10-K 1 fiscalyear2014form10-k.htm 10-K Fiscal Year 2014 Form 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9397
Baker Hughes Incorporated
(Exact name of registrant as specified in its charter)
Delaware
 
76-0207995
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
2929 Allen Parkway, Suite 2100, Houston, Texas
 
77019-2118
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (713) 439-8600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $1 Par Value per Share
 
New York Stock Exchange
 
 
SIX Swiss Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [X] NO [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [X]
 
Accelerated filer [ ]
  
Non-accelerated filer [ ]
  
Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting and non-voting common stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter (based on the closing price on June 30, 2014 reported by the New York Stock Exchange) was approximately $32,301,284,000.
As of February 19, 2015, the registrant has outstanding 434,526,345 shares of common stock, $1 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant’s Definitive Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.



Baker Hughes Incorporated
Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I

ITEM 1. BUSINESS
Baker Hughes Incorporated is a Delaware corporation engaged in the oilfield services industry. As used herein, phrases such as “Baker Hughes,” “Company,” “we,” “our” and “us” intend to refer to Baker Hughes Incorporated and/or its subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationships.
AVAILABILITY OF INFORMATION FOR STOCKHOLDERS
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our Internet website at www.bakerhughes.com as soon as reasonably practicable after these reports have been electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). Information contained on or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing we make with the SEC.
We have a Business Code of Conduct to provide guidance to our directors, officers and employees on matters of business conduct and ethics, including compliance standards and procedures. We have also required our principal executive officer, principal financial officer and principal accounting officer to sign a Code of Ethical Conduct Certification.
Our Business Code of Conduct and Code of Ethical Conduct Certifications are available on the Investor Relations section of our website at www.bakerhughes.com. We will disclose on a current report on Form 8-K or on our website information about any amendment or waiver of these codes for our executive officers and directors. Waiver information disclosed on our website will remain on the website for at least 12 months after the initial disclosure of a waiver. Our Corporate Governance Guidelines and the charters of our Audit/Ethics Committee, Compensation Committee, Executive Committee, Finance Committee and Governance Committee are also available on the Investor Relations section of our website at www.bakerhughes.com. In addition, a copy of our Business Code of Conduct, Code of Ethical Conduct Certifications, Corporate Governance Guidelines and the charters of the committees referenced above are available in print at no cost to any stockholder who requests them by writing or telephoning us at the following address or telephone number:
Baker Hughes Incorporated
2929 Allen Parkway, Suite 2100
Houston, TX 77019-2118
Attention: Investor Relations
Telephone: (713) 439-8600
ABOUT BAKER HUGHES
Baker Hughes is a leading supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. We also provide industrial products and services to the downstream chemicals, and process and pipeline services. Baker Hughes was formed as a corporation in April 1987 in connection with the combination of Baker International Corporation and Hughes Tool Company. We conduct our operations through subsidiaries, affiliates, ventures and alliances. We operate in more than 80 countries around the world and our corporate headquarters is in Houston, Texas. As of December 31, 2014, we had approximately 62,000 employees, of which approximately 58% work outside the United States (“U.S.”).


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Our global oilfield operations are organized into a number of geomarket organizations, which are combined into and report to four region presidents, who in turn report to our chief executive officer. These regions form the basis of our four geographical operating segments detailed below:
North America - headquartered in Houston, Texas
Latin America - headquartered in Houston, Texas
Europe/Africa/Russia Caspian - headquartered in London, England
Middle East/Asia Pacific - headquartered in Dubai, United Arab Emirates
Through the geographic organization, our management is located close to our customers, facilitating strong customer relationships and allowing us to react quickly to local market conditions and customer needs. The geographic organization supports our oilfield operations and is responsible for sales, field operations and well site execution. In addition to the above, we have an Industrial Services segment, headquartered in Houston, Texas, which includes the downstream chemicals business and the process and pipeline services business.
Certain support operations are organized at the enterprise level and include the supply chain and product line technology organizations. The supply chain organization is responsible for the cost-effective procurement and manufacturing of our products as well as product quality and reliability. The product line technology organization is responsible for product development, technology and marketing of innovative and reliable solutions for our customers to advance their reservoir performance. The product line technology organization also facilitates cross-product line technology development, sales processes and integrated operations capabilities.
Further information about our segments is set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 4. "Segment Information" of the Notes to Consolidated Financial Statements in Item 8 herein.
HALLIBURTON MERGER AGREEMENT
On November 16, 2014, Baker Hughes and Halliburton Company (“Halliburton”) entered into a definitive agreement and plan of merger under which Halliburton will acquire all the outstanding shares of Baker Hughes in a stock and cash transaction. Under the terms of the agreement, stockholders of Baker Hughes will receive, for each share of common stock of Baker Hughes, a fixed exchange ratio of 1.12 Halliburton shares plus $19.00 in cash. The transaction is subject to approvals from each company’s stockholders, regulatory approvals and customary closing conditions. The transaction is expected to close in the second half of 2015. However, Baker Hughes cannot predict with certainty when, or if, the pending merger will be completed because completion of the transaction is subject to conditions beyond the control of Baker Hughes. For further information about the merger, see Note 2. "Halliburton Merger Agreement" of the Notes to Consolidated Financial Statements in Item 8 herein.
PRODUCTS AND SERVICES
Oilfield Operations
We offer a full suite of products and services to our customers around the world. Our oilfield products and services fall into one of two categories, Drilling and Evaluation or Completion and Production. This classification is based on the two major phases of constructing an oil and/or natural gas well, the drilling phase and the completion phase, and how our products and services are utilized for each phase.
Drilling and Evaluation products and services consist of the following:
Drill Bits - includes Tricone, PDC or “diamond”, and Kymerahybrid drill bits used for performance drilling, hole enlargement and coring.
Drilling Services - includes conventional and rotary steerable systems used to drill wells directionally and horizontally; measurement-while-drilling and logging-while-drilling systems used to perform reservoir navigation services; drilling optimization services; tools for coil tubing drilling and wellbore re-entry systems; coring drilling systems; and surface logging.


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Wireline Services - includes tools for both open hole and cased hole well logging used to gather data to perform petrophysical and geophysical analysis; reservoir evaluation coring; casing perforation; fluid characterization; production logging; well integrity testing; pipe recovery; and seismic and microseismic services.
Drilling and Completion Fluids - includes emulsion and water-based drilling fluids systems; reservoir drill-in fluids; and fluids environmental services.
Completion and Production products and services consist of the following:
Completion Systems - includes products and services used to control the flow of hydrocarbons within a wellbore including sand control systems; liner hangers; wellbore isolation; expandable tubulars; multilaterals; safety systems; packers and flow control; and tubing conveyed perforating.
Wellbore Intervention - includes products and services used in existing wellbores to improve their performance including thru-tubing fishing; thru-tubing inflatables; conventional fishing; casing exit systems; production injection packers; remedial and stimulation tools; and wellbore cleanup.
Intelligent Production Systems - includes products and services used to monitor and dynamically control the production from individual wells or fields including production decisions services; chemical injection services; well monitoring services; intelligent well systems; and artificial lift monitoring.
Artificial Lift - includes electric submersible pump systems; progressing cavity pump systems; gas lift systems; and surface horizontal pumping systems used to lift large volumes of oil and water when a reservoir is no longer able to flow on its own.
Upstream Chemicals - includes chemicals and chemical application systems to provide flow assurance, integrity management and production management for upstream hydrocarbon production.
Pressure Pumping - includes cementing, stimulation, including hydraulic fracturing, and coil tubing services used in the completion of new oil and natural gas wells and in remedial work on existing wells, both onshore and offshore. Hydraulic fracturing is the practice of pumping fluid through a wellbore at pressures and rates sufficient to crack rock in the target formation, extend the cracks, and leave behind a propping agent to keep the cracks open after pumping ceases. The purpose of the cracks is to provide a pathway that allows for the passage of hydrocarbons from the rock to the wellbore, thus improving the production of hydrocarbons to the surface.
We also provide dedicated project solutions to our customers through our Integrated Operations group. Integrated Operations is focused on the execution of projects that have one or more of the following attributes: project management, well site supervision, well construction, intervention, third party contractor management, procurement and rig management. Contracts for this business unit tend to be longer in duration, often spanning multiple years, and may include significant third party components to supplement the core products and services provided by us. By partnering with Integrated Operations, our customers have access a comprehensive business solution that leverages our technical expertise, relationships with third party and rig providers, and our industry leading technologies.
Additional information regarding our oilfield products and services can be found on the Company’s website at www.bakerhughes.com. Our website also includes details of our hydraulic fracturing operations, including our hydraulic fracturing chemical disclosure policy and support of the online national hydraulic fracturing chemical registry at www.fracfocus.org, and information on our SmartCare qualified systems and products, which are intended to maximize performance while minimizing our impact on the community and environment.
Industrial Services
Industrial Services consists primarily of our downstream chemicals, and process and pipeline services businesses. Downstream chemicals provides products and services that help to increase refinery production, as well as improve plant safety and equipment reliability. Process and pipeline services works to improve efficiency and reduce downtime with inspection, pre-commissioning and commissioning of new and existing pipeline systems and process plants.
MARKETING, COMPETITION AND CONTRACTING
We market our products and services within our four geographic regions on a product line basis primarily through our own sales organizations. We ordinarily provide technical and advisory services to assist in our


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customers’ use of our products and services. Stock points and service centers for our products and services are located in areas of drilling and production activity throughout the world.
Our primary competitors include the major diversified oilfield service companies such as Schlumberger, Halliburton and Weatherford International, where the breadth of service capabilities as well as competitive position of each product line are the keys to differentiation in the market. We also compete with other companies who may participate in only a few of the same product lines as us, for example, National Oilwell Varco, Ecolab, Newpark Resources and FTS International. Our products and services are sold in highly competitive markets and revenue and earnings are affected by changes in commodity prices, fluctuations in the level of drilling, workover and completion activity in major markets, general economic conditions, foreign currency exchange fluctuations and governmental regulations. We believe that the principal competitive factors in our industries are product and service quality, reliability and availability, health, safety and environmental standards, technical proficiency and price.
Our customers include the large integrated major and super-major oil and natural gas companies, U.S. and international independent oil and natural gas companies and the national or state-owned oil companies. No single customer accounts for more than 10% of our business. While we may have contracts with customers that include multiple well projects and that may extend over a period of time ranging from two to four years, our services and products are generally provided on a well-by-well basis. Most contracts cover our pricing of the products and services, but do not necessarily establish an obligation to use our products and services.
We strive to negotiate the terms of our customer contracts consistent with what we consider to be best practices. The general industry practice is for oilfield service providers, like us, to be responsible for their own products and services and for our customers to retain liability for drilling and related operations. Consistent with this practice, we generally take responsibility for our own people and property while our customers, such as the operator of a well, take responsibility for their own people, property and all liabilities related to the well and subsurface operations, regardless of either party’s negligence. In general, any material limitations on indemnifications to us from our customers in support of this allocation of responsibility arise only by applicable statutes.
Certain states such as Texas, Louisiana, Wyoming, and New Mexico have enacted oil and natural gas specific statutes that void any indemnity agreement that attempts to relieve a party from liability resulting from its own negligence (“anti-indemnity statutes”). These statutes can void the allocation of liability agreed to in a contract; however, both the Texas and Louisiana anti-indemnity statutes include important exclusions. The Louisiana statute does not apply to property damage, and the Texas statute allows mutual indemnity agreements that are supported by insurance and has exclusions, which include, among other things, loss or liability for property damage that results from pollution and the cost of well control events. We negotiate with our customers in the U.S. to include a choice of law provision adopting the law of a state that does not have an anti-indemnity statute because both Baker Hughes and our customers generally prefer to contract on the basis as we mutually agree. When this does not occur, we will generally use Texas law. With the exclusions contained in the Texas anti-indemnity statute, we are usually able to structure the contract such that the limitation on the indemnification obligations of the customer is limited and should not have a material impact on the terms of the contract. State law, laws or public policy in countries outside the U.S., or the negotiated terms of our agreement with the customer may also limit the customer’s indemnity obligations in the event of the gross negligence or willful misconduct of a Company employee. The Company and the customer may also agree to other limitations on the customer’s indemnity obligations in the contract.
The Company maintains a commercial general liability insurance policy program that covers against certain operating hazards, including product liability claims and personal injury claims, as well as certain limited environmental pollution claims for damage to a third party or its property arising out of contact with pollution for which the Company is liable, but clean up and well control costs are not covered by such program. All of the insurance policies purchased by the Company are subject to self-insured retention amounts for which we are responsible for payment, specific terms, conditions, limitations and exclusions. There can be no assurance that the nature and amount of Company insurance will be sufficient to fully indemnify us against liabilities related to our business.
RESEARCH AND DEVELOPMENT AND PATENTS
Our products and technology organization engages in research and development activities directed primarily toward the development of new products, processes and services, the improvement of existing products and


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services and the design of specialized products to meet specific customer needs. We have technology centers located in the U.S. (several in Houston, Texas and surrounding areas and one in Claremore, Oklahoma), Germany (Celle), Russia (Novosibirsk), and Saudi Arabia (Dhahran). For information regarding the total amount of research and development expense in each of the three years in the period ended December 31, 2014, see Note 1. "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Item 8 herein.
We have followed a policy of seeking patent and trademark protection in numerous countries and regions throughout the world for products and methods that appear to have commercial significance. We believe our patents, trademarks, and related intellectual property rights are adequate for the conduct of our business, and aggressively pursue protection of our intellectual property rights against infringement worldwide. Additionally, the Company considers the quality and timely delivery of its products, the service it provides to its customers and the technical knowledge and skills of its personnel to be other important components of the portfolio of capabilities and assets supporting its ability to compete. No single patent or trademark is considered to be critical to our business.
SEASONALITY
Our operations can be affected by seasonal weather, which can temporarily affect the delivery and performance of our products and services, as well as customers’ budgetary cycles. Examples of seasonal events which can impact our business include:
The severity and duration of both the summer and the winter in North America can have a significant impact on activity levels. In Canada, the timing and duration of the spring thaw directly affects activity levels, which reach seasonal lows during the second quarter and build through the third and fourth quarters to a seasonal high in the first quarter.
Adverse weather conditions such as hurricanes and typhoons can disrupt coastal and offshore drilling and production operations.
Severe weather during the winter months normally results in reduced activity levels in the North Sea and Russia generally in the first quarter.
Scheduled repair and maintenance of offshore facilities in the North Sea can reduce activity in the second and third quarters.
Many of our international oilfield customers increase orders for certain products and services in the fourth quarter.
Our Industrial Services segment typically experiences lower sales during the first and fourth quarters of the year due to the Northern Hemisphere winter.
RAW MATERIALS
We purchase various raw materials and component parts for use in manufacturing our products and delivering our services. The principal materials we purchase include, but are not limited to, steel alloys (including chromium and nickel), titanium, barite, beryllium, copper, lead, tungsten carbide, synthetic and natural diamonds, gels, sand and other proppants, printed circuit boards and other electronic components and hydrocarbon-based chemical feed stocks. These materials are generally available from multiple sources and may be subject to price volatility. While we generally do not experience significant or long-term shortages of these materials, we have from time to time experienced temporary shortages of particular raw materials. In addition, we normally do not carry inventories of such materials in excess of those reasonably required to meet our production schedules. We do not expect significant interruptions in the supply of raw materials, but there can be no assurance that there will be no price or supply issues over the long-term.
EMPLOYEES
As of December 31, 2014, we had approximately 62,000 employees, of which the majority are outside the U.S. Less than 10% of these employees are represented under collective bargaining agreements or similar-type labor arrangements.


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EXECUTIVE OFFICERS OF BAKER HUGHES INCORPORATED
The following table shows, as of February 25, 2015, the name of each of our executive officers, together with his or her age and all offices presently or previously held. There are no family relationships among our executive officers.

