Annual Report Project: Baker Hughes

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Annual Report Project: Baker Hughes

  1. 1. ^kkr^i=obmloq=molgb`q Baker Hughes Jeff Burkhardt Syarifah Fakhry Julio Idrovo Sri Krishna Dionne Moonah Bernd Ruehlicke University of Houston-Victoria ACC6351 Fall 2005 December 5, 2005
  2. 2. q^_ib=lc=`lkqbkqp I. Introduction 3 II. Industry Economic Characteristics 12 III. Business Strategies and Performance 35 IV. Financial Reporting and Analysis 43 V. Forecasting Profitability and Risk 79 VI. Conclusion and Recommendations 94 References 100 Appendix 1012
  3. 3. fK=fkqolar`qflk • History 4 • Products and Services 5 • Core Values and Keys to Success 7 • Management Team and Leadership 8 • Business Performance 9 – Sales Growth and Profit – Market Shares – Stock Market Performance3
  4. 4. efpqlov • In 1907, Reuben C. Baker developed a casing shoe that revolutionized cable tool drilling. In 1909, Howard R. Hughes, Sr. introduced the first roller cutter bit, which dramatically improved the rotary drilling process • Over the next eight decades, Baker International and Hughes Tool Company became worldwide leaders in well completion, drilling tools, and related services. The two companies merged in 1987 to form Baker Hughes, Incorporated • During its history, Baker Hughes has acquired and assimilated numerous oilfield pioneers4
  5. 5. molar`qp=^ka=pbosf`bp Baker Hughes delivers a broad range of products and services that help the petroleum industry improve efficiency and increase ultimate productivity for the life of the reservoir. • Drilling – Logging-While-Drilling – Directional Drilling – Measurement-While- – Drill Bits Drilling – Drilling Fluids Systems – Reservoir and Petrophysical Analysis – Drilling Optimization (OASIS) – Surface Logging Systems – Waste Management • Formation Evaluation Services – Coring Services – Wireline Logging – Integrated Formation Evaluation5
  6. 6. molar`qp=^ka=pbosf`bp • Completion Services • Production Management – APEX Big Bore Solutions – Coiled Tubing – Completion Systems – Electric Submersible Pumps – Deepwater Upper (ESP) Completions – Oil/Water Separation and – Fishing Services Treatment Systems – Flow Control – Pipeline Management – High Pressure/High – Production Services Temperature – Reentry – Inflatable Systems – Reservoir Management – Liner Hangers – Specialty Chemical – Packers Programs – Perforating Systems – Wellbore Instrumentation – Safety Systems – Workover Services – Sand Control • Seismic Acquisition & – Service Tools Processing6
  7. 7. `lob=s^irbp=^ka hbvp=ql=pr``bpp • Core Values – Integrity – Teamwork – Performance – Learning • Keys to Success – People contributing at their full potential. Everyone can make a difference. – Delivering unmatched value to our customers. – Being cost efficient in everything we do. – Employing our resources effectively.7
  8. 8. j^k^dbjbkq=qb^j ^ka=ib^abopefm • Comprised of eight operating Management Organization Chart divisions focused on technology development, customer service, field operations, and financial performance • Baker Hughes Business Shared Services provides administrative services supporting Baker Hughes divisions including information technology, finance and accounting, and human resources and benefits Baker Hughes executive management team. (bakerhughes.com) • Corporate offices provide legal, tax, finance and investor relations support, and executive management8
  9. 9. _rpfkbpp=mbocloj^k`b Sales Growth and Profit Revenues* 2004 $6.1 billion 2003 5.3 billion 2002 4.9 billion Operating Income* 2004 $821.0 million 2003 560.3 million 2002 562.4 million Net Income* 2004 $528.6 million 2003 128.9 million 2002 168.9 million * Excludes the results of EIMCO Process Equipment, Bird Machine, and oil producing operations in West Africa, which are discontinued business. Baker Hughes sales and profitability figures for Baker Hughes financial highlights as of 2002 through 2004. (bakerhughes.com) June 30, 2005. (finance.yahoo.com)9
  10. 10. _rpfkbpp=mbocloj^k`b Market Shares Market Postion Drilling and Evaluation Baker Hughes Drilling Fluids 3 Drilling Fluids 1 2 Hughes Dill Bits 1 Christensen - 4 Drilling and Evaluation 2 INTEQ 1 3 Wireline 2 Baker Atlas 1 3 Completion and Production Baker Oil Completions 1 Tools 2 3 Electronic Submersible Pumps 1 Centrilift 2 - Baker Oilfield Chemicals 1 Petrolite - - Seismic 1* Western Geco 1* - * Joint venture between Baker Hughes and Schlumberger Oil services industry market share by market position rank for Baker Hughes, Schlumberger, and Haliburton. (One-on-One, 2005)(RBC Capital, 2005)10
  11. 11. _rpfkbpp=mbocloj^k`b Stock Market Performance BHI: Baker Hughes Inc., GSPC: S&P 500, DJI: Dow Jones Index The dramatic difference between the S&P 500 and Baker Hughes shows its strong correlation to the price of oil. In June 2005, crude oil was $45 per Barrel, and peaked in September at $70 per Barrel11
  12. 12. ffK=fkarpqov=b`lkljf` `e^o^`qbofpqf`p • Critical Success Factors 13 • Business Environment Analysis 18 (SWOT) • Industry Competition Analysis 25 (Porter’s Five Forces) • Customer Analysis 33 • Government and Regulatory Analysis 3412
  13. 13. `ofqf`^i=pr``bpp=c^`qlop The Strategic Framework • High Performance Culture • Best-in-Class Opportunities • Financial Flexibility • Master the Market13
  14. 14. `ofqf`^i=pr``bpp=c^`qlop High Performance Culture • Core Values • Keys to Success • Leadership team development – Succession planning • Recruit, train, and retain a high performance Illustrates the relationships within Baker Hughes’ high performance culture. nationalized (One-on-One, 2005) workforce14
  15. 15. `ofqf`^i=pr``bpp=c^`qlop Best-in-Class Opportunities • Geographic opportunities – Russia and Caspian Sea – Middle East – Mature markets • Customer opportunities – National oil companies (One-on-One, 2005) • Market opportunites – Critical wells: risk reduction – Standard wells: cost15 reduction
  16. 16. `ofqf`^i=pr``bpp=c^`qlop Financial Flexibility • Cost discipline – Efficient cost base • Financial discipline – Quarterly performance reviews – Incentive compensation plan – Individual performance contracts • Financial Flexibility – Retire debt Effective debt-load of Baker – Repurchase stock Hughes from 1999 to 2005. (One-on-One, 2005)16 – Grow the business
  17. 17. `ofqf`^i=pr``bpp=c^`qlop Master the Market • Cultivate superior process and capabilites in: – Product development and commercialization – Manufacturing and product quality – Service quality • Strengthen support services Illustrates Baker Hughes’ overlapping focus on product development, manufacturing and product quality, and service quality. (One-on-One, 2005)17
