Baker Hughes 2007 Annual Report Download - page 113

30 Baker Hughes Incorporated
agreement was designated and qualified as a fair value hedg-
ing instrument. Due to our outlook for interest rates, we termi-
nated the interest rate swap agreement in June 2005, which
required us to make a payment of $5.5 million. This amount
was deferred and is being amortized as an increase to interest
expense over the remaining life of the underlying debt security.
We received proceeds of $67.7 million, $92.5 million and
$228.1 million in 2007, 2006 and 2005, respectively, from
the issuance of common stock through the exercise of stock
options and the employee stock purchase plan.
Prior to our 2005 purchases, we had authorization remain-
ing of $500.0 million to repurchase our common stock. Dur-
ing 2005, we repurchased 1.7 million shares of our common
stock at an average price of $58.17 per share, for a total of
$98.5 million. In April 2006, the Board of Directors authorized
the repurchase of an additional $1.8 billion of common stock.
During 2006, we repurchased 24.3 million shares of our com-
mon stock at an average price of $76.50 per share, for a total
of $1,856.0 million. On July 26, 2007, our Board of Directors
authorized a plan to repurchase up to $1.0 billion of our com-
mon stock, from time to time, in addition to the existing stock
repurchase plan. During 2007, we repurchased 6.4 million shares
of common stock at an average price of $81.25 per share for
a total of $521.5 million. We had authorization remaining to
repurchase approximately $824.0 million in common stock at
the end of 2007.
We paid dividends of $166.2 million, $172.6 million and
$161.1 million in 2007, 2006 and 2005, respectively.
Available Credit Facilities
At December 31, 2007, we had $1,018.5 million of credit
facilities with commercial banks, of which $500.0 million is a
committed revolving credit facility (the “facility”) that expires
in July 2012. The facility provides for a one year extension,
subject to the approval and acceptance by the lenders, among
other conditions. In addition, the facility contains a provision
to allow for an increase in the facility amount of an additional
$500.0 million, subject to the approval and acceptance by the
lenders, among other conditions. The facility contains certain
covenants which, among other things, require the maintenance
of a funded indebtedness to total capitalization ratio (a defined
formula per the facility) of less than or equal to 0.60, restrict
certain merger transactions or the sale of all or substantially
all of the assets of the Company or a significant subsidiary and
limit the amount of subsidiary indebtedness. Upon the occur-
rence of certain events of default, our obligations under the
facility may be accelerated. Such events of default include pay-
ment defaults to lenders under the facility, covenant defaults
and other customary defaults. At December 31, 2007, we
were in compliance with all of the facility covenants. There
were no direct borrowings under the facility during the year
ended December 31, 2007; however, to the extent we have
outstanding commercial paper, our ability to borrow under
the facility is reduced. At December 31, 2007, we had no
outstanding commercial paper.
If market conditions were to change and revenues were
to be significantly reduced or operating costs were to increase,
our cash flows and liquidity could be reduced. Additionally,
it could cause the rating agencies to lower our credit ratings.
We do not have any ratings triggers in the facility that would
accelerate the maturity of any borrowings under the facility.
However, a downgrade in our credit ratings could increase the
cost of borrowings under the facility and could also limit or
preclude our ability to issue commercial paper. Should this
occur, we would seek alternative sources of funding, including
borrowing under the facility.
We believe our credit ratings and relationships with major
commercial and investment banks would allow us to obtain
interim financing over and above our existing credit facilities
for any currently unforeseen significant needs or growth
opportunities. We also believe that such interim financings
could be funded with subsequent issuances of long-term debt
or equity, if necessary.
Cash Requirements
In 2008, we believe operating cash flows will provide us
with sufficient capital resources and liquidity to manage our
working capital needs, meet contractual obligations, fund capi-
tal expenditures, pay dividends, repurchase common stock and
support the development of our short-term and long-term
operating strategies. We may incur short-term debt to fund
expenses, capital expenditures 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.
In 2008, we expect capital expenditures to be approximately
$1.3 billion excluding acquisitions. The expenditures are expected
to be used primarily for normal, recurring items necessary to
support the growth of our business and operations. In 2008,
we also expect to make interest payments of between $73.0 mil-
lion and $75.0 million, based on debt levels as of December 31,
2007. We anticipate making income tax payments of between
$810.0 million and $860.0 million in 2008.
We may repurchase our common stock depending on mar-
ket conditions, applicable legal requirements, our liquidity and
other considerations. Stock repurchases in 2008 (through Feb-
ruary 19, 2008) were 8.0 million shares of common stock at an
average price of $68.95 per share for a total of $551.8 million.
As of February 19, 2008, we have authorization remaining to
repurchase up to a total of $272.2 million of our common stock.
We anticipate paying dividends of between $160.0 million and
$165.0 million in 2008; however, the Board of Directors can
change the dividend policy at anytime.
In the U.S., we merged two pension plans effective Janu-
ary 1, 2007, resulting in one tax-qualified U.S. pension plan,
the Baker Hughes Incorporated Pension Plan (“BHIPP”). As
a result of the merger of these plans, BHIPP is overfunded;
therefore, we are not required nor do we intend to make pen-
sion contributions to BHIPP in 2008, and we currently estimate
that we will not be required to make contributions to BHIPP
for four to seven years thereafter. We do expect to contribute
between $2.0 million and $3.0 million to our nonqualified
U.S. pension plans and between $13.0 million and $15.0 mil-
lion to the non-U.S. pension plans. We will also make benefit
payments related to postretirement welfare plans of between