Name
 
Age
 
Background
Martin S. Craighead
 
55
 
Chairman of the Board of Directors of the Company since April 2013 and Director since 2011. Chief Executive Officer of the Company since January 2012 and President since 2010. Chief Operating Officer from 2009 to 2012. Group President of Drilling and Evaluation from 2007 to 2009. President of INTEQ from 2005 to 2007 and President of Baker Atlas from February 2005 to August 2005. Employed by the Company in 1986.
Kimberly A. Ross
 
49
 
Senior Vice President and Chief Financial Officer of the Company since October 2014. Executive Vice President and Chief Financial Officer of Avon Products Incorporated from 2011 to 2014. Executive Vice President and Chief Financial Officer of Royal Ahold N.V. from 2007 to 2011 and various other finance positions with Royal Ahold from 2001 to 2007. Ms. Ross serves on the board of directors and the audit committee of ACE Ltd. Employed by the Company in October 2014.
Belgacem Chariag
 
52
 
Chief Integration Officer since December 2014. President, Global Products and Services of the Company from October 2013 to December 2014. President, Eastern Hemisphere Operations from 2009 to 2013. Vice President/Director HSE of Schlumberger Limited from May 2008 to May 2009. Various other executive positions at Schlumberger from 1989 to 2008. Employed by the Company in 2009.
Alan R. Crain
 
63
 
Senior Vice President, Chief Legal and Governance Officer of the Company since 2013. Senior Vice President and General Counsel of the Company from 2007 to 2013. Vice President and General Counsel of the Company from 2000 to 2007. Employed by the Company in 2000.
Archana Deskus
 
49
 
Vice President and Chief Information Officer of the Company since 2013. Vice President and Chief Information Officer for Ingersoll-Rand from 2011 to 2012. Senior Vice President and Chief Information Officer for Timex Group from 2006 to 2011. Various positions at United Technologies from 1987 to 2006, including Vice President and Chief Information Officer for Carrier North America. Employed by the Company in 2013.
Angela Durkin
 
47
 
Vice President, Health Safety and Environment of the Company since July 2014. Vice President of Continental Europe for the Company from February 2013 to July 2014. Previous roles within the Company include leadership positions in manufacturing quality, reliability assurance, operations and technical support, business development, and emerging technologies from 1996 until 2013. Employed by the Company since March 1996.
Andrew C. Esparza
 
56
 
Chief Human Resources Officer since January 2015. Former Chief Human Resources Officer for Dell from 2007 to 2010. Various other human resources roles at Dell between 1997 and 2010. Employed by the Company in 2015.
Alan J. Keifer
 
60
 
Vice President and Controller of the Company since 1999. Western Hemisphere Controller of Baker Oil Tools from 1997 to 1999 and Director of Corporate Audit for the Company from 1990 to 1996. Employed by the Company in 1990.
William D. Marsh
 
52
 
Vice President and General Counsel of the Company since February 2013. Vice President-Legal for Western Hemisphere from May 2009 to February 2013. Various executive, legal and corporate roles within the Company from 1998 to 2009. Partner at Ballard Spahr LLP from 1997 to 1998. Employed by the Company in 1998.
Jay G. Martin
 
63
 
Vice President, Chief Compliance Officer and Senior Deputy General Counsel of the Company since 2004. Shareholder at Winstead Sechrest & Minick P.C. from 2001 to 2004. Employed by the Company in 2004.
Derek Mathieson
 
44
 
Chief Strategy Officer of the Company since October 2013. President Western Hemisphere Operations from 2012 to 2013. President, Products and Technology from May 2009 to January 2012. Chief Technology and Marketing Officer of the Company from December 2008 to May 2009. Employed by the Company in 2008.


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Khaled Nouh
 
47
 
President, Middle East and Asia Pacific Region of the Company since October 2013. President, Middle East Region of the Company from 2009 to 2013. Vice President Integrated Project Management Middle East at Schlumberger from 2008 to 2009. Various other positions at Schlumberger from 1994 to 2008. Employed by the Company in 2009.
Mario Ruscev
 
58
 
Vice President and Chief Technology Officer of the Company since August 2012. Chief Executive Officer of Geotech Seismic Services from January 2012 to August 2012. Chief Executive Officer of FormFactor from 2008 to 2010. Various positions at Schlumberger for 20 years. Employed by the Company in 2012.
Arthur L. Soucy
 
52
 
President, Europe, Africa and Russia Caspian Region of the Company since 2013. President, Global Products and Services from 2012 to 2013. Vice President Supply Chain of the Company from April 2009 to January 2012. Vice President, Global Supply Chain for Pratt and Whitney from 2007 to 2009. Employed by the Company in 2009.
Richard Ward
 
46
 
President, Global Products and Services of the Company since December 2014. President of Completions and Wellbore Intervention of the Company from October 2013 until December 2014, President, Completions and Production from June 2012 until October 2013, Region President for Asia Pacific from 2009 to 2012, Vice President for Baker Oil Tools in the Middle East Asia Pacific region from 2007 to 2009. Various positions within the Company from 1991 to 2007. Employed by the Company in 1991.
Richard L. Williams
 
59
 
President, North America Region of the Company since October 2013. President, U.S. Region from November 2012 to October 2013 and President, Gulf of Mexico Region from 2009 to 2012. Various executive positions within the Company from 1975 to 2009. Employed by the Company in 1975.
ENVIRONMENTAL MATTERS
We are committed to the health and safety of people, protection of the environment and compliance with laws, regulations and our policies. Our past and present operations include activities that are subject to extensive domestic (including U.S. federal, state and local) and international regulations with regard to air, land and water quality and other environmental matters. We believe we are in substantial compliance with these regulations. Regulation in this area continues to evolve, and changes in standards of enforcement of existing regulations, as well as the enactment and enforcement of new legislation, may require us and our customers to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation. Our environmental compliance expenditures and our capital costs for environmental control equipment may change accordingly.
We are involved in voluntary remediation projects at some of our present and former manufacturing locations or other facilities, the majority of which relate to properties no longer actively used in operations. On rare occasions, remediation activities are conducted as specified by a government agency-issued consent decree or agreed order. Estimated remediation costs are accrued using currently available facts, existing environmental permits, technology and presently enacted laws and regulations. We record accruals when it is probable that we will be obligated to pay amounts for environmental site evaluation, remediation or related activities, and such amounts can be reasonably estimated. In general, we seek to accrue costs for the most likely scenario, where known. Accruals are recorded even if significant uncertainties exist over the ultimate cost of the remediation. Ongoing environmental compliance costs, such as obtaining environmental permits, installation of pollution control equipment and waste disposal, are expensed as incurred.
The Comprehensive Environmental Response, Compensation and Liability Act (known as “Superfund”) imposes liability for the release of a “hazardous substance” into the environment. Superfund liability is imposed without regard to fault, even if the waste disposal was in compliance with laws and regulations. The U.S. Environmental Protection Agency (the “EPA”) and appropriate state agencies supervise investigative and cleanup activities at Superfund sites. We have been identified as a potentially responsible party (“PRP”) in remedial activities related to various Superfund sites, and we accrue our share of the estimated remediation costs of the site based on the ratio of the estimated volume of waste we contributed to the site to the total estimated volume of waste disposed at the site. PRPs in Superfund actions have joint and several liability for all costs of remediation. Accordingly, a PRP may be required to pay more than its proportional share of such costs. For some projects, it is not possible to quantify our ultimate exposure because the projects are either in the investigative or early remediation stage, or allocation information is not yet available. However, based upon current information, we do not believe that probable or reasonably possible expenditures in connection with the sites are likely to have a material adverse effect on our


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consolidated financial statements because we have recorded adequate reserves to cover the estimate we presently believe will be our ultimate liability in the matter. Further, other PRPs involved in the sites have substantial assets and may reasonably be expected to pay their share of the cost of remediation, and, in some circumstances, we have insurance coverage or contractual indemnities from third parties to cover a portion of the ultimate liability.
Based upon current information, we believe that our overall compliance with environmental regulations, including routine environmental compliance costs and capital expenditures for environmental control equipment, will not have a material adverse effect on our consolidated financial statements. Our total accrual for environmental remediation is $35 million and $34 million, which includes accruals of $3 million and $4 million for the various Superfund sites, at December 31, 2014 and 2013, respectively.
We are subject to various other governmental proceedings and regulations, including foreign regulations, relating to environmental matters, but we do not believe that any of these matters are likely to have a material adverse effect on our consolidated financial statements. We continue to focus on reducing future environmental liabilities by maintaining appropriate company standards and improving our assurance programs.
ITEM 1A. RISK FACTORS
An investment in our common stock involves various risks. When considering an investment in Baker Hughes, one should carefully consider all of the risk factors described below, as well as other information included and incorporated by reference in this report. There may be additional risks, uncertainties and matters not listed below, that we are unaware of, or that we currently consider immaterial. Any of these may adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in Baker Hughes.
Risk Factors Related to the Worldwide Oil and Natural Gas Industry
Our business is focused on providing products and services to the worldwide oil and natural gas industry; therefore, our risk factors include those factors that impact, either positively or negatively, the markets for oil and natural gas. Expenditures by our customers for exploration, development and production of oil and natural gas are based on their expectations of future hydrocarbon demand, their expectations for future energy prices, the risks associated with developing the reserves, their ability to finance exploration for and development of reserves, and the future value of the reserves. Their evaluation of the future value is based, in part, on their expectations for global demand, global supply, spare productive capacity, inventory levels and other factors that influence oil and natural gas prices. The key risk factors we believe are currently influencing the worldwide oil and natural gas markets are discussed below.
Demand for oil and natural gas is subject to factors beyond our control, which may adversely affect our operating results. Changes in the global economy could impact our customers’ spending levels and our revenue and operating results.
Demand for oil and natural gas, as well as the demand for our services, is highly correlated with global economic growth, and in particular by the economic growth of countries such as the U.S., India, China, and developing countries in Asia and the Middle East who are either significant users of oil and natural gas or whose economies are experiencing the most rapid economic growth compared to the global average. Weakness or deterioration of the global economy or credit markets could reduce our customers’ spending levels and reduce our revenue and operating results. Incremental weakness in global economic activity, particularly in China, India, Europe, the Middle East and developing countries in Asia, could reduce demand for oil and natural gas and result in lower oil and natural gas prices. Incremental strength in global economic activity in such areas will create more demand for oil and natural gas and support higher oil and natural gas prices. In addition, demand for oil and natural gas could be impacted by environmental regulation, including cap and trade legislation, regulation of hydraulic fracturing, carbon taxes and the cost for carbon capture and sequestration related regulations.
Supply of oil and natural gas is subject to factors beyond our control, which may adversely affect our operating results.
Productive capacity for oil and natural gas is dependent on our customers’ decisions to develop and produce oil and natural gas reserves and on the regulatory environment in which our customers and we operate. The ability to produce oil and natural gas can be affected by the number and productivity of new wells drilled and completed, as


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well as the rate of production and resulting depletion of existing wells. Advanced technologies, such as horizontal drilling and hydraulic fracturing, improve total recovery but also result in a more rapid production decline and may become subject to more stringent regulation in the future.
Productive capacity in excess of demand (“spare productive capacity”) is also an important factor influencing energy prices and spending by oil and natural gas exploration companies. Spare productive capacity and oil and natural gas storage inventory levels are an indicator of the relative balance between supply and demand. High or increasing storage, inventories, or spare productive capacity generally indicate that supply is exceeding demand and that energy prices are likely to soften. Low or decreasing storage, inventories, or spare productive capacity are generally an indicator that demand is growing faster than supply and that energy prices are likely to rise.
Access to prospects is also important to our customers and such access may be limited because host governments do not allow access to the reserves. Government regulations and the costs incurred by oil and natural gas exploration companies to conform to and comply with government regulations may also limit the quantity of oil and natural gas that may be economically produced.
Supply can also be impacted by the degree to which individual Organization of Petroleum Exporting Countries (“OPEC”) nations and other large oil and natural gas producing countries, including, but not limited to, Norway and Russia, are willing and able to control production and exports of oil, to decrease or increase supply and to support their targeted oil price while meeting their market share objectives. Any of these factors could affect the supply of oil and natural gas and could have a material effect on our results of operations.
Volatility of oil and natural gas prices can adversely affect demand for our products and services.
Volatility in oil and natural gas prices can also impact our customers’ activity levels and spending for our products and services. Current energy prices are important contributors to cash flow for our customers and their ability to fund exploration and development activities. Over the past several months oil prices have declined significantly due in large part to increasing supplies, weakening demand growth and OPEC's position to not cut production. Expectations about future prices and price volatility are important for determining future spending levels.
Lower oil and natural gas prices generally lead to decreased spending by our customers. While higher oil and natural gas prices generally lead to increased spending by our customers, sustained high energy prices can be an impediment to economic growth, and can therefore negatively impact spending by our customers. Our customers also take into account the volatility of energy prices and other risk factors by requiring higher returns for individual projects if there is higher perceived risk. Any of these factors could affect the demand for oil and natural gas and could have a material effect on our results of operations.
Our customers’ activity levels and spending for our products and services and ability to pay amounts owed us could be impacted by the ability of our customers to access equity or credit markets.
Our customers’ access to capital is dependent on their ability to access the funds necessary to develop economically attractive projects based upon their expectations of future energy prices, required investments and resulting returns. Limited access to external sources of funding has and may continue to cause customers to reduce their capital spending plans to levels supported by internally-generated cash flow. In addition, a reduction of cash flow resulting from declines in commodity prices, a reduction in borrowing bases under reserve-based credit facilities or the lack of available debt or equity financing may impact the ability of our customers to pay amounts owed to us.


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Seasonal and weather conditions could adversely affect demand for our services and operations.
Variation from normal weather patterns, such as cooler or warmer summers and winters, can have a significant impact on demand. Adverse weather conditions, such as hurricanes in the Gulf of Mexico, may interrupt or curtail our operations, or our customers’ operations, cause supply disruptions and result in a loss of revenue and damage to our equipment and facilities, which may or may not be insured. Extreme winter conditions in Canada, Russia or the North Sea may interrupt or curtail our operations, or our customers’ operations, in those areas and result in a loss of revenue.
Risk Factors Related to Our Business
Our expectations regarding our business are affected by the following risk factors and the timing of any of these risk factors:
We operate in a highly competitive environment, which may adversely affect our ability to succeed.
We operate in a highly competitive environment for marketing oilfield services and securing equipment and trained personnel. Our ability to continually provide competitive products and services can impact our ability to defend, maintain or increase prices for our products and services, maintain market share, and negotiate acceptable contract terms with our customers. In order to be competitive, we must provide new technologies, reliable products and services that perform as expected and that create value for our customers, and successfully recruit, train and retain competent personnel. Our investments in new technologies and property, plant and equipment may not provide competitive returns. Our ability to defend, maintain or increase prices for our products and services is in part dependent on the industry’s capacity relative to customer demand, and on our ability to differentiate the value delivered by our products and services from our competitors’ products and services.
Managing development of competitive technology and new product introductions on a forecasted schedule and at forecasted costs can impact our financial results. Development of competing technology that accelerates the obsolescence of any of our products or services can have a detrimental impact on our financial results.
We may be disadvantaged competitively and financially by a significant movement of exploration and production operations to areas of the world in which we are not currently active.
The high cost or unavailability of infrastructure, materials, equipment, supplies and personnel, particularly in periods of rapid growth, could adversely affect our ability to execute our operations on a timely basis.
Our manufacturing operations are dependent on having sufficient raw materials, component parts and manufacturing capacity available to meet our manufacturing plans at a reasonable cost while minimizing inventories. Our ability to effectively manage our manufacturing operations and meet these goals can have an impact on our business, including our ability to meet our manufacturing plans and revenue goals, control costs, and avoid shortages of raw materials and component parts. Raw materials and components of particular concern include steel alloys (including chromium and nickel), titanium, barite, beryllium, copper, lead, tungsten carbide, synthetic and natural diamonds, gels, sand and other proppants, printed circuit boards and other electronic components and hydrocarbon-based chemical feed stocks. Our ability to repair or replace equipment damaged or lost in the well can also impact our ability to service our customers. A lack of manufacturing capacity could result in increased backlog, which may limit our ability to respond to orders with short lead times.
People are a key resource to developing, manufacturing and delivering our products and services to our customers around the world. Our ability to manage the recruiting, training, retention and efficient usage of the highly skilled workforce required by our plans and to manage the associated costs could impact our business. A well-trained, motivated workforce has a positive impact on our ability to attract and retain business. Periods of rapid growth present a challenge to us and our industry to recruit, train and retain our employees, while managing the impact of wage inflation and potential lack of available qualified labor in the markets where we operate.
Likewise, when there is a downturn in the economy or our markets, we may have to adjust our workforce to control costs and yet not lose our skilled and diverse workforce. Labor-related actions, including strikes, slowdowns and facility occupations can also have a negative impact on our business.