  18. 18. _rpfkbpp=bksfolkjbkq ^k^ivpfp SWOT • Strengths • Weaknesses • Opportunities • Threats • SWOT Summary • SWOT Matrix18
  19. 19. _rpfkbpp=bksfolkjbkq ^k^ivpfp Strengths • Strong product line divisions that give a competitive advantage. • Develop technology innovations that cut cost, reduce risk, and increase productivity. • Focus on best-in-class products and services. • Maintain capital discipline by reducing debt and carefully evaluating investments.19
  20. 20. _rpfkbpp=bksfolkjbkq ^k^ivpfp Weaknesses • Compete with the oil and natural gas industry’s largest diversified oilfield service providers • Not to carry inventory of materials and component parts used in manufacturing products that could be subject to shortages and rising costs • Limited number of buyers • Cyclical demand, dependent upon customer’s forecasts of future oil and natural gas prices and production, future economic growth.20
  21. 21. _rpfkbpp=bksfolkjbkq ^k^ivpfp Opportunities • Worldwide oil demand estimated to increase 2-3% in 2005 which will affect the clients to increase their upstream spending program by 9-12% • Expand business in the areas that are growing rapidly, such as Russia and Caspian regions • Expecting higher levels of activity in the Gulf of Mexico as deepwater development proceeds and in the North Sea where independents are ramping up operations.21
  22. 22. _rpfkbpp=bksfolkjbkq ^k^ivpfp Threats • Operations are subject to the risk of war, boycott, and change in foreign currency exchange rate • Risk of disruption in oil supply due to terrorist attacks targeting oil production from key producers, labor strikes, and military activity • Adverse weather conditions, such as hurricanes • Risk of doing business in multiple countries with various laws and differing political structures22
  23. 23. _rpfkbpp=bksfolkjbkq ^k^ivpfp SWOT Summary • Strengths: High • Weaknesses: Low • Opportunities: High • Threats: Moderate23
  24. 24. _rpfkbpp=bksfolkjbkq ^k^ivpfp SWOT Matrix Strengths Weaknesses S-O Strategies W-O Strategies Low Growing demand for Expand business in the natural gas will support areas where are few Opportunities strong drilling activities. competitors exist. S-T Strategies W-T Strategies Develop technology Not to carry inventory of innovation that reduce materials and component Threats risk of weather and component parts to conditions. avoid risk of political and weather condition.24
  25. 25. fkarpqov=`ljmbqfqflk ^k^ivpfp Porter’s Five Forces • Buyer Power • Supplier Power • Rivalry Among Existing Firms • Threat of New Entrants • Threat of Substitutes • Porter’s Five Forces Summary • Porter’s Generic Strategies25
  26. 26. fkarpqov=`ljmbqfqflk ^k^ivpfp Buyer Power • Direct sales account for most of the revenues, not retailers or distributors • Products and services offered are quite unique in a small industry of specialists • Products provided are extremely essential for the industry, but the number of buyers is quite limited • Cost of production and services offered is a small portion of the total capital investment of buyers26
  27. 27. fkarpqov=`ljmbqfqflk ^k^ivpfp Supplier Power • Very specialized and high-tech suppliers for components built and services offered • Small number of suppliers, more bargaining power • The size of companies they are selling to however, gives them some leverage when exercising control over suppliers 27
  28. 28. fkarpqov=`ljmbqfqflk ^k^ivpfp Rivalry Among Existing Firms • Halliburton Co., Schlumberger Ltd., Smith International, Inc. are 3 main competitors • The relative size and broad range of products and services offered makes the rivalry quite severe • Number of buyers is quite limited • Some competitor products are reasonably similar but each is best suited for certain applications only 28
  29. 29. fkarpqov=`ljmbqfqflk ^k^ivpfp Threat of New Entrants • High capital investments, technology and expertise and patents available with existing firms are high barriers for new entrants • Limited number of buyers • Very cyclical industry. During bad times, business is very bad • Brand recognition for existing firms is quite high • Reasonable good profitability 29
  30. 30. fkarpqov=`ljmbqfqflk ^k^ivpfp Threat of Substitutes • Number of competitors is very limited • Limited number of buyers • Buyers like to standardize products and services for entire fleets • After making a decision on one firm, it is very expensive to make a switch to another firm’s products 30
  31. 31. fkarpqov=`ljmbqfqflk ^k^ivpfp Porter’s Five Forces Summary • Buyer Power: Low • Supplier Power: Moderate • Rivalry Among Existing Firms: High • Threat of New Entrants: Low • Threat of Substitutes: Low31
  32. 32. fkarpqov=`ljmbqfqflk ^k^ivpfp Porter’s Generic Strategies Baker Hughes’ broad range of services and operational units requires a varied strategic approach to each unit--not just a common strategy for the entire firm. Cost Leadership Focus Strategy Differentiation Strategy • Concentration within a Strategy • Acquisitions and narrow segment • Unique products mergers • Risk of less bargaining • Strong R&D group • Outsourcing power with suppliers, • Strong sales group • Efficiencies in design so less of focus strategy is applied • Example : AutoTrack and production rotarty Closed Loop • Vertical integration • Since the market Drilling System, Low segment is narrow, a Dosage Hydrate • Examples : Reservoir broad range of products and Petrophysical Inhibitors, Specialty and services is offered Chemicals Analysis tools, Wellbore • In a cyclical industry Instrumentation, adoption of a firm-wide OASIS business unit, focus strategy is very VSFusion tools risky 32
  33. 33. `rpqljbo=^k^ivpfp • Business based customers only • Three major customers – Super major and major integrated oil and natural gas companies – Independent oil and natural gas companies – State-owned national oil companies (NCO’s)33
  34. 34. dlsbokjbkq=^ka obdri^qlov=^k^ivpfp • Compliance with all U.S. federal, state and local laws. – Comprehensive Environmental Response, Compensation and Liability Act (Superfund or CERCLA) – The United States Protection Agency (EPA) – The Texas Commission on Environmental Quality (TECQ) – Identify as Potential Responsible Parties (PRP) • Occupational Safety and Health Administration (OSHA) • International Regulations – with regards to air and water quality • Securities and Exchange Commission • Financial Accounting and Standards Board34
