEQ฀฀
experienced฀the฀highest฀revenue฀growth฀of฀our฀divisions;฀how-
ever,฀margins฀deteriorated฀as฀they฀were฀impacted฀by฀increased฀
downward฀pricing฀trends,฀increased฀repair฀and฀maintenance฀
costs฀for฀newly฀developed฀downhole฀rental฀tools฀and฀other฀
nonrecurring฀costs.฀A฀change฀in฀the฀geographic฀and฀product฀
mix฀from฀the฀sale฀of฀our฀products฀and฀services฀also฀contributed฀
to฀the฀increase฀in฀the฀cost฀of฀revenues฀as฀a฀percentage฀of฀reve-
nues.฀During฀2003,฀our฀revenue฀increases฀came฀predominantly฀
from฀North฀America฀and฀our฀margins฀on฀revenues฀generated฀
in฀North฀America฀are฀typically฀lower฀than฀margins฀generated฀
outside฀of฀North฀America.
Selling,฀General฀and฀Administrative
Selling,฀general฀and฀administrative฀(“SG&A”)฀expenses฀for฀
2004฀increased฀10.7%฀compared฀with฀2003.฀This฀increase฀was฀
primarily฀due฀to฀higher฀marketing฀and฀administrative฀expenses฀
as฀a฀result฀of฀increased฀activity,฀including฀higher฀annual฀employee฀
bonus฀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฀Sarbanes-
Oxley฀Act฀of฀2002.
SG&A฀expenses฀for฀2003฀increased฀2.4%฀compared฀with฀
2002.฀This฀increase฀was฀primarily฀due฀to฀an฀$8.9฀million฀
increase฀in฀net฀costs฀related฀to฀corporate฀activities฀and฀an฀
increase฀of฀approximately฀$17.0฀million฀in฀costs฀related฀to฀
our฀self฀insurance฀programs,฀offset฀by฀improvement฀in฀the฀
impact฀of฀foreign฀currency฀exchange฀activity฀of฀$18.3฀million.
Reversal฀of฀Restructuring฀Charge
In฀2000,฀our฀Board฀of฀Directors฀approved฀a฀plan฀to฀sub-
stantially฀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.
Impairment฀of฀Investment฀in฀Affiliate
In฀2003,฀as฀a฀result฀of฀the฀continued฀weakness฀in฀the฀seis-
mic฀industry,฀we฀evaluated฀the฀carrying฀value฀of฀our฀invest-
ment฀in฀WesternGeco฀and฀recorded฀an฀impairment฀loss฀of฀
$45.3฀million฀to฀write-down฀the฀investment฀to฀its฀fair฀value.฀
The฀fair฀value฀was฀determined฀using฀a฀combination฀of฀a฀mar-
ket฀capitalization฀and฀discounted฀cash฀flows฀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฀addi-
tional฀impairments.
Equity฀in฀Income฀(Loss)฀of฀Affiliates
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฀West-
ernGeco฀in฀the฀third฀quarter฀of฀2003.฀During฀2003,฀the฀฀
2004฀Form฀10-K฀฀฀฀฀27