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Our business could be impacted by geopolitical and terrorism threats.
Geopolitical and terrorism risks continue to grow in a number of key countries where we do business. Geopolitical and terrorism risks could lead to, among other things, a loss of our investment in the country, impairment of the safety of our employees and impairment of our ability to conduct our operations.
Our business operations may be impacted by civil unrest, government expropriations and/or epidemic outbreaks.
In addition to other geopolitical and terrorism risks, civil unrest continues to grow in a number of key countries where we do business. Our ability to conduct business operations may be impacted by that civil unrest and our assets in these countries may also be subject to expropriation by governments or other parties involved in civil unrest. Epidemic outbreaks may also impact our business operations by, among other things, restricting travel to protect the health and welfare of our employees and decisions by our customers to curtail or stop operations in impacted areas.
Our business could be impacted by cybersecurity risks and threats.
Threats to our information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow and it is possible that breaches to our systems could go unnoticed for some period of time. Risks associated with these threats include, among other things, loss of intellectual property, impairment of our ability to conduct our operations, disruption of our customers’ operations, loss or damage to our customer data delivery systems, and increased costs to prevent, respond to or mitigate cybersecurity events.
Our failure to comply with the Foreign Corrupt Practices Act (“FCPA”) could have a negative impact on our ongoing operations.
Our ability to comply with the FCPA is dependent on the success of our ongoing compliance program, including our ability to continue to manage our agents and business partners, and supervise, train and retain competent employees. Our compliance program is also dependent on the efforts of our employees to comply with applicable law and the Baker Hughes Business Code of Conduct. We could be subject to sanctions and civil and criminal prosecution as well as fines and penalties in the event of a finding of a violation of the FCPA by us or any of our employees.
Compliance with and changes in laws could be costly and could affect operating results. In addition, government disruptions could negatively impact our ability to conduct our business.
We have operations in the U.S. and in more than 80 countries that can be impacted by expected and unexpected changes in the legal and business environments in which we operate. Compliance related issues could also limit our ability to do business in certain countries and impact our earnings. Changes that could impact the legal environment include new legislation, new regulations, new policies, investigations and legal proceedings and new interpretations of existing legal rules and regulations, in particular, changes in export control laws or exchange control laws, additional restrictions on doing business in countries subject to sanctions, and changes in laws in countries where we operate or intend to operate. In addition, government disruptions, such as a U.S. government shutdown, may delay or halt the granting and renewal of permits, licenses and other items required by us and our customers to conduct our business.
Changes in tax laws or tax rates, adverse positions taken by taxing authorities and tax audits could impact operating results.
Changes in tax laws or tax rates, the resolution of tax assessments or audits by various tax authorities, and the ability to fully utilize our tax loss carryforwards and tax credits could impact operating results. In addition, we may periodically restructure our legal entity organization. If taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective tax rate could be materially impacted.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. These audits may result in assessment of additional


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taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of any tax matter involves uncertainties and there are no assurances that the outcomes will be favorable.
Changes in and compliance with restrictions or regulations on offshore drilling may adversely affect our business and operating results and reduce the need for our services in those areas.
Legislation and regulation in the U.S. and other parts of the world of the offshore oil and natural gas industry may result in substantial increases in costs or delays in drilling or other operations in the Gulf of Mexico and other parts of the world, oil and natural gas projects becoming potentially non-economic, and a corresponding reduced demand for our services. If the U.S. or other countries where we operate, enact stricter restrictions on offshore drilling or further regulate offshore drilling or contracting services operations, higher operating costs could result and adversely affect our business and operating results.
If the Company were to be involved in a future incident similar to the 2010 Deepwater Horizon accident, the Company could suffer significant financial losses that could severely impair the Company. Protections available to the Company through contractual terms and insurance coverage may not be sufficient to protect the Company in the event we were involved in that type of an incident.
Compliance with, and rulings and litigation in connection with, environmental regulations and the environmental impacts of our or our customers’ operations may adversely affect our business and operating results.
Our business is impacted by material changes in environmental laws, rulings and litigation. Our expectations regarding our compliance with environmental laws and our expenditures to comply with environmental laws, including (without limitation) our capital expenditures for environmental control equipment, are only our forecasts regarding these matters. These forecasts may be substantially different from actual results, which may be affected by factors such as: changes in law that impose new restrictions on air emissions, wastewater management, waste disposal, hydraulic fracturing, or wetland and land use practices; more stringent enforcement of existing environmental regulations; a change in our allocation or other unexpected, adverse outcomes with respect to sites where we have been named as a PRP, including (without limitation) Superfund sites; the discovery of other sites where additional expenditures may be required to comply with environmental legal obligations; and the accidental discharge of hazardous materials.
International, national, and state governments and agencies continue to evaluate and promulgate legislation and regulations that are focused on restricting emissions commonly referred to as greenhouse gas (“GHG”) emissions. In the U.S., the EPA has taken steps to regulate GHG emissions as air pollutants under the Clean Air Act. The EPA’s Greenhouse Gas Reporting Rule requires monitoring and reporting of GHG emissions from, among others, certain mobile and stationary GHG emission sources in the oil and natural gas industry, which in turn may include data from certain of our wellsite equipment and operations. In addition, the U.S. government has announced plans to issue proposed rules setting GHG emission standards for the oil and natural gas industry.  We are unable to predict whether the proposed changes in laws or regulations will ultimately occur or what they will ultimately require, and accordingly, we are unable to assess the potential financial or operational impact they may have on our business.
Other developments focused on restricting GHG emissions include the United Nations Framework Convention on Climate Change, which includes the Kyoto Protocol; the European Union Emission Trading System; the United Kingdom's Carbon Reduction Commitment which affects more than 40 Baker Hughes facilities; and, in the U.S., the Regional Greenhouse Gas Initiative, the Western Regional Climate Action Initiative, and various state programs implementing California Assembly Bill 32.
Current or future legislation, regulations and developments may curtail production and demand for hydrocarbons such as oil and natural gas in areas of the world where our customers operate and thus adversely affect future demand for our services, which may in turn adversely affect future results of operations.


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Demand for pressure pumping services could be reduced or eliminated by governmental regulation or a change in the law.
Some federal, state and foreign governmental bodies have adopted laws and regulations or are considering legislative and regulatory proposals that, if signed into law, would among other things require the public disclosure of chemicals used in hydraulic fracturing operations in more detail than the Company currently provides and would subject hydraulic fracturing to more stringent regulation with respect to, for example, construction standards for wells intended for hydraulic fracturing, certifications concerning the conduct of hydraulic fracturing operations, management of flowback waters from hydraulic fracturing operations, or other measures intended to prevent operational hazards. Such federal, state or foreign legislation and/or regulations could impair our operations, increase our operating costs, and/or greatly reduce or eliminate demand for the Company’s hydraulic fracturing services. The EPA and other governmental bodies are studying hydraulic fracturing operations. Government actions relating to the development of unconventional oil and natural gas resources may impede the development of these resources by our customers, delaying or reducing the demand for our services. We are unable to predict whether the proposed changes in laws or regulations or any other governmental proposals or responses will ultimately occur, and accordingly, we are unable to assess the potential financial or operational impact they may have on our business.
Uninsured claims and litigation against us could adversely impact our operating results.
We could be impacted by the outcome of pending litigation as well as unexpected litigation or proceedings. We have insurance coverage against operating hazards, including product liability claims and personal injury claims related to our products, to the extent deemed prudent by our management and to the extent insurance is available; however, no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future claims and litigation. This insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The insurance does not cover damages from breach of contract by us or based on alleged fraud or deceptive trade practices. In addition, the following risks apply with respect to our insurance coverage:
we may not be able to continue to obtain insurance on commercially reasonable terms;
we may be faced with types of liabilities that will not be covered by our insurance;
our insurance carriers may not be able to meet their obligations under the policies; or
the dollar amount of any liabilities may exceed our policy limits.
Whenever possible, we obtain agreements from customers that limit our liability. However, state law, laws or public policy in countries outside the U.S., or the negotiated terms of the agreement with the customer may not recognize those limitations of liability and/or limit the customer’s indemnity obligations to the Company. In addition, insurance and customer agreements do not provide complete protection against losses and risks from an event like a well control failure that can lead to property damage, personal injury, death or the discharge of hazardous materials into the environment. Our results of operations could be adversely affected by unexpected claims not covered by insurance.
Control of oil and natural gas reserves by state-owned oil companies may impact the demand for our services and create additional risks in our operations.
Much of the world’s oil and natural gas reserves are controlled by state-owned oil companies. State-owned oil companies may require their contractors to meet local content requirements or other local standards, such as joint ventures, that could be difficult or undesirable for the Company to meet. The failure to meet the local content requirements and other local standards may adversely impact the Company’s operations in those countries. In addition, our ability to work with state-owned oil companies is subject to our ability to negotiate and agree upon acceptable contract terms.
Providing services on an integrated or turnkey basis could require the Company to assume additional risks.
Many state-owned oil companies and other operators may require integrated contracts or turnkey contracts and the Company may choose to provide services outside its core business. Providing services on an integrated or


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turnkey basis generally subjects the Company to additional risks, such as costs associated with unexpected delays or difficulties in drilling or completion operations and risks associated with subcontracting arrangements.
Currency fluctuations or devaluations may impact our operating results.
Fluctuations or devaluations in foreign currencies relative to the U.S. Dollar can impact our revenue and our costs of doing business. Most of our products and services are sold through contracts denominated in U.S. Dollars or local currency indexed to U.S. Dollars; however, some of our revenue, local expenses and manufacturing costs are incurred in local currencies and therefore changes in the exchange rates between the U.S. Dollar and foreign currencies can increase or decrease our revenue and expenses reported in U.S. Dollars and may impact our results of operations.
Changes in economic and/or market conditions may impact our ability to borrow and/or cost of borrowing.
The condition of the capital markets and equity markets in general can affect the price of our common stock and our ability to obtain financing, if necessary. If the Company’s credit rating is downgraded, this would increase borrowing costs under our credit facility and commercial paper program, as well as the cost of renewing or obtaining, or make it more difficult to renew or obtain or issue new debt financing.
The Company has a significant concentration of its business in North America.
During the year ended December 31, 2014, approximately one-half of our revenue and operating income were attributable to North America. In North America, a decrease in demand for energy or in oil and natural gas exploration and production, or an increase in competition could result in a significant adverse effect on our operating results.
Risk Factors Related to the Pending Merger with Halliburton
Our expectations regarding our business may be impacted by the following risk factors related to the pending merger with Halliburton:
The pendency of our merger with Halliburton could adversely affect our business.
In connection with our pending merger with Halliburton, some of our suppliers and customers may delay or defer sales and purchasing decisions, which could negatively impact revenues, earnings and cash flows regardless of whether the merger is completed. We have agreed in the merger agreement to refrain from taking certain actions with respect to our business and financial affairs during the pendency of the merger, which restrictions could be in place for an extended period of time if completion of the merger is delayed and could adversely impact our financial condition, results of operations or cash flows. The process of seeking to accomplish the merger could also divert the focus of our management from pursuing other opportunities that could be beneficial to us.
We may be unable to attract and retain key employees during the pendency of our merger with Halliburton.
In connection with our pending merger with Halliburton, current and prospective employees of Baker Hughes may experience uncertainty about their future roles with the combined company following the merger, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the merger. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the merger.
The ability of Baker Hughes and Halliburton to complete the merger is subject to various closing conditions, including the approval of Baker Hughes and Halliburton stockholders and the receipt of consents and approvals from governmental authorities, which may impose conditions that could adversely affect Baker Hughes or cause the merger to be abandoned.
To complete the merger, Baker Hughes stockholders must adopt the merger agreement, and Halliburton stockholders must approve the issuance of shares of Halliburton common stock as contemplated by the merger


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agreement. In addition, each of Baker Hughes and Halliburton must make certain filings with and obtain certain other approvals and consents from various federal and state governmental and regulatory authorities.
Baker Hughes and Halliburton have not yet obtained the regulatory clearances, consents and approvals required to complete the merger. Governmental or regulatory agencies could seek to block or challenge the merger or could impose restrictions they deem necessary or desirable in the public interest as a condition to approving the merger. Baker Hughes and Halliburton will be unable to complete the merger until the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 have expired or been terminated and approvals are received from the European Commission and various other governmental authorities. Regulatory authorities may impose certain requirements or obligations as conditions for their approval. The merger agreement may require Baker Hughes and/or Halliburton to accept conditions from these regulators that could adversely impact the combined company. If the required regulatory clearances are not received, or they are not received on terms that satisfy the conditions set forth in the merger agreement, then neither Baker Hughes nor Halliburton will be obligated to complete the merger.
Additionally, even after the statutory waiting period under the antitrust laws and even after completion of the merger, governmental authorities could seek to block or challenge the merger as they deem necessary or desirable in the public interest. In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. Baker Hughes or Halliburton may not prevail and may incur significant costs in defending or settling any action under the antitrust laws.
Pending litigation against Baker Hughes and Halliburton could result in an injunction preventing the consummation of the merger or may adversely affect our business, financial condition or results of operations.
Following the announcement of the merger, various lawsuits have been filed against Baker Hughes, the members of the Baker Hughes Board of Directors and Halliburton, alleging breaches of various fiduciary duties by the members of the Baker Hughes Board of Directors during the merger negotiations and by entering into the merger agreement and approving the merger and alleging that Baker Hughes aided and abetted such alleged breaches of fiduciary duties. Among other remedies, the plaintiffs seek to enjoin the merger and rescind the merger agreement, in addition to certain unspecified damages and reimbursement of costs. While we believe these suits are without merit and intend to vigorously defend against such claims, the outcome of any such litigation is inherently uncertain. The defense, outcome or settlement of any lawsuit or claim may adversely affect our business, financial condition or results of operation.
Failure to complete our merger with Halliburton could negatively affect our stock price and our future business and financial results.
If our merger with Halliburton is not completed, our ongoing business may be adversely affected and will be subject to several risks, including the following:
the attention of our management may have been diverted to the merger instead of on our operations and pursuit of other opportunities that may have been beneficial to us;
resulting negative customer perception could adversely affect our ability to compete for, or to win, new and renewal business in the marketplace;
having to pay certain significant costs relating to the merger without receiving the benefits of the merger, including in certain circumstances a termination fee of $1 billion to Halliburton; and
the trading price of Baker Hughes common stock may decline to the extent that the current trading price reflects a market assumption that the merger will be completed.
Following our merger with Halliburton, the combined company may encounter difficulties in integrating the businesses of Baker Hughes and Halliburton and realizing the anticipated benefits of the merger.
The merger involves the combination of two companies that currently operate as independent public companies. The combined company will be required to devote management attention and resources to integrating its business practices and operations, and prior to the merger, management attention and resources will be required


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to plan for such integration. Potential difficulties the combined company may encounter in the integration process include the following:
the inability to successfully integrate the respective businesses of Baker Hughes and Halliburton in a manner that permits the combined company to achieve the cost savings and operating synergies anticipated to result from the merger, which could result in the anticipated benefits of the merger not being realized partly or wholly in the time frame currently anticipated or at all;
lost sales and customers as a result of certain customers of either or both of the two companies deciding not to do business with the combined company, or deciding to decrease their amount of business in order to reduce their reliance on a single company;
integrating personnel from the two companies while maintaining focus on providing consistent, high quality products and services;
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and
performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own or lease numerous properties throughout the world. We consider our manufacturing plants, equipment assembly, maintenance and overhaul facilities, grinding plants, drilling fluids and chemical processing centers, and primary research and technology centers to be our principal properties. The following sets forth the location of our principal owned or leased facilities for our oilfield operations:

North America:
 
Houston, Pasadena, Tomball, and The Woodlands, Texas; Broken Arrow, Claremore, Tulsa and Sand Springs, Oklahoma; Bossier City, Broussard, and Lafayette, Louisiana - all located in the United States; Leduc, Canada
Europe/Africa/Russia Caspian:
 
Aberdeen, Scotland; Liverpool, England; Celle, Germany; Tananger, Norway; Port Harcourt, Nigeria; Tyumen and Novosibirsk, Russia
Middle East/Asia Pacific:
 
Dubai, United Arab Emirates; Dhahran, Saudi Arabia; Singapore, Singapore; Chonburi, Thailand
Principal properties for the Industrial Services segment include locations in Houston, Texas and Barnsdall, Oklahoma. Industrial Services also co-locates with our oilfield operations in Sand Springs, Oklahoma; Pasadena, Texas; and Liverpool, England.
We own or lease numerous other facilities such as service centers, workshops and sales and administrative offices throughout the geographic regions in which we operate. We also have a significant investment in service vehicles, tools and manufacturing and other equipment. All of our owned properties are unencumbered. We believe that our facilities are well maintained and suitable for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS
We are subject to a number of lawsuits and claims arising out of the conduct of our business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. We record a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, including accruals for self-insured losses which are calculated based on historical claim data, specific loss development factors and other information. A range of total possible losses for all litigation matters cannot be reasonably estimated. Based on a consideration of all relevant facts and circumstances, we do not expect the ultimate outcome of any currently pending lawsuits or claims against us will have a material adverse effect on our financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters.


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We insure against risks arising from our business to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending or future legal proceedings or other claims. Most of our insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.
The following lawsuits have been filed in Delaware in connection with our pending merger with Halliburton:
On November 24, 2014, Gary Molenda, a purported shareholder of the Company, filed a class action lawsuit in the Court of Chancery of the State of Delaware ("Delaware Chancery Court") against Baker Hughes, the Company’s Board of Directors, Halliburton, and Red Tiger LLC, a wholly owned subsidiary of Halliburton (“Red Tiger” and together with all defendants, “Defendants”) styled Gary R. Molenda v. Baker Hughes, Inc., et al., Case No. 10390-CB.
On November 26, 2014, a second purported shareholder of the Company, Booth Family Trust, filed a substantially similar class action lawsuit in Delaware Chancery Court.
On December 1, 2014, New Jersey Building Laborers Annuity Fund and James Rice, two additional purported shareholders of the Company, filed substantially similar class action lawsuits in Delaware Chancery Court.
On December 10, 2014, a fifth purported shareholder of the Company, Iron Workers Mid-South Pension Fund, filed another substantially similar class action lawsuit in the Delaware Chancery Court, and
On December 24, 2014, a sixth purported shareholder of the Company, Annette Shipp, filed another substantially similar class action lawsuit in the Delaware Chancery Court.
All of the lawsuits make substantially similar claims.  The plaintiffs generally allege that the members of the Company’s Board of Directors breached their fiduciary duties to our shareholders in connection with the merger negotiations by entering into the merger agreement and by approving the merger, and that the Company, Halliburton, and Red Tiger aided and abetted the purported breaches of fiduciary duties.  More specifically, the lawsuits allege that the merger agreement provides inadequate consideration to our shareholders, that the process resulting in the merger agreement was flawed, that the Company’s directors engaged in self-dealing, and that certain provisions of the merger agreement improperly favor Halliburton and Red Tiger, precluding or impeding third parties from submitting potentially superior proposals, among other things.  The lawsuit filed by Annettee Shipp also alleges that our Board of Directors failed to disclose material information concerning the proposed merger in the preliminary registration statement on Form S-4.  On January 7, 2015, James Rice amended his complaint, adding similar allegations regarding the disclosures in the preliminary registration statement on Form S-4.  The lawsuits seek unspecified damages, injunctive relief enjoining the merger, and rescission of the merger agreement, among other relief.  On January 23, 2015, the Delaware lawsuits were consolidated under the caption In re Baker Hughes Inc. Stockholders Litigation, Consolidated C.A. No. 10390-CB. Pursuant to the Court’s consolidation order, plaintiffs filed a consolidated complaint on February 4, 2015, which alleges substantially similar claims and seeks substantially similar relief to that raised in the six individual complaints, except that while Baker Hughes is named as a defendant, no claims are asserted against the Company.    
On November 26, 2014, a seventh class action challenging the merger was filed by a purported Company shareholder in the United States District Court for the Southern District of Texas (Houston Division).  The lawsuit, styled Marc Rovner v. Baker Hughes Inc., et al., Cause No. 4:14-cv-03416, asserts claims against the Company, most of our current Board of Directors, Halliburton, and Red Tiger.  The lawsuit asserts substantially similar claims and seeks substantially similar relief as that sought in the Delaware lawsuits.  The Defendants are currently scheduled to respond to the complaint on February 13, 2015.
On October 9, 2014, our subsidiary filed a Request for Arbitration against a customer before the London Court of International Arbitration, pursuing claims for the non-payment of invoices for goods and services provided in amount provisionally quantified to exceed $67.9 million. In our Request for Arbitration, we also noted that invoices in an amount exceeding $57 million had been issued to the customer, and would be added to the claim in the event that they became overdue. The due date for payment of all of these invoices has now passed. On November 6, 2014, the customer filed its Response and Counterclaim, denying liability and counterclaiming damages for breach of contract of approximately $182 million. We deny any liability to the customer and intend to pursue our claims against the customer and defend the claims made under the counterclaim. No timetable for the conduct of the arbitration has yet been established.