  35. 35. fffK=_rpfkbpp=pqo^qbdfbp ^ka=mbocloj^k`b • Product Life Cycle 36 • Business Segments 37 • BCG Matrix 38 • Integration with Value Chain 39 • Geographical Diversification 41 35
  36. 36. molar`q=ifcb=`v`ib • Negative Financing Consolidated Cash Flow 1000 activity 800 600 • Large positive 400 Operating activities Investing activities Operating activity 200 0 Financing activities Cash • Along with Investing -200 -400 activity patterns, we -600 2000 2001 2002 2003 2004 clearly identify a Break-down of cash flow by activity for Baker Hughes for 2000 through 2004. (Baker Hughes, company in its 2005) Maturity phase36
  37. 37. _rpfkbpp=pbdjbkqp • Baker Hughes is focused on providing drilling, formation evaluation and production technology used within oil and gas wells. Six divisions provide best-in-class products and services to the worldwide petroleum industry. – Baker Hughes Drilling Fluids: The market leader in providing advanced reservoir drill-in fluids that help maximize production. Drilling – Hughes Christensen: The most innovative and technically advanced drill bit manufacturer in the world. Formation Eval – INTEQ: Delivers advanced drilling technologies and services that deliver efficiency and precise well placement. – Baker Atlas: Advanced well logging and completion systems. Industry Completion leader in wireline and tubing-conveyed perforating services. – Baker Oil Tools: Leads the world in completion, workover and fishing solutions.Production – Centrilift: Provides a broad variety of pumping systems and related components. The leader in proprietary technology for electrical submersible pumps (ESPs), variable frequency drives, and cabling for ESP systems. – Baker Petrolite: World leader in providing chemical technology solutions to the global hydrocarbon recovery and processing industries.37
  38. 38. _`d=j^qofu • Baker Hughes’ core businesses have moved to “Cash Cow” status, while others enjoy “Star” status; some remain as “Question Marks” • Baker Atlas introduced new technologies and expanded into new markets; along with a solid 2nd place market share, it has star status • Hughes Christensen delivered record revenues and profits; as the industry leader, has star value • Centrilift delivered record revenues and profits; as a narrow industry leader, has cash cow status with star potential • Baker Oil Tools revenues increased 16.4% in 2004; as industry leader, has cash cow status with star potential • Baker Petrolite was able to offset rising material Boston Consulting Group growth-share matrix costs through improved efficiency and price for each of Baker Hughes’ business segments increases; along with industry lead, gives it cash based on relative market share, revenue, and cow status profitability. (quickmba.com) (One-on-One, • INTEQ posted improvement in profitability, but 2005)(Baker Hughes, 2004) with 2nd and sometimes 3rd place market share, a question mark with star potential • Drilling Fluids (DF), Hughes Christensen • Drilling Fluids disaggregated from INTEQ to (HC), INTEQ (I), Baker Atlas (BA), renew focus; does not share top market position Baker Oil Tools (BOT), Centrilift (C), • Baker Hughes will need to gain adoption of new Baker Petrolite (BP) technologies to move “Question Marks” to “Stars” and increase market share to return to and maintain “Star” status in others38
  39. 39. fkqbdo^qflk=tfqe=s^irb=`e^fk Each step in the oilfield services covered by one or more divisions has their individual value chain. We will focus on overall value chain. Looking at the chain of oilfield services Baker Hughes is covering Drilling Formation Evaluation Completion Production39
  40. 40. fkqbdo^qflk=tfqe=s^irb=`e^fk It is clear that the firm is pursuing a vertical integration strategy. • Inbound Logistics: Transportation to onside production sites worldwide • Operations: Tool and material production or custom adjusting of equipment • Outbound Logistics: Applying/using equipment • Marketing and Sales: SPE, Internet, tradeshows • Service: Fishing, workover, chemical provider • Support Activities: Increased research and development40
  41. 41. dbldo^mef`^i afsbopfcf`^qflk • Reason Global Operations – Having construction and production sites at oilfield location – Being close to the customer • Risk – Security Baker Hughes operates in 100 countries, with – Terrorism manufacturing facilities in 60. They employ more than 27,000 people around the world. (One-onOne, 2005)41
  42. 42. dbldo^mef`^i afsbopfcf`^qflk • Strategy Forward Geographic Shift – Switching from mature areas like North Sea/North America to Eastern Hemisphere (Middle East, Caspian, Russia) – Russia and China will roll in competitors – Follow the super majors – National oil companies attain momentum (Middle Illustrates Baker Hughes’ shift from mature areas to emerging areas. (Ward, 2005) East, China, Russia) holding large reserves42
  43. 43. fsK=cfk^k`f^i=obmloqfkd ^ka=^k^ivpfp • Accounting practices 44 – Accounting methods used – Recent accounting changes and effects on financial statements – Audit opinion • Financial reporting with SEC 52 – Compliance with SEC – Recent changes in accounting and financial reporting • Long-term trend analysis 55 – Financial position and health – Operating performance – Cash flow • Financial ratio analysis 64 – Profitability Measures – Activity Measures – Liquidity Measures43 – Solvency Measures
  44. 44. ^``lrkqfkd=mo^`qf`bp Accounting Methods Used • Financial statements are in conformity with U.S. GAAP • Product Revenue Recognition – Upon delivery, when title passes and when collectibility is reasonably assured during ordinary operations. – Products produce to customer specifications are produced using standard manufacturing operations and sold using regular marketing channel • Service Revenue Recognition – When rendered and collectability is reasonably assured during ordinary business operations – Usually priced on a per day, per meter or per man hour44
  45. 45. ^``lrkqfkd=mo^`qf`bp Accounting Methods Used • Impairment of Long-Lived Assets – Long lived assets includes property, goodwill and intangible assets which carrying values are periodically reviewed for impairment Losses. – Base on the business climate in which BHI operates no significant impairment losses are anticipated for the foreseeable future • Inventories – Stated at the lower of cost or market value. – Cost is determined by using the First-in, First-out ( FIFO) or the Average Cost method • Cash equivalents – Highly liquid investments with an original maturity date of 3 months or less • Allowance for doubtful debts (Bad Debts) – Recorded when it is evident that customers will not meet present or future payments as required by contractual due dates. – BAD Debts at December 2004 was $50.5 million or 3.6% of A/R.45
