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28 Baker Hughes Incorporated
proactive post-retention oversight; this includes, among
other things, the maintenance of comprehensive due dili-
gence records, and the certification, periodic recertification,
and training of all non-U.S. commercial agents, including
written acknowledgement by these agents of all of our FCPA
requirements and policies; and
•฀ We฀conduct฀periodic฀internal฀audits฀that฀include฀onsite฀
legal/accounting audits of all non-U.S. third party commer-
cial agents, specific FCPA audit steps in all audits conducted
by the internal audit function and FCPA risk assessments by
the Corporate Ethics & Compliance Group in specified coun-
tries such as those which are rated high on Transparency
International’s Corruption Perception Index.
LIQUIDITY AND CAPITAL RESOURCES
Our objective in financing our business is to maintain
adequate financial resources and access to additional liquidity.
During 2007, cash flows from operations were the principal
sources of funding. We anticipate that cash flows from opera-
tions will be sufficient to fund our liquidity needs in 2008. We
may incur short-term debt to fund expenses, capital expendi-
tures and additional stock repurchases in the U.S. until cash
can be cost effectively transferred to the U.S. from offshore.
We may issue commercial paper or other short-term debt to
fund cash needs in the U.S. in excess of the cash generated in
the U.S. We also have a $500.0 million committed revolving
credit facility that provides back-up liquidity in the event an
unanticipated and significant demand on cash flows could not
be funded by operations. To the extent we have outstanding
commercial paper; however, our ability to borrow under the
credit facility is reduced.
Our capital planning process is focused on utilizing cash
flows generated from operations in ways that enhance the
value of our Company. In 2007, we used cash for a variety
of activities including working capital needs, payment of divi-
dends, repurchase of common stock and capital expenditures.
Cash Flows
Cash flows provided (used) by continuing operations by type
of activity were as follows for the years ended December 31
(in millions):
2007 2006 2005
Operating activities $ 1,474.7 $ 589.7 $ 949.6
Investing activities (620.2) 1,376.2 (465.3)
Financing activities (592.0) (1,926.4) (108.1)
Statements of cash flows for entities with international
operations that are local currency functional exclude the effects
of the changes in foreign currency exchange rates that occur
during any given year, as these are noncash changes. As a
result, changes reflected in certain accounts on the consoli-
dated statements of cash flows may not reflect the changes in
corresponding accounts on the consolidated balance sheets.
Operating Activities
Cash flows from operating activities of continuing operations
provided $1,474.7 million for the year ended December 31, 2007
compared with $589.7 million for the year ended December 31,
2006. Cash flows from operating activities for 2007 and 2006
were reduced by $125.3 million and $555.1 million, respec-
tively, for income tax payments related to the gain on the sale
of our interest in WesternGeco. Excluding these income tax
payments, cash flows from operating activities for 2007 and
2006 were $1,600.0 million and $1,144.8 million, respectively,
an increase of $455.2 million. This increase is primarily due to
an increase of $198.4 million in income from contin uing oper-
ations adjusted for noncash items coupled with a decrease of
$131.4 million in net operating assets and liabilities which used
less cash. Cash flows from operating activities, excluding the
WesternGeco transaction in 2006, have been steadily increas-
ing over the last three years and we expect this trend to con-
tinue in 2008.
The underlying drivers of the changes in operating assets
and liabilities are as follows:
•฀ An฀increase฀in฀accounts฀receivable฀used฀$287.3฀million฀in฀
cash in 2007 compared with using $316.4 million in cash in
2006. This increase in accounts receivable was primarily due
to the increase in revenues offset partially by an increase in
collections as reflected in a decrease in days sales outstand-
ing (defined as the average number of days our net trade
receivables are outstanding based on quarterly revenues)
of approximately one day.
•฀ A฀build฀up฀in฀inventory฀in฀anticipation฀of฀and฀related฀to฀
increased activity used $141.8 million in cash in 2007
compared with using $364.9 million in cash in 2006.
•฀ A฀net฀decrease฀in฀accounts฀payable,฀accrued฀employee฀com-
pensation and other accrued liabilities used $113.0 million in
cash in 2007 compared with providing $173.2 million in cash
in 2006. This was primarily due to higher employee bonus pay-
ments made in cash (for bonuses accrued in 2006 and paid
in 2007) coupled with lower bonus accrual requirements for
2007 compared to 2006. The increase in cash used in 2007
was also impacted by the payment of $44.1 million related
to the settlement of the investigations by the SEC and DOJ.
Our contributions to our defined benefit pension plans
in 2007 were approximately $21.0 million compared to 2006
contributions of approximately $34.0 million, a decrease of
approximately $13.0 million. This reduction in contributions
is primarily due to lower minimum funding requirements in
our non-U.S. plans.
Cash flows from operating activities of continuing oper-
ations provided $589.7 million for the year ended Decem-
ber 31, 2006 compared with $949.6 million for the year ended
December 31, 2005. Cash flows from operating activities for
2006 were reduced by $555.1 million of income tax payments
related to the gain on the sale of our interest in WesternGeco.
Excluding these income tax payments, cash flows from operat-
ing activities for 2006 were $1,144.8 million, an increase of
$195.2 million from the prior year. This increase is primarily
due to an increase in income from continuing operations
adjusted for noncash items partially offset by a change in
net operating assets and liabilities that used cash flows.
The underlying drivers of the changes in operating assets
and liabilities are as follows:
•฀ An฀increase฀in฀accounts฀receivable฀used฀$316.4฀million฀in฀
cash in 2006 compared with using $329.4 million in cash
in 2005. This was due to an increase in revenues partially