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During 2014, we investigated customer notifications related to a possible equipment failure in a natural gas storage system in the Europe/Africa/Russia Caspian region, which includes certain of our products. We are currently investigating the cause of the possible failure and, if necessary, possible repair and replacement options for our products. Similar products were utilized in other natural gas storage systems for this and other customers. At this time, we are not able to predict whether our products will need to be repaired or replaced and are not able to reasonably estimate the impact, if any, such repairs or replacements or other damages would have on our financial position, results of operations or cash flows.
We are a defendant in various labor claims including the following matters. On April 28, 2014, a collective action lawsuit alleging that we failed to pay class of workers overtime in compliance with the Fair Labor Standards Act ("FLSA") was filed titled Michael Ciamillo, individually, etc., et al. vs. Baker Hughes Incorporated in the U.S. District Court for the District of Alaska (“Ciamillo”). During the fourth quarter of 2014, the parties agreed to settle the Ciamillo lawsuit, including certain state law claims, for $5 million, subject to final court approval. On December 10, 2013, a class and collective action lawsuit alleging that we failed to pay a nationwide class of workers overtime in compliance with the FLSA and certain state laws was filed titled Lea et al. v. Baker Hughes, Inc. in the U.S. District Court for the Southern District of Texas, Galveston Division ("Lea"). During the second quarter of 2014, the parties agreed to settle the Lea lawsuit, subject to final court approval, and we recorded a charge of $62 million, which includes the Lea settlement amount and associated costs and an amount for settlement of another wage and hour lawsuit. On October 21, 2013, a collective action lawsuit alleging that we failed to pay a class of workers overtime in compliance with the FLSA was filed titled Zamora et al. v. Baker Hughes Incorporated in the U.S. District Court for the Southern District of Texas, Corpus Christi Division (“Zamora”). In October of 2014, the parties agreed to settle the Zamora lawsuit for an amount that was not material to our financial position, results of operations or cash flows.
On May 30, 2013, we received a Civil Investigative Demand ("CID") from the U.S. Department of Justice ("DOJ") pursuant to the Antitrust Civil Process Act. The CID seeks documents and information from us for the period from May 29, 2011 through the date of the CID in connection with a DOJ investigation related to pressure pumping services in the U.S. We are working with the DOJ to provide the requested documents and information. We are not able to predict what action, if any, might be taken in the future by the DOJ or other governmental authorities as a result of the investigation.

We were among several unrelated companies who received a subpoena from the Office of the New York Attorney General, dated June 17, 2011. The subpoena we received sought information and documents relating to, among other things, natural gas development and hydraulic fracturing, and we have responded.
ITEM 4. MINE SAFETY DISCLOSURES
Our barite mining operations, in support of our drilling fluids products and services business, are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this report.


19


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock, $1.00 par value per share, is principally traded on the New York Stock Exchange. Our common stock is also traded on the SIX Swiss Exchange. As of February 19, 2015, there were approximately 9,727 stockholders of record.
For information regarding quarterly high and low sales prices on the New York Stock Exchange for our common stock during the two years ended December 31, 2014, and information regarding dividends declared on our common stock during the two years ended December 31, 2014, see Note 15. "Quarterly Data (Unaudited)" of the Notes to Consolidated Financial Statements in Item 8 herein.
The following table contains information about our purchases of equity securities during the fourth quarter of 2014.
Issuer Purchases of Equity Securities

Period
Total Number
of Shares
Purchased
(1)
 
Average
Price Paid
Per Share (1)
 
Total Number of
Shares Purchased as
Part of a Publicly
Announced Program (2)
 
Maximum Dollar Value
of Shares that May Yet Be
Purchased Under the Program (3)
October 1-31, 2014
1,102

 
$
52.59

 
 
$
1,049,832,435

November 1-30, 2014
8,998

 
63.51

 
 
$
1,049,832,435

December 1-31, 2014
15,129

 
55.24

 
 
$
1,049,832,435

Total
25,229

 
$
58.07

 
 
 
(1) 
Represents shares purchased from employees to satisfy the tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock units.
(2) 
There were no repurchases during the fourth quarter of 2014 under our previously announced purchase program.
(3) 
Under the merger agreement with Halliburton, as described in Note 2. "Halliburton Merger Agreement" of the Notes to Consolidated Financial Statements in Item 8 herein, we have generally agreed not to repurchase any shares of our common stock while the merger is pending.


20


Corporate Performance Graph
The following graph compares the yearly change in our cumulative total stockholder return on our common stock (assuming reinvestment of dividends into common stock at the date of payment) with the cumulative total return on the published Standard & Poor’s (“S&P”) 500 Stock Index and the cumulative total return on the S&P 500 Oil and Gas Equipment and Services Index over the preceding five-year period.
Comparison of Five-Year Cumulative Total Return *
Baker Hughes Incorporated; S&P 500 Index and S&P 500 Oil and Gas Equipment and Services Index
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Baker Hughes
$
100.00

 
$
143.07

 
$
123.00

 
$
104.77

 
$
143.48

 
$
147.04

S&P 500 Index
100.00

 
115.03

 
117.47

 
136.19

 
180.20

 
204.76

S&P 500 Oil and Gas Equipment and Services Index
100.00

 
139.22

 
123.05

 
123.09

 
160.80

 
148.23

* Total return assumes reinvestment of dividends on a quarterly basis.
The comparison of total return on investment (change in year-end stock price plus reinvested dividends) assumes that $100 was invested on December 31, 2009 in Baker Hughes common stock, the S&P 500 Index and the S&P 500 Oil and Gas Equipment and Services Index.
The corporate performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that Baker Hughes specifically incorporates it by reference into such filing.



21


ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data, both contained herein.

 
Year Ended December 31,
(In millions, except per share amounts)
2014 (1)

 
2013 (1)

 
2012 (1)

 
2011 (1)

 
2010 (1)
Revenue
$
24,551

 
$
22,364

 
$
21,361

 
$
19,831

 
$
14,414

Operating income (2)
2,859

 
1,949

 
2,192

 
2,600

 
1,417

Non-operating expense, net
(232
)
 
(234
)
 
(210
)
 
(261
)
 
(135
)
Income before income taxes
2,627

 
1,715

 
1,982

 
2,339

 
1,282

Income taxes (3)
(896
)
 
(612
)
 
(665
)
 
(596
)
 
(463
)
Net income
1,731

 
1,103

 
1,317

 
1,743

 
819

Net income attributable to noncontrolling interests
(12
)
 
(7
)
 
(6
)
 
(4
)
 
(7
)
Net income attributable to Baker Hughes
$
1,719

 
$
1,096

 
$
1,311

 
$
1,739

 
$
812

Per share of common stock:
 
 
 
 
 
 
 
 
 
Net income attributable to Baker Hughes:
 
 
 
 
 
 
 
 
 
Basic
$
3.93

 
$
2.47

 
$
2.98

 
$
3.99

 
$
2.06

Diluted
3.92

 
2.47

 
2.97

 
3.97

 
2.06

Dividends
0.64

 
0.60

 
0.60

 
0.60

 
0.60

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
1,740

 
$
1,399

 
$
1,015

 
$
1,050

 
$
1,706

Working capital (current assets minus current liabilities)
7,408

 
6,717

 
6,293

 
6,295

 
5,568

Total assets
28,827

 
27,934

 
26,689

 
24,847

 
22,986

Long-term debt
3,913

 
3,882

 
3,837

 
3,845

 
3,554

Total equity
18,730

 
17,912

 
17,268

 
15,964

 
14,286

Notes To Selected Financial Data
(1) 
We acquired BJ Services Company ("BJ Services") on April 28, 2010, and accordingly, the financial results of BJ Services are included only from the date of acquisition.
(2) 
Operating income for 2011 includes a charge of $315 million before-tax ($220 million net of tax), the majority of which relates to the impairment associated with the decision to minimize the use of the BJ Services trade name.
(3) 
Income taxes for 2011 include a tax benefit of $214 million associated with the reorganization of certain foreign subsidiaries.



22


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data contained herein.
EXECUTIVE SUMMARY
Baker Hughes is a leading supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry, referred to as our oilfield operations. We manage our oilfield operations through four geographic segments consisting of North America, Latin America, Europe/Africa/Russia Caspian, and Middle East/Asia Pacific. Our Industrial Services businesses are reported in a fifth segment. As of December 31, 2014, Baker Hughes had approximately 62,000 employees compared to approximately 59,400 employees as of December 31, 2013.
Within our oilfield operations, the primary driver of our businesses is our customers’ capital and operating expenditures dedicated to oil and natural gas exploration, field development and production. The main products and services provided by oilfield operations fall into one of two categories, Drilling and Evaluation or Completion and Production. This classification is based on the two major phases of constructing an oil and/or natural gas well, the drilling phase and the completion phase, and how our products and services are utilized in each phase. We also provide products and services to the downstream chemicals, and process and pipeline services, referred to as Industrial Services.
Financial Results
For 2014, we generated revenue of $24.55 billion, an increase of $2.19 billion, or 10%, compared to 2013. Revenue from our North America segment for 2014 was $12.08 billion, an increase of $1.2 billion, or 11%, compared to 2013. The increase in this segment was the result of higher activity levels in our U.S. onshore operations, improved utilization and pricing in our pressure pumping business, and growing demand for new technologies in the unconventional plays. Revenue for our Latin America segment for 2014 was $2.24 billion, a decrease of $71 million, or 3%, compared to 2013. The slight reduction in this segment is attributed to revenue declines in Venezuela and Brazil, partially offset by revenue growth in Argentina, Mexico and Ecuador. Revenue in our Middle East/Asia Pacific ("MEAP") segment for 2014 was $4.46 billion, an increase of $597 million, or 15%, compared to 2013. The strong growth in this segment was driven primarily by increased drilling activity across the region, in particular Saudi Arabia. Revenue in our Europe/Africa/Russia Caspian ("EARC") segment for 2014 was $4.42 billion, an increase of $376 million, or 9%, compared to 2013. The increase was driven mainly by revenue growth in Africa, Continental Europe and the United Kingdom. Industrial Services revenue was $1.36 billion, an increase of $85 million, or 7%, compared to 2013. A large contributor to the growth in this segment was the acquisition of a complementary pipeline services business in the third quarter of 2014.
Net income attributable to Baker Hughes was $1.72 billion for 2014 compared to $1.10 billion for 2013. Operating profit before tax increased significantly year over year due to robust activity growth and higher incremental profit on increased revenue in North America, MEAP and EARC, and improved profitability in Latin America. In North America, profit before tax increased $498 million, or 51%, compared to 2013. In addition to strong activity levels in U.S. onshore, increased profitability was driven by improved utilization and pricing in our pressure pumping operations, along with growing demand for new technologies which command a higher premium. In Latin America, profit before tax improved $224 million, or 339%, compared to 2013. The business realignment performed in late 2013 provided an improved cost structure for 2014 activity levels. Additionally, this segment saw higher incremental profit on increased revenue in Mexico and Argentina. In EARC, profit before tax increased $30 million, or 5%, compared to 2013. Profitability increased as a result of activity growth in the year, but was partially offset by a $58 million restructuring charge in North Africa and foreign exchange losses, particularly in Russia. In MEAP, profit before tax increased $218 million, or 48%, compared to 2013. The increase in profitability was due to a combination of strong activity growth and improved profitability in Iraq, where in the prior year, we incurred a business disruption charge of $79 million, which negatively impacted profit before tax. Profitability in our Industrial Services segment decreased $16 million, or 12%, as a result of integration expenses related to an acquisition, along with an increase in environmental remediation costs compared to the prior year.


23


Halliburton Merger Agreement
On November 16, 2014, Baker Hughes and Halliburton Company (“Halliburton”) entered into a definitive agreement and plan of merger under which Halliburton will acquire all of the outstanding shares of Baker Hughes in a stock and cash transaction. Under the terms of the agreement, stockholders of Baker Hughes will receive, for each share of common stock of Baker Hughes, a fixed exchange ratio of 1.12 Halliburton shares plus $19.00 in cash. The transaction is subject to approvals from each company’s stockholders, regulatory approvals and customary closing conditions. The transaction is expected to close in the second half of 2015; however, Baker Hughes cannot predict with certainty when, or if, the pending merger will be completed because completion of the transaction is subject to conditions beyond the control of Baker Hughes. For further information about the merger, see Note 2. "Halliburton Merger Agreement" of the Notes to Consolidated Financial Statements in Item 8 herein.
Outlook
Our industry is cyclical, and past cycles have been driven primarily by alternating periods of ample supply or shortages of oil and natural gas relative to demand. As an oilfield services company, our revenue is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is dependent on a number of factors, including our customers’ forecasts of future energy demand, their expectations for future energy prices, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs and the impact of new government regulations.
In the second half of 2014, the oil market experienced an excess of supply as a result of sustained high output from tight oil plays in North America, a slowdown in demand from key consumer regions such as Europe and East Asia and the Organization of the Petroleum Exporting Countries ("OPEC") position in late November to not cut production. This market imbalance resulted in a rapid decline in oil prices, with both Brent and West Texas Intermediate prices dropping to near six-year lows and 60% below 2014 peak highs. Oil prices continued to drop in early 2015.
These changes in market conditions are a clear indicator that we are in the early stages of a down cycle in our industry. As with past cycles, the early days are always marked with a high degree of uncertainty, with capital spending from our customers remaining highly uncertain as a result of the rapid decline in commodity prices.
In North America, activity levels began to decline in late December, and we expect, based on prior cycles, for activity to continue to decline throughout 2015. In each of the last three downturns dating back to the 1990s, North America rig counts have fallen between 40% and 60% in a period of only twelve months. At the end of January 2015, the U.S. onshore oil-directed rig count had fallen approximately 25% from October highs, declining faster than we had predicted in early January. The Canadian rig count, which we previously expected to remain flat in the first quarter of the year, is already trending 10% below the prior quarter average, with an increased likelihood of further declines, as signs of an early spring break up are already impacting oilfield activity. At this accelerated pace, the North America rig count is currently trending to exit the first quarter of 2015 down approximately 1,000 rigs, or 50%, compared to the fourth quarter average.
Outside of North America, in prior cycles the international rig count has not fallen as sharply, but begins to drop steadily a couple months after the first signs of weakness appear in North America. Unlike prior cycles, we are already seeing the international rig count decline, with customers beginning to defer new projects and executing spending reductions for 2015. The decline is expected to begin in onshore and shallow water markets, with deepwater activity and spending from national oil companies remaining more resilient.
Based on the expected reduction in activity and customer spending, pricing declines for our products and services will potentially occur as a result of excess supply of equipment and the increase in our customers’ needs for cost reductions in order to maintain the economic viability of current projects. The combination of reduced activity and increased pricing pressure from our customers will result in a contraction of our revenue and margins in 2015.
Our objective through this down cycle is to remain nimble and maintain a strong focus on asset utilization, working capital and returns. We believe we are well positioned financially and strategically, and will proactively adapt to changing market conditions by right-sizing our cost structure to reflect expected near-term activity levels,


24


reducing discretionary spending, and lowering costs within our supply chain. As previously announced in late January 2015, we are undertaking a workforce reduction of approximately 7,000 positions and will record a charge in the range of $160 million to $185 million for severance during the first quarter of 2015. Additionally, we are reviewing our operations for other cost saving or consolidation opportunities that may result in asset impairments and further workforce reductions. Although these actions will reduce our cost base, we still anticipate margin contraction to occur globally throughout 2015.
The International Energy Agency indicates in their January 2015 report that a rebalancing of the market could begin as early as the second half of the year; however, this does not mean that we will return to 2014 oil prices, as the market has clearly undergone a historical change as result of the U.S. oil production growth.
Technology will be a critical differentiator for oilfield service providers in this new environment, as our customers’ need for innovative solutions is more important than ever before. As such, we remain committed to our strategy of leveraging our strength in technology development to deliver differentiating new products and services which are designed to solve our customer’s three biggest challenges: efficient well construction; optimized well production and increase ultimate recovery. The current market conditions notwithstanding, the long term outlook for our industry remains strong. The world’s demand for energy will continue to rise, and the supply of energy will continue to increase in complexity, requiring greater service intensity and more advanced technology for oilfield service.
BUSINESS ENVIRONMENT
We operate in more than 80 countries helping customers find, evaluate, drill, produce, transport and process hydrocarbon resources. Our revenue is predominately generated from the sale of products and services to major, national, and independent oil and natural gas companies worldwide, and is dependent on spending by our customers for oil and natural gas exploration, field development and production.  This spending is dependent on a number of factors, including our customers’ forecasts of future energy demand and supply, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, the impact of new government regulations and most importantly, their expectations for oil and gas prices as a key driver of their cash flows.
Oil and Natural Gas Prices
Oil and natural gas prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.