  46. 46. ^``lrkqfkd=mo^`qf`bp Accounting Methods Used • Interest Expense – Decreased by $16.0 million in 2004 due to repayment of $350 million long term debt. – Decreased by $8.0 Million in 2004 due to lower weighted average interest rates on commercial papers and market borrowings. – Decreased by $4.1 million in 2004 as a result of new interest rate swap agreements entered into the second quarter of 2004 • Product Warranties – Estimated warranty claims are based upon current and historical product sales data • Remediation Cost – Accrue base on estimates of a probably environmental exposure, using current data and recorded when likely obligated to pay.46
  47. 47. ^``lrkqfkd=mo^`qf`bp Accounting Methods Used • Foreign Currency – Gains/losses due to foreign currency translation are recorded as a component of accumulated other comprehensive income • Stock-Based Compensation – Stocks issued to employee as part of their compensation are valued using the intrinsic value method • Income Taxes – Liability method is used for determining income taxes. – Current deferred tax liabilities and assets are recorded in accordance with enacted domestic and foreign tax laws and rates. – Earnings from foreign subsidiaries will be indefinitely reinvested subsequently, no U.S. income taxes on these amounts will be paid. – BHI effective tax rate differ from the U.S. statutory rate of 35%. – BHI is confident that estimates and assumptions when providing for tax valuation will be accurate47
  48. 48. ^``lrkqfkd=mo^`qf`bp Accounting Methods Used Estimated Depreciation Estimated Asset Class Residual Method Useful Life Value Plant, Straight-line Property, and for financial Machinery statements 20 - 25 years 3% - 12% Capital Lease Straight-line 5-15 years 1% - 3% Intangible Review for Assets Amortize 40 YEARS impairment *For Income tax purposes Baker Hughes uses the accelerated method of depreciation.48
  49. 49. ^``lrkqfkd=mo^`qf`bp Recent Accounting Changes • SFAS No. 142: Goodwill and Other Intangible Assets – Adopted January 1, 2002 – Cease amortizing goodwill and perform a transitional impairment test from – Valuations of the reporting units were performed by a third party – Goodwill in EIMCO and BIRD operation divisions determined to be impaired – Recognized transitional impairment losses of $42.5 million, net of tax of $20.4 million49
  50. 50. ^``lrkqfkd=mo^`qf`bp Recent Accounting Changes • SFAS No. 143: Asset Retirement Obligations – Adopted January 1, 2003 – Fair value of a liability associated with an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimation can be made – Resulted in a change of $5.6 million, net of tax of $2.8 million – Recorded ARO liabilities of $11.4 million50
  51. 51. ^``lrkqfkd=mo^`qf`bp Audit Opinion In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Baker Hughes Incorporated and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Deloitte & Touche, LLP Houston, Texas February 24, 200551
  52. 52. cfk^k`f^i=obmloqfkd=tfqe=pb` Compliance with SEC • Section 16(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), requires executive officers and directors, and persons who beneficially own more than 10% of the Common Stock, to file initial reports of ownership and reports of changes in ownership with the SEC and the NYSE. • SEC regulations require executive officers, directors and greater than 10% beneficial owners to furnish the Company with copies of all Section 16(a) forms they file. • Based solely on a review of the copies of those forms furnished to the Company and written representations from the executive officers and directors, the Company believes, that during its fiscal year ended December 31, 2003, the Company’s executive officers and directors complied with all applicable Section 16(a) filing requirements.52
  53. 53. cfk^k`f^i=obmloqfkd=tfqe=pb` Recent Changes in Accounting and Financial Reporting • Effective as of January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, which established new accounting and reporting standards for asset retirement obligations • Effective as of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, which established new accounting and reporting standards for the recording, amortization and impairment of goodwill and other intangibles • Effective as of January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, as amended, which established new accounting and reporting standards for derivative instruments and hedging activities.53
  54. 54. cfk^k`f^i=obmloqfkd=tfqe=pb` Recent Changes in Accounting and Financial Reporting Date Rule Number Description Consequence Guarantor’s Accounting and Disclosure Did not have an impact on the FASB issued November Requirements for Guarantees, Including consolidated financial statements of the Interpretation No. 45 2002 Indirect Guarantees of Indebtedness of Company (“FIN 45”) Others Requires that the fair value of a liability Charge of $5.6 million, net of tax of associated with an asset retirement $2.8 million, recorded as the cumulative FASB issued SFAS obligation (“ARO”) be recognized in effect of accounting change in the June 2005 No. 143 the period in which it is incurred if a consolidated statement of operations reasonable estimate of fair value can be made January & FASB issued Consolidation of Variable Interest Does not expect the adoption to have a December Interpretation No. 46 Entities material impact, if any, on the 2003 (“FIN 46”) consolidated financial statements Amendment of Statement 133 on No impact on the consolidated financial FASB issued SFAS April 2003 Derivative Instruments and Hedging statements No. 149 Activities Accounting for Certain Financial No impact on the consolidated financial FASB issued SFAS May 2003 Instruments with Characteristics of both statements No. 150 Liabilities and Equity December FASB revised SFAS Employers’ Disclosures about Pensions Adopted the disclosure requirements 2003 No. 132 and Other Post retirement Benefits that were effective for 2003 Accounting and Disclosure Elected to defer accounting for the FASB issued FASB Requirements Related to the Medicare effects of the Act until 2004 January 2004 Staff Position No. FAS Prescription Drug, Improvement and 106-1 (“FSP 106-1”) Modernization Act of 200354
