Baker Hughes 2009 Annual Report Download - page 119

2009 Form 10-K 45
special meetings scheduled on March 19, 2010 subject to
adjournment or postponement, regulatory approvals, and the
satisfaction or waiver of various other conditions as more fully
described in the Merger Agreement.
Subject to receipt of all required approvals, it is anticipated
that closing of the merger will occur in March 2010. Under
the terms of the Merger Agreement, each share of BJ Services
common stock will be converted into the right to receive
0.40035 shares of the Company’s common stock and $2.69 in
cash. Baker Hughes has estimated the total consideration
expected to be issued and paid in the merger to be approxi-
mately $6.4 billion, consisting of approximately $0.8 billion
to be paid in cash and approximately $5.6 billion to be paid
through the issuance of approximately 118 million shares of
Baker Hughes common stock valued at the February 11, 2010
closing share price of $46.68 per share. The value of the
merger consideration will fluctuate based upon changes in
the price of shares of Baker Hughes common stock and the
number of BJ Services common shares and options outstanding
at the closing date.
NOTE 3. GAIN ON SALE OF PRODUCT LINE
In February 2008, we sold the assets associated with the
Completion and Production segment’s Surface Safety Systems
(“SSS”) product line and received cash proceeds of $31 million.
The SSS assets sold included hydraulic and pneumatic actua-
tors, bonnet assemblies and control systems. We recorded a
pre-tax gain of $28 million ($18 million after-tax) in 2008.
NOTE 4. STOCK-BASED COMPENSATION
Stock-based compensation cost is measured at the date
of grant, based on the calculated fair value of the award, and
is recognized as expense over the employee’s service period,
which is generally the vesting period of the equity grant. Addi-
tionally, compensation cost is recognized based on awards ulti-
mately expected to vest, therefore, we have reduced the cost
for estimated forfeitures based on historical forfeiture rates.
Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods to reflect actual forfeitures.
The following table summarizes stock-based compensa-
tion costs for the years ended December 31, 2009, 2008
and 2007. There were no stock-based compensation costs
capitalized as the amounts were not material.
2009 2008 2007
Stock-based
compensation costs $ 88 $ 60 $ 51
Tax benefit (15) (11) (11)
Stock-based
compensation costs,
net of tax $ 73 $ 49 $ 40
For our stock options and restricted stock awards and
units, we currently have 17 million shares authorized for issu-
ance and as of December 31, 2009, approximately 2 million
shares were available for future grants. Our policy is to issue
new shares for exercises of stock options; vesting of restricted
stock awards and units; and issuances under the employee
stock purchase plan.
Stock Options
Our stock option plans provide for the issuance of incen-
tive and non-qualified stock options to directors, officers and
other key employees at an exercise price equal to the fair mar-
ket value of the stock at the date of grant. Although subject
to the terms of the stock option agreement, substantially all
of the stock options become exercisable in three equal annual
installments, beginning a year from the date of grant, and
generally expire ten years from the date of grant. The stock
option plans provide for the acceleration of vesting upon the
employee’s retirement; therefore, the service period is reduced
for employees that are or will become retirement eligible dur-
ing the vesting period and, accordingly, the recognition of
compensation expense for these employees is accelerated.
Compensation cost related to stock options is recognized on
a straight-line basis over the vesting or service period and is
net of forfeitures.
The fair value of each stock option granted is estimated
using the Black-Scholes option pricing model. The following
table presents the weighted average assumptions used in the
option pricing model for options granted. The expected life
of the options represents the period of time the options are
expected to be outstanding. The expected life is based on our
historical exercise trends and post-vest termination data incor-
porated into a forward-looking stock price model. The expected
volatility is based on our implied volatility, which is the volatility
forecast that is implied by the prices of our actively traded
options to purchase our stock observed in the market. The
risk-free interest rate is based on the observed U.S. Treasury
yield curve in effect at the time the options were granted.
The dividend yield is based on our history of dividend payouts.
2009 2008 2007
Expected life (years) 6.0 5.5 5.1
Risk-free interest rate 2.6% 3.1% 4.8%
Volatility 41.2% 31.4% 28.6%
Dividend yield 1.8% 0.8% 0.7%
Weighted average
fair value per share
at grant date $ 12.66 $ 23.64 $ 24.20
A summary of our stock option activity and related informa-
tion is presented below (in thousands, except per option prices):
Weighted Average
Number of Exercise Price
Options Per Option
Outstanding at December 31, 2008 3,470 $ 59.92
Granted 2,311 35.03
Exercised (40) 29.16
Forfeited (55) 49.18
Expired (10) 36.77
Outstanding at December 31, 2009 5,676 $ 50.16