 
2014
 
2013
 
2012
Brent oil prices ($/Bbl) (1)
$
98.88

 
$
108.81

 
$
111.96

WTI oil prices ($/Bbl) (2)
93.03

 
97.98

 
94.12

Natural gas prices ($/mmBtu) (3)
4.35

 
3.73

 
2.76

(1) 
Bloomberg Dated Brent (“Brent”) Oil Spot Price per Barrel
(2) 
Bloomberg West Texas Intermediate (“WTI”) Cushing Crude Oil Spot Price per Barrel
(3) 
Bloomberg Henry Hub Natural Gas Spot Price per million British Thermal Unit
Outside North America, customer spending is most heavily influenced by Brent oil prices, which fluctuated significantly throughout the year, ranging from a high of $115.00/Bbl in June 2014 to a low of $55.76/Bbl in December 2014. Brent oil prices were the highest in the second quarter of 2014 as geopolitical disputes in the Middle East and Africa reduced output and threatened future production. In September 2014, oil prices began to steadily decline as rapidly increasing production from the tight oil plays in North America, coupled with unfavorable economic data from Europe and Asia, led to negative demand forecasts and fears of a global economic downturn, which in turn, caused an imbalance in the market. OPEC's decision in late November to maintain its current crude oil production target, despite lower oil prices, put additional downward pressure on price expectations, and as a result, Brent oil prices exited 2014 reflecting a 52% reduction compared to the peak earlier in the year.


25


In North America, customer spending is highly driven by WTI oil prices, which, similar to Brent oil prices, fluctuated significantly throughout the year, with the highest prices being recorded in the third quarter. Overall, WTI oil prices ranged from a high of $107.62/Bbl in July 2014 to a low of $53.27/Bbl in December 2014. High prices during the third quarter were a result of WTI crude increasingly displacing Brent-quality crude imports into North America through increased U.S. oil production and improved crude-by-rail and pipeline infrastructure.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas Spot Price, averaged $4.35/mmBtu in 2014, representing a 17% increase over the prior year. Natural gas prices were above the average for the first two months of the year before settling closer to the average for the remainder of the year. In December 2014, based on forecasts of increased production exceeding demand, natural gas prices began falling and declined to a low of $2.75/mmBtu. According to the U.S. Department of Energy (“DOE”), working natural gas in storage at the end of 2014 was 3,220 billion cubic feet ("Bcf"), which was 7.8% or 232 Bcf above the corresponding week in 2013.
Baker Hughes Rig Count
The Baker Hughes rig counts are an important business barometer for the drilling industry and its suppliers. When drilling rigs are active they consume products and services produced by the oil service industry. Rig count trends are governed by the exploration and development spending by oil and gas companies, which in turn is influenced by current and future price expectations for oil and gas. Therefore, the counts may reflect the relative strength and stability of energy prices and overall market activity. However, these counts should not be solely relied on as other specific and pervasive conditions may exist that affects overall energy prices and market activity.
Baker Hughes has been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors and/or other outside sources. We base the classification of a well as either oil or natural gas primarily upon filings made by operators in the relevant jurisdiction. This data is then compiled and distributed to various wire services and trade associations and is published on our website. We believe the counting process and resulting data is reliable; however, it is subject to our ability to obtain accurate and timely information. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian region, Iran and onshore China because this information is not readily available.
Rigs in the U.S. and Canada are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential consumer of our drill bits. In international areas, rigs are counted on a weekly basis and deemed active if drilling activities occurred during the majority of the week. The weekly results are then averaged for the month and published accordingly. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities, including production testing, completion and workover, and are not expected to be significant consumers of drill bits.


26


The rig counts are summarized in the table below as averages for each of the periods indicated.

 
2014
 
2013
 
2012
U.S. - onshore
1,804

 
1,705

 
1,871

U.S. - offshore
57

 
56

 
47

Canada
379

 
353

 
364

North America
2,240

 
2,114

 
2,282

Latin America
397

 
419

 
423

North Sea
40

 
42

 
40

Continental Europe
105

 
93

 
79

Africa
134

 
125

 
96

Middle East
406

 
372

 
356

Asia Pacific
254

 
246

 
241

Outside North America
1,336

 
1,297

 
1,235

Worldwide
3,576

 
3,411

 
3,517

2014 Compared to 2013
The rig count in North America increased 6% in 2014 compared to 2013 primarily driven by a 9% growth in oil-directed rigs. The oil-directed rig count increased 11% in the U.S. as a result of increased exploration & production spending, but decreased by 6% in Canada where many operators curtailed their oil-directed drilling plans in the second half of 2014 due to high oil price differentials as compared to WTI and wet weather in southern Alberta and Saskatchewan. The natural gas-directed rig count in North America declined 2% reflecting a 13% decrease in the U.S. partially offset by a 34% increase in Canada. Natural gas-directed drilling in the U.S. was negatively impacted by the continued weakness in North America natural gas prices which discouraged new investment in natural gas fields. In Canada, the increase in natural gas-directed rigs was driven by drilling in condensate rich zones in Alberta to service the oil sands drilling activity. Overall, Canada rig counts increased 7% in 2014 compared to 2013.
Outside North America, the rig count increased 3% in 2014 compared to 2013. The rig count in Latin America decreased 5% as a result of reduced rig activity in Brazil and Mexico, partially offset by an increase in activity in the emerging unconventional plays in Argentina. The North Sea rig count decreased by 5%, primarily due to a decline in the rig activity in Norway. The rig count in Continental Europe increased by 13% with higher activity in Turkey and Romania. In Africa, the rig count increased 7% primarily due to higher activity in Kenya, Angola, and Chad. The rig count increased 9% in the Middle East due to higher activity in Saudi Arabia, Oman and Kuwait, slightly offset by a reduction in Iraq due to political unrest. The rig count in Asia Pacific increased 3% due to increased activity in offshore China, partially offset by activity reduction in Indonesia, Malaysia and New Zealand.
2013 Compared to 2012
The rig count in North America decreased 7% in 2013 compared to 2012 primarily driven by a 23% decline in natural gas-directed rigs. The oil-directed rig count declined 1%. The natural gas-directed rig count reflected a 31% decrease in the U.S. offset by an 18% increase in Canada. The oil-directed rig count increased 1% in the U.S., but decreased by 11% in Canada. Natural gas-directed drilling in the U.S. was negatively impacted by the continued weakness in North America natural gas prices which discouraged new investment in natural gas fields. In Canada, the increase in natural gas-directed rigs was driven by drilling in condensate rich zones in Alberta to service the oil sands drilling activity. In Canada, many operators curtailed their oil-directed drilling plans in the second half of 2013 due to high oil price differentials as compared to WTI and wet weather in southern Alberta and Saskatchewan. Overall, Canada rig counts decreased 3% in 2013 compared to 2012.
Outside North America, the rig count increased 5% in 2013 compared to 2012. The rig count in Latin America was relatively flat as increased rig activity in Argentina and Ecuador was offset by reductions in Brazil and Colombia. The rig count in Continental Europe increased by 18% with higher activity in Turkey, the Balkans, and Sakhalin. The North Sea rig count increased by 5%, primarily due to increased activity in Norway. In Africa, the rig count increased primarily due to the resumption of drilling activities in Libya, as well as higher activity in Algeria and


27


Kenya. The rig count increased 5% in the Middle East due to higher activity in Iraq, Abu Dhabi and Pakistan offset by a reduction in Egypt due to political unrest.
Baker Hughes Well Count
Baker Hughes began providing U.S. well count data to the oil and natural gas industry in July 2013. The Baker Hughes Well Count is an extension of the Baker Hughes Rig Count, and provides a quarterly census of the number of new onshore oil and natural gas wells where drilling began, or spud, in the U.S. The Baker Hughes Well Count includes wells that are identified to be significant consumers of oilfield services and supplies, and excludes wells categorized as workover, plugged and abandoned or completed. Well count trends are governed by oil company exploration and development spending in the U.S., which in turn is influenced by the current and expected price of oil and natural gas. Well counts therefore may reflect the strength and stability of energy prices. However, there are many other factors that can influence the well count, including new technologies, pad drilling, weather, seasonal spending and changes to local regulations. We believe the counting process and resulting data is reliable; however, it is subject to our ability to obtain accurate and timely information.
During 2014, 37,508 wells were spud on land in the U.S. This compares to 35,676 wells spud in 2013, or an increase of 5%.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items. In addition, the discussions below for revenue and cost of revenue are on a total basis as the business drivers for product sales and services are similar. All dollar amounts in tabulations in this section are in millions of dollars, unless otherwise stated.
Revenue and Profit Before Tax
Revenue and profit before tax for each of our five operating segments is provided below. The performance of our segments is evaluated based on profit before tax, which is defined as income before income taxes and before the following: net interest expense, corporate expenses, and certain gains and losses not allocated to the segments. During 2014, certain North African entities previously reported in our Middle East/Asia Pacific segment were realigned and are now reported within our Europe/Africa/Russia Caspian segment to reflect how we manage the business. Accordingly, all prior segment disclosures have been recast to reflect this realignment.
2014 Compared to 2013

 
Year Ended December 31,
 
 
  
2014
 
2013
 
$ Change
 
% Change
Revenue:
 
 
 
 
 
 
 
North America
$
12,078

 
$
10,878

 
$
1,200

 
11
 %
Latin America
2,236

 
2,307

 
(71
)
 
(3
)%
Europe/Africa/Russia Caspian
4,417

 
4,041

 
376

 
9
 %
Middle East/Asia Pacific
4,456

 
3,859

 
597

 
15
 %
Industrial Services
1,364

 
1,279

 
85

 
7
 %
Total Revenue
$
24,551

 
$
22,364

 
$
2,187

 
10
 %


28


 
Year Ended December 31,
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
Profit Before Tax:
 
 
 
 
 
 
 
North America
$
1,466

 
$
968

 
$
498

 
51
 %
Latin America
290

 
66

 
224

 
339
 %
Europe/Africa/Russia Caspian
621

 
591

 
30

 
5
 %
Middle East/Asia Pacific
675

 
457

 
218

 
48
 %
Industrial Services
119

 
135

 
(16
)
 
(12
)%
Total Operations
3,171

 
2,217

 
954

 
43
 %
Corporate and other
(544
)
 
(502
)
 
(42
)
 
8
 %
Total Profit Before Tax
$
2,627

 
$
1,715

 
$
912

 
53
 %
Revenue for 2014 increased $2.2 billion or 10% compared to 2013. All segments, except for Latin America, experienced revenue growth in 2014, with North America being the largest contributor. Likewise, revenue grew across all our product lines, in particular drilling services, artificial lift and pressure pumping. Profit before tax from operations for 2014 increased $954 million or 43% compared to 2013. Strong activity growth in North America and MEAP, and improved profitability in Latin America contributed to the significant year over year increase in profit before tax. The increase was also driven by improved utilization and improved contractual terms in our pressure pumping U.S. onshore operations.
North America
North America revenue in 2014 increased $1.2 billion or 11% compared to 2013, with rig counts increasing 6% from the prior year average. The increase in revenue was driven almost entirely by our U.S. onshore operations, where higher activity levels, improved utilization and market conditions in pressure pumping, along with increased demand for new technologies in the unconventional plays contributed to solid growth across all our districts and product lines. The largest contributor to the revenue growth was our pressure pumping operations, where market conditions gradually improved during the year, reversing the over supply of hydraulic fracturing equipment; which, when combined with our multi-year improvement initiative for this product line, resulted in improved utilization and increased efficiencies. Our artificial lift, drilling services and drill bit product lines also delivered exceptionally strong growth, as demand increased for our new technologies specifically designed for the unconventional plays. Revenue in Canada declined in 2014 as compared to 2013, in part due to a 6% decline in the oil-directed rig count, which is a significant driver of our operations in the country. In addition, we experienced a decline in Canadian revenue in our pressure pumping product line, due to lower demand for hydraulic fracturing, which was partially offset by strong growth in our drill bit and artificial lift product lines. Revenue in the Gulf of Mexico declined slightly despite a relatively flat rig count in 2014 compared to 2013. The revenue decline is attributable to activity delays, primarily in drilling and stimulation, that resulted from unusually strong ocean currents in the second half of 2014.
North America profit before tax was $1,466 million in 2014, an increase of $498 million or 51% compared to 2013. In addition to the strong activity levels in U.S. onshore, increased profitability was driven by improved contractual terms and utilization in our pressure pumping operations, as well as other efficiency gains and cost savings recognized as part of our pressure pumping profit improvement plan. The growing demand for new technologies, which command a higher premium, also contributed to the improvement. In the Gulf of Mexico, profitability improved, despite the decline in revenue, as a result of a more favorable mix of revenue with an increase in deepwater completion systems. In Canada, profitability decreased in line with the revenue decline, as costs savings achieved in pressure pumping were offset by the foreign exchange impact of the weakening Canadian dollar. Profitability in 2014 was negatively impacted by $29 million of severance costs and $13 million of costs associated with a technology royalty agreement.
Latin America
Latin America revenue decreased $71 million or 3% in 2014 compared to 2013. Revenue reductions in Brazil and Venezuela were partially offset by increased revenue throughout the rest of the region. Revenue declined across most product lines in Brazil due to lower activity levels in 2014, as evidenced by a 27% reduction in the rig


29


count compared to 2013. Revenue in Venezuela decreased across all product lines as a result of our decision in May 2014 to move from the official rate of 6.3 Bolivares Fuertes (“BsF”) per U.S. Dollar to the SICAD 2 rate of approximately 50 BsF per U.S. Dollar. These decreases were partially offset by increased activity and share gains in the pressure pumping and completion services product lines in Argentina, as unconventional activity continued to grow; offshore drilling in Mexico's marine region; and our artificial lift and upstream chemicals product lines in Ecuador.
Latin America profit before tax increased $224 million or 339% in 2014 compared to 2013. The significant improvement in profitability can be primarily attributed to cost reduction strategies implemented throughout the region in the second half of 2013, with particular focus on Brazil. 2013 includes a charge of $19 million for severance related to these actions. Increased activity in Argentina, Mexico and Ecuador also contributed to the profitability improvement in 2014. Profitability was also impacted by foreign exchange losses of $12 million and $23 million in 2014 and 2013, respectively, due to the currency devaluation in Venezuela. Our operations in Venezuela could be impacted by further devaluations of the local currency; however, we believe the potential impact would not be material to our consolidated financial statements.
Europe/Africa/Russia Caspian (“EARC”)
EARC revenue increased $376 million or 9% in 2014 compared to 2013. In 2014, we delivered strong revenue growth in Africa, Continental Europe and Russia Caspian. Revenue was negatively impacted by the unfavorable change in exchange rates of several currencies including the Russian Ruble relative to the U.S. Dollar. In Africa, revenue increased as a result of activity growth and share gains across most of the region, predominately in West Africa. These increases were slightly offset by a decline in activity in North Africa resulting from industry-wide disruptions in Libya due to political instability in the country during the third quarter of 2014. In Continental Europe, revenue growth was driven by increased demand for our completion and production product lines. In the North Sea, drilling and evaluation activity increases in the United Kingdom were entirely offset by reduced activity in Norway. In the Russia Caspian region, revenue growth was driven by increased activity in our completion and production product lines.
EARC profit before tax increased $30 million or 5% in 2014 compared to 2013. Incremental profitability growth from increased revenue was almost entirely offset by a $58 million charge associated with the restructuring of our operations in North Africa and impairment of certain assets, mainly due to the recent disruption in our operations in Libya. Profitability was also negatively impacted by foreign exchange losses as a result of the devaluation of several currencies, including the Russian Ruble.
Middle East/Asia Pacific (“MEAP”)
MEAP revenue increased $597 million or 15% in 2014 compared to 2013, while the corresponding rig count increased only 7% over the same period. We posted strong revenue growth in virtually all geographies, most notably in Saudi Arabia, Iraq, the Arabian Gulf, Southeast Asia and China. In Saudi Arabia, revenue increases were primarily related to activity growth in our integrated operations contracts. In addition, we experienced strong demand for our drilling services and completion services product lines, as the average rig count reached another record in 2014, up 24% compared to the prior year average. In Iraq, revenue increased in 2014 over the prior year, as 2013 was negatively impacted by a significant disruption in operations in the fourth quarter partially offset by a decline in activity in 2014 due to a demobilization on a major contract. Revenue increased in the Arabian Gulf due to increased demand for our drilling services and pressure pumping product lines in the United Arab Emirates and India. Within Asia Pacific, revenue growth was strongest in South East Asia and China, predominately in our drilling services product line.
MEAP profit before tax improved $218 million or 48% in 2014 compared to 2013. The primary driver of the increase in profit before tax was higher incremental profit on increased revenue across the segment, most notably in Saudi Arabia and Iraq. Further, we experienced a favorable shift in product mix with a higher proportion of revenue derived from our drilling services product line. Profit before tax in 2013 was negatively impacted by $79 million of losses in Iraq related to the significant disruption to our operations, expenses associated with personnel movements and security measures, and other non-recurring items.