  55. 55. ilkdJqboj=qobka=^k^ivpfp • Financial Position and Health – Balance Sheets • Operating Performance – Income Statements • Cash Flow – Statements of Cash Flow55
  56. 56. ilkdJqboj=qobka=^k^ivpfp Financial Health and Position Selected company information for 2004. (bakerhughes.com)56
  57. 57. ilkdJqboj=qobka=^k^ivpfp Financial Health and Position • Cash and cash equivalents increased in 2004 • Accounts receivable have increased somewhat in 2004, probably due in part to increased revenue • Inventories, property, plant, and equipment, and other assets have remained stable during the last 5 years. Balance Sheet Baker Hughes 2004 2003 2002 2001 2000 Assets Current assets: Cash and cash equivalents 319 98.4 143.9 38.7 34.6 Accounts receivable 1356.1 1141.8 1110.6 1268.8 1310.4 Inventories 1035.2 1013.4 1032 1031.9 898.5 Total current assets 2966.6 2533 2555.5 2806.7 2486.6 Total Assets 6821.3 6416.5 6400.8 6676.2 6452.7 * Full financial statements are included in the Appendix57
  58. 58. ilkdJqboj=qobka=^k^ivpfp Financial Health and Position • Long-term debt shows a decreasing trend for the past 5 years • Retained earnings have increased heavily in 2004, maybe due to the increase in cash mentioned above Balance Sheet Baker Hughes 2004 2003 2002 2001 2000 Liabilities and Stockholders Equity Total current liabilities 1235.5 1324.4 1080.1 1218.6 987.8 Long-term debt 1086.3 1133 1424.3 1682.4 2049.6 Retained earnings 545.9 170.9 196.3 182.3 -101.3 Total stockholders equity 3895.4 3350.4 3397.2 3327.8 3046.7 Total Liabilities and Stockholders Equity 6821.3 6416.5 6400.8 6676.2 6452.7 * Full financial statements are included in the Appendix58
  59. 59. ilkdJqboj=qobka=^k^ivpfp Financial Health and Position • Firm is financially healthy (cash showing a positive trend, long term debt decreasing). • Baker Hughes has enough cash to cover short term debt and current portion of long term debt commitments. Note: • Halliburtons consolidated balance sheet numbers include both ESG (direct competitor of Baker Hughes) and KBR (engineering & construction) business units.59
  60. 60. ilkdJqboj=qobka=^k^ivpfp Operating Performance • Baker Hughes shows lower COGS compared to its main competitors • Selling, general & administrative costs are stable, but much higher than Halliburton and Schlumberger • Baker Hughes’ net income in 2004 increased considerably compared to previous years, and it is at the top of its competitors Income Statement Baker Hughes 2004 2003 2002 2001 2000 Revenues 6103.8 5252.4 5020.4 5139.6 5233.8 Operating expenses: Cost of goods sold 4367.4 3820.9 3625.7 3655.9 4009.6 Selling, general, and administrative 915.4 827.0 840.6 781.7 759.6 Net Income 528.6 128.9 168.9 438.0 102.3 * Full financial statements are included in the Appendix60
  61. 61. ilkdJqboj=qobka=^k^ivpfp Operating Performance • Baker Hughes’ overall operating performance is improving as shown by the stable COGS (may indicate good cost control) and the increase in net income. Note: • Halliburtons consolidated income statement numbers include both ESG (direct competitor of Baker Hughes) and KBR (engineering & construction) business units.61
  62. 62. ilkdJqboj=qobka=^k^ivpfp Cash Flow Baker Hughes Consolidated Cash Flow 2004 2003 2002 2001 2000 Net cash flows from operating activities 783.7 656.1 706.4 720.8 563.5 Net cash flows from investing activities (196.8) (362.2) (283.1) (241.3) (313.5) Net cash flows from financing activities (352.2) (335.8) (312.3) (465.0) (223.2) Cash and cash equivalents, end of year 319.0 98.4 143.9 45.4 34.6 Baker Hughes Percent Change Cash Flow 2004 2003 2002 2001 2000 Net cash flows from operating activities 19.45% -7.12% -2.00% 27.91% 3.74% Net cash flows from investing activities -45.67% 27.94% 17.32% -23.03% -35.52% Net cash flows from financing activities 4.88% 7.52% -32.84% 108.33% 280.89% Cash and cash equivalents, end of year 224.19% -31.62% 216.96% 31.21% 121.79% Consolidated Cash Flow Percent Change Cash Flow 1000 300.00% 800 250.00% 600 200.00% 400 Operating activities 150.00% Operating activities Investing activities Investing activities 200 Financing activities 100.00% Financing activities 0 Cash 50.00% Cash -200 0.00% -400 -50.00% -600 -100.00% 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 * Full financial statements are included in the Appendix62
  63. 63. ilkdJqboj=qobka=^k^ivpfp Cash Flow • Operating cash flow show a steady increase in excess of finance and investing activities • No stock was repurchased in 2004 and close to twice as much as in 2003 were issued in 2004 • This free cash gives Baker Hughes the opportunity to repay borrowing • Baker Hughes may consider increasing dividends payments63
  64. 64. cfk^k`f^i=o^qfl=^k^ivpfp • Profitability Measures – Return on Assets (ROA) – Gross Profit Margin – Asset Turnover – Return on Common Shareholder’s Equity (ROCE) – Earnings per Share (EPS) • Activity Measures – Inventory Turnover – Accounts Receivable Turnover – Accounts Payable Turnover • Liquidity Measures – Current Ratio – Working Capital • Solvency Measures – Debt to Assets – Debt to Equity – Long-term Debt to Equity • Summary64
  65. 65. cfk^k`f^i=o^qfl=^k^ivpfp Return on Assets (ROA) Return on Assets • ROA based on income 10 . 0 % 9.0% from continuing 8.0% 7.0% operations 6.0% 5.0% • Average ROA of 5.4% 4.0% 3.0% 2.0% • Baker Hughes above 1. 0 % 0.0% industry average 2000 2001 2002 2003 2004 Baker Hughes 3.2% 7.6% 4.5% 3.1% 8.8% • Last four year greater or Schlumberger Industry 5.4% 3.8% 6.6% 3.5% 3.7% 3.1% 3.2% 6.6% equal to Schlumberger Comparison of return on assets ratios for Baker • Increasing ROA Hughes and Schlumberger between 2000 and 2004. (Baker Hughes, 2004)(Schlumberger, 2004)(D&B indicates a better Key Business Ratios) operating performance65
  66. 66. cfk^k`f^i=o^qfl=^k^ivpfp Gross Profit Margin Gross Profit Margin • Above industry 29.0% average 27.0% 25.0% 23.0% • Increasing margins 21.0% will improve Return 19.0% 17.0% on Sales 15.0% Baker Hughes 2000 23.4% 2001 28.9% 2002 27.8% • Similar trend to 2003 27.3% 2004 28.4% Schlumberger Industry (5-Yr. Avg.) 21.6% 21.6% 17.8% Schlumberger, but 15.9% 26.2% 21.2% Comparison of gross profit margin for Baker Hughes more stable and Schlumberger between 2000 and 2004. (Baker Hughes, 2004)(Schlumberger, 2004) (investor.reuters.com)66
