Baker Hughes 2004 Annual Report Download - page 95

permits,฀installation฀of฀pollution฀control฀equipment฀and฀waste฀
disposal,฀are฀expensed฀as฀incurred.฀Where฀we฀have฀been฀iden-
tified฀as฀a฀potentially฀responsible฀party฀in฀a฀United฀States฀fed-
eral฀or฀state฀“Superfund”฀site,฀we฀accrue฀our฀share฀of฀the฀
estimated฀remediation฀costs฀of฀the฀site.฀This฀share฀is฀based฀on฀
the฀ratio฀of฀the฀estimated฀volume฀of฀waste฀we฀contributed฀to฀
the฀site฀to฀the฀total฀volume฀of฀waste฀disposed฀at฀the฀site.
Foreign฀Currency
The฀majority฀of฀our฀significant฀foreign฀subsidiaries฀have฀
designated฀the฀local฀currency฀as฀their฀functional฀currency฀
and,฀as฀such,฀gains฀and฀losses฀resulting฀from฀balance฀sheet฀
translation฀of฀foreign฀operations฀are฀included฀as฀a฀separate฀
component฀of฀accumulated฀other฀comprehensive฀loss฀within฀
stockholders’฀equity.฀Gains฀and฀losses฀from฀foreign฀currency฀
transactions,฀such฀as฀those฀resulting฀from฀the฀settlement฀of฀
foreign฀receivables฀or฀payables,฀are฀included฀in฀selling,฀general฀
and฀administrative฀(“SG&A”)฀expense฀in฀the฀consolidated฀
statements฀of฀operations฀as฀incurred.฀For฀those฀foreign฀฀
subsidiaries฀that฀have฀designated฀the฀U.S.฀Dollar฀as฀the฀฀
functional฀currency,฀gains฀and฀losses฀resulting฀from฀balance฀
sheet฀translation฀of฀foreign฀operations฀are฀also฀included฀in฀
SG&A฀expense฀in฀the฀consolidated฀statements฀of฀operations฀
as฀incurred.฀We฀recorded฀net฀foreign฀currency฀transaction฀
and฀translation฀gains฀(losses)฀of฀$4.0฀million,฀$1.5฀million฀
and฀$(16.8)฀million฀in฀2004,฀2003฀and฀2002,฀respectively.
Derivative฀Financial฀Instruments
We฀monitor฀our฀exposure฀to฀various฀business฀risks฀includ-
ing฀commodity฀price,฀foreign฀currency฀exchange฀rate฀and฀
interest฀rate฀risks฀and฀occasionally฀use฀derivative฀financial฀
instruments฀to฀manage฀the฀impact฀of฀certain฀of฀these฀risks.฀
Our฀policies฀do฀not฀permit฀the฀use฀of฀derivative฀financial฀
instruments฀for฀speculative฀purposes.฀We฀use฀foreign฀currency฀
forward฀contracts฀to฀hedge฀certain฀firm฀commitments฀and฀
transactions฀denominated฀in฀foreign฀currencies.฀We฀use฀inter-
est฀rate฀swaps฀to฀manage฀interest฀rate฀risk.
At฀the฀inception฀of฀any฀new฀derivative,฀we฀designate฀the฀
derivative฀as฀a฀cash฀flow฀hedge฀or฀fair฀value฀hedge.฀We฀docu-
ment฀all฀relationships฀between฀the฀hedging฀instruments฀and฀
the฀hedged฀items,฀as฀well฀as฀our฀risk฀management฀objectives฀
and฀strategy฀for฀undertaking฀various฀hedge฀transactions.฀We฀
assess฀whether฀the฀derivatives฀that฀are฀used฀in฀hedging฀trans-
actions฀are฀highly฀effective฀in฀offsetting฀changes฀in฀cash฀flows฀
of฀the฀hedged฀item฀at฀both฀the฀inception฀of฀the฀hedge฀and฀on฀
an฀ongoing฀basis.