30


Industrial Services
Industrial Services revenue increased 7% and profit before tax decreased 12% in 2014 compared to 2013. The increase in revenue was primarily driven by the acquisition of a complementary pipeline services business in the third quarter of 2014. Profitability in the segment decreased as a result of integration expenses related to this acquisition, along with an increase in environmental costs compared to the prior year.
2013 Compared to 2012

 
Year Ended December 31,
 
 
  
2013
 
2012
 
$ Change
 
% Change
Revenue:
 
 
 
 
 
 
 
North America
$
10,878

 
$
10,836

 
$
42

 
 %
Latin America
2,307

 
2,399

 
(92
)
 
(4
)%
Europe/Africa/Russia Caspian
4,041

 
3,810

 
231

 
6
 %
Middle East/Asia Pacific
3,859

 
3,099

 
760

 
25
 %
Industrial Services
1,279

 
1,217

 
62

 
5
 %
Total Revenue
$
22,364

 
$
21,361

 
$
1,003

 
5
 %
 
Year Ended December 31,
 
 
 
 
  
2013
 
2012
 
$ Change
 
% Change
Profit Before Tax:
 
 
 
 
 
 
 
North America
$
968

 
$
1,268

 
$
(300
)
 
(24
)%
Latin America
66

 
197

 
(131
)
 
(66
)%
Europe/Africa/Russia Caspian
591

 
605

 
(14
)
 
(2
)%
Middle East/Asia Pacific
457

 
294

 
163

 
55
 %
Industrial Services
135

 
131

 
4

 
3
 %
Total Operations
2,217

 
2,495

 
(278
)
 
(11
)%
Corporate and other
(502
)
 
(513
)
 
11

 
(2
)%
Total Profit Before Tax
$
1,715

 
$
1,982

 
$
(267
)
 
(13
)%
Revenue for 2013 increased $1 billion or 5% compared to 2012, with the increase coming predominantly from the Eastern Hemisphere as we continue to grow our operations in the Middle East, Asia Pacific, Africa and Russia Caspian. In North America, revenue growth in the Gulf of Mexico was essentially offset by lower revenue in Canada.
Profit before tax from operations for 2013 decreased $278 million or 11% compared to 2012. Despite the increase in revenue, our profit before tax was significantly impacted by low equipment utilization resulting from over capacity in the pressure pumping business in North America, a decline in activity and lower prices for drilling services in Brazil, and reduced pricing and increased start-up costs associated with the new drilling contract in Norway. Additionally, during the fourth quarter of 2013, we incurred costs of $79 million in Iraq related to a significant disruption to operations, increased personnel and security costs, and other non-recurring items. These reductions to profit before tax were partially offset by Asia Pacific, which experienced a significant improvement in profitability throughout the region driven by increased activity and improved mix of product sales.
In 2012, profit before tax included charges of $63 million, of which $43 million related to the impairment of certain information technology assets primarily associated with internally developed software and other assets, and $20 million related to the closure of a chemical manufacturing facility in the U.K. As our information technology and supply chain organizations support our global operations, these charges were allocated to all segments. The amount of the impairment charges recorded by segment in 2012 was as follows: North America - $33 million; Latin America - $7 million; Europe/Africa/Russia Caspian - $11 million; Middle East/Asia Pacific - $10 million; and Industrial Services - $2 million.


31


North America
North America revenue was flat in 2013 compared to 2012, despite rig counts declining 7%. Revenue in the Gulf of Mexico increased in-line with the rig count increase of 17% compared to 2012. The main drivers for the revenue growth in the Gulf of Mexico were increased activity in our drilling and completion fluids, pressure pumping, completion systems and wireline services product lines. Despite a 9% decline in the U.S. onshore rig count in 2013 compared to 2012, driven by lower natural gas-directed rigs, total revenue for our U.S. onshore business was flat year over year. During 2013, we experienced revenue growth in our U.S. onshore drilling services, artificial lift and completion systems product lines. However, these increases were mostly offset by reduced revenue in our drilling and completion fluids and pressure pumping product lines. Although we experienced share gains in 2013 compared to 2012 in our pressure pumping product line across several basins in the U.S., revenue declined in our pressure pumping business due to the continued oversupply of pressure pumping capacity in the industry. Revenue in Canada declined in 2013 as compared to 2012, in part due to an 11% decline in the oil-directed rig count, which is a significant driver of our operations in the country. Our revenue in Canada was also negatively impacted by a decline in our pressure pumping product line, where we experienced lower demand for hydraulic fracturing. An unfavorable change in the Canadian exchange rate relative to the U.S. Dollar also contributed to the year over year revenue decline.
North America profit before tax was $968 million in 2013, a decrease of $300 million or 24% compared to 2012. Profits from our U.S. onshore and Canadian operations were significantly impacted by the continued oversupply of pressure pumping equipment, resulting in low fleet utilization and increased competition. North America profit before tax was further reduced by higher depreciation and amortization expense of $64 million and higher compensation costs. These reductions were partially offset by improved profits in the Gulf of Mexico resulting from a favorable mix of sales to deepwater completion systems and pressure pumping services, as well as lower costs for raw materials, and other efficiency gains and cost savings recognized as part of our pressure pumping profit improvement plan. In 2012, North America profit before tax was negatively impacted by the impairment charges associated with the information technology assets and facility closure discussed previously.
Latin America
Latin America revenue decreased $92 million or 4% in 2013 compared to 2012. The primary drivers were reduced revenue in Brazil and Venezuela, partially offset by increased revenue throughout the rest of the region. Activity declined across almost all product lines in Brazil in part due to a 23% reduction in the rig count as compared to 2012, but also due to a new drilling services contract with lower activity and pricing. Revenue in Venezuela decreased across almost all product lines due to lower activity levels and the impact of a devaluation in the local currency. These decreases were partially offset by increased revenue for our drilling services and artificial lift product lines in Ecuador, pressure pumping and wireline services in Argentina, and pressure pumping and drilling services in Mexico.
Latin America profit before tax decreased $131 million or 66% in 2013 compared to 2012. The main drivers behind this reduction were lower revenue and pricing for our drilling services product line in Brazil, expenses associated with demobilization of equipment in Brazil, lower activity levels in Venezuela, and severance charges of $32 million throughout Latin America. In February 2013, Venezuela's currency was devalued from the prior exchange rate of 4.3 Bolivars Fuertes per U.S. Dollar to 6.3 Bolivars Fuertes per U.S. Dollar, which applies to our local currency denominated balances. The impact of this devaluation was a loss of $23 million that was recorded in MG&A expense in the first quarter of 2013. In 2012, Latin America profit before tax was negatively impacted by the impairment charges associated with the information technology assets and facility closure discussed previously.
Europe/Africa/Russia Caspian
EARC revenue increased $231 million or 6% in 2013 compared to 2012. Revenue increased in both Africa and Russia Caspian, with Europe remaining flat. The increase in Africa was predominantly in Nigeria, where our drilling services and completion systems product lines experienced increased activity, as well as in North Africa, where the resumption of activity in Libya benefited our drilling services, wireline services and completion systems product lines. Increased activity in Algeria and share gains in Mauritania also contributed to increased revenue compared to 2012. Growth in Russia Caspian was due to increased demand for our drilling services, completion systems, pressure pumping and artificial lift product lines. In Europe, revenue was flat compared to 2012. A new drilling


32


services contract and higher activity for pressure pumping and wireline services in Norway were offset by the completion of significant projects in the Eastern Mediterranean and lower activity across all drilling and evaluation product lines in the United Kingdom.
EARC profit before tax decreased $14 million or 2% in 2013 compared to 2012. In Europe, profit margins declined due to reduced pricing and increased start-up costs associated with the new drilling services contract in Norway. Europe profitability was also impacted by the reduced drilling and evaluation activity in the United Kingdom and completion of the projects in the Eastern Mediterranean. These declines were partially mitigated by improved profits in Africa and Russia Caspian, primarily associated with higher revenue. In 2012, EARC profit before tax was negatively impacted by the impairment charges associated with the information technology assets and facility closure discussed previously.
Middle East/Asia Pacific
MEAP revenue increased $760 million or 25% in 2013 compared to 2012, while the corresponding rig count increased only 4% over the same period. Both the Middle East and Asia Pacific posted strong revenue growth in all geographies, most notably in Iraq, Saudi Arabia, the Arabian Gulf, Southeast Asia and China. Iraq revenue increased due to growth in our integrated services contracts. However, Iraq revenue was negatively impacted in the fourth quarter of 2013 due to a significant disruption in operations. Saudi Arabia saw a significant increase in revenue due to higher demand for our drilling services, pressure pumping and wireline services product lines as well as growth in an integrated services contract. Revenue increased in the Arabian Gulf due to increased demand for our drilling services and wireline services product lines in United Arab Emirates, as well as for wireline services in India. Within Asia Pacific, revenue growth was strongest in South East Asia for drilling services, completion systems and pressure pumping. Indonesia and China experienced increased activity for drilling services, and demand for wireline services grew in Papua New Guinea.
MEAP profit before tax increased $163 million or 55% in 2013 compared to 2012. The primary driver of the increase in profit before tax was higher incremental profit on increased revenue in Asia Pacific, and to a lesser extent in the Middle East. Further, we experienced a favorable shift in product mix with a higher proportion of revenue derived from our drilling services and completion systems product lines. Profit before tax in 2013 also benefited from ongoing profit improvement initiatives in Asia Pacific. These improvements were offset by $79 million of losses in Iraq related to the significant disruption to our operations, expenses associated with personnel movements and security measures, and other non-recurring items. In 2012, MEAP profit before tax was negatively impacted by the impairment charges associated with the information technology assets and facility closure discussed previously.
Industrial Services
For Industrial Services, revenue increased 5% and profit before tax increased 3% in 2013 compared to 2012. The increase in revenue was primarily driven by increased demand for our process and pipeline business. The increase in profit before tax is due to the revenue increase offset by higher compensation expenses. In 2012, Industrial Services profit before tax was negatively impacted by the impairment charges associated with information technology assets and facility closure discussed previously.
Costs and Expenses
The table below details certain consolidated statement of income data and as a percentage of revenue.

 
2014
 
2013
 
2012
  
$
 
%
 
$
 
%
 
$
 
%
Revenue
$
24,551

 
100
%
 
$
22,364

 
100
%
 
$
21,361

 
100
%
Cost of revenue
19,746

 
80
%
 
18,553

 
83
%
 
17,356

 
81
%
Research and engineering
613

 
2
%
 
556

 
2
%
 
497

 
2
%
Marketing, general and administrative
1,271

 
5
%
 
1,306

 
6
%
 
1,316

 
6
%


33


Cost of Revenue
Cost of revenue as a percentage of revenue was 80% and 83% for 2014 and 2013, respectively. The improvement in cost of revenue as a percentage of revenue was due primarily to the continued improvement in our U.S. onshore pressure pumping business, which resulted in higher asset utilization and organizational efficiencies, as well as improved contractual terms. In Latin America, margins improved due to cost reduction strategies implemented throughout the region in the second half of 2013. Margins in the MEAP segment were improved by higher incremental profit on increased revenue, combined with a favorable shift in product mix. Reduced disruptions in our Iraq operations for 2014 also contributed to lower cost of revenue in the MEAP segment. In the EARC segment, profitability increased in Continental Europe, the United Kingdom and most of Africa but were partially offset by restructuring charges of $58 million associated with our operations in North Africa, primarily from disruptions in Libya. These improvements were partially offset by $113 million of increased depreciation expense across all segments except Latin America; $29 million of severance charges in North America; and $29 million of costs associated with a technology royalty agreement.
Cost of revenue as a percentage of revenue was 83% and 81% for 2013 and 2012, respectively. The increase in cost of revenue as a percentage of revenue was due primarily to lower margins in our pressure pumping product line in North America as a result of the overcapacity in the pressure pumping industry. Additionally, depreciation expense across all segments increased cost of revenue by $160 million in 2013 compared to 2012. In Latin America, lower pricing on the drilling services contract in Brazil led to an increase in cost of revenue relative to revenue. In Europe, reduced pricing and increased start-up costs on a new drilling services contract in Norway decreased margins, as well as an unfavorable change in sales mix. Margins in the Middle East were negatively impacted by third party costs related to our Iraq integrated contracts. Further, cost of revenue was negatively impacted from a disruption to our operations in Iraq in the fourth quarter of 2013. In 2013, margins were favorably impacted by higher incremental profit on revenue in Asia Pacific, and improvement of sales mix in Africa, Russia Caspian and the Gulf of Mexico.
Research and Engineering
Research and engineering expenses increased 10% in 2014 compared to 2013 as we continued our commitment to invest in the research and product development required to meet our customers' need for innovative new products and emerging technologies, focusing on lowering the cost of well construction, optimizing well production and increasing ultimate recoveries. As a result of our research and development activities in 2014, we commercially launched over 160 new products and services.
Research and engineering expenses increased 12% in 2013 compared to 2012. In 2013, we continued to ramp up our research and development activities at our technology centers, which resulted in higher personnel and material costs. As a result of our research and development activities in 2013, we commercially launched over 100 new products and services. We are committed to expanding our core services to include critical capabilities and emerging technologies.
Marketing, General and Administrative
Marketing, general and administrative (“MG&A”) expenses decreased 3% in 2014 compared to 2013. MG&A expenses in 2014 includes a net gain of $34 million recognized on the deconsolidation of a jointly owned legal entity. For further discussion, see Note 3. "Acquisitions and Deconsolidation" of the Notes to Consolidated Financial Statements in Item 8 herein. Cost savings experienced across the organization were mostly offset by a charge of $14 million related to the impairment of a technology investment and $11 million of merger related expenses. Also included in MG&A in 2014 and 2013 are foreign exchange losses of $12 million and $23 million, respectively, due to the currency devaluation in Venezuela.
MG&A expenses decreased 1% in 2013 compared to 2012. MG&A expenses in 2013 decreased as a result of non-recurring charges recorded in 2012 including $43 million related to the impairment of certain information technology assets as well as the winding down of our worldwide integration efforts subsequent to our acquisition of BJ Services in 2010. The conclusion of our integration efforts resulted in decreased costs related to technology, project management and personnel, and led to improved efficiencies among our global operations and support functions. The reduction in MG&A was largely offset by the loss of $23 million due to the currency devaluation in


34


Venezuela, higher salaries and wage costs for personnel, and foreign exchange losses caused by unfavorable movement in exchange rates for foreign currencies against the U.S. Dollar.
Litigation Settlement
During the second quarter of 2014, we recorded a charge of $62 million related to litigation settlements for wage and hour lawsuits. For further discussion, see Note 13. "Commitments and Contingencies - Litigation" of the Notes to Consolidated Financial Statements in Item 8 herein.
Interest Expense, net
Interest expense, net of interest income, was $232 million in 2014, which remained relatively flat when compared to $234 million in 2013. For 2013, interest expense, net of interest income increased $24 million when compared to 2012, primarily due to the reduction of capitalized interest in 2013, which corresponds with the decrease in our capital expenditures.
Income Taxes
Total income tax expense was $896 million, $612 million and $665 million for 2014, 2013 and 2012, respectively. Our effective tax rate on operating profits in 2014, 2013, and 2012 was 34.1%, 35.7% and 33.6%, respectively. The 2014 effective tax rate is lower than the U.S. statutory income tax rate of 35% due to lower rates on certain international operations, partially offset by state income taxes and adjustments to prior years’ tax positions. The 2013 effective tax rate is higher than the U.S. statutory income tax rate of 35% due to higher rates on certain international operations, primarily resulting from foreign losses with no tax benefit, and state income taxes partially offset by adjustments to prior years’ tax positions. The 2012 effective tax rate was lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations and adjustments to prior years' tax positions partially offset by state income taxes.
COMPLIANCE
We do business in more than 80 countries, including approximately 18 of the 40 countries having the lowest scores in the Transparency International’s Corruption Perception Index survey for 2014, which indicates high levels of corruption. We devote significant resources to the development, maintenance, communication and enforcement of our Business Code of Conduct, our anti-bribery compliance policies, our internal control processes and procedures and other compliance related policies. Notwithstanding the devotion of such resources, and in part as a consequence thereof, from time to time we discover or receive information alleging potential violations of laws and regulations, including the FCPA and our policies, processes and procedures. We conduct timely internal investigations of these potential violations and take appropriate action depending upon the outcome of the investigation.
We anticipate that the devotion of significant resources to compliance-related issues, including the necessity for investigations, will continue to be an aspect of doing business in a number of the countries in which oil and natural gas exploration, development and production take place and in which we conduct operations. Compliance-related issues have limited our ability to do business or have raised the cost of operating in these countries. In order to provide products and services in some of these countries, we may in the future utilize ventures with third parties, sell products to distributors or otherwise modify our business approach in order to improve our ability to conduct our business in accordance with applicable laws and regulations and our Business Code of Conduct.
Our Best-in-Class Global Ethics and Compliance Program (“Compliance Program”) is based on (i) our Core Values of Integrity, Performance, Teamwork, Learning and Courage; (ii) the standards contained in our Business Code of Conduct; and (iii) the laws of the countries where we operate. Our Compliance Program is referenced within the Company as “C2” or “Completely Compliant.” The Completely Compliant theme is intended to establish the proper Tone-at-the-Top throughout the Company. Employees are consistently reminded that they play a crucial role in ensuring that the Company always conducts its business ethically, legally and safely.