  67. 67. cfk^k`f^i=o^qfl=^k^ivpfp Total Asset Turnover Total Asset Turnover • Steadily increasing asset 1.00 turnover 0.90 0.80 • Indicates resources are 0.70 0.60 well managed 0.50 0.40 • Average consistently 0.30 2000 2001 2002 2003 2004 above Schlumberger’s Baker Hughes 0.77 0.78 0.77 0.82 0.92 Schlumberger 0.59 0.71 0.46 0.91 0.64 • Between two different Industry (Med. Val.) Industry (5-Yr. Avg.) 1.76 1.83 1.37 0.88 acquired industry Comparison of total asset turnover for Baker Hughes averages and Schlumberger between 2000 and 2004. (Baker Hughes, 2004)(Schlumberger, 2004) (D&B Key • Adds to the increase of Business Ratios)(investor.reuters.com) ROA67
  68. 68. cfk^k`f^i=o^qfl=^k^ivpfp Return on Common Shareholder’s Equity (ROCE) Return on Common Shareholders Equity • ROCE significantly higher 21.0% since 2002, but still lower 19.0% than Schlumberger 17.0% 15.0% • Higher ROCE can be 13.0% attributed to a combination 11.0% of: 9.0% 7.0% - Higher profit margins 5.0% 2000 2001 2002 2003 2004 - Greater asset utilization Baker Hughes 6.6% 8.5% 8.6% 11.2% 13.6% Schlumberger 8.9% 9.7% 12.4% 15.5% 20.2% - Change in leverage Industry (Comp. Val.) 9.8% 5.6% 6.5% 6.9% - Emerging economies Comparison of return on common shareholder’s equity for Baker Hughes and Schlumberger between 2000 and 2004. (Baker Hughes, 2004)(Schlumberger, 2004) (D&B Key Business Ratios)68
  69. 69. cfk^k`f^i=o^qfl=^k^ivpfp Earnings Per Share Earnings per Share (Basic) • Uses income from $2.50 continuing operations $2.00 before taxes due to $1.50 extraordinary losses $1.00 from discontinued $0.50 operations sustained by $0.00 Schlumberger in 2002 2000 2001 2002 2003 2004 Baker Hughes $0.71 $1.98 $1.13 $0.98 $2.33 • Earnings comparable to Schlumberger $1.69 $1.96 $1.13 $0.78 $2.25 Schlumberger’s Comparison of earnings per share for Baker Hughes and Schlumberger between 2000 and 2004. (Baker • After a two-year retreat, Hughes, 2004)(Schlumberger, 2004) earnings improving again • Little or no dilution potential69
  70. 70. cfk^k`f^i=o^qfl=^k^ivpfp Inventory Turnover Inventory Turnover • Baker Hughes’ COGS is 12.00 much lesser than 10.00 Schulmberger’s, hence the 8.00 smaller ratio 6.00 4.00 • Baker Hughes’s ratio over 2.00 the past 3 years has been 0.00 2000 2001 2002 2003 2004 steady Baker Hughes Schlumberger 4.56 6.54 3.79 9.51 3.51 7.06 3.74 8.43 4.23 9.71 • Schlumberger’s ratio has however been changing Comparison of inventory turnover for Baker Hughes and Schlumberger between 2000 and 2004. (Baker • The increasing ratio Hughes, 2004)(Schlumberger, 2004) indicates a tendency for Schlumberger to decrease investment in inventory70
  71. 71. cfk^k`f^i=o^qfl=^k^ivpfp Accounts Receivable Turnover Accounts Receivable Turnover • Baker Hughes’s ratio is 5.50 consistently higher than 5.00 Schlumberger’s 4.50 4.00 • For Baker Hughes, the 3.50 ratio has been reasonably 3.00 2.50 steady over the past 5 2.00 2000 2001 2002 2003 2004 years Baker Hughes Schlumberger 4.20 3.78 3.99 4.14 4.22 2.57 4.36 3.04 4.95 3.73 • Much lower value for Schlumberger could signal Comparison of accounts receivable turnover for Baker Hughes and Schlumberger between 2000 and difficulty in collecting 2004. (Baker Hughes, 2004)(Schlumberger, 2004) accounts receivable, especially in 200271
  72. 72. cfk^k`f^i=o^qfl=^k^ivpfp Accounts Payable Turnover Accounts Payable Turnover • Baker Hughes’s ratio is 11.00 consistently higher than 9.00 Schlumberger’s 7.00 • Schlumberger has shown a 5.00 constant ratio over the past 3.00 5 years whereas that of 1.00 2000 2001 2002 2003 2004 Baker Hughes has been Baker Hughes 8.34 7.33 7.83 8.23 10.41 Schlumberger 2.94 3.00 1.71 2.11 2.40 rising for the past 3 years. Comparison of accounts payable turnover for Baker • Increasing ratio indicates Hughes and Schlumberger between 2000 and 2004. better ability to make (Baker Hughes, 2004)(Schlumberger, 2004) payments by reducing the accounts payable days.72
  73. 73. cfk^k`f^i=o^qfl=^k^ivpfp Current Ratio Current Ratio • 2003 number corrected for 2.60 the sale of SEMA 2.40 2.20 • Stable, between 2.0 & 2.5 2.00 1. 8 0 during last 5 years • Current ratio values 1. 6 0 1. 4 0 1. 2 0 1. 0 0 indicate good ability to Baker Hughes 2000 2.52 2001 2.30 2002 2.37 2003 1.91 2004 2.40 pay short-term debt Schlumberger Industry (Med. Val.) 1.88 1.24 2.20 1.11 2.20 1.28 2.00 1.50 • Larger that main Comparison of current ratio for Baker Hughes and competitor Schlumberger Schlumberger between 2000 and 2004. (Baker Hughes, 2004)(Schlumberger, 2004) (D&B Key Business Ratios)73
  74. 74. cfk^k`f^i=o^qfl=^k^ivpfp Working Capital Working Capital • 2003 number corrected 4, 000 for the sale of SEMA 3, 000 • Stable during the last 5 2, 000 years • Indicates stable amount 1, 000 of net current resources 0 2000 2001 2002 2003 2004 dedicated to run the Baker Hughes Schlumberger 1,498.8 3,502.3 1,588.1 1,487.1 1,475.4 734.4 1,208.6 1,554.2 1,731.1 2,327.9 business Comparison of working capital for Baker Hughes • Main competitor and Schlumberger between 2000 and 2004. (Baker Schlumberger showing a Hughes, 2004)(Schlumberger, 2004) steep decrease in 2002 due to charges for discontinued operations74
  75. 75. cfk^k`f^i=o^qfl=^k^ivpfp Debt to Assets Debt to Assets • Baker Hughes’ ratio 75.00 70.00 is lower than 65.00 Schlumberger’s 60.00 55.00 • Schlumberger’s 50.00 45.00 higher ratio indicates 40.00 2000 2001 2002 2003 it’s operations are 2004 Baker Hughes Schlumberger 52.78 51.69 50.15 62.47 46.93 71.15 47.78 70.65 more dependent on 42.89 61.77 Comparison of debt to assets for Baker Hughes and debt source than Schlumberger between 2000 and 2004. (Baker Baker Hughes Hughes, 2004)(Schlumberger, 2004) • More stable than Schlumberger75
  76. 76. cfk^k`f^i=o^qfl=^k^ivpfp Debt to Equity Debt to Equity • Baker Hughes’ ratio 115.00 105.00 has steadily declined 95.00 85.00 compared to 75.00 65.00 Schlumberger’s 55.00 45.00 • Baker Hughes’ 35.00 25.00 2000 2001 2002 2003 decreasing ratio 2004 Baker Hughes Schlumberger 67.27 43.07 50.55 74.18 41.93 107.53 33.81 103.67 indicates a better 27.89 64.48 Comparison of debt to equity for Baker Hughes and operating Schlumberger between 2000 and 2004. (Baker performance Hughes, 2004)(Schlumberger, 2004) • More stable than Schlumberger76
  77. 77. cfk^k`f^i=o^qfl=^k^ivpfp Long-Term Debt to Equity Long-Term Debt to Equity • Baker Hughes’ ratio 55.00 50.00 has steadily declined 45.00 compared to 40.00 35.00 Schlumberger’s 30.00 25.00 • Baker Hughes’ lower 20.00 2000 2001 2002 2003 ratio indicates lower 2004 Baker Hughes Schlumberger 40.22 30.11 33.58 42.59 29.54 51.82 25.27 50.90 risk of bankruptcy 21.81 39.20 Comparison of long-term debt to equity for Baker compared to Hughes and Schlumberger between 2000 and 2004. Schlumberger’s (Baker Hughes, 2004)(Schlumberger, 2004) • More stable than Schlumberger77