Stock-Based฀Compensation
As฀allowed฀under฀Statement฀of฀Financial฀Accounting฀฀
Standards฀(“SFAS”)฀No.฀123,฀Accounting฀for฀Stock-Based฀฀
Compensation,฀we฀have฀elected฀to฀account฀for฀our฀stock-
based฀compensation฀using฀the฀intrinsic฀value฀method฀of฀
accounting฀in฀accordance฀with฀Accounting฀Principles฀Board฀
Opinion฀No.฀25฀(“APB฀No.฀25”),฀Accounting฀for฀Stock฀Issued฀
to฀Employees.฀Under฀this฀method,฀compensation฀expense฀
is฀to฀be฀recognized฀for฀the฀difference฀between฀the฀quoted฀
market฀price฀of฀the฀stock฀at฀the฀measurement฀date฀less฀the฀
amount,฀if฀any,฀the฀employee฀is฀required฀to฀pay฀for฀the฀stock.฀
Our฀reported฀net฀income฀does฀not฀include฀any฀compensation฀
expense฀associated฀with฀stock฀option฀awards฀because฀the฀
exercise฀prices฀of฀our฀stock฀option฀awards฀equal฀the฀market฀
prices฀of฀the฀underlying฀stock฀when฀granted.฀Our฀reported฀
net฀income฀does฀include฀compensation฀expense฀associated฀
with฀restricted฀stock฀awards.
If฀we฀had฀recognized฀compensation฀expense฀as฀if฀the฀fair฀
value฀based฀method฀had฀been฀applied฀to฀all฀awards฀as฀pro-
vided฀for฀under฀SFAS฀No.฀123,฀our฀pro฀forma฀net฀income,฀
earnings฀per฀share฀(“EPS”)฀and฀stock-based฀compensation฀cost฀
would฀have฀been฀as฀follows฀for฀the฀years฀ended฀December฀31:
฀ 2004฀ 2003฀ 2002฀
Net฀income,฀as฀reported฀ $฀ 528.6฀ $฀ 128.9฀ $฀ 168.9
Add:฀Stock-based฀com-฀
฀ pensation฀for฀restricted฀
฀ stock฀awards฀included฀
฀ in฀reported฀net฀income,฀฀
฀ net฀of฀tax฀ ฀ 1.6฀ ฀ 1.9฀ ฀ 2.1฀
Deduct:฀Stock-based฀฀
฀ compensation฀deter-฀
฀ mined฀under฀the฀฀
฀ fair฀value-method,฀฀
฀ net฀of฀tax฀฀ ฀ (23.1)฀ ฀ (23.1)฀ ฀ (23.3)
Pro฀forma฀net฀income฀ $฀ 507.1฀ $฀ 107.7฀ $฀ 147.7
Basic฀EPS฀
฀ As฀reported฀ $฀ 1.58฀ $฀ 0.38฀ $฀ 0.50฀
฀ Pro฀forma฀ ฀ 1.52฀ ฀ 0.32฀ ฀ 0.44฀
Diluted฀EPS฀
฀ As฀reported฀ $฀ 1.58฀ $฀ 0.38฀ $฀ 0.50฀
฀ Pro฀forma฀ ฀ 1.51฀ ฀ 0.32฀ ฀ 0.44
These฀pro฀forma฀calculations฀may฀not฀be฀indicative฀of฀future฀
amounts฀since฀additional฀awards฀in฀future฀years฀are฀anticipated.
Under฀SFAS฀No.฀123,฀the฀fair฀value฀of฀stock-based฀awards฀is฀
calculated฀through฀the฀use฀of฀option฀pricing฀models.฀These฀mod-
els฀require฀subjective฀assumptions,฀including฀future฀stock฀price฀
volatility฀and฀expected฀time฀to฀exercise,฀which฀greatly฀affect฀
the฀calculated฀values.฀Our฀calculations฀were฀made฀using฀the฀
Black-Scholes฀option฀pricing฀model฀with฀the฀following฀weighted฀
average฀assumptions฀for฀the฀years฀ended฀December฀31:
฀ Assumptions
฀ ฀ ฀ Risk-Free฀ Expected฀
฀ Dividend฀ Expected฀ Interest฀ Life฀
฀ Yield฀ Volatility฀ Rate฀ (In฀Years)
2004฀ 1.3%฀ 39.9%฀ 2.8%฀ 3.5฀
2003฀ 1.6%฀ 45.0%฀ 2.5%฀ 3.8฀
2002฀ 1.4%฀ 45.0%฀ 3.5%฀ 3.8
The฀weighted฀average฀fair฀values฀of฀options฀granted฀in฀
2004,฀2003฀and฀2002฀were฀$11.16,฀$10.25฀and฀$10.24฀per฀
share,฀respectively.
2004฀Form฀10-K฀฀฀฀฀45