35


Highlights of our Compliance Program include the following:
We have comprehensive internal policies over such areas as facilitating payments; travel, entertainment, gifts and charitable donations connected to non-U.S. government officials; payments to non-U.S. commercial sales representatives; and the use of non-U.S. police or military organizations for security purposes. In addition, we have country-specific guidance for customs standards, visa processing, export and re-export controls, economic sanctions and antiboycott laws.
We have a comprehensive employee compliance training program covering substantially all employees.
We have a due diligence procedure for commercial sales, processing and professional agents and an enhanced process for classifying distributors.
We have a special compliance committee, which is made up of senior officers, that meets no less than once a year to review the oversight reports for all active commercial sales representatives.
We have continued our reduction of the use of commercial sales representatives and processing agents, including the reduction of customs agents.
We use technology to monitor and report on compliance matters, including a web-based antiboycott reporting tool and a global trade management software tool.
We have a compliance governance committee, which includes senior officers of the Company, that reviews our effectiveness and compliance with processes and controls of the Company's global compliance program including all areas covered by the Business Code of Conduct.
We have a program designed to encourage reporting of any ethics or compliance matter without fear of retaliation including a worldwide Business Helpline operated by a third party and currently available toll-free in 150 languages to ensure that our helpline is easily accessible to employees in their own language.
We have a centralized finance organization including an enterprise-wide accounting system and company-wide policies. In addition, the corporate audit function has incorporated anti-corruption procedures in audits of certain countries. We also conduct FCPA risk assessments and legal audit procedures.
We continue to work to ensure that we have adequate legal compliance coverage around the world, including the coordination of compliance advice and customized training across all regions and countries where we do business.
We have a centralized human resources function, including consistent standards for pre-hire screening of employees, the screening of existing employees prior to promoting them to positions where they may be exposed to corruption-related risks, and a uniform policy for new hire training.
LIQUIDITY AND CAPITAL RESOURCES
Our objective in financing our business is to maintain sufficient liquidity, adequate financial resources and financial flexibility in order to fund the requirements of our business. At December 31, 2014, we had cash and cash equivalents of $1.74 billion, of which approximately $1.31 billion was held by foreign subsidiaries. A substantial portion of the cash held by foreign subsidiaries at December 31, 2014 was reinvested in our international operations as our intent is to use this cash to, among other things, fund the operations of our foreign subsidiaries. If we decide at a later date to repatriate those funds to the U.S., we may be required to provide taxes on certain of those funds based on applicable U.S. tax rates net of foreign tax credits. We have a committed revolving credit facility with commercial banks and a related commercial paper program under which the maximum combined borrowing at any time under both the credit facility and the commercial paper program is $2.50 billion. At December 31, 2014, we had no commercial paper outstanding; therefore, the amount available for borrowing under the facility as of December 31, 2014 was $2.50 billion. We believe that cash on hand, cash flows generated from operations and the available credit facility, including the issuance of commercial paper, will provide sufficient liquidity to manage our global cash needs. In 2014, we used cash to pay for a variety of activities including working capital needs, capital expenditures, acquisitions, repurchase of our common stock and payment of dividends.


36


Cash Flows
Cash flows provided by (used in) each type of activity were as follows for the years ended December 31:

(In millions)
2014
 
2013
 
2012
Operating activities
$
2,953

 
$
3,161

 
$
1,835

Investing activities
(1,659
)
 
(1,663
)
 
(2,521
)
Financing activities
(939
)
 
(1,103
)
 
646

Operating Activities
Cash flows from operating activities provided $2.95 billion and $3.16 billion for the years ended December 31, 2014 and 2013, respectively. Cash flows from operating activities decreased $208 million in 2014 primarily due to the change in net operating assets and liabilities, which used more cash in 2014 compared to 2013, partially offset by the increase in net income.
The main underlying drivers in 2014 compared to 2013 of the changes in operating assets and liabilities are as follows:
An increase in accounts receivable used cash of $524 million and $453 million in 2014 and 2013, respectively. The increase in accounts receivable in 2014 was primarily due to an increase in activity and the corresponding revenue growth partially offset by improved collections as evidenced by a decrease in days sales outstanding (defined as the average number of days our net trade receivables are outstanding based on quarterly revenue).
An increase in inventory used cash of $259 million and $120 million in 2014 and 2013, respectively, driven by an increase in activity levels.
An increase in accounts payable provided cash of $291 million and $845 million in 2014 and 2013, respectively. The increase in accounts payable in 2014 was primarily due to an increase in activity and the continuation of our vendor management initiatives.
Accrued employee compensation and other accrued liabilities provided cash of $115 million and $231 million in 2014 and 2013, respectively. The decrease in cash provided in 2014 from 2013 was primarily due to higher payments for employee bonuses in 2014 compared to 2013.
Cash flows from operating activities provided $3.16 billion and $1.84 billion for the year ended December 31, 2013 and 2012, respectively. Cash flows from operating activities increased $1.33 billion in 2013 primarily due to the change in net operating assets and liabilities, which used less cash in 2013 compared to 2012.
The main underlying drivers in 2013 compared to 2012 of the changes in operating assets and liabilities are as follows:
An increase in accounts receivable used cash of $453 million and provided cash of $16 million in 2013 and 2012, respectively. The increase in accounts receivable in 2013 was primarily due to an increase in activity and the corresponding revenue growth partially offset by improved collections as evidenced by a decrease in days sales outstanding.
An increase in inventory used cash of $120 million and $547 million in 2013 and 2012, respectively, driven by an increase in activity levels partially offset by improved inventory utilization.
An increase in accounts payable provided $845 million in cash in 2013 and used cash of $94 million in 2012. This increase in accounts payable was primarily due to increased activity and an improvement in our days payable outstanding resulting from vendor management initiatives.
Accrued employee compensation and other accrued liabilities provided cash of $231 million and used cash of $90 million in 2013 and 2012, respectively. The increase in cash provided in 2013 was primarily due to the change in accrued employee compensation driven by an increase in employee bonus accruals for 2013 compared to 2012 coupled with lower payments for employee bonuses in 2013 compared to 2012. Additionally, the cash improvement for other accrued liabilities resulted from advanced customer payments.


37


Investing Activities
Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels and types of machinery and equipment in place to generate revenue from operations. Expenditures for capital assets totaled $1.79 billion, $2.09 billion and $2.91 billion for 2014, 2013 and 2012, respectively. While the majority of these expenditures were for machinery and equipment, it also includes expenditures for new facilities, expansions of existing facilities and other infrastructure projects.
Proceeds from the disposal of assets were $437 million, $455 million and $389 million for 2014, 2013 and 2012, respectively. These disposals related to equipment that was lost-in-hole and property, machinery, and equipment no longer used in operations that was sold throughout the year.
We routinely evaluate potential acquisitions of businesses that may enhance our current operations or expand our operations into new markets or product lines. We may also from time to time sell business operations that are not considered part of our core business. In 2014, we paid $314 million for acquisitions, net of cash acquired of $7 million. During 2013 and 2012, we did not have any significant business acquisitions or dispositions.
Under the merger agreement with Halliburton, as described in Note 2. "Halliburton Merger Agreement" of the Notes to Consolidated Financial Statements in Item 8 herein, we have restrictions on our ability to acquire or dispose of any businesses while the merger is pending.
Financing Activities
We had net repayments of commercial paper and other short-term debt of $248 million and $571 million in 2014 and 2013, respectively, and net borrowing of commercial paper and other short-term debt of $847 million in 2012.
Total debt outstanding at December 31, 2014 was $4.13 billion, a decrease of $248 million compared to December 31, 2013. The total debt-to-capital (defined as total debt plus equity) ratio was 0.18 at December 31, 2014 and 0.20 at December 31, 2013. We received proceeds of $216 million, $101 million and $81 million in 2014, 2013 and 2012, respectively, from the issuance of common stock through the exercise of stock options and the employee stock purchase plan.
Our Board of Directors has authorized a program to repurchase our common stock from time to time. During 2013, our Board of Directors increased the authorization to purchase our common stock under our share repurchase program by $800 million. During 2014, we repurchased 9.1 million shares of our common stock at an average price of $65.75 per share, for a total of $600 million. We had authorization remaining to repurchase approximately $1.05 billion in common stock at the end of 2014. During 2013, we repurchased 6.3 million shares of our common stock at an average prices of $55.59 per share, for a total of $350 million. During 2012, we did not repurchase any shares of common stock.
We paid dividends of $279 million, $267 million and $263 million in 2014, 2013 and 2012, respectively.
Under the merger agreement with Halliburton, as described in Note 2. "Halliburton Merger Agreement" of the Notes to Consolidated Financial Statements in Item 8 herein, we have generally agreed not to repurchase any shares of common stock or increase the quarterly dividend while the merger is pending.
Available Credit Facility
    
We have a committed revolving credit facility (“credit facility”) with commercial banks and a related commercial paper program under which the maximum combined borrowing at any time under both the credit facility and the commercial paper program is $2.5 billion. The credit facility matures in September 2016 and contains certain covenants which, among other things, restrict certain merger transactions or the sale of all or substantially all of our assets or a significant subsidiary and limit the amount of subsidiary indebtedness. Upon the occurrence of certain events of default, our obligations under the credit facility may be accelerated. Such events of default include payment defaults to lenders under the credit facility, covenant defaults and other customary defaults. We were in compliance with all of the credit facility’s covenants, and there were no direct borrowings under the credit facility during 2014. Under the commercial paper program, we may issue from time to time up to $2.5 billion in commercial


38


paper with maturities of no more than 270 days. The amount available to borrow under the credit facility is reduced by the amount of any commercial paper outstanding. At December 31, 2014, we had no outstanding borrowings under the commercial paper program.
If market conditions were to change and our revenue was reduced significantly 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 rating. There are no ratings triggers that would accelerate the maturity of any borrowings under our committed credit 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 current credit ratings would allow us to obtain interim financing over and above our existing credit facility for any currently unforeseen significant needs.
Cash Requirements
In 2015, we believe cash on hand, cash flows from operating activities and the available credit facility will provide us with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations, fund capital expenditures and dividends, and support the development of our short-term and long-term operating strategies. If necessary, 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 2015, we expect our capital expenditures to be approximately $1.4 billion, excluding any amount related to acquisitions. The expenditures are expected to be used primarily for normal, recurring items necessary to support our business. A significant portion of our capital expenditures can be adjusted and managed by us to match market demand and activity levels. We also anticipate making income tax payments in the range of $350 million and $450 million in 2015. For all defined benefit, defined contribution and other postretirement plans, we expect to contribute between $350 million and $390 million to these plans in 2015. See Note 12. "Employee Benefit Plans" of the Notes to Consolidated Financial Statements in Item 8 herein for further discussion.
In May 2014, the Board of Directors approved a $0.02 per share increase in the quarterly cash dividend to $0.17 per share of common stock for the August 2014 holders of record over the previous quarter's dividend of $0.15 per share of common stock. We anticipate paying dividends in the range of $287 million to $297 million in 2015; however, the Board of Directors can change the dividend policy at any time.
Under the merger agreement with Halliburton, as described in Note 2. "Halliburton Merger Agreement" of the Notes to Consolidated Financial Statements in Item 8 herein, we have agreed not to increase the quarterly dividend while the merger is pending.


39


Contractual Obligations
In the table below, we set forth our contractual cash obligations as of December 31, 2014. Certain amounts included in this table are based on our estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other factors. The contractual cash obligations we will actually pay in future periods may vary from those reflected in the table because the estimates and assumptions are subjective.

 
Payments Due by Period
(In millions)
Total
 
Less Than
1 Year
 
2 - 3
Years
 
4 - 5
Years
 
More Than
5 Years
Total debt and capital lease obligations (1)
$
4,161

 
$
220

 
$
47

 
$
1,044

 
$
2,850

Estimated interest payments (2)
3,014

 
227

 
444

 
356

 
1,987

Operating leases (3)
806

 
284

 
305

 
103

 
114

Purchase obligations (4)
1,427

 
532

 
568

 
228

 
99

Liabilities for uncertain income tax positions (5)
291

 
117

 
57

 
90

 
27

Other long-term liabilities
182

 
28

 
77

 
16

 
61

Total (6)
$
9,881

 
$
1,408

 
$
1,498

 
$
1,837

 
$
5,138

(1) 
Amounts represent the expected cash payments for the principal amounts related to our debt, including capital lease obligations. Amounts for debt do not include any unamortized discounts or deferred issuance costs. Expected cash payments for interest are excluded from these amounts.
(2) 
Amounts represent the expected cash payments for interest on our long-term debt and capital lease obligations.
(3) 
Represents future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more. We enter into operating leases, some of which include renewal options. We have excluded renewal options from the table above unless it is anticipated that we will exercise such renewals.
(4) 
Purchase obligations include capital improvements as well as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
(5) 
The estimated income tax liabilities for uncertain tax positions will be settled as a result of expiring statutes, audit activity, competent authority proceedings related to transfer pricing, or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. The timing of any particular settlement will depend on the length of the tax audit and related appeals process, if any, or an expiration of a statute. If a liability is settled due to a statute expiring or a favorable audit result, the settlement of the tax liability would not result in a cash payment.
(6) 
Amount does not include expected contributions to our pension and other postretirement benefit plans of between $85 million and $100 million as the majority of these contributions relate to amounts greater than necessary to meet minimum funding requirements and as such would not be considered a contractual obligation.
Off-Balance Sheet Arrangements
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees, which totaled approximately $1.3 billion at December 31, 2014. It is not practicable to estimate the fair value of these financial instruments. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our consolidated financial statements.
As of December 31, 2014, we had no material off-balance sheet financing arrangements other than normal operating leases. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.


40


CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures as well as disclosures about any contingent assets and liabilities. We base these estimates and judgments on historical experience and other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects are subject to uncertainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.
We have defined a critical accounting estimate as one that is both important to the portrayal of either our financial condition or results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. The Audit/Ethics Committee of our Board of Directors has reviewed our critical accounting estimates and the disclosure presented below. During the past three fiscal years, we have not made any material changes in the methodology used to establish the critical accounting estimates, and we believe that the following are the critical accounting estimates used in the preparation of our consolidated financial statements. There are other items within our consolidated financial statements that require estimation and judgment but they are not deemed critical as defined above.
Allowance for Doubtful Accounts
The determination of the collectability of amounts due from our customers requires us to make judgments and estimates regarding our customers’ ability to pay amounts due us in order to determine the amount of valuation allowances required for doubtful accounts. We monitor our customers’ payment history and current credit worthiness to determine that collectability is reasonably assured. We also consider the overall business climate in which our customers operate. Provisions for doubtful accounts are recorded when it becomes evident that the customer will not make the required payments at either contractual due dates or in the future. At December 31, 2014 and 2013, the allowance for doubtful accounts totaled $224 million, or 4%, and $238 million, or 4%, of total gross accounts receivable, respectively. We believe that our allowance for doubtful accounts is adequate to cover potential bad debt losses under current conditions; however, uncertainties regarding changes in the financial condition of our customers, either adverse or positive, could impact the amount and timing of any additional provisions for doubtful accounts that may be required. A five percent change in the allowance for doubtful accounts would have had an impact on income before income taxes of approximately $11 million in 2014.
Inventory Reserves
Inventory is a significant component of current assets and is stated at the lower of cost or market. This requires us to record provisions and maintain reserves for excess, slow moving and obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements and technological developments. These estimates and forecasts inherently include uncertainties and require us to make judgments regarding potential future outcomes. At December 31, 2014 and 2013, inventory reserves totaled $319 million, or 7%, and $382 million, or 9%, of gross inventory, respectively. We believe that our reserves are adequate to properly value potential excess, slow moving and obsolete inventory under current conditions. Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess, slow moving or obsolete inventory that may be required. A five percent change in this inventory reserve balance would have had an impact on income before income taxes of approximately $16 million in 2014.
Goodwill and Other Long-Lived Assets
The purchase price of acquired businesses is allocated to its identifiable assets and liabilities based upon estimated fair values as of the acquisition date. Goodwill is the excess of the purchase price over the fair value of tangible and identifiable intangible assets and liabilities acquired in a business acquisition. Our goodwill at December 31, 2014 and 2013, totaled $6.08 billion and $5.97 billion, respectively. We perform an annual test of goodwill for impairment as of October 1 of each year for each of our reporting units which are the same as our five reportable segments. We have the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. If a qualitative assessment indicates that it is more likely than not that the fair value of a


41


reporting unit is less than its carrying amount, then we would be required to perform a quantitative impairment test for goodwill. In 2014, we performed a qualitative assessment for our annual goodwill impairment test. In 2013 and 2012, a quantitative assessment for the determination of impairment was made by comparing the carrying amount of each reporting unit with its fair value. There were no impairments of goodwill in any of the three years ended December 31, 2014.
In determining the carrying amount of reporting units, corporate and other assets and liabilities are allocated to the extent that they relate to the operations of those reporting units. Our impairment tests include both qualitative and quantitative factors. When necessary, we calculate the fair value of a reporting unit using various valuation techniques, including a market approach, a comparable transactions approach and discounted cash flow ("DCF") methodology. The market approach and comparable transactions approach provide value indications for a company through a comparison with guideline public companies or guideline transactions, respectively. Both entail selecting relevant financial information of the subject company, and capitalizing those amounts using valuation multiples that are based on empirical market observations. The DCF methodology includes, but is not limited to, assumptions regarding matters such as discount rates, anticipated growth rates, expected profitability rates and the timing of expected future cash flows. Unanticipated changes, including even small revisions, to these assumptions could require a provision for impairment in a future period. Given the nature of these evaluations and their application to specific assets and time-frames, it is not possible to reasonably quantify the impact of changes in these assumptions.
Long-lived assets, which include property and equipment, intangible assets other than goodwill, and certain other assets, comprise a significant amount of our total assets. We review the carrying values of these assets for impairment periodically, and at least annually for certain intangible assets or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires us to make judgments regarding long-term forecasts of future revenue and costs and cash flows related to the assets subject to review. These forecasts are uncertain in that they require assumptions about demand for our products and services, future market conditions and technological developments.
Income Taxes
The liability method is used for determining our income tax provisions, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the need for valuation allowances, we have considered and made judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets. Historically, changes to valuation allowances have been caused by major changes in the business cycle in certain countries and changes in local country law. The ultimate realization of the deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions.
We operate in more than 80 countries under many legal forms. As a result, we are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Our operations in these different jurisdictions are taxed on various bases: actual income before taxes, deemed profits (which are generally determined using a percentage of revenue rather than profits) and withholding taxes based on revenue. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the authorities