  78. 78. cfk^k`f^i=o^qfl=^k^ivpfp Summary • Robust gross profit margins due to favorable economic conditions and the ability to control costs has led to a surplus of cash • Improving activity ratios, with a steady supply of inventory, better conversion of accounts receivable to cash, and, despite faster payment of accounts payable, fewer overall days of financing required • Retirement of debt has led to much improved liquidity and solvency, and thus, a surplus of cash78
  79. 79. sK=clob`^pqfkd=molcfq^_fifqv ^ka=ofph • Assumptions used in Forecasting 80 – Pro-Forma Income Statements – Pro-Forma Balance Sheets • Pro-Forma Financial Ratios Analysis 89 – Pro-Forma Profitability Measures – Pro-Forma Risk Measures • Pro-Forma Analysis 9379
  80. 80. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Income Statements • Revenue Assumption (Assumption 1) – Revenue growth rate in 2005 will remain strong due to price and demand increases carrying over from 2004 – However, revenue growth for 2006 to 2009 can not be maintained at the same growth rate as 2005, due to the cyclicality of the demand in the oil & gas industry Increase in demand => High oil prices => More expenditure in exploration & production => Oil rigs count increases => More revenue + Oil service companies (BHI) increase prices BAKER HUGHES PRO-FORMA INCOME STATEMENTS HISTORICAL INCOME STATEMENTS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Revenues 8476.5 7996.7 7544.1 7117.0 6714.2 6103.8 5252.4 5020.4 5139.6 5233.8 Assumption 1: Revenue Growth Rate 6.0% 6.0% 6.0% 6.0% 10.0% 16.2% 4.6% -2.3% -1.8% 6.0% * Full financial statements are included in the Appendix 80
  81. 81. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Income Statements • COGS Assumption (Assumption 2) – One of Baker Hughes’ strategic goals is cost containment, hence the assumption is that COGS will decrease a bit or remain constant in the next few years (average COGS as % of Revenue was 72% during last 4 years) – A value of 71% was found to be a good assumption for forecasting BAKER HUGHES PRO-FORMA INCOME STATEMENTS HISTORICAL INCOME STATEMENTS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Cost of goods sold 6018.3 5677.7 5356.3 5053.1 4767.1 4367.4 3820.9 3625.7 3655.9 4009.6 Assumption 2: COGS as % of Revenue 71.0% 71.0% 71.0% 71.0% 71.0% 71.6% 72.7% 72.2% 71.1% 76.6% * Full financial statements are included in the Appendix 81
  82. 82. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Balance Sheets • Cash Assumption (Assumption 1) – Cash was calculated as: Cash Balance = (Avg Sales per Day) x (Days Sales in Cash) where: Avg. Sales per Day(t+1) = Revenue(t+1) / 365 and: Days Sales in Cash = 365 / [Sales(t) / Cash(t)] – By forecasting Cash as shown above (same method used in textbook) more realistic values are obtained, than if using Cash as the account to balance the Balance Sheet BAKER HUGHES PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Cash and cash equivalents 443.0 417.9 394.3 372.0 350.9 319 98.4 143.9 38.7 34.6 Assumption 1: a) Avg Sales per Day 23 22 21 19 18 b) Days Sales in Cash 19 * Full financial statements are included in the Appendix 82
  83. 83. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Balance Sheets • Accounts Receivable Assumption (Assumption 2) – A/R Turnover ratio has been constant (around 5.0) during the last 2 years. This same value will be used when forecasting Accounts Receivable BAKER HUGHES PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Accounts receivable 1734.4 1636.3 1543.7 1456.3 1373.8 1356.1 1141.8 1110.6 1268.8 1310.4 Assumption 2: A/R Turnover Ratio 5 5 5 5 5 5 5 4 4 4 * Full financial statements are included in the Appendix 83
  84. 84. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Balance Sheets • Inventories Assumption (Assumption 3) – Inventory Turnover ratio has been constant (around 4.0) during the last 4 years. The value 4.3 from year 2004 will be used when forecasting Inventories BAKER HUGHES PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Inventories 1411.5 1331.6 1256.2 1185.1 1118.0 1035.2 1013.4 1032 1031.9 898.5 Assumption 3: Inventory Turnover Ratio 4.3 4.3 4.3 4.3 4.3 4.3 3.7 3.5 3.8 4.6 * Full financial statements are included in the Appendix 84
  85. 85. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Balance Sheets • Property, Plant, and Equipment Assumption (Assumption 6) – Fixed Assets will continue growing (as does Revenue), but a constant rate. The average F/A growth ratio of the last 4 years (which was 3.8) was used here BAKER HUGHES PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Property, plant, and equipment 2230.7 2104.4 1985.3 1872.9 1766.9 1334.1 1395.1 1354.7 1297 1378.7 Assumption 6: Avg F/A Turnover Ratio 3.8 3.8 3.8 3.8 3.8 4.5 3.8 3.8 3.8 3.0 * Full financial statements are included in the Appendix 85
  86. 86. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Balance Sheets • Assumption 11 – Accounts Payable will continue to grow at a constant rate – An Accounts Payable Turnover Ratio of 8.8 will be used, as this was the average value from the last 5 years BAKER HUGHES PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Accounts payable 690.2 651.1 614.3 579.5 548.9 454.3 386.4 389.2 537.2 469.3 Assumption 11: A/P Turnover Ratio 8.8 8.8 8.8 8.8 8.8 10.4 9.8 7.8 7.5 8.6 * Full financial statements are included in the Appendix 86
  87. 87. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Balance Sheets • Assumption 12 – Short-Term Borrowing and Current Portion of Long- Term Debt is a small percentage of Total Assets – The last 5 years average value of 1.8% will be used for projecting values for this account BAKER HUGHES PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Short-term borrowings and current portion of long-term debt 83.0 81.6 80.1 78.7 77.4 76 351.4 123.5 12.2 13.3 Assumption 12: As % of Total Assets 1.8% 1.8% 1.8% 1.8% 1.8% 1.1% 5.5% 1.9% 0.2% 0.2% * Full financial statements are included in the Appendix 87