42


or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of these situations inevitably includes some degree of uncertainty; accordingly, we provide taxes only for the amounts we believe will ultimately result from these proceedings. The resulting change to our tax liability, if any, is dependent on numerous factors including, among others, the amount and nature of additional taxes potentially asserted by local tax authorities; the willingness of local tax authorities to negotiate a fair settlement through an administrative process; the impartiality of the local courts; the number of countries in which we do business; and the potential for changes in the tax paid to one country to either produce, or fail to produce, an offsetting tax change in other countries. Our experience has been that the estimates and assumptions we have used to provide for future tax assessments have proven to be appropriate. However, past experience is only a guide, and the potential exists that the tax resulting from the resolution of current and potential future tax controversies may differ materially from the amount accrued.
In addition to the aforementioned assessments that have been received from various tax authorities, we also provide for taxes for uncertain tax positions where formal assessments have not been received. The determination of these liabilities requires the use of estimates and assumptions regarding future events. Once established, we adjust these amounts only when more information is available or when a future event occurs necessitating a change to the reserves such as changes in the facts or law, judicial decisions regarding the application of existing law or a favorable audit outcome. We believe that the resolution of tax matters will not have a material effect on the consolidated financial condition of the Company, although a resolution could have a material impact on our consolidated statements of income for a particular period and on our effective tax rate for any period in which such resolution occurs.
Pensions and Postretirement Benefit Obligations
Pensions and postretirement benefit obligations and the related expenses are calculated using actuarial models and methods. This involves the use of two critical assumptions, the discount rate and the expected rate of return on assets, both of which are important elements in determining pension expense and in measuring plan liabilities. We evaluate these critical assumptions at least annually, and as necessary, we utilize third party actuarial firms to assist us. Although considered less critical, other assumptions used in determining benefit obligations and related expenses, such as demographic factors like retirement age, mortality and turnover, are also evaluated periodically and are updated to reflect our actual and expected experience.
The discount rate enables us to determine expected future cash flows at a present value on the measurement date. The development of the discount rate for our largest plans was based on a bond matching model whereby the cash flows underlying the projected benefit obligation are matched against a yield curve constructed from a bond portfolio of high-quality, fixed-income securities. Use of a lower discount rate would increase the present value of benefit obligations and increase pension expense. We used a weighted average discount rate of 4.5% in 2014, 4.0% in 2013 and 4.6% in 2012 to determine pension expense. A 50 basis point reduction in the weighted average discount rate would have increased pension expense and the projected benefit obligation of our principal pension plans by approximately $3 million and $108 million, respectively, in 2014.
To determine the expected rate of return on plan assets, we consider the current and target asset allocations, as well as historical and expected future returns on various categories of plan assets. A lower rate of return would decrease plan assets which results in higher pension expense. We assumed a weighted average expected rate of return on our plan assets of 6.7% in 2014, 6.9% in 2013 and 7.0% in 2012. A 50 basis point reduction in the weighted average expected rate of return on assets of our principal pension plans would have increased pension expense by approximately $7 million in 2014.
NEW ACCOUNTING STANDARDS UPDATES
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The pronouncement is effective for annual reporting periods beginning after December


43


15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. We are currently evaluating the impact the pronouncement will have on our consolidated financial statements and related disclosures.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation by raising the threshold for a disposal to qualify as discontinued operations. The ASU will also require entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The pronouncement is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. We adopted the ASU in the second quarter of 2014 and it did not impact our consolidated financial statements or the notes to our financial statements.
RELATED PARTY TRANSACTIONS
There were no significant related party transactions during the three years ended December 31, 2014.
FORWARD-LOOKING STATEMENTS
This Form 10-K, including MD&A and certain statements in the Notes to Consolidated Financial Statements, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, (each a “forward-looking statement”). The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “estimate,” “probable,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “would,” “potential,” “may,” “likely” and similar expressions, and the negative thereof, are intended to identify forward-looking statements. Our forward-looking statements are based on assumptions that we believe to be reasonable but that may not prove to be accurate. The statements do not include the potential impact of future transactions, such as an acquisition, disposition, merger, joint venture or other transaction that could occur, including the pending merger with Halliburton. We undertake no obligation to publicly update or revise any forward-looking statement. Our expectations regarding our business outlook, including changes in revenue, pricing, capital spending, profitability, strategies for our operations, impact of any common stock repurchases, oil and natural gas market conditions, the business plans of our customers, market share and contract terms, costs and availability of resources, legal, economic and regulatory conditions, and environmental matters are only our forecasts regarding these matters.
All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in Item 1A. Risk Factors and those set forth from time to time in our filings with the SEC. These documents are available through our website or through the SEC’s Electronic Data Gathering and Analysis Retrieval (EDGAR) system at http://www.sec.gov.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial instruments and arise from changes in interest rates and foreign currency exchange rates. We may enter into derivative financial instrument transactions to manage or reduce market risk but do not enter into derivative financial instrument transactions for speculative purposes. A discussion of our primary market risk exposure in financial instruments is presented below.
INTEREST RATE RISK
We have debt in fixed and floating rate instruments. We are subject to interest rate risk on our debt and investment portfolio. We maintain an interest rate risk management strategy which primarily uses a mix of fixed and variable rate debt that is intended to mitigate the risk exposure to changes in interest rates in the aggregate. We may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt. There were no outstanding interest rate swap agreements as of December 31, 2014 or 2013.


44


We had fixed rate long-term debt, including capital lease obligations, aggregating $3.9 billion at both December 31, 2014 and 2013. The following table sets forth our fixed rate long-term debt and the related weighted average interest rates by expected maturity dates as of December 31, 2014 and 2013.

(In millions)
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total (3)
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt (1) (2)
$

 
$
27

 
$
20

 
$
1,022

 
$
22

 
$
2,850

 
$
3,941

Weighted average interest rates

 
8.44
%
 
7.88
%
 
7.28
%
 
5.94
%
 
5.16
%
 
5.83
%
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt (1) (2)
$
21

 
$
17

 
$
11

 
$
1,013

 
$
14

 
$
2,835

 
$
3,911

Weighted average interest rates
13.68
%
 
17.71
%
 
17.47
%
 
7.41
%
 
14.62
%
 
5.31
%
 
6.02
%
(1) 
Amounts do not include any unamortized discounts, premiums or deferred issuance costs on our fixed rate long-term debt.
(2) 
Fair market value of our fixed rate long-term debt was $4.44 billion at December 31, 2014 and $4.36 billion at December 31, 2013.
(3) 
Amounts represent the principal value of our long-term debt outstanding and related weighted average interest rates at the end of the respective period.
FOREIGN CURRENCY EXCHANGE RISK
We conduct our operations around the world in a number of different currencies, and we are exposed to market risks resulting from fluctuations in foreign currency exchange rates. Many of our significant foreign subsidiaries have designated the local currency as their functional currency. As such, future earnings are subject to change due to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than our functional currencies. To minimize the need for foreign currency forward contracts to hedge this exposure, our objective is to manage foreign currency exposure by maintaining a minimal consolidated net asset or net liability position in a currency other than the functional currency.
At December 31, 2014 and 2013, we had outstanding foreign currency forward contracts with notional amounts aggregating $580 million and $486 million, respectively, to hedge exposure to currency fluctuations in various foreign currencies. These contracts are either undesignated hedging instruments or designated and qualify as fair value hedging instruments. The notional amounts of our foreign currency forward contracts do not generally represent amounts exchanged by the parties and, thus are not a measure of the cash requirements related to these contracts or of any possible loss exposure. The amounts actually exchanged are calculated by reference to the notional amounts and by other terms of the derivative contracts, such as exchange rates. Based on quoted market prices as of December 31, 2014 and 2013 for contracts with similar terms and maturity dates, we recorded a loss of $11 million and a gain of $2 million, respectively, to adjust these foreign currency forward contracts to their fair market value. These gains and losses offset designated foreign currency exchange gains and losses resulting from the underlying exposures and are included in MG&A expenses in the consolidated statements of income.


45


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting was effective as of December 31, 2014. This conclusion is based on the recognition that there are inherent limitations in all systems of internal control. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting.

/s/ MARTIN S. CRAIGHEAD
Martin S. Craighead
Chairman and
Chief Executive Officer
  
/s/ KIMBERLY A. ROSS
Kimberly A. Ross
Senior Vice President and
Chief Financial Officer
  
/s/ ALAN J. KEIFER
Alan J. Keifer
Vice President and
Controller
Houston, Texas
February 25, 2015



46


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Baker Hughes Incorporated
Houston, Texas
We have audited the accompanying consolidated balance sheets of Baker Hughes Incorporated and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included financial statement schedule II, valuation and qualifying accounts, listed in the Index at Item 15. We also have audited the Company's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Baker Hughes Incorporated and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, 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. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2015


47


BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME


 
Year Ended December 31,
(In millions, except per share amounts)
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Sales
$
8,056

 
$
7,594

 
$
7,274

Services
16,495

 
14,770

 
14,087

Total revenue
24,551

 
22,364

 
21,361

Costs and expenses:
 
 
 
 
 
Cost of sales
6,294

 
5,932

 
5,758

Cost of services
13,452

 
12,621

 
11,598

Research and engineering
613

 
556

 
497

Marketing, general and administrative
1,271

 
1,306

 
1,316

Litigation settlements
62

 

 

Total costs and expenses
21,692

 
20,415

 
19,169

Operating income
2,859

 
1,949

 
2,192

Interest expense, net
(232
)
 
(234
)
 
(210
)
Income before income taxes
2,627

 
1,715

 
1,982

Income taxes
(896
)
 
(612
)
 
(665
)
Net income
1,731

 
1,103

 
1,317

Net income attributable to noncontrolling interests
(12
)
 
(7
)
 
(6
)
Net income attributable to Baker Hughes
$
1,719

 
$
1,096

 
$
1,311

 
 
 
 
 
 
Basic earnings per share attributable to Baker Hughes
$
3.93

 
$
2.47

 
$
2.98

 
 
 
 
 
 
Diluted earnings per share attributable to Baker Hughes
$
3.92

 
$
2.47

 
$
2.97

See Notes to Consolidated Financial Statements



48


BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


 
Year Ended December 31,
(In millions)
2014
 
2013
 
2012
Net income
$
1,731

 
$
1,103

 
$
1,317

Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation adjustments during the period
(216
)
 
(61
)
 
78

Pension and other postretirement benefits, net of tax
(2014 - $9; 2013 - $(23); 2012 - $(13))
(29
)
 
33

 
1

Other comprehensive (loss) income
(245
)
 
(28
)
 
79

Comprehensive income
1,486

 
1,075

 
1,396

Comprehensive income attributable to noncontrolling interests
(12
)
 
(7
)
 
(6
)
Comprehensive income attributable to Baker Hughes
$
1,474

 
$
1,068

 
$
1,390

See Notes to Consolidated Financial Statements



49


BAKER HUGHES INCORPORATED
CONSOLIDATED BALANCE SHEETS

 
December 31,
(In millions, except par value)
2014
 
2013
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
1,740

 
$
1,399

Accounts receivable - less allowance for doubtful accounts
(2014 - $224; 2013 - $238)
5,418

 
5,138

Inventories, net
4,074

 
3,884

Deferred income taxes
418

 
380

Other current assets
395

 
494

Total current assets
12,045

 
11,295

 
 
 
 
Property, plant and equipment - less accumulated depreciation
(2014 - $8,215; 2013 - $7,219)
9,063

 
9,076

Goodwill
6,081

 
5,966

Intangible assets, net
812

 
883

Other assets
826

 
714

Total assets
$
28,827

 
$
27,934

LIABILITIES AND EQUITY
Current Liabilities:
 
 
 
Accounts payable
$
2,807

 
$
2,574

Short-term debt and current portion of long-term debt
220

 
499

Accrued employee compensation
782

 
778

Income taxes payable
265

 
213

Other accrued liabilities
563

 
514

Total current liabilities
4,637

 
4,578

 
 
 
 
Long-term debt
3,913

 
3,882

Deferred income taxes and other tax liabilities
740

 
821

Liabilities for pensions and other postretirement benefits
629

 
583

Other liabilities
178

 
158

Commitments and contingencies

 

 
 
 
 
Equity:
 
 
 
Common stock, one dollar par value
(shares authorized - 750; issued and outstanding: 2014 - 434; 2013 - 438)
434

 
438

Capital in excess of par value
7,062

 
7,341

Retained earnings
11,878

 
10,438

Accumulated other comprehensive loss
(749
)
 
(504
)
Baker Hughes stockholders’ equity
18,625

 
17,713

Noncontrolling interests
105

 
199

Total equity
18,730

 
17,912

Total liabilities and equity
$
28,827

 
$
27,934

See Notes to Consolidated Financial Statements


50


BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


 
Baker Hughes Stockholders' Equity
 
 
 
 
(In millions, except per share amounts)
Common Stock
 
Capital in Excess of Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Non-controlling Interests
 
Total
Balance at December 31, 2011
$
437

 
$
7,303

 
$
8,561

 
$
(555
)
 
$
218

 
$
15,964

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
1,311

 
 
 
6

 
1,317

Other comprehensive income
 
 
 
 
 
 
79

 

 
79

Activity related to stock plans
4

 
55

 
 
 
 
 
 
 
59

Stock-based compensation cost
 
 
115

 
 
 
 
 
 
 
115

Cash dividends ($0.60 per share)
 
 
 
 
(263
)
 
 
 
 
 
(263
)
Net activity related to noncontrolling interests
 
 
22

 
 
 
 
 
(25
)
 
(3
)
Balance at December 31, 2012
$
441

 
$
7,495

 
$
9,609

 
$
(476
)
 
$
199

 
$
17,268

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
1,096

 
 
 
7

 
1,103

Other comprehensive loss
 
 
 
 
 
 
(28
)
 
 
 
(28
)
Activity related to stock plans
3

 
75

 
 
 
 
 
 
 
78

Repurchase and retirement of common stock
(6
)
 
(344
)
 
 
 
 
 
 
 
(350
)
Stock-based compensation cost
 
 
115

 
 
 
 
 
 
 
115

Cash dividends ($0.60 per share)
 
 
 
 
(267
)
 
 
 
 
 
(267
)
Net activity related to noncontrolling interests
 
 


 
 
 
 
 
(7
)
 
(7
)
Balance at December 31, 2013
$
438

 
$
7,341

 
$
10,438

 
$
(504
)
 
$
199

 
$
17,912

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
1,719

 
 
 
12

 
1,731

Other comprehensive loss
 
 
 
 
 
 
(245
)
 

 
(245
)
Activity related to stock plans
5

 
200

 
 
 
 
 
 
 
205

Repurchase and retirement of common stock
(9
)
 
(591
)
 
 
 
 
 
 
 
(600
)
Stock-based compensation cost
 
 
122

 
 
 
 
 
 
 
122

Cash dividends ($0.64 per share)
 
 
 
 
(279
)
 
 
 
 
 
(279
)
Net activity related to noncontrolling interests
 
 
(10
)
 
 
 
 
 
(106
)
 
(116
)
Balance at December 31, 2014
$
434

 
$
7,062

 
$
11,878

 
$
(749
)
 
$
105

 
$
18,730

See Notes to Consolidated Financial Statements


51


BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS


 
Year Ended December 31,
(In millions)
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
Net income
$
1,731

 
$
1,103

 
$
1,317

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
 
Depreciation and amortization
1,814

 
1,698

 
1,568

Provision (benefit) for deferred income taxes
(70
)
 
1

 
(114
)
Gain on disposal or deconsolidation of assets
(297
)
 
(275
)
 
(222
)
Stock-based compensation cost
122

 
115

 
115

Provision for doubtful accounts
102

 
75

 
100

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(524
)
 
(453
)
 
16

Inventories
(259
)
 
(120
)
 
(547
)
Accounts payable
291

 
845

 
(94
)
Accrued employee compensation and other accrued liabilities
115

 
231

 
(90
)
Income taxes payable
90

 
(31
)
 
(56
)
Other operating items, net
(162
)
 
(28
)
 
(158
)
Net cash flows provided by operating activities
2,953

 
3,161

 
1,835

Cash flows from investing activities:
 
 
 
 
 
Expenditures for capital assets
(1,791
)
 
(2,085
)
 
(2,910
)
Proceeds from disposal of assets
437

 
455

 
389

Acquisition of businesses, net of cash acquired
(314
)
 
(22
)
 

Other investing items, net
9

 
(11
)
 

Net cash flows used in investing activities
(1,659
)
 
(1,663
)
 
(2,521
)
Cash flows from financing activities:
 
 
 
 
 
Net (repayments) proceeds of commercial paper borrowings and other debt with three months or less original maturity
(216
)
 
(650
)
 
764

Repayment of short-term debt with greater than three months original maturity
(217
)
 
(163
)