  88. 88. ^pprjmqflkp=rpba=fk clob`^pqfkd Pro-Forma Balance Sheets • Retained Earnings Assumption (Assumption 21) – Retained Earnings was used as the item to balance the Balance Sheet – It worked out better than using the Cash account for balancing the Balance Sheet. Forecasted values for Retained Earnings are higher than Net Income (which is correct since Net Income is one of its components) BAKER HUGHES PRO-FORMA BALANCE SHEETS HISTORICAL BALANCE SHEETS 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Retained earnings 1891.4 1594.8 1315.7 1052.9 803.5 545.9 170.9 196.3 182.3 -101.3 Assumption 21: Plug in value 1891.4 1594.8 1315.7 1052.9 803.5 * Full financial statements are included in the Appendix 88
  89. 89. molJcloj^=cfk^k`f^i o^qfl=^k^ivpfp Pro-Forma Profitability Measures ROA 10.0% 9.0% 8.0% 7.0% 6.0% Earnings per Share 5.0% 4.0% 3.0% 2.5 2.0% 1.0% 2 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1.5 ROCE 1 10.0% 9.0% 0.5 8.0% 7.0% 6.0% 0 5.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 4.0% 3.0% 2.0% 1.0% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 89
  90. 90. molJcloj^=cfk^k`f^i o^qfl=^k^ivpfp Pro-Forma Profitability Measures Accounts Receivable Turnover Inventory Turnover 5.1 5.5 4.9 5 4.7 4.5 4.5 4 4.3 3.5 4.1 3 3.9 2.5 3.7 2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 90
  91. 91. molJcloj^=cfk^k`f^i o^qfl=^k^ivpfp Pro-Forma Risk Measures Dept-Equity Ratio 80.0% 70.0% 60.0% 50.0% Current Ratio 40.0% 30.0% 2.6 20.0% 2.5 10.0% 0.0% 2.4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2.3 2.2 Long-Term Dept Ratio 2.1 45.0% 2 40.0% 1.9 35.0% 1.8 30.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 25.0% 20.0% 15.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 91
  92. 92. molJcloj^=cfk^k`f^i o^qfl=^k^ivpfp Pro-Forma Risk Measures Days Accounts Receivable 100 95 90 85 80 Days Inventory 75 70 65 110 60 105 55 50 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 95 90 Days Accounts Payable 85 50 48 80 46 44 75 42 70 40 38 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 36 34 32 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 92
  93. 93. molJcloj^=^k^ivpfp • Most of the Profitability and Risk Ratios show good trending. There are no major outliers that merit special explanation or investigation. This means our assumptions were reasonable • The calculated plug in values for Retained Earnings follow a good trending, are higher than Net Income (one of its components), and are already deducted by the Dividends value (which are not reported separately by Baker Hughes) • Long-term debt will increase at a moderate rate, in order to cover expansion of operations into emerging markets (consistent with increase in PP&E) • Projected steady increase in revenues will increase cash and retained earnings. Company must have a strategic plan to use that excess cash efficiently93
  94. 94. sfK=`lk`irpflk=^ka ob`ljjbka^qlkp • Business Strategy and Performance 95 – Evaluation: Past and Present – Projection • Strategic Recommendations for Future 97 – Recommended Strategies – Cost/Benefit Analysis • Investment Recommendation 9994
  95. 95. _rpfkbpp=pqo^qbdv ^ka=mbocloj^k`b Evaluation: Past and Present • Consolidation of business units • Increasing global presence • Reducing long-term debt • Increasing prices to take advantage of up market 95
  96. 96. _rpfkbpp=pqo^qbdv ^ka=mbocloj^k`b Projection • Invest in emerging markets such as Russia • Continue reducing long-term debt • Invest in differentiating technologies 96
  97. 97. pqo^qbdf`=ob`ljjbka^qflkp clo=crqrob Recommended Strategies • Increase capital spending budget to support the increase market activity in Russia and Caspian Region • Continue to invest in human resources and new technology that deliver measurable economic benefit to the customers • Continue to strive for fair pricing for the value provided • Consider increasing rental tool capital spending modestly to support the anticipated growth in revenues while maintaining financial discipline 97 • Liquidate underperforming divisions
  98. 98. pqo^qbdf`=ob`ljjbka^qflkp clo=crqrob Cost/Benefit Analysis • Has demonstrated the ability to deliver a healthy return on assets and total assets turnover in recent years • Abundance of cash on hand makes new and expanded capital projects less expensive relative to financing • Weak U.S. dollar makes foreign investing less risky 98
  99. 99. fksbpqjbkq=ob`ljjbka^qflk “Buy” • The company has a strong cash situation • Debt will be reduced drastically with the cash on hand • Pro-forma Revenue estimates are good • Pro-forma Earnings per share (EPS) estimates are also good • Small risk is involved with the introduction of “Windfall Profit Tax” by the federal government; this is being discussed for oil companies only, not for service providers • Demand for energy and price of crude oil are not99 expected to go down anytime soon
  100. 100. obcbobk`bp • Baker Hughes. (2004). 2004 annual report and proxy statement. Houston, TX: Author. • Bank of America Presentation. (2005, November). Retrieved November 21, 2005, from http://www.bakerhughes.com/investor/resources/Presentations/bank_of_america_nov05.pdf • Group A. (2005). Southwest Airlines: Financial Reporting and Analysis. Unpublished presentation. University of Houston-Victoria. • Group B. (2004). The Home Depot, Inc: Annual Report Project. Unpublished presentation. University of Houston-Victoria. • finance.yahoo.com • One-on-One Presentation Book, (2005, June). Retrieved September 15, 2005, from http://www.bakerhughes.com/investor/resources/Presentations/June2005/1on1.pdf • Schlumberger. (2004). 2004 annual report. New York, NY: Author. • Stanko, B. B., & Zeller, T. L. (2003). Understanding the Corporate Annual Report: A User’s Guide. Hoboken, NJ: John Wiley & Sons. • Stickney, C. P., Brown, P. R., & Wahlen, J. M. (2004). Financial Reporting and Statement Analysis: A Strategic Perspective. Mason, OH: South-Western. • Ward, R.D. (2005, May). MENA…Opportunity and Challenge. JP Morgan Middle East/North Africa Upstream Development Symposium. Retrieved September 15, 2005, from http://www.bakerhughes.com/investor/resources/Presentations/JP_MORGAN_PRESENTATI ON.pdf • www.bakerhughes.com • www.investor.reuters.com • www.quickmba.com100
  101. 101. ^mmbkafu • Consolidated Balance Sheets • Common-Sized Balance Sheets • Percentage Change Balance Sheets • Consolidated Income Statements • Common-Sized Income Statements • Percentage Change Income Statements • Consolidated Statements of Cash Flow • Percentage Change Statements of Cash Flow • Pro-Forma Assumptions for Income Statements • Pro-Forma Assumptions for Balances Sheets • Pro-Forma Balance Sheets • Pro-Forma Income Statements • Pro-Forma Profitability Ratios • Pro-Forma Risk Ratios101 • 2004 Annual Report Baker Hughes

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